What changed in this filing

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Item 1. Financial Statements

2023-08-04 compared with 2023-05-05 · 236 added, 141 removed, 855 unchanged (31% of the section changed)

38 unchanged sentences

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

Common stock, $ 1 par value, 10,000,000 shares authorized, 5,672,841 and 5,700,728 issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Common stock, $ 1 par value, 10,000,000 shares authorized, 5,610,841 and 5,700,728 issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 14,411 17,784

6 unchanged sentences

Consolidated Statements of Income

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In Thousands, Except Per Share Data) 2023 2022 2023 2022

13 unchanged sentences

Net Interest Income 25,142 22,212 50,174 41,516

Provision (benefit) for credit losses 360 ( 150 )

Net Interest Income After Provision (Benefit) for Credit Losses 24,672 19,454

Provision for credit losses 1,407 463 1,767 313

Net Interest Income After Provision for Credit Losses 23,735 21,749 48,407 41,203

Other Operating Income

3 unchanged sentences

Service charges on deposit accounts 505 402 962 776

Unrealized (loss) gain on marketable equity securities ( 223 ) ( 422 )

Keyman life insurance proceeds — — — 2,002

Unrealized loss on marketable equity securities ( 234 ) ( 810 ) ( 457 ) ( 1,232 )

Other income 792 822 1,573 1,503

7 unchanged sentences

Insurance expense 647 516 1,204 1,082

OREO expense, net rental income and gains on sale 26 ( 12 )

Intangible asset amortization expense 3 6 7 12

OREO expense, net rental income and gains on sale ( 8 ) 19 18 7

Other operating expense 2,035 1,715 3,889 3,285

10 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended March 31,

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

(In Thousands) 2023 2022 2023 2022

55 unchanged sentences

Balance as of March 31, 2023 5,673 $ 5,673 $ 16,625 $ 225,611 ($ 23,484 ) $ 224,425

Cash dividend on common stock ($ 0.60 per share)

— — — ( 3,432 ) — ( 3,432 )

Stock-based compensation expense — — 225 — — 225

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

Repurchase of common stock ( 62 ) ( 62 ) ( 2,439 ) — — ( 2,501 )

Other comprehensive loss, net of tax — — — — ( 2,958 ) ( 2,958 )

Net income — — — 5,577 — 5,577

Balance as of June 30, 2023 5,611 $ 5,611 $ 14,411 $ 227,756 ($ 26,442 ) $ 221,336

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(In Thousands) 2023 2022

9 unchanged sentences

Deferred loan fees and amortization, net of costs ( 676 ) ( 3,247 )

Provision (benefit) for credit losses 360 ( 150 )

Provision for credit losses 1,767 313

Additions to home mortgage servicing rights carried at fair value ( 982 ) ( 2,115 )

6 unchanged sentences

Net changes in assets and liabilities:

(Increase) decrease in accrued interest receivable ( 941 ) ( 319 )

(Increase) in accrued interest receivable ( 595 ) ( 1,271 )

Decrease in other assets 739 3,324

(Decrease) in other liabilities ( 4,668 ) ( 6,010 )

Net Cash Provided by Operating Activities 4,349 19,845

Net Cash (Used) Provided by Operating Activities ( 22,519 ) 15,309

Investing Activities:

1 unchanged sentence

Purchases of investment securities available for sale ( 6,000 ) ( 214,703 )

Purchases of marketable equity securities ( 324 ) ( 1,937 )

Purchases of FHLB stock ( 2,715 ) ( 727 )

10 unchanged sentences

(Decrease) in deposits ( 84,900 ) ( 86,241 )

(Decrease) in borrowings ( 104 ) ( 104 )

Increase (decrease) in borrowings 50,792 ( 206 )

Repurchase of common stock ( 3,828 ) ( 14,157 )

5 unchanged sentences

Supplemental Information:

Income taxes paid $ 856 $ 40

Interest paid $ 11,081 $ 1,471

14 unchanged sentences

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

Operating results for the interim period ended March 31, 2023 are not necessarily indicative of the results anticipated for the year ending December 31, 2023.

