UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39036

ALERUS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	45-0375407
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

401 Demers Avenue
Grand Forks, ND	58201
(Address of principal executive offices)	(Zip Code)

~~(701) 795‑3200~~(701) 795-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:


Title of each class	Trading symbol
~~Title of each class~~	~~Trading symbol~~	Name of each exchange on which registered
Common Stock, par value $1.00 per share	ALRS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule ~~12b‑2~~12b-2 of the Exchange Act.

Large accelerated filer ☐◻

Accelerated filer ☐⌧

Non-accelerated filer ☒◻

Smaller reporting company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b‑2~~12b-2 of the Act). Yes ☐ No ☒⌧

The number of shares of the registrant’s common stock outstanding at ~~November 7, 2019~~April 30, 2022 was ~~17,049,439.~~17,288,575.

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets


	March 31,		December 31,
(dollars in thousands, except share and per share data)	2022		2021
Assets	(Unaudited)		(Audited)
Cash and cash equivalents	$	132,832	$	242,311
Investment securities
Available-for-sale, at fair value		866,333		853,649
Held-to-maturity, at carrying value		340,150		352,061
Loans held for sale		21,864		46,490
Loans		1,818,042		1,758,020
Allowance for loan losses		(31,713)		(31,572)
Net loans		1,786,329		1,726,448
Land, premises and equipment, net		17,619		18,370
Operating lease right-of-use assets		3,360		3,727
Accrued interest receivable		8,516		8,537
Bank-owned life insurance		33,358		33,156
Goodwill		31,490		31,490
Other intangible assets		19,197		20,250
Servicing rights		1,771		1,880
Deferred income taxes, net		23,517		11,614
Other assets		49,863		42,708
Total assets	$	3,336,199	$	3,392,691
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	831,558	$	938,840
Interest-bearing		2,060,709		1,981,711
Total deposits		2,892,267		2,920,551
Long-term debt		58,902		58,933
Operating lease liabilities		3,850		4,275
Accrued expenses and other liabilities		52,675		49,529
Total liabilities		3,007,694		3,033,288
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding		—		—
Common stock, $1 par value, 30,000,000 shares authorized: 17,288,575 and 17,212,588 issued and outstanding		17,289		17,213
Additional paid-in capital		92,573		92,878
Retained earnings		260,967		253,567
Accumulated other comprehensive income (loss)		(42,324)		(4,255)
Total stockholders’ equity		328,505		359,403
Total liabilities and stockholders’ equity	$	3,336,199	$	3,392,691

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three months ended
	March 31,
(dollars and shares in thousands, except per share data)	2022		2021
Interest Income
Loans, including fees	$	17,292	$	20,567
Investment securities
Taxable		5,440		2,401
Exempt from federal income taxes		216		236
Other		116		117
Total interest income		23,064		23,321
Interest Expense
Deposits		829		995
Long-term debt		562		288
Total interest expense		1,391		1,283
Net interest income		21,673		22,038
Provision for loan losses		—		—
Net interest income after provision for loan losses		21,673		22,038
Noninterest Income
Retirement and benefit services		17,646		17,255
Wealth management		5,326		4,986
Mortgage banking		4,931		17,132
Service charges on deposit accounts		363		338
Net gains (losses) on investment securities		—		114
Other		1,204		1,056
Total noninterest income		29,470		40,881
Noninterest Expense
Compensation		19,051		23,698
Employee taxes and benefits		6,162		5,813
Occupancy and equipment expense		2,051		2,231
Business services, software and technology expense		4,924		4,976
Intangible amortization expense		1,053		1,151
Professional fees and assessments		1,541		1,472
Marketing and business development		600		676
Supplies and postage		646		531
Travel		179		26
Mortgage and lending expenses		686		1,332
Other		1,178		1,136
Total noninterest expense		38,071		43,042
Income before income taxes		13,072		19,877
Income tax expense		2,888		4,662
Net income	$	10,184	$	15,215
Per Common Share Data
Basic earnings per common share	$	0.58	$	0.87
Diluted earnings per common share	$	0.57	$	0.86
Dividends declared per common share	$	0.16	$	0.15
Average common shares outstanding		17,244		17,145
Diluted average common shares outstanding		17,500		17,465

See accompanying notes to consolidated financial statements (unaudited)

September 30,

December 31,
(dollars and shares in thousands, except per share data)

2019

2018
Assets




Cash and cash equivalents

$
61,174

$
40,651
Investment securities, at fair value




Trading

—

1,539
Available-for-sale

278,716

250,174
Equity

2,675

3,165
Loans held for sale

66,021

14,486
Loans held for branch sale

—

32,031
Loans

1,686,087

1,701,850
Allowance for loan losses

(22,984)

(22,174)
Net loans

1,663,103

1,679,676
Land, premises and equipment, net

21,150

21,743
Operating lease right-of-use assets

8,877

—
Accrued interest receivable

7,412

7,645
Bank-owned life insurance

31,364

30,763
Goodwill

27,329

27,329
Other intangible assets

19,382

22,473
Servicing rights

4,146

4,623
Deferred income taxes, net

7,695

10,085
Other assets

29,267

32,687
Total assets

$
2,228,311

$
2,179,070
Liabilities and Stockholders’ Equity




Deposits




Noninterest-bearing

$
537,951

$
550,640
Interest-bearing

1,295,162

1,224,456
Total deposits

1,833,113

1,775,096
Deposits held for sale

—

24,197
Short-term borrowings

—

93,460
Long-term debt

58,775

58,824
Operating lease liabilities

9,401

—
Accrued expenses and other liabilities

45,619

30,539
Total liabilities

1,946,908

1,982,116
Commitments and contingent liabilities ESOP-owned shares

—

34,494
Stockholders’ equity




Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding

—

—
Common stock, $1 par value, 30,000,000 shares authorized: 17,049,493 and 13,775,327 issued and outstanding

17,049

13,775
Additional paid-in capital

88,230

27,743
Retained earnings

173,039

159,037
Accumulated other comprehensive income (loss)

3,085

(3,601)
Total stockholders’ equity

281,403

196,954
Less ESOP-owned shares

—

(34,494)
Total stockholders’ equity net ESOP-owned shares

281,403

162,460
Total liabilities and stockholders’ equity

$
2,228,311

$
2,179,070

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Net Income	$	10,184	$	15,215
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities		(46,708)		(18,036)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity		(4,118)		—
Reclassification adjustment for losses (gains) realized in income		—		(114)
Total other comprehensive income (loss), before tax		(50,826)		(18,150)
Income tax expense (benefit) related to items of other comprehensive income		(12,757)		(4,556)
Other comprehensive income (loss), net of tax		(38,069)		(13,594)
Total comprehensive income (loss)	$	(27,885)	$	1,621

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of ~~Income~~Changes in Stockholders’ Equity (Unaudited)


	Three months ended March 31, 2022
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2021	$	17,213	$	92,878	$	253,567	$	(4,255)	$	359,403
Net income		—		—		10,184		—		10,184
Other comprehensive income (loss)		—		—		—		(38,069)		(38,069)
Common stock repurchased		(20)		(587)		—		—		(607)
Common stock dividends		—		—		(2,784)		—		(2,784)
Share‑based compensation expense		—		378		—		—		378
Vesting of restricted stock		96		(96)		—		—		—
Balance as of March 31, 2022	$	17,289	$	92,573	$	260,967	$	(42,324)	$	328,505


	Three months ended March 31, 2021
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2020	$	17,125	$	90,237	$	212,163	$	10,638	$	330,163
Net income		—		—		15,215		—		15,215
Other comprehensive income (loss)		—		—		—		(13,594)		(13,594)
Common stock repurchased		(16)		(134)		(296)		—		(446)
Common stock dividends		—		—		(2,602)		—		(2,602)
Share‑based compensation expense		—		498		—		—		498
Vesting of restricted stock		81		(81)		—		—		—
Balance as of March 31, 2021	$	17,190	$	90,520	$	224,480	$	(2,956)	$	329,234

See accompanying notes to consolidated financial statements (unaudited)

Three months ended

Nine months ended

September 30,

September 30,
(dollars and shares in thousands, except per share data)

2019

2018

2019

2018
Interest Income

Loans, including fees

$
21,886

$
20,576

$
65,171

$
59,594
Investment securities








Taxable

1,374

1,129

4,021

3,475
Exempt from federal income taxes

163

301

618

927
Other

202

191

603

475
Total interest income

23,625

22,197

70,413

64,471
Interest Expense








Deposits

3,506

1,790

9,802

4,481
Short-term borrowings

539

575

1,805

1,331
Long-term debt

899

903

2,714

2,688
Total interest expense

4,944

3,268

14,321

8,500
Net interest income

18,681

18,929

56,092

55,971
Provision for loan losses

1,498

1,530

5,515

7,080
Net interest income after provision for loan losses

17,183

17,399

50,577

48,891
Noninterest Income








Retirement and benefit services

15,307

15,536

46,142

46,873
Wealth management

3,896

3,685

11,385

10,948
Mortgage banking

8,135

5,318

19,739

13,551
Service charges on deposit accounts

447

442

1,321

1,333
Net gains (losses) on investment securities

48

13

357

119
Other

1,747

1,264

5,694

3,784
Total noninterest income

29,580

26,258

84,638

76,608
Noninterest Expense








Compensation

20,041

17,873

54,997

50,906
Employee benefits

4,600

4,314

15,188

13,606
Occupancy and equipment expense

2,700

2,698

8,086

8,215
Business services, software and technology expense

4,224

3,731

12,044

10,467
Intangible amortization expense

990

1,196

3,091

3,588
Professional fees and assessments

1,051

1,628

3,146

3,734
Marketing and business development

890

856

2,024

2,439
Supplies and postage

631

611

2,027

1,902
Travel

435

382

1,335

1,252
Mortgage and lending expenses

751

437

1,966

1,597
Other

1,014

610

2,198

2,708
Total noninterest expense

37,327

34,336

106,102

100,414
Income before income taxes

9,436

9,321

29,113

25,085
Income tax expense

2,332

1,951

7,225

5,252
Net income

$
7,104

$
7,370

$
21,888

$
19,833
Per Common Share Data

Basic earnings per common share

$
0.49

$
0.53

$
1.53

$
1.44
Diluted earnings per common share

$
0.48

$
0.52

$
1.49

$
1.41
Dividends declared per common share

$
0.14

$
0.13

$
0.42

$
0.39
Average common shares outstanding

14,274

13,777

13,957

13,759
Diluted average common shares outstanding

14,626

14,071

14,317

14,060

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Operating Activities
Net income	$	10,184	$	15,215
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		854		264
Depreciation and amortization		2,083		2,345
Amortization and accretion of premiums/discounts on investment securities		1,010		794
Amortization of operating lease right-of-use assets		(19)		(8)
Stock-based compensation		378		498
Increase in value of bank-owned life insurance		(202)		(193)
Realized loss (gain) on sale of fixed assets		—		(27)
Realized loss (gain) on derivative instruments		2		(713)
Realized loss (gain) on loans sold		(3,097)		(14,201)
Realized loss (gain) on sale of foreclosed assets		(8)		(23)
Realized loss (gain) on sale of investment securities		—		(114)
Realized loss (gain) on servicing rights		(51)		(165)
Net change in:
Loans held for sale		27,638		57,823
Accrued interest receivable		21		391
Other assets		(4,818)		(2,050)
Accrued expenses and other liabilities		872		(4,995)
Net cash provided (used) by operating activities		34,847		54,841
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		—		13,189
Proceeds from maturities of investment securities available-for-sale		31,665		27,307
Purchases of investment securities available-for-sale		(95,640)		(262,081)
Proceeds from sales or calls of investment securities held-to-maturity		515		—
Proceeds from maturities of investment securities held-to-maturity		10,851		—
Net (increase) decrease in loans		(59,910)		41,391
Purchases of premises and equipment		(130)		(277)
Proceeds from sales of foreclosed assets		57		101
Net cash provided (used) by investing activities		(112,592)		(180,370)
Financing Activities
Net increase (decrease) in deposits		(28,284)		145,580
Repayments of long-term debt		(59)		(49,748)
Proceeds from the issuance of subordinated debt		—		50,000
Cash dividends paid on common stock		(2,784)		(2,602)
Repurchase of common stock		(607)		(446)
Net cash provided (used) by financing activities		(31,734)		142,784
Net change in cash and cash equivalents		(109,479)		17,255
Cash and cash equivalents at beginning of period		242,311		172,962
Cash and cash equivalents at end of period	$	132,832	$	190,217

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

~~Alerus Financial Corporation and Subsidiaries~~

~~Consolidated Statements of Comprehensive Income (Unaudited)~~


	Three months ended
	March 31,
Supplemental Cash Flow Disclosures	2022		2021
Cash paid for:
Interest	$	926	$	1,405
Income taxes		12		736
Non-cash information
Loan collateral transferred to foreclosed assets		29		154
Unrealized gain (loss) on investment securities available-for-sale		(33,951)		(13,594)
Accretion of unrealized (gain) loss on investment securities held-to-maturity		(4,118)		—

Three months ended

Nine months ended

September 30,

September 30,
(dollars in thousands)

2019

2018

2019

2018
Net Income

$
7,104

$
7,370

$
21,888

$
19,833
Other Comprehensive Income, Net of Tax








Unrealized gains (losses) on available-for-sale securities

2,187

(1,351)

9,307

(5,978)
Reclassification adjustment for losses (gains) realized in income

(49)

(13)

(379)

(135)
Total other comprehensive income (loss), before tax

2,138

(1,364)

8,928

(6,113)
Income tax expense (benefit) related to items of other comprehensive income

538

(342)

2,242

(1,534)
Other comprehensive income (loss), net of tax

1,600

(1,022)

6,686

(4,579)
Total comprehensive income

$
8,704

$
6,348

$
28,574

$
15,254

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

Alerus Financial Corporation and Subsidiaries

~~Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)~~

Three months ended September 30, 2019

Accumulated

Additional

Other

ESOP-

Common

Paid-in

Retained

Comprehensive

Owned

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Shares

Total
Balance as of June 30, 2019

$
13,816

$
28,676

$
169,788

$
1,485

$
(34,494)

$
179,271
Net income

—

—

7,104

—

—

7,104
Other comprehensive income (loss)

—

—

—

1,600

—

1,600
Common stock repurchased

(77)

(275)

(1,489)

—

—

(1,841)
Common stock dividends

—

—

(2,364)

—

—

(2,364)
ESOP repurchase obligation termination

—

—

—

—

34,494

34,494
Initial public offering of 3,289,000 shares of common stock net of issuance costs

3,289

59,515

—

—

—

62,804
Stock-based compensation expense

—

335

—

—

—

335
Vesting of restricted stock

21

(21)

—

—

—

—
Balance as of September 30, 2019

$
17,049

$
88,230

$
173,039

$
3,085

$
—

$
281,403

Nine months ended September 30, 2019

Accumulated

Additional

Other

ESOP-

Common

Paid-in

Retained

Comprehensive

Owned

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Shares

Total
Balance as of December 31, 2018

$
13,775

$
27,743

$
159,037

$
(3,601)

$
(34,494)

$
162,460
Net income

—

—

21,888

—

—

21,888
Other comprehensive income (loss)

—

—

—

6,686

—

6,686
Common stock repurchased

(82)

(291)

(1,574)

—

—

(1,947)
Common stock dividends

—

—

(6,312)

—

—

(6,312)
ESOP repurchase obligation termination

—

—

—

—

34,494

34,494
Initial public offering of 3,289,000 shares of common stock net of issuance costs

3,289

59,515

—

—

—

62,804
Stock-based compensation expense

13

1,317

—

—

—

1,330
Vesting of restricted stock

54

(54)

—

—

—

—
Balance as of September 30, 2019

$
17,049

$
88,230

$
173,039

$
3,085

$
—

$
281,403

Three months ended September 30, 2018

Accumulated

Additional

Other

ESOP-

Common

Paid-in

Retained

Comprehensive

Owned

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Shares

Total
Balance as of June 30, 2018

$
13,778

$
26,664

$
149,541

$
(4,617)

$
(31,491)

$
153,875
Net income

—

—

7,370

—

—

7,370
Other comprehensive income (loss)

—

—

—

(1,022)

—

(1,022)
Common stock repurchased

(2)

(6)

(32)

—

—

(40)
Common stock dividends

—

—

(1,829)

—

—

(1,829)
Net change in fair value of ESOP shares

—

—

—

—

(3,003)

(3,003)
Stock-based compensation expense

—

237

—

—

—

237
Vesting of restricted stock

—

—

—

—

—

—
Balance as of September 30, 2018

$
13,776

$
26,895

$
155,050

$
(5,639)

$
(34,494)

$
155,588

Nine months ended September 30, 2018

Accumulated

Additional

Other

ESOP-

Common

Paid-in

Retained

Comprehensive

Owned

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Shares

Total
Balance as of December 31, 2017

$
13,699

$
26,040

$
140,986

$
(1,131)

$
(31,491)

$
148,103
Net income

—

—

19,833

—

—

19,833
Adjustment for adoption of ASU 2016-01

—

—

(71)

71

—

—
Other comprehensive income (loss)

—

—

—

(4,579)

—

(4,579)
Common stock repurchased

(11)

(39)

(212)

—

—

(262)
Common stock dividends

—

—

(5,486)

—

—

(5,486)
Net change in fair value of ESOP shares

—

—

—

—

(3,003)

(3,003)
Stock-based compensation expense

11

971

—

—

—

982
Vesting of restricted stock

77

(77)

—

—

—

—
Balance as of September 30, 2018

$
13,776

$
26,895

$
155,050

$
(5,639)

$
(34,494)

$
155,588

~~See accompanying notes to consolidated financial statements (unaudited)~~

~~Table of Contents~~

~~Alerus Financial Corporation and Subsidiaries~~

~~Consolidated Statements of Cash Flows (Unaudited)~~

Nine months ended

September 30,
(dollars in thousands)

2019

2018
Operating Activities




Net income

$
21,888

$
19,833
Adjustments to reconcile net income to net cash provided (used) by operating activities




Deferred income taxes

149

(1,907)
Provision for loan losses

5,515

7,080
Depreciation and amortization

6,503

6,591
Amortization and accretion of premiums/discounts on investment securities

832

1,227
Stock-based compensation

1,330

982
Increase in value of bank-owned life insurance

(601)

(602)
Realized loss (gain) on sale of branch

(1,544)

—
Realized loss (gain) on sale of fixed assets

(541)

—
Realized loss (gain) on forward sale derivatives

(7)

—
Realized loss (gain) on rate lock commitments

12

(24)
Realized loss (gain) on sale of foreclosed assets

(120)

187
Realized loss (gain) on sale of investment securities

(379)

(135)
Realized loss (gain) on servicing rights

(213)

(497)
Net change in:

Securities held for trading

1,539

51
Loans held for sale

(51,535)

(9,734)
Accrued interest receivable

151

(993)
Other assets

3,287

6,707
Accrued expenses and other liabilities

15,666

(1,417)
Net cash provided (used) by operating activities

1,932

27,349
Investing Activities




Proceeds from sales of investment securities available-for-sale

32,565

2,466
Proceeds from maturities of investment securities available-for-sale

27,818

26,120
Purchases of investment securities available-for-sale

(80,450)

(10,493)
Net (increase) decrease in equity securities

490

2,698
Net (increase) decrease in loans

14,213

(153,475)
Proceeds from sale of branch

10,379

—
Proceeds from sale of fixed assets

875

—
Purchases of premises and equipment

(2,450)

(2,314)
Proceeds from sales of foreclosed assets

1,006

687
Net cash provided (used) by investing activities

4,446

(134,311)
Financing Activities




Net increase (decrease) in deposits

53,241

(17,253)
Net increase (decrease) in short-term borrowings

(93,460)

43,930
Repayments of long-term debt

(181)

(128)
Cash dividends paid on common stock

(6,312)

(5,486)
Repurchase of common stock

(1,947)

(262)
Proceeds from the issuance of common stock in initial public offering net of issuance costs

62,804

—
Net cash provided (used) by financing activities

14,145

20,801
Net change in cash and cash equivalents

20,523

(86,161)
Cash and cash equivalents at beginning of period

40,651

121,998
Cash and cash equivalents at end of period

$
61,174

$
35,837

~~See accompanying notes to consolidated financial statements (unaudited)~~

~~Table of Contents~~

Nine months ended

September 30,
Supplemental Cash Flow Disclosures

2019

2018
Cash paid for:




Interest

$
13,162

$
7,692
Income taxes

5,550

3,030
Non-cash information




Loan collateral transferred to foreclosed assets

766

661
Unrealized gain (loss) on investment securities available-for-sale

6,686

(4,579)
Initial recognition of operating lease right-of-use assets

10,475

—
Initial recognition of operating lease liabilities

10,996

—
Change in fair value of ESOP shares

—

(3,003)
ESOP repurchase obligation termination

34,494

—

~~See accompanying notes to consolidated financial statements (unaudited)~~

~~Table of Contents~~

~~Alerus Financial Corporation and Subsidiaries~~

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Significant Accounting Policies

Organization

Alerus Financial Corporation, or the Company, is a financial holding company organized under the laws of the state of Delaware. ~~Alerus Financial Corporation (the “Company”)~~The Company and its subsidiaries isoperate as a diversified financial services company headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, ~~(the “Bank”),~~or the Bank, the Company provides ~~innovative and comprehensive~~ financial solutions to businesses and consumers through ~~four~~4 distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.

~~Initial Public Offering~~

On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On September 25, 2019, the Company sold an additional 429,000 shares of common stock pursuant to the exercise in full, by the underwriters, of their option to purchase additional shares. The aggregate offering price for the shares sold by the Company was $69.1 million, and after deducting $4.7 million of underwriting discounts and $1.6 million of offering expenses paid to third parties, the Company received total net proceeds of $62.8 million.

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, ~~(“SEC”)~~or SEC, and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America, ~~(“GAAP”)~~or GAAP, for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, ~~2018,~~2021, included in the Company’s ~~prospectus~~Annual Report on Form 10-K filed with the SEC on ~~September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933.~~March 11, 2022.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its ~~wholly owned~~wholly-owned subsidiaries. The Company’s principal operating subsidiary is the Bank.

In the normal course of business, the Company may enter into a transaction with a variable interest entity, ~~(“VIE”).~~or VIE. VIE’s are legal entities whose investors lack the ability to make decisions about the entity’s activities, or whose equity investors do not have the right to receive the residual returns of the entity. The applicable accounting guidance requires the Company to perform ongoing quantitative and qualitative analysis to determine whether it must consolidate any VIE. The Company does not have any ownership interest in, or exert any control, over any VIE, and thus no VIE’s are included in the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atas of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

~~Table of Contents~~

Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

Table of Contents

Reclassifications

Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.

Other Information

As of March 31, 2022, the Coronavirus Disease, or COVID-19, pandemic was ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, with certain setbacks, started reopening and wider distribution of vaccines encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the continued distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, ~~(the “JOBS Act”),~~or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, ~~(the~~or the “Exchange Act”); or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

NOTE 2 Recent Accounting Pronouncements

The following FASB Accounting Standards Updates, ~~(“ASUs”)~~or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, ~~2019,~~2022, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of ~~September 30, 2019.~~March 31, 2022.

Adopted Pronouncements

In ~~February 2016,~~December 2019, the FASB issued ASU ~~No. 2016‑02, “Leases.” Under~~2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the ~~new guidance, lessees will be required to recognize the following for all leases (with the exception~~general principles in Topic 740. The amendments also improve consistent application of ~~short‑term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments,~~ and ~~2) a right‑of‑use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset~~simplify GAAP for the ~~lease term. Lessor accounting under the new~~areas of Topic 740 by clarifying and amending existing guidance. This guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales‑type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease‑related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016‑02 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,

Table of Contents

2020, for public business entities. For private companies and ~~annual~~smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, ~~2018.~~

~~Table of Contents~~

All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018‑11, the modified retrospective approach was applied on January 1, 2019.2021. The Company ~~also elected certain relief options offered in~~adopted ASU ~~2016‑02 including the package~~2019-12, as of practical expedients, the option not to separate lease and non‑lease components and instead to account for them as a single lease component, and the option not to recognize right‑of‑use assets and lease liabilities that arise from short‑term leases (i.e., leases with terms of twelve months or less). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right‑of‑use assets. The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated balance sheets. The new guidance requires these lease agreements to be recognized on the consolidated balance sheets as a right‑of‑use asset and a corresponding lease liability.January 2022. The new guidance did not have ~~a material~~an impact on the ~~consolidated statements of income or the consolidated statements of cash flows. See “NOTE 7 Leases” for more information.~~

In March 2017, the FASB issued ASU No. 2017‑08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual life of the security. ASU 2017‑08 does not change the accounting for purchased callable debt securities held at a discount as the discount will continue to be accreted to maturity. ASU 2017‑08 is effective for public business entities for the interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative‑effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which ASU 2017‑08 is adopted. The Company elected to early adopt this standard as of January 1, 2019, and has evaluated the provisions of ASU 2017‑08 and determined there is no impact on its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017‑12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017‑12 is effective for interim and annual reporting periods beginning after December 15, 2018. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not currently utilize hedge accounting. As such, ASU No. 2017‑12 did not impact the Company’s ~~consolidated financial statements.~~

In September 2018, the FASB issued ASU No. 2018‑07, Compensation (Topic 718): Improvements to Nonemployee Share‑Based Payment Accounting. This ASU has been issued as part of a simplification initiative which will expand the scope of Topic 718 to include share‑based payment transactions for the acquiring of goods and services from non‑employees and expands the scope through the amendments to address and improve aspects of the accounting for non‑employee share‑based payment transactions. The amendments will be effective for public business entities for interim and annual reporting periods beginning after December 15, 2018. The Company elected to early adopt ASU 2018‑07 effective January 1, 2019, and has evaluated the provisions of ASU 2018‑07 and determined there was no significant impact on its consolidated financial statements.

