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 ~~June 30, 2021~~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

(Registrant’s telephone number, including area code)

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

��


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 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 of the Act). Yes ☐ No ⌧

The number of shares of the registrant’s common stock outstanding at ~~July 31, 2021~~April 30, 2022 was ~~17,202,863.~~17,288,575.

Table of Contents

Alerus Financial Corporation and Subsidiaries

Table of Contents

		Page
Part 1:	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	1
	Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	2
	Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	3
	Consolidated Statements of Changes in Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	4
	Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3534
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5854
Item 4.	Controls and Procedures	6056

Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	6156
Item 1A.	Risk Factors	6156
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6156
Item 3.	Defaults Upon Senior Securities	6257
Item 4.	Mine Safety Disclosures	6257
Item 5.	Other Information	6257
Item 6.	Exhibits	6358

Signatures		6459

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands, except share and per share data)	2021		2020		2022		2021
Assets	(Unaudited)		(Audited)		(Unaudited)		(Audited)
Cash and cash equivalents	$	315,430	$	172,962	$	132,832	$	242,311
Investment securities
Available-for-sale, at fair value		651,546		592,342		866,333		853,649
Held-to-maturity, at carrying value		146,316		—		340,150		352,061
Loans held for sale		66,856		122,440		21,864		46,490
Loans		1,835,312		1,979,375		1,818,042		1,758,020
Allowance for loan losses		(33,764)		(34,246)		(31,713)		(31,572)
Net loans		1,801,548		1,945,129		1,786,329		1,726,448
Land, premises and equipment, net		18,847		20,289		17,619		18,370
Operating lease right-of-use assets		4,203		6,918		3,360		3,727
Accrued interest receivable		8,463		9,662		8,516		8,537
Bank-owned life insurance		32,752		32,363		33,358		33,156
Goodwill		30,201		30,201		31,490		31,490
Other intangible assets		23,680		25,919		19,197		20,250
Servicing rights		1,964		1,987		1,771		1,880
Deferred income taxes, net		11,522		9,409		23,517		11,614
Other assets		43,901		44,150		49,863		42,708
Total assets	$	3,157,229	$	3,013,771	$	3,336,199	$	3,392,691
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	758,820	$	754,716	$	831,558	$	938,840
Interest-bearing		1,952,120		1,817,277		2,060,709		1,981,711
Total deposits		2,710,940		2,571,993		2,892,267		2,920,551
Long-term debt		58,992		58,735		58,902		58,933
Operating lease liabilities		4,868		7,861		3,850		4,275
Accrued expenses and other liabilities		38,038		45,019		52,675		49,529
Total liabilities		2,812,838		2,683,608		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: 17,197,771 and 17,125,270 issued and outstanding		17,198		17,125
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		91,273		90,237		92,573		92,878
Retained earnings		233,397		212,163		260,967		253,567
Accumulated other comprehensive income (loss)		2,523		10,638		(42,324)		(4,255)
Total stockholders’ equity		344,391		330,163		328,505		359,403
Total liabilities and stockholders’ equity	$	3,157,229	$	3,013,771	$	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				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars and shares in thousands, except per share data)	2021		2020		2021		2020		2022		2021
Interest Income
Loans, including fees	$	19,324	$	21,372	$	39,891	$	41,914	$	17,292	$	20,567
Investment securities
Taxable		2,897		1,765		5,298		3,524		5,440		2,401
Exempt from federal income taxes		233		239		469		474		216		236
Other		130		130		247		700		116		117
Total interest income		22,584		23,506		45,905		46,612		23,064		23,321
Interest Expense
Deposits		906		2,558		1,901		5,950		829		995
Long-term debt		538		857		826		1,734		562		288
Total interest expense		1,444		3,415		2,727		7,684		1,391		1,283
Net interest income		21,140		20,091		43,178		38,928		21,673		22,038
Provision for loan losses		—		3,500		—		6,000		—		—
Net interest income after provision for loan losses		21,140		16,591		43,178		32,928		21,673		22,038
Noninterest Income
Retirement and benefit services		17,871		13,710		35,126		29,930		17,646		17,255
Wealth management		5,138		4,112		10,124		8,158		5,326		4,986
Mortgage banking		12,287		17,546		29,419		22,591		4,931		17,132
Service charges on deposit accounts		330		297		668		720		363		338
Net gains (losses) on investment securities		—		1,294		114		1,294		—		114
Other		1,122		1,271		2,178		2,726		1,204		1,056
Total noninterest income		36,748		38,230		77,629		65,419		29,470		40,881
Noninterest Expense
Compensation		24,309		21,213		48,007		39,944		19,051		23,698
Employee taxes and benefits		5,572		4,747		11,385		10,055		6,162		5,813
Occupancy and equipment expense		1,918		2,612		4,149		5,104		2,051		2,231
Business services, software and technology expense		4,958		4,580		9,934		9,123		4,924		4,976
Intangible amortization expense		1,088		991		2,239		1,981		1,053		1,151
Professional fees and assessments		1,509		1,177		2,981		2,233		1,541		1,472
Marketing and business development		769		549		1,445		1,159		600		676
Supplies and postage		503		675		1,034		1,382		646		531
Travel		36		51		62		312		179		26
Mortgage and lending expenses		1,199		1,341		2,531		2,482		686		1,332
Other		689		1,798		1,825		2,685		1,178		1,136
Total noninterest expense		42,550		39,734		85,592		76,460		38,071		43,042
Income before income taxes		15,338		15,087		35,215		21,887		13,072		19,877
Income tax expense		3,644		3,613		8,306		5,050		2,888		4,662
Net income	$	11,694	$	11,474	$	26,909	$	16,837	$	10,184	$	15,215
Per Common Share Data
Basic earnings per common share	$	0.67	$	0.66	$	1.54	$	0.97	$	0.58	$	0.87
Diluted earnings per common share	$	0.66	$	0.65	$	1.52	$	0.95	$	0.57	$	0.86
Dividends declared per common share	$	0.16	$	0.15	$	0.31	$	0.30	$	0.16	$	0.15
Average common shares outstanding		17,194		17,111		17,170		17,091		17,244		17,145
Diluted average common shares outstanding		17,497		17,445		17,482		17,425		17,500		17,465

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				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2021		2020		2021		2020		2022		2021
Net Income	$	11,694	$	11,474	$	26,909	$	16,837	$	10,184	$	15,215
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities		7,430		4,794		(10,606)		11,753		(46,708)		(18,036)
Accretion of gains (losses) on debt securities reclassified to held-to-maturity		(115)		—		(115)		—
Accretion of (gains) losses on debt securities reclassified to held-to-maturity										(4,118)		—
Reclassification adjustment for losses (gains) realized in income		—		(1,294)		(114)		(1,294)		—		(114)
Total other comprehensive income (loss), before tax		7,315		3,500		(10,835)		10,459		(50,826)		(18,150)
Income tax expense (benefit) related to items of other comprehensive income		1,836		878		(2,720)		2,624		(12,757)		(4,556)
Other comprehensive income (loss), net of tax		5,479		2,622		(8,115)		7,835		(38,069)		(13,594)
Total comprehensive income	$	17,173	$	14,096	$	18,794	$	24,672
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 Changes in Stockholders’ Equity (Unaudited)

Three months ended June 30, 2021

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars and shares in thousands)

Stock

Capital

Earnings

Income (Loss)

Total
Balance as of March 31, 2021

$
17,190

$
90,520

$
224,480

$
(2,956)

$
329,234
Net income

—

—

11,694

—

11,694
Other comprehensive income (loss)

—

—

—

5,479

5,479
Common stock repurchased

—

—

—

—

—
Common stock dividends

—

—

(2,777)

—

(2,777)
Stock-based compensation expense

8

753

—

—

761
Vesting of restricted stock

—

—

—

—

—
Balance as of June 30, 2021

$
17,198

$
91,273

$
233,397

$
2,523

$
344,391


	Six months ended June 30, 2021										Three months ended March 31, 2022
							Accumulated										Accumulated
			Additional				Other						Additional				Other
	Common		Paid-in		Retained		Comprehensive				Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total		Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2020	$	17,125	$	90,237	$	212,163	$	10,638	$	330,163
Balance as of December 31, 2021											$	17,213	$	92,878	$	253,567	$	(4,255)	$	359,403
Net income		—		—		26,909		—		26,909		—		—		10,184		—		10,184
Other comprehensive income (loss)		—		—		—		(8,115)		(8,115)		—		—		—		(38,069)		(38,069)
Common stock repurchased		(16)		(134)		(296)		—		(446)		(20)		(587)		—		—		(607)
Common stock dividends		—		—		(5,379)		—		(5,379)		—		—		(2,784)		—		(2,784)
Share‑based compensation expense		8		1,251		—		—		1,259		—		378		—		—		378
Vesting of restricted stock		81		(81)		—		—		—		96		(96)		—		—		—
Balance as of June 30, 2021	$	17,198	$	91,273	$	233,397	$	2,523	$	344,391
Balance as of March 31, 2022											$	17,289	$	92,573	$	260,967	$	(42,324)	$	328,505

Three months ended June 30, 2020

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Total
Balance as of March 31, 2020

$
17,106

$
88,703

$
180,650

$
7,149

$
293,608
Net income

—

—

11,474

—

11,474
Other comprehensive income (loss)

—

—

—

2,622

2,622
Common stock repurchased

—

—

—

—

—
Common stock dividends

—

—

(2,596)

—

(2,596)
Stock-based compensation expense

14

610

—

—

624
Vesting of restricted stock

—

—

—

—

—
Balance as of June 30, 2020

$
17,120

$
89,313

$
189,528

$
9,771

$
305,732


	Six months ended June 30, 2020										Three months ended March 31, 2021
							Accumulated										Accumulated
			Additional				Other						Additional				Other
	Common		Paid-in		Retained		Comprehensive				Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total		Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2019	$	17,050	$	88,650	$	178,092	$	1,936	$	285,728
Balance as of December 31, 2020											$	17,125	$	90,237	$	212,163	$	10,638	$	330,163
Net income		—		—		16,837		—		16,837		—		—		15,215		—		15,215
Other comprehensive income (loss)		—		—		—		7,835		7,835		—		—		—		(13,594)		(13,594)
Common stock repurchased		(15)		(111)		(210)		—		(336)		(16)		(134)		(296)		—		(446)
Common stock dividends		—		—		(5,191)		—		(5,191)		—		—		(2,602)		—		(2,602)
Share‑based compensation expense		14		845		—		—		859		—		498		—		—		498
Vesting of restricted stock		71		(71)		—		—		—		81		(81)		—		—		—
Balance as of June 30, 2020	$	17,120	$	89,313	$	189,528	$	9,771	$	305,732
Balance as of March 31, 2021											$	17,190	$	90,520	$	224,480	$	(2,956)	$	329,234

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended				Three months ended
	June 30,				March 31,
(dollars in thousands)	2021		2020		2022		2021
Operating Activities
Net income	$	26,909	$	16,837	$	10,184	$	15,215
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		606		(3,543)		854		264
Provision for loan losses		—		6,000
Depreciation and amortization		4,555		4,382		2,083		2,345
Amortization and accretion of premiums/discounts on investment securities		1,674		684		1,010		794
Amortization of operating lease right-of-use assets		(22)		(12)		(19)		(8)
Stock-based compensation		1,259		859		378		498
Increase in value of bank-owned life insurance		(389)		(393)		(202)		(193)
Realized loss (gain) on sale of fixed assets		(62)		—		—		(27)
Realized loss (gain) on derivative instruments		4,803		(1,009)		2		(713)
Realized loss (gain) on loans sold		(27,206)		(19,099)		(3,097)		(14,201)
Realized loss (gain) on sale of foreclosed assets		(204)		(19)		(8)		(23)
Realized loss (gain) on sale of investment securities		(114)		(1,294)		—		(114)
Realized loss (gain) on servicing rights		(361)		558		(51)		(165)
Net change in:
Loans held for sale		82,713		(34,935)		27,638		57,823
Accrued interest receivable		1,199		(424)		21		391
Other assets		(5,632)		(3,826)		(4,818)		(2,050)
Accrued expenses and other liabilities		(5,404)		12,541		872		(4,995)
Net cash provided (used) by operating activities		84,324		(22,693)		34,847		54,841
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		13,189		39,505		—		13,189
Proceeds from maturities of investment securities available-for-sale		57,661		22,266		31,665		27,307
Purchases of investment securities available-for-sale		(291,361)		(134,079)		(95,640)		(262,081)
Proceeds from sales or calls of investment securities held-to-maturity		1,415		—		515		—
Proceeds from maturities of investment securities held-to-maturity		1,180		—		10,851		—
Net (increase) decrease in equity securities		—		2,808
Net (increase) decrease in loans		142,510		(315,888)		(59,910)		41,391
Purchases of premises and equipment		(429)		(1,998)		(130)		(277)
Proceeds from sales of foreclosed assets		481		303		57		101
Net cash provided (used) by investing activities		(75,354)		(387,083)		(112,592)		(180,370)
Financing Activities
Net increase (decrease) in deposits		138,947		481,837		(28,284)		145,580
Repayments of long-term debt		(49,804)		(103)		(59)		(49,748)
Proceeds from the issuance of subordinated debt		50,000		—		—		50,000
Cash dividends paid on common stock		(5,199)		(5,191)		(2,784)		(2,602)
Repurchase of common stock		(446)		(336)		(607)		(446)
Net cash provided (used) by financing activities		133,498		476,207		(31,734)		142,784
Net change in cash and cash equivalents		142,468		66,431		(109,479)		17,255
Cash and cash equivalents at beginning of period		172,962		144,006		242,311		172,962
Cash and cash equivalents at end of period	$	315,430	$	210,437	$	132,832	$	190,217

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents


	Six months ended				Three months ended
	June 30,				March 31,
Supplemental Cash Flow Disclosures	2021		2020		2022		2021
Cash paid for:
Interest	$	2,521	$	302	$	926	$	1,405
Income taxes		9,072		7,835		12		736
Non-cash information
Loan collateral transferred to foreclosed assets						29		154
Unrealized gain (loss) on investment securities available-for-sale		(8,000)		7,835		(33,951)		(13,594)
Accretion of unrealized gain (loss) on investment securities held-to-maturity		(115)		—
Investment securities transferred to held-to-maturity		149,191		—
Right-of-use assets obtained in exchange for new operating leases		—		1,531
Accretion of unrealized (gain) loss on investment securities held-to-maturity						(4,118)		—

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. The Company and its subsidiaries operate as a diversified financial services company headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, or the Bank, the Company provides financial solutions to businesses and consumers through 4 distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.

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, 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, 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, ~~2020,~~2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~12, 2021.~~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, 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.

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.

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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 ~~June 30, 2021,~~March 31, 2022, the Coronavirus Disease, or COVID-19, pandemic iswas 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. In~~loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, ~~has,~~ with certain setbacks, ~~begun~~started reopening and wider distribution of vaccines ~~has~~ 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 as the year progresses.~~unfold.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, 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, 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.

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.

~~Investment Securities~~

Held-to-maturity securities consist of debt securities, primarily obligations of state and political agencies. Held-to-maturity securities are carried at amortized cost based on the Company’s intent and ability to hold these securities to maturity. Interest earned on held-to-maturity debt securities is included in interest income. Amortization or accretion of premiums and discounts is also recognized in interest income using the effective interest method over the contractual life of the security and is adjusted to reflect actual prepayments. Transfers of debt securities from available-for-sale to held-to-maturity are made at fair value at the date of transfer. Unrealized holding gains and losses at the date of transfer are included in other comprehensive income and in the carrying value of the held-to-maturity security are amortized over the remaining life of the security.

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NOTE 2 Recent Accounting Pronouncements

The following FASB Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, ~~2021,~~2022, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of ~~June 30, 2021.~~March 31, 2022.

Adopted Pronouncements

In ~~January 2020,~~December 2019, the FASB issued ASU ~~2020-01, Investments – Equity Securities~~2019-12, Income Taxes (Topic ~~321)~~740), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability inwhich simplifies accounting for ~~these transactions. ASU 2016-01 made targeted improvements~~income taxes by removing certain exceptions to ~~accounting for financial instruments, including providing an entity~~ the ~~ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes~~general principles in ~~orderly transactions~~Topic 740. The amendments also improve consistent application of and simplify GAAP for the ~~identical or a similar investment~~areas of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU areTopic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,

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2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal ~~years. Early adoptions are permitted.~~years beginning after December 15, 2021. The Company adopted ASU ~~2020-01~~2019-12, as of January ~~1, 2021 the implementation had no impact on its consolidated financial statements.~~

~~In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional~~2022. The new guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) in response to concerns about structural risks in accounting for reference rate reform. The ASU clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting to apply to derivatives that are affected by the discontinuing transition. The Company adopted ASU 2020-04, as of March 2020 and is putting a transition plan together but doesdid not ~~expect adoption to~~ have ~~a material~~an impact on the Company’s consolidated financial statements.

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial 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, 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 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 debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including private companies and smaller reporting companies, until 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 and plans to adopt the standard with the amended effective date. The 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 be influenced by the composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date.

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In April 2019, the FASB issued ASU 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. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2019-04.