Operating results for the interim period ended June 30, 2023 are not necessarily indicative of the results anticipated for the year ending December 31, 2023.

These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

18 unchanged sentences

Accounting pronouncements to be implemented in future periods

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU 2020-04").

ASU 2020-04 was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued.

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 January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848):

Scope, ("ASU 2021-01").

The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.

The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition.

LIBOR is a widely-referenced benchmark rate, which is published in five currencies and a range of tenors, and seeks to estimate the cost at which banks can borrow on an unsecured basis from other banks.

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

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

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

As of March 31, 2023, we had approximately $ 133.0 million of assets, including $ 78.2 million in commercial loans and $ 54.8 million in debt securities, and $ 10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR.

These amounts exclude derivative assets and liabilities on our consolidated balance sheet.

As of March 31, 2023, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 145.0 million.

Of this amount, $ 67.5 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers.

An additional $ 67.5 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps.

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.

In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to:

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

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

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323):

2 unchanged sentences

The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met.

ASU 2023-02 provides amendments to paragraph 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization method.

ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization

The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs.

However, the conditions in substance remain consistent with current GAAP.

The amendments in this ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely for LIHTCs with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method.

The amendments in this ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely for LIHTCs with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method.

ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023 and must be applied on either a modified retrospective or a retrospective basis.

The Company does not have any equity investments made primarily for the purpose of receiving income tax credits except for LIHTC structures, which it accounts for using the proportional amortization method.

The Company does not believe that ASU 2023-02 will have a material impact on the Company's consolidated financial statements.

The Company does not believe that the adoption of ASU 2023-02 will have a material impact on the Company's consolidated financial statements.

Investment Securities

Marketable Equity Securities

The Company held marketable equity securities with fair values of $ 10.5 million and $ 10.7 million at March 31, 2023 and December 31, 2022, respectively.

The Company held marketable equity securities with fair values of $ 10.6 million and $ 10.7 million at June 30, 2023 and December 31, 2022, respectively.

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

Three Months Ended March 31,

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

(In Thousands) 2023 2022 2023 2022

6 unchanged sentences

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

March 31, 2023

June 30, 2023

Securities available for sale

5 unchanged sentences

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

March 31, 2023

June 30, 2023

Securities held to maturity

16 unchanged sentences

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

Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2023 and December 31, 2022 were as follows:

Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2023 and December 31, 2022 were as follows:

Less Than 12 Months More Than 12 Months Total

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

March 31, 2023

June 30, 2023

Securities available for sale

13 unchanged sentences

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

At March 31, 2023, the Company had 85 available for sale securities in an unrealized loss position without an ACL.

At March 31, 2023, the Company had five held to maturity securities in an unrealized loss position without an ACL.

At June 30, 2023, the Company had 83 available for sale securities in an unrealized loss position without an ACL.

At June 30, 2023, the Company had five held to maturity securities in an unrealized loss position without an ACL.

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

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

Accordingly, as of March 31, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, primarily changes in interest rates, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At March 31, 2023 and December 31, 2022, carrying amounts of $ 108.2 million and $ 59.3 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at March 31, 2023, are distributed by contractual maturity as shown below.

The fair value is expected to recover as the securities approach their

maturity date or repricing date or if market yields for such investments decline.

Accordingly, as of June 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, primarily changes in interest rates, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At June 30, 2023 and December 31, 2022, carrying amounts of $ 161.7 million and $ 59.3 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at June 30, 2023, are distributed by contractual maturity as shown below.

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

16 unchanged sentences

Total $ 820 $ 802

There were no proceeds from sales of investment securities for the three-month periods ending March 31, 2023 and 2022.

A summary of interest income for the three-month periods ending March 31, 2023 and 2022, on available for sale investment securities are as follows:

Three Months Ended March 31,

There were no proceeds from sales of investment securities for the three or six-month periods ending June 30, 2023 and 2022.