Pronouncements Not Yet Effective

In ~~September~~June 2016, the FASB issued ASU No. ~~2016‑13,~~2016-13, Financial ~~Instruments—~~Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss, ~~(“CECL”)~~or CECL, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU ~~2016‑13~~2016-13 include (1) replacing the “incurred cost” approach under GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to ~~available‑for‑sale~~available-for-sale debt securities rather than a direct ~~write‑down~~write-down of the carrying amount of the investments, as is required by the ~~other‑than‑temporary~~other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase ~~credit‑impaired~~credit-impaired debt securities and loans. ~~For public business entities that are~~

~~Table of Contents~~

U.S. Securities and Exchange Commission filers, ASU 2016‑13 is effective for interim and annual reporting periods beginning after December 15, 2019. For all other public business entities ASU 2016‑13 is effective for interim and annual reporting periods beginning after December 15, 2020. As an emerging growth company, ASU 2016‑13 is effective for interim and annual reporting periods beginning after December 15, 2021, although early adoption is permitted. The Company is currently evaluating the potential impact of ASU 2016‑13 on its consolidated financial statements. On July 17,In November 2019, the FASB ~~voted to issue a proposal~~issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for public comment that would potentially result in a postponement of the required implementation date for ASU 2016‑13, and on October 16, 2019, the FASB approved delaying the implementation of this ASU forcertain entities, including private companies and smaller reporting companies, until ~~2023.~~fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. As an emerging growth company, the Company can take advantage of this ~~delay. Management will continue~~delay and plans to ~~monitor any new developments regarding this possible delay.~~

~~In August 2018,~~adopt the ~~FASB issued ASU No. 2018‑13, Disclosure Framework—Changes to~~standard with the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds, and modifies certain disclosure requirements for estimated fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfer between Level 1 and Level 2 of the estimated fair value hierarchy, but will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value measurements. ASU 2018‑13 is effective for all entities interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Entities are also allowed to elect for early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until theiramended effective date. The ~~revised disclosure requirements~~Company does not plan to early adopt this standard but continues to work on its implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will ~~not have a material impact on~~be influenced by the ~~Company’s consolidated financial statements.~~composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date.

In April 2019, the FASB issued ASU ~~2019‑04,~~2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ~~This update is not expected to have a significant impact on~~The Company will consider these clarifications and improvements in determining the ~~Company’s consolidated financial statements.~~appropriate adoption of ASU 2019-04.

In May 2019, the FASB issued ASU ~~2019‑05,~~2019-05, Targeted Transition Relief, to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments. ~~As an emerging growth company, these ASUs are~~In November 2019, the FASB Issued ASU 2019-10, which amends the effective date of this ASU for ~~fiscal years beginning~~certain entities, including private companies and smaller reporting companies, until after December 15, ~~2021,~~2022, including interim periods within those fiscal years. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. This update is not expected to have a significant impact on the Company’s consolidated financial ~~statements.~~statements

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU represents changes to clarify or improve the Accounting Standards Codification, or ASC, related to seven topics. The amendments make the ASC easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Issues 1, 2, 3, 4, and 5 are conforming amendments and for public business entities effective upon the issuance of the standard. Issues 6 and 7 are amendments that affect the guidance in ASU 2016-13. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2016-13.

NOTE 3 Investment Securities

The following tables present amortized cost, gross unrealized gain and losses, and fair value of the available-for-sale investment securities and the amortized cost, net unrealized gains, carrying value, gross unrealized gains and losses and fair value of for held-to-maturity as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:

September 30, 2019

Amortized

Unrealized

Unrealized

Fair
(dollars in thousands)

Cost

Gains

Losses

Value
U.S. Treasury and agencies

$
21,607

$
29

$
(34)

$
21,602
Obligations of state and political agencies

47,227

703

(74)

47,856
Mortgage backed securities




Residential agency

165,995

3,467

(125)

169,337
Commercial

32,546

139

(33)

32,652
Asset backed securities

152

5

—

157
Corporate bonds

7,069

43

—

7,112
Total available-for-sale investment securities

$
274,596

$
4,386

$
(266)

$
278,716

Table of Contents


	March 31, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	4,107	$	60	$	—	$	4,167
Mortgage backed securities
Residential agency		765,363		229		(54,471)		711,121
Commercial		85,123		185		(2,576)		82,732
Asset backed securities		41		1		—		42
Corporate bonds		69,033		531		(1,293)		68,271
Total available-for-sale investment securities		923,667		1,006		(58,340)		866,333
Held-to-maturity
Obligations of state and political agencies		141,373		1		(7,594)		133,780
Mortgage backed securities
Residential agency		198,777		—		(14,731)		184,046
Total held-to-maturity investment securities		340,150		1		(22,325)		317,826
Total investment securities	$	1,263,817	$	1,007	$	(80,665)	$	1,184,159


	December 31, 2021
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	5,028	$	75	$	—	$	5,103
Mortgage backed securities
Residential agency		717,781		1,213		(11,837)		707,157
Commercial		88,362		2,674		(123)		90,913
Asset backed securities		52		2		—		54
Corporate bonds		49,035		1,398		(11)		50,422
Total available-for-sale investment securities		860,258		5,362		(11,971)		853,649
Held-to-maturity
Obligations of state and political agencies		144,543		1,110		(349)		145,304
Mortgage backed securities
Residential agency		207,518		—		(3,145)		204,373
Total held-to-maturity investment securities		352,061		1,110		(3,494)		349,677
Total investment securities	$	1,212,319	$	6,472	$	(15,465)	$	1,203,326

December 31, 2018

Amortized

Unrealized

Unrealized

Fair
(dollars in thousands)

Cost

Gains

Losses

Value
U.S. Treasury and agencies

$
19,364

$
—

$
(222)

$
19,142
Obligations of state and political agencies

67,662

171

(1,446)

66,387
Mortgage backed securities








Residential agency

129,906

210

(3,118)

126,998
Commercial

29,050

20

(303)

28,767
Asset backed securities

398

5

(4)

399
Corporate bonds

8,602

—

(121)

8,481
Total available-for-sale investment securities

$
254,982

$
406

$
(5,214)

$
250,174

~~The following tables present~~Gross unrealized losses ~~and fair values for available-for-sale~~on investment securities asand the fair value of ~~September 30, 2019 and December 31, 2018,~~the related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss ~~position:~~position as of March 31, 2022 and December 31, 2021, were as follows:

September 30, 2019

Less than 12 Months

Over 12 Months

Total

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair
(dollars in thousands)

Losses

Value

Losses

Value

Losses

Value
U.S. Treasury and agencies

$
(3)

$
1,757

$
(31)

$
9,969

$
(34)

$
11,726
Obligations of state and political agencies

(23)

5,965

(51)

5,999

(74)

11,964
Mortgage backed securities












Residential agency

(44)

10,020

(81)

17,138

(125)

27,158
Commercial

(18)

9,215

(15)

3,126

(33)

12,341
Asset backed securities

—

2

—

—

—

2
Corporate bonds

—

—

—

—

—

—
Total available-for-sale investment securities

$
(88)

$
26,959

$
(178)

$
36,232

$
(266)

$
63,191


	December 31, 2018
	Less than 12 Months				Over 12 Months				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair

													March 31, 2022
													Less than 12 Months				Over 12 Months				Total
													Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	(8)	$	5,288	$	(214)	$	11,598	$	(222)	$	16,886	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of state and political agencies		—		389		(1,446)		55,770		(1,446)		56,159
Mortgage backed securities
Residential agency		(44)		7,352		(3,074)		112,293		(3,118)		119,645		(30,707)		462,087		(23,764)		219,167		(54,471)		681,254
Commercial		(39)		7,844		(264)		9,741		(303)		17,585		(2,576)		70,176		—		—		(2,576)		70,176
Asset backed securities		—		2		(4)		155		(4)		157		—		—		—		2		—		2
Corporate bonds		—		—		(121)		8,481		(121)		8,481		(1,293)		38,240		—		—		(1,293)		38,240
Total available-for-sale investment securities	$	(91)	$	20,875	$	(5,123)	$	198,038	$	(5,214)	$	218,913		(34,576)		570,503		(23,764)		219,169		(58,340)		789,672
Held-to-maturity
Obligations of state and political agencies														(7,594)		131,278		—		—		(7,594)		131,278
Mortgage backed securities
Residential agency														(14,731)		184,046		—		—		(14,731)		184,046
Total held-to-maturity investment securities														(22,325)		315,324		—		—		(22,325)		315,324
Total investment securities													$	(56,901)	$	885,827	$	(23,764)	$	219,169	$	(80,665)	$	1,104,996


	December 31, 2021
	Less than 12 Months				Over 12 Months				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities
Residential agency		(10,156)		554,811		(1,681)		55,082		(11,837)		609,893
Commercial		(123)		17,470		—		—		(123)		17,470
Asset backed securities		—		—		—		2		—		2
Corporate bonds		(11)		5,989		—		—		(11)		5,989
Total available-for-sale investment securities		(10,290)		578,270		(1,681)		55,084		(11,971)		633,354
Held-to-maturity
Obligations of state and political agencies		(349)		53,210		—		—		(349)		53,210
Mortgage backed securities
Residential agency		(3,145)		204,373		—		—		(3,145)		204,373
Total held-to-maturity investment securities		(3,494)		257,583		—		—		(3,494)		257,583
Total investment securities	$	(13,784)	$	835,853	$	(1,681)	$	55,084	$	(15,465)	$	890,937

For all of the above investment securities, the unrealized losses ~~are~~were generally due to changes in interest rates, and unrealized losses ~~are~~were considered to be temporary as the fair value is expected to recover as the securities approach their maturity ~~date.~~dates. The Company expects that it could see a continued increase in unrealized losses if the Federal Reserve continues to raise interest rates. The Company evaluates securities for other-than-temporary impairment, ~~(“OTTI”)~~or OTTI, on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, consideration is given to the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities, considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

For the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018,~~2021, the Company did not recognize OTTI losses on its investment securities.

The following table presents amortized cost and ~~estimated~~ fair value of ~~the~~ available-for-sale and carrying value and fair value of held-to-maturity investment securities as of ~~September 30, 2019,~~March 31, 2022, by contractual maturity:

Amortized

Fair
(dollars in thousands)

Cost

Value
Due within one year or less

$
3,016

$
3,026
Due after one year through five years

35,948

35,989
Due after five years through ten years

78,983

80,405
Due after 10 years

156,649

159,296
Total available-for-sale investment securities

$
274,596

$
278,716


	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	7,452	$	7,423	$	1	$	1
Due after one year through five years		35,474		33,923		8,456		8,316
Due after five years through ten years		73,557		69,032		100,021		98,740
Due after 10 years		223,667		207,448		815,189		759,276
Total investment securities	$	340,150	$	317,826	$	923,667	$	866,333

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

Investment securities with a total carrying value of ~~$141.1~~$270.0 million and ~~$149.0~~$192.8 million were pledged as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, respectively, to secure public deposits and for other purposes required or permitted by law.

Proceeds from the sale or call of ~~available‑for‑sale~~available-for-sale investment securities, for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018,~~2021, are displayed in the table below:

Three months ended

Nine months ended

September 30,

September 30,
(dollars in thousands)

2019

2018

2019

2018
Proceeds

$
10,934

$
2,021

$
32,565

$
2,466
Realized gains

59

—

357

105
Realized losses

11

—

22

5


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Proceeds	$	—	$	13,189
Realized gains		—		114
Realized losses		—		—

Proceeds from the call of held-to-maturity investment securities, for the three months ended March 31, 2022 and 2021, are displayed in the table below:


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Proceeds	$	515	$	—
Realized gains		—		—
Realized losses		—		—

As of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, ~~(“FHLB”)~~or FHLB, stock was as follows:

September 30,

December 31,
(dollars in thousands)

2019

2018
Federal Reserve

$
2,675

$
2,675
FHLB

3,121

6,875


	March 31,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	2,675	$	2,675
FHLB		4,246		3,806

These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

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Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of ~~September 30, 2019,~~March 31, 2022, the conversion ratio was ~~1.6298.~~1.6181. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares ~~(11,285~~(11,204 Class A equivalents) that the Company ~~owns~~owned as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018, are~~2021, were carried at a ~~zero~~0 cost basis.

~~Table of Contents~~

NOTE 4 Loans and Allowance for Loan Losses

The following table presents total loans outstanding, by portfolio segment, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:


	March 31,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	467,449	$	436,761
Real estate construction		41,604		40,619
Commercial real estate		602,158		598,893
Total commercial		1,111,211		1,076,273
Consumer
Residential real estate first mortgage		522,489		510,716
Residential real estate junior lien		130,604		125,668
Other revolving and installment		53,738		45,363
Total consumer		706,831		681,747
Total loans	$	1,818,042	$	1,758,020

September 30,

December 31,
(dollars in thousands)

2019

2018
Commercial

Commercial and industrial

$
485,183

$
510,706
Real estate construction

21,674

18,965
Commercial real estate

444,600

439,963
Total commercial

951,457

969,634
Consumer




Residential real estate first mortgage

459,763

448,143
Residential real estate junior lien

182,516

188,855
Other revolving and installment

92,351

95,218
Total consumer

734,630

732,216
Total loans

$
1,686,087

$
1,701,850

(1)	Included Paycheck Protection Program, or PPP, loans of $13.1 million at March 31, 2022 and $33.6 million at December 31, 2021.

Total loans ~~include~~included net deferred loan fees and costs of ~~$1.1 million~~$444 thousand and ~~$1.7 million~~$231 thousand at ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, respectively. Deferred loan fees on PPP loans were $333 thousand at March 31, 2022 and $881 thousand at December 31, 2021.

Management monitors the credit quality of its loan portfolio on an ongoing basis. ~~Measurement~~Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status. Loan modifications made in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions, as issued on April 7, 2020, are included as accruing current.

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The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:

September 30, 2019

90 Days

Accruing

30 - 89 Days

or More

Total
(dollars in thousands)

Current

Past Due

Past Due

Nonperforming

Loans
Commercial










Commercial and industrial

$
481,480

$
1,561

$
45

$
2,097

$
485,183
Real estate construction

21,224

450

—

—

21,674
Commercial real estate

443,129

—

—

1,471

444,600
Total commercial

945,833

2,011

45

3,568

951,457
Consumer










Residential real estate first mortgage

456,981

2,105

—

677

459,763
Residential real estate junior lien

181,646

14

—

856

182,516
Other revolving and installment

92,176

169

—

6

92,351
Total consumer

730,803

2,288

—

1,539

734,630
Total loans

$
1,676,636

$
4,299

$
45

$
5,107

$
1,686,087


	March 31, 2022
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	465,678	$	218	$	146	$	1,407	$	467,449
Real estate construction		41,604		—		—		—		41,604
Commercial real estate		601,087		442		—		629		602,158
Total commercial		1,108,369		660		146		2,036		1,111,211
Consumer
Residential real estate first mortgage		520,043		687		—		1,759		522,489
Residential real estate junior lien		129,934		445		—		225		130,604
Other revolving and installment		53,518		171		—		49		53,738
Total consumer		703,495		1,303		—		2,033		706,831
Total loans	$	1,811,864	$	1,963	$	146	$	4,069	$	1,818,042


	December 31, 2021
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	435,135	$	168	$	121	$	1,337	$	436,761
Real estate construction		40,619		—		—		—		40,619
Commercial real estate		598,264		—		—		629		598,893
Total commercial		1,074,018		168		121		1,966		1,076,273
Consumer
Residential real estate first mortgage		508,925		1,770		—		21		510,716
Residential real estate junior lien		125,412		167		—		89		125,668
Other revolving and installment		45,242		121		—		—		45,363
Total consumer		679,579		2,058		—		110		681,747
Total loans	$	1,753,597	$	2,226	$	121	$	2,076	$	1,758,020

~~Table of Contents~~

December 31, 2018

90 Days

Accruing

30 - 89 Days

or More

Total
(dollars in thousands)

Current

Past Due

Past Due

Nonperforming

Loans
Commercial










Commercial and industrial

$
504,313

$
2,815

$
—

$
3,578

$
510,706
Real estate construction

18,965

—

—

—

18,965
Commercial real estate

438,446

—

—

1,517

439,963
Total commercial

961,724

2,815

—

5,095

969,634
Consumer










Residential real estate first mortgage

444,470

2,411

—

1,262

448,143
Residential real estate junior lien

187,502

769

—

584

188,855
Other revolving and installment

94,615

581

—

22

95,218
Total consumer

726,587

3,761

—

1,868

732,216
Total loans

$
1,688,311

$
6,576

$
—

$
6,963

$
1,701,850

Interest income foregone on nonaccrual loans approximated $36 thousand and $80 thousand for the three months ended March 31, 2022 and 2021, respectively.

The Company’s consumer loan portfolio is primarily comprised of ~~both~~ secured ~~and unsecured~~ loans that ~~are relatively small and~~ are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred.

The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:

Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.

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Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a ~~well‑defined~~well-defined weakness or weaknesses that jeopardize the repayment of the debt. ~~Well‑defined~~Well-defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and charged off immediately.

~~Table of Contents~~

The tables below present total loans outstanding, by loan portfolio segment, and risk category as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:

September 30, 2019

Criticized

Special

(dollars in thousands)

Pass

Mention

Substandard

Doubtful

Total
Commercial










Commercial and industrial

$
453,707

$
10,439

$
20,781

$
256

$
485,183
Real estate construction

20,396

284

994

—

21,674
Commercial real estate

420,060

673

23,867

—

444,600
Total commercial

$
894,163

$
11,396

$
45,642

$
256

$
951,457
Consumer










Residential real estate first mortgage

459,086

—

677

—

459,763
Residential real estate junior lien

180,344

—

2,172

—

182,516
Other revolving and installment

92,345

—

6

—

92,351
Total consumer

731,775

—

2,855

—

734,630
Total loans

$
1,625,938

$
11,396

$
48,497

$
256

$
1,686,087


	December 31, 2018
			Criticized
			Special

											March 31, 2022
													Criticized
													Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	459,565	$	12,055	$	37,523	$	1,563	$	510,706	$	463,278	$	—	$	4,171	$	—	$	467,449
Real estate construction		17,910		—		1,055		—		18,965		41,604		—		—		—		41,604
Commercial real estate		407,178		6,304		26,481		—		439,963		592,748		—		9,410		—		602,158
Total commercial	$	884,653	$	18,359	$	65,059	$	1,563	$	969,634		1,097,630		—		13,581		—		1,111,211
Consumer
Residential real estate first mortgage		448,124		—		19		—		448,143		520,438		—		2,051		—		522,489
Residential real estate junior lien		186,370		—		2,485		—		188,855		129,830		—		774		—		130,604
Other revolving and installment		95,218		—		—		—		95,218		53,689		—		49		—		53,738
Total consumer		729,712		—		2,504		—		732,216		703,957		—		2,874		—		706,831
Total loans	$	1,614,365	$	18,359	$	67,563	$	1,563	$	1,701,850	$	1,801,587	$	—	$	16,455	$	—	$	1,818,042


	December 31, 2021
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	430,235	$	480	$	6,046	$	—	$	436,761
Real estate construction		40,619		—		—		—		40,619
Commercial real estate		585,291		—		13,602		—		598,893
Total commercial		1,056,145		480		19,648		—		1,076,273
Consumer
Residential real estate first mortgage		510,375		—		341		—		510,716
Residential real estate junior lien		124,898		—		770		—		125,668
Other revolving and installment		45,363		—		—		—		45,363
Total consumer		680,636		—		1,111		—		681,747
Total loans	$	1,736,781	$	480	$	20,759	$	—	$	1,758,020

The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical

Table of Contents

net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.

~~Table of Contents~~

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan losses for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018:~~2021:

Three months ended September 30, 2019

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial










Commercial and industrial

$
11,694

$
(962)

$
(324)

$
538

$
10,946
Real estate construction

323

25

—

—

348
Commercial real estate

5,765

(4)

—

—

5,761
Total commercial

17,782

(941)

(324)

538

17,055
Consumer










Residential real estate first mortgage

1,155

(139)

—

—

1,016
Residential real estate junior lien

710

157

(20)

49

896
Other revolving and installment

380

1

(31)

28

378
Total consumer

2,245

19

(51)

77

2,290
Unallocated

1,219

2,420

—

—

3,639
Total

$
21,246

$
1,498

$
(375)

$
615

$
22,984


	Three months ended March 31, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	771	$	(27)	$	126	$	9,795
Real estate construction		783		27		—		—		810
Commercial real estate		12,376		(441)		—		11		11,946
Total commercial		22,084		357		(27)		137		22,551
Consumer
Residential real estate first mortgage		6,532		129		—		—		6,661
Residential real estate junior lien		1,295		92		—		13		1,400
Other revolving and installment		481		145		(18)		36		644
Total consumer		8,308		366		(18)		49		8,705
Unallocated		1,180		(723)		—		—		457
Total	$	31,572	$	—	$	(45)	$	186	$	31,713


	Three months ended March 31, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	316	$	(204)	$	170	$	10,487
Real estate construction		658		(60)		—		—		598
Commercial real estate		14,105		277		(536)		3		13,849
Total commercial		24,968		533		(740)		173		24,934
Consumer
Residential real estate first mortgage		5,774		273		—		—		6,047
Residential real estate junior lien		1,373		(168)		—		83		1,288
Other revolving and installment		753		(83)		(44)		40		666
Total consumer		7,900		22		(44)		123		8,001
Unallocated		1,378		(555)		—		—		823
Total	$	34,246	$	—	$	(784)	$	296	$	33,758

Nine months ended September 30, 2019

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial

Commercial and industrial

$
12,127

$
3,263

$
(5,275)

$
831

$
10,946
Real estate construction

250

97

(1)

2

348
Commercial real estate

6,279

(668)

—

150

5,761
Total commercial

18,656

2,692

(5,276)

983

17,055
Consumer

Residential real estate first mortgage

1,156

(140)

—

—

1,016
Residential real estate junior lien

805

113

(154)

132

896
Other revolving and installment

380

388

(513)

123

378
Total consumer

2,341

361

(667)

255

2,290
Unallocated

1,177

2,462

—

—

3,639
Total

$
22,174

$
5,515

$
(5,943)

$
1,238

$
22,984

Three months ended September 30, 2018

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial

Commercial and industrial

$
10,024

$
1,452

$
(424)

$
126

$
11,178
Real estate construction

395

(109)

—

—

286
Commercial real estate

6,478

(72)

—

20

6,426
Total commercial

16,897

1,271

(424)

146

17,890
Consumer

Residential real estate first mortgage

1,486

(142)

—

—

1,344
Residential real estate junior lien

830

20

(47)

11

814
Other revolving and installment

483

31

(99)

26

441
Total consumer

2,799

(91)

(146)

37

2,599
Unallocated

173

350

—

—

523
Total

$
19,869

$
1,530

$
(570)

$
183

$
21,012

Table of Contents

Nine months ended September 30, 2018

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial










Commercial and industrial

$
7,589

$
6,158

$
(3,078)

$
509

$
11,178
Real estate construction

343

1

(60)

2

286
Commercial real estate

4,909

1,458

—

59

6,426
Total commercial

12,841

7,617

(3,138)

570

17,890
Consumer










Residential real estate first mortgage

1,411

(38)

(29)

—

1,344
Residential real estate junior lien

902

(145)

(133)

190

814
Other revolving and installment

499

34

(236)

144

441
Total consumer

2,812

(149)

(398)

334

2,599
Unallocated

911

(388)

—

—

523
Total

$
16,564

$
7,080

$
(3,536)

$
904

$
21,012

The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~

September 30, 2019

Recorded Investment

Allowance for Loan Losses

Individually

Collectively

Individually

Collectively

(dollars in thousands)

Evaluated

Evaluated

Total

Evaluated

Evaluated

Unallocated

Total
Commercial







Commercial and industrial

$
2,513

$
482,670

$
485,183

$
1,429

$
9,517

$
—

$
10,946
Real estate construction

—

21,674

21,674

—

348

—

348
Commercial real estate

1,480

443,120

444,600

352

5,409

—

5,761
Total commercial

3,993

947,464

951,457

1,781

15,274

—

17,055
Consumer







Residential real estate first mortgage

355

459,408

459,763

—

1,016

—

1,016
Residential real estate junior lien

804

181,712

182,516

324

572

—

896
Other revolving and installment

5

92,346

92,351

2

376

—

378
Total consumer

1,164

733,466

734,630

326

1,964

—

2,290
Total loans

$
5,157

$
1,680,930

$
1,686,087

$
2,107

$
17,238

$
3,639

$
22,984

December 31, 2018

Recorded Investment

Allowance for Loan Losses

Individually

Collectively

Individually

Collectively

(dollars in thousands)

Evaluated

Evaluated

Total

Evaluated

Evaluated

Unallocated

Total
Commercial







Commercial and industrial

$
3,945

$
506,761

$
510,706

$
2,059

$
10,068

$
—

$
12,127
Real estate construction

—

18,965

18,965

—

250

—

250
Commercial real estate

1,684

438,279

439,963

455

5,824

—

6,279
Total commercial

5,629

964,005

969,634

2,514

16,142

—

18,656
Consumer







Residential real estate first mortgage

352

447,791

448,143

—

1,156

—

1,156
Residential real estate junior lien

559

188,296

188,855

4

801

—

805
Other revolving and installment

20

95,198

95,218

20

360

—

380
Total consumer

931

731,285

732,216

24

2,317

—

2,341
Total loans

$
6,560

$
1,695,290

$
1,701,850

$
2,538

$
18,459

$
1,177

$
22,174

2021:


	March 31, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,584	$	465,865	$	467,449	$	339	$	9,456	$	9,795
Real estate construction		—		41,604		41,604		—		810		810
Commercial real estate		806		601,352		602,158		4		11,942		11,946
Total commercial		2,390		1,108,821		1,111,211		343		22,208		22,551
Consumer
Residential real estate first mortgage		1,759		520,730		522,489		—		6,661		6,661
Residential real estate junior lien		226		130,378		130,604		—		1,400		1,400
Other revolving and installment		49		53,689		53,738		18		626		644
Total consumer		2,034		704,797		706,831		18		8,687		8,705
Unallocated		—		—		—		—		—		457
Total loans	$	4,424	$	1,813,618	$	1,818,042	$	361	$	30,895	$	31,713


	December 31, 2021
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,831	$	434,930	$	436,761	$	278	$	8,647	$	8,925
Real estate construction		—		40,619		40,619		—		783		783
Commercial real estate		809		598,084		598,893		5		12,371		12,376
Total commercial		2,640		1,073,633		1,076,273		283		21,801		22,084
Consumer
Residential real estate first mortgage		21		510,695		510,716		—		6,532		6,532
Residential real estate junior lien		91		125,577		125,668		—		1,295		1,295
Other revolving and installment		—		45,363		45,363		—		481		481
Total consumer		112		681,635		681,747		—		8,308		8,308
Unallocated		—		—		—		—		—		1,180
Total loans	$	2,752	$	1,755,268	$	1,758,020	$	283	$	30,109	$	31,572

Table of Contents

The tables below summarize key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses.