In May 2019, the FASB issued ASU 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. In November 2019, the FASB Issued ASU 2019-10, which amends the effective date of this ASU for certain entities, including private companies and smaller reporting companies, until after December 15, 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.~~

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. As an emerging growth company, the Company can take advantage of this later effective date. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. The Company is currently reviewing the provisions of this new pronouncement but does not expect adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU ~~2020-03.~~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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

June 30, 2021

Amortized

Unrealized

Unrealized

Fair
(dollars in thousands)

Cost

Gains

Losses
   ��
Value
Available-for-sale

U.S. Treasury and agencies

$
5,570

$
90

$
—

$
5,660
Mortgage backed securities



Residential agency

512,904

2,961

(6,022)

509,843
Commercial

95,744

4,344

—

100,088
Asset backed securities

69

3

—

72
Corporate bonds

35,040

1,107

(264)

35,883
Total available-for-sale investment securities

$
649,327

$
8,505

$
(6,286)

$
651,546

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	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

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June 30, 2021

Amortized

Net Unrealized

Carrying

Unrealized

Unrealized

Fair
(dollars in thousands)

Cost

Gains (1)

Value

Gains (2)

Losses (2)

Value
Held-to-maturity

Obligations of state and political agencies

$
147,466

$
1,150

$
146,316

$
1,974

$
(5)

$
148,285
Total held-to-maturity investment securities

$
147,466

$
1,150

$
146,316

$
1,974

$
(5)

$
148,285

~~(1)~~

Net unrealized gains on held-to-maturity securities represents the net unrealized gains /(losses) on previously available-for-sale securities transferred to held-to-maturity at fair value and is being amortized through accumulated other comprehensive income over the remaining life of the securities.

~~(2)~~

Unrecognized gains and losses of held-to-maturity securities are not reflected in the financial statements, as they represent fair value fluctuations from the date of the security is designated as held-to-maturity.

December 31, 2020

Amortized

Unrealized

Unrealized

Fair
(dollars in thousands)

Cost

Gains

Losses

Value
Available-for-sale

U.S. Treasury and agencies

$
5,926

$
—

$
(19)

$
5,907
Obligations of state and political agencies

148,491

5,282

—

153,773
Mortgage backed securities




Residential agency

303,760

3,395

(436)

306,719
Commercial

89,300

5,678

—

94,978
Asset backed securities

109

6

—

115
Corporate bonds

30,552

388

(90)

30,850
Total available-for-sale investment securities

$
578,138

$
14,749

$
(545)

$
592,342

On April 1, 2021, the Company transferred its debt securities consisting of obligations of state and political agencies with a fair value of $149.2 million and a net unrealized gain of $1.3 million from available-for-sale to held-to-maturity.

Gross unrealized losses on investment securities and the fair value of the related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, were as follows:


	June 30, 2021												March 31, 2022
	Less than 12 Months				Over 12 Months				Total				Less than 12 Months				Over 12 Months				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		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	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities
Residential agency		(6,022)		322,584		—		—		(6,022)		322,584		(30,707)		462,087		(23,764)		219,167		(54,471)		681,254
Commercial		—		—		—		—		—		—		(2,576)		70,176		—		—		(2,576)		70,176
Asset backed securities		—		—		—		2		—		2		—		—		—		2		—		2
Corporate bonds		(264)		9,736		—		—		(264)		9,736		(1,293)		38,240		—		—		(1,293)		38,240
Total available-for-sale investment securities	$	(6,286)	$	332,320	$	—	$	2	$	(6,286)	$	332,322		(34,576)		570,503		(23,764)		219,169		(58,340)		789,672
Held-to-maturity
Obligations of state and political agencies	$	(5)	$	5,996	$	—	$	—	$	(5)	$	5,996		(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		(5)		5,996		—		—		(5)		5,996		(22,325)		315,324		—		—		(22,325)		315,324
Total investment securities	$	(6,291)	$	338,316		—		2		(6,291)		338,318	$	(56,901)	$	885,827	$	(23,764)	$	219,169	$	(80,665)	$	1,104,996

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	December 31, 2020												December 31, 2021
	Less than 12 Months				Over 12 Months				Total				Less than 12 Months				Over 12 Months				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		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	$	(10)	$	4,509	$	(9)	$	1,309	$	(19)	$	5,818	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of state and political agencies		—		—		—		—		—		—
Mortgage backed securities
Residential agency		(432)		68,494		(4)		2,356		(436)		70,850		(10,156)		554,811		(1,681)		55,082		(11,837)		609,893
Commercial		—		—		—		—		—		—		(123)		17,470		—		—		(123)		17,470
Asset backed securities		—		—		—		2		—		2		—		—		—		2		—		2
Corporate bonds		(90)		16,454		—		—		(90)		16,454		(11)		5,989		—		—		(11)		5,989
Total available-for-sale investment securities	$	(532)	$	89,457	$	(13)	$	3,667	$	(545)	$	93,124		(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 were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their maturity 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, 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 six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company did not recognize OTTI losses on its investment securities.

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The following table presents amortized cost and fair value of available-for-sale and carrying value and fair value of held-to-maturity investment securities as of ~~June 30, 2021,~~March 31, 2022, by contractual maturity:


	Held-to-maturity				Available-for-sale				Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair		Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value		Value		Value		Cost		Value
Due within one year or less	$	5,141	$	5,142	$	—	$	—	$	7,452	$	7,423	$	1	$	1
Due after one year through five years		28,706		28,745		3,001		3,100		35,474		33,923		8,456		8,316
Due after five years through ten years		76,714		77,812		86,721		89,886		73,557		69,032		100,021		98,740
Due after 10 years		35,755		36,586		559,605		558,560		223,667		207,448		815,189		759,276
Total investment securities	$	146,316	$	148,285	$	649,327	$	651,546	$	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 ~~$171.4~~$270.0 million and ~~$160.8~~$192.8 million were pledged as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 investment securities, for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ are displayed in the table below:


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2021		2020		2021		2020		2022		2021
Proceeds	$	—	$	35,505	$	13,189	$	39,505	$	—	$	13,189
Realized gains		—		1,294		114		1,294		—		114
Realized losses		—		—		—		—		—		—

~~Table~~Proceeds from the call of ~~Contents~~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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Federal Reserve	$	2,675	$	2,675	$	2,675	$	2,675
FHLB		3,839		3,090		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 ~~June 30, 2021,~~March 31, 2022, the conversion ratio was ~~1.6228.~~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 ~~(11,236~~(11,204 Class A equivalents) that the Company owned as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020, are~~2021, were carried at a 0 cost basis.

NOTE 4 Loans and Allowance for Loan Losses

The following table presents total loans outstanding, by portfolio segment, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Commercial
Commercial and industrial (1)	$	572,734	$	691,858	$	467,449	$	436,761
Real estate construction		36,549		44,451		41,604		40,619
Commercial real estate		567,987		563,007		602,158		598,893
Total commercial		1,177,270		1,299,316		1,111,211		1,076,273
Consumer
Residential real estate first mortgage		470,822		463,370		522,489		510,716
Residential real estate junior lien		130,180		143,416		130,604		125,668
Other revolving and installment		57,040		73,273		53,738		45,363
Total consumer		658,042		680,059		706,831		681,747
Total loans	$	1,835,312	$	1,979,375	$	1,818,042	$	1,758,020

(1)	Included Paycheck Protection Program, or PPP, loans of ~~$165.0~~$13.1 million at ~~June 30, 2021~~March 31, 2022 and ~~$268.4~~$33.6 million at December 31, ~~2020.~~2021.

Total loans included net deferred loan fees and costs of ~~$4.4 million~~$444 thousand and ~~$4.7 million~~$231 thousand at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Deferred loan fees on PPP loans were ~~$4.6 million~~$333 thousand at ~~June 30, 2021~~March 31, 2022 and ~~$4.3 million~~$881 thousand at December 31, ~~2020.~~2021.

Management monitors the credit quality of its loan portfolio on an ongoing basis. 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.

Table of Contents

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021										March 31, 2022
					90 Days										90 Days
	Accruing		30 - 89 Days		or More				Total		Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans		Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	570,287	$	312	$	—	$	2,135	$	572,734	$	465,678	$	218	$	146	$	1,407	$	467,449
Real estate construction		36,549		—		—		—		36,549		41,604		—		—		—		41,604
Commercial real estate		563,521		—		—		4,466		567,987		601,087		442		—		629		602,158
Total commercial		1,170,357		312		—		6,601		1,177,270		1,108,369		660		146		2,036		1,111,211
Consumer
Residential real estate first mortgage		469,273		1,526		—		23		470,822		520,043		687		—		1,759		522,489
Residential real estate junior lien		129,698		159		—		323		130,180		129,934		445		—		225		130,604
Other revolving and installment		56,757		270		—		13		57,040		53,518		171		—		49		53,738
Total consumer		655,728		1,955		—		359		658,042		703,495		1,303		—		2,033		706,831
Total loans	$	1,826,085	$	2,267	$	—	$	6,960	$	1,835,312	$	1,811,864	$	1,963	$	146	$	4,069	$	1,818,042


	December 31, 2020										December 31, 2021
					90 Days										90 Days
	Accruing		30 - 89 Days		or More				Total		Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans		Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	689,340	$	500	$	30	$	1,988	$	691,858	$	435,135	$	168	$	121	$	1,337	$	436,761
Real estate construction		44,451		—		—		—		44,451		40,619		—		—		—		40,619
Commercial real estate		558,127		2,449		—		2,431		563,007		598,264		—		—		629		598,893
Total commercial		1,291,918		2,949		30		4,419		1,299,316		1,074,018		168		121		1,966		1,076,273
Consumer
Residential real estate first mortgage		461,179		1,752		—		439		463,370		508,925		1,770		—		21		510,716
Residential real estate junior lien		143,060		191		—		165		143,416		125,412		167		—		89		125,668
Other revolving and installment		73,128		118		—		27		73,273		45,242		121		—		—		45,363
Total consumer		677,367		2,061		—		631		680,059		679,579		2,058		—		110		681,747
Total loans	$	1,969,285	$	5,010	$	30	$	5,050	$	1,979,375	$	1,753,597	$	2,226	$	121	$	2,076	$	1,758,020

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 secured loans that 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.

~~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.

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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 weakness or weaknesses that jeopardize the repayment of the debt. 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.

The tables below present total loans outstanding, by loan portfolio segment, and risk category as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021										March 31, 2022
			Criticized										Criticized
			Special										Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	561,345	$	1,515	$	9,874	$	—	$	572,734	$	463,278	$	—	$	4,171	$	—	$	467,449
Real estate construction		36,549		—		—		—		36,549		41,604		—		—		—		41,604
Commercial real estate		542,417		3,339		22,231		—		567,987		592,748		—		9,410		—		602,158
Total commercial		1,140,311		4,854		32,105		—		1,177,270		1,097,630		—		13,581		—		1,111,211
Consumer
Residential real estate first mortgage		469,037		—		1,785		—		470,822		520,438		—		2,051		—		522,489
Residential real estate junior lien		128,661		395		1,124		—		130,180		129,830		—		774		—		130,604
Other revolving and installment		57,027		—		13		—		57,040		53,689		—		49		—		53,738
Total consumer		654,725		395		2,922		—		658,042		703,957		—		2,874		—		706,831
Total loans	$	1,795,036	$	5,249	$	35,027	$	—	$	1,835,312	$	1,801,587	$	—	$	16,455	$	—	$	1,818,042


	December 31, 2020										December 31, 2021
			Criticized										Criticized
			Special										Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	669,602	$	5,415	$	16,841	$	—	$	691,858	$	430,235	$	480	$	6,046	$	—	$	436,761
Real estate construction		44,451		—		—		—		44,451		40,619		—		—		—		40,619
Commercial real estate		533,733		6,686		22,588		—		563,007		585,291		—		13,602		—		598,893
Total commercial		1,247,786		12,101		39,429		—		1,299,316		1,056,145		480		19,648		—		1,076,273
Consumer
Residential real estate first mortgage		461,221		1,406		743		—		463,370		510,375		—		341		—		510,716
Residential real estate junior lien		140,461		1,819		1,136		—		143,416		124,898		—		770		—		125,668
Other revolving and installment		73,236		—		37		—		73,273		45,363		—		—		—		45,363
Total consumer		674,918		3,225		1,916		—		680,059		680,636		—		1,111		—		681,747
Total loans	$	1,922,704	$	15,326	$	41,345	$	—	$	1,979,375	$	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 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

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.

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan losses for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:


	Three months ended June 30, 2021										Three months ended March 31, 2022
	Beginning		Provision for		Loan		Loan		Ending		Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance		Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,487	$	(869)	$	(273)	$	275	$	9,620	$	8,925	$	771	$	(27)	$	126	$	9,795
Real estate construction		598		(11)		—		—		587		783		27		—		—		810
Commercial real estate		13,849		(913)		—		1		12,937		12,376		(441)		—		11		11,946
Total commercial		24,934		(1,793)		(273)		276		23,144		22,084		357		(27)		137		22,551
Consumer
Residential real estate first mortgage		6,047		129		—		—		6,176		6,532		129		—		—		6,661
Residential real estate junior lien		1,288		99		—		14		1,401		1,295		92		—		13		1,400
Other revolving and installment		666		(81)		(49)		38		574		481		145		(18)		36		644
Total consumer		8,001		147		(49)		52		8,151		8,308		366		(18)		49		8,705
Unallocated		823		1,646		—		—		2,469		1,180		(723)		—		—		457
Total	$	33,758	$	—	$	(322)	$	328	$	33,764	$	31,572	$	—	$	(45)	$	186	$	31,713

Six months ended June 30, 2021

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial

Commercial and industrial

$
10,205

$
(553)

$
(477)

$
445

$
9,620
Real estate construction

658

(71)

—

—

587
Commercial real estate

14,105

(636)

(536)

4

12,937
Total commercial

24,968

(1,260)

(1,013)

449

23,144
Consumer

Residential real estate first mortgage

5,774

402

—

—

6,176
Residential real estate junior lien

1,373

(69)

—

97

1,401
Other revolving and installment

753

(164)

(93)

78

574
Total consumer

7,900

169

(93)

175

8,151
Unallocated

1,378

1,091

—

—

2,469
Total

$
34,246

$
—

$
(1,106)

$
624

$
33,764


	Three months ended June 30, 2020										Three months ended March 31, 2021
	Beginning		Provision for		Loan		Loan		Ending		Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance		Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	12,901	$	278	$	(2,703)	$	321	$	10,797	$	10,205	$	316	$	(204)	$	170	$	10,487
Real estate construction		334		109		—		—		443		658		(60)		—		—		598
Commercial real estate		8,276		2,537		(865)		—		9,948		14,105		277		(536)		3		13,849
Total commercial		21,511		2,924		(3,568)		321		21,188		24,968		533		(740)		173		24,934
Consumer
Residential real estate first mortgage		2,209		459		—		5		2,673		5,774		273		—		—		6,047
Residential real estate junior lien		1,025		32		(12)		57		1,102		1,373		(168)		—		83		1,288
Other revolving and installment		441		171		(86)		20		546		753		(83)		(44)		40		666
Total consumer		3,675		662		(98)		82		4,321		7,900		22		(44)		123		8,001
Unallocated		1,833		(86)		—		—		1,747		1,378		(555)		—		—		823
Total	$	27,019	$	3,500	$	(3,666)	$	403	$	27,256	$	34,246	$	—	$	(784)	$	296	$	33,758

Table of Contents

Six months ended June 30, 2020

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial










Commercial and industrial

$
12,270

$
348

$
(2,735)

$
914

$
10,797
Real estate construction

303

140

—

—

443
Commercial real estate

6,688

4,125

(865)

—

9,948
Total commercial

19,261

4,613

(3,600)

914

21,188
Consumer








Residential real estate first mortgage

1,448

1,220

—

5

2,673
Residential real estate junior lien

671

349

(12)

94

1,102
Other revolving and installment

352

263

(153)

84

546
Total consumer

2,471

1,832

(165)

183

4,321
Unallocated

2,192

(445)

—

—

1,747
Total

$
23,924

$
6,000

$
(3,765)

$
1,097

$
27,256

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021												March 31, 2022
	Recorded Investment						Allowance for Loan Losses						Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	2,696	$	570,038	$	572,734	$	885	$	8,735	$	9,620	$	1,584	$	465,865	$	467,449	$	339	$	9,456	$	9,795
Real estate construction		—		36,549		36,549		—		587		587		—		41,604		41,604		—		810		810
Commercial real estate		4,653		563,334		567,987		7		12,930		12,937		806		601,352		602,158		4		11,942		11,946
Total commercial		7,349		1,169,921		1,177,270		892		22,252		23,144		2,390		1,108,821		1,111,211		343		22,208		22,551
Consumer
Residential real estate first mortgage		23		470,799		470,822		—		6,176		6,176		1,759		520,730		522,489		—		6,661		6,661
Residential real estate junior lien		326		129,854		130,180		27		1,374		1,401		226		130,378		130,604		—		1,400		1,400
Other revolving and installment		13		57,027		57,040		3		571		574		49		53,689		53,738		18		626		644
Total consumer		362		657,680		658,042		30		8,121		8,151		2,034		704,797		706,831		18		8,687		8,705
Unallocated		—		—		—		—		—		2,469		—		—		—		—		—		457
Total loans	$	7,711	$	1,827,601	$	1,835,312	$	922	$	30,373	$	33,764	$	4,424	$	1,813,618	$	1,818,042	$	361	$	30,895	$	31,713


	December 31, 2020												December 31, 2021
	Recorded Investment						Allowance for Loan Losses						Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	2,616	$	689,242	$	691,858	$	336	$	9,869	$	10,205	$	1,831	$	434,930	$	436,761	$	278	$	8,647	$	8,925
Real estate construction		—		44,451		44,451		—		658		658		—		40,619		40,619		—		783		783
Commercial real estate		5,224		557,783		563,007		837		13,268		14,105		809		598,084		598,893		5		12,371		12,376
Total commercial		7,840		1,291,476		1,299,316		1,173		23,795		24,968		2,640		1,073,633		1,076,273		283		21,801		22,084
Consumer
Residential real estate first mortgage		439		462,931		463,370		—		5,774		5,774		21		510,695		510,716		—		6,532		6,532
Residential real estate junior lien		224		143,192		143,416		19		1,354		1,373		91		125,577		125,668		—		1,295		1,295
Other revolving and installment		27		73,246		73,273		13		740		753		—		45,363		45,363		—		481		481
Total consumer		690		679,369		680,059		32		7,868		7,900		112		681,635		681,747		—		8,308		8,308
Unallocated		—		—		—		—		—		1,378		—		—		—		—		—		1,180
Total loans	$	8,530	$	1,970,845	$	1,979,375	$	1,205	$	31,663	$	34,246	$	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.