A summary of interest income for the three and six-month periods ending June 30, 2023 and 2022, on available for sale investment securities are as follows:

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

(In Thousands) 2023 2022 2023 2022

7 unchanged sentences

Loans Held for Sale

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of March 31, 2023 and December 31, 2022.

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of June 30, 2023 and December 31, 2022.

Loans Held for Investment

The following table presents amortized cost and unpaid principal balance of loans, categorized by the segments used in the Company's CECL methodology to assess credit risk, for the periods indicated:

March 31, 2023 December 31, 2022

The following table presents amortized cost and unpaid principal balance of loans, categorized by the segments used in the Company's Current Expected Credit Losses methodology to assess credit risk, for the periods indicated:

June 30, 2023 December 31, 2022

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

15 unchanged sentences

$ 1,643,594 $ 1,667,173 ($ 7,934 ) $ 1,487,947 $ 1,510,395 ($ 8,610 )

The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.6 million at both March 31, 2023 and December 31, 2022.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 6.5 million and $ 5.5 million at March 31, 2023 and December 31, 2022, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 4.2 million and $ 7.1 million as of March 31, 2023 and December 31, 2022, respectively, in Paycheck Protection Program loans administered by the U.S.

The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 7.9 million at June 30, 2023 and $ 8.6 million at December 31, 2022.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 6.7 million and $ 5.5 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 3.6 million and $ 7.1 million as of June 30, 2023 and December 31, 2022, respectively, in Paycheck Protection Program loans administered by the U.S.

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

Allowance for Credit Losses

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

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

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

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

(In Thousands)

27 unchanged sentences

Total $ 11,310 $ 273 ($ 166 ) $ 120 $ 11,537

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

(In Thousands)

Commercial & industrial loans $ 2,914 $ 467 ($ 49 ) $ 86 $ 3,418

Commercial real estate:

Owner occupied properties 3,094 ( 287 ) — — 2,807

Non-owner occupied and multifamily properties 3,615 ( 355 ) — — 3,260

Residential real estate:

1-4 family residential properties secured by first liens 1,413 1,793 — — 3,206

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 389 22 — 12 423

1-4 family residential construction loans 312 ( 106 ) — — 206

Other construction, land development and raw land loans 1,803 193 — — 1,996

Obligations of states and political subdivisions in the US 79 9 — — 88

Agricultural production, including commercial fishing 145 17 — — 162

Consumer loans 68 17 ( 14 ) 3 74

Other loans 6 ( 1 ) — — 5

Total $ 13,838 $ 1,769 ($ 63 ) $ 101 $ 15,645

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

Commercial real estate:

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

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

Residential real estate:

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

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

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

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

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

Agricultural production, including commercial fishing 91 21 — 15 127

Consumer loans 67 ( 4 ) — 1 64

Other loans 7 ( 1 ) — — 6

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

The following table shows gross charge-offs by grade and by year of loan origination for the periods indicated:

Three Months Ended March 31,

Six Months Ended June 30,

(In Thousands) 2023 2022 2021 2020 2019 Prior Total

36 unchanged sentences

An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted.

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not

practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.

The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination.

1 unchanged sentence

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

March 31, 2023 2023 2022 2021 2020 2019 Prior Total

June 30, 2023 2023 2022 2021 2020 2019 Prior Total

(In Thousands)

116 unchanged sentences

Due Current Total Greater Than 90 Days Past Due Still Accruing

March 31, 2023

June 30, 2023

Commercial & industrial loans $ — $ — $ 400 $ 400 $ 418,352 $ 418,752 $ —

28 unchanged sentences

Nonaccrual loans:

Nonaccrual loans net of government guarantees totaled $ 6.1 million and $ 6.4 million at March 31, 2023 and December 31, 2022, respectively.

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

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

Nonaccrual loans net of government guarantees totaled $ 5.3 million and $ 6.4 million at June 30, 2023 and December 31, 2022, respectively.