September 30, 2019

December 31, 2018

Recorded

Unpaid

Related

Recorded

Unpaid

Related
(dollars in thousands)

Investment

Principal

Allowance

Investment

Principal

Allowance
Impaired loans with a valuation allowance







Commercial and industrial

$
1,757

$
1,900

$
1,429

$
2,660

$
2,752

$
2,059
Commercial real estate

1,480

1,595

352

1,499

1,517

455
Residential real estate first mortgage

—

—

—

—

—

—
Residential real estate junior lien

536

619

324

4

4

4
Other revolving and installment

4

4

2

19

20

20
Total impaired loans with a valuation allowance

3,777

4,118

2,107

4,182

4,293

2,538
Impaired loans without a valuation allowance







Commercial and industrial

756

1,077

—

1,285

1,422

—
Commercial real estate

—

—

—

185

218

—
Residential real estate first mortgage

355

367

—

352

504

—
Residential real estate junior lien

268

290

—

555

697

—
Other revolving and installment

1

1

—

1

2

—
Total impaired loans without a valuation allowance

1,380

1,735

—

2,378

2,843

—
Total impaired loans







Commercial and industrial

2,513

2,977

1,429

3,945

4,174

2,059
Commercial real estate

1,480

1,595

352

1,684

1,735

455
Residential real estate first mortgage

355

367

—

352

504

—
Residential real estate junior lien

804

909

324

559

701

4
Other revolving and installment

5

5

2

20

22

20
Total impaired loans

$
5,157

$
5,853

$
2,107

$
6,560

$
7,136

$
2,538


	March 31, 2022						December 31, 2021
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	508	$	532	$	339	$	445	$	464	$	278
Commercial real estate		177		199		4		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		40		40		18		—		—		—
Total impaired loans with a valuation allowance		725		771		361		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		1,076		1,188		—		1,386		1,575		—
Commercial real estate		629		684		—		629		684		—
Residential real estate first mortgage		1,759		1,759		—		21		24		—
Residential real estate junior lien		226		256		—		91		120		—
Other revolving and installment		9		9		—		—		—		—
Total impaired loans without a valuation allowance		3,699		3,896		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		1,584		1,720		339		1,831		2,039		278
Commercial real estate		806		883		4		809		887		5
Residential real estate first mortgage		1,759		1,759		—		21		24		—
Residential real estate junior lien		226		256		—		91		120		—
Other revolving and installment		49		49		18		—		—		—
Total impaired loans	$	4,424	$	4,667	$	361	$	2,752	$	3,070	$	283

The table below presents the average recorded investment in impaired loans and interest income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018:~~2021:


	Three months ended September 30,
	2019				2018
	Average				Average
	Recorded		Interest		Recorded		Interest

									Three Months Ended March 31,
									2022				2021
									Average				Average
									Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,964	$	4	$	1,961	$	9	$	528	$	3	$	1,816	$	13
Commercial real estate		1,623		2		1,767		2		180		2		2,793		138
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		619		1		63		1		—		—		33		—
Other revolving and installment		5		—		39		—		41		—		38		—
Total impaired loans with a valuation allowance		4,211		7		3,830		12		749		5		4,680		151
Impaired loans without a valuation allowance
Commercial and industrial		1,206		7		1,073		—		1,126		—		1,258		22
Commercial real estate		—		—		842		—		642		—		2,158		—
Residential real estate first mortgage		183		—		525		—		1,759		—		435		—
Residential real estate junior lien		297		—		394		—		230		—		176		—
Other revolving and installment		2		—		3		—		9		—		—		—
Total impaired loans without a valuation allowance		1,688		7		2,837		—		3,766		—		4,027		22
Total impaired loans
Commercial and industrial		3,170		11		3,034		9		1,654		3		3,074		35
Commercial real estate		1,623		2		2,609		2		822		2		4,951		138
Residential real estate first mortgage		183		—		525		—		1,759		—		435		—
Residential real estate junior lien		916		1		457		1		230		—		209		—
Other revolving and installment		7		—		42		—		50		—		38		—
Total impaired loans	$	5,899	$	14	$	6,667	$	12	$	4,515	$	5	$	8,707	$	173

~~Table of Contents~~

Nine Months Ended September 30,

2019

2018

Average

Average

Recorded

Interest

Recorded

Interest
(dollars in thousands)

Investment

Income

Investment

Income
Impaired loans with a valuation allowance








Commercial and industrial

$
2,473

$
12

$
2,026

$
27
Commercial real estate

1,668

6

1,793

7
Residential real estate first mortgage

—

—

—

—
Residential real estate junior lien

621

3

63

2
Other revolving and installment

5

—

43

—
Total impaired loans with a valuation allowance

4,767

21

3,925

36
Impaired loans without a valuation allowance








Commercial and industrial

2,979

23

1,130

—
Commercial real estate

—

—

747

—
Residential real estate first mortgage

92

—

539

—
Residential real estate junior lien

302

—

403

1
Other revolving and installment

4

—

3

—
Total impaired loans without a valuation allowance

3,377

23

2,822

1
Total impaired loans








Commercial and industrial

5,452

35

3,156

27
Commercial real estate

1,668

6

2,540

7
Residential real estate first mortgage

92

—

539

—
Residential real estate junior lien

923

3

466

3
Other revolving and installment

9

—

46

—
Total impaired loans

$
8,144

$
44

$
6,747

$
37

Loans with a carrying value of ~~$1.1~~$1.3 billion as of ~~September 30, 2019~~March 31, 2022 and $1.2 billion as of December 31, ~~2018,~~2021, were pledged to secure public deposits, and for other purposes required or permitted by law.

Table of Contents

Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a ~~troubled debt restructuring (“TDR”)~~TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDR concessions can include a reduction of interest rates, an extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

During the first quarter of ~~2019~~2022, there ~~was one loan that was~~were 0 loans modified as a troubled debt restructuring as a result of extending the amortization period. As of September 30, 2019, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for the loan losses allocated to the loan modified as troubled debt restructuring.TDR. During the first quarter of ~~2018,~~2021, there ~~was one loan~~were 0 loans modified as a troubled debt restructuring as a result of adjusting the interest rate below current market levels. The balance at the time of restructuring was $1.0 million. As of December 31, 2018, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for loan losses allocated to the loan modified as troubled debt restructuring.TDR.

The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in ~~troubled debt restructurings~~TDRs or whose loans are on ~~nonaccrual.~~nonaccrual

~~Table of Contents~~

NOTE 5 Goodwill and Other Intangible Assets

~~As of September 30, 2019 and December 31, 2018, goodwill totaled $27.3 million.~~

The following table summarizes the carrying amount of goodwill, by segment, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:

(dollars in thousands)

Goodwill
Banking

$
20,131
Retirement and benefit services

7,198
Total goodwill

$
27,329


	March 31,		December 31,
(dollars in thousands)	2022		2021
Banking	$	20,131	$	20,131
Retirement and benefit services		11,359		11,359
Total goodwill	$	31,490	$	31,490

Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was 0 goodwill impairment as of March 31, 2022.

The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:

September 30, 2019

December 31, 2018
(dollars in thousands)

Gross Carrying Amount

Accumulated Amortization

Total

Gross Carrying Amount

Accumulated Amortization

Total
Identifiable customer intangibles

$
55,744

$
(37,374)

$
18,370

$
55,744

$
(34,972)

$
20,772
Core deposit intangible assets

7,216

(6,204)

1,012

7,216

(5,515)

1,701
Total intangible assets

$
62,960

$
(43,578)

$
19,382

$
62,960

$
(40,487)

$
22,473


	March 31, 2022						December 31, 2021
(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Identifiable customer intangibles	$	42,057	$	(22,860)	$	19,197	$	42,057	$	(21,807)	$	20,250
Total intangible assets	$	42,057	$	(22,860)	$	19,197	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was ~~$1.0~~$1.1 million and ~~$3.1~~$1.2 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2022, and ~~$1.2 million and $3.6 million for the comparable periods in 2018,~~2021, respectively.

NOTE 6 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled ~~$560.9~~$325.0 million and ~~$591.6~~$345.8 million as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

The following table summarizes the Company’s activity related to servicing rights for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018:~~

Three months ended

Nine months ended

September 30,

September 30,
(dollars in thousands)

2019

2018

2019

2018
Balance, beginning of period

$
4,300

$
4,676

$
4,623

$
4,686
Additions

179

152

279

431
Amortization

(287)

(165)

(690)

(512)
(Impairment)/Recovery

(46)

8

(66)

66
Balance, end of period

$
4,146

$
4,671

$
4,146

$
4,671

2021:

2019

Table of Contents


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Balance, beginning of period	$	1,880	$	1,987
Additions		4		49
Amortization		(159)		(200)
(Impairment)/Recovery		46		116
Balance, end of period	$	1,771	$	1,952

The following is a summary of key data and assumptions used in the valuation of servicing rights as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018.~~2021. Increases or decreases in any one of these assumptions would result in lower or higher fair value ~~measurements.~~

September 30,

December 31,

(dollars in thousands)

2019

2018

Fair value of servicing rights

$
4,146

$
4,623

Weighted-average remaining term, years

20.5

20.8

Prepayment speeds

11.6
%

7.8
%
Discount rate

9.5
%

10.5
%

measurements:


	March 31,			December 31,
(dollars in thousands)	2022			2021
Fair value of servicing rights	$	1,771		$	1,880
Weighted-average remaining term, years		20.7			20.3
Prepayment speeds		8.8	%		14.2	%
Discount rate		10.0	%		9.5	%

NOTE 7 Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for ~~branches,~~offices and office equipment rentals with terms extending through ~~2032.~~2027. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated financial statements. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated financial statements as a right‑of‑use (“ROU”) asset and a corresponding lease liability.leases. The Company has ~~one~~1 existing finance lease ~~(previously referred to as a capital lease)~~ for ~~a portion of~~ the Company’s headquarters building with a lease term through October 31, 2022. ~~As this lease was previously required to be recorded on the Company’s consolidated financial statements, Topic 842 did not materially impact the accounting for this lease.~~

The Company elected not to include ~~short‑term~~short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial ~~statements.~~statements:

September 30,
(dollars in thousands)

2019
Lease Right-of-Use Assets

Classification

Operating lease right-of-use assets

Operating lease right-of-use assets

$
8,877
Finance lease right-of-use assets

Land, premises and equipment, net

347
Total lease right-of-use assets

$
9,224
Lease Liabilities




Operating lease liabilities

Operating lease liabilities

$
9,401
Finance lease liabilities

Long-term debt

690
Total lease liabilities

$
10,091


		March 31,		December 31,
(dollars in thousands)		2022		2021
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,360	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		58		87
Total lease right-of-use assets		$	3,418	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,850	$	4,275
Finance lease liabilities	Long-term debt		143		203
Total lease liabilities		$	3,993	$	4,478

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include ~~one~~1 or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For ~~operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For~~ the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.

2120

Table of Contents


	~~September 30,~~
	~~2019~~
~~Weighted-average remaining lease term, years~~
~~Operating leases~~		~~6.5~~
~~Finance leases~~		~~3.1~~
~~Weighted-average discount rate~~
~~Operating leases~~		~~3.2~~	%
~~Finance leases~~		~~7.8~~	%


	March 31,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	3.3		3.4
Finance leases	0.5		0.8
Weighted-average discount rate
Operating leases	2.3	%	2.5	%
Finance leases	7.8	%	7.8	%

As the Company elected, for all classes of underlying assets, not to separate lease and ~~non‑lease~~non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for usage or maintenance of those capitalized equipment operating leases.

The following table presents lease costs and other lease information for the three ~~and nine~~ months ending ~~September 30, 2019.~~March 31, 2022 and 2021:

Three months ended

Nine months ended
(dollars in thousands)

September 30, 2019

September 30, 2019
Lease costs


Operating lease cost

$
602

$
1,772
Variable lease cost

222

633
Short-term lease cost

122

416
Finance lease cost


Interest on lease liabilities

14

45
Amortization of right-of-use assets

29

87
Sublease income

(65)

(202)
Net lease cost

$
924

$
2,751
Other information


Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases

600

1,774
Right-of-use assets obtained in exchange for new operating lease liabilities

—

—
Right-of-use assets obtained in exchange for new finance lease liabilities

—

—


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Lease costs
Operating lease cost	$	411	$	496
Variable lease cost		213		233
Short-term lease cost		45		37
Finance lease cost
Interest on lease liabilities		4		8
Amortization of right-of-use assets		29		29
Sublease income		(57)		(60)
Net lease cost	$	645	$	743
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	392	$	487
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	—

Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of ~~September 30, 2019~~March 31, 2022 were as follows:

September 30, 2019

Finance

Operating
(dollars in thousands)

Leases

Leases
2020

$
251

$
2,291
2021

251

1,676
2022

251

1,579
2023

20

1,506
2024

—

1,061
Thereafter

—

2,460
Total future minimum lease payments

$
773

$
10,573
Amounts representing interest

(83)

(1,172)
Total operating lease liabilities

$
690

$
9,401


	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
March 31, 2023	$	146	$	1,597
March 31, 2024		—		1,439
March 31, 2025		—		676
March 31, 2026		—		389
March 31, 2027		—		250
Thereafter		—		238
Total future minimum lease payments	$	146	$	4,589
Amounts representing interest		(3)		(739)
Total operating lease liabilities	$	143	$	3,850

~~Table of Contents~~

NOTE 8 Deposits

The components of deposits in the consolidated balance sheets as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018~~2021 were as follows:

September 30,

December 31,
(dollars in thousands)

2019

2018
Noninterest-bearing demand

$
537,951

$
550,640
Interest-bearing




Interest-bearing demand

424,249

401,078
Savings accounts

55,513

53,971
Money market savings

622,647

598,820
Time deposits

192,753

170,587
Total interest-bearing

1,295,162

1,224,456
Total deposits

$
1,833,113

$
1,775,096

Table of Contents


	March 31,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	831,558	$	938,840
Interest-bearing
Interest-bearing demand		760,321		714,669
Savings accounts		99,299		96,825
Money market savings		976,905		937,305
Time deposits		224,184		232,912
Total interest-bearing		2,060,709		1,981,711
Total deposits	$	2,892,267	$	2,920,551

NOTE 9 ~~Short‑Term Borrowings~~

~~There were no short‑term borrowings outstanding as of September 30, 2019. Short-term borrowing as of December 31, 2018, were $93.5 million and consisted of Fed funds purchased.~~

~~The following table presents information related to short-term borrowings for the three and nine months ending September 30, 2019 and September 30, 2018:~~

Three months ended

September 30,

(dollars in thousands)

2019

2018

Fed funds purchased

Balance as of end of period

$
—

$
73,930

Average daily balance

61,386

103,171

Maximum month-end balance

124,250

94,410

Weighted-average rate

During period

2.40
%

2.21
%
End of period

2.30
%

2.30
%
FHLB Short-term advances

Balance as of end of period

$
—

$
—

Average daily balance

25,815

—

Maximum month-end balance

—

—

Weighted-average rate

During period

2.58
%

—
%
End of period

—
%

—
%

~~Table of Contents~~

Nine months ended

September 30,

(dollars in thousands)

2019

2018

Fed funds purchased

Balance as of end of period

$
—

$
73,930

Average daily balance

82,504

87,391

Maximum month-end balance

139,605

112,260

Weighted-average rate

During period

2.54
%

0.36
%
End of period

2.30
%

2.30
%
FHLB Short-term advances

Balance as of end of period

$
—

$
—

Average daily balance

12,985

110

Maximum month-end balance

135,000

—

Weighted-average rate

During period

2.44
%

2.43
%
End of period

—
%

—
%

~~NOTE 10 Long‑Term~~Long-Term Debt

~~Long‑term~~Long-term debt as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018~~2021 consisted of the following:

September 30, 2019

Period End

Face

Carrying

Interest

Maturity

(dollars in thousands)

Value

Value

Interest Rate

Rate

Date

Call Date
Subordinated notes payable

$
50,000

$
49,609

Fixed

5.75
%
12/30/2025

12/30/2020
Junior subordinated debenture (Trust I)

4,000

3,390

Three-month LIBOR + 3.10%

5.21
%
6/26/2033

6/26/2008
Junior subordinated debenture (Trust II)

6,000

5,086

Three-month LIBOR + 1.80%

3.92
%
9/15/2036

9/15/2011
Finance lease liability

2,700

690

Fixed

7.81
%
10/31/2022

N/A
Total long-term debt

$
62,700

$
58,775


	December 31, 2018
						Period End
	Face		Carrying			Interest		Maturity

										March 31, 2022
															Period End
										Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	49,562	Fixed	5.75	%	12/30/2025	12/30/2020	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,000		3,357	Three-month LIBOR + 3.10%	5.92	%	6/26/2033	6/26/2008		4,124		3,503	Three-month LIBOR + 3.10%	4.07	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		5,035	Three-month LIBOR + 1.80%	4.59	%	9/15/2036	9/15/2011		6,186		5,256	Three-month LIBOR + 1.80%	2.63	%	9/15/2036	9/15/2011
Obligations under capital lease		2,700		870	Fixed	7.81	%	10/31/2022	N/A
Finance lease liability											2,700		143	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	62,700	$	58,824						$	63,010	$	58,902


	December 31, 2021
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,124		3,492	Three-month LIBOR + 3.10%	3.32	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,238	Three-month LIBOR + 1.80%	2.00	%	9/15/2036	9/15/2011
Finance lease liability		2,700		203	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,933

The Company had a $150 thousand letter of credit with the Federal Home Loan Bank as of September 30, 2019 and December 31, 2018. Bank of North Dakota letters of credit are collateralized by loans pledged to the Bank of North Dakota in the amount of $244.8 million and $260.6 million as of September 30, 2019 and December 31, 2018, respectively. There were no outstanding letters of credit with the Bank of North Dakota as of September 30, 2019 and December 31, 2018, respectively.

~~Table of Contents~~

NOTE 1110 Financial Instruments with ~~Off‑Balance~~Off-Balance Sheet Risk

In the normal course of business, the Bank has outstanding commitment and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

As22

Table of ~~September 30, 2019~~Contents

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of March 31, 2022 and December 31, ~~2018, the following financial instruments whose contract amount represents credit risk were approximately~~2021, respectively, was as follows:

September 30,

December 31,
(dollars in thousands)

2019

2018
Commitments to extend credit

$
570,220

$
529,890
Standby letters of credit

8,023

8,852
Total

$
578,243

$
538,742


	March 31,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	650,087	$	668,115
Standby letters of credit		10,591		10,529
Total	$	660,678	$	678,644

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

The Company was not required to perform on any financial guarantees and did not incur any losses on its commitments during the past two years.

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had a $150 thousand letter of credit with the FHLB as of March 31, 2022 and December 31, 2021. With the Bank of North Dakota, the Company had 0 letters of credit outstanding as of March 31, 2022 and December 31, 2021. Bank of North Dakota potential letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of $227.9 million and $229.7 million as of March 31, 2022 and December 31, 2021, respectively.

NOTE 1211 Share-Based Compensation

~~The~~Before May 6, 2016, the Company ~~has~~ granted equity awards pursuant to the Alerus Financial Corporation 2009 Stock Plan. The awards ~~can be~~were in the form of restricted stock or restricted stock units and ~~are considered to~~ represent an element of employee compensation. ~~Compensation~~The Related compensation expense for the ~~award~~awards is based on the fair value of Alerus Financial Corporation common stock at the time of grant. The value of awards that are expected to vest ~~are~~is amortized ~~into~~as an expense over the applicable vesting periods. The ability to grant awards under this plan ~~have~~has expired. ~~Compensation expense relating to awards under this plan was $1.2 million and $702 thousand for the nine months ending September 30, 2019 and September 30, 2018, respectively.~~

~~The following table presents the activity in the stock plan for the nine months ended September 30, 2019 and 2018:~~

Nine months ended September 30, 2019

Nine months ended September 30, 2018

Weighted-

Weighted-




Average Grant


Average Grant


Awards

Date Fair Value

Awards

Date Fair Value
Restricted Stock Awards

Outstanding at beginning of period

337,014

$
18.36

336,397

$
15.38
Granted

70,617

19.87

76,031

22.67
Vested

(53,882)

18.69

(76,753)

10.56
Forfeited or cancelled

(6,138)

17.34

—

—
Outstanding at end of period

347,611

$
18.64

335,675

$
18.13

~~Table of Contents~~

As of September 30, 2019, there was $3.6 million of unrecognized compensation expense related to non-vested restricted stock awards granted under the plan. The expense is expected to be recognized over a weighted-average period of 3.29 years.

On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan ~~allows~~gives the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a ~~stock‑settled~~stock-settled stock appreciation right or other awards ~~that~~and were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan ~~is authorized to issue~~authorizes the issuance of up to ~~1,100,000.~~1,100,000 shares of common stock. As of ~~September 30, 2019, no awards had been issued under the plan~~

~~For the nine months ended September 30, 2019, the Company issued 13,144~~March 31, 2022, 948,428 shares of common stock ~~pursuant to~~are still available for issuance under the ~~Alerus Financial Corporation Stock Grant Plan for Non‑Employee Directors. Compensation~~plan.

The compensation expense relating to ~~stock~~ awards under ~~this plan~~these plans was $378 thousand and $498 thousand for the ~~nine~~three months ~~ending September 30, 2019~~ended March 31, 2022 and ~~2018, was $251 thousand and $2~~45 ~~thousand~~2021, respectively.

~~NOTE 13 Noninterest Income~~

~~All of the Company’s revenue from contracts with customers, within the scope of ASC 606, is recognized in noninterest income. The material groups of noninterest income are defined as follows:~~

~~Retirement and benefit services:~~ Retirement and benefit services income is primarily comprised of fees earned from the administration of retirement plans, record‑keeping, compliance services, payroll processing, health savings accounts, and flexible benefit plans. Fees are earned based on a combination of the market value of assets under administration and transaction based fees for services provided. Fees that are determined based on the market value of the assets under administration are generally billed monthly or quarterly in arrears and recognized monthly as the Company’s performance obligations are met. Other transaction based fees are recognized monthly as the performance obligation is satisfied.

~~Wealth management:~~ Wealth management income is earned from a variety of sources including trust administration and other related fiduciary services, custody, investment management and advisory services, and brokerage. Fees are based on the market value of the assets under management and are generally billed monthly in arrears and recognized monthly as the Company’s performance obligations are met. Commissions on transactions are recognized on a trade‑date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Other related services are based on a fixed fee schedule and the revenue is recognized when the services are rendered, which is when the Company has satisfied its performance obligation.

~~Service charges on deposit accounts:~~ Service charges on deposit accounts primarily consist of account analysis fees, monthly maintenance fees, overdraft fees, and other deposit account related fees. Overdraft fees and certain service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction. The consideration for analysis fees and monthly maintenance fees are variable as the fee can be reduced if the customer meets certain qualifying metrics. The Company’s performance obligations are satisfied at the time of the transaction or over the course of a month.

~~Other noninterest income:~~ Other noninterest income components include debit card interchange fees, bank‑owned life insurance income and miscellaneous transactional fees. Income earned from these revenue streams is generally recognized concurrently with the satisfaction of the performance obligation.

2623

Table of Contents

The following table presents the ~~Company’s noninterest income~~activity in the stock plans for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021:

Three months ended

Nine months ended

September 30,

September 30,
(dollars in thousands)

2019

2018

2019

2018
Retirement and benefits

$
15,307

$
15,536

$
46,142

$
46,873
Wealth management

3,896

3,685

11,385

10,948
Mortgage banking (1)

8,135

5,318

19,739

13,551
Service charges on deposit accounts

447

442

1,321

1,333
Net gains (losses) on investment securities (1)

48

13

357

119
Other




Interchange fees

506

509

1,480

1,519
Bank-owned life insurance income (1)

205

202

601

602
Misc. transactional fees

312

272

881

784
Other noninterest income

724

281

2,732

879
Total noninterest income

$
29,580

$
26,258

$
84,638

$
76,608

~~(1)~~

~~Not within scope of ASC 606.~~


	Three months ended March 31,
	2022			2021
		Weighted-			Weighted-
		Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period	260,850	$	21.04	325,030	$	19.48
Granted	70,850		28.39	59,374		26.36
Vested	(96,618)		18.66	(81,092)		20.72
Forfeited or cancelled	(2,209)		22.75	—		—
Outstanding at end of period	232,873	$	23.33	303,312	$	20.49

As of March 31, 2022, there was $3.1 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.9 years.

NOTE 1412 Income Taxes

The components of income tax expense (benefit) for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018 are~~2021 were as follows:

Three months ended September 30,

2019

2018

Percent of

Percent of

(dollars in thousands)

Amount

Pretax Income

Amount

Pretax Income

Taxes at statutory federal income tax rate

$
1,982

21.0
%

$
1,957

21.0
%
Tax effect of:

Tax exempt income

(107)

(1.1)

(132)

(1.4)

Other

457

4.8

126

1.3

Applicable income taxes

$
2,332

24.7
%

$
1,951

20.9
%


	Nine months ended September 30,
	2019				2018
			Percent of				Percent of

									Three months ended March 31,
									2022				2021
											Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income		Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	6,114	21.0	%	$	5,268	21.0	%	$	2,745	21.0	%	$	4,174	21.0	%
Tax effect of:
Tax exempt income		(329)	(1.1)			(402)	(1.6)			(117)	(0.9)	%		(153)	(0.8)	%
Other		1,440	4.9			386	1.5
State income taxes, net of federal benefits										579	4.4			854	4.3
Nondeductible items and other										(319)	(2.4)			(213)	(1.1)
Applicable income taxes	$	7,225	24.8	%	$	5,252	20.9	%	$	2,888	22.1	%	$	4,662	23.4	%

It is the opinion of management that the Company has no0 significant uncertain tax positions that would be subject to change upon examination.

NOTE 13 Tax Credit Investments

The Company invests in qualified affordable housing projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.

The following table presents a summary of the Company’s investments in qualified affordable housing project tax credit investments as of March 31, 2022 and December 31, 2021:


		March 31, 2022				December 31, 2021
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	Accounting Method
Low income housing tax credit	Proportional amortization	$	12,906	$	11,686	$	7,906	$	6,999
Total		$	12,906	$	11,686	$	7,906	$	6,999

Table of Contents

NOTE 1514 Segment Reporting

The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial statements, and management’s regular review of the operating results of those services. The Company operates through ~~four~~4 operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.

~~Table of Contents~~

The financial information presented onfor each segment ~~sets forth~~includes net interest income, provision for loan losses, direct noninterest income, and direct noninterest expense, before indirect allocations. Corporate Administration includes the indirect overhead and is set forth in the table below. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes.