	June 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
	Recorded		Unpaid		Related		Recorded		Unpaid		Related		Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance		Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	1,534	$	1,546	$	885	$	723	$	725	$	336	$	508	$	532	$	339	$	445	$	464	$	278
Commercial real estate		187		211		7		3,948		3,974		837		177		199		4		180		203		5
Residential real estate junior lien		27		28		27		19		20		19		—		—		—		—		—		—
Other revolving and installment		13		13		3		27		27		13		40		40		18		—		—		—
Total impaired loans with a valuation allowance		1,761		1,798		922		4,717		4,746		1,205		725		771		361		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		1,162		1,314		—		1,893		2,173		—		1,076		1,188		—		1,386		1,575		—
Commercial real estate		4,466		4,621		—		1,276		1,415		—		629		684		—		629		684		—
Residential real estate first mortgage		23		25		—		439		464		—		1,759		1,759		—		21		24		—
Residential real estate junior lien		299		325		—		205		306		—		226		256		—		91		120		—
Other revolving and installment		—		—		—		—		—		—		9		9		—		—		—		—
Total impaired loans without a valuation allowance		5,950		6,285		—		3,813		4,358		—		3,699		3,896		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		2,696		2,860		885		2,616		2,898		336		1,584		1,720		339		1,831		2,039		278
Commercial real estate		4,653		4,832		7		5,224		5,389		837		806		883		4		809		887		5
Residential real estate first mortgage		23		25		—		439		464		—		1,759		1,759		—		21		24		—
Residential real estate junior lien		326		353		27		224		326		19		226		256		—		91		120		—
Other revolving and installment		13		13		3		27		27		13		49		49		18		—		—		—
Total impaired loans	$	7,711	$	8,083	$	922	$	8,530	$	9,104	$	1,205	$	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 six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Three months ended June 30,

2021

2020

Average

Average

Recorded

Interest

Recorded

Interest
(dollars in thousands)

Investment

Income

Investment

Income
Impaired loans with a valuation allowance

Commercial and industrial

$
1,548

$
3

$
4,881

$
15
Commercial real estate

188

2

200

8
Residential real estate first mortgage

—

—

—

—
Residential real estate junior lien

27

—

20

—
Other revolving and installment

13

—

35

—
Total impaired loans with a valuation allowance

1,776

5

5,136

23
Impaired loans without a valuation allowance

Commercial and industrial

1,174

5

694

26
Commercial real estate

4,472

—

1,693

—
Residential real estate first mortgage

23

—

755

—
Residential real estate junior lien

302

—

255

3
Other revolving and installment

—

—

4

—
Total impaired loans without a valuation allowance

5,971

5

3,401

29
Total impaired loans

Commercial and industrial

2,722

8

5,575

41
Commercial real estate

4,660

2

1,893

8
Residential real estate first mortgage

23

—

755

—
Residential real estate junior lien

329

—

275

3
Other revolving and installment

13

—

39

—
Total impaired loans

$
7,747

$
10

$
8,537

$
52

~~Table of Contents~~


	Six Months Ended June 30,								Three Months Ended March 31,
	2021				2020				2022				2021
	Average				Average				Average				Average
	Recorded		Interest		Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,637	$	6	$	4,714	$	15	$	528	$	3	$	1,816	$	13
Commercial real estate		190		4		203		8		180		2		2,793		138
Residential real estate junior lien		30		—		20		—		—		—		33		—
Other revolving and installment		14		—		35		—		41		—		38		—
Total impaired loans with a valuation allowance		1,871		10		4,972		23		749		5		4,680		151
Impaired loans without a valuation allowance
Commercial and industrial		1,187		11		747		26		1,126		—		1,258		22
Commercial real estate		4,662		—		1,821		—		642		—		2,158		—
Residential real estate first mortgage		24		—		761		—		1,759		—		435		—
Residential real estate junior lien		303		—		279		3		230		—		176		—
Other revolving and installment		—		—		5		—		9		—		—		—
Total impaired loans without a valuation allowance		6,176		11		3,613		29		3,766		—		4,027		22
Total impaired loans
Commercial and industrial		2,824		17		5,461		41		1,654		3		3,074		35
Commercial real estate		4,852		4		2,024		8		822		2		4,951		138
Residential real estate first mortgage		24		—		761		—		1,759		—		435		—
Residential real estate junior lien		333		—		299		3		230		—		209		—
Other revolving and installment		14		—		40		—		50		—		38		—
Total impaired loans	$	8,047	$	21	$	8,585	$	52	$	4,515	$	5	$	8,707	$	173

Loans with a carrying value of $1.3 billion as of March 31, 2022 and $1.2 billion as of ~~June 30, 2021 and~~ December 31, ~~2020, respectively,~~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 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 ~~second~~first quarter of ~~2021,~~2022, there were 30 loans modified as ~~TDRs as~~ a result of changing the terms allowing for interest rate reductions and an extension of the maturity dates. As of June 30, 2021, the carrying value of the restructured loans was $795 thousand. The loans are not currently performing in compliance with the modified terms and were placed on nonaccrual. There is no specific reserve for loan losses allocated to the loans modified as TDRs.TDR. During the ~~second~~first quarter of ~~2020,~~2021, there were 0 loans modified as a TDR.

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

Beginning in 2020, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, through June 30, 2021, the Company had entered into modifications on 584 loans representing $154.5 million in principal balances, since the beginning of the COVID-19 pandemic. Of those loans, 12 loans with a total outstanding principal balance of $5.3 million, have been granted additional deferrals, 4 loans with a total outstanding principal balance of $653 thousand remain on the first deferral and the remaining loans have been returned to a normal payment status. These deferrals were generally no more than 90 days in duration and were not considered TDRs.

~~Table of Contents~~

NOTE 5 Goodwill and Other Intangible Assets

The following table summarizes the carrying amount of goodwill, by segment, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Banking	$	20,131	$	20,131	$	20,131	$	20,131
Retirement and benefit services		10,070		10,070		11,359		11,359
Total goodwill	$	30,201	$	30,201	$	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 ~~June 30, 2021.~~March 31, 2022.

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


	June 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Identifiable customer intangibles	$	43,346	$	(19,666)	$	23,680	$	43,346	$	(17,490)	$	25,856	$	42,057	$	(22,860)	$	19,197	$	42,057	$	(21,807)	$	20,250
Core deposit intangible assets		—		—		—		3,793		(3,730)		63
Total intangible assets	$	43,346	$	(19,666)	$	23,680	$	47,139	$	(21,220)	$	25,919	$	42,057	$	(22,860)	$	19,197	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was $1.1 million and ~~$1.0~~$1.2 million for the three months ended ~~June 30,~~March 31, 2022, and 2021, ~~and 2020, respectively. Amortization of intangible assets was $2.2 million and $2.0 million for the six months ended June 30, 2021, and 2020,~~ 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 ~~$417.5~~$325.0 million and ~~$445.5~~$345.8 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Three months ended

Six months ended

June 30,

June 30,
(dollars in thousands)

2021

2020

2021

2020
Balance, beginning of period

$
1,952

$
3,277

$
1,987

$
3,845
Additions

62

88

111

112
Amortization

(185)

(209)

(385)

(396)
(Impairment)/Recovery

135

(265)

251

(670)
Balance, end of period

$
1,964

$
2,891

$
1,964

$
2,891

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Increases or decreases in any one of these assumptions would result in lower or higher fair value ~~measurements.~~measurements:


	June 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2021			2020			2022			2021
Fair value of servicing rights	$	1,964		$	1,987		$	1,771		$	1,880
Weighted-average remaining term, years		20.1			20.1			20.7			20.3
Prepayment speeds		17.2	%		17.7	%		8.8	%		14.2	%
Discount rate		9.3	%		9.0	%		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 offices and office equipment rentals with terms extending through 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.~~leases. The Company has 1 existing finance lease for the Company’s headquarters building with a lease term through October 31, 2022.

The Company elected not to include 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:


		June 30,		December 31,			March 31,		December 31,
(dollars in thousands)		2021		2020			2022		2021
Lease Right-of-Use Assets	Classification					Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	4,203	$	6,918	Operating lease right-of-use assets	$	3,360	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		144		202	Land, premises and equipment, net		58		87
Total lease right-of-use assets		$	4,347	$	7,120		$	3,418	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	4,868	$	7,861	Operating lease liabilities	$	3,850	$	4,275
Finance lease liabilities	Long-term debt		319		430	Long-term debt		143		203
Total lease liabilities		$	5,187	$	8,291		$	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 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.

June 30,

December 31,


2021

2020

Weighted-average remaining lease term, years

Operating leases

3.7

5.8

Finance leases

1.3

1.8

Weighted-average discount rate



Operating leases

2.5
%
2.9
%
Finance leases

7.8
%
7.8
%

2120

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	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 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 six~~ months ending ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021:


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2021		2020		2021		2020		2022		2021
Lease costs
Operating lease cost	$	492	$	568	$	988	$	1,191	$	411	$	496
Variable lease cost		158		468		391		665		213		233
Short-term lease cost		46		107		83		202		45		37
Finance lease cost
Interest on lease liabilities		7		11		15		23		4		8
Amortization of right-of-use assets		29		29		58		58		29		29
Sublease income		(52)		(52)		(112)		(118)		(57)		(60)
Net lease cost	$	680	$	1,131	$	1,423	$	2,021	$	645	$	743
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	474	$	561	$	961	$	1,179	$	392	$	487
Right-of-use assets obtained in exchange for new operating lease liabilities		—		1,348		—		1,531	$	—	$	—

Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of ~~June 30, 2021~~March 31, 2022 were as follows:


	Finance		Operating		Finance		Operating
(dollars in thousands)	Leases		Leases		Leases		Leases
Twelve months ended
June 30, 2022	$	251	$	1,664
June 30, 2023		84		1,616
June 30, 2024		—		1,112
June 30, 2025		—		392
June 30, 2026		—		345
March 31, 2023					$	146	$	1,597
March 31, 2024						—		1,439
March 31, 2025						—		676
March 31, 2026						—		389
March 31, 2027						—		250
Thereafter		—		326		—		238
Total future minimum lease payments	$	335	$	5,455	$	146	$	4,589
Amounts representing interest		(16)		(587)		(3)		(739)
Total operating lease liabilities	$	319	$	4,868	$	143	$	3,850

NOTE 8 Deposits

The components of deposits in the consolidated balance sheets as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows:

June 30,

December 31,
(dollars in thousands)

2021

2020
Noninterest-bearing

$
758,820

$
754,716
Interest-bearing




Interest-bearing demand

736,043

618,900
Savings accounts

89,437

79,902
Money market savings

920,831

909,137
Time deposits

205,809

209,338
Total interest-bearing

1,952,120

1,817,277
Total deposits

$
2,710,940

$
2,571,993

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

~~Table of Contents~~

NOTE 9 Long-Term Debt

Long-term debt as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 consisted of the following:


	June 30, 2021									March 31, 2022
						Period End									Period End
	Face		Carrying			Interest		Maturity		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	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,470	Three-month LIBOR + 3.10%	3.25	%	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)		6,186		5,203	Three-month LIBOR + 1.80%	1.92	%	9/15/2036	9/15/2011		6,186		5,256	Three-month LIBOR + 1.80%	2.63	%	9/15/2036	9/15/2011
Finance lease liability		2,700		319	Fixed	7.81	%	10/31/2022	N/A		2,700		143	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,992						$	63,010	$	58,902


	December 31, 2020									December 31, 2021
						Period End									Period End
	Face		Carrying			Interest		Maturity		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	$	49,688	Three-month LIBOR + 4.12%	4.36	%	12/30/2025	12/30/2020	$	50,000	$	50,000	Fixed	3.50	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,124		3,447	Three-month LIBOR + 3.10%	3.35	%	6/26/2033	6/26/2008		4,124		3,492	Three-month LIBOR + 3.10%	3.32	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,170	Three-month LIBOR + 1.80%	2.02	%	9/15/2036	9/15/2011		6,186		5,238	Three-month LIBOR + 1.80%	2.00	%	9/15/2036	9/15/2011
Finance lease liability		2,700		430	Fixed	7.81	%	10/31/2022	N/A		2,700		203	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,735						$	63,010	$	58,933

NOTE 10 Financial Instruments with 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.

Table of 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, 2021, respectively, was as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Commitments to extend credit	$	610,448	$	611,140	$	650,087	$	668,115
Standby letters of credit		6,406		6,510		10,591		10,529
Total	$	616,854	$	617,650	$	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.

~~Table of Contents~~

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. With the Bank of North Dakota, the Company had 0 letters of credit outstanding as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Bank of North Dakota potential letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of ~~$230.2~~$227.9 million and ~~$245.7~~$229.7 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

NOTE 11 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 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 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 has expired.

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 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 authorizes the issuance of up to 1,100,000 shares of common stock. As of ~~June 30, 2021, 37,789~~March 31, 2022, 948,428 shares of common stock ~~awards and 91,302 restricted stock units had been issued~~are still available for issuance under the plan.

~~Compensation~~The compensation expense relating to awards under these plans was ~~$761~~$378 thousand and ~~$624~~$498 thousand for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~Compensation expense relating to awards under these plans was $1.3 million and $859 thousand for the six months ended June 30, 2021 and 2020, respectively.~~

~~The following table presents the activity in the stock plans for the six months ended June 30, 2021 and 2020:~~

Six months ended June 30, 2021

Six months ended June 30, 2020

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

325,030

$
19.48

347,211

$
18.64
Granted

66,664

26.63

77,846

19.53
Vested

(88,382)

21.38

(86,137)

16.15
Forfeited or cancelled

—

—

(5,068)

19.37
Outstanding at end of period

303,312

$
20.49

333,852

$
19.48

As of June 30, 2021, there was $3.6 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 2.85 years.

2423

Table of Contents

The following table presents the activity in the stock plans for the three months ended March 31, 2022 and 2021:


	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 12 Income Taxes

The components of income tax expense (benefit) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ were as follows:

Three months ended June 30,

2021

2020




Percent of




Percent of

(dollars in thousands)

Amount

Pretax Income


Amount

Pretax Income

Taxes at statutory federal income tax rate

$
3,221

21.0
%

$
3,168

21.0
%
Tax effect of:

Tax exempt income

(148)

(1.0)
%

(127)

(0.8)
%
Other

571

3.7
%

572

3.8
%
Applicable income taxes

$
3,644

23.7
%

$
3,613

24.0
%


	Six months ended June 30,								Three months ended March 31,
	2021				2020				2022				2021
			Percent of				Percent of				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	$	7,395	21.0	%	$	4,596	21.0	%	$	2,745	21.0	%	$	4,174	21.0	%
Tax effect of:
Tax exempt income		(301)	(0.9)	%		(247)	(1.1)	%		(117)	(0.9)	%		(153)	(0.8)	%
Other		1,212	3.4	%		701	3.2	%
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	$	8,306	23.5	%	$	5,050	23.1	%	$	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 1314 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 4 operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.