The following table presents loans on nonaccrual status and loans on nonaccrual status for the periods presented for which there was no related ACL.

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

12 unchanged sentences

Net nonaccrual loans $ 5,349 $ 5,301 $ 6,430 $ 6,368

There was no interest on nonaccrual loans reversed through interest income during three-month period ending March 31, 2023.

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

There was no interest earned on nonaccrual loans with a principal balance during the three-month periods ending March 31, 2023 and March 31, 2022.

However, the Company recognized interest income of $ 179,000 and $ 57,000 in the three-month periods ending March 31, 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

There was no interest on nonaccrual loans reversed through interest income during three and six-month periods ending June 30, 2023.

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

There was no interest earned on nonaccrual loans with a principal balance during the three and six-month periods ending June 30, 2023 and June 30, 2022.

However, the Company recognized interest income of $ 205,000 and $ 873,000 in the three-month periods ending June 30, 2023 and 2022, respectively, and $ 384,000 and $ 930,000 in the six-month periods ending June 30, 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Loan Modifications:

3 unchanged sentences

The Company may provide multiple types of concessions on one loan.

There were no loans that were both experiencing financial difficulty and modified during the first quarter of 2023.

As noted in Note 1, the Company adopted ASU 2022-02 effective January 1, 2023.

1 unchanged sentence

TDRs totaled $ 5.1 million at December 31, 2022.

The following table shows the amortized cost basis of the loans that were both experiencing financial difficulty and modified during the period indicated, by class and type of modification.

The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:

June 30, 2023

Term Modification Payment Modification Interest Rate Modification Principal Forgiveness Total Modifications Percentage of Class of Financing Receivable

(In Thousands)

Commercial & industrial loans $ 2,468 $ 1,988 $ — $ — $ 4,456 1 %

Commercial real estate:

Owner occupied properties — — — — — — %

Non-owner occupied and multifamily properties — — — — — — %

Residential real estate:

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

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

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

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

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

Agricultural production, including commercial fishing — — — — — — %

Consumer loans — — — — — — %

Other loans — — — — — — %

Total $ 2,468 $ 1,988 $ — $ — $ 4,456 — %

The Company has no outstanding commitments to the borrowers included in the previous table.

The Company monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

As of June 30, 2023, no loan modifications were past due.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three-months ended June 30, 2023:

June 30, 2023

Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (months)

(In Thousands)

Commercial & industrial loans $ — — % 3

Commercial real estate:

Owner occupied properties — — % 0

Non-owner occupied and multifamily properties — — % 0

Residential real estate:

1-4 family residential properties secured by first liens — — % 0

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — % 0

1-4 family residential construction loans — — % 0

Other construction, land development and raw land loans — — % 0

Obligations of states and political subdivisions in the US — — % 0

Agricultural production, including commercial fishing — — % 0

Consumer loans — — % 0

Other loans — — % 0

Total $ — — % 3

There were no loans that had a payment default during the three-months ended June 30, 2023 which were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

Upon the Company's determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

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

1 unchanged sentence

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

As of March 31, 2023 and December 31, 2022, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs principal balance outstanding of:

Loan Modifications due to COVID-19 as of March 31, 2023 and December 31, 2022

As of June 30, 2023, the Company has no loan modifications related to COVID-19, which are not classified as TDRs.

At December 31, 2022, the Company had made the following types of loan modifications related to COVID-19, which are not classified as TDRs principal balance outstanding of:

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

(Dollars in thousands) Interest Only Full Payment Deferral Total

3 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 were no purchased receivables past due at March 31, 2023 or December 31, 2022, and there were no restructured purchased receivables at March 31, 2023 or December 31, 2022.

There were no purchased receivables past due at June 30, 2023 or December 31, 2022, and there were no restructured purchased receivables at June 30, 2023 or December 31, 2022.

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

There were no nonperforming purchased receivables as of March 31, 2023 or December 31, 2022.