The following table presents key metrics related to the Company’s segments for the periods presented:

Three months ended September 30, 2019




Retirement and

Wealth



Corporate


(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income

$
19,193

$
—

$
—

$
384

$
(896)

$
18,681
Provision for loan losses

1,498

—

—

—

—

1,498
Noninterest income

1,695

15,307

3,896

8,135

547

29,580
Noninterest expense

10,800

8,551

1,835

7,256

8,885

37,327
Net income before taxes

$
8,590

$
6,756

$
2,061

$
1,263

$
(9,234)

$
9,436


	Nine months ended September 30, 2019
				Retirement and		Wealth				Corporate

														Three months ended March 31, 2022
																Retirement and		Wealth				Corporate
(dollars in thousands)		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income		$	57,987	$	—	$	—	$	818	$	(2,713)	$	56,092	$	21,525	$	—	$	—	$	709	$	(561)	$	21,673
Provision for loan losses			5,515		—		—		—		—		5,515		—		—		—		—		—		—
Noninterest income			5,273		46,142		11,385		19,739		2,099		84,638		1,538		17,646		5,326		4,931		29		29,470
Noninterest expense			30,880		26,142		5,936		17,184		25,960		106,102		12,694		8,432		1,838		5,020		10,087		38,071
Net income before taxes		$	26,865	$	20,000	$	5,449	$	3,373	$	(26,574)	$	29,113	$	10,369	$	9,214	$	3,488	$	620	$	(10,619)	$	13,072


	Three months ended September 30, 2018
				Retirement and		Wealth				Corporate

														Three months ended March 31, 2021
																Retirement and		Wealth				Corporate
(dollars in thousands)		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income		$	19,568	$	—	$	17	$	248	$	(904)	$	18,929	$	21,880	$	—	$	—	$	446	$	(288)	$	22,038
Provision for loan losses			1,521		—		—		9		—		1,530		—		—		—		—		—		—
Noninterest income			1,710		15,536		3,685		5,318		9		26,258		1,522		17,255		4,986		17,132		(14)		40,881
Noninterest expense			10,042		8,948		1,709		5,319		8,318		34,336		11,084		10,112		2,335		10,853		8,658		43,042
Net income before taxes		$	9,715	$	6,588	$	1,993	$	238	$	(9,213)	$	9,321	$	12,318	$	7,143	$	2,651	$	6,725	$	(8,960)	$	19,877

Nine months ended September 30, 2018




Retirement and

Wealth



Corporate


(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income

$
57,960

$
—

$
47

$
653

$
(2,689)

$
55,971
Provision for loan losses

7,071

—

—

9

—

7,080
Noninterest income

5,159

46,873

10,948

13,551

77

76,608
Noninterest expense

29,416

27,338

5,702

14,273

23,685

100,414
Net income before taxes

$
26,632

$
19,535

$
5,293

$
(78)

$
(26,297)

$
25,085

Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through ~~locations~~14 offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segment’s balance sheet.

~~Table of Contents~~

Retirement and Benefit Services

Retirement and Benefit Services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; ESOP trustee, recordkeeping, and administration; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, ~~Cobra~~COBRA recordkeeping and administration services, and payroll to employers; and payroll and HRIS services for employers. In addition, the division operates within each of the banking markets, as well as in Lansing, Michigan and Littleton, Colorado.

Wealth Management

The Wealth Management division provides advisory and planning services, investment management, and trust and fiduciary services to clients across the Company’s footprint.

Table of Contents

Mortgage

The ~~mortgage~~Mortgage division offers first and second mortgage loans through a centralized mortgage unit in Minneapolis, Minnesota, as well as through the Banking office locations.

NOTE 1615 Earnings Per Share

Beginning in the third quarter of 2019, the Company has elected to prospectively use the two-class method in calculating earnings per share due to the restricted stock awards and restricted stock units qualifying as participating securities. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings. Average shares of common stock for diluted net income per common share include shares to be issued upon the vesting of restricted stock awards and restricted stock units granted under the Company's share-based compensation plans.

The calculation of basic and diluted earnings per share using the two-class method for the three ~~and nine~~ months ending ~~September 30, 2019 is~~March 31, 2022 and 2021 are presented below:

Three months ended

Nine months ended

September 30,

September 30,
(dollars and shares in thousands, except per share data)

2019

2019
Net income

$
7,104

$
21,888
Dividends and undistributed earnings allocated to participating securities

154

514
Net income available to common shareholders

$
6,950

$
21,374
Weighted-average common shares outstanding for basic earnings per share

14,274

13,957
Dilutive effect of stock-based awards

352

360
Weighted-average common shares outstanding for diluted earnings per share

14,626

14,317
Earnings per common share:

Basic earnings per common share

$
0.49

$
1.53
Diluted earnings per common share

$
0.48

$
1.49

For the three and nine months ended September 30, 2018, the basic and diluted earnings per share were calculated using the treasury stock method, as presented in the table below. The Company determined that the impact to diluted earnings per share would be immaterial if calculated under the two-class method for the three and nine months ended September 30, 2018.


	Three months ended
	March 31,
(dollars and shares in thousands, except per share data)	2022		2021
Net income	$	10,184	$	15,215
Dividends and undistributed earnings allocated to participating securities		125		254
Net income available to common shareholders	$	10,059	$	14,961
Weighted-average common shares outstanding for basic earnings per share		17,244		17,145
Dilutive effect of stock-based awards		256		320
Weighted-average common shares outstanding for diluted earnings per share		17,500		17,465
Earnings per common share:
Basic earnings per common share	$	0.58	$	0.87
Diluted earnings per common share	$	0.57	$	0.86

~~Table of Contents~~

~~The calculation of basic and diluted earnings per share using the treasury stock method for the three and nine months ending September 30, 2018 is presented below:~~

Three months ended

Nine months ended

September 30,

September 30,
(dollars and shares in thousands, except per share data)

2018

2018
Basic:

Net income attributable to common shareholders

$
7,370

$
19,833
Weighted-average common shares outstanding

13,777

13,759
Basic earnings per common share

$
0.53

$
1.44
Diluted:

Net income attributable to common shareholders

7,370

19,833
Weighted-average common shares outstanding

13,777

13,759
Add: Dilutive effect of stock-based awards

294

301
Weighted-average common shares outstanding for diluted EPS

14,071

14,060
Diluted earnings per common share

$
0.52

$
1.41

NOTE 1716 Derivative Instruments

The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with U.S. financial institutions in order to minimize risk to the Company. These swaps are derivatives but are not designated as hedging instruments.

The Company did not have any derivatives designated as hedging instruments as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018.~~2021. The following table presents the amounts recorded in the Company’s consolidated balance sheets, for derivatives not designated as hedging instruments, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~

September 30, 2019

December 31, 2018

Fair

Notional

Fair

Notional
(dollars in thousands)



Value

Amount

Value

Amount
Asset Derivatives

Consolidated Balance Sheet Location








Interest rate lock commitments

Other assets

$
2,036

$
89,608

$
12

$
33,858
Forward loan sales commitments

Other assets

447

17,662

—

—
TBA mortgage backed securities

Other assets

—

—

—

—
Total asset derivatives



$
2,483

$
107,270

$
12

$
33,858
Liability Derivatives










Interest rate lock commitments

Accrued expenses and other liabilities

$
—

$
—

$
—

$
—
Forward loan sales commitments

Accrued expenses and other liabilities

—

—

7

2,956
TBA mortgage backed securities

Accrued expenses and other liabilities

104

148,500

—

—
Total liability derivatives



$
104

$
148,500

$
7

$
2,956

2021:


		March 31, 2022				December 31, 2021
		Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount
Asset Derivatives	Consolidated Balance Sheet Location
Interest rate swaps	Other assets	$	3,642	$	44,480	$	1,366	$	44,826
Interest rate lock commitments	Other assets		882		53,070		1,507		52,316
Forward loan sales commitments	Other assets		—		—		490		13,418
TBA mortgage backed securities	Other assets		1,230		80,466		34		97,000
Total asset derivatives		$	5,754	$	178,016	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	3,644	$	44,480	$	1,368	$	44,826
TBA mortgage backed securities	Accrued expenses and other liabilities		—		—		—		—
Total liability derivatives		$	3,644	$	44,480	$	1,368	$	44,826

The gain (loss) recognized on derivative instruments for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018~~2021 was as follows:

Gain/(loss)

Three months ended

Nine months ended

September 30,

September 30,

September 30,

September 30,
(dollars in thousands)

Consolidated Statements of Income Location

2019

2018

2019

2018
Interest rate lock commitments

Mortgage banking

$
(257)

$
(29)

$
2,024

$
(11)
Forward loan sales commitments

Mortgage banking

(199)

46

454

24
TBA mortgage backed securities

Mortgage banking

680

—

(104)

—
Total gain/(loss) from derivative instruments

$
224

$
17

$
2,374

$
13

3026

Table of Contents


		Three months ended
	Consolidated Statements	March 31,		March 31,
(dollars in thousands)	of Income Location	2022		2021
Interest rate swaps	Other noninterest income	$	—	$	2
Interest rate lock commitments	Mortgage banking		(710)		(6,245)
Forward loan sales commitments	Mortgage banking		(490)		(1,635)
TBA mortgage backed securities	Mortgage banking		2,503		8,961
Total gain/(loss) from derivative instruments		$	1,303	$	1,083

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at March 31, 2022 and December 31, 2021 was $19 thousand and $19 thousand, respectively. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.

NOTE 1817 Regulatory Matters

The Company and the Bank isare subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s ~~and the Bank’s~~ consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes ~~as of September 30, 2019~~at March 31, 2022 and December 31, ~~2018,~~2021, each of the Company and the Bank had met all of the capital adequacy requirements to which it ~~is subject and would be considered well capitalized under the regulatory framework for prompt corrective action.~~was subject.

The following table presents the Company’s and the Bank’s actual capital amounts and ratios as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:

September 30, 2019

Minimum to be

Requirements

Well Capitalized

for Capital

Under Prompt

Actual

Adequacy Purposes

Corrective Action

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk weighted assets













Consolidated

$
233,030

12.38
%
84,705

4.50
%
N/A

N/A

Bank

222,600

11.84
%
84,594

4.50
%
122,192

6.50
%
Tier 1 capital to risk weighted assets







.



Consolidated

241,197

12.81
%
112,940

6.00
%
N/A

N/A

Bank

222,600

11.84
%
112,792

6.00
%
150,390

8.00
%
Total capital to risk weighted assets













Consolidated

313,700

16.67
%
150,587

8.00
%
N/A

N/A

Bank

245,585

13.06
%
150,390

8.00
%
187,987

10.00
%
Tier 1 capital to average assets













Consolidated

241,197

11.33
%
85,152

4.00
%
N/A

N/A

Bank

222,600

10.47
%
85,009

4.00
%
106,261

5.00
%


	March 31, 2022
										Minimum to be
						Requirements				Well Capitalized
						for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	322,985	14.27	%	$	101,863	4.50	%	$	N/A	N/A
Bank		305,828	13.52	%		101,817	4.50	%		147,070	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		331,743	14.66	%		135,817	6.00	%		N/A	N/A
Bank		305,828	13.52	%		135,757	6.00	%		181,009	8.00	%
Total capital to risk weighted assets
Consolidated		410,081	18.12	%		181,090	8.00	%		N/A	N/A
Bank		334,153	14.77	%		181,009	8.00	%		226,261	10.00	%
Tier 1 capital to average assets
Consolidated		331,743	10.30	%		128,837	4.00	%		N/A	N/A
Bank		305,828	9.50	%		128,768	4.00	%		160,960	5.00	%

3127

Table of Contents

December 31, 2018

Minimum to be

Requirements

Well Capitalized

for Capital

Under Prompt

Actual

Adequacy Purposes

Corrective Action

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk weighted assets













Consolidated

$
151,745

8.43
%
N/A

N/A

N/A

N/A

Bank

204,680

11.39
%
80,866

4.50
%
116,806

6.50
%
Tier 1 capital to risk weighted assets













Consolidated

159,774

8.87
%
N/A

N/A

N/A

N/A

Bank

204,680

11.39
%
107,821

6.00
%
143,761

8.00
%
Total capital to risk weighted assets













Consolidated

231,510

12.86
%
N/A

N/A

N/A

N/A

Bank

226,854

12.62
%
143,806

8.00
%
179,758

10.00
%
Tier 1 capital to average assets













Consolidated

159,774

7.51
%
N/A

N/A

N/A

N/A

Bank

204,680

9.63
%
85,018

4.00
%
106,272

5.00
%


	December 31, 2021
										Minimum to be
						Requirements				Well Capitalized
						for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	314,628	14.65	%	$	96,647	4.50	%	$	N/A	N/A
Bank		297,453	13.87	%		96,538	4.50	%		139,444	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		323,358	15.06	%		128,862	6.00	%		N/A	N/A
Bank		297,453	13.87	%		128,718	6.00	%		171,624	8.00	%
Total capital to risk weighted assets
Consolidated		400,263	18.64	%		171,816	8.00	%		N/A	N/A
Bank		324,328	15.12	%		171,624	8.00	%		214,530	10.00	%
Tier 1 capital to average assets
Consolidated		323,358	9.79	%		132,112	4.00	%		N/A	N/A
Bank		297,453	9.01	%		132,039	4.00	%		165,049	5.00	%

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules included the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of March 31, 2022, the ratios for the Company and the Bank were sufficient to meet the conservation buffer. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development, ~~(“HUD”)~~or HUD, regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of ~~September 30, 2019,~~March 31, 2022, and December 31, ~~2018,~~2021, the Company was in compliance with ~~HUD~~the aforementioned guidelines.

NOTE 18 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended March 31, 2022, there were 0 shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 19 Fair Value of Assets and Liabilities

The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized based on the following inputs to the valuation techniques as follows:

Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.

Table of Contents

Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.

Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may ~~re‑measure~~re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their estimated fair value.

~~Table of Contents~~

Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at estimated fair value for the initial and subsequent measurement on an ~~instrument‑by‑instrument~~instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired financial instruments at estimated fair value in the future.

Recurring Basis

The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures.

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~

September 30, 2019
(dollars in thousands)

Level 1

Level 2

Level 3

Total
Trading securities








U.S. treasury and government agencies

$
—

$
—

$
—

$
—
Available-for-sale and equity securities








U.S. treasury and government agencies

$
—

$
21,602

$
—

$
21,602
Obligations of state and political agencies

—

47,856

—

47,856
Mortgage backed securities








Residential agency

—

169,337

—

169,337
Commercial

—

32,652

—

32,652
Asset backed securities

—

157

—

157
Corporate bonds

—

7,112

—

7,112
Equity securities

2,675

—

—

2,675
Total available-for-sale and equity securities

$
2,675

$
278,716

$
—

$
281,391
Other assets








Derivatives

$
—

$
2,483

$
—

$
2,483
Other liabilities








Derivatives

$
—

$
104

$
—

$
104

December 31, 2018
(dollars in thousands)

Level 1

Level 2

Level 3

Total
Trading securities








U.S. treasury and government agencies

$
—

$
1,539

$
—

$
1,539
Available-for-sale and equity securities








U.S. treasury and government agencies

$
—

$
19,142

$
—

$
19,142
Obligations of state and political agencies

—

66,387

—

66,387
Mortgage backed securities








Residential agency

—

126,998

—

126,998
Commercial

—

28,767

—

28,767
Asset backed securities

—

399

—

399
Corporate bonds

—

8,481

—

8,481
Equity securities

3,165

—

—

3,165
Total available-for-sale and equity securities

$
3,165

$
250,174

$
—

$
253,339
Other assets








Derivatives

$
—

$
12

$
—

$
12
Other liabilities








Derivatives

$
—

$
7

$
—

$
7

2021:


	March 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	4,167	$	—	$	4,167
Mortgage backed securities
Residential agency		—		711,121		—		711,121
Commercial		—		82,732		—		82,732
Asset backed securities		—		42		—		42
Corporate bonds		—		68,271		—		68,271
Total available-for-sale investment securities	$	—	$	866,333	$	—	$	866,333
Other assets
Derivatives	$	—	$	5,754	$	—	$	5,754
Other liabilities
Derivatives	$	—	$	3,644	$	—	$	3,644


	December 31, 2021
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	5,103	$	—	$	5,103
Mortgage backed securities
Residential agency		—		707,157		—		707,157
Commercial		—		90,913		—		90,913
Asset backed securities		—		54		—		54
Corporate bonds		—		50,422		—		50,422
Total available-for-sale investment securities	$	—	$	853,649	$	—	$	853,649
Other assets
Derivatives	$	—	$	3,397	$	—	$	3,397
Other liabilities
Derivatives	$	—	$	1,368	$	—	$	1,368

3329

Table of Contents

The following is a description of the valuation methodologies used for instruments measured at estimated fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities, Available-for-Sale

~~When available, the Company uses quoted market prices to determine the estimated fair value of investment securities; such items~~Generally, debt securities are classified in Level 1 of the estimated fair value hierarchy. For the Company’s investment securities for which quoted prices are not available for identical investment securities in an active market, the Company determines estimated fair value utilizing vendors who apply matrixvalued using pricing for similar ~~bonds for which no prices~~securities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are observable or may compile prices from various sources. These models are primarily industry‑standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Estimated fair values from these models are verified, where possible, against quoted prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. ~~However, when prices from independent sources vary, cannot be obtained, or cannot be corroborated, a security is generally classified as Level 3.~~

Derivatives

All of the Company’s derivatives are traded in ~~over‑the‑counter~~over-the-counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts. Any remaining derivative estimated fair value measurements using significant assumptions that are unobservable are classified as Level 3. Level 3 derivatives include interest rate lock commitments written for residential mortgage loans that are held for sale.

Nonrecurring Basis

Certain assets are measured at estimated fair value on a nonrecurring basis. These assets are not measured at estimated fair value on an ongoing basis; however, they are subject to estimated fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.

Net impairment related to nonrecurring estimated fair value measurements of certain assets as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018~~2021 consisted of the following:

September 30, 2019
(dollars in thousands)

Level 2

Level 3

Total

Impairment
Loans held for sale

$
66,021

$
—

$
66,021

$
—
Loans held for branch sale

—

—

—

—
Impaired loans

—

3,050

3,050

2,107
Foreclosed assets

—

84

84

—
Servicing rights

—

4,146

4,146

—


	December 31, 2018

									March 31, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment		Level 2		Level 3		Total		Impairment
Loans held for sale	$	14,486	$	—	$	14,486	$	—	$	21,864	$	—	$	21,864	$	—
Loans held for branch sale		—		32,031		32,031		—
Impaired loans		—		4,022		4,022		2,538		—		4,063		4,063		361
Foreclosed assets		—		204		204		245		—		865		865		—
Servicing rights		—		4,623		4,623		—		—		1,771		1,771		—


	December 31, 2021
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	46,490	$	—	$	46,490	$	—
Impaired loans		—		2,469		2,469		283
Foreclosed assets		—		885		885		—
Servicing rights		—		1,880		1,880		—

~~Table of Contents~~

Loans Held for Sale

Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.

On January 15, 2019, the Bank entered into an agreement with a third party to sell the loans of two branch locations in Duluth, Minnesota, and on April 26, 2019, the Bank completed the sale. As of December 31, 2018, the loans were held for branch sale and totaled $32.0 million. The estimated fair value in the table above was based on the agreed upon purchase price in the sales contract. The measurements were classified as Level 3.

Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value, represent additional net ~~write‑downs~~write-downs during the period to record these loans at the lower of cost or estimated fair value, subsequent to their initial classification as loans held for sale.

~~Impaired Loans~~

In accordance with the provisions of the loan impairment guidance, loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms are measured for impairment. Allowable methods for estimating fair value include using the estimated fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using a discounted cash flow method. The estimated fair value method requires obtaining a current independent appraisal of the collateral and applying a discount factor, if necessary, to the appraised value and including costs to the sell. Because many of these inputs are not observable, the measurements are classified as Level 3.

~~Foreclosed Assets~~

Foreclosed assets are recorded at estimated fair value based on property appraisals, less estimated selling costs, at the date of the transfer with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or estimated fair value, less estimated selling costs with changes in the estimated fair value or any impairment amount recorded in other noninterest expense. Fair value measurements may be based upon appraisals, third‑party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.

~~Servicing Rights~~

Servicing rights do not trade in an active market with readily observable prices. Accordingly, the estimated fair value of servicing rights is determined using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Servicing rights are carried at lower of cost or market value, and therefore can be subject to estimated fair value measurements on a nonrecurring basis. Estimated fair value measurements of servicing rights use significant unobservable inputs and accordingly, are classified as Level 3. The Company obtains the estimated fair value of servicing rights from an independent third party pricing service and records the unadjusted estimated fair values in the financial statements.

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The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of ~~September 30, 2019,~~March 31, 2022, and December 31, ~~2018,~~2021, were as follows:

September 30, 2019

(dollars in thousands)

Weighted

Asset Type

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Impaired loans

Appraisal value

Property specific adjustment

3,050

N/A

N/A

Foreclosed assets

Appraisal value

Property specific adjustment

84

N/A

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

4,146

154-270

194



Discount rate



9.5
%
9.5
%

December 31, 2018

March 31, 2022

(dollars in thousands)

Weighted

Weighted

Asset Type

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Loans held for branch sale

Discounted cash flows

Sales agreement

32,031

N/A

Impaired loans

Appraisal value

Property specific adjustment

4,022

N/A

Appraisal value

Property specific adjustment

4,063

N/A

Foreclosed assets

Appraisal value

Property specific adjustment

204

N/A

Appraisal value

Property specific adjustment

865

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

4,623

104 - 211

130

Discounted cash flows

Prepayment speed assumptions

1,771

126-174

147

Discount rate

10.5

Discount rate

10.0


			December 31, 2021
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	2,469	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		885	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		1,880	161-327		237
		Discount rate			9.5	%	9.5	%

Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all ~~non‑financial~~non-financial instruments, are excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balances, as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, were not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the consolidated balance sheets approximate those ~~assets~~assets’ and ~~liabilities~~liabilities’ estimated fair values.

Investment Securities, Held-to-Maturity

The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.

Loans

For ~~variable‑rate~~variable-rate loans that reprice frequently and with no significant change in credit risk, estimated fair values are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

~~Bank‑Owned~~31

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Bank-Owned Life Insurance

~~Bank‑owned~~Bank-owned life insurance is carried at the amount due upon surrender of the policy, which is also the estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying insurance contract.

~~Table of Contents~~

Deposits

The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the consolidated balance sheet date. The estimated fair values of ~~fixed‑rate~~fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

~~Deposits Held for Sale~~

On January 15, 2019, the Bank entered into an agreement with a third party to sell the deposits of two branch locations in Duluth, Minnesota, and on April 26, 2019, the Bank completed the sale. As of December 31, 2018, the deposits were held for sale and totaled $24.2 million. The estimated fair value in the table below was based on the carrying value of the deposits, less the premium the Bank received, in accordance with the purchase agreement.

~~Short‑Term~~Short-Term Borrowings and ~~Long‑Term~~Long-Term Debt

For ~~variable‑rate~~variable-rate borrowings that reprice frequently, estimated fair values are based on carrying values. The estimated fair value of ~~fixed‑rate~~fixed-rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

~~Off‑Balance~~Off-Balance Sheet ~~Credit‑Related~~Credit-Related Commitments

~~Off‑balance~~Off-balance sheet credit related commitments are generally of ~~short‑term~~short-term nature. The contract amount of such commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at the dates indicated are as follows:

September 30, 2019

Carrying

Estimated Fair Value
(dollars in thousands)

Amount

Level 1

Level 2

Level 3

Total
Financial Assets










Cash and cash equivalents

$
61,174

$
61,174

$
—

$
—

$
61,174
Loans

1,663,103

—

—

1,658,151

1,658,151
Accrued interest receivable

7,412

7,412

—

—

7,412
Bank-owned life insurance

31,364

—

31,364

—

31,364
Financial Liabilities










Noninterest-bearing transaction

$
537,951

$
—

$
537,951

$
—

$
537,951
Interest-bearing transaction

1,102,409

—

1,102,409

—

1,102,409
Time deposits

192,753

—

—

192,869

192,869
Short-term borrowings

—

—

—

—

—
Long-term debt

58,775

—

58,285

—

58,285
Accrued interest payable

1,879

1,879

—

—

1,879


	March 31, 2022
	Carrying		Estimated��Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	132,832	$	132,832	$	—	$	—	$	132,832
Investment securities held-to-maturity		340,150		—		317,826		—		317,826
Loans, net		1,786,329		—		—		1,800,339		1,800,339
Accrued interest receivable		8,516		8,516		—		—		8,516
Bank-owned life insurance		33,358		—		33,358		—		33,358
Financial Liabilities
Noninterest-bearing deposits	$	831,558	$	—	$	831,558	$	—	$	831,558
Interest-bearing deposits		1,836,525		—		1,836,525		—		1,836,525
Time deposits		224,184		—		—		223,127		223,127
Long-term debt		58,902		—		61,651		—		61,651
Accrued interest payable		2,139		2,139		—		—		2,139

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	December 31, 2021
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	242,311	$	242,311	$	—	$	—	$	242,311
Investment securities held-to-maturity		352,061		—		349,677		—		349,677
Loans, net		1,726,448		—		—		1,760,784		1,760,784
Accrued interest receivable		8,537		8,537		—		—		8,537
Bank-owned life insurance		33,156		—		33,156		—		33,156
Financial Liabilities
Noninterest-bearing deposits	$	938,840	$	—	$	938,840	$	—	$	938,840
Interest-bearing deposits		1,748,799		—		1,748,799		—		1,748,799
Time deposits		232,912		—		—		232,970		232,970
Long-term debt		58,933		—		57,772		—		57,772
Accrued interest payable		1,674		1,674		—		—		1,674

December 31, 2018

Carrying

Estimated Fair Value
(dollars in thousands)

Amount

Level 1

Level 2

Level 3

Total
Financial Assets










Cash and cash equivalents

$
40,651

$
40,651

$
—

$
—

$
40,651
Loans

1,679,676

—

—

1,663,401

1,663,401
Accrued interest receivable

7,645

7,645

—

—

7,645
Bank-owned life insurance

30,763

—

30,763

—

30,763
Financial Liabilities










Noninterest-bearing transaction

$
550,640

$
—

$
550,640

$
—

$
550,640
Interest-bearing transaction

1,053,869

—

1,053,869

—

1,053,869
Time deposits

170,587

—

—

172,616

172,616
Deposits held for sale

24,197

—

—

22,019

22,019
Short-term borrowings

93,460

93,460

—

—

93,460
Long-term debt

58,824

—

59,988

—

59,988
Accrued interest payable

720

720

—

—

720

~~NOTE 20 Branch Sale~~

On January 15, 2019, the Bank announced an agreement to sell the Bank’s branch offices located in Duluth, Minnesota, including loans and deposits attributable to those offices, to another financial institution. The Bank decided to exit the Duluth market to reallocate resources to the Minneapolis-St. Paul-Bloomington metropolitan statistical area, which is a higher growth market in the state, and its’ other core markets in the Phoenix-Mesa-Scottsdale metropolitan statistical area, and in Fargo and Grand Forks, North Dakota. The loans and deposits were classified as held for sale in the consolidated financial statements as of December 31, 2018. The transaction closed on April 26, 2019. The loans and deposits associated with this transaction totaled approximately $28.3 million and $19.4 million, respectively, as of the closing date. A pre‑tax gain on the sale was recognized in the amount of $1.5 million.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion explains our financial condition and results of operations as of and for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s ~~prospectus filed with the SEC~~Annual Report on ~~September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933, which contains audited financial statements of the Company as of and~~Form 10-K for the year ended December 31, ~~2018. Annualized results for these interim periods may not be indicative of results for~~2021, filed with the ~~full year or future periods.~~Securities and Exchange Commission on March 11, 2022.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements we make regarding our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; business and economic conditions generally and in the financial services industry, nationally and within our market areas; the overall health of the local and national real estate market; concentrations within our loan portfolio; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid technological change in the financial services industry; increased competition in the financial services industry; our ability to successfully manage liquidity risk; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; potential impairment to the goodwill we recorded in connection with our past acquisitions; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; interest rate risks associated with our business; fluctuations in the values of the securities held in our securities portfolio; governmental monetary, trade and fiscal policies; any material weaknesses in our internal control over financial reporting; our success at managing the risks involved in the foregoing items; and any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

●

our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses;

●

new or revised accounting standards, including as a result of the future implementation of the new Current Expected Credit Loss standard;

●

business and economic conditions generally and in the financial services industry, nationally and within our market areas, including rising rates of inflation;

●

the overall health of the local and national real estate market;

●

concentrations within our loan portfolio;

●

the level of nonperforming assets on our balance sheet;

●

the impact of economic or market conditions on our fee-based services;

●

our ability to implement our organic and acquisition growth strategies;

●

potential impairment to the goodwill we recorded in connections with our past acquisitions;

3934

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●

our ability to continue to grow our retirement and benefit services business;

●

our ability to continue to originate a sufficient volume of residential mortgages;

●

the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;

●

interruptions involving our information technology and telecommunications systems or third-party servicers;

●

developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates;

●

potential losses incurred in connection with mortgage loan repurchases;

●

the composition of our executive management team and our ability to attract and retain key personnel;

●

severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts of war or terrorism, including the Russian invasion of Ukraine, or other adverse external events;

●

any material weaknesses in our internal control over financial reporting;

●

our ability to successfully manage liquidity risk, especially in light of recent excess liquidity at the Bank;

●

concentrations of large depositors;

●

our dependence on dividends from the Bank;

●

the effectiveness of our risk management framework;

●

the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject;

●

the extensive regulatory framework that applies to us;

●

the impact of recent and future legislative and regulatory changes;

●

the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, including due to supply chain disruptions, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic;

●

interest rate risks associated with our business, including the effects of anticipated rate increases by the Federal Reserve;

●

fluctuations in the values of the securities held in our securities portfolio;

●

governmental monetary, trade and fiscal policies;

●

rapid technological change in the financial services industry;

●

increased competition in the financial services industry from non-banks such as credit unions and Fintech companies;

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●

our ability to manage mortgage pipeline risk;

●

changes to U.S. or state tax laws, regulations and guidance, including recent proposals to increase the federal corporate tax rate;

●

talent and labor shortages and employee turnover;

●

possible federal mask and vaccine mandates;

●

the impact of inflation and anticipated interest rate increases;

●

our success at managing the risks involved in the foregoing items; and

●

any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

We are a diversified financial services company headquartered in Grand Forks, North Dakota. Through our subsidiary, Alerus Financial, National Association, ~~(the “Bank”),~~or the Bank, we provide ~~innovative and comprehensive~~ financial solutions to businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth management and mortgage. These solutions are delivered through a ~~relationship‑oriented~~relationship-oriented primary point of contact along with responsive and ~~client‑friendly~~client-friendly technology.

Our business model produces strong financial performance and a diversified revenue stream, which has helped us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, ~~(“GAAP”). Our critical accounting policies require reliance on~~or GAAP. The preparation of our consolidated financial statements requires management to make estimates and ~~assumptions, which~~judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current ~~circumstances, but~~circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may ~~prove to be inaccurate or can be subject to variations. Changes in underlying factors,~~differ from these estimates under different assumptions or conditions. The estimates ~~could~~and judgments that management believes have ~~a material impact~~the most effect on ~~our future~~the Company’s reported financial ~~condition~~position and results of ~~operations.~~

~~The most critical of these significant accounting policies~~operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in our ~~consolidated financial statements as of and~~Annual Report on Form 10-K for the ~~periods~~year ended December 31, ~~2018, 2017, and 2016 included in our prospectus filed with the SEC on September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933.~~2021. There have been no significant changes in critical accounting policies, or the assumptions and judgments utilized in applying these policies since December 31, ~~2018.~~2021.

The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the

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transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.

Recent Developments

~~On September 17, 2019, we sold 2,860,000 shares~~Impact of ~~common stock~~COVID-19

As of March 31, 2022, the COVID-19 pandemic remained ongoing. The progression of the COVID-19 pandemic in the United States did not have an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2022. Nonetheless, the economic recovery could remain gradual and uneven and could be hindered by persistent or resurgent infection rates, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to the new variants of the virus.

Effects on Our Market Areas. Our primary banking market areas are the states of North Dakota, Minnesota and Arizona. Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit services at all of our banking offices located in our ~~initial public offering. On September 25, 2019,~~three primary market areas. In addition, we ~~sold an additional 429,000 shares~~operate one retirement and benefit services office in Minnesota, one in Michigan and one in Colorado.

Each of ~~common stock pursuant~~our market areas continues to have different responses to the ~~exercise in full by~~COVID-19 pandemic due to the underwriters of their option to purchase additional shares. The aggregate offering price for the shares sold by us was $69.1 million, and after deducting $4.7 million of underwriting discounts and $1.6 million of offering expenses paid to third parties, we received total net proceeds of $62.8 million. Allavailability of the ~~shares were sold pursuant~~COVID-19 vaccines and varying infection rates. Based on the current environment, it is unclear how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and whether any such changes will negatively impact our ~~Registration Statement on Form S-1, as amended (File No. 333-233339), which was declared effective by the SEC on September 12, 2019.~~

On August 28, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.14 per share. This dividend was paid out on October 11, 2019, to stockholders of record at the close of business on September 20, 2019.

~~Table of Contents~~

customers and regional economies.

Operating Results Overview

The following table summarizes key financial results as of and for the periods indicated:


	Three months ended
	March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2022			2021			2021
Performance Ratios
Return on average total assets		1.26	%		1.50	%		2.02	%
Return on average common equity		11.78	%		14.13	%		18.46	%
Return on average tangible common equity (1)		14.72	%		17.36	%		23.03	%
Noninterest income as a % of revenue		57.62	%		59.67	%		64.97	%
Net interest margin (taxable-equivalent basis)		2.83	%		2.84	%		3.12	%
Efficiency ratio (1)		72.25	%		71.06	%		66.43	%
Average equity to average assets		10.67	%		10.65	%		10.97	%
Net charge-offs/(recoveries) to average loans		(0.03)	%		(0.22)	%		0.10	%
Dividend payout ratio		28.07	%		22.22	%		17.44	%
Per Common Share
Earnings per common share - basic	$	0.58		$	0.73		$	0.87
Earnings per common share - diluted	$	0.57		$	0.72		$	0.86
Dividends declared per common share	$	0.16		$	0.16		$	0.15
Book value per common share	$	19.00		$	20.88		$	19.15
Tangible book value per common share (1)	$	16.07		$	17.87		$	15.95
Average common shares outstanding - basic		17,244			17,210			17,145
Average common shares outstanding - diluted		17,500			17,480			17,465
Other Data
Retirement and benefit services assets under administration/management	$	35,333,131		$	36,732,938		$	34,774,650
Wealth management assets under administration/management	$	4,584,856		$	4,039,931		$	3,357,530
Mortgage originations	$	186,762		$	356,821		$	518,014

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

(dollars and shares in thousands, except per share data)

2019

2019

2018

2019

2018

Performance Ratios









Return on average total assets

1.29
%

1.52
%

1.36
%

1.34
%

1.25
%
Return on average common equity

12.42
%

15.82
%

15.45
%

13.74
%

14.35
%
Return on average tangible common equity (1)

17.01
%

21.93
%

23.08
%

19.24
%

22.05
%
Noninterest income as a % of revenue

61.29
%

62.11
%

58.11
%

60.14
%

57.78
%
Net interest margin (taxable-equivalent basis) (1)

3.69
%

3.62
%

3.80
%

3.72
%

3.85
%
Efficiency ratio (1)

75.17
%

70.74
%

73.16
%

73.06
%

72.84
%
Net charge-offs/(recoveries) to average loans

(0.01)
%

0.18
%

0.02
%

0.27
%

0.16
%
Dividend payout ratio

29.17
%

23.73
%

25.00
%

28.19
%

27.66
%
Per Common Share









Earnings per common share - basic

$
0.49

$
0.60

$
0.53

$
1.53

$
1.44

Earnings per common share - diluted

$
0.48

$
0.59

$
0.52

$
1.49

$
1.41

Dividends declared per common share

$
0.14

$
0.14

$
0.13

$
0.42

$
0.39

Tangible book value per common share (1)

$
13.77

$
12.02

$
10.11

$
13.77

$
10.11

Average common shares outstanding - basic

14,274

13,810

13,777

13,957

13,759

Average common shares outstanding - diluted

14,626

14,100

14,071

14,317

14,060

Other Data



Assets under administration

$
27,702,273

$
27,854,052

$
28,533,616

$
27,702,273

$
28,533,616

Assets under management

5,724,412

5,260,233

4,854,106

5,724,412

4,854,106

Mortgage originations

313,527

246,115

222,330

685,178

609,941

(1)

~~(1)~~

Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

Table of Contents

Selected Financial Data

The following tables summarize selected financial data as of and for the periods indicated:


	Three months ended						Nine months ended
	September 30,		June 30,		September 30,		September 30,		September 30,

											Three months ended
											March 31,		December 31,		March 31,
(dollars in thousands)	2019		2019		2018		2019		2018		2022		2021		2021
Selected Average Balance Sheet Data
Loans	$	1,691,542	$	1,724,081	$	1,699,048	$	1,715,629	$	1,661,493	$	1,768,226	$	1,782,657	$	1,945,437
Investment securities		257,561		255,502		248,568		255,903		256,331		1,216,256		1,119,370		662,413
Assets		2,176,862		2,200,797		2,144,841		2,185,868		2,115,708		3,286,809		3,353,900		3,047,261
Deposits		1,763,217		1,777,003		1,764,939		1,779,610		1,755,473		2,816,828		2,870,631		2,615,579
Short-term borrowings		87,201		115,892		103,171		95,489		87,501
Long-term debt		58,776		58,808		58,812		58,798		58,812		58,908		58,938		25,677
Stockholders’ equity		226,931		211,655		189,311		212,911		184,733		350,545		357,084		334,188


	September 30,		June 30,		September 30,

							March 31,		December 31,		March 31,
(dollars in thousands)	2019		2019		2018		2022		2021		2021
Selected Period End Balance Sheet Data
Loans	$	1,686,087	$	1,713,452	$	1,724,656	$	1,818,042	$	1,758,020	$	1,937,345
Allowance for loan losses		(22,984)		(21,246)		(21,012)		(31,713)		(31,572)		(33,758)
Investment securities		281,391		256,252		246,387		1,206,483		1,205,710		795,097
Assets		2,228,311		2,207,129		2,171,821		3,336,199		3,392,691		3,151,756
Deposits		1,833,113		1,753,365		1,817,709		2,892,267		2,920,551		2,717,573
Long-term debt		58,775		58,808		58,824		58,902		58,933		59,020
Total stockholders’ equity		281,403		213,765		190,082		328,505		359,403		329,234


	Three months ended
	March 31,		December 31,		March 31,
(dollars in thousands)	2022		2021		2021
Selected Income Statement Data
Net interest income	$	21,673	$	22,789	$	22,038
Provision for loan losses		—		(1,500)		—
Noninterest income		29,470		33,718		40,881
Noninterest expense		38,071		41,276		43,042
Income before income taxes		13,072		16,731		19,877
Income tax expense		2,888		4,026		4,662
Net income	$	10,184	$	12,705	$	15,215

~~Table of Contents~~

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,
(dollars in thousands)

2019

2019

2018

2019

2018
Selected Income Statement Data

Net interest income

$
18,681

$
18,291

$
18,929

$
56,092

$
55,971
Provision for loan losses

1,498

1,797

1,530

5,515

7,080
Noninterest income

29,580

29,984

26,258

84,638

76,608
Noninterest expense

37,327

35,261

34,336

106,102

100,414
Income before income taxes

9,436

11,217

9,321

29,113

25,085
Income tax expense

2,332

2,869

1,951

7,225

5,252
Net income

$
7,104

$
8,348

$
7,370

$
21,888

$
19,833

Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, we routinely supplement our evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible book value per common ~~equity per~~ share, return on average tangible common equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders' equity ~~including ESOP-owned shares,~~ less goodwill and other intangible assets; (ii) tangible book value per common ~~equity per~~ share as tangible common equity divided by shares of common stock outstanding; (iii) tangible assets as total assets, less goodwill and other intangible assets; (iv) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; ~~(v) net interest margin (tax-equivalent) as net interest income plus a tax-equivalent adjustment, divided by average earning assets;~~ and ~~(vi)~~(v) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment.

Table of Contents

The following tables present these non-GAAP financial measures along with the most directly comparable financial measures calculated in accordance with GAAP for the periods ~~indicated.~~indicated:


	September 30,			June 30,			December 31,			September 30,
	2019			2019			2018			2018

													March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)													2022			2021			2021
Tangible common equity to tangible assets
Total common stockholders’ equity	$	281,403		$	213,765		$	196,954		$	190,082		$	328,505		$	359,403		$	329,234
Less: Goodwill		27,329			27,329			27,329			27,329			31,490			31,490			30,201
Less: Other intangible assets		19,382			20,372			22,473			23,523			19,197			20,250			24,768
Tangible common equity (a)		234,692			166,064			147,152			139,230			277,818			307,663			274,265
Total assets		2,228,311			2,207,129			2,179,070			2,171,821			3,336,199			3,392,691			3,151,756
Less: Goodwill		27,329			27,329			27,329			27,329			31,490			31,490			30,201
Less: Other intangible assets		19,382			20,372			22,473			23,523			19,197			20,250			24,768
Tangible assets (b)		2,181,600			2,159,428			2,129,268			2,120,969			3,285,512			3,340,951			3,096,787
Tangible common equity to tangible assets (a)/(b)		10.76	%		7.69	%	$	6.91	%		6.56	%		8.46	%		9.21	%		8.86	%
Tangible book value per common share
Total common stockholders’ equity	$	281,403		$	213,765		$	196,954		$	190,082		$	328,505		$	359,403		$	329,234
Less: Goodwill		27,329			27,329			27,329			27,329			31,490			31,490			30,201
Less: Other intangible assets		19,382			20,372			22,473			23,523			19,197			20,250			24,768
Tangible common equity (c)		234,692			166,064			147,152			139,230			277,818			307,663			274,265
Total common shares issued and outstanding (d)		17,049			13,816			13,775			13,776			17,289			17,213			17,190
Tangible book value per common share (c)/(d)	$	13.77		$	12.02		$	10.68		$	10.11		$	16.07		$	17.87		$	15.95


	Three months ended
	March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2022			2021			2021
Return on average tangible common equity
Net income	$	10,184		$	12,705		$	15,215
Add: Intangible amortization expense (net of tax)		832			832			909
Net income, excluding intangible amortization (e)		11,016			13,537			16,124
Average total equity		350,545			357,084			334,188
Less: Average goodwill		31,490			30,930			30,201
Less: Average other intangible assets (net of tax)		15,569			16,843			19,995
Average tangible common equity (f)		303,486			309,311			283,992
Return on average tangible common equity (e)/(f)		14.72	%		17.36	%		23.03	%
Efficiency ratio
Noninterest expense	$	38,071		$	41,276		$	43,042
Less: Intangible amortization expense		1,053			1,053			1,151
Adjusted noninterest expense (g)		37,018			40,223			41,891
Net interest income		21,673			22,789			22,038
Noninterest income		29,470			33,718			40,881
Tax-equivalent adjustment		94			99			143
Total tax-equivalent revenue (h)		51,237			56,606			63,062
Efficiency ratio (g)/(h)		72.25	%		71.06	%		66.43	%

4239

Table of Contents

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,


2019

2019

2018

2019

2018

Return on average tangible common equity

Net income

$
7,104

$
8,348

$
7,370

$
21,888

$
19,833

Add: Intangible amortization expense (net of tax)

782

830

945

2,442

2,835

Net income, excluding intangible amortization (e)

7,886

9,178

8,315

24,330

22,668

Average total equity

226,931

211,655

189,311

212,911

184,733

Less: Average goodwill

27,329

27,329

27,329

27,329

27,329

Less: Average other intangible assets (net of tax)

15,697

16,498

19,045

16,502

19,982

Average tangible common equity (f)

183,905

167,828

142,937

169,080

137,422

Return on average tangible common equity (e)/(f)

17.01
%

21.93
%

23.08
%

19.24
%

22.05
%
Net interest margin (tax-equivalent)







Net interest income

$
18,681

$
18,291

$
18,929

$
56,092

$
55,971

Tax-equivalent adjustment

81

84

114

257

348

Tax-equivalent net interest income (g)

18,762

18,375

19,043

56,349

56,319

Average earning assets (h)

2,017,198

2,037,605

1,987,267

2,024,814

1,955,253

Net interest margin (tax-equivalent) (g)/(h)

3.69
%

3.62
%

3.80
%

3.72
%

3.85
%
Efficiency ratio







Noninterest expense

$
37,327

$
35,261

$
34,336

$
106,102

$
100,414

Less: Intangible amortization expense

990

1,050

1,196

3,091

3,588

Adjusted noninterest expense (i)

36,337

34,211

33,140

103,011

96,826

Net interest income

18,681

18,291

18,929

56,092

55,971

Noninterest income

29,580

29,984

26,258

84,638

76,608

Tax-equivalent adjustment

81

84

114

257

348

Total tax-equivalent revenue (j)

48,342

48,359

45,301

140,987

132,927

Efficiency ratio (i)/(j)

75.17
%

70.74
%

73.16
%

73.06
%

72.84
%

Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended ~~September 30, 2019~~March 31, 2022 was ~~$7.1~~$10.2 million, or ~~$0.48~~$0.57 per diluted common share, a $5.0 million decrease as compared to ~~$7.4~~$15.2 million, or ~~$0.52~~$0.86 per diluted common share, for the three months ended ~~September 30, 2018.~~March 31, 2021. The decrease ~~of $266 thousand~~ in net income was primarily ~~due~~attributable to ~~an increase~~decreases of ~~$3.3~~$11.4 million in noninterest income and $365 thousand in net interest income, partially offset by ~~increases~~decreases of ~~$3.0~~$5.0 million in noninterest expense and ~~$381 thousand~~$1.8 million in income tax ~~expense and a $248 thousand decrease in net interest income.~~

Net income for the nine months ended September 30, 2019 was $21.9 million, or $1.49 per diluted common share, compared to $19.8 million, or $1.41 per diluted common share, for the nine months ended September 30, 2018. The increase of $2.1 million in net income in the first nine months of 2019 primarily reflects an increase of $8.0 million in noninterest income and a $1.6 million decrease in provision for loan losses partially offset by an increase of $5.7 million in noninterest expense and an increase in income tax expense of $2.0 million.expense.

Net Interest Income

Net interest income is the difference between interest income and ~~yield‑related~~yield-related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021.

Net interest income for the three months ended March 31, 2022 was ~~$18.7~~$21.7 million, ~~and $18.9~~a decrease of $365 thousand from $22.0 million for the three months ended ~~September 30, 2019 and 2018, respectively.~~March 31, 2021. The ~~three months ended September 30, 2019 included~~decrease in net interest income was primarily a ~~$1.4~~result of a $3.3 million decrease in interest income from loans, partially offset by a $3.0 million increase in interest income from investment securities. The decrease in interest income earned on loans was primarily the result of a $177.2 million decrease in average loans. This was offset by a ~~$1.7~~$553.8 million increase in ~~interest expense, compared~~average investment securities, as we’ve continued to the same period in 2018. The increase in interest income was primarily driven by an increase of $1.3 million in interest and fees on loans, whereas the increase in interest expense was primarily driven by an increase of $1.7 million in deposit interest expense. The change in interest and fees

~~Table of Contents~~

on loans for the three months ended September 30, 2019, compared to the same period 2018 was driven by a combination of growth in total loans and by higher interest rates. The increase in deposit interest expense during the three months ended September 30, 2019, was primarily due to higher average rates paid on deposits as a result of the increase in the target federal funds rate, as well as an increase in total deposits compared to the same period in 2018.

Net interest income was $56.1 million and $56.0 million for the nine months ended September 30, 2019 and 2018, respectively. The nine months ended September 30, 2019 included a $5.9 million increase in interest income offset by a $5.8 million increase in interest expense, compared to the same period in 2018. The increase in interest income was primarily driven by an increase of $5.6 million in interest and fees on loans, whereas the increase in interest expense was primarily driven by an increase of $5.3 million in deposit interest expense and an increase of $500 thousand in interest expense on other borrowed funds. The change in interest and fees on loans for the nine months ended September 30, 2019 compared to the same period 2018 was driven by a combination of growth in total loans and by higher interest rates. The increase in deposit interest expense during the nine months ended September 30, 2019 was driven by a combination of growth in total deposits and higher average rates paid on deposits as a result of the increase in the target federal fund rate, compared to the same period in 2018.update our balance sheet mix.

Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended ~~September 30, 2019~~March 31, 2022 was ~~3.69%~~2.83%, compared to ~~3.80%~~3.12% for the same period in ~~2018.~~2021. This decrease was primarily due to a 29 basis point decrease in the overall yield of our interest earning assets, the largest component of which was a 27 basis point decrease in our loan yield. The loan yield decrease ~~of 11 basis points~~ was primarily driven by a $240.3 million decrease in our average commercial and industrial loans, of which, $231.5 million were PPP loans. Excluding PPP loans, average loans would have increased $54.3 million.

As a result of ~~an increased cost of~~the expected increases in the target federal funds ~~compared to the same period in 2018. For the three months ended September 30, 2019~~interest rate, we anticipate that our net interest income and 2018, the average yield on total loans was 5.06% and 4.77%, respectively. For the three months ended September 30, 2019 and 2018, the cost of interest-bearing liabilities was 1.39% and 0.94%, respectively.

~~Our~~ net interest margin ~~(FTE) for the nine months ended September 30, 2019 was 3.72%, compared to 3.85% for the same period~~(on a FTE basis) will remain under pressure in 2018. The decrease of 13 basis points was primarily a result of an increased cost of funds compared to the same period in 2018. For the nine months ended September 30, 2019 and 2018, the average yield on total loans was 5.03% and 4.77%, respectively. For the nine months ended September 30, 2019 and 2018, the cost of interest-bearing liabilities was 1.33% and 0.83%, respectively.

future periods.

4440

Table of Contents

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields on assets, ~~and~~ average yields earned, and rates paid for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021. We derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on ~~tax‑exempt~~tax-exempt assets in order to present ~~tax‑exempt~~tax-exempt income and fully taxable income on a comparable basis.

Three months ended September 30,

2019

2018

Interest

Average

Interest

Average

Average

Income/

Yield/

Average

Income/

Yield/

(dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest Earning Assets

Interest-bearing deposits with banks

$
12,998

$
83

2.53
%
$
7,260

$
43

2.35
%
Investment securities (1)

257,561

1,580

2.43
%

248,568

1,510

2.41
%
Loans held for sale

45,794

359

3.11
%

22,438

182

3.22
%
Loans













Commercial:









Commercial and industrial

494,081

6,830

5.48
%

524,601

6,867

5.19
%
Real estate construction

25,137

352

5.56
%

23,999

326

5.39
%
Commercial real estate

439,751

5,866

5.29
%

435,950

5,133

4.67
%
Total commercial

958,969

13,048

5.40
%

984,550

12,326

4.97
%
Consumer













Residential real estate first mortgage

454,971

4,789

4.18
%

434,691

4,530

4.13
%
Residential real estate junior lien

184,124

2,611

5.63
%

188,897

2,563

5.38
%
Other revolving and installment

93,478

1,117

4.74
%

90,910

1,009

4.40
%
Total consumer

732,573

8,517

4.61
%

714,498

8,102

4.50
%
Total loans (1)

1,691,542

21,565

5.06
%

1,699,048

20,428

4.77
%
Federal Reserve/FHLB Stock

9,303

119

5.07
%

9,953

148

5.90
%
Total interest earning assets

2,017,198

23,706

4.66
%

1,987,267

22,311

4.45
%
Noninterest earning assets

159,664

157,574

Total assets

$
2,176,862





$
2,144,841





Interest-Bearing Liabilities













Interest-bearing demand deposits

$
424,896

$
522

0.49
%
$
393,390

$
231

0.23
%
Money market and savings deposits

649,190

2,162

1.32
%

619,386

1,042

0.67
%
Time deposits

187,023

822

1.74
%

207,009

517

0.99
%
Short-term borrowings

87,201

539

2.46
%

103,171

575

2.21
%
Long-term debt

58,776

899

6.07
%

58,812

903

6.09
%
Total interest-bearing liabilities

1,407,086

4,944

1.39
%

1,381,768

3,268

0.94
%
Noninterest-Bearing Liabilities and Stockholders' Equity







Noninterest-bearing deposits

502,108



545,154





Other noninterest-bearing liabilities

40,737



28,608





Stockholders’ equity

226,931



189,311





Total liabilities and stockholders’ equity

$
2,176,862



$
2,144,841





Net interest rate spread

3.27
%





3.51
%
Net interest rate margin (2)

3.69
%





3.80
%


	Three months ended March 31,
	2022						2021
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	105,726	$	46	0.18	%	$	184,376	$	53	0.12	%
Investment securities ⁽¹⁾		1,216,256		5,713	1.90	%		662,413		2,700	1.65	%
Loans held for sale		24,656		156	2.57	%		82,249		432	2.13	%
Loans
Commercial:
Commercial and industrial		434,656		5,016	4.68	%		674,935		7,863	4.72	%
Real estate construction		41,139		395	3.89	%		45,264		471	4.22	%
Commercial real estate		601,024		5,399	3.64	%		560,986		5,243	3.79	%
Total commercial		1,076,819		10,810	4.07	%		1,281,185		13,577	4.30	%
Consumer
Residential real estate first mortgage		514,724		4,433	3.49	%		457,882		4,247	3.76	%
Residential real estate junior lien		125,997		1,382	4.45	%		137,745		1,650	4.86	%
Other revolving and installment		50,686		548	4.38	%		68,625		741	4.38	%
Total consumer		691,407		6,363	3.73	%		664,252		6,638	4.05	%
Total loans ⁽¹⁾		1,768,226		17,173	3.94	%		1,945,437		20,215	4.21	%
Federal Reserve/FHLB Stock		6,486		70	4.38	%		5,780		64	4.49	%
Total interest earning assets		3,121,350		23,158	3.01	%		2,880,255		23,464	3.30	%
Noninterest earning assets		165,459						167,006
Total assets	$	3,286,809					$	3,047,261
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	714,472	$	215	0.12	%	$	642,832	$	247	0.16	%
Money market and savings deposits		1,043,430		367	0.14	%		1,030,348		403	0.16	%
Time deposits		227,485		247	0.44	%		210,719		345	0.66	%
Fed funds purchased		—		—	—	%		—		—	—	%
Long-term debt		58,908		562	3.87	%		25,677		288	4.55	%
Total interest-bearing liabilities		2,044,295		1,391	0.28	%		1,909,576		1,283	0.27	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		831,441						731,680
Other noninterest-bearing liabilities		60,528						71,817
Stockholders’ equity		350,545						334,188
Total liabilities and stockholders’ equity	$	3,286,809					$	3,047,261
Net interest income			$	21,767					$	22,181
Net interest rate spread					2.73	%					3.03	%
Net interest margin on FTE basis (1)					2.83	%					3.12	%

~~Table of Contents~~

Nine months ended September 30,

2019

2018




Interest

Average



Interest

Average

Average

Income/

Yield/

Average

Income/

Yield/

(dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest Earning Assets













Interest-bearing deposits with banks

$
12,910

$
231

2.39
%
$
7,905

$
121

2.05
%
Investment securities (1)

255,903

4,803

2.51
%

256,331

4,648

2.42
%
Loans held for sale

30,734

745

3.24
%

20,217

459

3.04
%
Loans













Commercial:









Commercial and industrial

509,806

20,966

5.50
%

514,940

19,549

5.08
%
Real estate construction

23,532

975

5.54
%

24,533

1,000

5.45
%
Commercial real estate

444,964

16,768

5.04
%

441,209

15,665

4.75
%
Total commercial

978,302

38,709

5.29
%

980,682

36,214

4.94
%
Consumer













Residential real estate first mortgage

455,898

14,496

4.25
%

402,644

12,528

4.16
%
Residential real estate junior lien

186,744

8,028

5.75
%

191,348

7,665

5.36
%
Other revolving and installment

94,685

3,286

4.64
%

86,819

2,830

4.36
%
Total consumer

737,327

25,810

4.68
%

680,811

23,023

4.52
%
Total loans (1)

1,715,629

64,519

5.03
%

1,661,493

59,237

4.77
%
Federal Reserve/FHLB Stock

9,638

372

5.16
%

9,307

354

5.09
%
Total interest earning assets

2,024,814

70,670

4.67
%

1,955,253

64,819

4.43
%
Noninterest earning assets

161,054

160,455

Total assets

$
2,185,868





$
2,115,708





Interest-Bearing Liabilities













Interest-bearing demand deposits

$
423,181

$
1,415

0.45
%
$
405,837

$
699

0.23
%
Money market and savings deposits

675,921

6,217

1.23
%

618,700

2,552

0.55
%
Time deposits

183,686

2,170

1.58
%

199,928

1,230

0.82
%
Short-term borrowings

95,489

1,805

2.53
%

87,501

1,331

2.03
%
Long-term debt

58,798

2,714

6.17
%

58,812

2,688

6.11
%
Total interest-bearing liabilities

1,437,075

14,321

1.33
%

1,370,778

8,500

0.83
%
Noninterest-Bearing Liabilities and Stockholders' Equity









Noninterest-bearing deposits

496,822





531,008

Other noninterest-bearing liabilities

39,060





29,189





Stockholders’ equity

212,911





184,733





Total liabilities and stockholders’ equity

$
2,185,868





$
2,115,708





Net interest rate spread





3.34
%





3.60
%
Net interest rate margin (2)





3.72
%





3.85
%

(1)

~~(1)~~

Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent.

~~(2)~~

~~Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”~~

~~Table of Contents~~

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the

Table of Contents

change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.


	Three months ended March 31, 2022
	Compared with
	Three months ended March 31, 2021
	Change due to:				Interest
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance
Interest earning assets
Interest-bearing deposits with banks	$	(23)	$	16	$	(7)
Investment securities		2,253		760		3,013
Loans held for sale		(302)		26		(276)
Loans
Commercial:
Commercial and industrial		(2,796)		(51)		(2,847)
Real estate construction		(43)		(33)		(76)
Commercial real estate		374		(218)		156
Total commercial		(2,465)		(302)		(2,767)
Consumer
Residential real estate first mortgage		527		(341)		186
Residential real estate junior lien		(141)		(127)		(268)
Other revolving and installment		(194)		1		(193)
Total consumer		192		(467)		(275)
Total loans		(2,273)		(769)		(3,042)
Federal Reserve/FHLB Stock		8		(2)		6
Total interest income		(337)		31		(306)
Interest-bearing liabilities
Interest-bearing demand deposits		28		(60)		(32)
Money market and savings deposits		5		(41)		(36)
Time deposits		27		(125)		(98)
Short-term borrowings		—		—		—
Long-term debt		373		(99)		274
Total interest expense		433		(325)		108
Change in net interest income	$	(770)	$	356	$	(414)

Three Months Ended September 30, 2019

Nine months ended September 30, 2019

Compared with

Compared with

Three Months Ended September 30, 2018

Nine months ended September 30, 2018


Change due to:

Interest

Change due to:

Interest
(tax-equivalent basis, dollars in thousands)

Volume

Rate

Variance

Volume

Rate

Variance
Interest earning assets






Interest-bearing deposits with banks

$
34

$
6

$
40

$
77

$
33

$
110
Investment securities

55

15

70

(8)

163

155
Loans held for sale

190

(13)

177

239

47

286
Loans












Commercial:












Commercial and industrial

(399)

362

(37)

(195)

1,612

1,417
Real estate construction

15

11

26

(41)

16

(25)
Commercial real estate

45

688

733

133

970

1,103
Total commercial

(339)

1,061

722

(103)

2,598

2,495
Consumer

`










Residential real estate first mortgage

211

48

259

1,657

311

1,968
Residential real estate junior lien

(65)

113

48

(185)

548

363
Other revolving and installment

28

80

108

257

199

456
Total consumer

174

241

415

1,729

1,058

2,787
Total loans

(165)

1,302

1,137

1,626

3,656

5,282
Federal Reserve/FHLB Stock

(10)

(19)

(29)

13

5

18
Total interest income

104

1,291

1,395

1,947

3,904

5,851
Interest-bearing liabilities












Interest-bearing demand deposits

18

273

291

30

686

716
Money market and savings deposits

50

1,070

1,120

235

3,430

3,665
Time deposits

(50)

355

305

(100)

1,040

940
Short-term borrowings

(89)

53

(36)

121

353

474
Long-term debt

(1)

(3)

(4)

(1)

27

26
Total interest expense

(72)

1,748

1,676

285

5,536

5,821
Change in net interest income

$
176

$
(457)

$
(281)

$
1,662

$
(1,632)

$
30

Provision for Loan Losses

The provision for loan losses ~~reflects~~is based upon our allowance methodology and is a charge to income that, in our judgment, ofis required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the ~~expense necessary to achieve the appropriate amount~~adequacy of the allowance, ~~for loan losses. We maintain~~management considers the allowance for loan losses at levels we believe adequate to cover our estimate of probable credit losses as of the end of the reporting period. The allowance for loan losses is determined through detailed quarterly analysissize and quality of the loan ~~portfolio. The~~portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, ~~for loan losses is based on our loss experience~~ and ~~changes~~any growth in the ~~economic environment, as well as an ongoing assessment of credit quality. Additional factors that are considered in determining~~loan portfolio and the ~~amount~~uncertainty of the ~~allowance for loan losses are the level of net charge-offs, nonperforming assets, risk-rating migration, as well as changes~~general economy may require additional provisions in ~~our portfolio size and composition.~~future periods.

WeThere was no provision expense recorded a provision for loan losses of $1.5 million for both the three months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019 we recorded a provision for loan losses of $5.5 million compared to $7.1 million for the ~~nine months ended September 30, 2018. The decrease in provision for loan losses was primarily due to a decrease in criticized assets as well as a decrease~~first quarter of 2022, no change from the first quarter of 2021. Management saw modest net recoveries in the ~~total loans outstanding.~~

~~Table~~first quarter of ~~Contents~~

2022, which supported the decision that no additional provision expense should be recognized.

Noninterest Income

Our noninterest income is generated from four primary sources: (1) retirement and ~~employee benefits;~~benefit services; (2) wealth ~~management, comprised of trust services, investment products and services, and asset management services;~~management; (3) mortgage banking; and (4) other general banking ~~services related to loans, deposits and other core client activities typically provided through the branch network and electronic banking channels.~~services.

Table of Contents

The following table presents our noninterest income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021:


	Three months ended						Nine months ended
	September 30,						September 30,

													Three months ended
													March 31,
(dollars in thousands)	2019			2018			2019			2018			2022			2021
Retirement and benefit services	$	15,307		$	15,536		$	46,142		$	46,873		$	17,646		$	17,255
Wealth management		3,896			3,685			11,385			10,948			5,326			4,986
Mortgage banking		8,135			5,318			19,739			13,551			4,931			17,132
Service charges on deposit accounts		447			442			1,321			1,333			363			338
Net gains (losses) on investment securities		48			13			357			119			—			114
Other		1,747			1,264			5,694			3,784			1,204			1,056
Total noninterest income	$	29,580		$	26,258		$	84,638		$	76,608		$	29,470		$	40,881
Noninterest income as a % of revenue		61.29	%		58.11	%		60.14	%		57.78	%		57.62	%		64.97	%

Total noninterest income for the three months ended ~~September 30, 2019~~March 31, 2022, was ~~$29.6~~$29.5 million, ~~an increase~~a decrease of ~~$3.3~~$11.4 million, or 27.9%, compared to ~~$26.3~~$40.9 million for the three months ended ~~September 30, 2018.~~March 31, 2021. The ~~increase~~year over year decrease in noninterest income was primarily ~~due~~attributable to ~~an increase~~a $12.2 million decrease in mortgage ~~division~~banking revenue, ~~driven by~~ a ~~$91.2~~result of a $331.3 million, ~~increase~~or 63.9%, decrease in mortgage originations ~~along with the transition~~compared to ~~mandatory delivery~~March 31, 2021. Partially offsetting this decrease were increases of ~~mortgage loans to the secondary market. Other noninterest income increased $483~~$391 thousand ~~as we realized a $542 thousand gain on the sale~~ of ~~a parcel of land in Grand Forks, North Dakota. This increase was partially offset by a decrease in~~ retirement and ~~benefits~~benefit services revenue, $340 thousand of ~~$229~~wealth management revenue and $148 thousand in other noninterest income. Retirement and benefit services revenue increased primarily due to a ~~decrease~~$588 thousand increase in ~~asset~~non-asset based fees, ~~partially offset by an~~specifically including a $280 thousand increase in ~~transaction fees.~~record keepings fees and $252 thousand in health and welfare income. Wealth management revenue increased as a result of $280 thousand in fee revenue earned from blueprint accounts and $209 thousand in fee revenue earned from dimension accounts.

~~Total~~We anticipate that our noninterest income ~~for the nine months ended September 30, 2019 was $84.6 million an increase of $8.0 million, compared to $76.6 million for the nine months ended September 30, 2018. The increase~~will be significantly adversely affected in noninterest income was primarily due to an increase in mortgage division revenue of $6.2 million, driven by the transition to mandatory delivery of mortgage loans to the secondary market in addition to an increase of $75.2 million in mortgage originations. Other noninterest income increased $1.9 million as we realized a $1.5 million gain on the sale of our Duluth, Minnesota branch as wellfuture periods as a ~~$542 thousand gain on the sale~~result of ~~a parcel of land in Grand Forks, North Dakota. These increases were partially offset by a decrease in retirement~~increasing interest rates and ~~benefits revenue of $731 thousand due to a decrease in asset based fees, partially offset by an increase in transaction fees.~~inflationary pressure, which will adversely affect mortgage originations and mortgage banking revenue.

Noninterest income as a ~~percent~~percentage of total operating revenue, which consists of net interest income plus noninterest income, was ~~61.3%~~57.6% for the three months ~~ending September 30, 2019,~~ended March 31, 2022, compared to ~~58.1%~~65.0% for the three months ~~ending September 30, 2018. The increase was due to noninterest income increasing by 12.7% while net interest income decreased 1.3%.~~

Noninterest income as a percent of total operating revenue was 60.1% for the nine months ending September 30, 2019, compared to 57.8% for the nine months ending September 30, 2018. The increase was due to noninterest income increasing by 10.5% while net interest income only increased by 0.2%.ended March 31, 2021.

See “NOTE 1513 Segment Reporting” for additional discussion regarding our business lines.

~~Table of Contents~~

Noninterest Expense

The following table presents noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018.~~2021.


	Three months ended
	March 31,
(dollars in thousands)	2022		2021
Compensation	$	19,051	$	23,698
Employee taxes and benefits		6,162		5,813
Occupancy and equipment expense		2,051		2,231
Business services, software and technology expense		4,924		4,976
Intangible amortization expense		1,053		1,151
Professional fees and assessments		1,541		1,472
Marketing and business development		600		676
Supplies and postage		646		531
Travel		179		26
Mortgage and lending expenses		686		1,332
Other		1,178		1,136
Total noninterest expense	$	38,071	$	43,042

Three months ended

Nine months ended

September 30,

September 30,
(dollars in thousands)

2019

2018

2019

2018
Compensation

$
20,041

$
17,873

$
54,997

$
50,906
Employee benefits

4,600

4,314

15,188

13,606
Occupancy and equipment expense

2,700

2,698

8,086

8,215
Business services, software and technology expense

4,224

3,731

12,044

10,467
Intangible amortization expense

990

1,196

3,091

3,588
Professional fees and assessments

1,051

1,628

3,146

3,734
Marketing and business development

890

856

2,024

2,439
Supplies and postage

631

611

2,027

1,902
Travel

435

382

1,335

1,252
Mortgage and lending expenses

751

437

1,966

1,597
Other

1,014

610

2,198

2,708
Total noninterest expense

$
37,327

$
34,336

$
106,102

$
100,414

Table of Contents

Total noninterest expense for the three months ended ~~September 30, 2019~~March 31, 2022 was ~~$37.3~~$38.1 million, ~~an increase~~a decrease of ~~$3.0~~$5.0 million, or 11.5%, compared to ~~$34.3~~$43.0 million for the three months ended ~~September 30, 2018.~~March 31, 2021. The ~~increase~~year over year decrease in noninterest expense was primarily attributable to decreases of $4.6 million in compensation expense and $646 thousand in mortgage and lending expense. Partially offsetting these decreases were increases of $349 thousand in employee and benefits expense, $153 thousand in travel expense, and $115 thousand in supplies and postage. The decreases in compensation expense and mortgage and lending expense were a result of the decrease in mortgage originations as previously stated. Employee taxes and benefits expense increased primarily due to an increase in ~~compensation~~group insurance. Travel expenses have increased as the effect of the COVID-19 pandemic subsides, and employee benefits of $2.5 million, an increase in business services, software and technology expense of $493 thousand, an increase of $314 thousand in mortgage and lending expenses, and an increase of $404 thousand in other expenses. The increase in compensation and employee benefits between periods was primarily the result of additional investments in talent, with an increase of eight, on average, full‑time equivalentour employees ~~along with annual merit pay increases. The increase in technology related expenses was due~~have started to the continued investments related to our new client relationship manager software and digital delivery of solutions to clients. These increases were partially offset by decreases of $577 thousand in professional fees and assessments and $206 thousand in intangible amortization expense.

Total noninterest expense for the nine months ended September 30, 2019 was $106.1 million, an increase of $5.7 million compared to $100.4 million for the nine months ended September 30, 2018. The increase in noninterest expense was primarily due to an increase in compensation and employee benefits of $5.7 million, an increase in business services, software and technology expense of $1.6 million, and an increase of $369 thousand in mortgage and lending expenses. The increase in compensation and employee benefits between periods was the result of an increase of fourteen, on average, full‑time equivalent employees, along with an increased cost of health insurance benefits. The increase in technology related expenses was due to the continued investments related to our new client relationship manager software and digital delivery of solutions to clients. These increases were partially offset by decreases of $588 thousand in professional fees and assessments, $510 thousand in other expenses, $497 thousand in intangible amortization expense, and $415 thousand in marketing and business development.resume serving clients face-to-face.

Income Tax Expense

Income tax expense is an estimate based on the amount we expect to owe the respective taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due, or to be received from, taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. If the final resolution of taxes payable differs from our estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.

~~Table of Contents~~

For the three months ended ~~September 30, 2019,~~March 31, 2022, we recognized income tax expense of ~~$2.3~~$2.9 million on ~~$9.4~~$13.1 million of ~~pre‑tax~~pre-tax income, resulting in an effective tax rate of ~~24.7%~~22.1%, compared to income tax expense of ~~$2.0~~$4.7 million on ~~$9.3~~$19.9 million of ~~pre‑tax~~pre-tax income for the three months ended March 31, 2021, resulting in an effective tax rate of 20.9%, for the three months ended September 30, 2018. The increase in the effective tax rate was primarily due to a reduction in tax exempt income and net operating loss deductions for the three months ended September 30, 2019 as compared to the same period in 2018.

For the nine months ended September 30, 2019, we recognized income tax expense of $7.2 million on $29.1 million of pre‑tax income, resulting in an effective tax rate of 24.8%, compared to income tax expense of $5.3 million on $25.1 million of pre‑tax income, resulting in an effective tax rate of 20.9%, for the nine months ended September 30, 2018. The increase in the effective tax rate was primarily due to a reduction in excess tax benefits from stock‑based compensation and a reduction in tax exempt income for the nine months ended September 30, 2019, as compared to the same period in 2018.23.4%.

Financial Condition

Overview

Total assets were ~~$2.2~~$3.3 billion as of ~~September 30, 2019, an increase~~March 31, 2022, a decrease of ~~$49.2~~$56.5 million, or ~~2.3%~~1.7%, as compared to December 31, ~~2018.~~2021. The ~~increase~~overall change in ~~total~~ assets ~~was primarily due to increases~~included decreases of ~~$51.5 million in loans held for sale, $28.5 million in available-for-sale investment securities, $20.5~~$109.5 million in cash and cash equivalents, ~~and the recognition of $8.9~~$11.9 million in ~~operating lease right-of-use assets. These increases were offset by a reduction of $32.0~~investment securities held-to-maturity, and $24.6 million in loans held for ~~branch sale,~~sale. Partially offsetting these decreases, was a $60.0 million increase in loans held for investment and ~~$15.8~~a $12.7 million increase in ~~loans.~~ investments available-for-sale. If PPP loans were excluded, loans held for investment would have increased $80.5 million, or 4.7%, from December 31, 2021.

Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and consumer ~~financing~~ loans. The goal of the overall portfolio mix is to ~~retain balance~~diversify with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories.

~~Commercial~~ As of March 31, 2022, the portfolio mix was 25.7% commercial and industrial, loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

~~Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, retail shopping centers and apartment buildings, as well as~~33.1% commercial real estate, ~~construction loans that are offered to builders and developers.~~

~~Residential~~35.9% residential real estate ~~loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15‑ to 30‑year term~~ and 5.3% in most cases, are extended to borrowers to finance their primary residence with both fixed‑rate and adjustable‑rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. Residential real estate loans also include home equity loans and lines of credit that are secured by a first‑ or second‑lien on the borrower’s residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

~~Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.~~

other categories.

5044

Table of Contents

The following table presents the composition of total loans outstanding by portfolio segment as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:


	March 31, 2022				December 31, 2021
			Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent
Commercial
Commercial and industrial (1)	$	467,449	25.7	%	$	436,761	24.8	%	$	30,688	7.0	%
Real estate construction		41,604	2.3	%		40,619	2.3	%		985	2.4	%
Commercial real estate		602,158	33.1	%		598,893	34.1	%		3,265	0.5	%
Total commercial		1,111,211	61.1	%		1,076,273	61.2	%		34,938	3.2	%
Consumer
Residential real estate first mortgage		522,489	28.7	%		510,716	29.1	%		11,773	2.3	%
Residential real estate junior lien		130,604	7.2	%		125,668	7.1	%		4,936	3.9	%
Other revolving and installment		53,738	3.0	%		45,363	2.6	%		8,375	18.5	%
Total consumer		706,831	38.9	%		681,747	38.8	%		25,084	3.7	%
Total loans	$	1,818,042	100.0	%	$	1,758,020	100.0	%	$	60,022	3.4	%

September 30, 2019

December 31, 2018

Percent of

Percent of

Change

(dollars in thousands)

Balance

Portfolio


Balance

Portfolio



Amount

Percent

Commercial









Commercial and industrial

$
485,183

28.7
%

$
510,706

30.0
%

$
(25,523)

(5.0)
%
Real estate construction

21,674

1.3
%

18,965

1.1
%

2,709

14.3
%
Commercial real estate

444,600

26.4
%

439,963

25.9
%

4,637

1.1
%
Total commercial

951,457

56.4
%

969,634

57.0
%

(18,177)

(1.9)
%
Consumer









Residential real estate first mortgage

459,763

27.3
%

448,143

26.3
%

11,620

2.6
%
Residential real estate junior lien

182,516

10.8
%

188,855

11.1
%

(6,339)

(3.4)
%
Other revolving and installment

92,351

5.5
%

95,218

5.6
%

(2,867)

(3.0)
%
Total consumer

734,630

43.6
%

732,216

43.0
%

2,414

0.3
%
Total loans

$
1,686,087

100.0
%

$
1,701,850

100.0
%

$
(15,763)

(0.9)
%

(1)	Included PPP loans of $13.1 million at March 31, 2022 and $33.6 million at December 31, 2021.

Total loans outstanding ~~of $1.69~~were $1.8 billion as of ~~September 30, 2019, decreased $15.8~~March 31, 2022, an increase of $60.0 million, or ~~0.9%~~3.4%, from December 31, ~~2018. The decrease in total loans~~2021. This increase was primarily ~~due to~~ a ~~decrease~~result of increases of $30.7 million in ~~our~~ commercial and industrial loans, ~~of $25.5 million, and residential real estate junior liens of $6.3 million. These decreases were offset by increases of $11.6 million in residential real estate first mortgages and $4.6~~$3.3 million in commercial real estate ~~loans.~~loans, $16.7 million in residential loans, and $9.4 million in other loan categories. If PPP loans were excluded, commercial and industrial loans would have increased $51.1 million, or 12.7%, from December 31, 2021, primarily as a result of increased credit line utilization.

We anticipate that loan growth will slow down in the future for our commercial and industrial, commercial real estate, residential real estate, and consumer loan portfolios as a result of the increasing interest rate environment and competition in our market areas.

Table of Contents

The following table presents the maturities and ~~type~~types of interest rates for the loan portfolio as of ~~September 30, 2019.~~ March 31, 2022:


	September 30, 2019
			After one
	One year		but within		After

									March 31, 2022
											After one		After five
									One year		but within		but within		After
(dollars in thousands)	or less		five years		five years		Total		or less		five years		fifteen years		fifteen years		Total
Commercial
Commercial and industrial	$	189,754	$	219,468	$	75,961	$	485,183	$	132,727	$	244,050	$	80,684	$	9,988	$	467,449
Real estate construction		6,381		10,201		5,092		21,674		20,617		17,294		3,693		—		41,604
Commercial real estate		44,431		222,814		177,355		444,600		24,079		228,237		322,616		27,226		602,158
Total commercial		240,566		452,483		258,408		951,457		177,423		489,581		406,993		37,214		1,111,211
Consumer
Residential real estate first mortgage		20,339		18,739		420,685		459,763		3,630		16,123		45,092		457,644		522,489
Residential real estate junior lien		21,234		86,632		74,650		182,516		8,490		28,263		30,813		63,038		130,604
Other revolving and installment		16,162		59,335		16,854		92,351		10,613		41,431		1,694		—		53,738
Total consumer		57,735		164,706		512,189		734,630		22,733		85,817		77,599		520,682		706,831
Total loans	$	298,301	$	617,189	$	770,597	$	1,686,087	$	200,156	$	575,398	$	484,592	$	557,896	$	1,818,042
Sensitivity of loans to changes in interest rates
Fixed interest rates			$	475,519	$	515,514
Floating interest rates				141,670		255,083
Total			$	617,189	$	770,597
Loans with fixed interest rates:
Commercial
Commercial and industrial									$	14,756	$	200,338	$	62,273	$	9,274	$	286,641
Real estate construction										20,617		9,094		1,977		—		31,688
Commercial real estate										17,272		173,837		171,363		10,681		373,153
Total commercial										52,645		383,269		235,613		19,955		691,482
Consumer
Residential real estate first mortgage										3,467		13,047		41,761		309,951		368,226
Residential real estate junior lien										3,441		6,748		10,973		3,265		24,427
Other revolving and installment										1,675		28,319		1,694		—		31,688
Total consumer										8,583		48,114		54,428		313,216		424,341
Total loans with fixed interest rates									$	61,228	$	431,383	$	290,041	$	333,171	$	1,115,823
Loans with floating interest rates:
Commercial
Commercial and industrial									$	117,971	$	43,712	$	18,411	$	714	$	180,808
Real estate construction										—		8,200		1,716		—		9,916
Commercial real estate										6,807		54,400		151,253		16,545		229,005
Total commercial										124,778		106,312		171,380		17,259		419,729
Consumer
Residential real estate first mortgage										163		3,076		3,331		147,693		154,263
Residential real estate junior lien										5,049		21,515		19,840		59,773		106,177
Other revolving and installment										8,938		13,112		—		—		22,050
Total consumer										14,150		37,703		23,171		207,466		282,490
Total loans with floating interest rates									$	138,928	$	144,015	$	194,551	$	224,725	$	702,219

~~As of September 30, 2019, 63.8% of the loan portfolio bore interest at fixed rates and 36.2% at floating rates.~~ The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.

~~Table of Contents~~

Asset Quality

Our strategy for credit risk management includes ~~well‑defined,~~well-defined, centralized credit policies; uniform underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and management reviews of loans experiencing deterioration of credit quality. We strive to identify potential problem loans early, take necessary ~~charge‑offs~~charge-offs promptly, and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.

Table of Contents

Credit Quality Indicators

Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized ~~category includes~~categories include special mention, substandard, and doubtful risk ratings. See “NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for a definition of each of the risk ~~rating.~~ratings.

The table below presents criticized loans outstanding by loan portfolio segment as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:


	September 30,			December 31,

							March 31,			December 31,
(dollars in thousands)	2019			2018			2022			2021
Commercial
Commercial and industrial	$	31,476		$	51,141		$	4,171		$	6,526
Real estate construction		1,278			1,055			—			—
Commercial real estate		24,540			32,785			9,410			13,602
Total commercial		57,294			84,981			13,581			20,128
Consumer
Residential real estate first mortgage		677			19			2,051			341
Residential real estate junior lien		2,172			2,485			774			770
Other revolving and installment		6			—			49			—
Total consumer		2,855			2,504			2,874			1,111
Total loans	$	60,149		$	87,485		$	16,455		$	21,239
Criticized loans as a percent of total loans		3.57	%		5.14	%		0.91	%		1.21	%

~~Table of Contents~~

The following table presents information regarding nonperforming assets as of ~~September~~March 31, ~~2019~~2022 and December 31, ~~2018:~~2021:


	March 31,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans	$	4,069		$	2,076
Accruing loans 90+ days past due		146			121
Total nonperforming loans		4,215			2,197
OREO and repossessed assets		865			885
Total nonperforming assets		5,080			3,082
Total restructured accruing loans		355			676
Total nonperforming assets and restructured accruing loans	$	5,435		$	3,758
Nonperforming loans to total loans		0.23	%		0.12	%
Nonperforming assets to total assets		0.15	%		0.09	%
Allowance for loan losses to nonperforming loans		752	%		1,437	%

Interest income lost on nonaccrual loans approximated $29 thousand and $80 thousand for the three months ended March 31, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended March 31, 2022 and 2021.

September 30,

December 31,

(dollars in thousands)

2019

2018

Nonaccrual loans

$
5,107

$
6,963

Accruing loans 90+ days past due

45

—

Total nonperforming loans

5,152

6,963

OREO and repossessed assets

84

204

Total nonperforming assets

$
5,236

$
7,167

Nonperforming loans to total loans

0.31
%

0.41
%
Nonperforming assets to total assets

0.23
%

0.33
%
Allowance for loan losses to nonperforming loans

446
%

318
%

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of incurred credit losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred losses in the loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic and other ~~factors.~~conditions. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated

Table of Contents

economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change.

The following table presents, by loan type, the changes in the allowance ~~is increased by provisions charged to expense and decreased by actual charge‑offs, net of recoveries.~~for loan losses for the periods presented:


	Three months ended
	March 31,
(dollars in thousands)	2022			2021
Balance—beginning of period	$	31,572		$	34,246
Commercial loan charge-offs
Commercial and Industrial		(27)			(204)
Real estate construction		—			—
Commercial real estate		—			(536)
Total commercial loan charge-offs		(27)			(740)
Consumer loan charge-offs
Residential real estate first mortgage		—			—
Residential real estate junior lien		—			—
Other revolving and installment		(18)			(44)
Total consumer loan charge-offs		(18)			(44)
Total loan charge-offs		(45)			(784)
Commercial loan recoveries
Commercial and Industrial		126			170
Real estate construction		—			—
Commercial real estate		11			3
Total commercial recoveries		137			173
Consumer loan recoveries
Residential real estate first mortgage		—			—
Residential real estate junior lien		13			83
Other revolving and installment		36			40
Total consumer loan recoveries		49			123
Total loan recoveries		186			296
Net loan charge-offs (recoveries)		(141)			488
Commercial loan provision
Commercial and Industrial		771			316
Real estate construction		27			(60)
Commercial real estate		(441)			277
Total commercial loan provision		357			533
Consumer loan provision
Residential real estate first mortgage		129			273
Residential real estate junior lien		92			(168)
Other revolving and installment		145			(83)
Total consumer loan provision		366			22
Unallocated provision expense		(723)			(555)
Total loan loss provision		—			—
Balance—end of period	$	31,713		$	33,758
Total loans	$	1,818,042		$	1,937,345
Average total loans		1,768,226			1,945,437
Allowance for loan losses to total loans		1.74	%		1.74	%
Net charge-offs/(recoveries) to average total loans (annualized)		(0.03)	%		0.10	%

The allowance for loan losses ~~represents management’s assessment~~was $31.7 million as of ~~probable credit losses inherent in~~March 31, 2022, compared to $31.6 million as of December 31, 2021. The $141 thousand increase was the ~~loan portfolio. The~~result of $141 thousand net recoveries and no additional provision expense. As of March 31, 2022, the allowance for loan losses ~~consists~~represented 1.74% of ~~specific components, based on individual evaluation~~total loans.

Table of ~~certain loans, and general components for homogeneous pools of loans with similar risk characteristics.~~Contents

~~Impaired loans include loans placed on nonaccrual status and TDRs. Loans are considered impaired when, based on current information and events, it is probable that all amounts due, in accordance with~~The following table presents the original contractual terms of the loan agreement, will not be collected. When determining if all amounts due in accordance with the original contractual terms of the loan agreement will be collected, the borrower’s overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral, are taken into consideration. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

~~All impaired loans are individually evaluated for impairment. If a loan is impaired, a portion~~allocation of the allowance ~~is allocated so that the~~for loan ~~is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent.~~

~~The allowance for non‑impaired loans is based on historical~~ losses adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history over the most recent five years. This actual loss experience is adjusted for economic factors based on the risks present for each portfolio segment. These economic factors include considerationas of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge‑offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment. These portfolio segments include commercial and industrial, real estate construction, commercial real estate, residential real estate first mortgage, residential real estate junior liens, and other revolving and installment.dates presented:


	March 31, 2022				December 31, 2021
			Percentage				Percentage
	Allocated		of loans to		Allocated		of loans to
(dollars in thousands)	Allowance		total loans		Allowance		total loans
Commercial and industrial	$	9,795	25.7	%	$	8,925	24.8	%
Real estate construction		810	2.3	%		783	2.3	%
Commercial real estate		11,946	33.1	%		12,376	34.1	%
Residential real estate first mortgage		6,661	28.7	%		6,532	29.1	%
Residential real estate junior lien		1,400	7.2	%		1,295	7.1	%
Other revolving and installment		644	3.0	%		481	2.6	%
Unallocated		457	—	%		1,180	—	%
Total loans	$	31,713	100.0	%	$	31,572	100.0	%

~~Table of Contents~~

In the ordinary course of business, we enter into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located ~~under~~in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was ~~$980 thousand as of September 30, 2019, compared to $1.4~~$2.1 million as of ~~December~~March 31, ~~2018.~~

~~The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented.~~

Three months ended

Nine months ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Balance—beginning of period

$
21,246

$
19,869

$
22,174

$
16,564

Commercial loan charge-offs









Commercial and Industrial

(324)

(424)

(5,275)

(3,078)

Real estate construction

—

—

(1)

(60)

Commercial real estate

—

—

—

—

Total commercial loan charge-offs

(324)

(424)

(5,276)

(3,138)

Consumer loan charge-offs









Residential real estate first mortgage

—

—

—

(29)

Residential real estate junior lien

(20)

(47)

(154)

(133)

Other revolving and installment

(31)

(99)

(513)

(236)

Total consumer loan charge-offs

(51)

(146)

(667)

(398)

Total loan charge-offs

(375)

(570)

(5,943)

(3,536)

Commercial loan recoveries









Commercial and Industrial

538

126

831

509

Real estate construction

—

—

2

2

Commercial real estate

—

20

150

59

Total commercial recoveries

538

146

983

570

Consumer loan recoveries









Residential real estate first mortgage

—

—

—

—

Residential real estate junior lien

49

11

132

190

Other revolving and installment

28

26

123

144

Total consumer loan recoveries

77

37

255

334

Total loan recoveries

615

183

1,238

904

Net loan charge-offs (recoveries)

(240)

387

4,705

2,632

Commercial loan provision









Commercial and Industrial

(962)

1,452

3,263

6,158

Real estate construction

25

(109)

97

1

Commercial real estate

(4)

(72)

(668)

1,458

Total commercial loan provision

(941)

1,271

2,692

7,617

Consumer loan provision









Residential real estate first mortgage

(139)

(142)

(140)

(38)

Residential real estate junior lien

157

20

113

(145)

Other revolving and installment

1

31

388

34

Total consumer loan provision

19

(91)

361

(149)

Unallocated provision expense

2,420

350

2,462

(388)

Total loan loss provision

1,498

1,530

5,515

7,080

Balance—end of period

$
22,984

$
21,012

$
22,984

$
21,012

Total loans

$
1,686,087

$
1,724,656

$
1,686,087

$
1,724,656

Average total loans

1,691,542

1,699,048

1,715,629

1,661,493

Allowance for loan losses as a percentage of total loans

1.36
%

1.22
%

1.36
%

1.22
%
Net charge-offs/(recoveries) to average total loans

(0.01)
%

0.02
%

0.27
%

0.16
%

The allowance for loan losses was $23.0 million as of September 30, 2019, compared to $22.2 million as of December 31, 2018. The $810 thousand increase in the allowance for loan losses was due to additional provision for loan losses of $5.5 million, partially offset by net loan charge‑offs of $4.7 million. The level of nonperforming loans to total loans as of September 30, 2019 was 0.31%, compared to 0.41% as of December 31, 2018. The allowance for loan losses to total loans was 1.36% as of September 30, 2019, compared to 1.30% as of December 31, 2018.

~~Table of Contents~~

~~The following table presents the allocation of the allowance for loan losses as of the dates presented.~~

September 30, 2019

December 31, 2018

Percentage

Percentage

Allocated

of loans to

Allocated

of loans to

(dollars in thousands)

Allowance

total loans


Allowance

total loans

Commercial and industrial

$
10,946

28.7
%

$
12,127

30.0
%
Real estate construction

348

1.3
%

250

1.1
%
Commercial real estate

5,761

26.4
%

6,279

25.9
%
Residential real estate first mortgage

1,016

27.3
%

1,156

26.3
%
Residential real estate junior lien

896

10.8
%

805

11.1
%
Other revolving and installment

378

5.5
%

380

5.6
%
Unallocated

3,639

—
%

1,177

—
%
Total loans

$
22,984

100.0
%

$
22,174

100.0
%

2022.

Loans Held for Sale

Loans held for sale represent loans to consumers for the purchase or refinance of a residence that we have originated and intend to sell into the secondary market. Loans held for sale were ~~$66.0~~$21.9 million as of ~~September 30, 2019, an increase~~March 31, 2022, a decrease of ~~$51.5~~$24.6 million, or 53.0%, as compared to December 31, ~~2018.~~2021. The ~~increase~~decrease in loans held for sale was primarily ~~due~~the result of a $170.1 million decrease in mortgage originations, as compared to ~~seasonally higher mortgage loan originations which were $313.5 million for~~ the three months ~~ended September 30, 2019 compared to $169.8 million for the three months ended~~ending December 31, ~~2018.~~

~~Loans Held for Branch Sale~~

On January 15, 2019, we entered into an agreement to sell the loans of two branch locations in Duluth, Minnesota. These loans were classified as loans held for branch sale in our consolidated balance sheets as of December 31, 2018. As of December 31, 2018, loans held for branch sale totaled $32.0 million. The sale was completed on April 26, 2019, and as of September 30, 2019, there were no loans held for branch sale.2021.

Investment Securities

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.

5549

Table of Contents

The following table presents the fair value composition of our investment securities portfolio as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:


	September 30, 2019				December 31, 2018
			Percent of				Percent of		Change

													March 31, 2022				December 31, 2021
															Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Amount		Percent		Balance		Portfolio		Balance		Portfolio
Trading	$	—	-	%	$	1,539	0.6	%	$	(1,539)	(100.0)	%
Available-for-sale
U.S. Treasury and agencies		21,602	7.7	%		19,142	7.5	%		2,460	12.9	%	$	4,167	0.3	%	$	5,103	0.4	%
Obligations of state and political agencies		47,856	17.0	%		66,387	26.0	%		(18,531)	(27.9)	%
Mortgage backed securities
Residential Agency		169,337	60.1	%		126,998	50.0	%		42,339	33.3	%
Residential agency														711,121	58.9	%		707,157	58.7	%
Commercial		32,652	11.6	%		28,767	11.3	%		3,885	13.5	%		82,732	6.9	%		90,913	7.5	%
Asset backed securities		157	0.1	%		399	0.2	%		(242)	(60.7)	%		42	—	%		54	—	%
Corporate bonds		7,112	2.5	%		8,481	3.3	%		(1,369)	(16.1)	%		68,271	5.7	%		50,422	4.2	%
Total available-for-sale		278,716	99.0	%		250,174	98.3	%		28,542	11.4	%
Equity		2,675	1.0	%		3,165	1.1	%		(490)	(15.5)	%
Total available-for-sale investment securities														866,333	71.8	%		853,649	70.8	%
Held-to-maturity
Obligations of state and political agencies														141,373	11.7	%		144,543	12.0	%
Mortgage backed securities
Residential agency														198,777	16.5	%		207,518	17.2	%
Total held-to-maturity investment securities														340,150	28.2	%		352,061	29.2	%
Total investment securities	$	281,391	100.0	%	$	254,878	100.0	%	$	26,513	10.4	%	$	1,206,483	100.0	%	$	1,205,710	100.0	%

The investment securities ~~available‑for‑sale~~ presented in the following table are reported at fair value and by contractual maturity as of ~~September 30, 2019.~~March 31, 2022. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis.


	Maturity as of September 30, 2019
	One year or less				One to five years				Five to ten years				After ten years
	Fair		Average		Fair		Average		Fair		Average		Fair		Average

																	Maturity as of March 31, 2022
																	One year or less				One to five years				Five to ten years				After ten years
																	Fair		Average		Fair		Average		Fair		Average		Fair		Average
(dollars in thousands)	Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield
Available-for-sale
U.S. Treasury and agencies	$	—	—	%	$	9,969	1.52	%	$	5,841	3.36	%	$	5,792	3.00	%	$	—	—	%	$	—	—	%	$	1,147	0.92	%	$	3,020	0.71	%
Obligations of state and political agencies		977	1.00	%		15,030	1.53	%		14,666	2.12	%		17,183	2.68	%
Mortgage backed securities
Residential Agency		17	—	%		3,783	2.37	%		51,512	2.55	%		114,025	2.79	%
Residential agency																		1	3.60	%		3,060	2.52	%		11,468	2.34	%		696,592	1.75	%
Commercial		—	—	%		2,127	3.06	%		8,386	2.39	%		22,139	2.65	%		—	—	%		5,256	2.88	%		25,838	2.79	%		51,638	2.56	%
Asset backed securities		—	4.90	%		—	—	%		—	—	%		157	5.64	%		—	—	%		—	—	%		16	5.17	%		26	5.29	%
Corporate bonds		2,032	—	%		5,080	2.58	%		—	—	%		—	—	%		—	—	%		—	—	%		60,271	3.85	%		8,000	3.75	%
Total available-for-sale	$	3,026	1.03	%	$	35,989	1.89	%	$	80,405	2.51	%	$	159,296	2.77	%
Total available-for-sale investment securities																		1	3.60	%		8,316	2.75	%		98,740	3.36	%		759,276	1.82	%
Held-to-maturity
Obligations of state and political agencies																		7,423	1.14	%		33,923	0.95	%		69,032	1.84	%		23,402	2.24	%
Mortgage backed securities
Residential agency																		—	—	%		—	—	%		—	—	%		184,046	1.88	%
Total held-to-maturity investment securities																		7,423	1.14	%		33,923	0.95	%		69,032	1.84	%		207,448	1.92	%
Total investment securities																	$	7,424	1.14	%	$	42,239	1.30	%	$	167,772	2.74	%	$	966,724	1.84	%

~~Cash and Cash Equivalents~~

Cash and cash equivalents increased $20.5 million to $61.2 million as of September 30, 2019 compared to December 31, 2018. This increase was primarily due to cash flows from financing activities and investing activities totaling $14.1 million and $4.4 million, respectively. The increase in cash flows provided by financing activities was primarily driven by $62.8 million in proceeds received from the issuance of common stock related to our initial public offering and a $53.2 million increase in deposits, partially offset by $93.5 million reduction in short-term borrowings. Cash flows provided by investing activities primarily consisted of a $60.4 million increase in proceeds from the sales and maturities of investment securities, $14.2 million in proceeds from a decrease in loans and $10.4 million in proceeds from the sale of our Duluth branch, partially offset by $80.5 million in purchases of investments securities available-for-sale.

Deposits

Total deposits were $2.9 billion as of ~~September 30, 2019 were $1.8 billion and increased $58.0~~March 31, 2022, a decrease of $28.3 million, or ~~3.3%~~1.0%, ~~as compared to~~from December 31, ~~2018. The increase in total~~2021. Interest-bearing deposits ~~was due to an increase in interest-bearing~~increased $79.0 million while noninterest-bearing deposits ~~of $70.7 million~~

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~~partially offset by a decrease in noninterest-bearing accounts of $12.7~~decreased $107.3 million. ~~Total deposits represented 94.2% of total liabilities as of September 30, 2019.~~ The increase in interest-bearing deposits ~~was fairly evenly split amongst~~included increases of $45.7 million in interest-bearing demand deposits, $39.6 million in money market accounts, and a $2.5 million increase in savings ~~and~~accounts, partially offset by an $8.7 million decrease in time deposits. Synergistic deposits decreased $26.1 million from December 31, 2021. Excluding synergistic deposits, commercial transaction deposits decreased $16.7 million, or 1.3%, partially offset by a $21.7 million increase in consumer transaction deposits.

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The following table presents the composition of our deposit portfolio as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~2021:


	September 30, 2019				December 31, 2018
			Percent of				Percent of		Change

													March 31, 2022				December 31, 2021
															Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent		Balance		Portfolio		Balance		Portfolio		Amount		Percent
Noninterest-bearing demand	$	537,951	29.3	%	$	550,640	31.0	%	$	(12,689)	(2.3)	%	$	831,558	28.7	%	$	938,840	32.1	%	$	(107,282)	(11.4)	%
Interest-bearing demand		424,249	23.1	%		401,078	22.6	%		23,171	5.8	%		760,321	26.3	%		714,669	24.5	%		45,652	6.4	%
Money market and savings		678,160	37.1	%		652,791	36.8	%		25,369	3.9	%		1,076,204	37.2	%		1,034,130	35.4	%		42,074	4.1	%
Time deposits		192,753	10.5	%		170,587	9.6	%		22,166	13.0	%		224,184	7.8	%		232,912	8.0	%		(8,728)	(3.7)	%
Total deposits	$	1,833,113	100.0	%	$	1,775,096	100.0	%	$	58,017	3.3	%	$	2,892,267	100.0	%	$	2,920,551	100.0	%	$	(28,284)	(1.0)	%

The following table presents the average balances and rates of our deposit portfolio for the three months ended ~~September 30, 2019~~March 31, 2022 and ~~2018:~~2021:


	Three months ended				Three months ended
	September 30, 2019				September 30, 2018
	Average		Average		Average		Average

									Three months ended March 31,
									2022				2021
									Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Noninterest-bearing demand	$	502,108	-	%	$	545,154	-	%	$	831,441	—	%	$	731,680	—	%
Interest-bearing demand		424,896	0.49	%		393,390	0.23	%		714,472	0.12	%		642,832	0.16	%
Money market and savings		649,190	1.32	%		619,386	0.67	%		1,043,430	0.14	%		1,030,348	0.16	%
Time deposits		187,023	1.74	%		207,009	0.99	%		227,485	0.44	%		210,719	0.66	%
Total deposits	$	1,763,217	0.79	%	$	1,764,939	0.40	%	$	2,816,828	0.12	%	$	2,615,579	0.15	%

The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of ~~$100~~$250 thousand and over, that were outstanding, as of ~~the dates presented:~~

September 30,

December 31,
(dollars in thousands)

2019

2018
Maturing in:




3 months or less

$
46,870

$
24,856
3 months to 6 months

32,389

37,129
6 months to 1 year

10,854

8,260
1 year or greater

15,657

13,767
Total

$
105,770

$
84,012

~~Deposits Held for Sale~~

On January 15, 2019, we entered into an agreement to sell our branch offices located in Duluth, Minnesota, including deposits attributable to those offices. These deposits were classified as held for sale in our consolidated balance sheets. As of DecemberMarch 31, ~~2018, deposits held for sale totaled $24.2 million. The sale was completed on April 26, 2019, and as of September 30, 2019, there were no deposits held for sale.~~2022:


	March 31,
(dollars in thousands)	2022
Maturing in:
3 months or less	$	—
3 months to 6 months		50,471
6 months to 1 year		31,799
1 year or greater		829
Total	$	83,099

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Borrowings

Borrowings as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018~~2021 were as follows:


	September 30, 2019				December 31, 2018
			Percent of				Percent of		Change

													March 31, 2022				December 31, 2021
															Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent		Balance		Portfolio		Balance		Portfolio
Fed funds purchased	$	—	0.0	%	$	93,460	61.4	%	$	(93,460)	(100.0)	%
FHLB Short-term advances		—	0.0	%		—	0.0	%		—	—	%
Subordinated notes		49,609	84.4	%		49,562	32.5	%		47	0.1	%		50,000	84.9	%		50,000	84.9	%
Junior subordinated debentures		8,476	14.4	%		8,392	5.5	%		84	1.0	%		8,759	14.9	%		8,730	14.8	%
Finance lease liability		690	1.2	%		870	0.6	%		(180)	(20.7)	%		143	0.2	%		203	0.3	%
Total borrowed funds	$	58,775	100.0	%	$	152,284	100.0	%	$	(93,509)	(61.4)	%	$	58,902	100.0	%	$	58,933	100.0	%

Capital Resources

Stockholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available-for-sale securities.

Stockholders' equity ~~increased $84.4~~decreased $30.9 million, or 8.6%, to ~~$281.4~~$328.5 million as of ~~September 30, 2019,~~March 31, 2022, compared to ~~$197.0~~$359.4 million as of December 31, ~~2018. The increase~~2021, primarily due to a $38.1 million decrease in stockholders' equity was primarily impacted by $62.8 million of net proceeds received from our initial public offering, $21.9 million of net income for the nine months ended September 30, 2019, and an increase of $6.7 million of accumulated other comprehensive income. These increases were partially offset by dividends paid to common shareholders totaling $6.3 million for the nine months ended September 30, 2019. The increase in accumulated other comprehensive income, ~~was entirely from the increase~~due

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to rising interest rates that resulted in ~~after-tax market~~a lower fair value ~~adjustments~~ on ~~the available-for-sale~~our investment securities ~~portfolio.~~

available-for-sale. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 8.46% as of March 31, 2022, from 9.21% as of December 31, 2021.

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk, and that common equity has the greatest capacity to absorb unexpected loss.

We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.

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At ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, we met all the capital adequacy requirements to which we were subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018:~~ 2021:


	March 31,		December 31,
Capital Ratios	2022		2021
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets	14.27	%	14.65	%
Tier 1 capital to risk weighted assets	14.66	%	15.06	%
Total capital to risk weighted assets	18.12	%	18.64	%
Tier 1 capital to average assets	10.30	%	9.79	%
Tangible common equity to tangible assets (1)	8.46	%	9.21	%

Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	13.52	%	13.87	%
Tier 1 capital to risk weighted assets	13.52	%	13.87	%
Total capital to risk weighted assets	14.77	%	15.12	%
Tier 1 capital to average assets	9.50	%	9.01	%

September 30,

December 31,

Capital Ratios

2019

2018

Alerus Financial Corporation





Common equity tier 1 capital to risk weighted assets

12.38
%
8.43
%
Tier 1 capital to risk weighted assets

12.81
%
8.87
%
Total capital to risk weighted assets

16.67
%
12.86
%
Tier 1 capital to average assets

11.33
%
7.51
%
Tangible common equity to tangible assets (1)

10.76
%
6.91
%

Alerus Financial, National Association

Common equity tier 1 capital to risk weighted assets

11.84
%
11.39
%
Tier 1 capital to risk weighted assets

11.84
%
11.39
%
Total capital to risk weighted assets

13.06
%
12.62
%
Tier 1 capital to average assets

10.47
%
9.63
%

(1)Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

~~(1)~~

~~Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”~~

The capital ratios for the Company and the Bank, as of ~~September 30, 2019,~~March 31, 2022, as shown in the above tables, ~~indicate~~were at levels above the regulatory ~~minimum~~minimums to be considered “well capitalized”. ~~All regulatory capital ratios increased from their December 31, 2018 levels primarily as a result of net proceeds received from our initial public offering and~~See “Note 16 Regulatory Matters” to the ~~increase in retained earnings.~~consolidated financial statements for additional information.

~~Contractual Obligations and Off‑Balance Sheet Arrangements~~

~~Contractual Obligations~~

~~In the ordinary course of our operations, we enter into certain contractual obligations. The following table presents our contractual obligations by maturity as of September 30, 2019.~~

September 30, 2019


Less than

One to

Three to

Over


(dollars in thousands)

one year

three years

five years

five years

Total
Operating lease obligations

$
2,291

$
3,255

$
2,567

$
2,460

$
10,573
Time deposits

154,554

23,665

7,247

7,287

192,753
Subordinated notes payable

—

—

—

49,609

49,609
Junior subordinated debenture (Trust I)

—

—

—

3,390

3,390
Junior subordinated debenture (Trust II)

—

—

—

5,086

5,086
Finance lease liability

251

502

20

—

773

~~Off‑Balance~~Off-Balance Sheet Arrangements

We are a party to financial instruments with ~~off‑balance~~off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normal credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitments is considered immaterial for disclosure purposes.

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A summary of the contractual amounts of our exposure to ~~off‑balance~~off-balance sheet agreements as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018, is~~2021, was as follows:


	March 31,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	650,087	$	668,115
Standby letters of credit		10,591		10,529
Total	$	660,678	$	678,644

September 30,

December 31,
(dollars in thousands)

2019

2018
Commitments to extend credit

$
570,220

$
529,890
Standby letters of credit

8,023

8,852
Total

$
578,243

$
538,742

Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. Liquidity is monitored and closely managed by our asset and liability committee, or the ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is the ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. The ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.

As of ~~September 30, 2019,~~March 31, 2022, we had on balance sheet liquidity of ~~$192.7~~$998.7 million, compared to ~~$152.1 million~~$1.1 billion as of December 31, ~~2018.~~2021. On balance sheet liquidity includes ~~total due from banks,~~cash and cash equivalents, federal funds sold, ~~interest‑bearing deposits with banks,~~ unencumbered securities ~~available‑for‑sale~~available-for-sale, and over collateralized securities pledging ~~position.~~positions available-for-sale.

The Bank is a member of the FHLB, which provides ~~short‑~~short- and ~~long‑term~~long-term funding to its members through advances collateralized by real estate related assets and other select collateral, most typically in the form of debt securities. ~~The actual~~Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of ~~September 30, 2019,~~March 31, 2022, we had no outstanding fed funds purchased from the ~~FHLB. As of September 30, 2019 we had $858.3~~FHLB and $760.7 million of ~~real estate‑related loans~~collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to ~~an additional $545.7 million.~~$760.4 million from the FHLB. In addition, we can borrow up to ~~$87.0~~$102.0 million through the unsecured lines of credit we have established with four other banks.

In addition, because the Bank is “well capitalized,” we can accept wholesale deposits up to 20.0% of total assets based on current policy ~~limits.~~limits, or $667.2 million, as of March 31, 2022. Management believed that we had adequate resources to fund all of our commitments as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018.~~2021.

Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding. ~~As of September 30, 2019, we had $61.2 million of cash and cash equivalents of which $25.0 million are interest‑earning deposits held at the Federal Reserve, FHLB and other correspondent banks.~~

Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of COVID-19 could place increased demand on our liquidity if we experience significant credit deterioration and as we meet borrowers’ needs. Accordingly, management has addressed this issue by formulating a liquidity contingency plan, which has been reviewed and approved by both the Bank’s board of directors and the ALCO. The plan addresses the actions that we would take in response to both a ~~short‑term~~short-term and ~~long‑term~~long-term funding crisis.

A ~~short‑term~~short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly ~~short‑term~~short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A ~~long‑term~~long-term funding crisis would most likely be the result of both external and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. ~~Interest‑rate~~Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of ~~interest‑earning~~interest-earning assets and the amount of ~~interest‑bearing~~interest-bearing liabilities that are prepaid/withdrawn, ~~re‑price,~~re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

Management regularly reviews our exposure to changes in interest rates. Among the factors considered are changes in the mix of ~~interest‑earning~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities, interest rate spreads and repricing periods. The ALCO reviews, on at least a quarterly basis, the interest rate risk position.

The ~~interest‑rate~~interest-rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both ~~short‑term~~short-term and ~~long‑term interest‑rate~~long-term interest-rate risk exposure.

Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

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The estimated impact on our net interest income as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, assuming immediate parallel moves in interest rates is presented in the table ~~below.~~below:

September 30, 2019

December 31, 2018


Following

Following

Following

Following

12 months

24 months

12 months

24 months

+400 basis points

4.4
%
11.4
%
0.4
%
10.7
%
+300 basis points

3.4
%
8.5
%
0.3
%
8.7
%
+200 basis points

2.3
%
5.5
%
0.2
%
6.6
%
+100 basis points

1.3
%
2.4
%
0.3
%
4.8
%
−100 basis points

−5.4
%
−11.4
%
−5.2
%
−6.7
%
−200 basis points

N/A
%
N/A
%
−9.6
%
−16.4
%

March 31, 2022

December 31, 2021

Following
Following
Following
Following

12 months

24 months

12 months

24 months
+400 basis points

−6.9
%
2.8
%
−8.2
%
−2.9
%
+300 basis points
−5.3
%
2.9
%
−6.1
%
−2.3
%
+200 basis points
−3.8
%
3.1
%
−4.1
%
−1.8
%
+100 basis points
−2.1
%
3.5
%
−2.0
%
−1.3
%
−100 basis points
−4.5
%
−5.6
%
−10.6
%
−15.7
%
−200 basis points
N/A
%
N/A
%
N/A
%
N/A
%

Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. ~~Market based~~Market-based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

Management uses an economic value of equity sensitivity analysis to understand the impact of interest rate changes on ~~long‑term~~long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.

The table below presents the change in the economic value of equity as of ~~September 30, 2019~~March 31, 2022 and December 31, ~~2018,~~2021, assuming immediate parallel shifts in interest ~~rates.~~rates:


	March 31,		December 31,
	2022		2021
+400 basis points	−22.1	%	−26.0	%
+300 basis points	−15.2	%	−16.8	%
+200 basis points	−8.7	%	−8.2	%
+100 basis points	−3.1	%	−1.4	%
−100 basis points	—	%	−31.2	%
−200 basis points	N/A	%	N/A	%

September 30,

December 31,

2019

2018

+400 basis points

18.5
%
4.9
%
+300 basis points

16.0
%
4.8
%
+200 basis points

12.5
%
4.0
%
+100 basis points

7.9
%
2.8
%
−100 basis points

−26.5
%
−15.9
%
−200 basis points

N/A
%
−36.8
%

Operational Risk

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.

Compliance Risk

Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of our banking center network, employment and tax matters.

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Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements

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that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various risks, including those related to the development of new products and business initiatives.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule ~~13a‑15(e)~~13a-15(e) under the Securities Exchange Act of 1934, or the ~~“Exchange Act”)~~Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule ~~13a‑15(f)~~13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1 – Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company or its subsidiaries, to which we or any of our subsidiaries isare a party or to which our property is the subject. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.

Item 1A – Risk Factors

There have been no material changes ~~from~~to the risk factors ~~previously~~ disclosed in the ~~“Risk Factors” section included in our prospectus~~Company’s Annual Report on Form 10-K filed with the SEC on ~~September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.~~March 11, 2022.

Item 2 ~~- Recent Sales of Unregistered Securities~~

– Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Table of Contents

Issuer Repurchases of Equity Securities

The following table presents information related to repurchases of shares of our common stock for each calendar month in the first quarter of 2022:



				Total Number of	Maximum Number of
	Total Number	Average		Shares Purchased as	Shares that May
	of Shares	Price Paid		Part of Publicly	Yet be Purchased
(dollars in thousands, except per share data)	Purchased (1)	per Share		Announced Plans	Under the Plan (2)
January	240	$	29.28	—	770,000
February	20,391		29.43	—	770,000
March	—		—	—	770,000
Total	20,631	$	29.43	—	770,000

(1)	Shares repurchased by the Company represent shares surrendered by employees to the Company to pay withholding taxes on the vesting of restricted stock awards.

(2)

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months, until February 28, 2024. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended March 31, 2022, there were no shares repurchased under the Program.

Use of Proceeds from Registered Securities

On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On September 25, 2019, the Company sold 429,000 additional shares of common stock pursuant to the exercise in full by

~~Table of Contents~~

the underwriters of their option to purchase additional shares to cover over-allotments. The aggregate offering price for the shares sold by the Company was $69.1 million, and after deducting $6.3 million of underwriting discounts, commissions and offering expenses paid to third parties, the Company received total net proceeds of $62.8 million. All of the shares were sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-233339), which was declared effective by the SEC on September 12, 2019, and registered shares of the Company’s common stock with a maximum aggregate offering price of $89.7 million. Raymond James & Associates, Inc. and D.A. Davidson & Co. served as joint book-running managers in the offering, and Piper Jaffray & Co. served as co-manager.2019. The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “ALRS”.

There has been no material change in the planned use of proceeds from the initial public offering as described in the Company’s prospectus filed with the SEC on September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933. From the effective date of the registration statement through ~~September 30, 2019,~~March 31, 2022, the Company has maintained the net proceeds of the initial public offering on deposit with the Bank. The Bank has used the deposits of the Company to pay down short-term borrowings.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

None.

6457

Table of Contents

Item 6 – Exhibits


Exhibit No.		Description
~~Exhibit No.~~		~~Description~~
3.1		Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019).

3.2		Second Amended and Restated Bylaws of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.2 on Form S-1 filed on August 16, 2019).

10.1		Employment Offer Letter between Alerus Financial Corporation and Alan Villalon dated January 11, 2022 (incorporated by reference to Exhibit 10.24 on Form 10-K filed on March 11, 2022).

10.2		Executive Severance Agreement by and between Alerus Financial Corporation and Alan Villalon, dated January 11, 2022 (incorporated by reference to Exhibit 10.25 on Form 10-K filed on March 11, 2022).

31.1		Chief Executive ~~Officer’s~~Officer’s Certifications required by Rule13(a)~~‑14(a)~~-14(a) – filed herewith.

31.2		Chief Financial ~~Officer’s~~Officer’s Certifications required by Rule13(a)~~‑14(a)~~-14(a) – filed herewith.

32.1		Chief Executive Officer Certifications pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2		Chief Financial Officer Certifications pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
101.INS*		~~XBRL~~
101.INS		iXBRL Instance Document

101.SCH*101.SCH		~~XBRL~~iXBRL Taxonomy Extension Schema

101.CAL*101.CAL		~~XBRL~~iXBRL Taxonomy Extension Calculation Linkbase

101.DEF*101.DEF		~~XBRL~~iXBRL Taxonomy Extension Definition Linkbase

101.LAB*101.LAB		~~XBRL~~iXBRL Taxonomy Extension Label Linkbase

101.PRE*101.PRE		~~XBRL~~iXBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibits 101)

6558

Table of Contents

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized


			ALERUS FINANCIAL CORPORATION
	~~ALERUS FINANCIAL CORPORATION~~

Date: ~~November 7, 2019~~May 6, 2022	By:	/s/ ~~Randy L. Newman~~Katie A. Lorenson
		Name: ~~Randy L. Newman~~Katie A. Lorenson
		Title: ~~Chairman,~~President and Chief Executive Officer (Principal Executive Officer)

Date: May 6, 2022	By:	/s/ Alan A. Villalon
		Name: Alan A. Villalon
		Title: Executive Vice President and ~~President~~Chief Financial Officer (Principal Financial Officer)

6659

			Page
Part 1:	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets as of ~~September 30, 2019 (Unaudited)~~March 31, 2022 and December 31, ~~2018~~2021	1
	Consolidated Statements of Income ~~(Unaudited)~~ for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018~~2021	2
	Consolidated Statements of Comprehensive Income ~~(Unaudited)~~ for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018~~2021	3
	Consolidated Statements of Changes in ~~Shareholders’~~Stockholders’ Equity ~~(Unaudited)~~ for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2022 and ~~2018~~2021	4
	Consolidated Statements of Cash Flows ~~(Unaudited)~~ for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2022 and ~~2018~~2021	5
	Notes to Consolidated Financial Statements ~~(Unaudited)~~	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39 34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
~~Item 4.~~	~~Controls and Procedures~~	63
		54
~~Part 2~~Item 4.	~~OTHER INFORMATION~~Controls and Procedures	56

Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	63 56
Item 1A.	Risk Factors	63 56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63 56
Item 3.	Defaults Upon Senior Securities	64
~~Item 4.~~	~~Mine Safety Disclosures~~	64
~~Item 5.~~	~~Other Information~~	64
~~Item 6.~~	~~Exhibits~~	65
		57
~~Signatures~~Item 4.	Mine Safety Disclosures	66 57
Item 5.	Other Information	57
Item 6.	Exhibits	58

Signatures		59


	September 30,		December 31,
(dollars and shares in thousands, except per share data)	2019		2018
Assets
Cash and cash equivalents	$	61,174	$	40,651
Investment securities, at fair value
Trading		—		1,539
Available-for-sale		278,716		250,174
Equity		2,675		3,165
Loans held for sale		66,021		14,486
Loans held for branch sale		—		32,031
Loans		1,686,087		1,701,850
Allowance for loan losses		(22,984)		(22,174)
Net loans		1,663,103		1,679,676
Land, premises and equipment, net		21,150		21,743
Operating lease right-of-use assets		8,877		—
Accrued interest receivable		7,412		7,645
Bank-owned life insurance		31,364		30,763
Goodwill		27,329		27,329
Other intangible assets		19,382		22,473
Servicing rights		4,146		4,623
Deferred income taxes, net		7,695		10,085
Other assets		29,267		32,687
Total assets	$	2,228,311	$	2,179,070
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	537,951	$	550,640
Interest-bearing		1,295,162		1,224,456
Total deposits		1,833,113		1,775,096
Deposits held for sale		—		24,197
Short-term borrowings		—		93,460
Long-term debt		58,775		58,824
Operating lease liabilities		9,401		—
Accrued expenses and other liabilities		45,619		30,539
Total liabilities		1,946,908		1,982,116
Commitments and contingent liabilities ESOP-owned shares		—		34,494
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding		—		—
Common stock, $1 par value, 30,000,000 shares authorized: 17,049,493 and 13,775,327 issued and outstanding		17,049		13,775
Additional paid-in capital		88,230		27,743
Retained earnings		173,039		159,037
Accumulated other comprehensive income (loss)		3,085		(3,601)
Total stockholders’ equity		281,403		196,954
Less ESOP-owned shares		—		(34,494)
Total stockholders’ equity net ESOP-owned shares		281,403		162,460
Total liabilities and stockholders’ equity	$	2,228,311	$	2,179,070


	Three months ended September 30, 2019
							Accumulated
			Additional				Other		ESOP-
	Common		Paid-in		Retained		Comprehensive		Owned
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Shares		Total
Balance as of June 30, 2019	$	13,816	$	28,676	$	169,788	$	1,485	$	(34,494)	$	179,271
Net income		—		—		7,104		—		—		7,104
Other comprehensive income (loss)		—		—		—		1,600		—		1,600
Common stock repurchased		(77)		(275)		(1,489)		—		—		(1,841)
Common stock dividends		—		—		(2,364)		—		—		(2,364)
ESOP repurchase obligation termination		—		—		—		—		34,494		34,494
Initial public offering of 3,289,000 shares of common stock net of issuance costs		3,289		59,515		—		—		—		62,804
Stock-based compensation expense		—		335		—		—		—		335
Vesting of restricted stock		21		(21)		—		—		—		—
Balance as of September 30, 2019	$	17,049	$	88,230	$	173,039	$	3,085	$	—	$	281,403


	Nine months ended September 30, 2018
							Accumulated
			Additional				Other		ESOP-
	Common		Paid-in		Retained		Comprehensive		Owned
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Shares		Total
Balance as of December 31, 2017	$	13,699	$	26,040	$	140,986	$	(1,131)	$	(31,491)	$	148,103
Net income		—		—		19,833		—		—		19,833
Adjustment for adoption of ASU 2016-01		—		—		(71)		71		—		—
Other comprehensive income (loss)		—		—		—		(4,579)		—		(4,579)
Common stock repurchased		(11)		(39)		(212)		—		—		(262)
Common stock dividends		—		—		(5,486)		—		—		(5,486)
Net change in fair value of ESOP shares		—		—		—		—		(3,003)		(3,003)
Stock-based compensation expense		11		971		—		—		—		982
Vesting of restricted stock		77		(77)		—		—		—		—
Balance as of September 30, 2018	$	13,776	$	26,895	$	155,050	$	(5,639)	$	(34,494)	$	155,588


	Nine months ended
	September 30,
Supplemental Cash Flow Disclosures	2019		2018
Cash paid for:
Interest	$	13,162	$	7,692
Income taxes		5,550		3,030
Non-cash information
Loan collateral transferred to foreclosed assets		766		661
Unrealized gain (loss) on investment securities available-for-sale		6,686		(4,579)
Initial recognition of operating lease right-of-use assets		10,475		—
Initial recognition of operating lease liabilities		10,996		—
Change in fair value of ESOP shares		—		(3,003)
ESOP repurchase obligation termination		34,494		—


	September 30, 2019
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U.S. Treasury and agencies	$	21,607	$	29	$	(34)	$	21,602
Obligations of state and political agencies		47,227		703		(74)		47,856
Mortgage backed securities
Residential agency		165,995		3,467		(125)		169,337
Commercial		32,546		139		(33)		32,652
Asset backed securities		152		5		—		157
Corporate bonds		7,069		43		—		7,112
Total available-for-sale investment securities	$	274,596	$	4,386	$	(266)	$	278,716


	September 30, 2019
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonperforming		Loans
Commercial
Commercial and industrial	$	481,480	$	1,561	$	45	$	2,097	$	485,183
Real estate construction		21,224		450		—		—		21,674
Commercial real estate		443,129		—		—		1,471		444,600
Total commercial		945,833		2,011		45		3,568		951,457
Consumer
Residential real estate first mortgage		456,981		2,105		—		677		459,763
Residential real estate junior lien		181,646		14		—		856		182,516
Other revolving and installment		92,176		169		—		6		92,351
Total consumer		730,803		2,288		—		1,539		734,630
Total loans	$	1,676,636	$	4,299	$	45	$	5,107	$	1,686,087


	Three months ended September 30, 2019
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	11,694	$	(962)	$	(324)	$	538	$	10,946
Real estate construction		323		25		—		—		348
Commercial real estate		5,765		(4)		—		—		5,761
Total commercial		17,782		(941)		(324)		538		17,055
Consumer
Residential real estate first mortgage		1,155		(139)		—		—		1,016
Residential real estate junior lien		710		157		(20)		49		896
Other revolving and installment		380		1		(31)		28		378
Total consumer		2,245		19		(51)		77		2,290
Unallocated		1,219		2,420		—		—		3,639
Total	$	21,246	$	1,498	$	(375)	$	615	$	22,984


	September 30, 2019
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Unallocated		Total
Commercial
Commercial and industrial	$	2,513	$	482,670	$	485,183	$	1,429	$	9,517	$	—	$	10,946
Real estate construction		—		21,674		21,674		—		348		—		348
Commercial real estate		1,480		443,120		444,600		352		5,409		—		5,761
Total commercial		3,993		947,464		951,457		1,781		15,274		—		17,055
Consumer
Residential real estate first mortgage		355		459,408		459,763		—		1,016		—		1,016
Residential real estate junior lien		804		181,712		182,516		324		572		—		896
Other revolving and installment		5		92,346		92,351		2		376		—		378
Total consumer		1,164		733,466		734,630		326		1,964		—		2,290
Total loans	$	5,157	$	1,680,930	$	1,686,087	$	2,107	$	17,238	$	3,639	$	22,984


	September 30, 2019
	Finance		Operating
(dollars in thousands)	Leases		Leases
2020	$	251	$	2,291
2021		251		1,676
2022		251		1,579
2023		20		1,506
2024		—		1,061
Thereafter		—		2,460
Total future minimum lease payments	$	773	$	10,573
Amounts representing interest		(83)		(1,172)
Total operating lease liabilities	$	690	$	9,401


	Nine months ended September 30, 2019			Nine months ended September 30, 2018
		Weighted-			Weighted-
		Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock Awards
Outstanding at beginning of period	337,014	$	18.36	336,397	$	15.38
Granted	70,617		19.87	76,031		22.67
Vested	(53,882)		18.69	(76,753)		10.56
Forfeited or cancelled	(6,138)		17.34	—		—
Outstanding at end of period	347,611	$	18.64	335,675	$	18.13


		Gain/(loss)
		Three months ended				Nine months ended
		September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	Consolidated Statements of Income Location	2019		2018		2019		2018
Interest rate lock commitments	Mortgage banking	$	(257)	$	(29)	$	2,024	$	(11)
Forward loan sales commitments	Mortgage banking		(199)		46		454		24
TBA mortgage backed securities	Mortgage banking		680		—		(104)		—
Total gain/(loss) from derivative instruments		$	224	$	17	$	2,374	$	13


	September 30, 2019
								Minimum to be
					Requirements			Well Capitalized
					for Capital			Under Prompt
	Actual				Adequacy Purposes			Corrective Action
(dollars in thousands)	Amount		Ratio		Amount	Ratio		Amount	Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	233,030	12.38	%	84,705	4.50	%	N/A	N/A
Bank		222,600	11.84	%	84,594	4.50	%	122,192	6.50	%
Tier 1 capital to risk weighted assets								.
Consolidated		241,197	12.81	%	112,940	6.00	%	N/A	N/A
Bank		222,600	11.84	%	112,792	6.00	%	150,390	8.00	%
Total capital to risk weighted assets
Consolidated		313,700	16.67	%	150,587	8.00	%	N/A	N/A
Bank		245,585	13.06	%	150,390	8.00	%	187,987	10.00	%
Tier 1 capital to average assets
Consolidated		241,197	11.33	%	85,152	4.00	%	N/A	N/A
Bank		222,600	10.47	%	85,009	4.00	%	106,261	5.00	%


	September 30, 2019
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities
U.S. treasury and government agencies	$	—	$	—	$	—	$	—
Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	21,602	$	—	$	21,602
Obligations of state and political agencies		—		47,856		—		47,856
Mortgage backed securities
Residential agency		—		169,337		—		169,337
Commercial		—		32,652		—		32,652
Asset backed securities		—		157		—		157
Corporate bonds		—		7,112		—		7,112
Equity securities		2,675		—		—		2,675
Total available-for-sale and equity securities	$	2,675	$	278,716	$	—	$	281,391
Other assets
Derivatives	$	—	$	2,483	$	—	$	2,483
Other liabilities
Derivatives	$	—	$	104	$	—	$	104


	September 30, 2019
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	61,174	$	61,174	$	—	$	—	$	61,174
Loans		1,663,103		—		—		1,658,151		1,658,151
Accrued interest receivable		7,412		7,412		—		—		7,412
Bank-owned life insurance		31,364		—		31,364		—		31,364
Financial Liabilities
Noninterest-bearing transaction	$	537,951	$	—	$	537,951	$	—	$	537,951
Interest-bearing transaction		1,102,409		—		1,102,409		—		1,102,409
Time deposits		192,753		—		—		192,869		192,869
Short-term borrowings		—		—		—		—		—
Long-term debt		58,775		—		58,285		—		58,285
Accrued interest payable		1,879		1,879		—		—		1,879


	Three Months Ended September 30, 2019						Nine months ended September 30, 2019
	Compared with						Compared with
	Three Months Ended September 30, 2018						Nine months ended September 30, 2018
	Change due to:				Interest		Change due to:				Interest
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance		Volume		Rate		Variance
Interest earning assets
Interest-bearing deposits with banks	$	34	$	6	$	40	$	77	$	33	$	110
Investment securities		55		15		70		(8)		163		155
Loans held for sale		190		(13)		177		239		47		286
Loans
Commercial:
Commercial and industrial		(399)		362		(37)		(195)		1,612		1,417
Real estate construction		15		11		26		(41)		16		(25)
Commercial real estate		45		688		733		133		970		1,103
Total commercial		(339)		1,061		722		(103)		2,598		2,495
Consumer		`
Residential real estate first mortgage		211		48		259		1,657		311		1,968
Residential real estate junior lien		(65)		113		48		(185)		548		363
Other revolving and installment		28		80		108		257		199		456
Total consumer		174		241		415		1,729		1,058		2,787
Total loans		(165)		1,302		1,137		1,626		3,656		5,282
Federal Reserve/FHLB Stock		(10)		(19)		(29)		13		5		18
Total interest income		104		1,291		1,395		1,947		3,904		5,851
Interest-bearing liabilities
Interest-bearing demand deposits		18		273		291		30		686		716
Money market and savings deposits		50		1,070		1,120		235		3,430		3,665
Time deposits		(50)		355		305		(100)		1,040		940
Short-term borrowings		(89)		53		(36)		121		353		474
Long-term debt		(1)		(3)		(4)		(1)		27		26
Total interest expense		(72)		1,748		1,676		285		5,536		5,821
Change in net interest income	$	176	$	(457)	$	(281)	$	1,662	$	(1,632)	$	30


	September 30, 2019				December 31, 2018
			Percentage				Percentage
	Allocated		of loans to		Allocated		of loans to
(dollars in thousands)	Allowance		total loans		Allowance		total loans
Commercial and industrial	$	10,946	28.7	%	$	12,127	30.0	%
Real estate construction		348	1.3	%		250	1.1	%
Commercial real estate		5,761	26.4	%		6,279	25.9	%
Residential real estate first mortgage		1,016	27.3	%		1,156	26.3	%
Residential real estate junior lien		896	10.8	%		805	11.1	%
Other revolving and installment		378	5.5	%		380	5.6	%
Unallocated		3,639	—	%		1,177	—	%
Total loans	$	22,984	100.0	%	$	22,174	100.0	%


	September 30,		December 31,
Capital Ratios	2019		2018
Alerus Financial Corporation
Common equity tier 1 capital to risk weighted assets	12.38	%	8.43	%
Tier 1 capital to risk weighted assets	12.81	%	8.87	%
Total capital to risk weighted assets	16.67	%	12.86	%
Tier 1 capital to average assets	11.33	%	7.51	%
Tangible common equity to tangible assets (1)	10.76	%	6.91	%

Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	11.84	%	11.39	%
Tier 1 capital to risk weighted assets	11.84	%	11.39	%
Total capital to risk weighted assets	13.06	%	12.62	%
Tier 1 capital to average assets	10.47	%	9.63	%


	September 30, 2019
	Less than		One to		Three to		Over
(dollars in thousands)	one year		three years		five years		five years		Total
Operating lease obligations	$	2,291	$	3,255	$	2,567	$	2,460	$	10,573
Time deposits		154,554		23,665		7,247		7,287		192,753
Subordinated notes payable		—		—		—		49,609		49,609
Junior subordinated debenture (Trust I)		—		—		—		3,390		3,390
Junior subordinated debenture (Trust II)		—		—		—		5,086		5,086
Finance lease liability		251		502		20		—		773