The financial information presented for each segment 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 June 30, 2021

Retirement and

Wealth

Corporate

(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income

$
21,188

$
—

$
—

$
490

$
(538)

$
21,140
Provision for loan losses

—

—

—

—

—

—
Noninterest income

1,466

17,871

5,138

12,287

(14)

36,748
Noninterest expense

10,914

9,988

2,128

10,661

8,859

42,550
Net income before taxes

$
11,740

$
7,883

$
3,010

$
2,116

$
(9,411)

$
15,338

~~Table of Contents~~


	Six months ended June 30, 2021												Three months ended March 31, 2022
			Retirement and		Wealth				Corporate						Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	43,068	$	—	$	—	$	936	$	(826)	$	43,178	$	21,525	$	—	$	—	$	709	$	(561)	$	21,673
Provision for loan losses		—		—		—		—		—		—		—		—		—		—		—		—
Noninterest income		2,988		35,126		10,124		29,419		(28)		77,629		1,538		17,646		5,326		4,931		29		29,470
Noninterest expense		21,998		20,100		4,463		21,514		17,517		85,592		12,694		8,432		1,838		5,020		10,087		38,071
Net income before taxes	$	24,058	$	15,026	$	5,661	$	8,841	$	(18,371)	$	35,215	$	10,369	$	9,214	$	3,488	$	620	$	(10,619)	$	13,072


	Three months ended June 30, 2020												Three months ended March 31, 2021
			Retirement and		Wealth				Corporate						Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated		Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	20,417	$	—	$	—	$	530	$	(856)	$	20,091	$	21,880	$	—	$	—	$	446	$	(288)	$	22,038
Provision for loan losses		3,500		—		—		—		—		3,500		—		—		—		—		—		—
Noninterest income		2,857		13,710		4,112		17,546		5		38,230		1,522		17,255		4,986		17,132		(14)		40,881
Noninterest expense		11,359		9,193		2,629		8,020		8,533		39,734		11,084		10,112		2,335		10,853		8,658		43,042
Net income before taxes	$	8,415	$	4,517	$	1,483	$	10,056	$	(9,384)	$	15,087	$	12,318	$	7,143	$	2,651	$	6,725	$	(8,960)	$	19,877

Six months ended June 30, 2020

Retirement and

Wealth

Corporate

(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income

$
39,863

$
—

$
—

$
798

$
(1,733)

$
38,928
Provision for loan losses

6,000

—

—

—

—

6,000
Noninterest income

4,731

29,930

8,158

22,591

9

65,419
Noninterest expense

24,011

17,125

4,144

13,459

17,721

76,460
Net income before taxes

$
14,583

$
12,805

$
4,014

$
9,930

$
(19,445)

$
21,887

Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through 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.

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

~~Table of Contents~~

NOTE 1415 Earnings Per Share

The calculation of basic and diluted earnings per share using the two-class method for the three ~~and six~~ months ending ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ are presented below:


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars and shares in thousands, except per share data)	2021		2020		2021		2020		2022		2021
Net income	$	11,694	$	11,474	$	26,909	$	16,837	$	10,184	$	15,215
Dividends and undistributed earnings allocated to participating securities		179		200		432		282		125		254
Net income available to common shareholders	$	11,515	$	11,274	$	26,477	$	16,555	$	10,059	$	14,961
Weighted-average common shares outstanding for basic earnings per share		17,194		17,111		17,170		17,091		17,244		17,145
Dilutive effect of stock-based awards		303		334		312		334		256		320
Weighted-average common shares outstanding for diluted earnings per share		17,497		17,445		17,482		17,425		17,500		17,465
Earnings per common share:
Basic earnings per common share	$	0.67	$	0.66	$	1.54	$	0.97	$	0.58	$	0.87
Diluted earnings per common share	$	0.66	$	0.65	$	1.52	$	0.95	$	0.57	$	0.86

NOTE 1516 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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The following table presents the amounts recorded in the Company’s consolidated balance sheets, for derivatives not designated as hedging instruments, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		June 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
		Fair		Notional		Fair		Notional			Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount			Value		Amount		Value		Amount
Asset Derivatives	Consolidated Balance Sheet Location									Consolidated Balance Sheet Location
Interest rate swaps	Other assets	$	882	$	58,778	$	569	$	44,597	Other assets	$	3,642	$	44,480	$	1,366	$	44,826
Interest rate lock commitments	Other assets		4,696		145,230		10,124		270,103	Other assets		882		53,070		1,507		52,316
Forward loan sales commitments	Other assets		1,101		31,659		2,664		86,990	Other assets		—		—		490		13,418
TBA mortgage backed securities										Other assets		1,230		80,466		34		97,000
Total asset derivatives		$	6,679	$	235,667	$	13,357	$	401,690		$	5,754	$	178,016	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	961	$	58,778	$	572	$	44,597	Accrued expenses and other liabilities	$	3,644	$	44,480	$	1,368	$	44,826
TBA mortgage backed securities	Accrued expenses and other liabilities		77		237,000		2,339		307,000	Accrued expenses and other liabilities		—		—		—		—
Total liability derivatives		$	1,038	$	295,778	$	2,911	$	351,597		$	3,644	$	44,480	$	1,368	$	44,826

The gain (loss) recognized on derivative instruments for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ was as follows:

Three months ended

Six months ended

Consolidated Statements of

June 30,

June 30,

June 30,

June 30,
(dollars in thousands)

of Income Location

2021

2020

2021

2020
Interest rate swaps

Other noninterest income

$
(1)

$
—

$
1

$
—
Interest rate lock commitments

Mortgage banking

740

4,352

(5,505)

5,579
Forward loan sales commitments

Mortgage banking

73

117

(1,562)

783
TBA mortgage backed securities

Mortgage banking

(3,405)

(1,929)

5,556

(5,352)
Total gain/(loss) from derivative instruments

$
(2,593)

$
2,540

$
(1,510)

$
1,010

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		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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 was ~~$2.6 million~~$19 thousand and ~~$2.7 million,~~$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 1617 Regulatory Matters

The Company and the Bank are 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 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 at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

The following table presents the Company’s and the Bank’s actual capital amounts and ratios as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021												March 31, 2022
										Minimum to be												Minimum to be
						Requirements				Well Capitalized								Requirements				Well Capitalized
						for Capital				Under Prompt								for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action				Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	290,330	14.30	%	$	91,349	4.50	%	$	N/A	N/A		$	322,985	14.27	%	$	101,863	4.50	%	$	N/A	N/A
Bank		275,218	13.57	%		91,283	4.50	%		131,853	6.50	%		305,828	13.52	%		101,817	4.50	%		147,070	6.50	%
Tier 1 capital to risk weighted assets										.												.
Consolidated		298,693	14.71	%		121,798	6.00	%		N/A	N/A			331,743	14.66	%		135,817	6.00	%		N/A	N/A
Bank		275,218	13.57	%		121,711	6.00	%		162,281	8.00	%		305,828	13.52	%		135,757	6.00	%		181,009	8.00	%
Total capital to risk weighted assets
Consolidated		374,172	18.43	%		162,398	8.00	%		N/A	N/A			410,081	18.12	%		181,090	8.00	%		N/A	N/A
Bank		300,678	14.82	%		162,281	8.00	%		202,851	10.00	%		334,153	14.77	%		181,009	8.00	%		226,261	10.00	%
Tier 1 capital to average assets
Consolidated		290,330	9.62	%		124,228	4.00	%		N/A	N/A			331,743	10.30	%		128,837	4.00	%		N/A	N/A
Bank		275,218	8.98	%		122,656	4.00	%		153,320	5.00	%		305,828	9.50	%		128,768	4.00	%		160,960	5.00	%

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	December 31, 2020												December 31, 2021
										Minimum to be												Minimum to be
						Requirements				Well Capitalized								Requirements				Well Capitalized
						for Capital				Under Prompt								for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action				Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	265,490	12.75	%	$	93,723	4.50	%	$	N/A	N/A		$	314,628	14.65	%	$	96,647	4.50	%	$	N/A	N/A
Bank		251,806	12.10	%		93,632	4.50	%		135,246	6.50	%		297,453	13.87	%		96,538	4.50	%		139,444	6.50	%
Tier 1 capital to risk weighted assets										.												.
Consolidated		273,797	13.15	%		124,964	6.00	%		N/A	N/A			323,358	15.06	%		128,862	6.00	%		N/A	N/A
Bank		251,806	12.10	%		124,843	6.00	%		166,457	8.00	%		297,453	13.87	%		128,718	6.00	%		171,624	8.00	%
Total capital to risk weighted assets
Consolidated		349,620	16.79	%		166,618	8.00	%		N/A	N/A			400,263	18.64	%		171,816	8.00	%		N/A	N/A
Bank		277,916	13.36	%		166,457	8.00	%		208,071	10.00	%		324,328	15.12	%		171,624	8.00	%		214,530	10.00	%
Tier 1 capital to average assets
Consolidated		273,797	9.24	%		118,587	4.00	%		N/A	N/A			323,358	9.79	%		132,112	4.00	%		N/A	N/A
Bank		251,806	8.50	%		118,511	4.00	%		148,139	5.00	%		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. ~~At June 30, 2021,~~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, 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 ~~June 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, the Company was in compliance with the aforementioned guidelines.

NOTE 1718 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 0no assurance that the Company will do so. For the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, there were no0 shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 1819 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.

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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 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.

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 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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021								March 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	5,660	$	—	$	5,660	$	—	$	4,167	$	—	$	4,167
Mortgage backed securities
Residential agency		—		509,843		—		509,843		—		711,121		—		711,121
Commercial		—		100,088		—		100,088		—		82,732		—		82,732
Asset backed securities		—		72		—		72		—		42		—		42
Corporate bonds		—		35,883		—		35,883		—		68,271		—		68,271
Total available-for-sale investment securities	$	—	$	651,546	$	—	$	651,546	$	—	$	866,333	$	—	$	866,333
Other assets
Derivatives	$	—	$	6,679	$	—	$	6,679	$	—	$	5,754	$	—	$	5,754
Other liabilities
Derivatives	$	—	$	1,038	$	—	$	1,038	$	—	$	3,644	$	—	$	3,644


	December 31, 2020								December 31, 2021
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	5,907	$	—	$	5,907	$	—	$	5,103	$	—	$	5,103
Obligations of state and political agencies		—		153,773		—		153,773
Mortgage backed securities
Residential agency		—		306,719		—		306,719		—		707,157		—		707,157
Commercial		—		94,978		—		94,978		—		90,913		—		90,913
Asset backed securities		—		115		—		115		—		54		—		54
Corporate bonds		—		30,850		—		30,850		—		50,422		—		50,422
Total available-for-sale investment securities	$	—	$	592,342	$	—	$	592,342	$	—	$	853,649	$	—	$	853,649
Other assets
Derivatives	$	—	$	13,357	$	—	$	13,357	$	—	$	3,397	$	—	$	3,397
Other liabilities
Derivatives	$	—	$	2,911	$	—	$	2,911	$	—	$	1,368	$	—	$	1,368

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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

Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are classified as Level 2.

Derivatives

All of the Company’s derivatives are traded in 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.

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 consisted of the following:


	June 30, 2021								March 31, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment		Level 2		Level 3		Total		Impairment
Loans held for sale	$	66,856	$	—	$	66,856	$	—	$	21,864	$	—	$	21,864	$	—
Impaired loans		—		6,789		6,789		922		—		4,063		4,063		361
Foreclosed assets		—		858		858		—		—		865		865		—
Servicing rights		—		1,964		1,964		—		—		1,771		1,771		—


	December 31, 2020								December 31, 2021
(dollars in thousands)	Level 2		Level 3		Total		Impairment		Level 2		Level 3		Total		Impairment
Loans held for sale	$	122,440	$	—	$	122,440	$	—	$	46,490	$	—	$	46,490	$	—
Impaired loans		—		7,325		7,325		1,205		—		2,469		2,469		283
Foreclosed assets		—		63		63		—		—		885		885		—
Servicing rights		—		1,987		1,987		—		—		1,880		1,880		—

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.

Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value, represent additional net 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.

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The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of ~~June 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, were as follows:

June 30, 2021

March 31, 2022

(dollars in thousands)

Weighted

Asset Type

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Impaired loans

Appraisal value

Property specific adjustment

6,789

N/A

Appraisal value

Property specific adjustment

4,063

N/A

Foreclosed assets

Appraisal value

Property specific adjustment

858

N/A

Appraisal value

Property specific adjustment

865

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

1,964

210-348

287

Discounted cash flows

Prepayment speed assumptions

1,771

126-174

147

Discount rate

9.3

Discount rate

10.0

December 31, 2020

December 31, 2021

(dollars in thousands)

Weighted

Asset Type

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Impaired loans

Appraisal value

Property specific adjustment

7,325

N/A

Appraisal value

Property specific adjustment

2,469

N/A

Foreclosed assets

Appraisal value

Property specific adjustment

N/A

Appraisal value

Property specific adjustment

885

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

1,987

191-403

285

Discounted cash flows

Prepayment speed assumptions

1,880

161-327

237

Discount rate

9.0

Discount rate

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 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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 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.

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Bank-Owned Life Insurance

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.

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 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.

Short-Term Borrowings and Long-Term Debt

For variable-rate borrowings that reprice frequently, estimated fair values are based on carrying values. The estimated fair value of 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 Sheet Credit-Related Commitments

Off-balance sheet credit related commitments are generally of 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:


	June 30, 2021										March 31, 2022
	Carrying		Estimated Fair Value								Carrying		Estimated��Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	315,430	$	315,430	$	—	$	—	$	315,430	$	132,832	$	132,832	$	—	$	—	$	132,832
Investment securities held-to-maturity		146,316		—		148,285		—		148,285		340,150		—		317,826		—		317,826
Loans		1,801,548		—		—		1,847,706		1,847,706
Loans, net												1,786,329		—		—		1,800,339		1,800,339
Accrued interest receivable		8,463		8,463		—		—		8,463		8,516		8,516		—		—		8,516
Bank-owned life insurance		32,752		—		32,752		—		32,752		33,358		—		33,358		—		33,358
Financial Liabilities
Noninterest-bearing deposits	$	758,820	$	—	$	758,820	$	—	$	758,820	$	831,558	$	—	$	831,558	$	—	$	831,558
Interest-bearing deposits		1,746,311		—		1,746,311		—		1,746,311		1,836,525		—		1,836,525		—		1,836,525
Time deposits		205,809		—		—		206,583		206,583		224,184		—		—		223,127		223,127
Long-term debt		58,992		—		57,129		—		57,129		58,902		—		61,651		—		61,651
Accrued interest payable		860		860		—		—		860		2,139		2,139		—		—		2,139

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December 31, 2020

Carrying

Estimated Fair Value
(dollars in thousands)

Amount

Level 1

Level 2

Level 3

Total
Financial Assets










Cash and cash equivalents

$
172,962

$
172,962

$
—

$
—

$
172,962
Loans

1,945,129

—

—

1,992,394

1,992,394
Accrued interest receivable

9,662

9,662

—

—

9,662
Bank-owned life insurance

32,363

—

32,363

—

32,363
Financial Liabilities










Noninterest-bearing deposits

$
754,716

$
—

$
754,716

$
—

$
754,716
Interest-bearing deposits

1,607,939

—

1,607,939

—

1,607,939
Time deposits

209,338

—

—

210,637

210,637
Long-term debt

58,735

—

56,131

—

56,131
Accrued interest payable

654

654

—

—

654


	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

~~NOTE 19 COVID-19 Pandemic Response~~

As discussed in “Note 1 Significant Accounting Policies,” the full extent of the impact of COVID-19 on the U.S. economy generally and the Company is uncertain. In the second quarter of 2020, the Company became a lender under the PPP which was administered through the U.S. Small Business Administration, or SBA, an agency of the U.S Department of the Treasury, which works with financial institutions in providing loans to small businesses. The PPP, which is meant to aid small businesses during the COVID-19 pandemic, was created under the Coronavirus Aid Relief, and Economic Security, or CARES, Act, which was signed into law on March 27, 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See “Note 4 Loans and Allowance for Loan Losses” for additional discussion regarding TDRs.

As of June 30, 2021, the Company had assisted 2,454 new and existing clients secure a total of approximately $474.2 million of PPP financing. Net processing fees in the amount of $15.7 million are being deferred and recognized as interest income on a level yield method over the life of the respective loans. See “Note 4 Loans and Allowance for Loan Losses” for additional discussion on the remaining deferred costs associated with PPP financing.

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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 six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~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 Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the Securities and Exchange Commission on March ~~12, 2021.~~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;

●

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;~~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;

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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;~~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;~~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;~~

●

~~our ability to manage mortgage pipeline risk;~~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;~~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, or the Bank, we provide 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 primary point of contact along with responsive and 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, or GAAP. The preparation of our consolidated financial statements requires management to make estimates and 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. 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 differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no significant changes in critical accounting policies, or the assumptions and judgments utilized in applying these policies since December 31, ~~2020.~~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

Impact of COVID-19

As of ~~June 30, 2021,~~March 31, 2022, the COVID-19 pandemic ~~remains~~remained 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. In 2021, the U.S. economy has, with certain setbacks,

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~~begun reopening and wider distribution of vaccines has encouraged increased economic activity.~~ The progression of the COVID-19 pandemic in the United States ~~has~~did not ~~had~~have an adverse impact on our financial condition and results of operations as of and for the three ~~and six~~ months ended ~~June 30, 2021.~~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 three primary market areas. In addition, we operate one retirement and benefit services office in Minnesota, one in Michigan and one in Colorado.

Each of our market areas continues to have different responses to the COVID-19 pandemic due to the availability of the 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 customers and regional economies.

~~Policy and Regulatory Developments.~~ ~~Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic. Most recently, these have included the following:~~

●

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, or the Plan, a new $1.9 trillion COVID-19 relief bill. The Plan includes a variety of economic assistance programs for Americans, such as the payment of an additional stimulus, extension of job benefits, additional funding for COVID-19 testing and vaccine distribution, an infusion of cash in state and local governments, and an array of tax benefits among other economic incentives.

●

On March 30, 2021, President Biden signed into law the PPP Extension Act of 2021, which provided an extension to May 31, 2021, for qualifying businesses to apply for a PPP loan and provided an additional 30 days for the SBA to process pending PPP loan applications.

~~Our Response.~~ ~~We have taken numerous steps in response to the COVID-19 pandemic, including the following:~~

●

~~Workforce~~. We’ve adopted a hybrid approach to our work environment, allowing many of our employees to work from home long-term. As vaccines became more widely available in the spring, we implemented our phased return to office plan, reopening our offices and returning those employees who will work from an Alerus office. We expect all phases of the plan to be complete by the end of September.

●

~~Client Service.~~ We offered payment deferrals and interest only payment options for consumer, small business, and commercial customers for initial terms of up to 90 days. We offered payment extensions for mortgage customers for initial terms of up to 90 days. As of June 30, 2021, we had executed 584 loan deferrals representing $154.5 million. Of those loans, 12 loans with a total outstanding principal balance of $5.3 million have been granted additional deferrals, 4 loans with a total outstanding principal balance of $653 thousand remain on the first deferral and the remaining loans have been returned to a normal payment status.

●

We participated in the SBA’s PPP. As of June 30, 2021, we had assisted 2,454 borrowers receive approval for funding of $474.2 million in PPP loans. As of June 30, 2021, our borrowers had received approval for forgiveness on 1,447 loans totaling $297.7 million from the SBA. We have submitted to the SBA an additional 65 forgiveness applications totaling $6.9 million.

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~~Shareholder Dividend and Stock Repurchases~~

On May 11, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $0.16 per common share. This dividend was paid out on July 9, 2021, to stockholders of record at the close of business on June 18, 2021. Although the Board of Directors is closely monitoring the impacts of the COVID-19 pandemic, it is the current expectation and intent of the Board of Directors to continue with a quarterly cash dividend.

On July 26, 2021 the Board of Directors of the Company declared a quarterly cash dividend of $0.16 per common share. This dividend is payable on October 8, 2021, to stockholders of record as of the close of business on September 17, 2021.

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. As of June 30, 2021, no shares had been repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

Operating Results Overview

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


	Three months ended									Six months ended						Three months ended
	June 30,			March 31,			June 30,			June 30,			June 30,			March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2021			2021			2020			2021			2020			2022			2021			2021
Performance Ratios
Return on average total assets		1.50	%		2.02	%		1.68	%		1.76	%		1.31	%		1.26	%		1.50	%		2.02	%
Return on average common equity		13.82	%		18.46	%		15.30	%		16.11	%		11.35	%		11.78	%		14.13	%		18.46	%
Return on average tangible common equity (1)		17.36	%		23.03	%		18.88	%		20.15	%		14.39	%		14.72	%		17.36	%		23.03	%
Noninterest income as a % of revenue		63.48	%		64.97	%		65.55	%		64.26	%		62.69	%		57.62	%		59.67	%		64.97	%
Net interest margin (taxable-equivalent basis) ~~(1)~~		2.88	%		3.12	%		3.14	%		3.00	%		3.24	%		2.83	%		2.84	%		3.12	%
Efficiency ratio (1)		71.46	%		66.43	%		66.31	%		68.84	%		71.23	%		72.25	%		71.06	%		66.43	%
Average equity to average assets		10.88	%		10.97	%		11.01	%		10.92	%		11.56	%		10.67	%		10.65	%		10.97	%
Net charge-offs/(recoveries) to average loans		—	%		0.10	%		0.66	%		0.05	%		0.29	%		(0.03)	%		(0.22)	%		0.10	%
Dividend payout ratio		24.24	%		17.44	%		23.08	%		20.39	%		31.58	%		28.07	%		22.22	%		17.44	%
Per Common Share
Earnings per common share - basic	$	0.67		$	0.87		$	0.66		$	1.54		$	0.97		$	0.58		$	0.73		$	0.87
Earnings per common share - diluted	$	0.66		$	0.86		$	0.65		$	1.52		$	0.95		$	0.57		$	0.72		$	0.86
Dividends declared per common share	$	0.16		$	0.15		$	0.15		$	0.31		$	0.30		$	0.16		$	0.16		$	0.15
Book value per common share																$	19.00		$	20.88		$	19.15
Tangible book value per common share (1)	$	16.89		$	15.95		$	15.30								$	16.07		$	17.87		$	15.95
Average common shares outstanding - basic		17,194			17,145			17,111			17,170			17,091			17,244			17,210			17,145
Average common shares outstanding - diluted		17,497			17,465			17,445			17,482			17,425			17,500			17,480			17,465
Other Data
Retirement and benefit services assets under administration/management	$	36,964,961		$	34,774,650		$	30,093,095								$	35,333,131		$	36,732,938		$	34,774,650
Wealth management assets under administration/management		3,538,959			3,357,530			2,957,213								$	4,584,856		$	4,039,931		$	3,357,530
Mortgage originations		545,437			518,014			431,638		$	1,063,451		$	660,206		$	186,762		$	356,821		$	518,014

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

3937

Table of Contents

Selected Financial Data

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


	Three months ended						Six months ended				Three months ended
	June 30,		March 31,		June 30,		June 30,		June 30,		March 31,		December 31,		March 31,
(dollars in thousands)	2021		2021		2020		2021		2020		2022		2021		2021
Selected Average Balance Sheet Data
Loans	$	1,887,986	$	1,945,437	$	1,986,028	$	1,916,553	$	1,858,810	$	1,768,226	$	1,782,657	$	1,945,437
Investment securities		800,812		662,413		369,247		731,995		353,203		1,216,256		1,119,370		662,413
Assets		3,119,740		3,047,261		2,740,330		3,083,702		2,579,995		3,286,809		3,353,900		3,047,261
Deposits		2,677,258		2,615,579		2,329,192		2,646,588		2,177,726		2,816,828		2,870,631		2,615,579
Short-term borrowings		—		—		321		—		161
Long-term debt		58,996		25,677		58,747		42,429		58,751		58,908		58,938		25,677
Stockholders’ equity		339,439		334,188		301,719		336,830		298,221		350,545		357,084		334,188


	June 30,		March 31,		December 31,		June 30,		March 31,		December 31,		March 31,
(dollars in thousands)	2021		2021		2020		2020		2022		2021		2021
Selected Period End Balance Sheet Data
Loans	$	1,835,312	$	1,937,345	$	1,979,375	$	2,034,197	$	1,818,042	$	1,758,020	$	1,937,345
Allowance for loan losses		(33,764)		(33,758)		(34,246)		(27,256)		(31,713)		(31,572)		(33,758)
Investment securities		797,862		795,097		592,342		393,727		1,206,483		1,205,710		795,097
Assets		3,157,229		3,151,756		3,013,771		2,875,457		3,336,199		3,392,691		3,151,756
Deposits		2,710,940		2,717,573		2,571,993		2,453,153		2,892,267		2,920,551		2,717,573
Long-term debt		58,992		59,020		58,735		58,754		58,902		58,933		59,020
Total stockholders’ equity		344,391		329,234		330,163		305,732		328,505		359,403		329,234


	Three months ended						Six months ended				Three months ended
	June 30,		March 31,		June 30,		June 30,		June 30,		March 31,		December 31,		March 31,
(dollars in thousands)	2021		2021		2020		2021		2020		2022		2021		2021
Selected Income Statement Data
Net interest income	$	21,140	$	22,038	$	20,091	$	43,178	$	38,928	$	21,673	$	22,789	$	22,038
Provision for loan losses		—		—		3,500		—		6,000		—		(1,500)		—
Noninterest income		36,748		40,881		38,230		77,629		65,419		29,470		33,718		40,881
Noninterest expense		42,550		43,042		39,734		85,592		76,460		38,071		41,276		43,042
Income before income taxes		15,338		19,877		15,087		35,215		21,887		13,072		16,731		19,877
Income tax expense		3,644		4,662		3,613		8,306		5,050		2,888		4,026		4,662
Net income	$	11,694	$	15,215	$	11,474	$	26,909	$	16,837	$	10,184	$	12,705	$	15,215

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 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 less goodwill and other intangible assets; (ii) tangible book value per common 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.

4038

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:


	June 30,			March 31,			December 31,			June 30,			March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2021			2021			2020			2020			2022			2021			2021
Tangible common equity to tangible assets						��
Total common stockholders’ equity	$	344,391		$	329,234		$	330,163		$	305,732		$	328,505		$	359,403		$	329,234
Less: Goodwill		30,201			30,201			30,201			27,329			31,490			31,490			30,201
Less: Other intangible assets		23,680			24,768			25,919			16,411			19,197			20,250			24,768
Tangible common equity (a)		290,510			274,265			274,043			261,992			277,818			307,663			274,265
Total assets		3,157,229			3,151,756			3,013,771			2,875,457			3,336,199			3,392,691			3,151,756
Less: Goodwill		30,201			30,201			30,201			27,329			31,490			31,490			30,201
Less: Other intangible assets		23,680			24,768			25,919			16,411			19,197			20,250			24,768
Tangible assets (b)		3,103,348			3,096,787			2,957,651			2,831,717			3,285,512			3,340,951			3,096,787
Tangible common equity to tangible assets (a)/(b)		9.36	%		8.86	%		9.27	%		9.25	%		8.46	%		9.21	%		8.86	%
Tangible book value per common share
Total common stockholders’ equity	$	344,391		$	329,234		$	330,163		$	305,732		$	328,505		$	359,403		$	329,234
Less: Goodwill		30,201			30,201			30,201			27,329			31,490			31,490			30,201
Less: Other intangible assets		23,680			24,768			25,919			16,411			19,197			20,250			24,768
Tangible common equity (c)		290,510			274,265			274,043			261,992			277,818			307,663			274,265
Total common shares issued and outstanding (d)		17,198			17,190			17,125			17,120			17,289			17,213			17,190
Tangible book value per common share (c)/(d)	$	16.89		$	15.95		$	16.00		$	15.30		$	16.07		$	17.87		$	15.95


	Three months ended									Six months ended						Three months ended
	June 30,			March 31,			June 30,			June 30,			June 30,			March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2021			2021			2020			2021			2020			2022			2021			2021
Return on average tangible common equity
Net income	$	11,694		$	15,215		$	11,474		$	26,909		$	16,837		$	10,184		$	12,705		$	15,215
Add: Intangible amortization expense (net of tax)		860			909			783			1,769			1,565			832			832			909
Net income, excluding intangible amortization (e)		12,554			16,124			12,257			28,678			18,402			11,016			13,537			16,124
Average total equity		339,439			334,188			301,719			336,830			298,221			350,545			357,084			334,188
Less: Average goodwill		30,201			30,201			27,329			30,201			27,329			31,490			30,930			30,201
Less: Average other intangible assets (net of tax)		19,123			19,995			13,345			19,556			13,737			15,569			16,843			19,995
Average tangible common equity (f)		290,115			283,992			261,045			287,073			257,155			303,486			309,311			283,992
Return on average tangible common equity (e)/(f)		17.36	%		23.03	%		18.88	%		20.15	%		14.39	%		14.72	%		17.36	%		23.03	%
Net interest margin (tax-equivalent)
Net interest income	$	21,140		$	22,038		$	20,091		$	43,178		$	38,928
Tax-equivalent adjustment		135			143			109			278			209
Tax-equivalent net interest income (g)		21,275			22,181			20,200			43,456			39,137
Average earning assets (h)		2,958,468			2,880,255			2,584,037			2,919,578			2,427,519
Net interest margin (tax-equivalent) (g)/(h)		2.88	%		3.12	%		3.14	%		3.00	%		3.24	%
Efficiency ratio
Noninterest expense	$	42,550		$	43,042		$	39,734		$	85,592		$	76,460		$	38,071		$	41,276		$	43,042
Less: Intangible amortization expense		1,088			1,151			991			2,239			1,981			1,053			1,053			1,151
Adjusted noninterest expense (i)		41,462			41,891			38,743			83,353			74,479
Adjusted noninterest expense (g)																	37,018			40,223			41,891
Net interest income		21,140			22,038			20,091			43,178			38,928			21,673			22,789			22,038
Noninterest income		36,748			40,881			38,230			77,629			65,419			29,470			33,718			40,881
Tax-equivalent adjustment		135			143			109			278			209			94			99			143
Total tax-equivalent revenue (j)		58,023			63,062			58,430			121,085			104,556
Efficiency ratio (i)/(j)		71.46	%		66.43	%		66.31	%		68.84	%		71.23	%
Total tax-equivalent revenue (h)																	51,237			56,606			63,062
Efficiency ratio (g)/(h)																	72.25	%		71.06	%		66.43	%

4139

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$11.7~~$10.2 million, or ~~$0.66~~$0.57 per diluted common share, a ~~$220 thousand increase~~$5.0 million decrease as compared to ~~$11.5~~$15.2 million, or ~~$0.65~~$0.86 per diluted common share, for the three months ended ~~June 30, 2020. This small increase~~March 31, 2021. The decrease in net income was primarily ~~due~~attributable to ~~an increase~~decreases of ~~$1.0~~$11.4 million in noninterest income and $365 thousand in net interest income, ~~and a $3.5 million decrease in provision expense,~~ partially offset by ~~a $1.5~~decreases of $5.0 million decrease in noninterest income and a $2.8 million increase in noninterest expense. The increase in net interest income was primarily due to a $1.1 million increase in interest income from investment securities as a result of a change to a more liquid balance sheet mix. The increase in noninterest expense ~~was primarily attributable to an increase~~and $1.8 million in ~~compensation expense related to the increase in mortgage originations.~~

~~Net~~ income for the six months ended June 30, 2021 was $26.9 million, or $1.52 per diluted common share, a $10.1 million increase as compared to $16.8 million, or $0.95 per diluted common share for the six months ended June 30, 2020. The increase in net income was primarily due to a $12.2 million increase in noninterest income, a $4.3 million increase in net interest income and a $6.0 million decrease in provision expense, partially offset by a $9.1 million increase in noninteresttax expense. The increase in noninterest income was primarily due to a $6.8 million increase in mortgage banking revenue as a result of increased mortgage originations. We also had a $5.2 million increase in retirement and benefits revenue primarily driven by the revenue attributable to the acquisition of Retirement and Planning Services, Inc., (doing business as RPS Plan Administrators and 24HourFlex) and a $2.0 million increase in wealth management revenue primarily driven by organic growth and market increases in assets under administration/management.

Net Interest Income

Net interest income is the difference between interest income and 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 six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~

In response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds rate by a total of 150 basis points in March 2020. We anticipate that our interest income will be significantly and adversely affected in future periods as a result of the COVID-19 pandemic, including as a result of the effects of lower interest rates.2021.

Net interest income for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$21.1~~$21.7 million, ~~an increase~~a decrease of ~~$1.0 million~~$365 thousand from ~~$20.1~~$22.0 million for the three months ended June 30, 2020. The three months ended June 30, 2021 included a $2.0 million decrease in interest expense compared to the same period in 2020 partially offset by a $922 thousand decrease in interest income. The decrease in interest expense was primarily driven by a decrease of $1.7 million in deposit interest expense and a decrease of $319 thousand in interest expense on long-term debt. The decrease in deposit interest expense for the three months ended June 30, 2021, compared to the same period 2020 was driven primarily by a 44 basis point reduction in the average rate paid on interest-bearing deposits, partially offset by a $284.8 million increase in the average balance of interest-bearing deposits. The decrease in interest expense on long-term debt for the three months ended June 30, 2021, was primarily due to a 221 basis point decrease in the average rate paid on long-term debt as a result of refinancing our subordinated notes in the first quarter ofMarch 31, 2021. The decrease in interest income was primarily driven by a $2.0 million decrease in interest income received from loans due to a decrease of $98.0 million in average balances coupled with a 20 basis point reduction in the average yield. Partially offsetting this decrease was a $1.1 million increase in interest income from investment securities primarily from a $431.6 million increase in the average balance of investment securities partially offset by a 65 basis point decrease in average yield.

~~Net interest income for the six months ended June 30, 2021 was $43.2 million, a $4.3 million increase, or 10.9%, from $38.9 million for the six months ended June 30, 2020. The change~~ in net interest income was ~~related to~~primarily a ~~$5.0~~result of a $3.3 million decrease in ~~interest expense partially offset by a $707 thousand decrease of interest income. The decrease in~~

~~Table of Contents~~

interest expense was primarily driven by a $4.0 million decrease in interest expense paid on deposits and a $908 thousand decrease in interest expense paid on long-term debt. The decrease in interest income was primarily due to a $2.0 million decrease on interest income from loans, partially offset by a ~~$1.8~~$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 $553.8 million increase in average investment securities, as we’ve continued to update our balance sheet mix.

Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~2.88%~~2.83%, compared to ~~3.14%~~3.12% for the same period in ~~2020. The~~2021. This decrease ~~in net interest margin from the second quarter of 2020~~ was primarily due to a ~~60 basis point lower average earning asset yield, partially offset by a 52~~29 basis point decrease in the ~~average rate paid on interest-bearing liabilities. The decrease in~~overall yield of our interest earning assets, the ~~average earning asset yield~~largest component of which was primarily due to decreases of 65 basis points on the average rate on investment securities and 43 basis points on the average rate on loans held for sale. These decreases were largely driven by the low interest rate environment as well as a shift to a more liquid balance sheet mix as the average balance in interest-bearing deposits with banks increased $38.5 million and the average balance in investment securities increased $431.6 million. The decrease in the average rate paid on total interest-bearing liabilities was primarily due to a 4427 basis point decrease in ~~the average rate paid on interest-bearing deposits.~~

~~Our net interest margin (on a FTE basis) for the six months ended June 30, 2021 was 3.00%, compared to 3.24% for the same period in 2020.~~our loan yield. The ~~change in net interest margin~~loan yield decrease was primarily ~~due to~~driven by a ~~69 basis point~~$240.3 million decrease in our average ~~earning asset yield, partially offset by a 68 basis point decrease in the~~commercial and industrial loans, of which, $231.5 million were PPP loans. Excluding PPP loans, average rate paid on interest-bearing liabilities. Also contributing to the decrease in net interest margin was the change in balance sheet mix as we had increases of $29.8 million in interest-bearing deposits with banks and $378.8 million in investment securities.loans would have increased $54.3 million.

As a result of the ~~reductions~~expected increases in the target federal funds interest rate, ~~as well as the impact of the COVID-19 pandemic,~~ we anticipate that our net interest income and net interest margin (on a FTE basis) will remain under pressure in future periods. Any decrease in net interest income or net interest margin will be partially offset by the processing fees received from PPP financing, which fees are being deferred and recognized as an adjustment to interest income over the life of the loans.

4340

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 six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~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 assets in order to present tax-exempt income and fully taxable income on a comparable basis.

Three months ended June 30,

2021

2020

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

$
191,695

$
59

0.12
%
$
153,197

$
62

0.16
%
Investment securities (1)

800,812

3,192

1.60
%

369,247

2,068

2.25
%
Loans held for sale

71,447

402

2.26
%

69,606

465

2.69
%
Loans













Commercial:









Commercial and industrial

627,613

7,112

4.55
%

739,816

7,582

4.12
%
Real estate construction

42,511

454

4.28
%

31,660

353

4.48
%
Commercial real estate

568,827

5,256

3.71
%

513,497

5,508

4.31
%
Total commercial

1,238,951

12,822

4.15
%

1,284,973

13,443

4.21
%
Consumer













Residential real estate first mortgage

459,278

4,047

3.53
%

459,789

4,681

4.09
%
Residential real estate junior lien

129,544

1,479

4.58
%

163,345

1,944

4.79
%
Other revolving and installment

60,213

647

4.31
%

77,921

884

4.56
%
Total consumer

649,035

6,173

3.81
%

701,055

7,509

4.31
%
Total loans (1)

1,887,986

18,995

4.04
%

1,986,028

20,952

4.24
%
Federal Reserve/FHLB Stock

6,528

71

4.36
%

5,959

68

4.59
%
Total interest earning assets

2,958,468

22,719

3.08
%

2,584,037

23,615

3.68
%
Noninterest earning assets

161,272

156,293

Total assets

$
3,119,740





$
2,740,330





Interest-Bearing Liabilities













Interest-bearing demand deposits

$
697,789

$
252

0.14
%
$
534,733

$
405

0.30
%
Money market and savings deposits

1,015,358

364

0.14
%

900,812

1,504

0.67
%
Time deposits

208,338

290

0.56
%

201,147

649

1.30
%
Short-term borrowings

—

—

—
%

321

—

—
%
Long-term debt

58,996

538

3.66
%

58,747

857

5.87
%
Total interest-bearing liabilities

1,980,481

1,444

0.29
%

1,695,760

3,415

0.81
%
Noninterest-Bearing Liabilities and Stockholders' Equity







Noninterest-bearing deposits

755,773



692,500





Other noninterest-bearing liabilities

44,047



50,351





Stockholders’ equity

339,439



301,719





Total liabilities and stockholders’ equity

$
3,119,740



$
2,740,330





Net interest income

$
21,275





$
20,200



Net interest rate spread

2.79
%





2.87
%
Net interest margin on FTE basis (1)

2.88
%





3.14
%

~~(1)~~

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

~~Table of Contents~~


	Six months ended June 30,												Three months ended March 31,
	2021						2020						2022						2021
			Interest		Average				Interest		Average				Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	188,056	$	112	0.12	%	$	158,274	$	564	0.72	%	$	105,726	$	46	0.18	%	$	184,376	$	53	0.12	%
Investment securities (1)		731,995		5,892	1.62	%		353,203		4,124	2.35	%		1,216,256		5,713	1.90	%		662,413		2,700	1.65	%
Loans held for sale		76,818		834	2.19	%		51,372		719	2.81	%		24,656		156	2.57	%		82,249		432	2.13	%
Loans
Commercial:
Commercial and industrial		651,143		14,975	4.64	%		609,553		13,854	4.57	%		434,656		5,016	4.68	%		674,935		7,863	4.72	%
Real estate construction		43,880		925	4.25	%		29,191		687	4.73	%		41,139		395	3.89	%		45,264		471	4.22	%
Commercial real estate		564,928		10,499	3.75	%		510,831		11,331	4.46	%		601,024		5,399	3.64	%		560,986		5,243	3.79	%
Total commercial		1,259,951		26,399	4.23	%		1,149,575		25,872	4.53	%		1,076,819		10,810	4.07	%		1,281,185		13,577	4.30	%
Consumer
Residential real estate first mortgage		458,584		8,294	3.65	%		460,258		9,380	4.10	%		514,724		4,433	3.49	%		457,882		4,247	3.76	%
Residential real estate junior lien		133,622		3,129	4.72	%		168,390		4,172	4.98	%		125,997		1,382	4.45	%		137,745		1,650	4.86	%
Other revolving and installment		64,396		1,388	4.35	%		80,587		1,854	4.63	%		50,686		548	4.38	%		68,625		741	4.38	%
Total consumer		656,602		12,811	3.93	%		709,235		15,406	4.37	%		691,407		6,363	3.73	%		664,252		6,638	4.05	%
Total loans (1)		1,916,553		39,210	4.13	%		1,858,810		41,278	4.47	%		1,768,226		17,173	3.94	%		1,945,437		20,215	4.21	%
Federal Reserve/FHLB Stock		6,156		135	4.42	%		5,860		136	4.67	%		6,486		70	4.38	%		5,780		64	4.49	%
Total interest earning assets		2,919,578		46,183	3.19	%		2,427,519		46,821	3.88	%		3,121,350		23,158	3.01	%		2,880,255		23,464	3.30	%
Noninterest earning assets		164,124						152,476						165,459						167,006
Total assets	$	3,083,702					$	2,579,995					$	3,286,809					$	3,047,261
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	670,462	$	499	0.15	%	$	496,880	$	933	0.38	%	$	714,472	$	215	0.12	%	$	642,832	$	247	0.16	%
Money market and savings deposits		1,022,812		767	0.15	%		852,325		3,582	0.85	%		1,043,430		367	0.14	%		1,030,348		403	0.16	%
Time deposits		209,521		635	0.61	%		200,117		1,435	1.44	%		227,485		247	0.44	%		210,719		345	0.66	%
Short-term borrowings		—		—	—	%		161		—	—	%
Fed funds purchased														—		—	—	%		—		—	—	%
Long-term debt		42,429		826	3.93	%		58,751		1,734	5.94	%		58,908		562	3.87	%		25,677		288	4.55	%
Total interest-bearing liabilities		1,945,224		2,727	0.28	%		1,608,234		7,684	0.96	%		2,044,295		1,391	0.28	%		1,909,576		1,283	0.27	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		743,793						628,404						831,441						731,680
Other noninterest-bearing liabilities		57,855						45,136						60,528						71,817
Stockholders’ equity		336,830						298,221						350,545						334,188
Total liabilities and stockholders’ equity	$	3,083,702					$	2,579,995					$	3,286,809					$	3,047,261
Net interest income			$	43,456					$	39,137					$	21,767					$	22,181
Net interest rate spread					2.91	%					2.92	%					2.73	%					3.03	%
Net interest margin on FTE basis (1)					3.00	%					3.24	%					2.83	%					3.12	%

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

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

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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 June 30, 2021						Six months ended June 30, 2021						Three months ended March 31, 2022
	Compared with						Compared with						Compared with
	Three Months Ended June 30, 2020						Six months ended June 30, 2020						Three months ended March 31, 2021
	Change due to:				Interest		Change due to:				Interest		Change due to:				Interest
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance		Volume		Rate		Variance		Volume		Rate		Variance
Interest earning assets
Interest-bearing deposits with banks	$	15	$	(18)	$	(3)	$	106	$	(558)	$	(452)	$	(23)	$	16	$	(7)
Investment securities		2,421		(1,297)		1,124		4,414		(2,646)		1,768		2,253		760		3,013
Loans held for sale		12		(75)		(63)		355		(240)		115		(302)		26		(276)
Loans
Commercial:
Commercial and industrial		(1,153)		683		(470)		943		178		1,121		(2,796)		(51)		(2,847)
Real estate construction		121		(20)		101		345		(107)		238		(43)		(33)		(76)
Commercial real estate		595		(847)		(252)		1,196		(2,028)		(832)		374		(218)		156
Total commercial		(437)		(184)		(621)		2,484		(1,957)		527		(2,465)		(302)		(2,767)
Consumer
Residential real estate first mortgage		(5)		(629)		(634)		(34)		(1,052)		(1,086)		527		(341)		186
Residential real estate junior lien		(404)		(61)		(465)		(859)		(184)		(1,043)		(141)		(127)		(268)
Other revolving and installment		(201)		(36)		(237)		(372)		(94)		(466)		(194)		1		(193)
Total consumer		(610)		(726)		(1,336)		(1,265)		(1,330)		(2,595)		192		(467)		(275)
Total loans		(1,047)		(910)		(1,957)		1,219		(3,287)		(2,068)		(2,273)		(769)		(3,042)
Federal Reserve/FHLB Stock		7		(4)		3		7		(8)		(1)		8		(2)		6
Total interest income		1,408		(2,304)		(896)		6,101		(6,739)		(638)		(337)		31		(306)
Interest-bearing liabilities
Interest-bearing demand deposits		122		(275)		(153)		327		(761)		(434)		28		(60)		(32)
Money market and savings deposits		191		(1,331)		(1,140)		719		(3,534)		(2,815)		5		(41)		(36)
Time deposits		23		(382)		(359)		67		(867)		(800)		27		(125)		(98)
Short-term borrowings		—		—		—		—		—		—		—		—		—
Long-term debt		4		(323)		(319)		(481)		(427)		(908)		373		(99)		274
Total interest expense		340		(2,311)		(1,971)		632		(5,589)		(4,957)		433		(325)		108
Change in net interest income	$	1,068	$	7	$	1,075	$	5,469	$	(1,150)	$	4,319	$	(770)	$	356	$	(414)

Provision for Loan Losses

The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan 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, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

~~We recorded~~There was no provision ~~for loan losses~~expense recorded for the ~~three and six months ended June 30, 2021, a $3.5 million decrease compared to~~first quarter of 2022, no change from the ~~provision for~~first quarter of 2021. Management saw modest net recoveries in the ~~three months ended June 30, 2020 and a $6.0 million decrease compared to~~first quarter of 2022, which supported the ~~provision for the six months ended June 30, 2020. Management believes~~decision that no additional provision ~~was necessary in the first and second quarters of 2021 due to declining loan balances and strong credit quality indicators.~~expense should be recognized.

Noninterest Income

Our noninterest income is generated from four primary sources: (1) retirement and benefit services; (2) wealth management; (3) mortgage banking; and (4) other general banking services.

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The following table presents our noninterest income for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021:


	Three months ended						Six months ended						Three months ended
	June 30,						June 30,						March 31,
(dollars in thousands)	2021			2020			2021			2020			2022			2021
Retirement and benefit services	$	17,871		$	13,710		$	35,126		$	29,930		$	17,646		$	17,255
Wealth management		5,138			4,112			10,124			8,158			5,326			4,986
Mortgage banking		12,287			17,546			29,419			22,591			4,931			17,132
Service charges on deposit accounts		330			297			668			720			363			338
Net gains (losses) on investment securities		—			1,294			114			1,294			—			114
Other		1,122			1,271			2,178			2,726			1,204			1,056
Total noninterest income	$	36,748		$	38,230		$	77,629		$	65,419		$	29,470		$	40,881
Noninterest income as a % of revenue		63.48	%		65.55	%		64.26	%		62.69	%		57.62	%		64.97	%

Total noninterest income for the three months ended ~~June 30, 2021,~~March 31, 2022, was ~~$36.7~~$29.5 million, a decrease of ~~$1.5~~$11.4 million, or ~~3.9%~~27.9%, compared to ~~$38.2~~$40.9 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The year over year decrease in noninterest income was primarily ~~driven by decreases of $5.3~~attributable to a $12.2 million decrease in mortgage banking revenue, ~~and $1.3~~a result of a $331.3 million, or 63.9%, decrease in ~~net gains on investment securities. These decreases~~mortgage originations compared to March 31, 2021. Partially offsetting this decrease were ~~partially offset by a $4.2 million increase in~~increases of $391 thousand of retirement and benefit services revenue, ~~and a $1.0 million increase in~~$340 thousand of wealth management ~~revenue. The decrease~~revenue and $148 thousand in mortgage banking revenue was primarily due to an $11.5 million decrease in the change in fair value of the secondary market hedge primarily due to a reduction in the hedged pipeline, partially offset by a 56 basis point increase in the gain on sale margin. The increase in retirementother noninterest income. Retirement and benefit services revenue was primarily due to organic growth and market increases in assets under administration/management, $1.4 million in revenue attributable to the acquisition of RPS and $693 thousand in document restatement fees. Wealth management revenue increased primarily due to ~~organic growth and market increases in assets under administration/management.~~

Total noninterest income for the six months ended June 30, 2021, was $77.6 million, an increase of $12.2 million or 18.7%, compared to $65.4 million for the six months ended June 30, 2020. The change in noninterest income was primarily driven by increases of $6.8 million in mortgage banking revenue, $5.2 million in retirement and benefit services revenue and a ~~$2.0 million~~$588 thousand increase in ~~wealth management revenue. The~~non-asset based fees, specifically including a $280 thousand increase in ~~mortgage~~record keepings fees and $252 thousand in health and welfare income. Wealth management revenue ~~was~~increased as a result of ~~the $403.2 million increase~~$280 thousand in ~~mortgage originations, partially offset by a $10.0 million decrease~~fee revenue earned from blueprint accounts and $209 thousand in ~~the change in fair value of the secondary market hedge. The increase in retirement and benefit services~~fee revenue was primarily driven by $2.7 million in revenue attributable to the acquisition of RPS as well as $807 thousand increase in document restatement fees. The increase in wealth management revenue was driven by market increases in assets under administration/management.earned from dimension accounts.

We anticipate that our noninterest income will be significantly adversely affected in future periods as a result of increasing interest rates and inflationary pressure, which will adversely affect mortgage originations and mortgage banking revenue.

Noninterest income as a percentage of total operating revenue, which consists of net interest income plus noninterest income, was ~~63.5%~~57.6% for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~65.6%~~65.0% for the three months ended ~~June 30, 2020. The decrease was due to noninterest income decreasing by 3.9% while net interest income increased by 5.2%.~~

Noninterest income as a percentage of total operating revenue was 64.3% for the six months ended June 30, 2021, compared to 62.7% for the six months ended June 30, 2020. The increase was due to noninterest income increasing 18.7% while net interest income increased 10.9%.March 31, 2021.

See “NOTE 13 Segment Reporting” for additional discussion regarding our business lines.

~~Table of Contents~~

Noninterest Expense

The following table presents noninterest expense for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2021		2020		2021		2020		2022		2021
Compensation	$	24,309	$	21,213	$	48,007	$	39,944	$	19,051	$	23,698
Employee taxes and benefits		5,572		4,747		11,385		10,055		6,162		5,813
Occupancy and equipment expense		1,918		2,612		4,149		5,104		2,051		2,231
Business services, software and technology expense		4,958		4,580		9,934		9,123		4,924		4,976
Intangible amortization expense		1,088		991		2,239		1,981		1,053		1,151
Professional fees and assessments		1,509		1,177		2,981		2,233		1,541		1,472
Marketing and business development		769		549		1,445		1,159		600		676
Supplies and postage		503		675		1,034		1,382		646		531
Travel		36		51		62		312		179		26
Mortgage and lending expenses		1,199		1,341		2,531		2,482		686		1,332
Other		689		1,798		1,825		2,685		1,178		1,136
Total noninterest expense	$	42,550	$	39,734	$	85,592	$	76,460	$	38,071	$	43,042

Table of Contents

Total noninterest expense for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$42.6~~$38.1 million, ~~an increase~~a decrease of ~~$2.8~~$5.0 million, or ~~7.1%~~11.5%, compared to ~~$39.7~~$43.0 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The ~~increase~~year over year decrease in noninterest expense was ~~driven by increases~~primarily attributable to decreases of ~~$3.1~~$4.6 million in compensation expense and ~~$825~~$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 ~~partially offset by decreases of $1.1 million in other noninterest~~ expense and $694 thousand in occupancy and equipment expense. The increases in compensation expense as well as employee taxes and benefits are due to increases in mortgage originations and the related compensation and incentives. The decreases in occupancy and equipment expense are attributable to the termination of facility leases. The decrease in other noninterest expense is a result of a $919 thousand decrease in the provision for unfunded commitments.

Total noninterest expense for the six months ended June 30, 2021 was $85.6 million, an increase of $9.1 million or 11.9%, compared to $76.5 million for the six months ended June 30, 2020. The increase in noninterest expense was primarily driven by increases of $8.1 million in compensation expense, $1.3 million in employee taxes and benefits and $811 thousand in business services, software and technology expense, partially offset by decreases of $955 thousand in occupancy and equipment expense and $860 thousand in other noninterest expense. The changes in compensation, employee and benefits, and occupancy and equipment expenses were similar to the changes stated previously. The increase in business services, software technology expense wasincreased primarily due to an increase in group insurance. Travel expenses have increased ~~expenses in digital engagement. The decrease in other noninterest expense was primarily driven by a $1.1 million decrease in~~as the ~~provision for unfunded commitments.~~effect of the COVID-19 pandemic subsides, and our employees have started to 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.

For the three months ended ~~June 30, 2021,~~March 31, 2022, we recognized income tax expense of ~~$3.6~~$2.9 million on ~~$15.3~~$13.1 million of pre-tax income, resulting in an effective tax rate of ~~23.7%~~22.1%, compared to income tax expense of ~~$3.6~~$4.7 million on ~~$15.1~~$19.9 million of pre-tax income for the three months ended ~~June 30, 2020,~~March 31, 2021, resulting in an effective tax rate of ~~24.0%~~23.4%.

For the six months ended June 30, 2021, we recognized income tax expense of $8.3 million on $35.2 million of pre-tax income, resulting in an effective tax rate of 23.5%, compared to income tax expense of $5.1 million on $21.9 million of pre-tax income for the six months ended June 30, 2020, resulting in an effective tax rate of 23.1%.

~~Table of Contents~~

Financial Condition

Overview

Total assets were ~~$3.2~~$3.3 billion as of ~~June 30, 2021, an increase~~March 31, 2022, a decrease of ~~$143.5~~$56.5 million, or ~~4.8%~~1.7%, as compared to December 31, ~~2020.~~2021. The ~~increase~~overall change in ~~total~~ assets ~~was primarily due to increases~~included decreases of ~~$205.5 million in investment securities and $142.5~~$109.5 million in cash and cash equivalents, ~~partially offset by decreases of $55.6~~$11.9 million in investment securities held-to-maturity, and $24.6 million in loans held for ~~sale and $144.1~~sale. Partially offsetting these decreases, was a $60.0 million increase in loans held for ~~investment.~~investment and a $12.7 million increase in 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 loans. The goal of the overall portfolio mix is to diversify with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories. As of ~~June 30, 2021,~~March 31, 2022, the portfolio mix was ~~31.2%~~25.7% commercial and industrial, ~~30.9%~~33.1% commercial real estate, ~~32.8%~~35.9% residential real estate and ~~5.1%~~5.3% in other categories. ~~Commercial and industrial loans included $165.0 million~~

Table of ~~PPP loans as of June 30, 2021.~~Contents

The following table presents the composition of total loans outstanding by portfolio segment as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021				December 31, 2020								March 31, 2022				December 31, 2021
			Percent of				Percent of		Change						Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent		Balance		Portfolio		Balance		Portfolio			Amount	Percent
Commercial
Commercial and industrial (1)	$	572,734	31.2	%	$	691,858	35.0	%	$	(119,124)	(17.2)	%	$	467,449	25.7	%	$	436,761	24.8	%	$	30,688	7.0	%
Real estate construction		36,549	2.0	%		44,451	2.2	%		(7,902)	(17.8)	%		41,604	2.3	%		40,619	2.3	%		985	2.4	%
Commercial real estate		567,987	30.9	%		563,007	28.5	%		4,980	0.9	%		602,158	33.1	%		598,893	34.1	%		3,265	0.5	%
Total commercial		1,177,270	64.1	%		1,299,316	65.7	%		(122,046)	(9.4)	%		1,111,211	61.1	%		1,076,273	61.2	%		34,938	3.2	%
Consumer
Residential real estate first mortgage		470,822	25.7	%		463,370	23.4	%		7,452	1.6	%		522,489	28.7	%		510,716	29.1	%		11,773	2.3	%
Residential real estate junior lien		130,180	7.1	%		143,416	7.2	%		(13,236)	(9.2)	%		130,604	7.2	%		125,668	7.1	%		4,936	3.9	%
Other revolving and installment		57,040	3.1	%		73,273	3.7	%		(16,233)	(22.2)	%		53,738	3.0	%		45,363	2.6	%		8,375	18.5	%
Total consumer		658,042	35.9	%		680,059	34.3	%		(22,017)	(3.2)	%		706,831	38.9	%		681,747	38.8	%		25,084	3.7	%
Total loans	$	1,835,312	100.0	%	$	1,979,375	100.0	%	$	(144,063)	(7.3)	%	$	1,818,042	100.0	%	$	1,758,020	100.0	%	$	60,022	3.4	%

(1)	Included PPP loans of ~~$165.0~~$13.1 million at ~~June 30, 2021~~March 31, 2022 and ~~$268.4~~$33.6 million at December 31, ~~2020.~~2021.

Total loans outstanding were ~~$1.84~~$1.8 billion as of ~~June 30, 2021, a decrease~~March 31, 2022, an increase of ~~$144.1~~$60.0 million, or ~~7.3%~~3.4%, from December 31, ~~2020. The decrease~~2021. This increase was primarily ~~due to decreases~~a result of ~~$119.1~~increases of $30.7 million in commercial and industrial ~~$7.9~~loans, $3.3 million in ~~our real estate construction and $22.0 in our consumer loan portfolios, partially offset by a $5.0 million increase in our~~ commercial real estate loans, $16.7 million in residential loans, and $9.4 million in other loan ~~portfolio. Excluding~~categories. If PPP loans ~~the~~were excluded, commercial ~~portfolio decreased by $18.6~~and industrial loans would have increased $51.1 million, or ~~1.8%~~12.7%, from December 31, ~~2020.~~

~~Consistent with regulatory guidance urging banks to work with borrowers during the COVID-19 pandemic and~~2021, primarily as ~~outlined in the CARES Act, the Company offered~~ a ~~payment deferral program for its lending clients that were adversely affected by COVID-19. These deferrals were generally no more than 90 days in duration. As~~result of June 30, 2021, the Company had executed 584 of these deferrals representing $154.5 million. Of those loans, 12 loans with a total outstanding principal balance of $5.3 million have been granted second deferrals, 4 loans with a total outstanding principal balance of $653 thousand remain on the first deferral and the remaining loans have been returned to a normal payment status. In accordance with the Interagency Statement on Loan Modifications and Reporting for Financial institutions as issued on April 7, 2020, these short-term deferrals were not considered TDRs. See “NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for additional information regarding TDRs.increased credit line utilization.

~~Table of Contents~~

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 ~~higher levels of liquidity~~the increasing interest rate environment and competition in our market areas.

Table of Contents

The following table presents the maturities and types of interest rates for the loan portfolio as of ~~June 30, 2021.~~March 31, 2022:


	June 30, 2021								March 31, 2022
			After one								After one		After five
	One year		but within		After				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	$	155,907	$	359,328	$	57,499	$	572,734	$	132,727	$	244,050	$	80,684	$	9,988	$	467,449
Real estate construction		3,095		12,658		20,796		36,549		20,617		17,294		3,693		—		41,604
Commercial real estate		40,180		222,456		305,351		567,987		24,079		228,237		322,616		27,226		602,158
Total commercial		199,182		594,442		383,646		1,177,270		177,423		489,581		406,993		37,214		1,111,211
Consumer
Residential real estate first mortgage		12,201		16,472		442,149		470,822		3,630		16,123		45,092		457,644		522,489
Residential real estate junior lien		11,231		34,139		84,810		130,180		8,490		28,263		30,813		63,038		130,604
Other revolving and installment		7,382		42,778		6,880		57,040		10,613		41,431		1,694		—		53,738
Total consumer		30,814		93,389		533,839		658,042		22,733		85,817		77,599		520,682		706,831
Total loans	$	229,996	$	687,831	$	917,485	$	1,835,312	$	200,156	$	575,398	$	484,592	$	557,896	$	1,818,042
Sensitivity of loans to changes in interest rates
Fixed interest rates			$	561,388	$	474,306
Floating interest rates				126,443		443,179
Total			$	687,831	$	917,485
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 June 30, 2021, 63.1% of the loan portfolio bore interest at fixed rates and 36.9% 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.

Asset Quality

Our strategy for credit risk management includes 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 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.

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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 categories include special mention, substandard, and doubtful risk ratings.

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See “NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for a definition of each of the risk ratings.

The table below presents criticized loans outstanding by loan portfolio segment as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2021			2020			2022			2021
Commercial
Commercial and industrial	$	11,389		$	22,256		$	4,171		$	6,526
Real estate construction		—			—			—			—
Commercial real estate		25,570			29,274			9,410			13,602
Total commercial		36,959			51,530			13,581			20,128
Consumer
Residential real estate first mortgage		1,785			2,149			2,051			341
Residential real estate junior lien		1,519			2,955			774			770
Other revolving and installment		13			37			49			—
Total consumer		3,317			5,141			2,874			1,111
Total loans	$	40,276		$	56,671		$	16,455		$	21,239
Criticized loans as a percent of total loans		2.19	%		2.86	%		0.91	%		1.21	%

The following table presents information regarding nonperforming assets as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2021			2020			2022			2021
Nonaccrual loans	$	6,960		$	5,050		$	4,069		$	2,076
Accruing loans 90+ days past due		—			30			146			121
Total nonperforming loans		6,960			5,080			4,215			2,197
OREO and repossessed assets		858			63			865			885
Total nonperforming assets		7,818			5,143			5,080			3,082
Total restructured accruing loans		751			3,427			355			676
Total nonperforming assets and restructured accruing loans	$	8,569		$	8,570		$	5,435		$	3,758
Nonperforming loans to total loans		0.38	%		0.26	%		0.23	%		0.12	%
Nonperforming assets to total assets		0.25	%		0.17	%		0.15	%		0.09	%
Allowance for loan losses to nonperforming loans		485	%		674	%		752	%		1,437	%

Interest income lost on nonaccrual loans approximated ~~$32~~$29 thousand and ~~$159~~$80 thousand for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

Interest income lost on nonaccrual loans approximated $112 thousand and $314 thousand for the six months ended June 30, 2021, and 2020, respectively. There was no interest income included in net interest income related to nonaccrual loans for the six months ended June 30, 2021 and 2020.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of incurred credit losses inherent in the loan portfolio atas 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 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

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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

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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 for loan losses for the periods ~~presented.~~presented:


	Three months ended						Six months ended						Three months ended
	June 30,						June 30,						March 31,
(dollars in thousands)	2021			2020			2021			2020			2022			2021
Balance—beginning of period	$	33,758		$	27,019		$	34,246		$	23,924		$	31,572		$	34,246
Commercial loan charge-offs
Commercial and Industrial		(273)			(2,703)			(477)			(2,735)			(27)			(204)
Real estate construction		—			—			—			—			—			—
Commercial real estate		—			(865)			(536)			(865)			—			(536)
Total commercial loan charge-offs		(273)			(3,568)			(1,013)			(3,600)			(27)			(740)
Consumer loan charge-offs
Residential real estate first mortgage		—			—			—			—			—			—
Residential real estate junior lien		—			(12)			—			(12)			—			—
Other revolving and installment		(49)			(86)			(93)			(153)			(18)			(44)
Total consumer loan charge-offs		(49)			(98)			(93)			(165)			(18)			(44)
Total loan charge-offs		(322)			(3,666)			(1,106)			(3,765)			(45)			(784)
Commercial loan recoveries
Commercial and Industrial		275			321			445			914			126			170
Real estate construction		—			—			—			—			—			—
Commercial real estate		1			—			4			—			11			3
Total commercial recoveries		276			321			449			914			137			173
Consumer loan recoveries
Residential real estate first mortgage		—			5			—			5			—			—
Residential real estate junior lien		14			57			97			94			13			83
Other revolving and installment		38			20			78			84			36			40
Total consumer loan recoveries		52			82			175			183			49			123
Total loan recoveries		328			403			624			1,097			186			296
Net loan charge-offs (recoveries)		(6)			3,263			482			2,668			(141)			488
Commercial loan provision
Commercial and Industrial		(869)			278			(553)			348			771			316
Real estate construction		(11)			109			(71)			140			27			(60)
Commercial real estate		(913)			2,537			(636)			4,125			(441)			277
Total commercial loan provision		(1,793)			2,924			(1,260)			4,613			357			533
Consumer loan provision
Residential real estate first mortgage		129			459			402			1,220			129			273
Residential real estate junior lien		99			32			(69)			349			92			(168)
Other revolving and installment		(81)			171			(164)			263			145			(83)
Total consumer loan provision		147			662			169			1,832			366			22
Unallocated provision expense		1,646			(86)			1,091			(445)			(723)			(555)
Total loan loss provision		—			3,500			—			6,000			—			—
Balance—end of period	$	33,764		$	27,256		$	33,764		$	27,256		$	31,713		$	33,758
Total loans	$	1,835,312		$	2,034,197		$	1,835,312		$	2,034,197		$	1,818,042		$	1,937,345
Average total loans		1,887,986			1,986,028			1,916,553			1,858,810			1,768,226			1,945,437
Allowance for loan losses to total loans		1.84	%		1.34	%		1.84	%		1.34	%		1.74	%		1.74	%
Net charge-offs/(recoveries) to average total loans (annualized)		—	%		0.66	%		0.05	%		0.29	%		(0.03)	%		0.10	%

The allowance for loan losses was ~~$33.8~~$31.7 million as of ~~June 30, 2021,~~March 31, 2022, compared to ~~$34.2~~$31.6 million as of December 31, ~~2020.~~2021. The ~~$482~~$141 thousand ~~decrease in~~increase was the ~~allowance for loan losses was due to~~result of $141 thousand net ~~charge-offs as there was~~recoveries and no additional provision ~~expense taken during the period.~~expense. As of ~~June 30, 2021,~~March 31, 2022, the allowance for loan losses represented ~~1.84%~~1.74% of total loans. ~~Excluding PPP loans, the ratio of allowance for loan losses to total loans was 2.02% at June 30, 2021, compared to 2.00% as of December 31, 2020.~~

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Based on current economic indicators, the Company maintained the economic factors within the allowance for loan losses evaluation. We believe our credit quality may decline and loan defaults may increase as a result of COVID-19.

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


	June 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
			Percentage				Percentage				Percentage				Percentage
	Allocated		of loans to		Allocated		of loans to		Allocated		of loans to		Allocated		of loans to
(dollars in thousands)	Allowance		total loans		Allowance		total loans		Allowance		total loans		Allowance		total loans
Commercial and industrial	$	9,620	31.2	%	$	10,205	35.0	%	$	9,795	25.7	%	$	8,925	24.8	%
Real estate construction		587	2.0	%		658	2.2	%		810	2.3	%		783	2.3	%
Commercial real estate		12,937	30.9	%		14,105	28.5	%		11,946	33.1	%		12,376	34.1	%
Residential real estate first mortgage		6,176	25.7	%		5,774	23.4	%		6,661	28.7	%		6,532	29.1	%
Residential real estate junior lien		1,401	7.1	%		1,373	7.2	%		1,400	7.2	%		1,295	7.1	%
Other revolving and installment		574	3.1	%		753	3.7	%		644	3.0	%		481	2.6	%
Unallocated		2,469	—	%		1,378	—	%		457	—	%		1,180	—	%
Total loans	$	33,764	100.0	%	$	34,246	100.0	%	$	31,713	100.0	%	$	31,572	100.0	%

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 in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was ~~$1.7~~$2.1 million as of ~~June 30, 2021, a decrease of $143 thousand, as compared to December~~March 31, ~~2020.~~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 ~~$66.9~~$21.9 million as of ~~June 30, 2021,~~March 31, 2022, a decrease of ~~$55.6~~$24.6 million, or 53.0%, as compared to December 31, ~~2020.~~2021. The decrease in loans held for sale was primarily ~~due to~~the result of a $170.1 million decrease in mortgage ~~originations. Mortgage loan~~ originations, ~~totaled $545.4 million for~~as compared to the three months ~~ended June 30, 2021, compared to $607.2 million for the three months ended~~ending December 31, ~~2020.~~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. In the second quarter of 2021, we transferred our investment securities of obligations of state and political agencies from available-for-sale to held-to-maturity to protect capital and reduce volatility in other comprehensive income due to market value changes.

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The following table presents the fair value composition of our investment securities portfolio as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021				December 31, 2020								March 31, 2022				December 31, 2021
			Percent of				Percent of		Change						Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Amount		Percent		Balance		Portfolio		Balance		Portfolio
Available-for-sale
U.S. Treasury and agencies		5,660	0.7	%		5,907	1.0	%	$	(247)	(4.2)	%	$	4,167	0.3	%	$	5,103	0.4	%
Obligations of state and political agencies		—	—	%		153,773	26.0	%		(153,773)	(100.0)	%
Mortgage backed securities
Residential Agency		509,843	64.0	%		306,719	51.8	%		203,124	66.2	%
Residential agency														711,121	58.9	%		707,157	58.7	%
Commercial		100,088	12.5	%		94,978	16.0	%		5,110	5.4	%		82,732	6.9	%		90,913	7.5	%
Asset backed securities		72	—	%		115	—	%		(43)	(37.4)	%		42	—	%		54	—	%
Corporate bonds		35,883	4.5	%		30,850	5.2	%		5,033	16.3	%		68,271	5.7	%		50,422	4.2	%
Total available-for-sale investment securities		651,546	81.7	%		592,342	100.0	%		59,204	10.0	%		866,333	71.8	%		853,649	70.8	%
Held-to-maturity
Obligations of state and political agencies		146,316	18.3	%		—	—	%		146,316	—	%		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		146,316	18.3	%		—	—	%		146,316	—	%		340,150	28.2	%		352,061	29.2	%
Total investment securities	$	797,862	100.0	%	$	592,342	100.0	%	$	205,520	34.7	%	$	1,206,483	100.0	%	$	1,205,710	100.0	%

The investment securities presented in the following table are reported at fair value and by contractual maturity as of ~~June 30, 2021.~~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 June 30, 2021																Maturity as of March 31, 2022
	One year or less				One to five years				Five to ten years				After ten years				One year or less				One to five years				Five to ten years				After ten years
	Fair		Average		Fair		Average		Fair		Average		Fair		Average		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	$	—	—	%	$	—	—	%	$	1,418	0.92	%	$	4,242	0.71	%	$	—	—	%	$	—	—	%	$	1,147	0.92	%	$	3,020	0.71	%
Mortgage backed securities
Residential Agency		—	—	%		3,100	2.64	%		15,790	2.12	%		490,953	1.21	%
Residential agency																		1	3.60	%		3,060	2.52	%		11,468	2.34	%		696,592	1.75	%
Commercial		—	—	%		—	—	%		36,795	2.80	%		63,293	2.56	%		—	—	%		5,256	2.88	%		25,838	2.79	%		51,638	2.56	%
Asset backed securities		—	—	%		—	—	%		—	—	%		72	5.02	%		—	—	%		—	—	%		16	5.17	%		26	5.29	%
Corporate bonds		—	—	%		—	—	%		35,883	4.29	%		—	—	%		—	—	%		—	—	%		60,271	3.85	%		8,000	3.75	%
Total available-for-sale investment securities	$	—	—	%	$	3,100	2.64	%	$	89,886	3.25	%	$	558,560	1.36	%		1	3.60	%		8,316	2.75	%		98,740	3.36	%		759,276	1.82	%
Held-to-maturity
Obligations of state and political agencies	$	5,142	0.28	%	$	28,745	0.80	%	$	77,812	1.64	%	$	36,586	2.09	%		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		5,142	0.28	%		28,745	0.80	%		77,812	1.64	%		36,586	2.09	%		7,423	1.14	%		33,923	0.95	%		69,032	1.84	%		207,448	1.92	%
Total investment securities	$	5,142	0.28	%	$	31,845	0.98	%	$	167,698	2.50	%	$	595,146	1.40	%	$	7,424	1.14	%	$	42,239	1.30	%	$	167,772	2.74	%	$	966,724	1.84	%

Deposits

Total deposits were ~~$2.71~~$2.9 billion as of ~~June 30, 2021, an increase~~March 31, 2022, a decrease of ~~$138.9~~$28.3 million, or ~~5.4%~~1.0%, from December 31, ~~2020.~~2021. Interest-bearing deposits increased ~~$134.8~~$79.0 million while noninterest-bearing deposits ~~increased $4.1~~decreased $107.3 million. ~~Key drivers included inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and volatile financial markets.~~ The increase in interest-bearing deposits included increases of ~~$117.1~~$45.7 million in interest-bearing demand deposits, ~~and $21.2~~$39.6 million in money market accounts, and a $2.5 million increase in savings accounts, partially offset by aan $8.7 million decrease ~~of $3.5 million~~ in time deposits. ~~Although overall~~Synergistic deposits ~~increased, we saw that within interest-bearing and noninterest-bearing deposits,~~decreased $26.1 million from December 31, 2021. Excluding synergistic deposits, commercial transaction deposits decreased ~~$44.0~~$16.7 million, ~~from our retirement and benefit services and wealth management segments. As of June 30, 2021, the total sourced deposits outside of our branch~~or 1.3%, partially offset by a $21.7 million increase in consumer transaction deposits.

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footprint was $551.6 million. Excluding synergistic deposits, commercial transaction deposits increased $113.9 million, or 10.3%, while consumer transaction deposits increased $75.8 million, or 11.8%, since December 31, 2020.

The following table presents the composition of our deposit portfolio as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	June 30, 2021				December 31, 2020								March 31, 2022				December 31, 2021
			Percent of				Percent of		Change						Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Amount		Percent		Balance		Portfolio		Balance		Portfolio		Amount		Percent
Noninterest-bearing demand	$	758,820	28.0	%	$	754,716	29.3	%	$	4,104	0.5	%	$	831,558	28.7	%	$	938,840	32.1	%	$	(107,282)	(11.4)	%
Interest-bearing demand		736,043	27.2	%		618,900	24.1	%		117,143	18.9	%		760,321	26.3	%		714,669	24.5	%		45,652	6.4	%
Money market and savings		1,010,268	37.2	%		989,039	38.5	%		21,229	2.1	%		1,076,204	37.2	%		1,034,130	35.4	%		42,074	4.1	%
Time deposits		205,809	7.6	%		209,338	8.1	%		(3,529)	(1.7)	%		224,184	7.8	%		232,912	8.0	%		(8,728)	(3.7)	%
Total deposits	$	2,710,940	100.0	%	$	2,571,993	100.0	%	$	138,947	5.4	%	$	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 ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:


	Three months ended				Three months ended				Three months ended March 31,
	June 30, 2021				June 30, 2020				2022				2021
	Average		Average		Average		Average		Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Noninterest-bearing demand	$	755,773	—	%	$	692,500	—	%	$	831,441	—	%	$	731,680	—	%
Interest-bearing demand		697,789	0.14	%		534,733	0.30	%		714,472	0.12	%		642,832	0.16	%
Money market and savings		1,015,358	0.14	%		900,812	0.67	%		1,043,430	0.14	%		1,030,348	0.16	%
Time deposits		208,338	0.56	%		201,147	1.30	%		227,485	0.44	%		210,719	0.66	%
Total deposits	$	2,677,258	0.14	%	$	2,329,192	0.44	%	$	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:~~March 31, 2022:


	June 30,		March 31,
(dollars in thousands)	2021		2022
Maturing in:
3 months or less	$	47,278	$	—
3 months to 6 months		66,820		50,471
6 months to 1 year		5,263		31,799
1 year or greater		7,724		829
Total	$	127,085	$	83,099

Borrowings

Borrowings as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows:


	June 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
			Percent of				Percent of				Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Balance		Portfolio		Balance		Portfolio
Subordinated notes		50,000	84.8	%		49,688	84.6	%		50,000	84.9	%		50,000	84.9	%
Junior subordinated debentures		8,673	14.7	%		8,617	14.7	%		8,759	14.9	%		8,730	14.8	%
Finance lease liability		319	0.5	%		430	0.7	%		143	0.2	%		203	0.3	%
Total borrowed funds	$	58,992	100.0	%	$	58,735	100.0	%	$	58,902	100.0	%	$	58,933	100.0	%

In the first quarter of 2021, we redeemed our previously issued subordinated debt with an initial fixed rate of 5.75% and issued new subordinated debt to the Bank of North Dakota with an initial fixed rate of 3.50%.

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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 $14.2~~decreased $30.9 million, or 8.6%, to ~~$344.4~~$328.5 million as of ~~June 30, 2021,~~March 31, 2022, compared to ~~$330.2~~$359.4 million as of December 31, ~~2020. The increase in stockholders' equity was~~2021, primarily ~~driven by $26.9 million in net income, partially offset by $5.4 million in dividends declared on common stock and an $8.1~~due to a $38.1 million decrease in ~~accumulated~~ other comprehensive ~~income.~~income, due

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to rising interest rates that resulted in a lower fair value on our investment securities available-for-sale. Tangible common equity to tangible assets, a non-GAAP financial measure, ~~increased~~decreased to ~~9.36%~~8.46% as of ~~June 30, 2021,~~March 31, 2022, from ~~9.27%~~9.21% as of December 31, ~~2020. Tangible common equity to tangible assets would have been 9.89% as of June 30, 2021 and 10.19% as of December 31, 2020, if PPP loans were excluded.~~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.

At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2019:~~2021:


	June 30,		December 31,		March 31,		December 31,
Capital Ratios	2021		2020		2022		2021
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets	14.30	%	12.75	%	14.27	%	14.65	%
Tier 1 capital to risk weighted assets	14.71	%	13.15	%	14.66	%	15.06	%
Total capital to risk weighted assets	18.43	%	16.79	%	18.12	%	18.64	%
Tier 1 capital to average assets	9.62	%	9.24	%	10.30	%	9.79	%
Tangible common equity to tangible assets (1)	9.36	%	9.27	%	8.46	%	9.21	%

Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	13.57	%	12.10	%	13.52	%	13.87	%
Tier 1 capital to risk weighted assets	13.57	%	12.10	%	13.52	%	13.87	%
Total capital to risk weighted assets	14.82	%	13.36	%	14.77	%	15.12	%
Tier 1 capital to average assets	8.98	%	8.50	%	9.50	%	9.01	%

(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 ~~June 30, 2021,~~March 31, 2022, as shown in the above tables, were at levels above the regulatory minimums to be considered “well capitalized”. See “Note 16 Regulatory Matters” to the consolidated financial statements for additional information.

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~~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 June 30, 2021.~~

June 30, 2021

Less than

One to

Three to

Over

(dollars in thousands)

one year

three years

five years

five years

Total
Operating lease obligations

$
1,664

$
2,728

$
737

$
326

$
5,455
Time deposits

182,120

14,069

7,022

2,598

205,809
Subordinated notes payable

—

—

—

50,000

50,000
Junior subordinated debenture (Trust I)

—

—

—

3,470

3,470
Junior subordinated debenture (Trust II)

—

—

—

5,203

5,203
Finance lease liability

251

84

—

—

335
Total contractual obligations

$
184,035

$
16,881

$
7,759

$
61,597

$
270,272

Off-Balance Sheet Arrangements

We are a party to financial instruments with 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 sheet agreements as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, was as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Commitments to extend credit	$	610,448	$	611,140	$	650,087	$	668,115
Standby letters of credit		6,406		6,510		10,591		10,529
Total	$	616,854	$	617,650	$	660,678	$	678,644

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 ~~June 30, 2021,~~March 31, 2022, we had on balance sheet liquidity of ~~$870.5~~$998.7 million, compared to ~~$511.1 million~~$1.1 billion as of December 31, ~~2020.~~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, and over collateralized securities pledging ~~positions.~~positions available-for-sale.

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The Bank is a member of the FHLB, which provides short- and 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 ~~June 30, 2021,~~March 31, 2022, we had no outstanding fed funds purchased from the FHLB and ~~$938.7~~$760.7 million of collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to ~~$645.6~~$760.4 million from the FHLB. In addition, we can borrow up to $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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding.

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 and long-term funding crisis.

A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly 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 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 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 assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, 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

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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 assets and 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 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 and 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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, assuming immediate parallel moves in interest rates is presented in the table ~~below.~~below:

June 30, 2021

December 31, 2020


Following

Following

Following

Following

12 months

24 months

12 months

24 months

+400 basis points

6.3
%
5.9
%
10.2
%
7.3
%
+300 basis points

4.6
%
2.3
%
7.9
%
3.2
%
+200 basis points

2.8
%
−1.3
%
5.5
%
−1.0
%
+100 basis points

1.2
%
−4.9
%
3.2
%
−5.3
%
−100 basis points

−7.1
%
−21.0
%
−4.9
%
−18.8
%
−200 basis points

N/A
%
N/A
%
N/A
%
N/A
%


	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 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.

~~Table of Contents~~

The table below presents the change in the economic value of equity as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, assuming immediate parallel shifts in interest ~~rates.~~rates:


	June 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
+400 basis points	−7.1	%	12.1	%	−22.1	%	−26.0	%
+300 basis points	−3.4	%	12.6	%	−15.2	%	−16.8	%
+200 basis points	−0.3	%	11.9	%	−8.7	%	−8.2	%
+100 basis points	1.8	%	9.5	%	−3.1	%	−1.4	%
−100 basis points	−36.7	%	−51.0	%	—	%	−31.2	%
−200 basis points	N/A	%	N/A	%	N/A	%	N/A	%

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.

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) 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) 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.

~~Table of Contents~~

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 to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~12, 2021.~~11, 2022.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

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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 ~~second~~first quarter of ~~2021.~~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~~	~~per Share~~		~~Announced Plans~~	~~Under the Plan (1)~~
~~April~~	—	$	—	—	~~770,000~~
~~May~~	—		—	—	~~770,000~~
~~June~~	—		—	—	~~770,000~~
~~Total~~	—	$	—	—	~~770,000~~



				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.~~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 the underwriters of their option to purchase additional shares to cover over-allotments. 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. 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 ~~June 30, 2021,~~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.

~~Table of Contents~~

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

None.

6257

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Item 6 – Exhibits


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 Certifications required by Rule 13(a)-14(a) – filed herewith.

31.2		Chief Financial Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.

32.1		Chief Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2		Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101.INS		iXBRL Instance Document

101.SCH		iXBRL Taxonomy Extension Schema

101.CAL		iXBRL Taxonomy Extension Calculation Linkbase

101.DEF		iXBRL Taxonomy Extension Definition Linkbase

101.LAB		iXBRL Taxonomy Extension Label Linkbase

101.PRE		iXBRL Taxonomy Extension Presentation Linkbase

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

6358

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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

Date: ~~August 5, 2021~~	~~By:~~	~~/s/ Randy L. Newman~~
		~~Name: Randy L. Newman~~
		~~Title: Chairman, Chief Executive Officer and President (Principal Executive Officer)~~

~~Date: August 5, 2021~~May 6, 2022	By:	/s/ Katie A. Lorenson
		Name: Katie A. Lorenson
		Title: 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 Chief Financial Officer (Principal Financial ~~and Accounting~~ Officer)

6459


	June 30, 2021
	Amortized		Net Unrealized		Carrying		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains (1)		Value		Gains (2)		Losses (2)		Value
Held-to-maturity
Obligations of state and political agencies	$	147,466	$	1,150	$	146,316	$	1,974	$	(5)	$	148,285
Total held-to-maturity investment securities	$	147,466	$	1,150	$	146,316	$	1,974	$	(5)	$	148,285


	Three months ended June 30,
	2021				2020
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,548	$	3	$	4,881	$	15
Commercial real estate		188		2		200		8
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		27		—		20		—
Other revolving and installment		13		—		35		—
Total impaired loans with a valuation allowance		1,776		5		5,136		23
Impaired loans without a valuation allowance
Commercial and industrial		1,174		5		694		26
Commercial real estate		4,472		—		1,693		—
Residential real estate first mortgage		23		—		755		—
Residential real estate junior lien		302		—		255		3
Other revolving and installment		—		—		4		—
Total impaired loans without a valuation allowance		5,971		5		3,401		29
Total impaired loans
Commercial and industrial		2,722		8		5,575		41
Commercial real estate		4,660		2		1,893		8
Residential real estate first mortgage		23		—		755		—
Residential real estate junior lien		329		—		275		3
Other revolving and installment		13		—		39		—
Total impaired loans	$	7,747	$	10	$	8,537	$	52


		Three months ended				Six months ended
	Consolidated Statements of	June 30,		June 30,		June 30,		June 30,
(dollars in thousands)	of Income Location	2021		2020		2021		2020
Interest rate swaps	Other noninterest income	$	(1)	$	—	$	1	$	—
Interest rate lock commitments	Mortgage banking		740		4,352		(5,505)		5,579
Forward loan sales commitments	Mortgage banking		73		117		(1,562)		783
TBA mortgage backed securities	Mortgage banking		(3,405)		(1,929)		5,556		(5,352)
Total gain/(loss) from derivative instruments		$	(2,593)	$	2,540	$	(1,510)	$	1,010


	June 30, 2021
	Less than		One to		Three to		Over
(dollars in thousands)	one year		three years		five years		five years		Total
Operating lease obligations	$	1,664	$	2,728	$	737	$	326	$	5,455
Time deposits		182,120		14,069		7,022		2,598		205,809
Subordinated notes payable		—		—		—		50,000		50,000
Junior subordinated debenture (Trust I)		—		—		—		3,470		3,470
Junior subordinated debenture (Trust II)		—		—		—		5,203		5,203
Finance lease liability		251		84		—		—		335
Total contractual obligations	$	184,035	$	16,881	$	7,759	$	61,597	$	270,272