There was no activity and no balance in the ACL for purchased receivables as of March 31, 2023 or December 31, 2022.

There were no nonperforming purchased receivables as of June 30, 2023 or December 31, 2022.

There was no activity and no balance in the ACL for purchased receivables as of June 30, 2023 or December 31, 2022.

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

(In Thousands) March 31, 2023 December 31, 2022

(In Thousands) June 30, 2023 December 31, 2022

Purchased receivables $ 21,866 $ 19,994

3 unchanged sentences

Mortgage servicing rights

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three-month periods ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the six-month periods ended June 30, 2023 and 2022:

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

(In Thousands) 2023 2022 2023 2022

8 unchanged sentences

(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of March 31, 2023 and December 31, 2022:

(In Thousands) March 31, 2023 December 31, 2022

The following table details information related to our serviced mortgage loan portfolio as of June 30, 2023 and December 31, 2022:

(In Thousands) June 30, 2023 December 31, 2022

Balance of mortgage loans serviced for others $ 921,616 $ 898,840

MSR as a percentage of serviced loans 1.98 % 2.07 %

The Company recognized servicing fees of $ 905,000 and $ 783,000 during the three-month periods ending March 31, 2023 and 2022, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

The Company recognized servicing fees of $ 906,000 and $ 804,000 during the three-month periods ending June 30, 2023 and 2022, respectively, and $ 1,811,000 and $ 1,587,000 during the six-month periods ending June 30, 2023 and 2022, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

Constant prepayment rate 7.70 % 6.64 %

Discount rate 10.97 % 11.25 %

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at March 31, 2023 and December 31, 2022 were as follows:

(In Thousands) March 31, 2023 December 31, 2022

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2023 and December 31, 2022 were as follows:

(In Thousands) June 30, 2023 December 31, 2022

Aggregate portfolio principal balance $ 921,616 $ 898,840

Weighted average rate of note 3.62 % 3.47 %

March 31, 2023 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

June 30, 2023 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

Constant prepayment rate 7.70 % 8.38 % 10.82 %

18 unchanged sentences

Commercial servicing rights

The commercial servicing rights asset ("CSR") has a carrying value of $ 2.2 million at March 31, 2023 and $ 2.1 million at December 31, 2022, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 290.8 million and $ 285.3 million at March 31, 2023 and December 31, 2022, respectively.

Key assumptions used in measuring the fair value of the CSR as of March 31, 2023 and December 31, 2022 include a constant prepayment rate of 10.19 % and a discount rate of 12.00 %.

The commercial servicing rights asset ("CSR") has a carrying value of $ 2.1 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 286.6 million and $ 285.3 million at June 30, 2023 and December 31, 2022, respectively.

Key assumptions used in measuring the fair value of the CSR as of June 30, 2023 and December 31, 2022 include a constant prepayment rate of 10.19 % and a discount rate of 12.00 %.

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

As of March 31, 2023, the Company has operating lease ROU assets of $ 9.5 million and operating lease liabilities of $ 9.5 million.

As of June 30, 2023, the Company has operating lease ROU assets of $ 10.1 million and operating lease liabilities of $ 10.1 million.

As of December 31, 2022, the Company had operating lease ROU assets of $ 9.9 million and operating lease liabilities of $ 9.9 million.

The Company did not have any agreements that are classified as finance leases as of March 31, 2023 or December 31, 2022.

The Company did not have any agreements that are classified as finance leases as of June 30, 2023 or December 31, 2022.

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

Three Months Ended March 31,

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

(In Thousands) 2023 2022 2023 2022

Operating lease cost (1)

$ 702 $ 672 $ 1,401 $ 1,353

Short term lease cost (1)

7 unchanged sentences

(In Thousands) Operating Leases

2023 (Nine months) $ 1,921

2023 (Six months) $ 1,321

Thereafter 4,418

7 unchanged sentences

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

The Company pledged $ 561,000 as of March 31, 2023 and $ 553,000 as of December 31, 2022 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 223.8 million and $ 226.2 million at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the notional amount of interest rate swaps is made up of 21 variable to fixed rate swaps to commercial loan customers totaling $ 111.9 million, and 21 fixed to variable rate swaps with a counterparty totaling $ 111.9 million.

