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, 2023~~March 31, 2024

☐ 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, 2023~~April 30, 2024 was ~~19,914,884.~~19,776,786.

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, 2023 and December 31, 2022~~	1
	Consolidated Statements of Income ~~for the three and six months ended June 30, 2023 and 2022~~	2
	Consolidated Statements of Comprehensive Income ~~for the three and six months ended June 30, 2023 and 2022~~	3
	Consolidated Statements of Changes in Stockholders’ Equity ~~for the three and six months ended June 30, 2023 and 2022~~	4
	Consolidated Statements of Cash Flows ~~for the six months ended June 30, 2023 and 2022~~	65
	Notes to Consolidated Financial Statements	87
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4443
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6667
Item 4.	Controls and Procedures	6869

Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71

Signatures		72

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

June 30,

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

2023

2022
Assets

(Unaudited)

(Audited)
Cash and cash equivalents

$
65,471

$
58,242
Investment securities




Available-for-sale, at fair value

677,454

717,324
Held-to-maturity, at carrying value (allowance for credit losses on investments of $218 June 30, 2023)

308,416

321,902
Loans held for sale

20,893

9,488
Loans

2,533,522

2,443,994
Allowance for credit losses on loans

(35,696)

(31,146)
Net loans

2,497,826

2,412,848
Land, premises and equipment, net

17,488

17,288
Operating lease right-of-use assets

6,440

5,419
Accrued interest receivable

13,587

12,869
Bank-owned life insurance

32,793

33,991
Goodwill

47,087

47,087
Other intangible assets

19,806

22,455
Servicing rights

2,351

2,643
Deferred income taxes, net

43,709

42,369
Other assets

79,657

75,712
Total assets

$
3,832,978

$
3,779,637
Liabilities and Stockholders’ Equity




Deposits




Noninterest-bearing

$
715,534

$
860,987
Interest-bearing

2,137,321

2,054,497
Total deposits

2,852,855

2,915,484
Short-term borrowings

492,060

378,080
Long-term debt

58,900

58,843
Operating lease liabilities

6,746

5,902
Accrued expenses and other liabilities

64,732

64,456
Total liabilities

3,475,293

3,422,765
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: 19,914,884 and 19,991,681 issued and outstanding

19,915

19,992
Additional paid-in capital

152,673

155,095
Retained earnings

285,839

280,426
Accumulated other comprehensive income (loss)

(100,742)

(98,641)
Total stockholders’ equity

357,685

356,872
Total liabilities and stockholders’ equity

$
3,832,978

$
3,779,637


	March 31,		December 31,
(dollars in thousands, except share and per share data)	2024		2023
Assets	(Unaudited)		(Unaudited)
Cash and cash equivalents	$	545,772	$	129,893
Investment securities
Trading		4,553		—
Available-for-sale, at fair value (amortized cost of $573,733 and $584,754, respectively)		472,272		486,736
Held-to-maturity, at amortized cost (fair value of $249,807 and $258,617, respectively, with an allowance for credit losses on investments of $207 and $213, respectively)		291,932		299,515
Loans held for sale		10,625		11,497
Loans		2,799,475		2,759,583
Allowance for credit losses on loans		(36,584)		(35,843)
Net loans		2,762,891		2,723,740
Land, premises and equipment, net		18,162		17,940
Operating lease right-of-use assets		5,112		5,436
Accrued interest receivable		16,149		15,700
Bank-owned life insurance		33,396		33,236
Goodwill		46,783		46,783
Other intangible assets, net		15,834		17,158
Servicing rights		1,983		2,052
Deferred income taxes, net		34,796		34,595
Other assets		77,833		83,432
Total assets	$	4,338,093	$	3,907,713
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	692,500	$	728,082
Interest-bearing		2,592,469		2,367,529
Total deposits		3,284,969		3,095,611
Short-term borrowings		555,000		314,170
Long-term debt		58,985		58,956
Operating lease liabilities		5,420		5,751
Accrued expenses and other liabilities		62,084		64,098
Total liabilities		3,966,458		3,538,586
Commitments and contingencies (Note 11)
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: 19,776,786 and 19,734,077 issued and outstanding		19,777		19,734
Additional paid-in capital		150,740		150,343
Retained earnings		275,374		272,705
Accumulated other comprehensive income (loss)		(74,256)		(73,655)
Total stockholders’ equity		371,635		369,127
Total liabilities and stockholders’ equity	$	4,338,093	$	3,907,713

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)	2023		2022		2023		2022		2024		2023
Interest Income
Loans, including fees	$	33,267	$	17,988	$	64,200	$	35,280	$	39,294	$	30,933
Investment securities
Taxable		6,125		6,068		12,076		11,508		4,568		5,951
Exempt from federal income taxes		186		213		376		429		174		190
Other		762		157		1,497		273		5,002		735
Total interest income		40,340		24,426		78,149		47,490		49,038		37,809
Interest Expense
Deposits		12,678		813		21,782		1,642		20,152		9,104
Short-term borrowings		4,763		278		9,156		278		5,989		4,393
Long-term debt		665		559		1,319		1,121		678		654
Total interest expense		18,106		1,650		32,257		3,041		26,819		14,151
Net interest income		22,234		22,776		45,892		44,449		22,219		23,658
Provision for credit losses		—		—		550		—		—		550
Net interest income after provision for credit losses		22,234		22,776		45,342		44,449		22,219		23,108
Noninterest Income
Retirement and benefit services		15,890		16,293		31,372		33,939		15,655		15,482
Wealth management		5,449		5,548		10,644		10,874		6,118		5,194
Mortgage banking		2,905		6,038		4,622		10,969		1,670		1,717
Service charges on deposit accounts		311		412		612		775		389		301
Other		1,223		935		3,781		2,139		1,491		2,559
Total noninterest income		25,778		29,226		51,031		58,696		25,323		25,253
Noninterest Expense
Compensation		18,847		21,248		38,005		40,299		19,332		19,158
Employee taxes and benefits		4,724		5,787		10,577		11,949		6,188		5,853
Occupancy and equipment expense		1,837		1,737		3,736		3,788		1,906		1,899
Business services, software and technology expense		5,269		4,785		10,593		9,709		5,345		5,324
Intangible amortization expense		1,324		1,053		2,648		2,106		1,324		1,324
Professional fees and assessments		1,530		2,246		2,682		3,787		1,993		1,152
Marketing and business development		648		814		1,334		1,414		685		686
Supplies and postage		406		572		866		1,218		528		460
Travel		306		356		554		535		292		248
Mortgage and lending expenses		215		482		712		1,168		441		497
Other		1,267		904		2,535		2,082		985		1,268
Total noninterest expense		36,373		39,984		74,242		78,055		39,019		37,869
Income before income taxes		11,639		12,018		22,131		25,090		8,523		10,492
Income tax expense		2,535		2,725		4,841		5,613		2,091		2,306
Net income	$	9,104	$	9,293	$	17,290	$	19,477	$	6,432	$	8,186
Per Common Share Data
Basic earnings per common share	$	0.45	$	0.53	$	0.86	$	1.11	$	0.32	$	0.41

Diluted earnings per common share	$	0.45	$	0.52	$	0.85	$	1.10	$	0.32	$	0.40
Dividends declared per common share	$	0.19	$	0.18	$	0.37	$	0.34	$	0.19	$	0.18
Average common shares outstanding		20,033		17,297		20,030		17,271		19,739		20,028
Diluted average common shares outstanding		20,241		17,532		20,243		17,517		19,986		20,246

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)	2023		2022		2023		2022		2024		2023
Net Income	$	9,104	$	9,293	$	17,290	$	19,477	$	6,432	$	8,186
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities		(9,636)		(37,394)		(4,708)		(88,119)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity		(84)		(97)		(171)		(199)
Net change in unrealized gain (losses) on derivatives		3,794		—		2,069		—
Net change in unrealized gains (losses) on debt securities										(3,517)		4,841
Net change in unrealized gain (losses) on cash flow hedging derivatives										684		—
Net change in unrealized gain (losses) on other derivatives										2,031		(1,725)
Total other comprehensive income (loss), before tax		(5,926)		(37,491)		(2,810)		(88,318)		(802)		3,116
Income tax expense (benefit) related to items of other comprehensive income (loss)		(1,491)		(9,410)		(709)		(22,168)		(201)		782
Other comprehensive income (loss), net of tax		(4,435)		(28,081)		(2,101)		(66,150)		(601)		2,334
Total comprehensive income (loss)	$	4,669	$	(18,788)	$	15,189	$	(46,673)	$	5,831	$	10,520

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, 2023

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars and shares in thousands)

Stock

Capital

Earnings

Income (Loss)

Total
Balance as of March 31, 2023

$
20,067

$
154,818

$
280,540

$
(96,307)

$
359,118
Net income

—

—

9,104

—

9,104
Other comprehensive income (loss)

—

—

—

(4,435)

(4,435)
Common stock repurchased

(170)

(2,783)

—

—

(2,953)
Common stock dividends

—

—

(3,805)

—

(3,805)
Share‑based compensation expense

18

638

—

—

656
Vesting of restricted stock

—

—

—

—

—
Balance as of June 30, 2023

$
19,915

$
152,673

$
285,839

$
(100,742)

$
357,685

Six months ended June 30, 2023

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Total
Balance as of December 31, 2022

$
19,992

$
155,095

$
280,426

$
(98,641)

$
356,872
Cumulative effect of change in accounting principles, net of tax

—

—

(4,452)

—

(4,452)
Balance as of January 1, 2023

19,992

155,095

275,974

(98,641)

352,420
Net income

—

—

17,290

—

17,290
Other comprehensive income (loss)

—

—

—

(2,101)

(2,101)
Common stock repurchased

(187)

(3,127)

—

—

(3,314)
Common stock dividends

—

—

(7,425)

—

(7,425)
Share‑based compensation expense

18

797

—

—

815
Vesting of restricted stock

92

(92)

—

—

—
Balance as of June 30, 2023

$
19,915

$
152,673

$
285,839

$
(100,742)

$
357,685

Three months ended June 30, 2022

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars in thousands)

Stock

Capital

Earnings

Income (Loss)

Total
Balance as of March 31, 2022

$
17,289

$
92,573

$
260,967

$
(42,324)

$
328,505
Net income

—

—

9,293

—

9,293
Other comprehensive income (loss)

—

—

—

(28,081)

(28,081)
Common stock repurchased

(4)

(86)

—

—

(90)
Common stock dividends

—

—

(3,132)

—

(3,132)
Share‑based compensation expense

10

653

—

—

663
Vesting of restricted stock

11

(11)

—

—

—
Balance as of June 30, 2022

$
17,306

$
93,129

$
267,128

$
(70,405)

$
307,158

~~Table of Contents~~


	Six months ended June 30, 2022										Three months ended
							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
Balance as of December 31, 2021	$	17,213	$	92,878	$	253,567	$	(4,255)	$	359,403
(dollars and shares in thousands)											Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2022												19,992	$	155,095	$	280,426	$	(98,641)	$	356,872
Cumulative effect of change in accounting principles, net of tax												—		—		(4,452)		—		(4,452)
Balance as of January 1, 2023												19,992		155,095		275,974		(98,641)		352,420
Net income		—		—		19,477		—		19,477		—		—		8,186		—		8,186
Other comprehensive income (loss)		—		—		—		(66,150)		(66,150)		—		—		—		2,334		2,334
Common stock repurchased		(24)		(673)		—		—		(697)		(17)		(344)		—		—		(361)
Common stock dividends		—		—		(5,916)		—		(5,916)		—		—		(3,620)		—		(3,620)
Share‑based compensation expense		10		1,031		—		—		1,041		—		159		—		—		159
Vesting of restricted stock		107		(107)		—		—		—		92		(92)		—		—		—
Balance as of June 30, 2022	$	17,306	$	93,129	$	267,128	$	(70,405)	$	307,158
Balance as of March 31, 2023												20,067	$	154,818	$	280,540	$	(96,307)	$	359,118

Balance as of December 31, 2023												19,734	$	150,343	$	272,705	$	(73,655)	$	369,127
Net income												—		—		6,432		—		6,432
Other comprehensive income (loss)												—		—		—		(601)		(601)
Common stock repurchased												(7)		(146)		—		—		(153)
Common stock dividends												—		—		(3,763)		—		(3,763)
Share‑based compensation expense												—		593		—		—		593
Vesting of restricted stock												50		(50)		—		—		—
Balance as of March 31, 2024												19,777	$	150,740	$	275,374	$	(74,256)	$	371,635

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

June 30,
(dollars in thousands)

2023

2022
Operating Activities




Net income

$
17,290

$
19,477
Adjustments to reconcile net income to net cash provided (used) by operating activities




Deferred income taxes

857

968
Provision for credit losses

550

—
Depreciation and amortization

4,239

3,998
Amortization and accretion of premiums/discounts on investment securities

1,092

1,829
Amortization of operating lease right-of-use assets

1,571

(51)
Share‑based compensation expense

815

1,041
Originations on loans held for sale

(146,664)

(353,547)
Proceeds on loans held for sale

138,818

351,625
(Increase) in value of bank-owned life insurance

(434)

(408)
Realized loss (gain) on sale of fixed assets

(116)

—
Realized loss (gain) on derivative instruments

1,344

(215)
Realized loss (gain) on loans sold

(3,531)

(6,037)
Realized loss (gain) on sale of foreclosed assets

5

(11)
Realized loss (gain) on BOLI mortality

(1,196)

—
Realized loss (gain) on servicing rights

(25)

(441)
Net change in:

Accrued interest receivable

(718)

(618)
Other assets

1,414

(9,803)
Accrued expenses and other liabilities

(3,311)

9,924
Net cash provided (used) by operating activities

12,000

17,731
Investing Activities




Proceeds from maturities of investment securities available-for-sale

34,549

61,313
Purchases of investment securities available-for-sale

—

(95,600)
Proceeds from calls of investment securities held-to-maturity

126

726
Proceeds from maturities of investment securities held-to-maturity

12,492

18,588
Net (increase) decrease in loans

(89,295)

(132,503)
Net (increase) decrease in FHLB stock

(5,020)

(10,132)
Proceeds from BOLI mortality claim

2,828

—
Purchases of premises and equipment

(1,088)

(471)
Proceeds from sales of foreclosed assets

25

117
Net cash provided (used) by investing activities

(45,383)

(157,962)
Financing Activities




Net increase (decrease) in deposits

(62,629)

(301,001)
Net increase (decrease) in short-term borrowings

113,980

242,350
Repayments of long-term debt

—

(119)
Cash dividends paid on common stock

(7,425)

(5,570)
Repurchase of common stock

(3,314)

(697)
Net cash provided (used) by financing activities

40,612

(65,037)
Net change in cash and cash equivalents

7,229

(205,268)
Cash and cash equivalents at beginning of period

58,242

242,311
Cash and cash equivalents at end of period

$
65,471

$
37,043


	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Operating Activities
Net income	$	6,432	$	8,186
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		—		1,459
Provision for credit losses		—		550
Depreciation and amortization		2,100		2,130
Amortization and accretion of premiums/discounts on investment securities		424		527
Amortization of operating lease right-of-use assets		(8)		(43)
Share‑based compensation expense		593		159
Originations on loans held for sale		(53,129)		(56,347)
Proceeds on loans held for sale		55,362		50,381
(Increase) in value of bank-owned life insurance		(160)		(224)
Realized loss (gain) on derivative instruments		(678)		(253)
Realized loss (gain) on loans sold		(1,438)		(1,344)
Realized loss (gain) on sale of foreclosed assets		—		8
Realized loss (gain) on BOLI mortality		—		(1,196)
Realized loss (gain) on servicing rights		(20)		38
Net change in:
Accrued interest receivable		(449)		(114)
Other assets		(1,071)		2,052
Accrued expenses and other liabilities		4,031		(8,352)
Net cash provided (used) by operating activities		11,989		(2,383)
Investing Activities
Proceeds from sales of trading investment securities		5,502		—
Purchases of trading investment securities		(10,008)		—
Proceeds from maturities of investment securities available-for-sale		10,818		16,139
Proceeds from calls of investment securities held-to-maturity		251		126
Proceeds from maturities and paydowns of investment securities held-to-maturity		7,043		7,578
Net (increase) decrease in loans		(40,223)		(42,801)
Net (increase) decrease in FHLB stock		5,075		(225)
Proceeds from BOLI mortality claim		—		2,828
Purchases of premises and equipment		(881)		(923)
Proceeds from sales of foreclosed assets		34		22
Net cash provided (used) by investing activities		(22,389)		(17,256)
Financing Activities
Net increase (decrease) in deposits		189,358		116,494
Net increase (decrease) in short-term borrowings		240,830		(5,935)
Repayments of long-term debt		1		—
Cash dividends paid on common stock		(3,757)		(3,620)
Repurchase of common stock		(153)		(361)
Net cash provided (used) by financing activities		426,279		106,578
Net change in cash and cash equivalents		415,879		86,939
Cash and cash equivalents at beginning of period		129,893		58,242
Cash and cash equivalents at end of period	$	545,772	$	145,181

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

Six months ended

June 30,
Supplemental Cash Flow Disclosures

2023

2022
Cash paid for:




Interest

$
31,723

$
3,913
Income taxes

3,720

4,677
Supplemental Disclosures of Noncash Investing and Financing Activities




Loan collateral transferred to foreclosed assets

—

81
Right-of-use assets obtained in exchange for new operating lease liabilities

2,286

—


	Three months ended
	March 31,
	2024		2023
Supplemental Cash Flow Disclosures
Interest paid	$	22,339	$	15,167
Income taxes paid		1		—
Cash dividends declared, not paid		3,763		3,620
Supplemental Disclosures of Noncash Investing and Financing Activities
Loan collateral transferred to foreclosed assets		(5)		—
Right-of-use assets obtained in exchange for new operating lease liabilities, net		108		257
Change in fair value hedges presented within residential real estate loans and other assets		268		—

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 four distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.

Basis of Presentation

The accompanying unaudited consolidated interim financial statements and notes thereto of the Company have been prepared in accordance with ~~the rules~~instructions for Form 10-Q and, ~~regulations of the Securities and Exchange Commission, or SEC, and conform to practices within the banking industry and~~therefore, do not include all ~~of the information and~~ disclosures required by accounting principles generally accepted ~~accounting principles~~ in the United States of America, or GAAP, for ~~interim~~complete presentation of financial ~~reporting. The accompanying unaudited~~statements. In the opinion of management, the consolidated financial statements ~~reflect~~contain all adjustments (consisting only of normal recurring ~~adjustments) that are~~accruals) necessary ~~for a fair presentation~~to present fairly the consolidated balance sheets of ~~financial results~~Alerus Financial Corporation, or the Company, as of March 31, 2024 and December 31, 2023, the consolidated statements of income for the ~~interim periods presented.~~three months ended March 31, 2024 and 2023, consolidated statements of comprehensive income (loss) for the three months ended March 31, 2024 and 2023, the consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2024 and 2023, and the consolidated statements of cash flows for the three months ended March 31, 2024 and 2023.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s principal operating subsidiary is the Bank. 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. 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, ~~2022,~~2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~13, 2023.~~8, 2024.

~~Principles of Consolidation~~

~~The accompanying unaudited consolidated financial statements include the accounts of the Company and its 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 as 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 credit losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

~~Table of Contents~~

~~Reclassifications~~

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

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 of 2002, or 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~~stockholder 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 U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.235 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. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile. The last year the Company qualifies as an emerging growth company is 2024.

Table of Contents

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.

~~Allowance for credit losses~~

~~Investment securities available-for-sale.~~ For available-for-sale investment securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in fair value below the amortized cost basis, or impairment, is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses, or ACL, related to investment securities available-for-sale on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available-for-sale investment security or is required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating available-for-sale securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

~~Accrued interest receivable is excluded from the estimate of credit losses.~~

~~Investment securities held-to-maturity.~~ Management measures expected credit losses on held-to-maturity investment securities on a collective basis by major security type. The Company evaluates held-to-maturity investment securities by credit rating and an external study, updated annually, that includes historical information such as

~~Table of Contents~~

~~probability of default and loss going back several years. Accrued interest receivable on held-to-maturity investment securities is excluded from the estimate of credit losses.~~

~~Loans held for investment.~~ Under the current expected credit loss, or CECL, accounting standard the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected.

The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premium, discount and net deferred fees or costs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made the policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the ACL through a charge to provision for credit losses when the Company deems all or a portion of the financial asset will be uncollectible; the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgement to determine when a financial asset is deemed uncollectible; however, generally, an asset will be considered uncollectible no later than when all efforts of collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.

Upon the adoption of the CECL accounting standard, the Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Upon the adoption of the CECL accounting standard, the ACL was determined for each pool and added to the pools’ carrying amount to establish a new amortized cost basis. Loans that do not share similar risk characteristics are evaluated on an individual basis.

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current loan-specific risk characteristics such as different underwriting standards, portfolio mix, delinquency level, or life of the loan, as well as changes in environmental conditions, levels of economic activity, unemployment rates, property values and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical loss information.

Ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration and other forecasts.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. The ACL on individually evaluated loans is recognized on the basis of the present value of expected future cash flows discounted at the effective interest rate, the fair value of collateral adjusted of estimated costs to sell, or observable market price as of the relevant date.

~~Reserve for off-balance sheet credit exposures.~~ In estimating expected credit losses for off-balance sheet credit exposures, the Company is required to estimate expected credit losses over the contractual period in which it is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. To be considered unconditionally cancellable for accounting purposes, the Company must have the ability to, at any time, with or without cause, refuse to extend credit under the commitment. Off-balance sheet credit exposure segments share the same risk characteristics as portfolio loans. The Company incorporates a probability of funding and utilizes the ACL loss rates to calculate the reserve. The reserve for off-balance sheet credit exposure is carried on the balance sheet in accrued expenses and other liabilities rather than as a component of the allowance. The reserve for off-balance sheet credit exposure is adjusted as a provision for off-balance sheet credit exposure reported as a component of the provision for credit loss expense in the accompanying unaudited Consolidated Statements of Income.

~~Table of Contents~~

NOTE 2 Recent Accounting Pronouncements

The following Financial Accounting Standards Board, or FASB, Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, ~~2023,~~2024, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of ~~June 30, 2023.~~March 31, 2024.

Adopted Pronouncements

OnThere have been no new ASUs adopted by the Company since January 1, 2024.

Pronouncements Not Yet Effective

In November 2023, the ~~Company adopted~~FASB issued guidance within ASU ~~No. 2016-13, Financial Instruments – Credit Losses~~2023-07, Segment Reporting (Topic ~~326): Measurement of Credit Losses on Financial Instruments.~~280). The ~~measurement of expected credit losses under~~amendments in this update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures related to significant segment expenses. The amendments do not change how an entity identifies its operating segments, aggregates those operating segments, or applies the ~~CECL accounting standard is applicable~~quantitative thresholds to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees,determine its reportable segments, and all existing segment disclosure requirements in ASC 280 and other ~~similar agreements). In addition, ASC 326 made changes~~Codification topics remain unchanged. The amendments in this update are incremental and require public entities that report segment information to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the ~~accounting~~chief operating decision maker and included within each reported measure of segment profit or loss as well as other segment items. Annual disclosure of the title and position of the chief operating decision maker and how the reported measures of segment profit or loss are used to assess performance and allocation of resources is also required.

The amendments in this update are effective for ~~held-to-maturity debt securities. One such change~~fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and are applied on a retrospective basis. The Company is currently evaluating the impact these amendments will have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to ~~require credit losses~~Income Tax Disclosures. The amendments in this ASU related to the rate reconciliation and income taxes paid disclosures, to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction disclosures. The amendments allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. The other amendments in this ASU improve the effectiveness and comparability of disclosures by adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be ~~presented as an allowance, rather than as a write-down.~~

~~The Company adopted ASC 326 using~~consistent with U.S. Securities and Exchange Commission (“SEC”) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the ~~modified retrospective method~~amendments in this ASU are effective for ~~all financial assets measured at amortized cost, off-balance sheet credit exposures, and held-to-maturity securities. Results for reporting~~annual periods beginning after December ~~31, 2022, are presented under ASC 326, while prior period amounts continue to~~15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this ASU should be ~~reported in accordance with previously applicable GAAP. The Company recorded~~applied on a ~~net decrease to retained earnings of $4.5 million as of January 1, 2023, for the cumulative effect of adopting ASC 326.~~

~~The Company adopted ASC 326 using the~~ prospective transition approach for financial assets purchased with credit deterioration previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether purchased credit impaired, or PCI, assets met the criteria of purchased credit deteriorated, or PCD, assets as of the date of adoption.

~~The following table illustrates the impact of ASC 326:~~basis. Retrospective application is also permitted.

January 1, 2023

As reported

Pre-tax impact of
(dollars in thousands)

under

Pre-ASC 326

ASC 326
Assets:

ASC 326

Adoption

Adoption
Investments

Held-to-maturity

Obligations of state and political agencies

$
110

$
—

$
110
Mortgage backed securities

Residential agency

62

—

62
Total allowance for held-to-maturity investment securities

172

—

172
Loans

Commercial

Commercial and industrial

8,296

9,158

(862)
Real estate construction

3,964

1,446

2,518
Commercial real estate

12,264

12,688

(424)
Total commercial

24,524

23,292

1,232
Consumer

Residential real estate first mortgage

7,849

5,769

2,080
Residential real estate junior lien

1,222

1,289

(67)
Other revolving and installment

424

528

(104)
Total consumer

9,495

7,586

1,909
Unallocated

984

268

716
Total allowance for loans

35,003

31,146

3,857
Allowance for credit losses on loans and investments securities

$
35,175

$
31,146

$
4,029
Liabilities:

Allowance for credit losses on unfunded commitments

$
5,159

$
3,244

$
1,915

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Table of Contents

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method, which clarifies the guidance on fair value hedge accounting of interest rate risk portfolios of financial assets. ASU 2022-01 updates guidance in Topic 815, to expand the scope of the current last-of-layer method to allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments on a prospective basis. Additionally, ASU 2022-01 clarifies that basis adjustments related to existing portfolio layer hedge relationships should not be considered when measuring credit losses on the financial assets included in the closed portfolio. Further, ASU 2022-01 clarifies that any reversal of fair value hedge basis adjustments associated with an actual breach should be recognized in interest income immediately. ASU 2022-01 was effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2022-01 effective January 1, 2023, and entered into a fair value hedge agreement on February 10, 2023 and adopted the portfolio layer method of accounting for this transaction. This adoption had no impact on our consolidated financial statements as the Company did not have any hedged assets using the last-of-layer hedge accounting method.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for Troubled Debt Restructurings, or TDRs, by creditors in Subtopic 310-40. Receivables – Troubled Debt Restructurings by Creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. For public business entities, this amendment also has vintage disclosures that require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20 Financial Instruments – Credit Losses – Measured at Amortized Cost. For entities that had not yet adopted the amendment in ASU 2016-13, the effective date for the amendments in this update are same as the effective date for ASU 2016-13. The Company adopted this ASU on January 1, 2023, and had no loans experience financial difficulty in the current period.

NOTE 3 Investment Securities

Trading securities are reported on the Company’s consolidated balance sheet at fair value. As of March 31, 2024, the fair value of the Company’s trading securities was $4.6 million. There were no trading securities as of December 31, 2023. Changes in fair value of trading securities are recorded in other noninterest income on the Company’s consolidated statements of income. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company’s deferred compensation plan for eligible employees, executives, and directors.

The following tables present amortized cost, gross unrealized gains and losses, allowance for credit losses, or ACL, and fair value of the available-for-sale, or AFS, investment securities and the amortized cost, gross unrealized gains and losses and fair value of held-to-maturity, or HTM, securities as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30, 2023										March 31, 2024
	Amortized		Unrealized		Unrealized		Allowance for		Fair		Amortized		Unrealized		Unrealized		Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value		Cost		Gains		Losses		Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	2,915	$	11	$	(20)	$	—	$	2,906	$	839	$	2	$	(3)	$	—	$	838
Mortgage backed securities
Residential agency		673,586		1		(115,131)		—		558,456		513,409		—		(92,516)		—		420,893
Commercial		68,379		—		(7,470)		—		60,909		1,471		—		(120)		—		1,351
Asset backed securities		28		—		—		—		28		23		—		(1)		—		22
Corporate bonds		69,497		—		(14,342)		—		55,155		57,991		—		(8,823)		—		49,168
Total available-for-sale investment securities		814,405		12		(136,963)		—		677,454		573,733		2		(101,463)		—		472,272
Held-to-maturity
Obligations of state and political agencies		131,016		—		(15,447)		115		115,569		124,971		—		(12,985)		110		111,986
Mortgage backed securities
Residential agency		177,618		—		(32,477)		103		145,141		167,168		—		(29,347)		97		137,821
Total held-to-maturity investment securities		308,634		—		(47,924)		218		260,710		292,139		—		(42,332)		207		249,807
Total investment securities	$	1,123,039	$	12	$	(184,887)	$	218	$	938,164	$	865,872	$	2	$	(143,795)	$	207	$	722,079


	December 31, 2023
	Amortized		Unrealized		Unrealized		Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	1,119	$	4	$	(3)		—	$	1,120
Mortgage backed securities
Residential agency		524,140		1		(88,547)		—		435,594
Commercial		1,476		—		(123)		—		1,353
Asset backed securities		26		—		(1)		—		25
Corporate bonds		57,993		—		(9,349)		—		48,644
Total available-for-sale investment securities		584,754		5		(98,023)		—		486,736
Held-to-maturity
Obligations of state and political agencies		129,603		—		(12,613)		114		116,990
Mortgage backed securities
Residential agency		170,125		—		(28,498)		99		141,627
Total held-to-maturity investment securities		299,728		—		(41,111)		213		258,617
Total investment securities	$	884,482	$	5	$	(139,134)	$	213	$	745,353

129

Table of Contents

The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of March 31, 2024, represent a credit loss impairment. As of March 31, 2024 and December 31, 2023, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions; however, all bonds had an investment grade rating as of March 31, 2024 and December 31, 2023. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

The ACL on HTM debt securities is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Using a probability of default and loss on given default analysis, the ACL on HTM debt securities was $207 thousand and $213 thousand as of March 31, 2024 and December 31, 2023, respectively.

Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of March 31, 2024, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.6 million and $1.0 million, respectively. As of December 31, 2023, the accrued interest receivable on available-for-sale investment securities and held-to-maturity investment securities totaled $1.5 million and $1.4 million, respectively.

The Company had no sales or calls of AFS investment securities for the three months ended March 31, 2024 and 2023.

The Company had no sales of HTM investment securities for the three months ended March 31, 2024 and 2023.

The following table presents investment securities with gross unrealized losses, for which an ACL has not been recorded at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:


		March 31, 2024
		Less than 12 Months				Over 12 Months				Total
	Number of	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Holdings	Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	1	$	(3)	$	454	$	—	$	—	$	(3)	$	454
Mortgage backed securities
Residential agency	111		—		35		(92,516)		420,815		(92,516)		420,850
Commercial	1		—		—		(120)		1,351		(120)		1,351
Asset backed securities	3		—		—		(1)		22		(1)		22
Corporate bonds	12		—		—		(8,823)		49,168		(8,823)		49,168
Total available-for-sale investment securities	128	$	(3)	$	489	$	(101,460)	$	471,356	$	(101,463)	$	471,845

Table of Contents

December 31, 2022

Amortized

Unrealized

Unrealized

Allowance for

Fair
(dollars in thousands)

Cost

Gains

Losses

Credit Losses

Value
Available-for-sale

U.S. Treasury and agencies

$
3,518

$
19

$
(17)

N/A

$
3,520
Mortgage backed securities




Residential agency

705,845

2

(118,168)

N/A

587,679
Commercial

70,669

—

(7,111)

N/A

63,558
Asset backed securities

34

—

—

N/A

34
Corporate bonds

69,501

—

(6,968)

N/A

62,533
Total available-for-sale investment securities

849,567

21

(132,264)

N/A

717,324
Held-to-maturity

Obligations of state and political agencies

137,787

—

(17,736)

N/A

120,051
Mortgage backed securities

Residential agency

184,115

—

(33,254)

N/A

150,861
Total held-to-maturity investment securities

321,902

—

(50,990)

��
N/A

270,912
Total investment securities

$
1,171,469

$
21

$
(183,254)

N/A

$
988,236

The adequacy of the allowance for credit losses on investment securities is assessed at the end of each quarter. The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position as of June 30, 2023, represent a credit loss impairment. As of June 30, 2023, and December 31, 2022, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.


		December 31, 2023
		Less than 12 Months				Over 12 Months				Total
	Number of	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Holdings	Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	1	$	(3)	$	489	$	—	$	—	$	(3)	$	489
Mortgage backed securities
Residential agency	112		—		43		(88,547)		435,505		(88,547)		435,548
Commercial	1		—		—		(123)		1,353		(123)		1,353
Asset backed securities	3		—		—		(1)		25		(1)		25
Corporate bonds	12		—		—		(9,349)		48,644		(9,349)		48,644
Total available-for-sale investment securities	129	$	(3)	$	532	$	(98,020)	$	485,527	$	(98,023)	$	486,059

The ~~allowance~~Company determined that the expected credit loss on its HTM portfolio was $207 thousand and $213 thousand as of March 31, 2024, and December 31, 2023, respectively. The change in the ACL on HTM debt securities was due to a change in the provision for credit losses, ~~on held-to-maturity~~with no charge-offs or recoveries for the three months ended March 31, 2024.

As of March 31, 2024 and December 31, 2023, none of the Company’s HTM debt securities ~~is estimated using relevant information, from internal~~were past due or on nonaccrual status. The Company did not recognize any interest income on nonaccrual HTM debt securities during the three months ended March 31, 2024 and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Using a probability of default and loss on given default analysis an allowance for credit losses was established in the amount of $218 thousand as of June 30, 2023.

Accrued interest receivable on available-for-sale investment securities and held-to-maturity investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of June 30, 2023 the accrued interest receivable on available-for-sale investment securities and held-to-maturity investment securities totaled $2.0 million and $1.4 million, respectively. As of December 31, 2022, the accrued interest receivable on available-for-sale investment securities and held-to-maturity investment securities totaled $1.9 million and $1.5 million, respectively.

~~The following table presents investment securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded as of June 30, 2023:~~

June 30, 2023

Less than 12 Months

Over 12 Months

Total

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair
(dollars in thousands)

Losses

Value

Losses

Value

Losses

Value
Available-for-sale

U.S. Treasury and agencies

$
(20)

$
420

$
—

$
—

$
(20)

$
420
Mortgage backed securities












Residential agency

(76)

2,148

(115,055)

556,258

(115,131)

558,406
Commercial

(32)

570

(7,438)

60,339

(7,470)

60,909
Asset backed securities

—

27

—

1

—

28
Corporate bonds

(867)

7,109

(13,475)

48,046

(14,342)

55,155
Total available-for-sale investment securities

$
(995)

$
10,274

$
(135,968)

$
664,644

$
(136,963)

$
674,918

~~Table of Contents~~

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 December 31, 2022, were as follows:

December 31, 2022

Less than 12 Months

Over 12 Months

Total

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair
(dollars in thousands)

Losses

Value

Losses

Value

Losses

Value
Available-for-sale

U.S. Treasury and agencies

$
(17)

$
509

$
—

$
—

$
(17)

$
509
Mortgage backed securities












Residential agency

(10,457)

79,693

(107,711)

507,418

(118,168)

587,111
Commercial

(4,835)

50,437

(2,276)

13,120

(7,111)

63,557
Asset backed securities

—

32

—

2

—

34
Corporate bonds

(4,452)

48,048

(2,516)

14,484

(6,968)

62,532
Total available-for-sale investment securities

(19,761)

178,719

(112,503)

535,024

(132,264)

713,743
Held-to-maturity

Obligations of state and political agencies

(3,336)

18,788

(14,400)

98,762

(17,736)

117,550
Mortgage backed securities

Residential agency

—

—

(33,254)

150,861

(33,254)

150,861
Total held-to-maturity investment securities

(3,336)

18,788

(47,654)

249,623

(50,990)

268,411
Total investment securities

$
(23,097)

$
197,507

$
(160,157)

$
784,647

$
(183,254)

$
982,154

Unrealized losses on available-for-sale investments securities have not been recognized into income because the issuers’ bonds are of high credit quality. Furthermore, the Company does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The issuers continue to make timely principal and interest payments on their bonds. The Company expects that it could see a continued increase in unrealized losses if the Federal Reserve continues to raise interest rates.

The following table presents amortized cost and fair value of ~~available-for-sale~~AFS investment securities and the carrying value and fair value of ~~held-to-maturity~~HTM investment securities as of ~~June 30, 2023,~~March 31, 2024, 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	$	6,098	$	5,946	$	—	$	—	$	8,161	$	7,974	$	—	$	—
Due after one year through five years		44,352		40,512		17,461		16,096		47,376		43,614		473		470
Due after five years through ten years		67,751		58,000		78,734		63,524		57,248		49,662		59,467		50,524
Due after 10 years		12,815		11,111		44,624		39,378		12,186		10,736		384		385
		131,016		115,569		140,819		118,998		124,971		111,986		60,324		51,379
Mortgage-backed securities
Residential agency		177,618		145,141		673,586		558,456		167,168		137,821		513,409		420,893
Total investment securities	$	308,634	$	260,710	$	814,405	$	677,454	$	292,139	$	249,807	$	573,733	$	472,272

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 ~~$388.0~~$559.1 million and ~~$260.7~~$250.0 million were pledged as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively, to secure public deposits and for other purposes required or permitted by law.

~~Table of Contents~~

~~The company had no sales or calls of available-for-sale investment securities, for the three and six months ended June 30, 2023 and 2022~~

~~Proceeds from the call of held-to-maturity investment securities, for the three and six months ended June 30, 2023 and 2022, are displayed in the table below:~~

Three months ended

Six months ended

June 30,

June 30,
(dollars in thousands)

2023

2022

2023

2022
Proceeds

$
—

$
211

$
126

$
726
Realized gains

—

—

—

—
Realized losses

—

—

—

—

As of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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)	2023		2022		2024		2023
Federal Reserve	$	4,623	$	4,595	$	4,623	$	4,623
FHLB		24,382		19,362		11,491		16,566

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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.

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, 2023,~~March 31, 2024, the conversion ratio was ~~1.5902.~~1.5875. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares ~~(11,010~~(10,992 Class A equivalents) that the Company owned as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, were carried at a zero cost basis.

NOTE 4 Loans and Allowance for Credit Losses

The following table presents total loans outstanding, by portfolio segment, as of March 31, 2024 and December 31, 2023:


	March 31,		December 31,
(dollars in thousands)	2024		2023
Commercial
Commercial and industrial	$	611,695	$	598,321
Real estate construction		125,966		124,034
Commercial real estate		1,152,948		1,126,912
Total commercial		1,890,609		1,849,267
Consumer
Residential real estate first mortgage		722,151		726,879
Residential real estate junior lien		156,882		154,134
Other revolving and installment		29,833		29,303
Total consumer		908,866		910,316
Total loans	$	2,799,475	$	2,759,583

Total loans included net deferred loan fees and costs of $46 thousand and $248 thousand at March 31, 2024 and December 31, 2023, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $4.7 million and $5.1 million as of March 31, 2024 and December 31, 2023, respectively.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $12.3 million at March 31, 2024 and $12.2 million at December 31, 2023.

The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends early, implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company monitors and manages credit risk through the following governance structure:

●

The Credit Risk team, Collection and Special Assets team and the Credit Governance Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking, oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system.

1512

Table of Contents

●

The Loan Committee is responsible for reviewing and approving all credit requests that exceed individual limits that have not been countersigned by an individual with sufficient assigned authority. This committee has full authority to commit the Bank to any request that fits within its assigned approval authority.

●

The adequacy of the ACL is overseen by the ACL Governance Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking. The ACL Governance Committee supports the oversight efforts of the Board of Directors.

●

The Board of Directors has approval authority and responsibility for all matters regarding loan policy, reviews all loans approved or declined by the Loan Committee, approves lending authority and monitors asset quality and concentration levels.

●

The ACL Governance Committee and Bank Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.

Loans with a carrying value of $1.6 billion as of March 31, 2024 and December 31, 2023, were pledged to secure public deposits, and for other purposes required or permitted by law.

ACL on Loans

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for credit losses on loans for the three months ended March 31, 2024 and 2023:


	Three months ended March 31, 2024
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Credit Losses⁽¹⁾		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,894	$	122	$	(164)	$	123	$	9,975
Real estate construction		6,111		(189)		—		—		5,922
Commercial real estate		11,897		834		(29)		11		12,713
Total commercial		27,902		767		(193)		134		28,610
Consumer
Residential real estate first mortgage		6,578		63		—		—		6,641
Residential real estate junior lien		1,151		(3)		—		—		1,148
Other revolving and installment		212		(28)		(12)		13		185
Total consumer		7,941		32		(12)		13		7,974
Total	$	35,843	$	799	$	(205)	$	147	$	36,584

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of ($793) thousand related to off-balance sheet credit exposure and $(6) thousand related to investment securities held-to-maturity.

Table of Contents


	Three months ended March 31, 2023
	Beginning		Adoption		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		of ASC 326		Credit Losses⁽¹⁾		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,233	$	(707)	$	(395)	$	(175)	$	56	$	8,012
Real estate construction		1,437		2,549		439		—		—		4,425
Commercial real estate		12,761		(131)		35		—		11		12,676
Total commercial		23,431		1,711		79		(175)		67		25,113
Consumer
Residential real estate first mortgage		5,858		2,269		187		—		2		8,316
Residential real estate junior lien		1,317		(27)		121		(77)		6		1,340
Other revolving and installment		540		(96)		(118)		(5)		12		333
Total consumer		7,715		2,146		190		(82)		20		9,989
Unallocated		—		—		—		—		—		—
Total	$	31,146	$	3,857	$	269	$	(257)	$	87	$	35,102

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $230 thousand related to off-balance sheet credit exposure and $51 thousand related to investment securities held-to-maturity.

~~NOTE 4 Loans and Allowance for Credit Losses~~

The ~~following table presents~~ACL on loans at March 31, 2024, was $36.6 million, an increase of $0.7 million, or 2.1%, since December 31, 2023. The increase was primarily due to a combined ACL increase of $1.0 million provision for credit losses in commercial and industrial and commercial real estate loans. This increase was primarily due to recent downgrades in the related loan pools.

Credit Concentrations

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes and state and county codes. Property type coding is used for investment real estate. As of March 31, 2024, the Company’s total ~~loans outstanding, by~~exposure to the general business industry and owner occupied real estate was 11.3% and 10.2%, respectively, of total loans. There were no other industry concentrations exceeding 10% of the Company's total loan portfolio ~~segment,~~ as of ~~June 30, 2023 and December~~March 31, ~~2022:~~2024.

June 30,

December 31,
(dollars in thousands)

2023

2022
Commercial

Commercial and industrial

$
551,860

$
583,876
Real estate construction

78,428

97,810
Commercial real estate

1,003,821

881,670
Total commercial

1,634,109

1,563,356
Consumer




Residential real estate first mortgage

707,630

679,551
Residential real estate junior lien

157,231

150,479
Other revolving and installment

34,552

50,608
Total consumer

899,413

880,638
Total loans

$
2,533,522

$
2,443,994

Total loans included net deferred loan fees and costs of $0.8 million and $0.9 million at June 30, 2023 and December 31, 2022, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $6.2 million as of June 30, 2023.

~~Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $9.8 million at both June 30, 2023 and December 31, 2022.~~

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.

~~The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of June 30, 2023 and December 31, 2022:~~

June 30, 2023

90 Days

Accruing

30 - 89 Days

or More

Total
(dollars in thousands)

Current

Past Due

Past Due

Nonaccrual

Loans
Commercial










Commercial and industrial

$
542,769

$
8,710

$
—

$
381

$
551,860
Real estate construction

78,277

—

—

151

78,428
Commercial real estate

1,002,925

—

—

896

1,003,821
Total commercial

1,623,971

8,710

—

1,428

1,634,109
Consumer










Residential real estate first mortgage

704,957

2,027

347

299

707,630
Residential real estate junior lien

156,626

105

—

500

157,231
Other revolving and installment

34,400

146

—

6

34,552
Total consumer

895,983

2,278

347

805

899,413
Total loans

$
2,519,954

$
10,988

$
347

$
2,233

$
2,533,522

~~Table of Contents~~

December 31, 2022

90 Days

Accruing

30 - 89 Days

or More

Total
(dollars in thousands)

Current

Past Due

Past Due

Nonaccrual

Loans
Commercial










Commercial and industrial

$
580,288

$
2,426

$
—

$
1,162

$
583,876
Real estate construction

97,370

—

—

440

97,810
Commercial real estate

879,830

368

—

1,472

881,670
Total commercial

1,557,488

2,794

—

3,074

1,563,356
Consumer










Residential real estate first mortgage

677,471

1,545

—

535

679,551
Residential real estate junior lien

149,918

377

—

184

150,479
Other revolving and installment

50,360

247

—

1

50,608
Total consumer

877,749

2,169

—

720

880,638
Total loans

$
2,435,237

$
4,963

$
—

$
3,794

$
2,443,994

In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following table presents the amortized cost basis on nonaccrual status loans and loans 90 days or more past due and still accruing as of June 30, 2023:

As of June 30, 2023

Nonaccrual

90 Days

with no Allowance

or More
(dollars in thousands)

for Credit Losses

Nonaccrual

Past Due
Commercial

Commercial and industrial

$
119

$
381

$
—
Real estate construction

151

151

—
Commercial real estate

—

896

—
Total commercial

270

1,428

—
Consumer

Residential real estate first mortgage

293

299

347
Residential real estate junior lien

500

500

—
Other revolving and installment

—

6

—
Total consumer

793

805

347
Total loans

$
1,063

$
2,233

$
347

Loans with a carrying value of $1.6 billion as of June 30, 2023 and $1.5 billion as of December 31, 2022, were pledged to secure public deposits, and for other purposes required or permitted by law.

A loan for which the terms have been modified resulting in a concession represents a loan experiencing financial difficulty. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During the three and six months ended June 30, 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.Credit Quality Indicators

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. These loans are rated as either performing or nonperforming.

The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and 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,

~~Table of Contents~~

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.

~~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 following table sets forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of June 30, 2023:~~

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Table of Contents

Revolving

(dollars in thousands)

Term Loans Amortized Cost Basis by Origination Year

Loans Amortized

As of June 30, 2023

2023

2022

2021

2020

2019

Prior

Cost Basis

Total
Commercial and industrial















Pass

$
72,021

$
124,487

$
81,827

$
72,874

$
40,610

$
24,848

$
102,467

$
519,134
Substandard

—

5,223

415

8,463

186

823

17,616

32,726
Subtotal

72,021

129,710

82,242

81,337

40,796

25,671

120,083

551,860
Real estate construction

Pass

6,263

37,948

19,315

4,440

9,150

1,006

306

78,428
Substandard

—

—

—

—

—

—

—

—
Subtotal

6,263

37,948

19,315

4,440

9,150

1,006

306

78,428
Commercial real estate

Pass

105,650

278,338

150,233

160,601

110,705

176,802

14,685

997,014
Substandard

—

—

886

—

4,096

1,825

—

6,807
Subtotal

105,650

278,338

151,119

160,601

114,801

178,627

14,685

1,003,821
Residential real estate first mortgage

Pass

40,090

202,056

226,785

111,801

34,894

91,680

216

707,522
Substandard

—

—

—

—

—

108

—

108
Subtotal

40,090

202,056

226,785

111,801

34,894

91,788

216

707,630
Residential real estate junior lien

Pass

13,552

17,683

6,751

4,936

1,947

6,939

105,066

156,874
Substandard

—

—

—

—

—

357

—

357
Subtotal

13,552

17,683

6,751

4,936

1,947

7,296

105,066

157,231
Other revolving and installment

Pass

4,090

9,031

1,467

6,071

2,506

2,037

9,350

34,552
Substandard

—

—

—

—

—

—

—

—
Subtotal

4,090

9,031

1,467

6,071

2,506

2,037

9,350

34,552
Total Loans

Pass

241,666

669,543

486,378

360,723

199,812

303,312

232,090

2,493,524
Substandard

—

5,223

1,301

8,463

4,282

3,113

17,616

39,998
Total loans

$
241,666

$
674,766

$
487,679

$
369,186

$
204,094

$
306,425

$
249,706

$
2,533,522

●

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.

●

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 following table sets forth the risk category of loans by class of loans and credit quality indicator used on the most recent analysis performed as of December 31, 2022:~~

December 31, 2022

Criticized

Special

(dollars in thousands)

Pass

Mention

Substandard

Doubtful

Total
Commercial










Commercial and industrial

$
558,694

$
21,969

$
3,213

$
—

$
583,876
Real estate construction

97,548

—

262

—

97,810
Commercial real estate

873,270

—

8,400

—

881,670
Total commercial

1,529,512

21,969

11,875

—

1,563,356
Consumer










Residential real estate first mortgage

678,743

63

745

—

679,551
Residential real estate junior lien

149,847

—

632

—

150,479
Other revolving and installment

50,607

—

1

—

50,608
Total consumer

879,197

63

1,378

—

880,638
Total loans

$
2,408,709

$
22,032

$
13,253

$
—

$
2,443,994

The adequacy of the allowance for credit losses on loans is assessed at the end of each quarter. The allowance for credit losses is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast of each loan segment. Historical experience is used to infer probability of default and loss given the reasonable and supportable forecast period. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate.

~~Table of Contents~~

~~The following tables present, by loan portfolio segment, a summary of the changes in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022:~~

Three months ended June 30, 2023

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Credit Losses⁽¹⁾

Charge-offs

Recoveries

Balance
Commercial










Commercial and industrial

$
7,800

$
(340)

$
(85)

$
438

$
7,813
Real estate construction

4,406

(760)

—

—

3,646
Commercial real estate

12,344

609

—

12

12,965
Total commercial

24,550

(491)

(85)

450

24,424
Consumer










Residential real estate first mortgage

8,060

(159)

—

—

7,901
Residential real estate junior lien

1,277

28

—

46

1,351
Other revolving and installment

314

(13)

(23)

15

293
Total consumer

9,651

(144)

(23)

61

9,545
Unallocated

901

826

—

—

1,727
Total

$
35,102

$
191

$
(108)

$
511

$
35,696

~~(1)~~

The difference in the credit loss expense reported herein compared to the Consolidated Statements of Income is associated with the credit loss expense reversal of $186 thousand related to off-balance sheet credit exposures and $5 thousand related to investment securities held-to-maturity.

Six months ended June 30, 2023

Beginning

Adoption

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

of ASC 326

Credit Losses⁽¹⁾

Charge-offs

Recoveries

Balance
Commercial

Commercial and industrial

$
9,158

$
(862)

$
(717)

$
(260)

$
494

$
7,813
Real estate construction

1,446

2,518

(318)

—

—

3,646
Commercial real estate

12,688

(424)

678

—

23

12,965
Total commercial

23,292

1,232

(357)

(260)

517

24,424
Consumer

Residential real estate first mortgage

5,769

2,080

50

—

2

7,901
Residential real estate junior lien

1,289

(67)

154

(77)

52

1,351
Other revolving and installment

528

(104)

(130)

(28)

27

293
Total consumer

7,586

1,909

74

(105)

81

9,545
Unallocated

268

716

743

—

—

1,727
Total

$
31,146

$
3,857

$
460

$
(365)

$
598

$
35,696

~~(1)~~

The difference in the credit loss expense reported herein compared to the Consolidated Statements of Income is associated with the credit loss expense of $44 thousand related to off-balance sheet credit exposures and $46 thousand related to investment securities held-to-maturity.

Three months ended June 30, 2022

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial

Commercial and industrial

$
9,795

$
1,085

$
(637)

$
90

$
10,333
Real estate construction

810

68

—

—

878
Commercial real estate

11,946

(1,123)

—

11

10,834
Total commercial

22,551

30

(637)

101

22,045
Consumer







Residential real estate first mortgage

6,661

(486)

—

—

6,175
Residential real estate junior lien

1,400

(134)

—

201

1,467
Other revolving and installment

644

(5)

(37)

32

634
Total consumer

8,705

(625)

(37)

233

8,276
Unallocated

457

595

—

—

1,052
Total

$
31,713

$
—

$
(674)

$
334

$
31,373

2015

Table of Contents

Six months ended June 30, 2022

Beginning

Provision for

Loan

Loan

Ending
(dollars in thousands)

Balance

Loan Losses

Charge-offs

Recoveries

Balance
Commercial










Commercial and industrial

$
8,925

$
1,856

$
(664)

$
216

$
10,333
Real estate construction

783

95

—

—

878
Commercial real estate

12,376

(1,564)

—

22

10,834
Total commercial

22,084

387

(664)

238

22,045
Consumer








Residential real estate first mortgage

6,532

(357)

—

—

6,175
Residential real estate junior lien

1,295

(42)

—

214

1,467
Other revolving and installment

481

140

(55)

68

634
Total consumer

8,308

(259)

(55)

282

8,276
Unallocated

1,180

(128)

—

—

1,052
Total

$
31,572

$
—

$
(719)

$
520

$
31,373

~~The following table presents, by loan portfolio segment, a summary of charge-offs, by vintage, for the six months ended June 30, 2023:~~

Gross Charge-offs for six months ended June 30, 2023
(dollars in thousands)

2023

2022

2021

2020

2019

Prior

Total
Commercial

Commercial and industrial

$
39

$
—

$
25

$
9

$
187

$
—

$
260
Real estate construction

—

—

—

—

—

—

—
Commercial real estate

—

—

—

—

—

—

—
Total commercial

39

—

25

9

187

—

260
Consumer

Residential real estate first mortgage

—

—

—

—

—

—

—
Residential real estate junior lien

—

—

—

—

—

77

77
Other revolving and installment

—

2

—

21

4

1

28
Total consumer

—

2

—

21

4

78

105
Total loans

$
39

$
2

$
25

$
30

$
191

$
78

$
365

The following tables ~~present~~set forth the amortized cost ~~and related allowance for credit losses on~~basis of loans by ~~portfolio segment,~~credit quality indicator and vintage based on the most recent analysis performed, as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30, 2023
	Amortized Cost						Allowance for Credit Losses on Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for																Revolving
(dollars in thousands)	Impairment		Impairment		Total		Impairment		Impairment		Total		Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
Commercial
As of March 31, 2024													2024		2023		2022		2021		2020		Prior		Cost Basis		Total
Commercial and industrial	$	381	$	551,479	$	551,860	$	78	$	7,735	$	7,813
Pass													$	41,962	$	183,564	$	82,980	$	56,800	$	60,343	$	48,218	$	95,175	$	569,042
Special mention														—		553		—		7,810		—		14		1,878		10,255
Substandard														—		446		4,960		1,543		5,487		2,976		16,986		32,398
Doubtful														—		—		—		—		—		—		—		—
Subtotal													$	41,962	$	184,563	$	87,940	$	66,153	$	65,830	$	51,208	$	114,039	$	611,695
Gross charge-offs for the period ended													$	—	$	—	$	—	$	—	$	—	$	164	$	—	$	164
Real estate construction		—		78,428		78,428		—		3,646		3,646
Pass													$	1,851	$	26,751	$	70,126	$	5,154	$	100	$	929	$	—	$	104,911
Special mention														—		—		—		—		—		—		—		—
Substandard														—		—		21,055		—		—		—		—		21,055
Doubtful														—		—		—		—		—		—		—		—
Subtotal													$	1,851	$	26,751	$	91,181	$	5,154	$	100	$	929	$	—	$	125,966
Gross charge-offs for the period ended													$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		886		1,002,935		1,003,821		572		12,393		12,965
Total commercial		1,267		1,632,842		1,634,109		650		23,774		24,424
Consumer
Pass													$	29,459	$	272,847	$	262,017	$	140,221	$	139,105	$	267,003	$	7,854	$	1,118,506
Special mention														—		—		—		—		12,957		1,972		—		14,929
Substandard														—		6,020		2,261		5,187		—		5,397		648		19,513
Doubtful														—		—		—		—		—		—		—		—
Subtotal													$	29,459	$	278,867	$	264,278	$	145,408	$	152,062	$	274,372	$	8,502	$	1,152,948
Gross charge-offs for the period ended													$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29
Residential real estate first mortgage		299		707,331		707,630		5		7,896		7,901
Performing													$	5,538	$	71,933	$	199,111	$	216,774	$	106,562	$	116,181	$	751	$	716,850
Nonperforming														—		—		4,361		7		12		921		—		5,301
Subtotal													$	5,538	$	71,933	$	203,472	$	216,781	$	106,574	$	117,102	$	751	$	722,151
Gross charge-offs for the period ended													$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate junior lien		500		156,731		157,231		—		1,351		1,351
Performing													$	2,059	$	17,642	$	15,169	$	5,872	$	4,528	$	6,394	$	102,630	$	154,294
Nonperforming														244		—		—		111		—		317		1,916		2,588
Subtotal													$	2,303	$	17,642	$	15,169	$	5,983	$	4,528	$	6,711	$	104,546	$	156,882
Gross charge-offs for the period ended													$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other revolving and installment		6		34,546		34,552		6		287		293
Total consumer		805		898,608		899,413		11		9,534		9,545
Unallocated		—		—		—		—		—		1,727
Performing													$	880	$	4,633	$	5,786	$	828	$	3,449	$	1,747	$	12,509	$	29,832
Nonperforming														—		—		—		—		—		1		—		1
Subtotal													$	880	$	4,633	$	5,786	$	828	$	3,449	$	1,748	$	12,509	$	29,833
Gross charge-offs for the period ended													$	—	$	—	$	3	$	—	$	—	$	9	$	—	$	12
Total loans	$	2,072	$	2,531,450	$	2,533,522	$	661	$	33,308	$	35,696	$	81,993	$	584,389	$	667,826	$	440,307	$	332,543	$	452,070	$	240,347	$	2,799,475
Gross charge-offs for the period ended													$	—	$	—	$	3	$	—	$	—	$	202	$	—	$	205

2116

Table of Contents

December 31, 2022

Recorded Investment

Allowance for Loan Losses

Individually

Collectively

Individually

Collectively

(dollars in thousands)

Evaluated

Evaluated

Total

Evaluated

Evaluated

Total
Commercial







Commercial and industrial

$
1,313

$
582,563

$
583,876

$
275

$
8,883

$
9,158
Real estate construction

262

97,548

97,810

97

1,349

1,446
Commercial real estate

1,472

880,198

881,670

582

12,106

12,688
Total commercial

3,047

1,560,309

1,563,356

954

22,338

23,292
Consumer







Residential real estate first mortgage

535

679,016

679,551

—

5,769

5,769
Residential real estate junior lien

184

150,295

150,479

—

1,289

1,289
Other revolving and installment

1

50,607

50,608

—

528

528
Total consumer

720

879,918

880,638

—

7,586

7,586
Unallocated

—

—

—

—

—

268
Total loans

$
3,767

$
2,440,227

$
2,443,994

$
954

$
29,924

$
31,146

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of June 30, 2023:

As of June 30, 2023

Primary Type of Collateral

Allowance for
(dollars in thousands)

Real estate

Equipment

Other

Total

Credit Losses
Commercial

Commercial and industrial

$
—

$
188

$
—

$
188

$
68
Commercial real estate

—

—

—

—

—
Total commercial

—

188

—

188

68
Consumer

Residential real estate first mortgage

299

—

—

299

5
Residential real estate junior lien

500

—

—

500

—
Other revolving and installment

—

—

6

6

6
Total consumer

799

—

6

805

11
Total loans

$
799

$
188

$
6

$
993

$
79

~~Table of Contents~~

~~Pre-ASC 326 Adoption impaired loan disclosures~~

~~The table below summarizes key information on impaired loans as of December 31, 2022:~~


													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	197,533	$	89,090	$	67,691	$	64,272	$	34,603	$	15,053	$	100,239	$	568,481
Special mention		—		—		—		—		—		—		—		—
Substandard		464		4,844		236		6,328		94		2,513		15,361		29,840
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	197,997	$	93,934	$	67,927	$	70,600	$	34,697	$	17,566	$	115,600	$	598,321
Gross charge-offs for the period ended	$	39	$	—	$	49	$	11	$	247	$	90	$	—	$	436
Real estate construction
Pass	$	29,902	$	57,944	$	14,326	$	122	$	—	$	952	$	121	$	103,367
Special mention		—		—		—		—		—		—		—		—
Substandard		—		20,667		—		—		—		—		—		20,667
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	29,902	$	78,611	$	14,326	$	122	$	—	$	952	$	121	$	124,034
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Pass	$	272,261	$	265,549	$	142,027	$	153,796	$	116,861	$	159,454	$	7,794	$	1,117,742
Special mention		—		—		—		—		—		262		—		262
Substandard		—		587		2,872		—		3,690		1,759		—		8,908
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	272,261	$	266,136	$	144,899	$	153,796	$	120,551	$	161,475	$	7,794	$	1,126,912
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate first mortgage
Performing	$	72,180	$	207,177	$	218,719	$	108,100	$	33,102	$	87,212	$	284	$	726,774
Nonperforming		—		—		—		—		—		105		—		105
Subtotal	$	72,180	$	207,177	$	218,719	$	108,100	$	33,102	$	87,317	$	284	$	726,879
Gross charge-offs for the period ended	$	—	$	—	$	9	$	—	$	—	$	40	$	—	$	49
Residential real estate junior lien
Performing	$	18,408	$	15,655	$	5,946	$	4,857	$	1,769	$	5,280	$	100,438	$	152,353
Nonperforming		—		—		—		—		—		—		1,781		1,781
Subtotal	$	18,408	$	15,655	$	5,946	$	4,857	$	1,769	$	5,280	$	102,219	$	154,134
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	77	$	—	$	77
Other revolving and installment
Performing	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Nonperforming		—		—		—		—		—		—		—		—
Subtotal	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Gross charge-offs for the period ended	$	4	$	2	$	—	$	31	$	6	$	8	$	—	$	51
Total loans	$	596,068	$	667,908	$	452,797	$	341,964	$	191,673	$	273,542	$	235,631	$	2,759,583
Gross charge-offs for the period ended	$	43	$	2	$	58	$	42	$	253	$	215	$	—	$	613

December 31, 2022

Recorded

Unpaid

Related
(dollars in thousands)

Investment

Principal

Allowance
Impaired loans with a valuation allowance

Commercial and industrial

$
675

$
711

$
275
Real estate construction

262

440

97
Commercial real estate

896

900

582
Residential real estate first mortgage

—

—

—
Total impaired loans with a valuation allowance

1,833

2,051

954
Impaired loans without a valuation allowance






Commercial and industrial

638

767

—
Real estate construction

—

—

—
Commercial real estate

576

660

—
Residential real estate first mortgage

535

573

—
Residential real estate junior lien

184

218

—
Other revolving and installment

1

1

—
Total impaired loans without a valuation allowance

1,934

2,219

—
Total impaired loans






Commercial and industrial

1,313

1,478

275
Real estate construction

262

440

97
Commercial real estate

1,472

1,560

582
Residential real estate first mortgage

535

573

—
Residential real estate junior lien

184

218

—
Other revolving and installment

1

1

—
Total impaired loans

$
3,767

$
4,270

$
954

Past Due and Nonaccrual Loans

The Company closely monitors the performance of its loan portfolio. A loan is placed on nonaccrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on nonaccrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on nonaccrual status. All previously accrued and unpaid interest is reversed at that time. A loan will return to accrual when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months.

2317

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The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of March 31, 2024 and December 31, 2023:


	March 31, 2024
							90 Days
	Accruing		30 - 59 Days		60 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	605,573	$	593	$	43	$	—	$	5,486	$	611,695
Real estate construction		125,966		—		—		—		—		125,966
Commercial real estate		1,151,672		474		—		—		802		1,152,948
Total commercial		1,883,211		1,067		43		—		6,288		1,890,609
Consumer
Residential real estate first mortgage		717,046		4,478		—		—		627		722,151
Residential real estate junior lien		155,919		509		25		—		429		156,882
Other revolving and installment		29,735		64		33		—		1		29,833
Total consumer		902,700		5,051		58		—		1,057		908,866
Total loans	$	2,785,911	$	6,118	$	101	$	—	$	7,345	$	2,799,475


	December 31, 2023
							90 Days
	Accruing		30 - 59 Days		60 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	590,663	$	924	$	—	$	139	$	6,595	$	598,321
Real estate construction		124,034		—		—		—		—		124,034
Commercial real estate		1,125,669		128		—		—		1,115		1,126,912
Total commercial		1,840,366		1,052		—		139		7,710		1,849,267
Consumer
Residential real estate first mortgage		724,786		901		554		—		638		726,879
Residential real estate junior lien		153,220		666		—		—		248		154,134
Other revolving and installment		29,086		170		47		—		—		29,303
Total consumer		907,092		1,737		601		—		886		910,316
Total loans	$	2,747,458	$	2,789	$	601	$	139	$	8,596	$	2,759,583

In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following table ~~below~~ presents the ~~average recorded investment in impaired~~amortized cost basis on nonaccrual status loans and ~~interest income for the three~~loans 90 days or more past due and ~~six months ended June 30, 2022:~~still accruing as of March 31, 2024 and December 31, 2023:

Three months ended June 30,

2022

Average

Recorded

Interest
(dollars in thousands)

Investment

Income
Impaired loans with a valuation allowance

Commercial and industrial

$
1,018

$
2
Commercial real estate

176

2
Other revolving and installment

75

—
Total impaired loans with a valuation allowance

1,269

4
Impaired loans without a valuation allowance

Commercial and industrial

761

—
Commercial real estate

629

—
Residential real estate first mortgage

1,962

—
Residential real estate junior lien

196

—
Other revolving and installment

—

—
Total impaired loans without a valuation allowance

3,548

—
Total impaired loans

Commercial and industrial

1,779

2
Commercial real estate

805

2
Residential real estate first mortgage

1,962

—
Residential real estate junior lien

196

—
Other revolving and installment

75

—
Total impaired loans

$
4,817

$
4

Six Months Ended June 30,

2022

Average

Recorded

Interest
(dollars in thousands)

Investment

Income
Impaired loans with a valuation allowance




Commercial and industrial

$
1,156

$
6
Commercial real estate

177

3
Other revolving and installment

157

—
Total impaired loans with a valuation allowance

1,490

9
Impaired loans without a valuation allowance




Commercial and industrial

761

—
Commercial real estate

629

—
Residential real estate first mortgage

1,953

—
Residential real estate junior lien

198

—
Total impaired loans without a valuation allowance

3,541

—
Total impaired loans




Commercial and industrial

1,917

6
Commercial real estate

806

3
Residential real estate first mortgage

1,953

—
Residential real estate junior lien

198

—
Other revolving and installment

157

—
Total impaired loans

$
5,031

$
9


	As of March 31, 2024
					90 Days
	Nonaccrual				or More
	with no Allowance				Past Due
(dollars in thousands)	for Credit Losses		Nonaccrual		and Accruing
Commercial
Commercial and industrial	$	69	$	5,486	$	—
Real estate construction		—		—		—
Commercial real estate		95		802		—
Total commercial		164		6,288		—
Consumer
Residential real estate first mortgage		621		627		—
Residential real estate junior lien		429		429		—
Other revolving and installment		—		1		—
Total consumer		1,050		1,057		—
Total loans	$	1,214	$	7,345	$	—

2418

Table of Contents


	December 31, 2023
					90 Days
	Nonaccrual				or More
	with no Allowance				Past Due
(dollars in thousands)	for Credit Losses		Nonaccrual		and Accruing
Commercial
Commercial and industrial	$	79	$	6,595	$	139
Real estate construction		—		—		—
Commercial real estate		95		1,115		—
Total commercial		174		7,710		139
Consumer
Residential real estate first mortgage		632		638		—
Residential real estate junior lien		185		248		—
Other revolving and installment		—		—		—
Total consumer		817		886		—
Total loans	$	991	$	8,596	$	139

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended March 31, 2024 and 2023, is estimated to have been $651 thousand and $38 thousand, respectively.

The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual status. As a result, the Company did not record any interest income on its nonaccrual loans for the three months ended March 31, 2024 and 2023. At March 31, 2024 and December 31, 2023, total accrued interest receivable on loans, which had been excluded from reported amortized cost basis on loans, was $12.3 million and $12.2 million, respectively, and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

In cases where a borrower experiences financial difficulty, the Company may make certain concessions for which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During the three months ended March 31, 2024 and 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.

The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of March 31, 2024 and December 31, 2023:


	As of March 31, 2024
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	5,070	$	—	$	—	$	5,070	$	2,280
Commercial real estate		515		—		40		555		366
Total commercial		5,585		—		40		5,625		2,646
Consumer
Residential real estate first mortgage		627		—		—		627		3
Residential real estate junior lien		429		—		1		430		—
Total consumer		1,056		—		1		1,057		3
Total loans	$	6,641	$	—	$	41	$	6,682	$	2,649

Table of Contents


	As of December 31, 2023
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	6,124	$	—	$	—	$	6,124	$	2,384
Real estate construction		—		—		—		—		—
Commercial real estate		695		—		96		791		601
Total commercial		6,819		—		96		6,915		2,985
Consumer
Residential real estate first mortgage		638		—		—		638		3
Residential real estate junior lien		134		22		93		249		6
Other revolving and installment		—		—		—		—		—
Total consumer		772		22		93		887		9
Total loans	$	7,591	$	22	$	189	$	7,802	$	2,994

Collateral dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.

NOTE 5 Goodwill and Other Intangible Assets

The following table summarizes the carrying amount of goodwill, by segment, as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2023		2022		2024		2023
Banking	$	35,260	$	35,260	$	35,260	$	35,260
Retirement and benefit services		11,827		11,827		11,523		11,523
Total goodwill	$	47,087	$	47,087	$	46,783	$	46,783

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 no goodwill impairment as of ~~June 30, 2023.~~March 31, 2024.

The gross carrying amount and accumulated amortization for each type of identifiable intangible asset, as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, were as follows:


	June 30, 2023						December 31, 2022						March 31, 2024						December 31, 2023
(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	$	41,423	$	(27,944)	$	13,479	$	41,423	$	(25,927)	$	15,496	$	41,423	$	(30,967)	$	10,456	$	41,423	$	(29,959)	$	11,464
Core deposit intangible assets		7,592		(1,265)		6,327		7,592		(633)		6,959		7,592		(2,214)		5,378		7,592		(1,898)		5,694
Total intangible assets	$	49,015	$	(29,209)	$	19,806	$	49,015	$	(26,560)	$	22,455	$	49,015	$	(33,181)	$	15,834	$	49,015	$	(31,857)	$	17,158

Amortization of intangible assets was $1.3 million ~~and $1.1 million~~ for both the three months ended ~~June 30, 2023~~March 31, 2024 and ~~2022. Amortization of intangible assets was $2.6 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively.~~2023.

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 ~~$367.8~~$185.7 million and ~~$357.2~~$190.0 million as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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, 2023 and 2022:~~

Three months ended

Six months ended

June 30,

June 30,
(dollars in thousands)

2023

2022

2023

2022
Balance, beginning of period

$
2,421

$
1,771

$
2,643

$
1,880
Additions

20

13

23

17
Amortization

(134)

(96)

(318)

(256)
Fair value adjustments

44

376

3

423
Balance, end of period

$
2,351

$
2,064

$
2,351

$
2,064

2520

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The following is a summary of key data and assumptions used in the valuation of servicing rights as of June 30, 2023 and December 31, 2022. Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements.

June 30,

December 31,

(dollars in thousands)

2023

2022

Fair value of servicing rights

$
2,351

$
2,643

Weighted-average remaining term, years

19.0

20.5

Prepayment speeds

6.1
%

6.9
%
Discount rate

11.0
%

10.5
%

The following table summarizes the Company’s activity related to servicing rights for the three months ended March 31, 2024 and 2023:


	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Servicing Assets:
Balance at beginning of year	$	2,052	$	2,643
Additions ⁽¹⁾		260		261
Amortization ⁽²⁾		(89)		(183)
Balance at end of year		2,223		2,721
Less valuation reserve ⁽³⁾		(240)		(300)
Balance at end of year, net of valuation reserve	$	1,983	$	2,421
Fair value, beginning of year	$	2,062	$	2,314
Fair value, end of year	$	2,083	$	2,236

(1)	Associated income was reported within mortgage banking income, net on the consolidated statements of income.

(2)	Associated amortization expense was reported within other noninterest income on the consolidated statements of income.

(3)	Associated valuation reserve was reported within mortgage and lending expenses on the consolidated statements of income.

The following is a summary of key data and assumptions used in the valuation of servicing rights as of March 31, 2024 and December 31, 2023. Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements.


	March 31,			December 31,
(dollars in thousands)	2024			2023
Fair value of servicing rights	$	2,083		$	2,062
Weighted-average remaining term, years		18.8			18.8
Prepayment speeds		6.2	%		6.2	%
Discount rate		11.1	%		11.1	%

NOTE 7 Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee are comprised of real property for offices and office equipment rentals with terms extending through ~~2032.~~2037. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases. The Company has no existing finance leases.

Table of Contents

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 as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


		June 30,		December 31,			March 31,		December 31,
(dollars in thousands)		2023		2022			2024		2023
Lease Right-of-Use Assets	Classification					Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	6,440	$	5,419	Operating lease right-of-use assets	$	5,112	$	5,436
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	6,746	$	5,902	Operating lease liabilities	$	5,420	$	5,751

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one 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. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.


	June 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Weighted-average remaining lease term, years
Operating leases	4.5		5.0		7.4		7.3
Weighted-average discount rate
Operating leases	3.6	%	3.1	%	3.8	%	3.9	%

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.

~~Table of Contents~~

The following table presents lease costs and other lease information for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022:~~2023:


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2023		2022		2023		2022		2024		2023
Lease costs
Operating lease cost	$	354	$	414	$	935	$	825	$	461	$	581
Variable lease cost		474		150		699		363		266		225
Short-term lease cost		39		43		82		88		36		43
Finance lease cost
Interest on lease liabilities		—		1		—		5		—		—
Amortization of right-of-use assets		—		29		—		58		—		—
Sublease income		(60)		(59)		(119)		(116)		(48)		(60)
Net lease cost	$	807	$	578	$	1,597	$	1,223	$	715	$	789
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	474	$	393	$	953	$	784	$	460	$	479
Right-of-use assets obtained in exchange for new operating lease liabilities		2,029		—		2,286		—		108		257

2722

Table of Contents

Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of ~~June 30, 2023~~March 31, 2024 were as follows:


	Operating		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
June 30, 2024	$	1,861
June 30, 2025		1,428
June 30, 2026		1,158
June 30, 2027		791
June 30, 2028		408
March 31, 2025			$	1,641
March 31, 2025				1,267
March 31, 2026				1,088
March 31, 2027				540
March 31, 2028				335
Thereafter		2,135		1,832
Total future minimum lease payments	$	7,781	$	6,703
Amounts representing interest		(1,035)		(1,283)
Total operating lease liabilities	$	6,746	$	5,420

NOTE 8 Deposits

The components of deposits in the consolidated balance sheets as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 were as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2023		2022		2024		2023
Noninterest-bearing	$	715,534	$	860,987	$	692,500	$	728,082
Interest-bearing
Interest-bearing demand		753,194		706,275		938,751		840,711
Savings accounts		93,557		99,882		82,727		82,485
Money market savings		986,403		1,035,981		1,114,262		1,032,771
Time deposits		304,167		212,359		456,729		411,562
Total interest-bearing		2,137,321		2,054,497		2,592,469		2,367,529
Total deposits	$	2,852,855	$	2,915,484	$	3,284,969	$	3,095,611

Certificates of deposit in excess of $250,000 totaled ~~$94.2~~$150.8 million and ~~$51.1~~$121.8 million at ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

NOTE 9 Short-Term Borrowings

Short-term borrowings at ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 consisted of the following:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2023		2022		2024		2023
Fed funds purchased	$	492,060	$	153,080	$	—	$	114,170
Bank Term Funding Program ⁽¹⁾						355,000		—
FHLB short-term advances		—		225,000		200,000		200,000
Total	$	492,060	$	378,080	$	555,000	$	314,170

(1)

In the first quarter of 2024, the Company borrowed $355.0 million from the Bank Term Funding Program, or BTFP, for a period of up to one year at a fixed rate of 4.88%. Under the program, the Company may prepay this borrowing at any time without penalty and the borrowing is secured by the Company’s pledged collateral of investment securities.

2823

Table of Contents

~~The following table presents information related to short-term borrowings for the three and six months ended June 30, 2023 and 2022:~~

Three months ended

June 30,

(dollars in thousands)

2023

2022

Fed funds purchased

Balance as of end of period

$
492,060

$
117,350

Average daily balance

360,033

81,506

Maximum month-end balance

492,060

117,350

Weighted-average rate

During period

5.31
%

1.18
%
End of period

5.35
%

1.44
%
FHLB short-term advances

Balance as of end of period

$
—

$
125,000

Average daily balance

—

9,615

Maximum month-end balance

—

125,000

Weighted-average rate

During period

N/A
%

1.59
%
End of period

N/A
%

1.80
%

Six months ended

June 30,

(dollars in thousands)

2023

2022

Fed funds purchased

Balance as of end of period

$
492,060

$
117,350

Average daily balance

325,303

40,978

Maximum month-end balance

492,060

117,350

Weighted-average rate

During period

5.10
%

1.18
%
End of period

5.35
%

1.44
%
FHLB short-term advances

Balance as of end of period

$
—

$
125,000

Average daily balance

39,779

4,834

Maximum month-end balance

225,000

125,000

Weighted-average rate

During period

4.69
%

1.59
%
End of period

N/A
%

1.80
%

NOTE 10 Long-Term Debt

Long-term debt as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 consisted of the following:


	June 30, 2023									March 31, 2024
						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		3,560	Three-month LIBOR + 3.10%	8.64	%	6/26/2033	6/26/2008		4,124		3,594	Three-month CME SOFR + 0.26% + 3.10%	8.67	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,340	Three-month LIBOR + 1.80%	7.35	%	9/15/2036	9/15/2011		6,186		5,391	Three-month CME SOFR + 0.26% + 1.80%	7.39	%	9/15/2036	9/15/2011
Total long-term debt	$	60,310	$	58,900						$	60,310	$	58,985

~~Table of Contents~~


	December 31, 2022									December 31, 2023
						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		3,537	Three-month LIBOR + 3.10%	7.82	%	6/26/2033	6/26/2008		4,124		3,583	Three-month CME SOFR + 0.26% + 3.10%	8.72	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,306	Three-month LIBOR + 1.80%	6.57	%	9/15/2036	9/15/2011		6,186		5,373	Three-month CME SOFR + 0.26% + 1.80%	7.45	%	9/15/2036	9/15/2011
Total long-term debt	$	60,310	$	58,843						$	60,310	$	58,956

NOTE 11 ~~Financial Instruments with Off-Balance Sheet Risk~~Commitments and Contingencies

Commitments

In the normal course of business, the Company has outstanding commitments 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 Company 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 Company uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively, was as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2023		2022		2024		2023
Commitments to extend credit	$	786,451	$	806,431	$	916,200	$	942,413
Standby letters of credit		9,784		13,089		12,755		10,045
Total	$	796,235	$	819,520	$	928,955	$	952,458

The Company ~~had~~establishes an ~~allowance for loan losses~~ACL on unfunded commitments, except those that are unconditionally cancellable by the Company. As of ~~$3.2 million as of~~March 31, 2024 and December 31, ~~2022. Upon~~2023, the ~~adoption of~~ACL on unfunded commitments was $6.6 million and $7.4 million, respectively. The ACL on unfunded commitments was presented within accrued expenses and other liabilities on the ~~CECL accounting standard, the Company recorded an additional $1.9 million reserve for unfunded commitments.~~consolidated balance sheet. For the ~~six~~three months ~~ending June 30,~~ended March 31, 2024 and 2023, the ~~Company recorded an additional $44 thousand in~~ provision (recovery) for credit losses on unfunded commitments ~~for a total~~was ($794) thousand and $230 thousand, respectively.

Table of ~~$5.1 million of allowance for credit losses on unfunded commitments as of June 30, 2023.~~Contents

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

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

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had no letters of credit outstanding with the FHLB as of ~~June 30, 2023~~March 31, 2024 or December 31, ~~2022.~~2023. With the Bank of North Dakota, the Company had ~~a no~~ letters of credit outstanding in the amount of $200.0 million and $182.0 million as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023, respectively. Letters of credit with the Bank of North Dakota were collateralized by loans pledged to the Bank of North Dakota in the amount of ~~$230.3~~$460.9 million and ~~$215.5~~$454.6 million as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

Legal Contingencies

In the normal course of business, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that, based on the information currently available, the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.

The Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed as of March 31, 2024 and December 31, 2023, respectively.

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NOTE 12 Share-Based Compensation

On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan ~~gives~~allows 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. Since inception, all awards issued under the plan have been restricted stock and restricted stock units. 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 ~~and~~that were not issued upon the settlement of the award. Restricted stock units issued do not participate in dividends and recipients are not entitled to vote these restricted stock units until shares of the Company’s common stock are delivered after vesting of the restricted stock units. 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. Awards issued to Company directors are not subject to any service requirements and vest immediately. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of ~~June 30, 2023, 810,277~~March 31, 2024, 716,917 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was ~~$656~~$593 thousand and ~~$663~~$159 thousand for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022. The compensation expense relating to awards under these plans was $815 thousand and $1.0 million for the six months ended June 30, 2023 and 2022,~~ respectively.

The following table presents the activity in the stock plans for the ~~six~~three months ended ~~June 30, 2023~~March 31, 2024 and ~~2022:~~2023:


	Six months ended June 30,						Three months ended March 31,
	2023			2022			2024			2023
		Weighted-			Weighted-			Weighted-			Weighted-
		Average Grant			Average Grant			Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value		Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period	238,929	$	23.66	260,850	$	21.04	231,657	$	22.96	238,929	$	23.66
Granted	82,810		20.85	94,592		19.01	60,976		21.83	82,810		20.85
Vested	(91,867)		21.29	(107,113)		19.19	(38,149)		26.05	(91,867)		21.29
Forfeited or cancelled	(22,204)		21.39	(10,624)		23.71	—		—	(22,204)		21.39
Outstanding at end of period	207,668	$	23.83	237,705	$	20.95	254,484	$	22.18	207,668	$	23.83

As of ~~June 30, 2023,~~March 31, 2024, there was ~~$3.0~~$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 ~~2.5~~2.4 years.

NOTE 13 Income Taxes

The components of income tax expense (benefit) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2024 and 2023 ~~and 2022~~ were as follows:


	Three months ended June 30,								Three months ended March 31,
	2023				2022				2024				2023
			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	$	2,444	21.0	%	$	2,524	21.0	%	$	1,790	21.0	%	$	2,203	21.0	%
Tax effect of:
Tax exempt income		(156)	(1.3)	%		(122)	(1.0)	%		(229)	(2.7)	%		(144)	(1.4)	%
State income taxes, net of federal benefits		485	4.1	%		531	4.4	%		413	4.8	%		461	4.4	%
Nondeductible items and other		(238)	(2.0)	%		(208)	(1.7)	%		117	1.4	%		(214)	(2.0)	%
Applicable income taxes	$	2,535	21.8	%	$	2,725	22.7	%	$	2,091	24.5	%	$	2,306	22.0	%

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Six months ended June 30,

2023

2022




Percent of




Percent of

(dollars in thousands)

Amount

Pretax Income


Amount

Pretax Income

Taxes at statutory federal income tax rate

$
4,648

21.0
%

$
5,269

21.0
%
Tax effect of:









Tax exempt income

(300)

(1.4)
%

(239)

(1.0)
%
State income taxes, net of federal benefits

946

4.3
%

1,109

4.4
%
Nondeductible items and other

(453)

(2.0)
%

(526)

(2.1)
%
Applicable income taxes

$
4,841

21.9
%

$
5,613

22.3
%

It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.

NOTE 14 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 credits as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


		June 30, 2023				December 31, 2022					March 31, 2024				December 31, 2023
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment			Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	Accounting Method									Accounting Method
Low income housing tax credit	Proportional amortization	$	17,906	$	15,202	$	17,906	$	15,559	Proportional amortization	$	17,906	$	7,466	$	17,906	$	12,347
Total		$	17,906	$	15,202	$	17,906	$	15,559		$	17,906	$	7,466	$	17,906	$	12,347

~~Table of Contents~~

The following table presents a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022:~~2023:


	Three months ended June 30,								Three months ended March 31,
	2023				2022				2024				2023
	Amortization		Tax Benefit		Amortization		Tax Benefit		Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)		Expense ⁽¹⁾		Recognized ⁽²⁾		Expense ⁽¹⁾		Recognized ⁽²⁾
Low income housing tax credit	$	278	$	(509)	$	111	$	(156)	$	432	$	(381)	$	360	$	(227)
Total	$	278	$	(509)	$	111	$	(156)	$	432	$	(381)	$	360	$	(227)

(1)	The amortization expense for low income housing tax credits were included in the income tax expense.

(2)	All of the tax benefits recognized were included in income tax expense.

Six months ended June 30,

2023

2022

Amortization

Tax Benefit

Amortization

Tax Benefit
(dollars in thousands)

Expense (1)

Recognized (2)

Expense (1)

Recognized (2)
Low income housing tax credit

$
639

$
(735)

$
111

$
(156)
Total

$
639

$
(735)

$
111

$
(156)

~~(1)~~

~~The amortization expense for low income housing tax credits were included in income tax expense.~~

~~(2)~~

~~All of the tax benefits recognized were included in income tax expense.~~

NOTE 15 Segment Reporting

Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The ~~Company determines reportable~~Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. Reportable segments are determined 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 currently operates through ~~four~~three operating segments: Banking, Retirement and Benefit Services, and Wealth ~~Management,~~Management. In prior periods, the Company had a fourth operating segment, Mortgage. As of January 1, 2024, the Mortgage division was fully integrated into the Banking division by the Company to reflect the way the Company currently manages and ~~Mortgage.~~views the business. The Company has restated all historical periods presented within these financial statements, and has not included the Mortgage operating segment.

The financial information presented for each segment includes net interest income, provision for credit losses, ~~direct~~ noninterest income, and direct and indirect noninterest ~~expense, before indirect allocations.~~expense. Corporate Administration includes ~~the indirect overhead~~all remaining income 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~~expenses not allocated to the ~~Company’s segments for the periods presented:~~three operating segments.

Three months ended June 30, 2023

Retirement and

Wealth

Corporate

(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income (loss)

$
22,681

$
—

$
—

$
218

$
(665)

$
22,234
Provision for credit losses

—

—

—

—

—

—
Noninterest income

1,336

15,890

5,449

2,905

198

25,778
Intercompany revenue (expense)

(2,933)

1,331

(257)

286

1,573

—
Noninterest expense

11,548

8,290

2,100

3,882

10,553

36,373
Net income (loss) before taxes

$
9,536

$
8,931

$
3,092

$
(473)

$
(9,447)

$
11,639

Six months ended June 30, 2023

Retirement and

Wealth

Corporate

(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income (loss)

$
46,832

$
—

$
—

$
380

$
(1,320)

$
45,892
Provision for credit losses

550

—

—

—

—

550
Noninterest income

4,158

31,372

10,644

4,622

235

51,031
Intercompany revenue (expense)

(5,980)

2,672

(425)

512

3,221

—
Noninterest expense

25,503

15,600

3,613

6,667

22,859

74,242
Net income (loss) before taxes

$
18,957

$
18,444

$
6,606

$
(1,153)

$
(20,723)

$
22,131

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Three months ended June 30, 2022

Retirement and

Wealth

Corporate

(dollars in thousands)

Banking

Benefit Services

Management

Mortgage

Administration

Consolidated
Net interest income (loss)

$
22,779

$
—

$
—

$
558

$
(561)

$
22,776
Provision for credit losses

—

—

—

—

—

—
Noninterest income

1,341

16,293

5,548

6,038

6

29,226
Intercompany revenue (expense)

(3,829)

1,095

(337)

1,334

1,737

Noninterest expense

11,790

7,693

1,293

6,543

12,665

39,984
Net income (loss) before taxes

$
8,501

$
9,695

$
3,918

$
1,387

$
(11,483)

$
12,018

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


	Six months ended June 30, 2022												Three months ended March 31, 2024
			Retirement and		Wealth				Corporate						Retirement and		Wealth		Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated		Banking		Benefit Services		Management		Administration		Consolidated
Net interest income (loss)	$	44,304	$	—	$	—	$	1,267	$	(1,122)	$	44,449	$	22,897	$	—	$	—	$	(678)	$	22,219
Provision for credit losses		—		—		—		—		—		—		—		—		—		—		—
Noninterest income		2,879		33,939		10,874		10,969		35		58,696
Intercompany revenue (expense)		(4,988)		692		(851)		1,828		3,319		—
Noninterest income (loss)														3,490		15,655		6,118		60		25,323
Noninterest expense		23,325		15,722		2,617		12,057		24,334		78,055		18,666		14,189		3,750		2,414		39,019
Net income (loss) before taxes	$	18,870	$	18,909	$	7,406	$	2,007	$	(22,102)	$	25,090	$	7,721	$	1,466	$	2,368	$	(3,032)	$	8,523
Total assets													$	4,262,600	$	33,636	$	4,787	$	37,070	$	4,338,093


	Three months ended March 31, 2023
			Retirement and		Wealth		Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Administration		Consolidated
Net interest income (loss)	$	24,312	$	—	$	—	$	(654)	$	23,658
Provision for credit losses		550		—		—		—		550
Noninterest income		4,539		15,482		5,194		38		25,253
Noninterest expense		18,650		13,595		3,362		2,262		37,869
Net income (loss) before taxes	$	9,651	$	1,887	$	1,832	$	(2,878)	$	10,492
Total assets	$	3,818,449	$	38,419	$	4,111	$	25,794	$	3,886,773

Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through fourteen 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; recordkeeping and ~~administration;~~administration services to other types of retirement plans; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, and COBRA recordkeeping and administration services. ~~In addition, the~~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.

~~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.~~

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NOTE 16 Earnings Per Share

The calculation of basic and diluted earnings per share using the two-class method for the three ~~and six~~ months ended ~~June 30,~~March 31, 2024 and 2023 ~~and 2022~~ 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)	2023		2022		2023		2022		2024		2023
Net income	$	9,104	$	9,293	$	17,290	$	19,477	$	6,432	$	8,186
Dividends and undistributed earnings allocated to participating securities		62		101		120		225		40		57
Net income available to common shareholders	$	9,042	$	9,192	$	17,170	$	19,252
Net income available to common stockholders									$	6,392	$	8,129
Weighted-average common shares outstanding for basic earnings per share		20,033		17,297		20,030		17,271		19,739		20,028
Dilutive effect of stock-based awards		208		235		213		246		247		218
Weighted-average common shares outstanding for diluted earnings per share		20,241		17,532		20,243		17,517		19,986		20,246
Earnings per common share:
Basic earnings per common share	$	0.45	$	0.53	$	0.86	$	1.11	$	0.32	$	0.41
Diluted earnings per common share	$	0.45	$	0.52	$	0.85	$	1.10	$	0.32	$	0.40

NOTE 17 Derivative Instruments

The ~~following table presents~~company uses a variety of derivative instruments to mitigate exposure to both market and credit risks inherent in its business activities. The Company manages these risks as part of its overall asset and liability management process and through its policies and procedures. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the ~~total~~other party based on a notional ~~amounts~~amount and ~~gross fair values~~an underlying as specified in the contract.

Derivatives are often measured in terms of notional amount, but this amount is generally not exchanged, and it is not recorded on the Company’s ~~derivatives~~consolidated balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate, security price, credit spread, or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as ~~of June 30, 2023 and December 31, 2022:~~

June 30, 2023

December 31, 2022

Fair

Notional

Fair

Notional
(dollars in thousands)



Value

Amount

Value

Amount
Designated as hedging instruments:

Consolidated Balance Sheet Location

Fair value hedges:

Interest rate swaps

Other assets

$
2,069

$
200,000

$
—

$
—
Total derivatives designated as hedging instruments

$
2,069

$
200,000

$
—

$
—
Not designated as hedging instruments:

Asset Derivatives








Interest rate swaps

Other assets

$
6,049

$
42,716

$
6,277

$
43,430
Interest rate lock commitments

Other assets

523

34,602

121

10,462
Forward loan sales commitments

Other assets

71

4,193

7

351
To-be-announced mortgage backed securities

Other assets

210

68,750

—

—
Total asset derivatives not designated as hedging instruments



$
6,853

$
150,261

$
6,405

$
54,243
Liability Derivatives










Interest rate swaps

Accrued expenses and other liabilities

$
6,049

$
42,716

$
6,277

$
43,430
To-be-announced mortgage backed securities

Accrued expenses and other liabilities

—

—

26

25,750
Total liability derivatives not designated as hedging instruments



$
6,049

$
42,716

$
6,303

$
69,180

derivative instruments.

Derivatives Designated as Hedging Instruments

The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under ~~GAAP~~GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s). As of March 31, 2024, the Company only uses fair value and cash flow hedges.

Fair value hedges: These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying mortgage-backed investment securities and mortgage loan pools. The interest rate swaps are carried on the Company’s Consolidated Balance Sheet at their fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). The changes in fair value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair value of the interest rate swaps due to changes in benchmark interest rates are recorded as an adjustment to the hedged instruments and offset in the same interest income line items.

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~~Fair value~~Cash flow hedges:~~Derivatives~~ These derivatives are ~~designated as fair value hedges~~interest rate swaps the Company uses to ~~limit~~hedge the ~~Company’s exposure to changes in the fair value~~variability of ~~assets or liabilities~~expected future cash flows due to ~~movements in~~market interest rates. During the first quarter of 2023, the Company entered into an interest rate swap, with an effective date of February 10, 2023. This transaction was designated a fair value hedge of certain mortgage-backed investment securities. The Company will pay the counterparty a fixed rate of 4.019% and will receive a floating rate based on the Secured Overnight Financing Rate. The fair value hedge has a maturity date of February 10, 2026.changes. The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). ~~The changes in the fair value of the interest rate swap are recorded in interest income. The unrealized gains or losses due to changes~~Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), or OCI, until the cash flows of the hedged ~~debt securities due~~items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to ~~changes~~be highly effective, the gain or loss in ~~benchmark interest rates are recorded as an adjustment~~OCI is amortized to earnings over the period the forecasted hedged ~~debt securities and offset in the same interest income line items.~~

~~The following table shows the carrying amount and associated cumulative basis adjustments related to the application of~~transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting ~~that~~ is ceased and any gain or loss included in OCI is reported in earnings immediately, unless the ~~carrying amount~~forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within accumulated other comprehensive income (loss), or AOCI. The Company estimates that an additional $0.4 million will be reclassified as a decrease to interest expense over the next 12 months. All cash flow hedges were highly effective for the three months ended March 31, 2024. As of March 31, 2024, the maximum length of time over which forecasted transactions are hedged ~~assets and liabilities in fair value hedging relationships at June 30, 2023:~~

June 30, 2023

Cumulative Fair

Value Hedging

Adjustment in the

Carrying Amount

Carrying Amount of

of Hedge Assets/

Hedged Assets/

Liabilities

Liabilities
(dollars in thousands)

Mortgage-backed securities

Residential agency

$
284,584

$
(2,073)
Total

$
284,584

$
(2,073)

is 12 months.

Derivatives Not Designated as Hedging Instruments

Interest rate swaps: The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.

Interest rate lock commitments, forward loan sales commitments and to be announced (TBA) mortgage backed securities: The Company enters into forward delivery contracts to sell mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments.

The ~~gain (loss) recognized on derivative instruments for~~following table presents the ~~three~~total notional amounts and ~~six months ended June 30, 2023~~gross fair values of the Company’s derivatives as of March 31, 2024 and ~~2022 was as follows:~~December 31, 2023:


	Derivative Assets					Derivative Liabilities
	Notional			Fair		Notional			Fair
(dollars in thousands)	Amount		Location	Value		Amount		Location	Value
March 31, 2024
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	600,000	Other Assets	$	1,938	$	600,000	Accrued expenses and other liabilities	$	—
Cash flow hedges:
Interest rate swaps		200,000	Other Assets		386		200,000	Accrued expenses and other liabilities		—
Total derivatives designated as hedging instruments	$	800,000		$	2,324	$	800,000		$	—
Not designated as hedging instruments:
Interest rate swaps ⁽¹⁾	$	120,304	Other Assets	$	6,294	$	120,304	Accrued expenses and other liabilities	$	6,294
Interest rate lock commitments		24,426	Other Assets		409		—	Accrued expenses and other liabilities		—
Forward loan sales commitments		—	Other Assets		—		—	Accrued expenses and other liabilities		—
To-be-announced mortgage backed securities		—	Other Assets		—		46,000	Accrued expenses and other liabilities		24
Total asset derivatives not designated as hedging instruments	$	144,730		$	6,703	$	166,304		$	6,318
December 31, 2023
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	600,000	Other Assets	$	—	$	600,000	Accrued expenses and other liabilities	$	352
Cash flow hedges:			Other Assets
Interest rate swaps		200,000	Other Assets		—		200,000	Accrued expenses and other liabilities		297
Total derivatives designated as hedging instruments	$	800,000		$	—	$	800,000		$	649
Not designated as hedging instruments:
Interest rate swaps ⁽¹⁾	$	120,671	Other Assets	$	8,327	$	120,671	Accrued expenses and other liabilities	$	8,348
Interest rate lock commitments		8,126	Other Assets		179		—	Accrued expenses and other liabilities		—
Forward loan sales commitments		190	Other Assets		6		—	Accrued expenses and other liabilities		—
To-be-announced mortgage backed securities		—			—		20,500	Accrued expenses and other liabilities		183
Total asset derivatives not designated as hedging instruments	$	128,987		$	8,512	$	141,171		$	8,531

(1)	Reported fair values include accrued interest receivable and payable.

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(dollars in thousands)

Three months ended June 30,

Six months ended June 30,
Derivatives designated as hedging instruments

Consolidated Statements of Income Location

2023

2022

2023

2022
Interest rate swaps

Interest income

$
—

$
—

$
—

$
—
Total gain (loss) from derivatives designated as hedging instruments

$
—

$
—

$
—

$
—
Derivatives not designated as hedging instruments

Interest rate swaps

Other noninterest income

$
—

$
1

$
—

$
1
Interest rate lock commitments

Mortgage banking

89

563

429

(147)
Forward loan sales commitments

Mortgage banking

70

542

64

52
To-be-announced mortgage backed securities

Mortgage banking

302

1,246

129

3,749
Total gain (loss) from derivatives not designated as hedging instruments

$
461

$
2,352

$
622

$
3,655

The following table shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses), before tax, reclassified from other comprehensive income (loss) into earnings for the periods indicated:


			Gains (Losses)
	Gains (Losses)		Reclassified
	Recognized in		from OCI
(dollars in thousands)	OCI		into Earnings
Derivatives designated as hedging instruments
For the three months ended March 31, 2024
Cash flow hedges:
Interest rate swaps	$	946	$	262

For the three months ended March 31, 2023
Cash flow hedges:
Interest rate swaps	$	—	$	—

The following table shows the effect of fair value and cash flow hedge accounting on derivatives designated as hedging instruments in the Consolidated Statements of Income:


	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income				Interest Expense
	Loans,		Investment
	including		securities -		Short-term
(dollars in thousands)	fees		Taxable		borrowings
For the three months ended March 31, 2024
Total amounts in the Consolidated Statements of Income	$	39,294	$	4,568	$	5,989
Fair value hedges:
Interest rate swaps		153		642		—
Cash flow hedges:
Interest rate swaps		—		—		262
For the three months ended March 31, 2023
Total amounts in the Consolidated Statements of Income	$	30,933	$	5,951	$	4,393
Fair value hedges:
Interest rate swaps		—		153		—
Cash flow hedges:
Interest rate swaps		—		—		—

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The following tables show the notional amount, carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships at March 31, 2024 and December 31, 2023, respectively:


	March 31, 2024
					Cumulative Fair
					Value Hedging
					Adjustment in the
			Carrying Amount		Carrying Amount of
	Notional		of Hedged Assets/		Hedged Assets/
(dollars in thousands)	Amount		Liabilities		Liabilities
Mortgage-backed securities
Residential agency ⁽¹⁾	$	200,000	$	198,210	$	(1,790)
Mortgage loan pools ⁽²⁾		400,000		399,830		(170)
Total	$	600,000	$	598,040	$	(1,960)

(1)	Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At March 31, 2024, the amortized cost of the closed portfolios used in these hedging relationships was $320.7 million.

(2)

These amounts include the amortized cost basis of residential real estate loans that were used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At March 31, 2024, the amortized cost basis of the residential real estate loans used in these hedging relationships was $664.1 million.


	December 31, 2023
					Cumulative Fair
					Value Hedging
					Adjustment in the
			Carrying Amount		Carrying Amount of
	Notional		of Hedged Assets/		Hedged Assets/
(dollars in thousands)	Amount		Liabilities		Liabilities
Mortgage-backed securities
Residential agency ⁽¹⁾	$	200,000	$	200,241	$	241
Mortgage loan pools ⁽²⁾		400,000		400,098		98
Total	$	600,000	$	600,339	$	339

(1)	Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At December 31, 2023, the amortized cost of the closed portfolios used in these hedging relationships was $323.4 million.

(2)

These amounts include the amortized cost basis of residential real estate loans that were used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023, the amortized cost basis of the residential real estate loans used in these hedging relationships was $687.5 million.

The gain (loss) recognized on derivatives not designated as hedging relationships for the three months ended March 31, 2024 and 2023 was as follows:



(dollars in thousands)		Three months ended March 31,
Derivatives not designated as hedging instruments	Consolidated Statements of Income Location	2024		2023
Interest rate swaps	Other noninterest income	$	21	$	—
Interest rate lock commitments	Mortgage banking		153		340
Forward loan sales commitments	Mortgage banking		(6)		(6)
To-be-announced mortgage backed securities	Mortgage banking		41		(173)
Total gain (loss) from derivatives not designated as hedging instruments		$	209	$	161

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The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. These requirements are dependent on certain specified credit measures. There was no collateral posted with third parties at March 31, 2024. The amount of collateral posted with third parties was ~~$290 thousand at June 30, 2023 and $309~~$550 thousand at December 31, ~~2022.~~2023. 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.

Credit Risk-Related Contingent Features

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where, if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.

As of March 31, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which included accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $0 and $649 thousand, respectively. As of March 31, 2024 and December 31, 2023, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $550 thousand, respectively. If the Company had breached any of these provisions at March 31, 2024 or December 31, 2023, it could have been required to settle its obligations under the agreements at their termination value of $0 and $649 thousand, respectively.

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Balance Sheet Offsetting

The following tables present the Company’s derivative positions and the potential effect of netting arrangements on its financial position as of the dates indicated:


							Gross Amount
							Not Offset in the
							Consolidated
							Balance Sheets
	Gross Amount		Gross Amount		Net Amount
	Recognized in the		Offset in the		Presented in the
	Consolidated		Consolidated		Consolidated		Cash Collateral
(dollars in thousands)	Balance Sheets		Balance Sheets		Balance Sheets		Pledged (Received)		Net Amount
March 31, 2024
Derivative assets:
Interest rate swaps − Company ⁽¹⁾	$	2,324	$	—	$	2,324	$	(2,459)	$	(135)
Interest rate swaps − dealer bank ⁽¹⁾		6,294		—		6,294		(4,681)		1,613
To-be-announced mortgage backed securities		—		—		—		—		—
Total	$	8,618	$	—	$	8,618	$	(7,140)	$	1,478
Derivative liabilities:
Interest rate swaps − Company ⁽¹⁾	$	—	$	—	$	—	$	—	$	—
Interest rate swaps − customer ⁽²⁾		6,294		—		6,294		—		6,294
To-be-announced mortgage backed securities		24		—		24		—		24
Total	$	6,318	$	—	$	6,318	$	—	$	6,318

(1)	The Company maintains a master netting agreement with each counterparty and settles collateral on a net basis for all interest rate swaps with counterparty banks.

(2)	The Company manages its net exposure on its customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices. The Company does not post collateral to its customers as part of its contract.

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							Gross Amount
							Not Offset in the
							Consolidated
							Balance Sheets
	Gross Amount		Gross Amount		Net Amount
	Recognized in the		Offset in the		Presented in the
	Consolidated		Consolidated		Consolidated		Cash Collateral
(dollars in thousands)	Balance Sheets		Balance Sheets		Balance Sheets		Pledged (Received)		Net Amount
December 31, 2023
Derivative assets:
Interest rate swaps − Company ⁽¹⁾	$	—	$	—	$	—	$	—	$	—
Interest rate swaps − dealer bank ⁽¹⁾		8,327		—		8,327		(1,740)		6,587
To-be-announced mortgage backed securities		—		—		—		—		—
Total	$	8,327	$	—	$	8,327	$	(1,740)	$	6,587
Derivative liabilities:
Interest rate swaps − Company ⁽¹⁾	$	649	$	—	$	649	$	550	$	99
Interest rate swaps − customer ⁽²⁾		8,348	$	—		8,348		—		8,348
To-be-announced mortgage backed securities		183		—		183		—		183
Total	$	9,180	$	—	$	9,180	$	550	$	8,630

(1)	The Company maintains a master netting agreement with each counterparty and settles collateral on a net basis for all interest rate swaps with counterparty banks.

(2)	The Company manages its net exposure on its customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices. The Company does not post collateral to its customers as part of its contract.

NOTE 18 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, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

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The following table presents the Company’s and the Bank’s actual capital amounts and ratios as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30, 2023												March 31, 2024
										Minimum to be											Minimum to be
						Requirements				Well Capitalized							Minimum Required				Well Capitalized
						for Capital				Under Prompt							for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action				Actual				Adequacy Purposes				Corrective Action ⁽¹⁾
(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	$	395,276	13.30	%	$	133,728	4.50	%	$	N/A	N/A
Consolidated ⁽¹⁾													$	387,012	11.87	%	$	146,733	4.50	%	$	N/A	N/A
Bank		383,663	12.93	%		133,585	4.50	%		192,895	6.50	%		371,632	11.73	%		142,616	4.50	%		206,001	6.50	%
Tier 1 capital to risk weighted assets										.												.
Consolidated		404,176	13.60	%		178,304	6.00	%		N/A	N/A
Consolidated ⁽¹⁾														395,997	12.14	%		195,644	6.00	%		N/A	N/A
Bank		383,663	12.93	%		178,113	6.00	%		237,409	8.00	%		371,632	11.73	%		190,155	6.00	%		253,540	8.00	%
Total capital to risk weighted assets
Consolidated		490,091	16.49	%		237,738	8.00	%		N/A	N/A
Consolidated ⁽¹⁾														486,789	14.93	%		260,858	8.00	%		N/A	N/A
Bank		419,578	14.14	%		237,486	8.00	%		296,762	10.00	%		411,294	12.98	%		253,540	8.00	%		316,925	10.00	%
Tier 1 capital to average assets
Consolidated		404,176	11.15	%		144,987	4.00	%		N/A	N/A
Consolidated ⁽¹⁾														395,997	9.89	%		160,216	4.00	%		N/A	N/A
Bank		383,663	10.59	%		144,890	4.00	%		181,112	5.00	%		371,632	9.30	%		159,882	4.00	%		199,852	5.00	%

(1)	“Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank holding companies.


	December 31, 2022												December 31, 2023
										Minimum to be											Minimum to be
						Requirements				Well Capitalized							Minimum Required				Well Capitalized
						for Capital				Under Prompt							for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action				Actual				Adequacy Purposes				Corrective Action ⁽¹⁾
(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	$	389,335	13.39	%	$	130,862	4.50	%	$	N/A	N/A
Consolidated ⁽¹⁾													$	382,578	11.82	%	$	145,605	4.50	%	$	N/A	N/A
Bank		370,749	12.76	%		130,791	4.50	%		188,920	6.50	%		367,445	11.40	%		145,101	4.50	%		209,590	6.50	%
Tier 1 capital to risk weighted assets										.												.
Consolidated		398,179	13.69	%		174,482	6.00	%		N/A	N/A
Consolidated ⁽¹⁾														391,534	12.10	%		194,139	6.00	%		N/A	N/A
Bank		370,749	12.76	%		174,388	6.00	%		232,517	8.00	%		367,445	11.40	%		193,468	6.00	%		257,957	8.00	%
Total capital to risk weighted assets
Consolidated		479,325	16.48	%		232,643	8.00	%		N/A	N/A
Consolidated ⁽¹⁾														477,590	14.76	%		258,853	8.00	%		N/A	N/A
Bank		401,895	13.83	%		232,517	8.00	%		290,646	10.00	%		403,501	12.51	%		257,957	8.00	%		322,446	10.00	%
Tier 1 capital to average assets
Consolidated		398,179	11.25	%		141,514	4.00	%		N/A	N/A
Consolidated ⁽¹⁾														391,534	10.57	%		148,111	4.00	%		N/A	N/A
Bank		370,749	10.48	%		141,440	4.00	%		176,800	5.00	%		367,445	9.92	%		148,186	4.00	%		185,232	5.00	%

(1)	“Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank holding companies.

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 include a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of ~~June 30, 2023,~~March 31, 2024, the capital 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, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Company was in compliance with the aforementioned guidelines.

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NOTE 19 Other Comprehensive Income (Loss)

The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:


	For the Three Months Ended
	March 31, 2024						March 31, 2023
			Tax						Tax
	Pre-Tax		(Expense)		After-Tax		Pre-Tax		(Expense)		After-Tax
(dollars in thousands)	Amount		Benefit		Amount		Amount		Benefit		Amount
Debt Securities:
Change in fair value	$	(3,443)	$	864	$	(2,579)	$	4,754	$	(1,193)	$	3,561
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM ⁽¹⁾		74		(18)		56		(87)		22		(65)
Less: reclassification adjustment for net realized losses ⁽²⁾		—		—		—		—		—		—
Net change		(3,517)		882		(2,635)		4,841		(1,215)		3,626
Cash Flow Hedges:
Change in fair value		946		(576)		370		—		—		—
Less: reclassified AOCI gain (loss) into interest expense ⁽³⁾		262		(66)		196		—		—		—
Net change		684		(510)		174		—		—		—
Other Derivatives:
Change in fair value		2,031		(171)		1,860		(1,725)		433		(1,292)
Less: reclassified AOCI gain (loss) into interest expense ⁽⁴⁾		—		—		—		—		—		—
Net change		2,031		(171)		1,860		(1,725)		433		(1,292)
Other comprehensive income (loss)	$	(802)	$	201	$	(601)	$	3,116	$	(782)	$	2,334

(1)	Reclassified into taxable and/or exempt from federal income taxes interest income on investment securities on the consolidated statements of income. Refer to “NOTE 3 Investment Securities” for further details.

(2)	Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to “NOTE 3 Investment Securities” for further details.

(3)	Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to “NOTE 17 Derivative Instruments” for further details.

(4)	Reclassified into interest income on loans, including fees and/or interest income on taxable investment securities on the consolidated statements of income. Refer to “NOTE 17 Derivative Instruments” for further details.


			Net Unrealized		Net Unrealized
	Net Unrealized		Gains (Losses) on		Gains (Losses)
	Gains (Losses) on		Cash Flow		on Other
(dollars in thousands)	Debt Securities ⁽¹⁾		Hedges ⁽¹⁾		Derivatives ⁽¹⁾		AOCI ⁽¹⁾
Balance at December 31, 2023	$	(73,158)	$	(237)	$	(260)	$	(73,655)
Other comprehensive income (loss) before reclassifications		(2,579)		370		1,860		(349)
Less: Amounts reclassified from AOCI		56		196		—		252
Other comprehensive income (loss)		(2,635)		174		1,860		(601)
Balance at March 31, 2024	$	(75,793)		(63)		1,600		(74,256)

Balance at December 31, 2022	$	(98,547)	$	—	$	(94)	$	(98,641)
Other comprehensive income (loss) before reclassifications		3,561		—		(1,292)		2,269
Less: Amounts reclassified from AOCI		(65)		—		—		(65)
Other comprehensive income (loss)		3,626		—		(1,292)		2,334
Balance at March 31, 2023		(94,921)		—		(1,386)		(96,307)

(1)	All amounts net of tax.

NOTE 20 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Old Stock Repurchase Program, which ~~authorizes~~authorized the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Old Stock Repurchase Program ~~was effective immediately and will continue for a period of 36 months, until~~expired on February 18, 2024.

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On December 12, 2023, the Board of Directors of the Company approved a new stock repurchase program, or the New Stock Repurchase Program, which authorizes the Company to repurchase up to 1,000,000 shares of its common stock subject to certain limitations and conditions. The New Stock Repurchase Program became effective February ~~28, 2024.~~ 18, 2024, and will expire on February 18, 2027. On February 18, 2024, the New Stock Repurchase Program replaced and superseded the Old Stock Repurchase Program.

The New Stock Repurchase 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 ~~six~~three months ended ~~June 30, 2023,~~March 31, 2024, there were no shares repurchased under the ~~Company repurchased 170,046 shares of common stock under~~Old Stock Repurchase Program or the New Stock Repurchase Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 2021 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.

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.

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The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30, 2023								March 31, 2024
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Trading									$	4,553	$	—	$	—	$	4,553
Available-for-sale
U.S. treasury and government agencies	$	—	$	2,906	$	—	$	2,906		—		838		—		838
Mortgage backed securities
Residential agency		—		558,456		—		558,456		—		420,893		—		420,893
Commercial		—		60,909		—		60,909		—		1,351		—		1,351
Asset backed securities		—		28		—		28		—		22		—		22
Corporate bonds		—		55,155		—		55,155		—		49,168		—		49,168
Total available-for-sale investment securities	$	—	$	677,454	$	—	$	677,454	$	—	$	472,272	$	—	$	472,272
Other assets
Derivatives	$	—	$	6,853	$	—	$	6,853	$	—	$	9,027	$	—	$	9,027
Other liabilities
Derivatives	$	—	$	8,118	$	—	$	8,118	$	—	$	6,318	$	—	$	6,318


	December 31, 2022								December 31, 2023
(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	$	—	$	3,520	$	—	$	3,520	$	—	$	1,120	$	—	$	1,120
Mortgage backed securities
Residential agency		—		587,679		—		587,679		—		435,594		—		435,594
Commercial		—		63,558		—		63,558		—		1,353		—		1,353
Asset backed securities		—		34		—		34		—		25		—		25
Corporate bonds		—		62,533		—		62,533		—		48,644		—		48,644
Total available-for-sale investment securities	$	—	$	717,324	$	—	$	717,324	$	—	$	486,736	$	—	$	486,736
Other assets
Derivatives	$	—	$	6,405	$	—	$	6,405	$	—	$	8,512	$	—	$	8,512
Other liabilities
Derivatives	$	—	$	6,303	$	—	$	6,303	$	—	$	9,180	$	—	$	9,180

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, Trading for Deferred Compensation

The fair value of trading securities for deferred compensation is reported using market quoted prices as such securities and underlying securities are actively traded and no valuation adjustments have been applied and therefore are classified as Level 1.

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.

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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.

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~~Net impairment related to nonrecurring~~The estimated fair value ~~measurements~~ of certain assets on a nonrecurring basis as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 consisted of the following:


	June 30, 2023								March 31, 2024
(dollars in thousands)	Level 2		Level 3		Total		Impairment		Level 1		Level 2		Level 3		Total
Loans held for sale	$	20,893	$	—	$	20,893	$	—
Individually evaluated		—		2,390		2,390		288
Collateral dependent loans									$	—	$	—	$	4,033	$	4,033
Foreclosed assets										—		—		3		3
Servicing rights		—		2,351		2,351		—		—		—		1,983		1,983


	December 31, 2022								December 31, 2023
(dollars in thousands)	Level 2		Level 3		Total		Impairment		Level 1		Level 2		Level 3		Total
Loans held for sale	$	9,488	$	—	$	9,488	$	—
Individually evaluated		—		2,813		2,813		954
Collateral dependent loans									$	—	$	—	$	3,998	$	3,998
Foreclosed assets		—		30		30		—		—		—		32		32
Servicing rights		—		2,643		2,643		—		—		—		2,052		2,052

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.

The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, were as follows:

June 30, 2023

March 31, 2024

(dollars in thousands)

Weighted

Asset Type

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Valuation Technique

Unobservable Input

Fair Value

Range

Average

Individually evaluated

Appraisal value

Property specific adjustment

2,390

N/A

Appraisal value

Property specific adjustment

4,033

10.0

Foreclosed assets

Appraisal value

Property specific adjustment

—

N/A

Appraisal value

Property specific adjustment ⁽¹⁾

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

2,351

83-134

101

Discounted cash flows

Prepayment speed assumptions

1,983

82-172

103

Discount rate

11.0

Discount rate

11.1

(1)	There were no discounts taken on the collateral that comprises the balance of foreclosed assets as of March 31, 2024.

December 31, 2022

(dollars in thousands)

Weighted

Asset Type

Valuation Technique

Unobservable Input
Fair Value

Range

Average

Individually evaluated

Appraisal value

Property specific adjustment
$
2,813

N/A

N/A

Foreclosed assets

Appraisal value

Property specific adjustment

30

N/A

N/A

Servicing rights

Discounted cash flows

Prepayment speed assumptions

2,643

103-137

115



Discount rate



10.5
%
10.5
%

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			December 31, 2023
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Individually evaluated	Appraisal value	Property specific adjustment	$	3,998	10.0	%	10.0	%
Foreclosed assets	Appraisal value	Property specific adjustment ⁽¹⁾		32	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,052	85-151		104
		Discount rate			11.1	%	11.1	%

(1)	There were no discounts taken on the collateral that comprises the balance of foreclosed assets as of December 31, 2023.

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

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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, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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 and 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.

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 values 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.

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Short-Term Borrowings and Long-Term Debt

Off-Balance Sheet Credit-Related Commitments

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, 2023										March 31, 2024
	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	$	65,471	$	65,471	$	—	$	—	$	65,471	$	545,772	$	545,772	$	—	$	—	$	545,772
Investment securities held-to-maturity		308,416		—		260,710		—		260,710		291,932		—		249,807		—		249,807
Loans, net		2,497,826		—		—		2,403,819		2,403,819		2,762,891		—		—		2,623,566		2,623,566
Accrued interest receivable		13,587		13,587		—		—		13,587		16,149		16,149		—		—		16,149
Bank-owned life insurance		32,793		—		32,793		—		32,793		33,396		—		33,396		—		33,396
Financial Liabilities
Noninterest-bearing deposits	$	715,534	$	—	$	715,534	$	—	$	715,534	$	692,500	$	—	$	692,500	$	—	$	692,500
Interest-bearing deposits		1,833,154		—		1,833,154		—		1,833,154		2,135,740		—		2,135,740		—		2,135,740
Time deposits		304,167		—		—		300,375		300,375		456,729		—		454,272		—		454,272
Short-term borrowings		492,060		492,060		—		—		492,060		555,000		555,000		—		—		555,000
Long-term debt		58,900		—		56,008		—		56,008		58,985		—		57,983		—		57,983
Accrued interest payable		2,960		2,960		—		—		2,960		11,304		11,304		—		—		11,304


	December 31, 2022										December 31, 2023
	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	$	58,242	$	58,242	$	—	$	—	$	58,242	$	129,893	$	129,893	$	—	$	—	$	129,893
Investment securities held-to-maturity		321,902		—		270,912		—		270,912		299,728		—		258,617		—		258,617
Loans, net		2,412,848		—		—		2,311,956		2,311,956		2,723,740		—		—		2,590,535		2,590,535
Accrued interest receivable		12,869		12,869		—		—		12,869		15,700		15,700		—		—		15,700
Bank-owned life insurance		33,991		—		33,991		—		33,991		33,236		—		33,236		—		33,236
Financial Liabilities
Noninterest-bearing deposits	$	860,987	$	—	$	860,987	$	—	$	860,987	$	728,082	$	—	$	728,082	$	—	$	728,082
Interest-bearing deposits		1,842,138		—		1,842,138		—		1,842,138		1,955,967		—		1,955,967		—		1,955,967
Time deposits		212,359		—		—		208,550		208,550		411,562		—		408,910		—		408,910
Short-term borrowings		378,080		378,080		—		—		378,080		314,170		314,170		—		—		314,170
Long-term debt		58,843		—		56,116		—		56,116		58,956		—		57,437		—		57,437
Accrued interest payable		2,426		2,426		—		—		2,426		6,826		6,826		—		—		6,826

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

General

The following discussion explains ~~our~~the Company’s financial condition and results of operations as of and for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023. 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, ~~2022,~~2023, filed with the ~~Securities and Exchange Commission~~SEC on March ~~13, 2023.~~8, 2024.

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”,“may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized,” “target” and ~~“outlook”,~~“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 wethe Company make regarding ~~our~~the Company’s 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~~the Company’s current beliefs, expectations and assumptions regarding the ~~future of our~~Company’s 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~~the Company’s control. ~~Our~~The Company’s actual results and financial condition may differ materially from those indicated in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause ~~our~~the Company’s actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:

●

interest rate ~~risks associated with our business,~~risk, including the effects of ~~recent and anticipated~~significant rate increases by the Federal ~~Reserve;~~Reserve since 2020;

●

~~our~~the Company’s ability to successfully manage credit risk, including in the commercial real estate portfolio, and maintain an adequate level of allowance for credit losses;

●

new or revised accounting ~~standards, including as a result of the implementation of the CECL accounting standard;~~standards;

●

business and economic conditions generally and in the financial services industry, nationally and within ~~our~~the Company’s market areas, including ~~continued rising~~high rates of inflation and possible ~~recession,~~ recession;

●

the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a ~~short period~~short-period of time ~~at Silicon Valley Bank, Signature Bank and First Republic Bank~~ that resulted in ~~the failure of those institutions;~~recent bank failures;

●

~~our ability to manage liquidity risk, including our need to access higher cost sources of funds such as fed funds purchased and short-term borrowings;~~

●

the concentration of large deposits from certain clients, who have balances above current Federal Deposit Insurance Corporation, or FDIC, insurance limits and may withdraw deposits to diversify their exposure;

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●

~~fluctuations in the values of securities held in our securities portfolio, including as a result of changes in interest rates;~~

●

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

●

concentrations within ~~our~~the Company’s loan portfolio;

●

the level of nonperforming assets on ~~our~~the Company’s balance sheet;

●

~~our~~the Company’s ability to implement ~~our~~ organic and acquisition growth ~~strategies, including the integration of Metro Phoenix Bank which we acquired in 2022;~~strategies;

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●

the impact of economic or market conditions on ~~our~~the Company’s fee-based services;

●

~~our~~the Company’s ability to continue to grow ~~our~~the retirement and benefit services business;

●

~~our~~the Company’s ability to continue to originate a sufficient volume of residential ~~mortgages;~~mortgages for the mortgage division to be profitable;

●

the occurrence of fraudulent activity, breaches or failures of ~~our~~the Company’s or the Company’s third party vendors’ information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools;

●

interruptions involving ~~our~~the Company’s information technology and telecommunications systems or third-party servicers;

●

potential losses incurred in connection with mortgage loan repurchases;

●

the composition of ~~our~~the Company’s executive management team and ~~our~~the Company’s ability to attract and retain key personnel;

●

~~the~~ rapid and expensive technological change in the financial services industry;

●

increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including ~~digital asset service providers;~~non-bank lending companies;

●

the Company’s ability to successfully manage liquidity risk, including the Company’s need to access higher cost sources of funds such as fed funds purchased and short-term borrowings;

●

the concentration of large deposits from certain clients, who have balances above current Federal Deposit Insurance Corporation (“FDIC”) insurance limits;

●

the effectiveness of ~~our~~the Company’s risk management framework;

●

the commencement and outcome of litigation and other legal proceedings and regulatory actions against usthe Company or to which wethe Company may become subject;

●

potential impairment to the goodwill wethe Company recorded in connection with ~~our~~the Company’s past acquisitions; ~~including the acquisition of Metro Phoenix Bank;~~

●

the extensive regulatory framework that applies to ~~us;~~the Company;

●

the impact of recent and future legislative and regulatory changes, including in response to the recent ~~failures of Silicon Valley Bank, Signature Bank and First Republic Bank;~~bank failures;

●

fluctuations in the values of the securities held in the Company’s securities portfolio, including as a result of changes in interest rates;

●

governmental monetary, trade and fiscal policies;

●

risks related to climate change and the negative impact it may have on ~~our~~the Company’s customers and their businesses;

●

severe weather, natural disasters, widespread disease or pandemics;

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●

~~severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic;~~

●

acts of war or terrorism, including the ongoing Israeli-Palestinian conflict and the Russian invasion of Ukraine, or other adverse external events;

●

any material weaknesses in ~~our~~the Company’s internal control over financial reporting;

●

changes to U.S. or state tax laws, regulations and guidance, including the ~~new~~ 1.0% excise tax on stock buybacks toby publicly traded companies;

●

potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

●

talent and labor shortages and employee turnover; ~~our~~

●

the Company’s success at managing the risks involved inwith the foregoing items; and

●

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

Any forward-looking statement made by usthe Company in this report is based only on information currently available to usthe Company and speaks only as of the date on which it is made. ~~We undertake~~The Company undertakes 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~~The Company is a ~~diversified financial~~commercial wealth bank and national retirement services ~~company~~provider headquartered in Grand Forks, North Dakota. Through ~~our~~the Company’s subsidiary, Alerus Financial, National Association, or the Bank, ~~we provide~~the Company provides financial solutions to businesses and consumers through ~~four~~three distinct business lines—banking, retirement and benefit services, and wealth ~~management and mortgage.~~management. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.

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

Critical Accounting Policies

~~Our~~Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s 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 is required to make significant estimates and ~~judgments~~assumptions that affect ~~the reported amounts of~~ assets, liabilities, revenues, and ~~expenses. These~~expenses reported. Actual results could differ materially from our current estimates as a result of changing conditions and future events. Several estimates are ~~based upon historical experience~~particularly critical and are susceptible to significant near term change, including (i) the ACL, including the ACL on ~~various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying~~investment securities, loans, and unfunded commitments; (ii) goodwill and intangible assets impairment; and (iii) fair 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 believesmeasurements.

There have ~~the most effect on~~been no material changes to 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~~critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, ~~2022.~~

~~On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which created material changes~~2023. Refer to the Company’s ~~existing~~Annual Report on Form 10-K for the year ended December 31, 2023 for discussion of the Company’s critical accounting policy that existed at December 31, 2022. Effective January 1, 2023, through March 31, 2023, the significant accounting policy which we believe to be critical in preparing our consolidated financial is the determination of the allowance for credit losses.policies.

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Management considers the policies related to the allowance for credit losses critical to the financial statement presentation. The allowance for credit losses is established through the provision for credit losses charged to current earnings. The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to ~~Note 1 – Significant~~“NOTE 2 Recent Accounting ~~Policies in the accompanying notes to~~Pronouncements” of the consolidated financial statements for ~~further~~ discussion ~~on the methodology in establishing the allowance for credit losses.~~of accounting pronouncements issued but yet to be adopted and implemented.

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 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

Shareholder Dividend

On ~~May 11, 2023,~~February 28, 2024, the Board of Directors of the Company declared a quarterly cash dividend of $0.19 per common share. This dividend was paid on ~~July 14, 2023,~~April 12, 2024, to stockholders of record at the close of business on ~~June~~March 15, ~~2023.~~2024.

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)	2023			2023			2022			2023			2022			2024			2023			2023
Performance Ratios
Return on average total assets		0.96	%		0.88	%		1.14	%		0.92	%		1.20	%		0.63	%		(1.51)	%		0.88	%
Return on average common equity		10.14	%		9.17	%		11.93	%		9.66	%		11.85	%		7.04	%		(16.75)	%		9.17	%
Return on average tangible common equity (1)		13.71	%		12.58	%		15.25	%		13.15	%		14.97	%		9.78	%		(18.85)	%		12.58	%
Noninterest income as a % of revenue		53.69	%		51.63	%		56.20	%		52.65	%		56.91	%		53.26	%		3.54	%		51.63	%
Net interest margin (taxable-equivalent basis)		2.52	%		2.70	%		2.98	%		2.61	%		2.91	%		2.30	%		2.37	%		2.70	%
Adjusted net interest margin (tax-equivalent basis) ⁽¹⁾																	2.44	%		2.37	%		2.70	%
Efficiency ratio (1)		72.79	%		74.53	%		74.72	%		73.67	%		73.50	%		78.88	%		165.40	%		74.53	%
Adjusted efficiency ratio ⁽¹⁾																	78.88	%		79.07	%		74.53	%
Average equity to average assets		9.52	%		9.54	%		9.59	%		9.53	%		10.13	%		8.87	%		9.03	%		9.54	%
Net charge-offs/(recoveries) to average loans		(0.07)	%		0.03	%		0.07	%		(0.02)	%		0.02	%		0.01	%		(0.04)	%		0.03	%
Dividend payout ratio		42.22	%		45.00	%		34.62	%		43.53	%		30.91	%		59.38	%		(26.03)	%		45.00	%
Per Common Share
Earnings per common share - basic	$	0.45		$	0.41		$	0.53		$	0.86		$	1.11
Earnings per common share - diluted	$	0.45		$	0.40		$	0.52		$	0.85		$	1.10
Earnings (losses) per common share − basic																$	0.32		$	(0.74)		$	0.41
Earnings (losses) per common share − diluted																$	0.32		$	(0.73)		$	0.40
Dividends declared per common share	$	0.19		$	0.18		$	0.18		$	0.37		$	0.34		$	0.19		$	0.19		$	0.18
Book value per common share	$	17.96		$	17.90		$	17.75								$	18.79		$	18.71		$	17.90
Tangible book value per common share (1)	$	14.60		$	14.50		$	14.93								$	15.63		$	15.46		$	14.50
Average common shares outstanding - basic		20,033			20,028			17,297			20,030			17,271
Average common shares outstanding - diluted		20,241			20,246			17,532			20,243			17,517
Average common shares outstanding − basic																	19,739			19,761			20,028
Average common shares outstanding − diluted																	19,986			19,996			20,246
Other Data
Retirement and benefit services assets under administration/management	$	35,052,652		$	33,404,342		$	31,749,157								$	38,488,523		$	36,682,425		$	33,404,342
Wealth management assets under administration/management	$	3,857,710		$	3,675,684		$	4,147,763								$	4,242,408		$	4,018,846		$	3,675,684
Mortgage originations	$	111,261		$	77,728		$	269,397		$	188,989		$	456,159		$	54,101		$	65,488		$	77,728

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

4746

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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)	2023		2023		2022		2023		2022		2024		2023		2023
Selected Average Balance Sheet Data
Loans	$	2,482,413	$	2,457,154	$	1,838,631	$	2,469,853	$	1,803,623	$	2,768,514	$	2,653,622	$	2,457,154
Investment securities		1,007,792		1,034,288		1,164,625		1,020,967		1,190,298		775,305		921,555		1,034,288
Assets		3,785,487		3,791,536		3,258,655		3,788,494		3,272,654		4,139,053		3,868,561		3,791,536
Deposits		2,940,216		2,933,022		2,740,417		2,936,638		2,778,411		3,163,565		2,994,900		2,933,022
Fed funds purchased		360,033		290,187		81,506		325,303		40,978
Short-term borrowings		—		80,000		9,615		39,779		4,834
Fed funds purchased and Bank Term Funding Program												282,614		189,568		290,187
FHLB short-term advances												200,000		200,000		80,000
Long-term debt		58,886		58,858		58,876		58,872		58,892		58,971		58,943		58,858
Stockholders’ equity		360,216		361,857		312,515		361,032		331,425		367,248		349,382		361,857


	June 30,		March 31,		December 31,		June 30,		March 31,		December 31,		March 31,
(dollars in thousands)	2023		2023		2022		2022		2024		2023		2023
Selected Period End Balance Sheet Data
Loans	$	2,533,522	$	2,486,625	$	2,443,994	$	1,890,243	$	2,799,475	$	2,759,583	$	2,486,625
Allowance for credit losses on loans		(35,696)		(35,102)		(31,146)		(31,373)		(36,584)		(35,843)		(35,102)
Investment securities		985,870		1,019,473		1,039,226		1,130,538		768,757		786,251		1,019,473
Assets		3,832,978		3,886,773		3,779,637		3,295,065		4,338,093		3,907,713		3,886,773
Deposits		2,852,855		3,031,978		2,915,484		2,619,550		3,284,969		3,095,611		3,031,978
Long-term debt		58,900		58,872		58,843		58,870		58,985		58,956		58,872
Total stockholders’ equity		357,685		359,118		356,872		307,158		371,635		369,127		359,118


	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)	2023		2023		2022		2023		2022		2024		2023		2023
Selected Income Statement Data
Net interest income	$	22,234	$	23,658	$	22,776	$	45,892	$	44,449	$	22,219	$	21,552	$	23,659
Provision for credit losses		—		550		—		550		—		—		1,507		550
Noninterest income		25,778		25,253		29,226		51,031		58,696		25,323		791		25,253
Noninterest expense		36,373		37,869		39,984		74,242		78,055		39,019		38,654		37,870
Income before income taxes		11,639		10,492		12,018		22,131		25,090
Income tax expense		2,535		2,306		2,725		4,841		5,613
Net income	$	9,104	$	8,186	$	9,293	$	17,290	$	19,477
Income (loss) before income taxes												8,523		(17,818)		10,492
Income tax expense (benefit)												2,091		(3,064)		2,307
Net income (loss)											$	6,432	$	(14,754)	$	8,185

Table of Contents

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

In addition to the results presented in accordance with GAAP, wethe Company routinely ~~supplement our~~supplements its 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, adjusted tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, adjusted efficiency ratio, adjusted noninterest income, net interest margin (tax-equivalent), and ~~the efficiency ratio, as adjusted.~~adjusted net interest margin (tax-equivalent). 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'~~stockholders’ equity less goodwill and other intangible assets; (ii) adjusted tangible common equity as total common stockholders’ equity less goodwill, other intangible assets, and cash proceeds from BTFP; (iii) tangible book value per common share as tangible common equity divided by shares of common stock outstanding; ~~(iii)~~(iv) tangible assets as total assets, less goodwill and other intangible assets; ~~(iv)~~(v) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; ~~and (v)~~(vi) efficiency ratio ~~as adjusted,~~ as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent ~~adjustment.~~adjustment; (vii) adjusted efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment less net gains (losses) on investment securities; (viii) adjusted noninterest income as noninterest income adjusted for net gains (losses) on investment securities; and (ix) adjusted net interest margin (tax equivalent) as net interest income less cash interest income and interest expense related to BTFP, adjusted for tax equivalent related to loans and securities, and adjust interest earning assets less average cash proceeds balance from BTFP.

~~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 as of and for the periods indicated:


	June 30,			March 31,			December 31,			June 30,			March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2023			2023			2022			2022			2024			2023			2023
Tangible common equity to tangible assets
Total common stockholders’ equity	$	357,685		$	359,118		$	356,872		$	307,158		$	371,635		$	369,127		$	359,118
Less: Goodwill		47,087			47,087			47,087			31,337			46,783			46,783			47,087
Less: Other intangible assets		19,806			21,131			22,455			17,511			15,834			17,158			21,131
Tangible common equity (a)		290,792			290,900			287,330			258,310			309,018			305,186			290,900
Total assets		3,832,978			3,886,773			3,779,637			3,295,065			4,338,093			3,907,713			3,886,773
Less: Goodwill		47,087			47,087			47,087			31,337			46,783			46,783			47,087
Less: Other intangible assets		19,806			21,131			22,455			17,511			15,834			17,158			21,131
Tangible assets (b)		3,766,085			3,818,555			3,710,095			3,246,217			4,275,476			3,843,772			3,818,555
Tangible common equity to tangible assets (a)/(b)		7.72	%		7.62	%		7.74	%		7.96	%		7.23	%		7.94	%		7.62	%
Adjusted Tangible Common Equity to Tangible Assets
Tangible assets (b)													$	4,275,476		$	3,843,772		$	3,818,555
Less: Cash proceeds from BTFP														355,000			—			—
Adjusted tangible assets (c)														3,920,476			3,843,772			3,818,555
Adjusted tangible common equity to tangible assets (a)/(c)														7.88	%		7.94	%		7.62	%
Tangible book value per common share
Total common stockholders’ equity	$	357,685		$	359,118		$	356,872		$	307,158		$	371,635		$	369,127		$	359,118
Less: Goodwill		47,087			47,087			47,087			31,337			46,783			46,783			47,087
Less: Other intangible assets		19,806			21,131			22,455			17,511			15,834			17,158			21,131
Tangible common equity (c)		290,792			290,900			287,330			258,310
Total common shares issued and outstanding (d)		19,915			20,067			19,992			17,306
Tangible book value per common share (c)/(d)	$	14.60		$	14.50		$	14.37		$	14.93
Tangible common equity (d)														309,018			305,186			290,900
Total common shares issued and outstanding (e)														19,777			19,734			20,067
Tangible book value per common share (d)/(e)													$	15.63		$	15.46		$	14.50

Three months ended

Six months ended

June 30,

March 31,

June 30,

June 30,

June 30,

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

2023

2023

2022

2023

2022

Return on average tangible common equity

Net income

$
9,104

$
8,186

$
9,293

$
17,290

$
19,477

Add: Intangible amortization expense (net of tax)

1,046

1,046

832

2,092

1,664

Net income, excluding intangible amortization (e)

10,150

9,232

10,125

19,382

21,141

Average total equity

360,216

361,857

312,515

361,032

331,425

Less: Average goodwill

47,087

47,087

31,488

47,087

31,489

Less: Average other intangible assets (net of tax)

16,153

17,208

14,737

16,678

15,151

Average tangible common equity (f)

296,976

297,562

266,290

297,267

284,785

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

13.71
%

12.58
%

15.25
%

13.15
%

14.97
%
Efficiency ratio

Noninterest expense

$
36,373

$
37,869

$
39,984

$
74,242

$
78,055

Less: Intangible amortization expense

1,324

1,324

1,053

2,648

2,106

Adjusted noninterest expense (g)

35,049

36,545

38,931

71,594

75,949

Net interest income

22,234

23,658

22,776

45,892

44,449

Noninterest income

25,778

25,253

29,226

51,031

58,696

Tax-equivalent adjustment

140

124

100

264

194

Total tax-equivalent revenue (h)

48,152

49,035

52,102

97,187

103,339

Efficiency ratio (g)/(h)

72.79
%

74.53
%

74.72
%

73.67
%

73.50
%

Table of Contents


	Three months ended
	March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2024			2023			2023
Return on average tangible common equity
Net income (loss)	$	6,432		$	(14,754)		$	8,186
Add: Intangible amortization expense (net of tax)		1,046			1,046			1,046
Net income (loss), excluding intangible amortization (f)		7,478			(13,708)			9,232
Average total equity		367,248			349,382			361,857
Less: Average goodwill		46,783			46,783			47,087
Less: Average other intangible assets (net of tax)		13,018			14,067			17,209
Average tangible common equity (g)		307,447			288,532			297,561
Return on average tangible common equity (f)/(g)		9.78	%		(18.85)	%		12.58	%
Efficiency ratio
Noninterest expense	$	39,019		$	38,654		$	37,869
Less: Intangible amortization expense		1,324			1,324			1,324
Adjusted noninterest expense (h)		37,695			37,330			36,545
Net interest income		22,219			21,552			23,658
Noninterest income		25,323			791			25,253
Tax-equivalent adjustment		247			226			124
Total tax-equivalent revenue (i)		47,789			22,569			49,035
Efficiency ratio (h)/(i)		78.88	%		165.40	%		74.53	%
Adjusted Efficiency Ratio
Noninterest expense	$	39,019		$	38,654		$	37,869
Less: Intangible amortization expense		1,324			1,324			1,324
Adjusted noninterest expense (j)		37,695			37,330			36,545
Net interest income		22,219			21,552			23,658
Noninterest income		25,323			791			25,253
Tax-equivalent adjustment		247			226			124
Less: Net gains (losses) on investment securities		—			(24,643)			—
Total tax-equivalent revenue (k)		47,789			47,212			49,035
Adjusted efficiency ratio (j)/(k)		78.88	%		79.07	%		74.53	%
Adjusted Noninterest Income
Noninterest income	$	25,323		$	791		$	25,253
Add: Net gains (losses) on investment securities		—			(24,643)			—
Adjusted noninterest income	$	25,323		$	25,434		$	25,253
Adjusted Net Interest Margin (Tax-Equivalent)
Net interest income	$	22,219		$	21,552		$	23,658
Less: BTFP cash interest income		3,615			—			—
Add: BTFP interest expense		3,266			—			—
Net interest income excluding BTFP impact		21,870			21,552			23,658
Add: Tax equivalent adjustment for loans and securities		247			226			124
Adjusted net interest income (l)	$	22,117		$	21,778		$	23,782
Interest earning assets		3,921,529			3,645,184			3,567,402
Less: Average cash proceeds balance from BTFP		269,176			—			—
Adjusted interest earning assets (m)	$	3,652,353		$	3,645,184		$	3,567,402
Adjusted net interest margin (tax-equivalent) (l)/(m)		2.44	%		2.37	%		2.70	%

Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended ~~June 30, 2023~~March 31, 2024, was ~~$9.1~~$6.4 million, or ~~$0.45~~$0.32 per diluted common share, a ~~$189 thousand~~$1.8 million, or 2%21.4%, decrease compared to ~~$9.3~~$8.2 million, or ~~$0.52~~$0.40 per diluted common share, for the three months ended ~~June 30, 2022.~~March 31, 2023. Earnings for the ~~second~~first quarter of ~~2023~~2024 compared to the ~~second~~first quarter of ~~2022~~2023 decreased primarily due to a ~~$3.4 million decrease in noninterest income and a $0.5~~$1.4 million decrease in net interest ~~income. These~~income and $1.2 million increase in noninterest expense. This negative ~~results were~~result was partially offset by a ~~$3.6~~$0.6 million decrease in ~~noninterest~~provision for credit losses expense.

Table of Contents

Net income for the six months ended June 30, 2023, was $17.3 million, or $0.85 per diluted common share, a $2.2 million, or 11.2%, decrease compared to $19.5 million, or $1.10 per diluted common share, for the six months ended June 30, 2022. Earnings for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 decreased primarily due to a $7.7 million decrease in noninterest income and a $0.6 million increase in provision for credit losses. These negative results were partially offset by a $1.4 million increase in net interest income and a $3.8 million decrease in noninterest expense.

Net Interest Income

Net interest income is the difference between interest income and ~~yield-related~~yield related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

Net interest income for the three months ended ~~June 30, 2023,~~March 31, 2024, was $22.2 million, a decrease of ~~$542 thousand,~~$1.4 million, or ~~2.4%~~6.1%, compared to ~~$22.8~~$23.7 million for the three months ended ~~June 30, 2022.~~March 31, 2023. Net interest income for the ~~second~~first quarter of ~~2023~~2024 decreased compared to the ~~second~~first quarter of ~~2022~~2023 primarily due to the increasing cost of interest-bearing liabilities as interest expense increased ~~$16.5~~$12.7 million mainly driven by an increase of ~~246~~133 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased ~~$503.1~~$456.3 million. This was partially offset by ~~a $16.0~~an $11.2 million increase in interest income, as interest earning assets increased ~~$490.3~~$354.1 million while the interest earning asset yield increased ~~135~~74 basis points. The increase in interest earning assets was primarily due to ~~a combination of~~ organic loan growth and ~~the acquisition of Metro Phoenix Bank.~~increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to ~~the acquisition of Metro Phoenix Bank~~core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and ~~a decrease in noninterest-bearing liabilities.~~

Net interest income for the six months ended June 30, 2023, was $45.9 million, an increase of $1.4 million, or 3.2%, compared to the $44.4 million for the six months ended June 30, 2022. Net interest income for the six months ended June 30, 2023 increased compared to the six months ended June 30, 2022 primarily due to a 133 basis point increase in the earning asset yield in addition to an increase of $468.3 million in the average balance of interest earning assets. This was partially offset by an increase of 221 basis points in the average rate paid on interest-bearing liabilities. The average balance in interest-bearing liabilities increased $515.8 million. The increase in interest earning assets was due to a combination of organic growth and the acquisition of Metro Phoenix Bank. The increase in interest-bearing liabilities was due to the acquisition of Metro Phoenix Bank and a decrease in noninterest-bearing liabilities.BTFP borrowings.

Net interest margin (on a ~~FTE~~tax-equivalent basis) for the three months ended ~~June 30, 2023,~~March 31, 2024, was ~~2.52%~~2.30%, compared to ~~2.98%~~2.70% for the same period in ~~2022.~~

~~Net~~2023. The decrease in net interest margin (on a ~~FTE~~tax-equivalent basis) was mainly attributable to higher earning assets at lower yields resulting from the BTFP opportunity. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings, was 2.44% for the ~~six months ended June 30, 2023, was 2.61%, compared to 2.91%~~first quarter of 2024, a 26 basis point decrease from 2.70% for the ~~same period~~first quarter of 2023. The decrease in ~~2022.~~adjusted net interest margin (on a tax-equivalent basis) (non-GAAP) from the year reflected higher cost of funds from continued growth on interest-bearing deposits, partially offset by higher yields on new loans.

~~As a result of the recent and expected increases in the~~The higher target federal funds interest rate ~~we anticipate~~continues to pressure funding costs. However, the Company anticipates that ~~our~~ net interest income and net interest margin (on ~~a FTE~~an adjusted tax equivalent basis) will ~~remain under pressure~~recover in future ~~periods.~~periods as interest-earning assets remix at higher rates and the increases in deposit costs slow.

Table of Contents

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022. We~~2023. The Company derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. WeThe Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual status, 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~~fully taxable equivalent (“FTE”) basis.


	Three months ended June 30,												Three months ended March 31,
	2023						2022						2024						2023
			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	$	36,418	$	363	4.00	%	$	28,920	$	28	0.39	%	$	352,038	$	4,665	5.33	%	$	41,947	$	334	3.23	%
Investment securities (1)		1,007,792		6,360	2.53	%		1,164,625		6,338	2.18	%		775,305		4,788	2.48			1,034,288		6,192	2.43
Loans held for sale		14,536		189	5.22	%		31,878		250	3.15	%		9,014		127	5.67			10,345		127	4.98
Loans
Commercial:
Commercial and industrial		545,357		9,386	6.90	%		463,215		5,053	4.38	%		599,456		10,323	6.93			559,416		8,394	6.09
Real estate construction		87,905		1,629	7.43	%		44,627		449	4.04	%		127,587		2,549	8.04			103,099		1,668	6.56
Commercial real estate		956,828		12,138	5.09	%		601,765		5,701	3.80	%		1,134,540		15,730	5.58			911,634		11,126	4.95
Total commercial		1,590,090		23,153	5.84	%		1,109,607		11,203	4.05	%		1,861,583		28,602	6.18			1,574,149		21,188	5.46
Consumer
Residential real estate first mortgage		698,288		6,548	3.76	%		543,023		4,458	3.29	%		723,315		7,281	4.05			688,754		6,387	3.76
Residential real estate junior lien		156,276		2,900	7.44	%		132,082		1,528	4.64	%		154,781		3,024	7.86			149,720		2,661	7.21
Other revolving and installment		37,759		568	6.03	%		53,919		592	4.40	%		28,835		461	6.43			44,531		643	5.86
Total consumer		892,323		10,016	4.50	%		729,024		6,578	3.62	%		906,931		10,766	4.77			883,005		9,691	4.45
Total loans (1)		2,482,413		33,169	5.36	%		1,838,631		17,781	3.88	%		2,768,514		39,368	5.72			2,457,154		30,879	5.10
Federal Reserve/FHLB Stock		23,724		399	6.75	%		10,564		129	4.90	%		16,658		337	8.14			23,668		401	6.87
Total interest earning assets		3,564,883		40,480	4.55	%		3,074,618		24,526	3.20	%		3,921,529		49,285	5.05			3,567,402		37,933	4.31
Noninterest earning assets		220,604						184,037						217,524						224,134
Total assets	$	3,785,487					$	3,258,655					$	4,139,053					$	3,791,536
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	775,818	$	2,431	1.26	%	$	703,365	$	212	0.12	%	$	869,060	$	4,249	1.97	%	$	746,660	$	1,594	0.87	%
Money market and savings deposits		1,145,335		8,033	2.81	%		1,041,898		373	0.14	%		1,186,900		11,117	3.77			1,165,269		6,232	2.17
Time deposits		270,121		2,214	3.29	%		211,787		228	0.43	%		431,679		4,786	4.46			231,959		1,278	2.23
Fed funds purchased		360,033		4,763	5.31	%		81,506		240	1.18	%
Short-term borrowings		—		—	—	%		9,615		38	1.59	%
Fed funds purchased and Bank Term Funding Program														282,614		3,508	4.99			290,187		3,467	4.85
FHLB short-term advances														200,000		2,481	4.99			80,000		926	4.69
Long-term debt		58,886		665	4.53	%		58,876		559	3.81	%		58,971		678	4.62			58,858		654	4.51
Total interest-bearing liabilities		2,610,193		18,106	2.78	%		2,107,047		1,650	0.31	%		3,029,224		26,819	3.56			2,572,933		14,151	2.23
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		748,942						783,367						675,926						789,134
Other noninterest-bearing liabilities		66,136						55,726						66,655						67,612
Stockholders’ equity		360,216						312,515						367,248						361,857
Total liabilities and stockholders’ equity	$	3,785,487					$	3,258,655					$	4,139,053					$	3,791,536
Net interest income			$	22,374					$	22,876
Net interest rate spread					1.77	%					2.89	%
Net interest income on FTE basis ⁽¹⁾															$	22,466					$	23,782
Net interest rate spread on FTE basis ⁽¹⁾																	1.49	%					2.08	%
Net interest margin on FTE basis (1)					2.52	%					2.98	%					2.30	%					2.70	%

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

Table of Contents

Six months ended June 30,

2023

2022




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

$
39,167

$
697

3.59
%
$
67,111

$
74

0.22
%
Investment securities ⁽¹⁾

1,020,967

12,552

2.48
%

1,190,298

12,051

2.04
%
Loans held for sale

12,452

316

5.12
%

28,287

407

2.90
%
Loans













Commercial:









Commercial and industrial

552,348

17,779

6.49
%

449,014

10,068

4.52
%
Real estate construction

95,460

3,297

6.96
%

42,893

844

3.97
%
Commercial real estate

934,356

23,265

5.02
%

601,397

11,100

3.72
%
Total commercial

1,582,164

44,341

5.65
%

1,093,304

22,012

4.06
%
Consumer













Residential real estate first mortgage

693,547

12,935

3.76
%

528,952

8,891

3.39
%
Residential real estate junior lien

153,016

5,561

7.33
%

129,056

2,910

4.55
%
Other revolving and installment

41,126

1,211

5.94
%

52,311

1,140

4.39
%
Total consumer

887,689

19,707

4.48
%

710,319

12,941

3.67
%
Total loans ⁽¹⁾

2,469,853

64,048

5.23
%

1,803,623

34,953

3.91
%
Federal Reserve/FHLB Stock

23,697

801

6.82
%

8,536

199

4.70
%
Total interest earning assets

3,566,136

78,414

4.43
%

3,097,855

47,684

3.10
%
Noninterest earning assets

222,358

174,799

Total assets

$
3,788,494





$
3,272,654





Interest-Bearing Liabilities













Interest-bearing demand deposits

$
761,319

$
4,025

1.07
%
$
708,888

$
426

0.12
%
Money market and savings deposits

1,155,247

14,265

2.49
%

1,042,660

741

0.14
%
Time deposits

251,145

3,492

2.80
%

219,592

475

0.44
%
Fed funds purchased

325,303

8,231

5.10
%

40,978

240

1.18
%
Short-term borrowings

39,779

926

4.69
%

4,834

38

1.59
%
Long-term debt

58,872

1,318

4.51
%

58,892

1,121

3.84
%
Total interest-bearing liabilities

2,591,665

32,257

2.51
%

2,075,844

3,041

0.30
%
Noninterest-Bearing Liabilities and Stockholders' Equity









Noninterest-bearing deposits

768,927





807,271

Other noninterest-bearing liabilities

66,870





58,114





Stockholders’ equity

361,032





331,425





Total liabilities and stockholders’ equity

$
3,788,494





$
3,272,654





Net interest income



$
46,157





$
44,643



Net interest rate spread





1.92
%





2.80
%
Net interest margin on FTE basis ⁽¹⁾





2.61
%





2.91
%

~~(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

~~Table of Contents~~

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


	Three Months Ended June 30, 2023						Six months ended June 30, 2023						Three months ended March 31, 2024
	Compared with						Compared with						Compared with
	Three Months Ended June 30, 2022						Six months ended June 30, 2022						Three months ended March 31, 2023
	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	$	7	$	328	$	335	$	(30)	$	653	$	623	$	2,490	$	1,841	$	4,331
Investment securities		(852)		874		22		(1,713)		2,214		501		(1,565)		161		(1,404)
Loans held for sale		(136)		75		(61)		(228)		137		(91)		(16)		16		—
Loans
Commercial:
Commercial and industrial		897		3,436		4,333		2,316		5,395		7,711		606		1,323		1,929
Real estate construction		436		744		1,180		1,035		1,418		2,453		399		482		881
Commercial real estate		3,364		3,073		6,437		6,142		6,023		12,165		2,743		1,861		4,604
Total commercial		4,697		7,253		11,950		9,493		12,836		22,329		3,748		3,666		7,414
Consumer
Residential real estate first mortgage		1,274		816		2,090		2,767		1,277		4,044		323		571		894
Residential real estate junior lien		280		1,092		1,372		541		2,110		2,651		91		272		363
Other revolving and installment		(177)		153		(24)		(243)		314		71		(229)		47		(182)
Total consumer		1,377		2,061		3,438		3,065		3,701		6,766		185		890		1,075
Total loans		6,074		9,314		15,388		12,558		16,537		29,095		3,933		4,556		8,489
Federal Reserve/FHLB Stock		161		109		270		353		249		602		(120)		56		(64)
Total interest income		5,254		10,700		15,954		10,940		19,790		30,730		4,722		6,630		11,352
Interest-bearing liabilities
Interest-bearing demand deposits		22		2,197		2,219		31		3,568		3,599		265		2,390		2,655
Money market and savings deposits		36		7,624		7,660		78		13,446		13,524		117		4,768		4,885
Time deposits		63		1,923		1,986		69		2,948		3,017		1,107		2,401		3,508
Fed funds purchased		819		3,704		4,523		1,664		6,327		7,991
Short-term borrowings		(38)		—		(38)		276		612		888
Fed funds purchased and Bank Term Funding Program														(91)		132		41
FHLB short-term advances														1,399		156		1,555
Long-term debt		—		106		106		—		197		197		1		23		24
Total interest expense		902		15,554		16,456		2,118		27,098		29,216		2,798		9,870		12,668
Change in net interest income	$	4,352	$	(4,854)	$	(502)	$	8,822	$	(7,308)	$	1,514	$	1,924	$	(3,240)	$	(1,316)

Provision for Credit Losses

The ~~Company recorded no provision for credit loss expense for the three months ending June 30, 2023 and June 30, 2022.~~

The Company recorded a provision for credit loss expense of $550 thousand for the six months ended June 30, 2023, a $550 thousand increase compared to the six months ended June 30, 2022. The provision for credit loss expense for the six months ended June 30, 2023 included $269 thousand in provision for credit loss on loans, $230 thousand in provision for credit loss on unfunded commitments and $51 thousand in provision for credit loss on investment securities held-to-maturity. The CECL accounting standard requires us to recognize losses over the expected life of the loan as opposed to the losses expected to already have been incurred. The increase in provision for credit losses ~~is primarily a result~~was made up of ~~a change in forecasting assumptions brought about by~~ the ~~new methodology.~~following components for the periods presented:


	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Provision (recovery) for loan losses	$	799	$	269
Provision (recovery) for credit losses on unfunded commitments		(793)		230
Provision (recovery) for HTM debt securities		(6)		51
Provision for credit losses	$	—	$	550

Table of Contents

Noninterest Income

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

~~Table of Contents~~

The following table presents ~~our~~the Company’s noninterest income for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022:~~2023:


	Three months ended						Six months ended						Three months ended
	June 30,						June 30,						March 31,
(dollars in thousands)	2023			2022			2023			2022			2024			2023
Retirement and benefit services	$	15,890		$	16,293		$	31,372		$	33,939		$	15,655		$	15,482
Wealth management		5,449			5,548			10,644			10,874			6,118			5,194
Mortgage banking		2,905			6,038			4,622			10,969			1,670			1,717
Service charges on deposit accounts		311			412			612			775			389			301
Other		1,223			935			3,781			2,139			1,491			2,559
Total noninterest income	$	25,778		$	29,226		$	51,031		$	58,696		$	25,323		$	25,253
Noninterest income as a % of revenue		53.69	%		56.20	%		52.65	%		56.91	%		53.26	%		51.63	%

Total noninterest income for the three months ended ~~June 30, 2023~~March 31, 2024 was ~~$25.8~~$25.3 million, a ~~$3.4 million,~~$70 thousand, or ~~11.8%~~0.3%, ~~decrease~~increase compared to ~~$29.2~~$25.3 million for the three months ended ~~June 30, 2022.~~March 31, 2023. The ~~decrease~~increase in noninterest income was primarily driven by ~~a decrease~~an increase of ~~$3.1~~$0.9 million in ~~mortgage banking~~wealth management revenue ~~as mortgage originations decreased $158.1~~and $0.2 million ~~or 58.7%, compared to 2022, as higher interest rates dramatically impacted demand. Retirement~~in retirement and benefit services ~~decreased $402 thousand mainly from~~revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets. This increase was offset by a $1.1 million decrease in other noninterest income, primarily due to $1.2 million in proceeds on a bank-owned life insurance claim in the ~~exit~~first quarter of ~~the payroll services business and one time non-recurring document restatement fees.~~

~~Total noninterest~~2023. Noninterest income for the ~~six~~three months ended ~~June 30,~~March 31, 2023, included revenue of $0.9 million related to the ESOP trustee business that was ~~$51.0 million, a $7.7 million, or 13.1%, decrease compared to $58.7 million for~~subsequently divested in the ~~six months ended June 30, 2022.~~ third quarter of 2023.

The decrease in noninterest income was primarily driven by a decrease of $6.3 million in mortgage banking revenue as mortgage originations decreased $267.2 million, or 58.6%, compared to 2022 as higher interest rates dramatically impacted demand. Retirement and benefit services decreased $2.6 million mainly from the exit of the payroll services business, document restatement fees and asset based fees.

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

~~Noninterest income as a percentage of total operating revenue was 53.7% for the three months ended June 30, 2023, compared to 56.2% for the three months ended June 30, 2022.~~

~~Noninterest income as a percentage of total operating revenue was 52.7% for the six months ended June 30, 2023, compared to 56.9% for the six months ended June 30, 2022.~~

See “NOTE 15 Segment Reporting” of the consolidated financial statements for additional discussion regarding ~~our~~the Company’s business lines.

~~Table of Contents~~

Noninterest Expense

The following table presents noninterest expense for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022:~~2023:


	Three months ended				Six months ended				Three months ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2023		2022		2023		2022		2024		2023
Compensation	$	18,847	$	21,248	$	38,005	$	40,299	$	19,332	$	19,158
Employee taxes and benefits		4,724		5,787		10,577		11,949		6,188		5,853
Occupancy and equipment expense		1,837		1,737		3,736		3,788		1,906		1,899
Business services, software and technology expense		5,269		4,785		10,593		9,709		5,345		5,324
Intangible amortization expense		1,324		1,053		2,648		2,106		1,324		1,324
Professional fees and assessments		1,530		2,246		2,682		3,787		1,993		1,152
Marketing and business development		648		814		1,334		1,414		685		686
Supplies and postage		406		572		866		1,218		528		460
Travel		306		356		554		535		292		248
Mortgage and lending expenses		215		482		712		1,168		441		497
Other		1,267		904		2,535		2,082		985		1,268
Total noninterest expense	$	36,373	$	39,984	$	74,242	$	78,055	$	39,019	$	37,869

Table of Contents

Total noninterest expense for the three months ended ~~June 30, 2023,~~March 31, 2024, was ~~$36.4~~$39.0 million, a ~~$3.6~~$1.2 million, or 9%3.0%, ~~decrease~~increase compared to ~~$40.0~~$37.9 million for the three months ended ~~June 30, 2022.~~March 31, 2023. The year over year ~~decrease~~increase was primarily due to a $2.4 million decrease in compensation, $1.1 million decrease in employee taxes and benefits, and $716 thousand decrease in professional fees and assessments. Compensation decreased primarily due to a decrease in mortgage related incentive compensation as a result of lower mortgage originations. The decrease in employee taxes and benefits resulted from lower group insurance claims, reduced headcount, and lower compensation costs. The number of full time equivalent employees was reduced by 65, or 8.1%, from the second quarter of 2022 after adjusting for the acquired employees from the Metro Phoenix Bank transaction.

Total noninterest expense for the six months ended June 30, 2023, was $74.2 million, a $3.8 million, or 4.9%, decrease compared to $78.1 million for the six months ended June 30, 2022. The decrease was driven by ~~decreases of $2.3 million in compensation, $1.4 million in employee taxes and benefits, $1.1 million in~~higher professional fees and assessments ~~$456 thousand in mortgage lending expense, and $352 thousand in supplies and postage. The decrease in compensation expense was primarily~~ due to a decrease in mortgage related incentive compensation as a result of lower mortgage originations, which was also the primary driver for the decrease in mortgage lending expense. The decrease in employee taxes and benefits was primarily due to lower group insurance claims driven by a reduction in headcount along with a decrease in taxes driven by lower compensation expense. The decrease in professional fees and assessments was primarily driven by lower merger and acquisition and recruitment expenses offset by an increase in FDIC assessments. The decrease in supplies and postage was driven by transitioning our retirement and benefit services fulfillment services from a mostly paper based to an electronic delivery method. These decreases were partially offset by increases of $884 thousand in business services, software and technology expense, $542 thousand in intangible amortization, and $453 thousand in other expenses. The increases in business services, software, and technology as well as intangible amortization were driven by our acquisition of Metro Phoenix Bank. The increase in other expenses was primarily due to provision of unfunded commitmentsassessments and an increase in ~~expenses incurred related to~~recruitment expense driven by talent acquisitions in the ~~payroll services line~~first quarter of ~~business which we exited in 2022.~~2024.

Income Tax Expense

Income tax expense is an estimate based on the amount ~~we expect~~the Company expects 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~~the Company’s tax position. If the final resolution of taxes payable differs from ~~our~~the Company’s estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.

~~Table of Contents~~

For the three months ended ~~June 30, 2023, we~~March 31, 2024, the Company recognized income tax expense of ~~$2.5~~$2.1 million on ~~$11.6~~$8.5 million of pre-tax income, resulting in an effective tax rate of ~~21.8%~~24.5%, compared to income tax expense of ~~$2.7~~$2.3 million on ~~$12.0~~$10.5 million of pre-tax income for the three months ended ~~June 30, 2022,~~March 31, 2023, resulting in an effective tax rate of ~~22.7%.~~

For the six months ended June 30, 2023, we recognized income tax expense of $4.8 million on $22.1 million of pre-tax income, resulting in an effective tax rate of 21.9%, compared to income tax expense of $5.6 million on $25.1 million of pre-tax income for the six months ended June 30, 2022, resulting in an effective tax rate of 22.3%22.0%.

Financial Condition

Overview

Total assets were ~~$3.8~~$4.3 billion as of ~~June 30, 2023,~~March 31, 2024, an increase of ~~$53.3~~$430.4 million, or ~~1.4%~~11.0%, as compared to December 31, ~~2022.~~2023. The increase was primarily due to a ~~$89.5 million increase in loans, $11.4 million increase in loans held for sale and $7.2~~$415.9 million increase in cash and cash equivalents and a $39.9 million increase in loans, partially offset by a decrease of ~~$53.4~~$17.5 million in investment securities.

~~Loans~~

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and other revolving and installment loans. As of June 30, 2023, the portfolio mix was 21.8% commercial and industrial, 39.6% commercial real estate, 34.1% residential real estate and 4.5% in other categories.

~~The following table presents the composition of total loans outstanding by portfolio segment as of June 30, 2023 and December 31, 2022:~~

June 30, 2023

December 31, 2022

Percent of

Percent of

Change

(dollars in thousands)

Balance

Portfolio


Balance

Portfolio



Amount

Percent

Commercial


Commercial and industrial

$
551,860

21.8
%

$
583,876

23.9
%

$
(32,016)

(5.5)
%
Real estate construction

78,428

3.1
%

97,810

4.0
%

(19,382)

(19.8)
%
Commercial real estate

1,003,821

39.6
%

881,670

36.0
%

122,151

13.9
%
Total commercial

1,634,109

64.5
%

1,563,356

63.9
%

70,753

4.5
%
Consumer

Residential real estate first mortgage

707,630

27.9
%

679,551

27.8
%

28,079

4.1
%
Residential real estate junior lien

157,231

6.2
%

150,479

6.2
%

6,752

4.5
%
Other revolving and installment

34,552

1.4
%

50,608

2.1
%

(16,056)

(31.7)
%
Total consumer

899,413

35.5
%

880,638

36.1
%

18,775

2.1
%
Total loans

$
2,533,522

100.0
%

$
2,443,994

100.0
%

$
89,528

3.7
%

~~Total loans outstanding were $2.5 billion as of June 30, 2023, an increase of $89.5 million, or 3.7%, from December 31, 2022.~~ The increase in cash and cash equivalents was primarily driven by a $122.2 million increase in commercial real estate and a $34.8 million increase in residential real estate loans, offset by a $32.0 million decrease in commercial and industrial, a $19.4 million decrease in real estate construction and a $16.1 million decrease in other consumer revolving and installment loans.

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

~~Table of Contents~~

~~The following table presents the maturities and types of interest rates for the loan portfolio as of June 30, 2023:~~

June 30, 2023

After one

After five

One year

but within

but within

After

(dollars in thousands)

or less

five years

fifteen years

fifteen years

Total
Commercial








Commercial and industrial

$
140,538

$
248,600

$
161,983

$
739

$
551,860
Real estate construction

25,301

42,706

8,375

2,046

78,428
Commercial real estate

57,619

414,874

470,975

60,353

1,003,821
Total commercial

223,458

706,180

641,333

63,138

1,634,109
Consumer








Residential real estate first mortgage

10,094

28,622

46,078

622,836

707,630
Residential real estate junior lien

8,990

24,807

35,574

87,860

157,231
Other revolving and installment

9,120

22,565

2,867

—

34,552
Total consumer

28,204

75,994

84,519

710,696

899,413
Total loans

$
251,662

$
782,174

$
725,852

$
773,834

$
2,533,522
Loans with fixed interest rates:








Commercial








Commercial and industrial

$
14,520

$
213,065

$
64,592

$
740

$
292,917
Real estate construction

5,915

2,601

6,168

—

14,684
Commercial real estate

42,073

322,046

296,216

21,158

681,493
Total commercial

62,508

537,712

366,976

21,898

989,094
Consumer








Residential real estate first mortgage

6,892

25,171

38,390

409,946

480,399
Residential real estate junior lien

1,381

6,312

22,717

14,684

45,094
Other revolving and installment

3,815

18,759

2,867

—

25,441
Total consumer

12,088

50,242

63,974

424,630

550,934
Total loans with fixed interest rates

$
74,596

$
587,954

$
430,950

$
446,528

$
1,540,028
Loans with floating interest rates:








Commercial








Commercial and industrial

$
126,018

$
35,535

$
97,391

$
—

$
258,944
Real estate construction

19,386

40,105

2,207

2,046

63,744
Commercial real estate

15,546

92,828

174,759

39,195

322,328
Total commercial

160,950

168,468

274,357

41,241

645,016
Consumer








Residential real estate first mortgage

3,202

3,451

7,688

212,890

227,231
Residential real estate junior lien

7,609

18,495

12,857

73,176

112,137
Other revolving and installment

5,305

3,806

—

—

9,111
Total consumer

16,116

25,752

20,545

286,066

348,479
Total loans with floating interest rates

$
177,066

$
194,220

$
294,902

$
327,307

$
993,495

~~The expected life of our loan portfolio will differ~~net proceeds 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.BTFP borrowings.

~~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 credit losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.

~~Table of Contents~~

~~Credit Quality Indicators~~

Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See “NOTE 4 Loans and Allowance for Credit Losses on Loans” 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, 2023 and December 31, 2022:~~

June 30,

December 31,

(dollars in thousands)

2023

2022

Commercial



Commercial and industrial

$
32,733

$
25,182

Real estate construction

—

262

Commercial real estate

6,806

8,400

Total commercial

39,539

33,844

Consumer



Residential real estate first mortgage

467

808

Residential real estate junior lien

357

632

Other revolving and installment

6

1

Total consumer

830

1,441

Total loans

$
40,369

$
35,285

Criticized loans as a percent of total loans

1.59
%

1.44
%

~~The following table presents information regarding nonperforming assets as of June 30, 2023 and December 31, 2022:~~

June 30,

December 31,

(dollars in thousands)

2023

2022

Nonaccrual loans

$
2,233

$
3,794

Accruing loans 90+ days past due

347

—

Total nonperforming loans

2,580

3,794

OREO and repossessed assets

—

30

Total nonperforming assets

2,580

3,824

Total restructured accruing loans

—

151

Total nonperforming assets and restructured accruing loans

$
2,580

$
3,975

Nonperforming loans to total loans

0.10
%

0.16
%
Nonperforming assets to total assets

0.07
%

0.10
%
Allowance for credit losses on loans to nonperforming loans

1,384
%

821
%

Interest income lost on nonaccrual loans approximated $101 thousand and $107 thousand for the six months ended June 30, 2023 and 2022, respectively. There was no interest income included in net interest income related to nonaccrual loans for the six months ended June 30, 2023 and 2022.

~~Allowance for Credit Losses on Loans~~

The allowance for credit losses is a significant estimate in the Company’s Consolidated Balance Sheet, affecting both earnings and capital. Its methodology influences and is influenced by the Company’s overall credit risk management processes. The allowance for credit losses is managed in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The allowance for credit losses is established through provision for credit loss expense charged to income.

~~Table of Contents~~

The Company calculates the allowance for credit losses at each reporting date. The Company recognizes an allowance for the lifetime expected credit losses for the amount the Company does not expect to collect. Subsequent changes in expected credit losses are recognized immediately in earnings. 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 economic conditions and considers such factors as the financial condition of the borrower, expected loss experience, and other relevant information from internal and external sources which management feels deserve recognition in establishing an appropriate reserve. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change.

~~Table of Contents~~

~~The following table presents, by loan type, the changes in the allowance for credit losses on loans for the periods presented:~~

Three months ended

Six months ended

June 30,

June 30,

(dollars in thousands)

2023

2022

2023

2022

Balance—beginning of period

$
35,102

$
31,713

$
35,003

$
31,572

Commercial loan charge-offs









Commercial and Industrial

(85)

(637)

(260)

(664)

Real estate construction

—

—

—

—

Commercial real estate

—

—

—

—

Total commercial loan charge-offs

(85)

(637)

(260)

(664)

Consumer loan charge-offs









Residential real estate first mortgage

—

—

—

—

Residential real estate junior lien

—

—

(77)

—

Other revolving and installment

(23)

(37)

(28)

(55)

Total consumer loan charge-offs

(23)

(37)

(105)

(55)

Total loan charge-offs

(108)

(674)

(365)

(719)

Commercial loan recoveries









Commercial and Industrial

438

90

494

216

Real estate construction

—

—

—

—

Commercial real estate

12

11

23

22

Total commercial recoveries

450

101

517

238

Consumer loan recoveries









Residential real estate first mortgage

—

—

2

—

Residential real estate junior lien

46

201

52

214

Other revolving and installment

15

32

27

68

Total consumer loan recoveries

61

233

81

282

Total loan recoveries

511

334

598

520

Net loan charge-offs (recoveries)

(403)

340

(233)

199

Commercial loan provision









Commercial and Industrial

(340)

1,085

(717)

1,856

Real estate construction

(760)

68

(318)

95

Commercial real estate

609

(1,123)

678

(1,564)

Total commercial loan provision

(491)

30

(357)

387

Consumer loan provision









Residential real estate first mortgage

(159)

(486)

50

(357)

Residential real estate junior lien

28

(134)

154

(42)

Other revolving and installment

(13)

(5)

(130)

140

Total consumer loan provision

(144)

(625)

74

(259)

Unallocated provision expense

826

595

743

(128)

Total provision for credit losses on loans

191

—

460

—

Balance—end of period

$
35,696

$
31,373

$
35,696

$
31,373

Total loans

$
2,533,522

$
1,890,243

$
2,533,522

$
1,890,243

Average total loans

2,482,413

1,838,631

2,469,853

1,803,623

Allowance for credit losses on loans to total loans

1.41
%

1.66
%

1.41
%

1.66
%
Net charge-offs/(recoveries) to average total loans (annualized)

(0.07)
%

0.07
%

(0.02)
%

0.02
%

Effective January 1, 2023, the Company adopted the new CECL accounting standard. The adoption of the CECL accounting standard resulted in the Company’s allowance for credit losses increasing by approximately $5.9 million relative to the allowance held as of December 31, 2022. The adoption of the CECL accounting standard resulted in an additional allowance of $3.9 million in the allowance for credit losses on loans and $1.9 million in additional allowance for credit losses on unfunded commitments. The allowance for credit losses on loans was $35.7 million as of June 30, 2023, compared to $31.1 million as of December 31, 2022. The $4.6 million increase was the result of a $3.9 million increase from the adoption of the CECL accounting standard as well as a $269 thousand provision for credit losses on loans expense. As of June 30, 2023, the allowance for credit losses on loans represented 1.41% of total loans.

~~Table of Contents~~

~~The following table summarizes the activity in the allowance for credit losses on loans for the periods indicated:~~

Three months ended

Six months ended

June 30,

June 30,

(dollars in thousands)

2023

2022

2023

2022

Balance—beginning of period

$
35,102

$
31,713

$
35,003

$
31,572

Net charge-offs (recoveries):


Commercial net charge-offs (recoveries)

Commercial and Industrial

(353)

547

(234)

448

Real estate construction

—

—

—

—

Commercial real estate

(12)

(11)

(23)

(22)

Total commercial net charge-offs (recoveries)

(365)

536

(257)

426

Consumer net charge-offs (recoveries)

Residential real estate first mortgage

—

—

(2)

—

Residential real estate junior lien

(46)

(201)

25

(214)

Other revolving and installment

8

5

1

(13)

Total consumer net charge-offs (recoveries)

(38)

(196)

24

(227)

Total net charge-offs (recoveries)

(403)

340

(233)

199

Provision for credit losses on loans

191

—

460

—

Balance—end of period

$
35,696

$
31,373

$
35,696

$
31,373

Net charge-offs (recoveries) to average loans

Commercial net charge-offs (recoveries) to average loans

Commercial and Industrial

(0.06)
%

0.12
%

(0.02)
%

0.05
%
Real estate construction

—
%

—
%

—
%

—
%
Commercial real estate

—
%

—
%

—
%

—
%
Total commercial net charge-offs (recoveries) to average loans

(0.06)
%

0.12
%

(0.02)
%

0.05
%
Consumer net charge-offs (recoveries) to average loans

Residential real estate first mortgage

—
%

—
%

—
%

—
%
Residential real estate junior lien

(0.01)
%

(0.04)
%

—
%

(0.02)
%
Other revolving and installment

—
%

—
%

—
%

—
%
Total consumer net charge-offs (recoveries) to average loans

(0.01)
%

(0.04)
%

—
%

(0.03)
%
Total net charge-offs (recoveries) to average loans

(0.07)
%

0.07
%

(0.02)
%

0.02
%

Allowance for credit losses on loans to total loans

1.41
%

1.66
%

1.41
%

1.66
%
Allowance for credit losses on loans to nonaccrual loans

1,599
%

827
%

1,599
%

827
%
Allowance for credit losses on loans to nonperforming loans

1,384
%

821
%

1,384
%

821
%

~~The following table presents the allocation of the allowance for credit losses on loans as of the dates presented:~~

June 30, 2023

December 31, 2022

Percentage

Percentage

Allocated

of loans to

Allocated

of loans to

(dollars in thousands)

Allowance

total loans


Allowance

total loans

Commercial and industrial

$
7,813

21.8
%

$
9,158

23.9
%
Real estate construction

3,646

3.1
%

1,446

4.0
%
Commercial real estate

12,965

39.6
%

12,688

36.0
%
Residential real estate first mortgage

7,901

27.9
%

5,769

27.8
%
Residential real estate junior lien

1,351

6.2
%

1,289

6.2
%
Other revolving and installment

293

1.4
%

528

2.1
%
Unallocated

1,727

—
%

268

—
%
Total loans

$
35,696

100.0
%

$
31,146

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. An allowance was established for off-balance sheet credit exposures as part of the adoption of the CECL accounting standard and is measured using similar internal and external assumptions. This allowance is located in

~~Table of Contents~~

~~accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was $5.2 million as of June 30, 2023.~~

Investment Securities

The following table presents the fair value composition of the Company’s investment securities portfolio as of March 31, 2024 and December 31, 2023:


	March 31, 2024				December 31, 2023
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Available-for-sale
U.S. Treasury and agencies	$	838	0.1	%	$	1,120	0.2	%
Mortgage backed securities
Residential agency		420,893	58.3			435,594	58.4
Commercial		1,351	0.2			1,353	0.2
Asset backed securities		22	—			25	—
Corporate bonds		49,168	6.8			48,644	6.5
Total available-for-sale investment securities		472,272	65.4			486,736	65.3
Held-to-maturity
Obligations of state and political agencies		111,986	15.5			116,990	15.7
Mortgage backed securities
Residential agency		137,821	19.1			141,627	19.0
Total held-to-maturity investment securities		249,807	34.6			258,617	34.7
Total investment securities	$	722,079	100.0	%	$	745,353	100.0	%

The composition of ~~our~~the Company’s investment securities portfolio reflects ~~our~~the Company’s 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

Table of Contents

sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.

~~The following table presents the fair value composition of our investment securities portfolio as of June 30, 2023 and December 31, 2022:~~

June 30, 2023

December 31, 2022


Percent of

Percent of

(dollars in thousands)

Balance

Portfolio

Balance

Portfolio

Available-for-sale

U.S. Treasury and agencies

$
2,906

0.3
%
$
3,520

0.3
%
Mortgage backed securities

Residential agency

558,456

56.6
%

587,679

56.6
%
Commercial

60,909

6.2
%

63,558

6.1
%
Asset backed securities

28

—
%

34

—
%
Corporate bonds

55,155

5.6
%

62,533

6.0
%
Total available-for-sale investment securities

677,454

68.7
%

717,324

69.0
%
Held-to-maturity

Obligations of state and political agencies

131,016

13.3
%

137,787

13.3
%
Mortgage backed securities

Residential agency

177,618

18.0
%

184,115

17.7
%
Total held-to-maturity investment securities

308,634

31.3
%

321,902

31.0
%
Total investment securities

$
986,088

100.0
%
$
1,039,226

100.0
%

The investment securities presented in the following table are reported at fair value and by contractual maturity as of ~~June 30, 2023.~~March 31, 2024. 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

~~Table of Contents~~

collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent ~~basis.~~basis, assuming a 21.00% income tax rate.


	Maturity as of June 30, 2023																Maturity as of March 31, 2024
	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	$	—	—	%	$	420	4.47	%	$	674	5.45	%	$	1,812	5.41	%	$	—	—	%	$	470	5.89	%	$	—	—	%	$	368	5.94	%
Mortgage backed securities
Residential agency		23	3.10	%		3,750	2.23	%		5,761	2.78	%		548,922	1.81	%		12	2.76			3,017	2.48			4,142	3.07			413,722	1.71
Commercial		—	—	%		15,676	2.77	%		7,686	2.81	%		37,547	2.47	%		—	—			—	—			1,351	2.40			—	—
Asset backed securities		—	—	%		—	—	%		8	5.54	%		20	5.22	%		—	—			—	—			5	4.19			17	5.04
Corporate bonds		—	—	%		—	—	%		55,155	3.83	%		—	—	%		—	—			—	—			49,168	3.69			—	—
Total available-for-sale investment securities		23	3.10	%		19,846	2.71	%		69,284	3.67	%		588,301	1.86	%		12	2.76			3,487	2.93			54,666	3.61			414,107	1.71
Held-to-maturity
Obligations of state and political agencies		5,946	0.60	%		40,512	1.31	%		58,000	2.00	%		11,111	2.21	%		7,974	1.08			43,614	1.43			49,662	2.04			10,736	2.21
Mortgage backed securities
Residential agency		—	—	%		—	—	%		—	—	%		145,141	2.21	%		—	—			—	—			—	—			137,821	2.24
Total held-to-maturity investment securities		5,946	0.60	%		40,512	1.31	%		58,000	2.00	%		156,252	2.21	%		7,974	1.08			43,614	1.43			49,662	2.04			148,557	2.23
Total investment securities	$	5,969	0.61	%	$	60,358	1.77	%	$	127,284	2.93	%	$	744,553	1.94	%	$	7,986	1.08	%	$	47,101	1.54	%	$	104,328	2.87	%	$	562,664	1.85	%

Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, real estate construction, commercial real estate (“CRE”), residential real estate, and other revolving and installment loans.

Total loans outstanding were $2.8 billion as of March 31, 2024, an increase of $39.9 million, or 1.4%, from December 31, 2023. The increase was primarily driven by a $28.0 million increase in CRE loans and a $13.4 million increase in commercial and industrial loans, offset by a $2.0 million decrease in residential real estate loans.

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The Company’s loan portfolio is highly diversified. As of March 31, 2024, approximately 21.8% of loans outstanding were commercial and industrial, while 45.7% of loans outstanding were CRE, and 31.4% of loans outstanding were residential real estate.


	March 31, 2024				December 31, 2023
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Commercial and industrial:
General business	$	316,298	11.3	%	$	294,149	10.7	%
Services		147,584	5.3			146,318	5.3
Retail trade		79,620	2.8			91,216	3.3
Manufacturing		68,193	2.4			66,638	2.4
Total commercial and industrial		611,695	21.8			598,321	21.7
Commercial real estate:
Owner occupied		285,149	10.2			271,619	9.8
Non-owner occupied
Multifamily		260,609	9.3			245,103	8.9
Office		133,284	4.8			124,684	4.5
Industrial		103,303	3.7			104,241	3.8
Retail		96,023	3.4			96,578	3.5
Hotel		67,288	2.4			80,576	2.9
Medical office		63,775	2.3			63,788	2.3
Medical or nursing facility		47,302	1.7			47,625	1.7
Other commercial real estate		55,066	1.9			51,866	1.9
Total non-owner occupied		826,650	29.5			814,461	29.5
Construction		125,966	4.5			124,034	4.5
Agricultural real estate		41,149	1.5			40,832	1.5
Total commercial real estate		1,278,914	45.7			1,250,946	45.3
Consumer
Residential real estate first mortgage		722,151	25.8			726,879	26.3
Residential real estate junior lien		156,882	5.6			154,134	5.6
Other revolving and installment		29,833	1.1			29,303	1.1
Total consumer		908,866	32.5			910,316	33.0
Total loans	$	2,799,475	100.0	%	$	2,759,583	100.0	%

Despite headwinds from a higher interest rate environment and competition in the Company’s market areas, the Company anticipates continued loan growth for the commercial and industrial and commercial real estate loan portfolios as a result of recently added production talent.

Commercial loans represent loans for working capital, purchases of equipment and other needs of commercial customers primarily located within the Bank’s geographical footprint. These loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and the customer’s market. While commercial loans are generally secured by the customer’s assets, including real property, inventory, accounts receivable, operating equipment and other property, and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer’s business. In addition, revolving lines of credit are generally governed by a borrowing base. Inherent lending risks are monitored on a continuous basis through interim reporting, covenant testing and annual underwriting.

CRE loans consist of term loans secured by a mortgage lien on real property and include both owner occupied CRE loans as well as non-owner occupied loans. Non-owner occupied CRE loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and other specific use properties as well as CRE construction loans that are offered to builders and developers generally within the Bank’s geographical footprint. The primary risk characteristics in the non-owner occupied portfolio include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each

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asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite. Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product type and are monitored quarterly by the Bank’s Credit Governance Committee and Bank Board of Directors.

CRE loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company does not monitor the CRE portfolio for attributes such as loan-to-value ratios, occupancy rates or net operating income, as these characteristics are assessed and evaluated on an individual loan basis. Portfolio stress testing is completed based on property type and takes into consideration changes to net operating income and capitalization rates. The Company does not have exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with strong occupancy levels.

The following table presents the geographical markets of the collateral related to the non-owner occupied CRE loans for the periods presented:


	March 31, 2024				December 31, 2023
			Percent of				Percent of
(dollars in thousands)	Balance		Total		Balance		Total
Geographical Market:
Minnesota	$	408,858	49.5	%	$	394,754	48.5	%
North Dakota		212,551	25.7	%		214,884	26.4	%
Arizona		130,568	15.8	%		139,450	17.1	%
Missouri		15,970	1.9	%		15,969	2.0	%
Oregon		14,956	1.8	%		14,953	1.8	%
South Dakota		14,720	1.8	%		14,790	1.8	%
Other		29,027	3.5	%		19,661	2.4	%
Total non-owner occupied commercial real estate loans	$	826,650	100.0	%	$	814,461	100.0	%

The Bank does not currently monitor owner occupied CRE loans based on geographical markets, as the primary source of repayment for these loans is predicated on the cash flow from the underlying operating entity. These loans are generally located within the Company’s geographical footprint.

Highly competitive conditions continue to prevail in the small- and middle-market commercial segments in which the Company primarily operates. The Company maintains a commitment to generating growth in the Company’s business portfolio in a manner that adheres to its twin goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities.

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

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

The Company originates both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of the Company’s fixed rate residential loans, along with some of the Company’s adjustable rate mortgages are sold to other financial institutions with which the Company has established a correspondent lending relationship.

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The Company’s consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of March 31, 2024, the Company’s consumer mortgage portfolio was $879.0 million, which was a $2.0 million, or 0.2%, decrease from $881.0 million as of December 31, 2023. Market interest rates, expected duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.

The following table presents the maturities and types of interest rates for the loan portfolio as of March 31, 2024:


	March 31, 2024
			After one		After five
	One year		but within		but within		After
(dollars in thousands)	or less		five years		fifteen years		fifteen years		Total
Commercial
Commercial and industrial	$	149,102	$	259,712	$	202,881	$	—	$	611,695
Real estate construction		12,214		109,851		1,709		2,192		125,966
Commercial real estate		91,414		610,152		384,410		66,972		1,152,948
Total commercial		252,730		979,715		589,000		69,164		1,890,609
Consumer
Residential real estate first mortgage		4,601		33,865		43,388		640,297		722,151
Residential real estate junior lien		8,684		21,224		32,724		94,250		156,882
Other revolving and installment		10,442		16,808		2,583		—		29,833
Total consumer		23,727		71,897		78,695		734,547		908,866
Total loans	$	276,457	$	1,051,612	$	667,695	$	803,711	$	2,799,475
Loans with fixed interest rates:
Commercial
Commercial and industrial	$	19,540	$	211,917	$	79,223	$	—	$	310,680
Real estate construction		10,220		22,143		34		—		32,397
Commercial real estate		78,793		415,228		253,237		23,456		770,714
Total commercial		108,553		649,288		332,494		23,456		1,113,791
Consumer
Residential real estate first mortgage		2,576		30,943		36,759		410,236		480,514
Residential real estate junior lien		2,314		6,312		22,269		14,091		44,986
Other revolving and installment		1,520		13,417		2,583		—		17,520
Total consumer		6,410		50,672		61,611		424,327		543,020
Total loans with fixed interest rates	$	114,963	$	699,960	$	394,105	$	447,783	$	1,656,811
Loans with floating interest rates:
Commercial
Commercial and industrial	$	129,562	$	47,795	$	123,658	$	—	$	301,015
Real estate construction		1,994		87,708		1,675		2,192		93,569
Commercial real estate		12,621		194,924		131,173		43,516		382,234
Total commercial		144,177		330,427		256,506		45,708		776,818
Consumer
Residential real estate first mortgage		2,025		2,922		6,629		230,061		241,637
Residential real estate junior lien		6,370		14,912		10,455		80,159		111,896
Other revolving and installment		8,922		3,391		—		—		12,313
Total consumer		17,317		21,225		17,084		310,220		365,846
Total loans with floating interest rates	$	161,494	$	351,652	$	273,590	$	355,928	$	1,142,664

The expected life of the Company’s 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.

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Asset Quality

The Company’s 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. The Company strives to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for credit losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. The Company utilized an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.

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. See “NOTE 4 Loans and Allowance for Credit Losses” of 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 March 31, 2024 and December 31, 2023:


	March 31,			December 31,
(dollars in thousands)	2024			2023
Commercial
Commercial and industrial	$	42,653		$	29,840
Real estate construction		21,055			20,667
Commercial real estate		34,442			9,170
Total commercial		98,150			59,677
Consumer
Residential real estate first mortgage		5,301			105
Residential real estate junior lien		2,588			1,781
Other revolving and installment		1			—
Total consumer		7,890			1,886
Total loans	$	106,040		$	61,563
Criticized loans as a percent of total loans		3.79	%		2.23	%

The following table presents information regarding nonperforming assets as of March 31, 2024 and December 31, 2023:


	March 31,			December 31,
(dollars in thousands)	2024			2023
Nonaccrual loans	$	7,345		$	8,596
Accruing loans 90+ days past due		—			139
Total nonperforming loans		7,345			8,735
OREO and repossessed assets		3			32
Total nonperforming assets		7,348			8,767
Total restructured accruing loans		—			—
Total nonperforming assets and restructured accruing loans	$	7,348		$	8,767
Nonperforming loans to total loans		0.26	%		0.32	%
Nonperforming assets to total assets		0.17	%		0.22	%
Allowance for credit losses on loans to nonperforming loans		498	%		410	%

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Interest income lost on nonaccrual loans approximated $651 thousand and $38 thousand for the three months ended March 31, 2024 and 2023, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended March 31, 2024 and 2023.

Allowance for Credit Losses

The allowance for credit losses, or ACL, on loans is maintained at a level management believes is sufficient to absorb expected losses in the loan portfolio over the remaining estimated life of loans in the portfolio. Under CECL accounting standard the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets. The expense for provision (recovery) for unfunded commitments for the three months ended March 31, 2024 and 2023, was ($0.8) million and $0.2 million, respectively.

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The following table presents, by loan type, the changes in the allowance for credit losses on loans for the periods presented:


	Three months ended
	March 31,
(dollars in thousands)	2024			2023
Balance—beginning of period	$	35,843		$	35,003
Commercial loan charge-offs
Commercial and Industrial		(164)			(175)
Real estate construction		—			—
Commercial real estate		(29)			—
Total commercial loan charge-offs		(193)			(175)
Consumer loan charge-offs
Residential real estate first mortgage		—			—
Residential real estate junior lien		—			(77)
Other revolving and installment		(12)			(5)
Total consumer loan charge-offs		(12)			(82)
Total loan charge-offs		(205)			(257)
Commercial loan recoveries
Commercial and Industrial		123			56
Real estate construction		—			—
Commercial real estate		11			11
Total commercial recoveries		134			67
Consumer loan recoveries
Residential real estate first mortgage		—			2
Residential real estate junior lien		—			6
Other revolving and installment		13			12
Total consumer loan recoveries		13			20
Total loan recoveries		147			87
Net loan charge-offs (recoveries)		58			170
Commercial loan provision
Commercial and Industrial		122			(395)
Real estate construction		(189)			439
Commercial real estate		834			35
Total commercial loan provision		767			79
Consumer loan provision
Residential real estate first mortgage		63			187
Residential real estate junior lien		(3)			121
Other revolving and installment		(28)			(118)
Total consumer loan provision		32			190
Total provision for credit losses on loans		799			269
Balance—end of period	$	36,584		$	35,102
Total loans	$	2,799,475		$	2,486,625
Average total loans		2,768,514			2,457,154
Allowance for credit losses on loans to total loans		1.31	%		1.41
Net charge-offs/(recoveries) to average total loans (annualized)		0.01	%		0.03

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The following table summarizes the activity in the allowance for credit losses on loans for the periods indicated:


	Three months ended
	March 31,
(dollars in thousands)	2024			2023
Balance—beginning of period	$	35,843		$	35,003
Net charge-offs (recoveries):
Commercial net charge-offs (recoveries)
Commercial and Industrial		41			119
Real estate construction		—			—
Commercial real estate		18			(11)
Total commercial net charge-offs (recoveries)		59			108
Consumer net charge-offs (recoveries)
Residential real estate first mortgage		—			(2)
Residential real estate junior lien		—			71
Other revolving and installment		(1)			(7)
Total consumer net charge-offs (recoveries)		(1)			62
Total net charge-offs (recoveries)		58			170
Provision for credit losses on loans		799			269
Balance—end of period	$	36,584		$	35,102

Net charge-offs (recoveries) to average loans
Commercial net charge-offs (recoveries) to average loans
Commercial and Industrial		0.01	%		0.02	%
Real estate construction		—	%		—	%
Commercial real estate		—	%		—	%
Total commercial net charge-offs (recoveries) to average loans		0.01	%		0.02	%
Consumer net charge-offs (recoveries) to average loans
Residential real estate first mortgage		—	%		—	%
Residential real estate junior lien		—	%		0.01	%
Other revolving and installment		—	%		—	%
Total consumer net charge-offs (recoveries) to average loans		—	%		0.01	%
Total net charge-offs (recoveries) to average loans		0.01	%		0.03	%

Allowance for credit losses on loans to total loans		1.31	%		1.41	%
Allowance for credit losses on loans to nonaccrual loans		498	%		1,657	%
Allowance for credit losses on loans to nonperforming loans		498	%		1,657	%

The following table presents the allocation of the allowance for credit losses on loans as of the dates presented:


	March 31, 2024				December 31, 2023
			Percentage				Percentage
	Allocated		of loans to		Allocated		of loans to
(dollars in thousands)	Allowance		total loans		Allowance		total loans
Commercial and industrial	$	9,975	21.8	%	$	9,894	21.7	%
Real estate construction		5,922	4.5			6,111	4.5
Commercial real estate		12,713	41.2			11,897	40.8
Residential real estate first mortgage		6,641	25.8			6,578	26.3
Residential real estate junior lien		1,148	5.6			1,151	5.6
Other revolving and installment		185	1.1			212	1.1
Total loans	$	36,584	100.0	%	$	35,843	100.0	%

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In the ordinary course of business, the Company enters 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. An ACL on off-balance sheet credit exposures is measured using similar internal and external assumptions as the ACL on loans. This allowance is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The ACL for unfunded commitments was $6.6 million and $5.4 million as of March 31, 2024 and 2023, respectively.

Deposits

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and economic conditions, and fluctuations in ~~our~~the Company’s customers’ own liquidity needs and may also be influenced by recent developments in the financial services industry, including the large-scale deposit withdrawals over a short period of time ~~at Silicon Valley Bank, Signature Bank, and First Republic Bank~~ that resulted in ~~the failure of those institutions.~~ recent bank failures.

Total deposits were ~~$2.9~~$3.3 billion as of ~~June 30, 2023, a decrease~~March 31, 2024, an increase of ~~$62.6~~$189.4 million, or ~~2.1%~~6.1%, from December 31, ~~2022.~~2023. Interest-bearing deposits increased ~~$82.8~~$224.9 million while noninterest-bearing deposits decreased ~~$145.5~~$35.6 million. The ~~decrease~~increase in total deposits was due to both seasonal inflows of public ~~unit depositor seasonality~~funds deposit balances and ~~clients using excess liquidity~~expanded commercial deposit relationships, along with time deposit and ~~paying down revolving debt.~~synergistic deposit growth. Noninterest-bearing deposits decreased from ~~29.5%~~23.5% of total deposits to ~~25.1%~~21.1% as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.

The following table presents the composition of ~~our~~the Company’s deposit portfolio as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30, 2023				December 31, 2022								March 31, 2024				December 31, 2023
			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	$	715,534	25.1	%	$	860,987	29.5	%	$	(145,453)	(16.9)	%	$	692,500	21.1	%	$	728,082	23.5	%	$	(35,582)	(4.9)	%
Interest-bearing demand		753,194	26.4	%		706,275	24.2	%		46,919	6.6	%		938,751	28.6			840,711	27.2			98,040	11.7
Money market and savings		1,079,960	37.8	%		1,135,863	39.0	%		(55,903)	(4.9)	%		1,196,989	36.4			1,115,256	36.0			81,733	7.3
Time deposits		304,167	10.7	%		212,359	7.3	%		91,808	43.2	%		456,729	13.9			411,562	13.3			45,167	11.0
Total deposits	$	2,852,855	100.0	%	$	2,915,484	100.0	%	$	(62,629)	(2.1)	%	$	3,284,969	100.0	%	$	3,095,611	100.0	%	$	189,358	6.1	%

The following table presents the average balances and rates of the Company’s deposit portfolio for the three months ended March 31, 2024 and 2023:


	Three months ended March 31,
	2024				2023
	Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest-bearing demand	$	675,926	—	%	$	789,134	—	%
Interest-bearing demand		869,060	1.97			746,660	0.87
Money market and savings		1,186,900	3.77			1,165,269	2.17
Time deposits		431,679	4.46			231,959	2.23
Total deposits	$	3,163,565	2.56	%	$	2,933,022	1.26	%

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~~The following table presents the average balances and rates of our deposit portfolio for the three months ended June 30, 2023 and 2022:~~

Three months ended June 30,

2023

2022

Average

Average

Average

Average

(dollars in thousands)

Balance

Rate

Balance

Rate

Noninterest-bearing demand

$
768,927

—
%
$
807,271

—
%
Interest-bearing demand

761,319

1.26
%

708,888

0.12
%
Money market and savings

1,155,247

2.81
%

1,042,660

0.14
%
Time deposits

251,145

3.29
%

219,592

0.43
%
Total deposits

$
2,936,638

1.73
%
$
2,778,411

0.12
%

The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $250 thousand and over, that were outstanding as of ~~June 30, 2023:~~March 31, 2024:


	June 30,		March 31,
(dollars in thousands)	2023		2024
Maturing in:
3 months or less	$	89,190	$	54,618
3 months to 6 months		3,453		79,005
6 months to 1 year		821		14,031
1 year or greater		752		3,128
Total	$	94,216	$	150,782

The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately ~~$983.6 million~~$1.2 billion at ~~June 30, 2023~~March 31, 2024 These amounts were estimated based on the same methodologies used for regulatory reporting purposes.

Borrowings

Borrowings as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 were as follows:

June 30, 2023

December 31, 2022

Percent of

Percent of

(dollars in thousands)

Balance

Portfolio

Balance

Portfolio

Fed funds purchased

$
492,060

89.3
%
$
153,080

35.0
%
FHLB Short-term advances

—

—
%

225,000

51.6
%
Subordinated notes

50,000

9.1
%

50,000

11.4
%
Junior subordinated debentures

8,900

1.6
%

8,843

2.0
%
Total borrowed funds

$
550,960

100.0
%
$
436,923

100.0
%


	March 31, 2024				December 31, 2023
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Fed funds purchased	$	—	—	%	$	114,170	30.6	%
Bank Term Funding Program ⁽¹⁾		355,000	57.8			—	—
FHLB Short-term advances		200,000	32.6			200,000	53.6
Subordinated notes		50,000	8.1			50,000	13.4
Junior subordinated debentures		8,985	1.5			8,956	2.4
Total borrowed funds	$	613,985	100.0	%	$	373,126	100.0	%

(1)

In the first quarter of 2024, the Company borrowed $355.0 million from BTFP for a period of up to one year at a fixed rate of 4.88%. Under the program, the Company may prepay this borrowing at any time without penalty and the borrowing is secured by the Company’s pledged collateral of investment securities.

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 ~~$813 thousand,~~$2.5 million, or ~~0.2%~~0.7%, to ~~$357.7~~$371.6 million as of ~~June 30, 2023,~~March 31, 2024, compared to ~~$356.9~~$369.1 million as of December 31, ~~2022~~2023. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to ~~7.72%~~7.23% as of ~~June 30, 2023,~~March 31, 2024, from ~~7.74%~~7.94% as of December 31, ~~2022.~~2023. Common equity tier 1 capital to risk weighted assets ~~decreased~~increased to ~~13.30%~~11.86% as of ~~June 30, 2023,~~March 31, 2024, from ~~13.39%~~11.82% as of December 31, ~~2022.~~2023.

~~We strive~~The Company strives to maintain an adequate capital base to support ~~our~~the Company’s 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~~

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the Company’s 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~~The Company is 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~~the Company’s 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

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under regulatory accounting policies. ~~We have~~The Company has consistently maintained regulatory capital ratios at or above the well-capitalized standards.

At ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022, we~~2023, the Company met all the capital adequacy requirements to which ~~we were~~the Company was subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022:~~2023:


	June 30,		December 31,		March 31,		December 31,
Capital Ratios	2023		2022		2024		2023
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets	13.30	%	13.39	%	11.86	%	11.82	%
Tier 1 capital to risk weighted assets	13.60	%	13.69	%	12.13	%	12.10	%
Total capital to risk weighted assets	16.49	%	16.48	%	14.79	%	14.76	%
Tier 1 capital to average assets	11.15	%	11.25	%	9.89	%	10.57	%
Tangible common equity to tangible assets (1)	7.72	%	7.74	%	7.23	%	7.94	%

Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	12.93	%	12.76	%	11.71	%	11.40	%
Tier 1 capital to risk weighted assets	12.93	%	12.76	%	11.71	%	11.40	%
Total capital to risk weighted assets	14.14	%	13.83	%	12.87	%	12.51	%
Tier 1 capital to average assets	10.59	%	10.48	%	9.30	%	9.92	%

(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, 2023,~~March 31, 2024, as shown in the above table, were at levels above the regulatory minimums to be considered “well ~~capitalized”.~~capitalized.” See “NOTE 18 Regulatory Matters” toof the consolidated financial statements for additional information.

Off-Balance Sheet Arrangements

~~We are~~The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of ~~our~~the Company’s 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.

A summary of the contractual amounts of ~~our~~the Company’s exposure to off-balance sheet agreements as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, was as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2023		2022		2024		2023
Commitments to extend credit	$	786,451	$	806,431	$	916,200	$	942,413
Standby letters of credit		9,784		13,089		12,755		10,045
Total	$	796,235	$	819,520	$	928,955	$	952,458

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Liquidity

Liquidity management is the process by which ~~we manage~~the Company manages the flow of funds necessary to meet ~~our~~the Company’s 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~~the Company’s operations, and capital expenditures. Liquidity is monitored and closely managed by ~~our~~the Company’s 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 Company has 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, 2023, we~~March 31, 2024, the Company had on balance sheet liquidity of ~~$654.4~~$712.3 million, compared to ~~$778.9~~$668.2 million as of December 31, ~~2022.~~2023. On balance sheet liquidity includes cash and cash equivalents, federal funds sold, unencumbered securities available-for-sale, and over collateralized securities pledging positions available-for-sale.

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. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of ~~June 30, 2023, we~~March 31, 2024, the Company had ~~$492.1 million in~~no federal funds purchased and no$200.0 million in short-term borrowings from the FHLB. As of ~~June 30, 2023, we~~March 31, 2024, the Company had ~~$1.5~~$1.6 billion of collateral pledged to the FHLB and based on this collateral, ~~we were~~the Company was eligible to borrow up to an additional ~~$493.5~~$898.0 million from the FHLB. In addition, wethe Company can borrow up to $107.0 million through the unsecured lines of credit ~~we have~~the Company has established with four other correspondent banks.

In addition, because the Bank is “well capitalized,” wethe Company can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or ~~$766.6~~$867.6 million, as of ~~June 30, 2023.~~March 31, 2024. Management believed that wethe Company had adequate resources to fund all of ~~our~~the Company’s commitments as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023.

~~Our~~The Company’s 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 the recent rise in inflation and rising interest rates could place increased demand on ~~our~~the Company’s liquidity if ~~we experience~~the Company experiences significant credit deterioration and as ~~we meet~~the Company meets 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 wethe Company 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~~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~~The Company seeks 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,

~~Table of Contents~~

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~~the Company’s assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

Management regularly reviews ~~our~~the Company’s 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~~the Company’s loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. The balance sheet composition and size are assumed to remain static in the simulation modeling process. The analysis provides a framework as to what ~~our~~the Company’s overall sensitivity position is as of ~~our~~the Company’s 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~~the Company’s 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~~the Company’s net interest income as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, assuming immediate parallel moves in interest rates, is presented in the table below:


	June 30, 2023				December 31, 2022				March 31, 2024				December 31, 2023
	Following		Following		Following		Following		Following		Following		Following		Following
	12 months		24 months		12 months		24 months		12 months		24 months		12 months		24 months
+400 basis points	−35.0	%	−18.2	%	−25.1	%	−8.2	%	10.9	%	8.0	%	1.0	%	2.4	%
+300 basis points	−26.3	%	−13.8	%	−18.9	%	−6.4	%	8.0	%	5.6	%	0.5	%	1.4	%
+200 basis points	−17.5	%	−9.2	%	−12.7	%	−4.4	%	5.6	%	4.3	%	0.3	%	0.9	%
+100 basis points	−8.5	%	−4.1	%	−6.2	%	−1.8	%	3.0	%	2.4	%	0.4	%	0.9	%
−100 basis points	7.7	%	2.8	%	5.2	%	0.5	%	−0.8	%	−2.9	%	−1.0	%	−1.7	%
−200 basis points	13.3	%	3.3	%	7.9	%	−1.7	%	−1.7	%	−5.9	%	−2.3	%	−4.1	%
−300 basis points									−2.9	%	−9.6	%	−4.1	%	−7.2	%
−400 basis points									−2.2	%	−10.2	%	−5.0	%	−7.6	%

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

~~Table of Contents~~

characteristics assumed, as well as changes in market conditions. 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.

The table below presents the change in the economic value of equity as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, assuming immediate parallel shifts in interest rates:


	June 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
+400 basis points	−27.7	%	−19.5	%	−8.5	%	−15.5	%
+300 basis points	−21.6	%	−15.3	%	−7.1	%	−12.6	%
+200 basis points	−14.6	%	−10.4	%	−3.5	%	−7.7	%
+100 basis points	−6.9	%	−4.9	%	−1.2	%	−3.1	%
−100 basis points	5.7	%	4.0	%	0.3	%	1.6	%
−200 basis points	8.7	%	5.0	%	−0.4	%	2.0	%
−300 basis points					−3.0	%	−0.3	%
−400 basis points					−7.2	%	−5.6	%

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~~the Company’s 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 usthe Company 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~~the Company’s banking center network, employment and tax matters.

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Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements 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~~the President and Chief Executive Officer, ~~our~~the Chief Financial Officer, and ~~our~~the Chief Accounting Officer have evaluated the effectiveness of ~~our~~the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, ~~our~~the President and Chief Executive Officer, ~~our~~the Chief Financial Officer and ~~our~~the Chief Accounting 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

~~Table of Contents~~

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, its Chief Financial Officer and its Chief Accounting 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.

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 wethe Company or any of ~~our~~its subsidiaries are a party or to which ~~our~~the Company's 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 ~~13, 2023.~~8, 2024.

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~~the Company’s common stock for each calendar month in the ~~second~~first quarter of ~~2023:~~2024:



				Total Number of	Maximum Number of				Total Number of	Maximum Number of
	Total Number	Average		Shares Purchased as	Shares that May	Total Number	Average		Shares Purchased as	Shares that May
	of Shares	Price Paid		Part of Publicly	Yet be Purchased	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)	Purchased ⁽¹⁾	per Share		Announced Plans	Under the Plan ⁽²⁾
April 1-30, 2023	—	$	—	—	770,000
May 1-31, 2023	62,513		16.13	62,513	770,000
June 1-30, 2023	107,533		18.09	107,533	770,000
January 1-31, 2024						902	$	20.62	—	1,000,000
February 1-29, 2024						1,856		22.39	—	1,000,000
March 1-31, 2024						33,658		22.06	—	1,000,000
Total	170,046	$	17.37	170,046	770,000	36,416	$	22.04	—	1,000,000

(1)	~~Shares repurchased~~Represents shares of the Company’s common stock purchased by the ~~Company represent~~Company’s Employee Stock Ownership Plan in open market purchases and 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 Existing Program, which ~~authorizes~~authorized the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Existing Program was effective immediately and ~~will continue for a period of 36 months,~~continued until February ~~28,~~18, 2024. On December 12, 2023, the Board approved a new stock repurchase program, or the New Program, which authorized the Company to repurchase up to 1,000,000 shares of its common stock, subject to certain limitations and conditions. The New Program ~~does not obligate~~became effective on February 18, 2024, and replaced the Existing Program. The New Program will expire on February 18, 2027. Neither the Existing Program nor the New Program obligates 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 ~~June 30, 2023,~~March 31, 2024, the Company ~~repurchased 170,046~~did not repurchase any shares of common stock under either the Existing Program or the New Program. Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan.

~~Table of Contents~~

Use of Proceeds from Registered Securities

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

During the fiscal quarter ended ~~June 30, 2023,~~March 31, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.

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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		Executive Severance Agreement by and between Alerus Financial Corporation and Forrest Wilson, dated February 26, 2024 (incorporated by reference to Exhibit 10.32 on Form 10-K filed on March 8, 2024)

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)

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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 3, 2023~~May 2, 2024	By:	/s/ Katie A. Lorenson
		Name: Katie A. Lorenson
		Title: President and Chief Executive Officer (Principal Executive Officer)

Date: ~~August 3, 2023~~May 2, 2024	By:	/s/ Alan A. Villalon
		Name: Alan A. Villalon
		Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer)


	January 1, 2023
	As reported				Pre-tax impact of
(dollars in thousands)	under		Pre-ASC 326		ASC 326
Assets:	ASC 326		Adoption		Adoption
Investments
Held-to-maturity
Obligations of state and political agencies	$	110	$	—	$	110
Mortgage backed securities
Residential agency		62		—		62
Total allowance for held-to-maturity investment securities		172		—		172
Loans
Commercial
Commercial and industrial		8,296		9,158		(862)
Real estate construction		3,964		1,446		2,518
Commercial real estate		12,264		12,688		(424)
Total commercial		24,524		23,292		1,232
Consumer
Residential real estate first mortgage		7,849		5,769		2,080
Residential real estate junior lien		1,222		1,289		(67)
Other revolving and installment		424		528		(104)
Total consumer		9,495		7,586		1,909
Unallocated		984		268		716
Total allowance for loans		35,003		31,146		3,857
Allowance for credit losses on loans and investments securities	$	35,175	$	31,146	$	4,029
Liabilities:
Allowance for credit losses on unfunded commitments	$	5,159	$	3,244	$	1,915


	As of June 30, 2023
	Nonaccrual				90 Days
	with no Allowance				or More
(dollars in thousands)	for Credit Losses		Nonaccrual		Past Due
Commercial
Commercial and industrial	$	119	$	381	$	—
Real estate construction		151		151		—
Commercial real estate		—		896		—
Total commercial		270		1,428		—
Consumer
Residential real estate first mortgage		293		299		347
Residential real estate junior lien		500		500		—
Other revolving and installment		—		6		—
Total consumer		793		805		347
Total loans	$	1,063	$	2,233	$	347


	December 31, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	558,694	$	21,969	$	3,213	$	—	$	583,876
Real estate construction		97,548		—		262		—		97,810
Commercial real estate		873,270		—		8,400		—		881,670
Total commercial		1,529,512		21,969		11,875		—		1,563,356
Consumer
Residential real estate first mortgage		678,743		63		745		—		679,551
Residential real estate junior lien		149,847		—		632		—		150,479
Other revolving and installment		50,607		—		1		—		50,608
Total consumer		879,197		63		1,378		—		880,638
Total loans	$	2,408,709	$	22,032	$	13,253	$	—	$	2,443,994


	December 31, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,313	$	582,563	$	583,876	$	275	$	8,883	$	9,158
Real estate construction		262		97,548		97,810		97		1,349		1,446
Commercial real estate		1,472		880,198		881,670		582		12,106		12,688
Total commercial		3,047		1,560,309		1,563,356		954		22,338		23,292
Consumer
Residential real estate first mortgage		535		679,016		679,551		—		5,769		5,769
Residential real estate junior lien		184		150,295		150,479		—		1,289		1,289
Other revolving and installment		1		50,607		50,608		—		528		528
Total consumer		720		879,918		880,638		—		7,586		7,586
Unallocated		—		—		—		—		—		268
Total loans	$	3,767	$	2,440,227	$	2,443,994	$	954	$	29,924	$	31,146


	December 31, 2022
	Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	675	$	711	$	275
Real estate construction		262		440		97
Commercial real estate		896		900		582
Residential real estate first mortgage		—		—		—
Total impaired loans with a valuation allowance		1,833		2,051		954
Impaired loans without a valuation allowance
Commercial and industrial		638		767		—
Real estate construction		—		—		—
Commercial real estate		576		660		—
Residential real estate first mortgage		535		573		—
Residential real estate junior lien		184		218		—
Other revolving and installment		1		1		—
Total impaired loans without a valuation allowance		1,934		2,219		—
Total impaired loans
Commercial and industrial		1,313		1,478		275
Real estate construction		262		440		97
Commercial real estate		1,472		1,560		582
Residential real estate first mortgage		535		573		—
Residential real estate junior lien		184		218		—
Other revolving and installment		1		1		—
Total impaired loans	$	3,767	$	4,270	$	954