Changes in fair value from these 21 interest rate swaps offset each other in the first three months of 2023.

The Company recognized zero and $ 3,000 in fee income related to interest rate swaps in the three-month periods ending March 31, 2023 and 2022, respectively.

The Company pledged $ 553,000 as of both June 30, 2023 and December 31, 2022 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 221.6 million and $ 226.2 million at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the notional amount of interest rate swaps is made up of 20 variable to fixed rate swaps to commercial loan customers totaling $ 110.8 million, and 20 fixed to variable rate swaps with a counterparty totaling $ 110.8 million.

Changes in fair value from these 20 interest rate swaps offset each other in the first six months of 2023.

The Company recognized $ 61,000 and $ 87,000 in fee income related to interest rate swaps in the three-month periods ending June 30, 2023 and 2022, respectively, and $ 61,000 and $ 90,000 in fee income related to interest rate swaps in the six-month periods ending June 30, 2023 and 2022, respectively.

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

3 unchanged sentences

The interest rate swap effectively fixes the Company's interest payments on the $ 10.0 million of junior subordinated debentures held under Northrim Statutory Trust 2 at 3.72 % through its maturity date.

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

This rate was 6.24 % as of March 31, 2023.

The Company pledged $ 130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of March 31, 2023 and $ 130,000 as of December 31, 2022.

As of June 30, 2023, the floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 % which reprices quarterly on the payment date.

This rate was 6.92 % as of June 30, 2023.

Upon the next reprice date, which is September 15, 2023, the floating rate will be based on the three month Secured Overnight Financing Rate, also known as SOFR, as LIBOR rates ceased to be published effective July 1, 2023.

The Company pledged $ 130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2023 and $ 130,000 as of December 31, 2022.

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

The unrealized gain on this interest rate swap was $ 1.2 million as of March 31, 2023 and the unrealized loss was $ 1.5 million as of December 31, 2022.

The unrealized gain on this interest rate swap was $ 1.4 million as of June 30, 2023 and the unrealized loss was $ 1.5 million as of December 31, 2022.

Derivatives related to home mortgage banking activities

4 unchanged sentences

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

RML had commitments to originate mortgage loans held for sale totaling $ 41.1 million and $ 29.1 million at March 31, 2023 and December 31, 2022, respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 71.1 million and $ 29.1 million at June 30, 2023 and December 31, 2022, respectively.

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

None of these derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at March 31, 2023 and December 31, 2022:

The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2023 and December 31, 2022:

(In Thousands) Asset Derivatives

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Balance Sheet Location Fair Value Fair Value

1 unchanged sentence

Interest rate lock commitments Other assets 851 440

Retail interest rate contracts Other assets 122 —

Total $ 13,374 $ 13,165

(In Thousands) Liability Derivatives

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Balance Sheet Location Fair Value Fair Value

3 unchanged sentences

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

Three Months Ended March 31,

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

(In Thousands) Income Statement Location 2023 2022 2023 2022

5 unchanged sentences

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

The following table summarizes the derivatives that have a right of offset as of March 31, 2023 and December 31, 2022:

March 31, 2023 Gross amounts not offset in the Statement of Financial Position

The following table summarizes the derivatives that have a right of offset as of June 30, 2023 and December 31, 2022:

June 30, 2023 Gross amounts not offset in the Statement of Financial Position

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

1 unchanged sentence

Interest rate swaps $ 12,401 $ — $ 12,401 $ — $ — $ 12,401

Retail interest rate contracts 122 — 122 — — 122

Liability Derivatives

Interest rate swaps $ 12,401 $ — $ 12,401 $ — $ 12,401 $ —

Retail interest rate contracts 107 — 107 — — 107

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

20 unchanged sentences

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

Although the Company has determined that the

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

However, as of March 31, 2023, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

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

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

However, as of June 30, 2023, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

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

17 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

9 unchanged sentences

Interest rate swaps 13,883 13,883 14,179 14,179

Retail interest rate contracts 122 122 — —

Level 3 inputs:

15 unchanged sentences

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

March 31, 2023

June 30, 2023

Available for sale securities

10 unchanged sentences

Commercial servicing rights 2,139 — — 2,139

Retail interest rate contracts 122 — 122 —

Total other assets $ 34,916 $ — $ 13,678 $ 21,238

Interest rate swaps $ 12,401 $ — $ 12,401 $ —

Retail interest rate contracts 107 — 107 —

Total other liabilities $ 12,401 $ — $ 12,401 $ —

16 unchanged sentences

Total other liabilities $ 12,728 $ — $ 12,728 $ —

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three-month periods ended March 31, 2023 and 2022:

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Interest rate lock commitments $ 685 ($ 378 ) $ 2,735 ($ 2,191 ) $ 851 $ 851

2 unchanged sentences

Total $ 21,158 ($ 1,008 ) $ 3,279 ($ 2,191 ) $ 21,238 $ 851

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

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

2 unchanged sentences

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

There were no changes in unrealized gains and losses for the three-month periods ending March 31, 2023 and 2022 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending March 31, 2023 and December 31, 2022, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

Six Months Ended June 30, 2023

Interest rate lock commitments $ 440 ($ 552 ) $ 4,232 ($ 3,269 ) $ 851 $ 851

Mortgage servicing rights 18,635 ( 1,369 ) 982 — 18,248 —

Commercial servicing rights 2,129 ( 105 ) 115 — 2,139 —

Total $ 21,204 ($ 2,026 ) $ 5,329 ($ 3,269 ) $ 21,238 $ 851

Six Months Ended June 30, 2022

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

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

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

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

There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2023 and 2022 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending June 30, 2023 and December 31, 2022, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

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

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

March 31, 2023

June 30, 2023

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

3 unchanged sentences

Total $ — $ — $ — $ —

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three-month periods ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and six-month periods ended June 30, 2023 and 2022:

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

(In Thousands) 2023 2022 2023 2022

2 unchanged sentences

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

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at March 31, 2023 and December 31, 2022:

Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range

March 31, 2023

June 30, 2023

Interest rate lock commitment External pricing model Pull through rate 92.17 %

13 unchanged sentences

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

As of March 31, 2023, the Community Banking segment operated 19 branches throughout Alaska.

As of June 30, 2023, the Community Banking segment operated 19 branches throughout Alaska.

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

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 22,700 2,442 25,142

Benefit for credit losses 360 — 360

Provision for credit losses 1,407 — 1,407

Other operating income 3,067 3,913 6,980

3 unchanged sentences

Net income $ 5,363 $ 214 $ 5,577

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 21,603 609 22,212

Benefit for credit losses ( 150 ) — ( 150 )

Provision for credit losses 463 — 463

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

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

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

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

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

Six Months Ended June 30, 2023

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 58,168 $ 3,447 $ 61,615

Interest expense 10,716 725 11,441

Net interest income 47,452 2,722 50,174

Provision for credit losses 1,767 — 1,767

Other operating income 5,967 5,921 11,888

Other operating expense 35,222 12,069 47,291

Income (loss) before provision for income taxes 16,430 ( 3,426 ) 13,004

Provision for income taxes 3,507 ( 910 ) 2,597

Net income (loss) $ 12,923 ($ 2,516 ) $ 10,407

Six Months Ended June 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 42,019 $ 1,031 $ 43,050

Interest expense 1,507 27 1,534

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

Provision for credit losses 313 — 313

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

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

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

1 unchanged sentence

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

March 31, 2023

June 30, 2023

(In Thousands) Community Banking Home Mortgage Lending Consolidated

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements