10-Q

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, 2022

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

Commission File Number: 001-39036

ALERUS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	45-0375407
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
401 Demers Avenue
Grand Forks, ND	58201
(Address of principal executive offices)	(Zip Code)

(701) 795-3200

(Registrant’s telephone number, including area code)

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

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

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

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

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

Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ☒

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

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

The number of shares of the registrant’s common stock outstanding at July 31, 2022 was 19,987,017.

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, 2022 and December 31, 2021	1
	Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021	2
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021	3
	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	61
Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
Signatures		65

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)	2022		2021
Assets	(Unaudited)		(Audited)
Cash and cash equivalents	$	37,043	$	242,311
Investment securities
Available-for-sale, at fair value		798,797		853,649
Held-to-maturity, at carrying value		331,741		352,061
Loans held for sale		54,363		46,490
Loans		1,890,243		1,758,020
Allowance for loan losses		(31,373)		(31,572)
Net loans		1,858,870		1,726,448
Land, premises and equipment, net		17,180		18,370
Operating lease right-of-use assets		3,439		3,727
Accrued interest receivable		9,155		8,537
Bank-owned life insurance		33,564		33,156
Goodwill		31,337		31,490
Other intangible assets		17,511		20,250
Servicing rights		2,064		1,880
Deferred income taxes, net		32,814		11,614
Other assets		67,187		42,708
Total assets	$	3,295,065	$	3,392,691
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	764,808	$	938,840
Interest-bearing		1,854,742		1,981,711
Total deposits		2,619,550		2,920,551
Short-term borrowings		242,350		—
Long-term debt		58,870		58,933
Operating lease liabilities		3,856		4,275
Accrued expenses and other liabilities		63,281		49,529
Total liabilities		2,987,907		3,033,288
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding		—		—
Common stock, $1 par value, 30,000,000 shares authorized: 17,306,237 and 17,212,588 issued and outstanding		17,306		17,213
Additional paid-in capital		93,129		92,878
Retained earnings		267,128		253,567
Accumulated other comprehensive income (loss)		(70,405)		(4,255)
Total stockholders’ equity		307,158		359,403
Total liabilities and stockholders’ equity	$	3,295,065	$	3,392,691

See accompanying notes to consolidated financial statements (unaudited)

1

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Interest Income
Loans, including fees	$	17,988	$	19,324	$	35,280	$	39,891
Investment securities
Taxable		6,068		2,897		11,508		5,298
Exempt from federal income taxes		213		233		429		469
Other		157		130		273		247
Total interest income		24,426		22,584		47,490		45,905
Interest Expense
Deposits		813		906		1,642		1,901
Short-term borrowings		278		—		278		—
Long-term debt		559		538		1,121		826
Total interest expense		1,650		1,444		3,041		2,727
Net interest income		22,776		21,140		44,449		43,178
Provision for loan losses		—		—		—		—
Net interest income after provision for loan losses		22,776		21,140		44,449		43,178
Noninterest Income
Retirement and benefit services		16,293		17,871		33,939		35,126
Wealth management		5,548		5,138		10,874		10,124
Mortgage banking		6,038		12,287		10,969		29,419
Service charges on deposit accounts		412		330		775		668
Net gains (losses) on investment securities		—		—		—		114
Other		935		1,122		2,139		2,178
Total noninterest income		29,226		36,748		58,696		77,629
Noninterest Expense
Compensation		21,248		24,309		40,299		48,007
Employee taxes and benefits		5,787		5,572		11,949		11,385
Occupancy and equipment expense		1,737		1,918		3,788		4,149
Business services, software and technology expense		4,785		4,958		9,709		9,934
Intangible amortization expense		1,053		1,088		2,106		2,239
Professional fees and assessments		2,246		1,509		3,787		2,981
Marketing and business development		814		769		1,414		1,445
Supplies and postage		572		503		1,218		1,034
Travel		356		36		535		62
Mortgage and lending expenses		482		1,199		1,168		2,531
Other		904		689		2,082		1,825
Total noninterest expense		39,984		42,550		78,055		85,592
Income before income taxes		12,018		15,338		25,090		35,215
Income tax expense		2,725		3,644		5,613		8,306
Net income	$	9,293	$	11,694	$	19,477	$	26,909
Per Common Share Data
Basic earnings per common share	$	0.53	$	0.67	$	1.11	$	1.54
Diluted earnings per common share	$	0.52	$	0.66	$	1.10	$	1.52
Dividends declared per common share	$	0.18	$	0.16	$	0.34	$	0.31
Average common shares outstanding		17,297		17,194		17,271		17,170
Diluted average common shares outstanding		17,532		17,497		17,517		17,482

See accompanying notes to consolidated financial statements (unaudited)

2

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Net Income	$	9,293	$	11,694	$	19,477	$	26,909
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities		(37,394)		7,430		(88,119)		(10,606)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity		(97)		(115)		(199)		(115)
Reclassification adjustment for losses (gains) realized in income		—		—		—		(114)
Total other comprehensive income (loss), before tax		(37,491)		7,315		(88,318)		(10,835)
Income tax expense (benefit) related to items of other comprehensive income		(9,410)		1,836		(22,168)		(2,720)
Other comprehensive income (loss), net of tax		(28,081)		5,479		(66,150)		(8,115)
Total comprehensive income (loss)	$	(18,788)	$	17,173	$	(46,673)	$	18,794

See accompanying notes to consolidated financial statements (unaudited)

3

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

	Three months ended June 30, 2022
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars and shares 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)
Stock-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

	Six 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 December 31, 2021	$	17,213	$	92,878	$	253,567	$	(4,255)	$	359,403
Net income		—		—		19,477		—		19,477
Other comprehensive income (loss)		—		—		—		(66,150)		(66,150)
Common stock repurchased		(24)		(673)		—		—		(697)
Common stock dividends		—		—		(5,916)		—		(5,916)
Share‑based compensation expense		10		1,031		—		—		1,041
Vesting of restricted stock		107		(107)		—		—		—
Balance as of June 30, 2022	$	17,306	$	93,129	$	267,128	$	(70,405)	$	307,158

	Three months ended June 30, 2021
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of March 31, 2021	$	17,190	$	90,520	$	224,480	$	(2,956)	$	329,234
Net income		—		—		11,694		—		11,694
Other comprehensive income (loss)		—		—		—		5,479		5,479
Common stock repurchased		—		—		—		—		—
Common stock dividends		—		—		(2,777)		—		(2,777)
Stock-based compensation expense		8		753		—		—		761
Vesting of restricted stock		—		—		—		—		—
Balance as of June 30, 2021	$	17,198	$	91,273	$	233,397	$	2,523	$	344,391

	Six months ended June 30, 2021
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of December 31, 2020	$	17,125	$	90,237	$	212,163	$	10,638	$	330,163
Net income		—		—		26,909		—		26,909
Other comprehensive income (loss)		—		—		—		(8,115)		(8,115)
Common stock repurchased		(16)		(134)		(296)		—		(446)
Common stock dividends		—		—		(5,379)		—		(5,379)
Share‑based compensation expense		8		1,251		—		—		1,259
Vesting of restricted stock		81		(81)		—		—		—
Balance as of June 30, 2021	$	17,198	$	91,273	$	233,397	$	2,523	$	344,391

See accompanying notes to consolidated financial statements (unaudited)

4

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six months ended
	June 30,
(dollars in thousands)	2022		2021
Operating Activities
Net income	$	19,477	$	26,909
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		968		606
Depreciation and amortization		3,999		4,555
Amortization and accretion of premiums/discounts on investment securities		1,829		1,674
Amortization of operating lease right-of-use assets		(51)		(22)
Stock-based compensation		1,041		1,259
Increase in value of bank-owned life insurance		(408)		(389)
Realized loss (gain) on sale of fixed assets		—		(62)
Realized loss (gain) on derivative instruments		(215)		4,803
Realized loss (gain) on loans sold		(6,037)		(27,206)
Realized loss (gain) on sale of foreclosed assets		(11)		(204)
Realized loss (gain) on sale of investment securities		—		(114)
Realized loss (gain) on servicing rights		(441)		(361)
Net change in:
Loans held for sale		(1,922)		82,713
Accrued interest receivable		(618)		1,199
Other assets		(19,936)		(5,632)
Accrued expenses and other liabilities		9,924		(5,404)
Net cash provided (used) by operating activities		7,599		84,324
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		—		13,189
Proceeds from maturities of investment securities available-for-sale		61,313		57,661
Purchases of investment securities available-for-sale		(95,600)		(291,361)
Proceeds from sales or calls of investment securities held-to-maturity		726		1,415
Proceeds from maturities of investment securities held-to-maturity		18,588		1,180
Net (increase) decrease in loans		(132,503)		142,510
Purchases of premises and equipment		(471)		(429)
Proceeds from sales of foreclosed assets		117		481
Net cash provided (used) by investing activities		(147,830)		(75,354)
Financing Activities
Net increase (decrease) in deposits		(301,001)		138,947
Net increase (decrease) in short-term borrowings		242,350		—
Repayments of long-term debt		(119)		(49,804)
Proceeds from the issuance of subordinated debt		—		50,000
Cash dividends paid on common stock		(5,570)		(5,199)
Repurchase of common stock		(697)		(446)
Net cash provided (used) by financing activities		(65,037)		133,498
Net change in cash and cash equivalents		(205,268)		142,468
Cash and cash equivalents at beginning of period		242,311		172,962
Cash and cash equivalents at end of period	$	37,043	$	315,430

See accompanying notes to consolidated financial statements (unaudited)

5

	Six months ended
	June 30,
Supplemental Cash Flow Disclosures	2022		2021
Cash paid for:
Interest	$	3,913	$	2,521
Income taxes		4,677		9,072
Non-cash information
Loan collateral transferred to foreclosed assets		81		1,072
Unrealized gain (loss) on investment securities available-for-sale		(65,951)		(8,000)
Accretion of unrealized (gain) loss on investment securities held-to-maturity		(199)		(115)
Investment securities transferred to held-to-maturity		—		149,191

See accompanying notes to consolidated financial statements (unaudited)

6

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

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 loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

7

Reclassifications

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

Other Information

As of June 30, 2022, the Coronavirus Disease, or COVID-19, pandemic was ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, with certain setbacks, started reopening and wider distribution of vaccines encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the continued distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full, long-term impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold.

Emerging Growth Company

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

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

NOTE 2 Recent Accounting Pronouncements

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

Adopted Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,

8

2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. The Company adopted ASU 2019-12, as of January 2022. The new guidance did not have an impact on the Company’s consolidated financial statements.

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss, or CECL, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred cost” approach under GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including private companies and smaller reporting companies, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard but continues to work on its implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures to provide resources to monitor and assist stakeholders with the implementation of Topic 326. Post-Implementation Review (PIR) activities have included forming a Credit Losses Transition Resource group conducting outreach with stakeholders of all types, developing educational materials and staff question-and-answer guidance, conducting education workshops and performing an archival review of financial reports. As we move forward with the implementation of this standard, we are reviewing these resources for additional guidance.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2019-04.

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

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

9

NOTE 3 Investment Securities

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

	June 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,643	$	66	$	—	$	3,709
Mortgage backed securities
Residential agency		740,734		27		(88,254)		652,507
Commercial		80,077		—		(3,947)		76,130
Asset backed securities		40		—		—		40
Corporate bonds		69,031		130		(2,750)		66,411
Total available-for-sale investment securities		893,525		223		(94,951)		798,797
Held-to-maturity
Obligations of state and political agencies		139,102		2		(12,927)		126,177
Mortgage backed securities
Residential agency		192,639		—		(24,867)		167,772
Total held-to-maturity investment securities		331,741		2		(37,794)		293,949
Total investment securities	$	1,225,266	$	225	$	(132,745)	$	1,092,746

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

10

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

	June 30, 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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities
Residential agency		(51,859)		436,234		(36,395)		214,079		(88,254)		650,313
Commercial		(3,947)		76,130		—		—		(3,947)		76,130
Asset backed securities		—		—		—		2		—		2
Corporate bonds		(2,750)		56,780		—		—		(2,750)		56,780
Total available-for-sale investment securities		(58,556)		569,144		(36,395)		214,081		(94,951)		783,225
Held-to-maturity
Obligations of state and political agencies		(12,927)		122,734		—		—		(12,927)		122,734
Mortgage backed securities
Residential agency		(24,867)		167,772		—		—		(24,867)		167,772
Total held-to-maturity investment securities		(37,794)		290,506		—		—		(37,794)		290,506
Total investment securities	$	(96,350)	$	859,650	$	(36,395)	$	214,081	$	(132,745)	$	1,073,731

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

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

For the three and six months ended June 30, 2022 and 2021, the Company did not recognize OTTI losses on its investment securities.

11

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

	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	6,831	$	6,794	$	20	$	21
Due after one year through five years		36,025		33,922		21,599		21,017
Due after five years through ten years		72,720		65,003		94,957		91,522
Due after 10 years		216,165		188,230		776,949		686,237
Total investment securities	$	331,741	$	293,949	$	893,525	$	798,797

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 $267.3 million and $192.8 million were pledged as of June 30, 2022 and December 31, 2021, respectively, to secure public deposits and for other purposes required or permitted by law.

Proceeds from the sale or call of available-for-sale investment securities, for the three and six months ended June 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	—	$	—	$	—	$	13,189
Realized gains		—		—		—		114
Realized losses		—		—		—		—

Proceeds from the call of held-to-maturity investment securities, for the three and six months ended June 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	211	$	—	$	726	$	1,415
Realized gains		—		—		—		—
Realized losses		—		—		—		—

As of June 30, 2022 and December 31, 2021, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	2,675	$	2,675
FHLB		13,938		3,806

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

12

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, 2022, the conversion ratio was 1.6059. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,119 Class A equivalents) that the Company owned as of June 30, 2022 and December 31, 2021, were carried at a zero cost basis.

NOTE 4 Loans and Allowance for Loan Losses

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	484,426	$	436,761
Real estate construction		48,870		40,619
Commercial real estate		599,737		598,893
Total commercial		1,133,033		1,076,273
Consumer
Residential real estate first mortgage		568,571		510,716
Residential real estate junior lien		135,255		125,668
Other revolving and installment		53,384		45,363
Total consumer		757,210		681,747
Total loans	$	1,890,243	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $6.9 million at June 30, 2022 and $33.6 million at December 31, 2021.

Total loans included net deferred loan fees and costs of $928 thousand and $231 thousand at June 30, 2022 and December 31, 2021, respectively. Deferred loan fees on PPP loans were $106 thousand at June 30, 2022 and $881 thousand at December 31, 2021.

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

13

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

	June 30, 2022
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	482,743	$	82	$	—	$	1,601	$	484,426
Real estate construction		48,833		37		—		—		48,870
Commercial real estate		599,108		—		—		629		599,737
Total commercial		1,130,684		119		—		2,230		1,133,033
Consumer
Residential real estate first mortgage		565,443		1,255		—		1,873		568,571
Residential real estate junior lien		134,636		426		—		193		135,255
Other revolving and installment		53,123		187		—		74		53,384
Total consumer		753,202		1,868		—		2,140		757,210
Total loans	$	1,883,886	$	1,987	$	—	$	4,370	$	1,890,243

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

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

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

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

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

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

14

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

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

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

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

	June 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	479,586	$	1,204	$	3,636	$	—	$	484,426
Real estate construction		48,870		—		—		—		48,870
Commercial real estate		589,552		4,689		5,496		—		599,737
Total commercial		1,118,008		5,893		9,132		—		1,133,033
Consumer
Residential real estate first mortgage		566,368		65		2,138		—		568,571
Residential real estate junior lien		134,537		—		718		—		135,255
Other revolving and installment		53,310		—		74		—		53,384
Total consumer		754,215		65		2,930		—		757,210
Total loans	$	1,872,223	$	5,958	$	12,062	$	—	$	1,890,243

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

The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.

15

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

	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

	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

	Three months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,487	$	(869)	$	(273)	$	275	$	9,620
Real estate construction		598		(11)		—		—		587
Commercial real estate		13,849		(913)		—		1		12,937
Total commercial		24,934		(1,793)		(273)		276		23,144
Consumer
Residential real estate first mortgage		6,047		129		—		—		6,176
Residential real estate junior lien		1,288		99		—		14		1,401
Other revolving and installment		666		(81)		(49)		38		574
Total consumer		8,001		147		(49)		52		8,151
Unallocated		823		1,646		—		—		2,469
Total	$	33,758	$	—	$	(322)	$	328	$	33,764

16

	Six months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(553)	$	(477)	$	445	$	9,620
Real estate construction		658		(71)		—		—		587
Commercial real estate		14,105		(636)		(536)		4		12,937
Total commercial		24,968		(1,260)		(1,013)		449		23,144
Consumer
Residential real estate first mortgage		5,774		402		—		—		6,176
Residential real estate junior lien		1,373		(69)		—		97		1,401
Other revolving and installment		753		(164)		(93)		78		574
Total consumer		7,900		169		(93)		175		8,151
Unallocated		1,378		1,091		—		—		2,469
Total	$	34,246	$	—	$	(1,106)	$	624	$	33,764

The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of June 30, 2022 and December 31, 2021:

	June 30, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,769	$	482,657	$	484,426	$	828	$	9,505	$	10,333
Real estate construction		—		48,870		48,870		—		878		878
Commercial real estate		803		598,934		599,737		3		10,831		10,834
Total commercial		2,572		1,130,461		1,133,033		831		21,214		22,045
Consumer
Residential real estate first mortgage		1,873		566,698		568,571		—		6,175		6,175
Residential real estate junior lien		193		135,062		135,255		—		1,467		1,467
Other revolving and installment		74		53,310		53,384		27		607		634
Total consumer		2,140		755,070		757,210		27		8,249		8,276
Unallocated		—		—		—		—		—		1,052
Total loans	$	4,712	$	1,885,531	$	1,890,243	$	858	$	29,463	$	31,373

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

17

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

	June 30, 2022						December 31, 2021
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	1,008	$	1,036	$	828	$	445	$	464	$	278
Commercial real estate		174		195		3		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans with a valuation allowance		1,256		1,305		858		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		761		873		—		1,386		1,575		—
Commercial real estate		629		684		—		629		684		—
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans without a valuation allowance		3,456		3,693		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		1,769		1,909		828		1,831		2,039		278
Commercial real estate		803		879		3		809		887		5
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans	$	4,712	$	4,998	$	858	$	2,752	$	3,070	$	283

18

The table below presents the average recorded investment in impaired loans and interest income for the three and six months ended June 30, 2022 and 2021:

	Three months ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,018	$	2	$	1,548	$	3
Commercial real estate		176		2		188		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		27		—
Other revolving and installment		75		—		13		—
Total impaired loans with a valuation allowance		1,269		4		1,776		5
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,174		5
Commercial real estate		629		—		4,472		—
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		302		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,548		—		5,971		5
Total impaired loans
Commercial and industrial		1,779		2		2,722		8
Commercial real estate		805		2		4,660		2
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		329		—
Other revolving and installment		75		—		13		—
Total impaired loans	$	4,817	$	4	$	7,747	$	10

	Six Months Ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,156	$	6	$	1,637	$	6
Commercial real estate		177		3		190		4
Residential real estate junior lien		—		—		30		—
Other revolving and installment		157		—		14		—
Total impaired loans with a valuation allowance		1,490		9		1,871		10
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,187		11
Commercial real estate		629		—		4,662		—
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		303		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,541		—		6,176		11
Total impaired loans
Commercial and industrial		1,917		6		2,824		17
Commercial real estate		806		3		4,852		4
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		333		—
Other revolving and installment		157		—		14		—
Total impaired loans	$	5,031	$	9	$	8,047	$	21

19

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

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

During the second quarter of 2022, there were no loans modified as a TDR. During the second quarter of 2021, there were 3 loans modified as TDRs as a result of changing the terms allowing for the interest rate reductions and an extension of the maturity dates. As of June 30, 2021, the carrying value of the restructured loans was $795 thousand. The loans are not currently performing in compliance with the modified terms and were placed on nonaccrual. There was no specific reserve for loan losses allocated to the loans modified as TDRs.

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

NOTE 5 Goodwill and Other Intangible Assets

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	20,131	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	31,337	$	31,490

Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was no goodwill impairment as of June 30, 2022.

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

	June 30, 2022						December 31, 2021
(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Identifiable customer intangibles	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250
Total intangible assets	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was $1.0 million and $1.1 million for the three months ended June 30, 2022, and 2021, respectively. Amortization of intangible assets was $2.1 million and $2.2 million for the six months ended June 30, 2022, and 2021, respectively.

NOTE 6 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $317.7 million and $345.8 million as of June 30, 2022 and December 31, 2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

20

The following table summarizes the Company’s activity related to servicing rights for the three and six months ended June 30, 2022 and 2021:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	1,771	$	1,952	$	1,880	$	1,987
Additions		13		62		17		111
Amortization		(96)		(185)		(256)		(385)
(Impairment)/Recovery		376		135		423		251
Balance, end of period	$	2,064	$	1,964	$	2,064	$	1,964

The following is a summary of key data and assumptions used in the valuation of servicing rights as of June 30, 2022 and December 31, 2021. 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)	2022			2021
Fair value of servicing rights	$	2,064		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		7.1	%		14.2	%
Discount rate		10.0	%		9.5	%

NOTE 7 Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for offices and office equipment rentals with terms extending through 2027. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases. The Company has one existing finance lease for the Company’s headquarters building with a lease term through October 31, 2022.

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

		June 30,		December 31,
(dollars in thousands)		2022		2021
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,439	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		29		87
Total lease right-of-use assets		$	3,468	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,856	$	4,275
Finance lease liabilities	Long-term debt		83		203
Total lease liabilities		$	3,939	$	4,478

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

21

	June 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.3		3.4
Finance leases	0.3		0.8
Weighted-average discount rate
Operating leases	2.8	%	2.5	%
Finance leases	7.8	%	7.8	%

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

The following table presents lease costs and other lease information for the three and six months ending June 30, 2022 and 2021:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	414	$	492	$	825	$	988
Variable lease cost		150		158		363		391
Short-term lease cost		43		46		88		83
Finance lease cost
Interest on lease liabilities		1		7		5		15
Amortization of right-of-use assets		29		29		58		58
Sublease income		(59)		(52)		(116)		(112)
Net lease cost	$	578	$	680	$	1,223	$	1,423
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	393	$	474	$	784	$	961
Right-of-use assets obtained in exchange for new operating lease liabilities		—		—	$	—	$	—

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

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
June 30, 2023	$	84	$	1,644
June 30, 2024		—		932
June 30, 2025		—		467
June 30, 2026		—		375
June 30, 2027		—		252
Thereafter		—		511
Total future minimum lease payments	$	84	$	4,181
Amounts representing interest		(1)		(325)
Total operating lease liabilities	$	83	$	3,856

22

NOTE 8 Deposits

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	764,808	$	938,840
Interest-bearing
Interest-bearing demand		642,641		714,669
Savings accounts		97,227		96,825
Money market savings		914,423		937,305
Time deposits		200,451		232,912
Total interest-bearing		1,854,742		1,981,711
Total deposits	$	2,619,550	$	2,920,551

NOTE 9 Short-Term Borrowings

Short-term borrowings at June 30, 2022 and December 31, 2021 consisted of the following:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	117,350	$	—
FHLB Short-term advances		125,000		—
Total	$	242,350	$	—

The following table presents information related to short-term borrowings for the three and six months ending June 30, 2022 and 2021:

	Three months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		81,506			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		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		1.59	%		—	%
End of period		1.80	%		—	%

23

	Six months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		40,978			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		1.44	%		—	%
FHLB Short-term advances
Balance as of end of period	$	125,000		$	—
Average daily balance		4,834			—
Maximum month-end balance		125,000			—
Weighted-average rate
During period		1.59	%		—	%
End of period		1.80	%		—	%

NOTE 10 Long-Term Debt

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

	June 30, 2022
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,515	Three-month LIBOR + 3.10%	5.30	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,272	Three-month LIBOR + 1.80%	3.63	%	9/15/2036	9/15/2011
Finance lease liability		2,700		83	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,870

	December 31, 2021
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,492	Three-month LIBOR + 3.10%	3.32	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,238	Three-month LIBOR + 1.80%	2.00	%	9/15/2036	9/15/2011
Finance lease liability		2,700		203	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,933

NOTE 11 Financial Instruments with Off-Balance Sheet Risk

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

24

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of June 30, 2022 and December 31, 2021, respectively, was as follows:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	635,320	$	668,115
Standby letters of credit		11,412		10,529
Total	$	646,732	$	678,644

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

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

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had a $150 thousand letter of credit outstanding with the FHLB as of June 30, 2022 and December 31, 2021. With the Bank of North Dakota, the Company had no letters of credit outstanding as of June 30, 2022 and December 31, 2021. Bank of North Dakota potential letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of $237.6 million and $229.7 million as of June 30, 2022 and December 31, 2021, respectively.

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 the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards and were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of June 30, 2022, 948,428 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $662 thousand and $761 thousand for the three months ended June 30, 2022 and 2021, respectively. The compensation expense relating to awards under these plans was $1.0 million and $1.3 million for the six months ended June 30, 2022 and 2021, respectively.

25

The following table presents the activity in the stock plans for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,
	2022			2021
		Weighted-			Weighted-
		Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period	260,850	$	21.04	325,030	$	19.48
Granted	94,592		19.01	66,664		26.63
Vested	(107,113)		19.19	(88,382)		21.38
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	237,705	$	20.95	303,312	$	20.49

As of June 30, 2022, there was $3.1 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.9 years.

NOTE 13 Income Taxes

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

	Three months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,524	21.0	%	$	3,221	21.0	%
Tax effect of:
Tax exempt income		(122)	(1.0)	%		(148)	(1.0)	%
State income taxes, net of federal benefits		531	4.4	%		663	4.3	%
Nondeductible items and other		(208)	(1.7)	%		(92)	(0.6)	%
Applicable income taxes	$	2,725	22.7	%	$	3,644	23.7	%

	Six months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	5,269	21.0	%	$	7,395	21.0	%
Tax effect of:
Tax exempt income		(239)	(1.0)	%		(301)	(0.9)	%
State income taxes, net of federal benefits		1,109	4.4	%		1,516	4.3	%
Nondeductible items and other		(526)	(2.1)	%		(304)	(0.9)	%
Applicable income taxes	$	5,613	22.3	%	$	8,306	23.5	%

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.

26

The following table presents a summary of the Company’s investments in qualified affordable housing project tax credits as of June 30, 2022 and December 31, 2021:

		June 30, 2022				December 31, 2021
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	Accounting Method
Low income housing tax credit	Proportional amortization	$	17,906	$	16,402	$	7,906	$	6,999
Total		$	17,906	$	16,402	$	7,906	$	6,999

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, 2022 and 2021.

	Three months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	111	$	(156)	$	—	$	—

(1) The amortization expense for low income housing tax credit investments were included in income tax expense.

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

	Six months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	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

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

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

27

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

	Three months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	22,779	$	—	$	—	$	558	$	(561)	$	22,776
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,341		16,293		5,548		6,038		6		29,226
Noninterest expense		15,619		6,598		1,630		5,209		10,928		39,984
Net income before taxes	$	8,501	$	9,695	$	3,918	$	1,387	$	(11,483)	$	12,018

	Six months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	44,304	$	—	$	—	$	1,267	$	(1,122)	$	44,449
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,879		33,939		10,874		10,969		35		58,696
Noninterest expense		28,313		15,030		3,468		10,229		21,015		78,055
Net income before taxes	$	18,870	$	18,909	$	7,406	$	2,007	$	(22,102)	$	25,090

	Three months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,188	$	—	$	—	$	490	$	(538)	$	21,140
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,466		17,871		5,138		12,287		(14)		36,748
Noninterest expense		10,914		9,988		2,128		10,661		8,859		42,550
Net income before taxes	$	11,740	$	7,883	$	3,010	$	2,116	$	(9,411)	$	15,338

	Six months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	43,068	$	—	$	—	$	936	$	(826)	$	43,178
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,988		35,126		10,124		29,419		(28)		77,629
Noninterest expense		21,998		20,100		4,463		21,514		17,517		85,592
Net income before taxes	$	24,058	$	15,026	$	5,661	$	8,841	$	(18,371)	$	35,215

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

Wealth Management

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

28

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.

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 ending June 30, 2022 and 2021 are presented below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,293	$	11,694	$	19,477	$	26,909
Dividends and undistributed earnings allocated to participating securities		101		179		225		432
Net income available to common shareholders	$	9,192	$	11,515	$	19,252	$	26,477
Weighted-average common shares outstanding for basic earnings per share		17,297		17,194		17,271		17,170
Dilutive effect of stock-based awards		235		303		246		312
Weighted-average common shares outstanding for diluted earnings per share		17,532		17,497		17,517		17,482
Earnings per common share:
Basic earnings per common share	$	0.53	$	0.67	$	1.11	$	1.54
Diluted earnings per common share	$	0.52	$	0.66	$	1.10	$	1.52

NOTE 17 Derivative Instruments

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

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

		June 30, 2022				December 31, 2021
		Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount
Asset Derivatives	Consolidated Balance Sheet Location
Interest rate swaps	Other assets	$	4,850	$	44,133	$	1,366	$	44,826
Interest rate lock commitments	Other assets		1,445		53,871		1,507		52,316
Forward loan sales commitments	Other assets		542		16,560		490		13,418
TBA mortgage backed securities	Other assets		343		113,000		34		97,000
Total asset derivatives		$	7,180	$	227,564	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	4,851	$	44,133	$	1,368	$	44,826
TBA mortgage backed securities	Accrued expenses and other liabilities		—		—		—		—
Total liability derivatives		$	4,851	$	44,133	$	1,368	$	44,826

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

29

		Three months ended				Six months ended
	Consolidated Statements	June 30,		June 30,		June 30,		June 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	(1)	$	1	$	1
Interest rate lock commitments	Mortgage banking		563		740		(147)		(5,505)
Forward loan sales commitments	Mortgage banking		542		73		52		(1,562)
TBA mortgage backed securities	Mortgage banking		1,246		(3,405)		3,749		5,556
Total gain/(loss) from derivative instruments		$	2,352	$	(2,593)	$	3,655	$	(1,510)

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $19 thousand at June 30, 2022 and December 31, 2021. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.

NOTE 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, 2022 and December 31, 2021, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

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

	June 30, 2022
										Minimum to be
						Requirements				Well Capitalized
						for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	331,692	14.19	%	$	105,214	4.50	%	$	N/A	N/A
Bank		318,704	13.64	%		105,115	4.50	%		151,833	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		340,479	14.56	%		140,285	6.00	%		N/A	N/A
Bank		318,704	13.64	%		140,154	6.00	%		186,872	8.00	%
Total capital to risk weighted assets
Consolidated		419,279	17.95	%		187,047	8.00	%		N/A	N/A
Bank		347,929	14.89	%		186,872	8.00	%		233,590	10.00	%
Tier 1 capital to average assets
Consolidated		340,479	10.80	%		126,051	4.00	%		N/A	N/A
Bank		318,704	10.12	%		125,962	4.00	%		157,453	5.00	%

30

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

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules 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, 2022, 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, 2022, and December 31, 2021, the Company was in compliance with the aforementioned guidelines.

NOTE 19 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the six months ended June 30, 2022, there were no shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 20 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.

31

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

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

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

Recurring Basis

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

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of June 30, 2022 and December 31, 2021:

	June 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,709	$	—	$	3,709
Mortgage backed securities
Residential agency		—		652,507		—		652,507
Commercial		—		76,130		—		76,130
Asset backed securities		—		40		—		40
Corporate bonds		—		66,411		—		66,411
Total available-for-sale investment securities	$	—	$	798,797	$	—	$	798,797
Other assets
Derivatives	$	—	$	7,180	$	—	$	7,180
Other liabilities
Derivatives	$	—	$	4,851	$	—	$	4,851

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

32

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

Investment Securities, Available-for-Sale

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

Derivatives

All of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts.

Nonrecurring Basis

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

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

	June 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	54,363	$	—	$	54,363	$	—
Impaired loans		—		3,854		3,854		858
Foreclosed assets		—		860		860		—
Servicing rights		—		2,064		2,064		—

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

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.

33

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

			June 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	3,854	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		860	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,064	109-155		119
		Discount rate			10.0	%	10.0	%

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

Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all non-financial 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, 2022 and December 31, 2021, were not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the consolidated balance sheets approximate those assets’ 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.

34

Bank-Owned Life Insurance

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

Deposits

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

Short-Term Borrowings and Long-Term Debt

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

Off-Balance Sheet Credit-Related Commitments

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

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

	June 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	37,043	$	37,043	$	—	$	—	$	37,043
Investment securities held-to-maturity		331,741		—		293,949		—		293,949
Loans, net		1,858,870		—		—		1,848,251		1,848,251
Accrued interest receivable		9,155		9,155		—		—		9,155
Bank-owned life insurance		33,564		—		33,564		—		33,564
Financial Liabilities
Noninterest-bearing deposits	$	764,808	$	—	$	764,808	$	—	$	764,808
Interest-bearing deposits		1,654,291		—		1,654,291		—		1,654,291
Time deposits		200,451		—		—		198,278		198,278
Short-term borrowings		242,350		242,350		—		—		242,350
Long-term debt		58,870		—		86,271		—		86,271
Accrued interest payable		802		802		—		—		802

35

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

NOTE 21 Subsequent Events

On July 1, 2022, the Company completed the merger with MPB BHC, Inc. (“MPHX”) (OTCPK: MPHX), the banking holding company for Metro Phoenix Bank (the “Merger”), pursuant to the Agreement of Plan of Merger, dated December 8, 2021, by and between the Company and MPHX. On July 1, 2022, MPHX merged with and into the Company, with the Company as the surviving entity in the merger.

Pursuant to the terms of the Merger, at the effective time of the Merger, each common share of MPHX issued and outstanding immediately prior to the effective time, was converted into the right to receive 0.74 shares of the Company’s common stock.

As of June 30, 2022, MPHX, had total assets of $399.0 million which included $277.6 million in gross loans, $354.5 million in total deposits, and $43.8 million in total equity.

36

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

General

The following discussion explains our financial condition and results of operations as of and for the three and six months ended June 30, 2022 and 2021. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 11, 2022.

Forward-Looking Statements

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

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

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

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

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

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

● concentrations within our loan portfolio;

● the level of nonperforming assets on our balance sheet;

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

● our ability to implement our organic and acquisition growth strategies;

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

37

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

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

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

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

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

● potential losses incurred in connection with mortgage loan repurchases;

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

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

● any material weaknesses in our internal control over financial reporting;

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

● concentrations of large depositors;

● our dependence on dividends from the Bank;

● the effectiveness of our risk management framework;

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

● the extensive regulatory framework that applies to us;

● the impact of recent and future legislative and regulatory changes;

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

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

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

● governmental monetary, trade and fiscal policies;

● rapid technological change in the financial services industry;

38

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

● our ability to manage mortgage pipeline risk;

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

● talent and labor shortages and employee turnover;

● possible federal mask and vaccine mandates;

● the impact of inflation and recent and anticipated interest rate increases on our clients;

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

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

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

Overview

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

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

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, or GAAP. The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in critical accounting policies, or the assumptions and judgments utilized in applying these policies since December 31, 2021.

39

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

Impact of COVID-19

As of June 30, 2022, the COVID-19 pandemic remained ongoing. The progression of the COVID-19 pandemic in the United States did not have an adverse impact on our financial condition and results of operations as of and for the three and six months ended June 30, 2022. Nonetheless, the economic recovery could remain gradual and uneven and could be hindered by persistent or resurgent infection rates, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to the new variants of the virus.

Effects on Our Market Areas. Our primary banking market areas are the states of North Dakota, Minnesota and Arizona. Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit services at all of our banking offices located in our three primary market areas. In addition, we operate one retirement and benefit services office in Minnesota, one in Michigan and one in Colorado.

Each of our market areas had and continues to have different responses to the COVID-19 pandemic due to the availability of the COVID-19 vaccines, prevalence of new variants of the virus, and varying infection rates. Based on the current environment, it is uncertain how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and whether any such changes will negatively impact our customers and regional economies.

Shareholder Dividend

On May 11, 2022, the Board of Directors of the Company declared a quarterly cash dividend of $0.18 per common share. This dividend was paid out on July 8, 2022, to stockholders of record at the close of business on June 17, 2022.

40

Operating Results Overview

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

	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)	2022			2022			2021			2022			2021
Performance Ratios
Return on average total assets		1.14	%		1.26	%		1.50	%		1.20	%		1.76	%
Return on average common equity		11.93	%		11.78	%		13.82	%		11.85	%		16.11	%
Return on average tangible common equity (1)		15.25	%		14.72	%		17.36	%		14.97	%		20.15	%
Noninterest income as a % of revenue		56.20	%		57.62	%		63.48	%		56.91	%		64.26	%
Net interest margin (taxable-equivalent basis)		2.98	%		2.83	%		2.88	%		2.91	%		3.00	%
Efficiency ratio (1)		74.72	%		72.25	%		71.46	%		73.50	%		68.84	%
Average equity to average assets		9.59	%		10.67	%		10.88	%		10.13	%		10.92	%
Net charge-offs/(recoveries) to average loans		0.07	%		(0.03)	%		—	%		0.02	%		0.05	%
Dividend payout ratio		34.62	%		28.07	%		24.24	%		30.91	%		20.39	%
Per Common Share
Earnings per common share - basic	$	0.53		$	0.58		$	0.67		$	1.11		$	1.54
Earnings per common share - diluted	$	0.52		$	0.57		$	0.66		$	1.10		$	1.52
Dividends declared per common share	$	0.18		$	0.16		$	0.16		$	0.34		$	0.31
Book value per common share	$	17.75		$	19.00		$	20.03
Tangible book value per common share (1)	$	14.93		$	16.07		$	16.89
Average common shares outstanding - basic		17,297			17,244			17,194			17,271			17,170
Average common shares outstanding - diluted		17,532			17,500			17,497			17,517			17,482
Other Data
Retirement and benefit services assets under administration/management	$	31,749,157		$	35,333,131		$	36,964,961
Wealth management assets under administration/management	$	4,147,763		$	4,584,856		$	3,538,959
Mortgage originations	$	269,397		$	186,762		$	545,437		$	456,159		$	1,063,451

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

Selected Financial Data

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

	Three months ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
(dollars in thousands)	2022		2022		2021		2022		2021
Selected Average Balance Sheet Data
Loans	$	1,838,631	$	1,768,226	$	1,887,986	$	1,803,623	$	1,916,553
Investment securities		1,164,625		1,216,256		800,812		1,190,298		731,995
Assets		3,258,655		3,286,809		3,119,740		3,272,654		3,083,702
Deposits		2,740,417		2,816,828		2,677,258		2,778,411		2,646,588
Short-term borrowings		81,506		—		—		40,978		—
Long-term debt		58,876		58,908		58,996		58,892		42,429
Stockholders’ equity		312,515		350,545		339,439		331,425		336,830

41

	June 30,		March 31,		December 31,		June 30,
(dollars in thousands)	2022		2022		2021		2021
Selected Period End Balance Sheet Data
Loans	$	1,890,243	$	1,818,042	$	1,758,020	$	1,835,312
Allowance for loan losses		(31,373)		(31,713)		(31,572)		(33,764)
Investment securities		1,130,538		1,206,483		1,205,710		797,862
Assets		3,295,065		3,336,199		3,392,691		3,157,229
Deposits		2,619,550		2,892,267		2,920,551		2,710,940
Long-term debt		58,870		58,902		58,933		58,992
Total stockholders’ equity		307,158		328,505		359,403		344,391

	Three months ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
(dollars in thousands)	2022		2022		2021		2022		2021
Selected Income Statement Data
Net interest income	$	22,776	$	21,673	$	21,140	$	44,449	$	43,178
Provision for loan losses		—		—		—		—		—
Noninterest income		29,226		29,470		36,748		58,696		77,629
Noninterest expense		39,984		38,071		42,550		78,055		85,592
Income before income taxes		12,018		13,072		15,338		25,090		35,215
Income tax expense		2,725		2,888		3,644		5,613		8,306
Net income	$	9,293	$	10,184	$	11,694	$	19,477	$	26,909

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

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

42

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

	June 30,			March 31,			December 31,			June 30,
(dollars and shares in thousands, except per share data)	2022			2022			2021			2021
Tangible common equity to tangible assets
Total common stockholders’ equity	$	307,158		$	328,505		$	359,403		$	344,391
Less: Goodwill		31,337			31,490			31,490			30,201
Less: Other intangible assets		17,511			19,197			20,250			23,680
Tangible common equity (a)		258,310			277,818			307,663			290,510
Total assets		3,295,065			3,336,199			3,392,691			3,157,229
Less: Goodwill		31,337			31,490			31,490			30,201
Less: Other intangible assets		17,511			19,197			20,250			23,680
Tangible assets (b)		3,246,217			3,285,512			3,340,951			3,103,348
Tangible common equity to tangible assets (a)/(b)		7.96	%		8.46	%		9.21	%		9.36	%
Tangible book value per common share
Total common stockholders’ equity	$	307,158		$	328,505		$	359,403		$	344,391
Less: Goodwill		31,337			31,490			31,490			30,201
Less: Other intangible assets		17,511			19,197			20,250			23,680
Tangible common equity (c)		258,310			277,818			307,663			290,510
Total common shares issued and outstanding (d)		17,306			17,289			17,213			17,198
Tangible book value per common share (c)/(d)	$	14.93		$	16.07		$	17.87		$	16.89

	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)	2022			2022			2021			2022			2021
Return on average tangible common equity
Net income	$	9,293		$	10,184		$	11,694		$	19,477		$	26,909
Add: Intangible amortization expense (net of tax)		832			832			860			1,664			1,769
Net income, excluding intangible amortization (e)		10,125			11,016			12,554			21,141			28,678
Average total equity		312,515			350,545			339,439			331,425			336,830
Less: Average goodwill		31,488			31,490			30,201			31,489			30,201
Less: Average other intangible assets (net of tax)		14,737			15,569			19,123			15,151			19,556
Average tangible common equity (f)		266,290			303,486			290,115			284,785			287,073
Return on average tangible common equity (e)/(f)		15.25	%		14.72	%		17.36	%		14.97	%		20.15	%
Efficiency ratio
Noninterest expense	$	39,984		$	38,071		$	42,550		$	78,055		$	85,592
Less: Intangible amortization expense		1,053			1,053			1,088			2,106			2,239
Adjusted noninterest expense (g)		38,931			37,018			41,462			75,949			83,353
Net interest income		22,776			21,673			21,140			44,449			43,178
Noninterest income		29,226			29,470			36,748			58,696			77,629
Tax-equivalent adjustment		100			94			135			194			278
Total tax-equivalent revenue (h)		52,102			51,237			58,023			103,339			121,085
Efficiency ratio (g)/(h)		74.72	%		72.25	%		71.46	%		73.50	%		68.84	%

43

Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended June 30, 2022 was $9.3 million, or $0.52 per diluted common share, a $2.4 million, or 20.5%, decrease as compared to $11.7 million, or $0.66 per diluted common share, for the three months ended June 30, 2021. Net income decreased primarily due to a $7.5 million decrease in noninterest income, partially offset by a $1.6 million increase in net interest income and a $2.6 million decrease in noninterest expense.

Net income for the six months ended June 30, 2022 was $19.5 million, or $1.10 per diluted common share, a $7.4 million, or 27.6%, decrease as compared to $26.9 million, or $1.52 per diluted common share, for the six months ended June 30, 2021. The decrease in net income was primarily due to an $18.9 million decrease in noninterest income, partially offset by a $1.3 million increase in net interest income and a $7.5 million decrease in noninterest expense.

Net Interest Income

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

Net interest income for the three months ended June 30, 2022 was $22.8 million, a $1.6 million, or 7.7%, increase from $21.1 million for the three months ended June 30, 2021. Net interest income increased primarily due to a $1.8 million increase in interest income, driven by a $3.2 million increase in interest income from investment securities, and partially offset by a $1.3 million decrease in interest income from loans. The increase in interest income from investment securities was primarily due to a $363.8 million increase in the average balance of investment securities. Interest income from loans decreased primarily due to a $2.3 million decrease in income received from PPP loans. Excluding PPP loans, the average loan balance would have increased $170.8 million. The increase in net interest income was partially offset by a $206 thousand increase in interest expense, primarily due to an increase in short-term borrowings in response to a decrease in deposits.

Net interest income for the six months ended June 30, 2022 was $44.4 million, an increase of $1.3 million, or 2.9%, as compared to the $43.2 million for the six months ended June 30, 2021. The increase in net interest income was primarily driven by a $1.6 million increase in interest income, driven in part by a $6.2 million increase in interest income from investment securities, partially offset by $4.6 million decrease in interest income from loans. The increase in interest income from investment securities was primarily due to a $458.3 million increase in the average balance of investment securities. Interest income from loans decreased primarily due to a $112.9 million decrease in the average loans, primarily due to our continued PPP loan forgiveness. Excluding PPP loans, average loans would have increased $112.9 million.

Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended June 30, 2022 was 2.98%, compared to 2.88% for the same period in 2021. The yield on earning assets increased 12 basis points while average earnings assets increased 3.9%. Partially offsetting this increase was a modest 2 basis point increase in our interest bearing liabilities yield while the average balance of interest-bearing liabilities increased 6.4%.

Our net interest margin (on a FTE basis) for the six months ended June 30, 2022 was 2.91%, compared to 3.00% for the same period in 2021. The decrease in net interest margin was primarily driven by a 9 basis point decrease in the interest earning asset yield. The interest earning asset yield decreased primarily due to a 22 basis point decrease in loan yield, a result of the decrease in average loans previously stated.

As a result of the recent and expected increases in the target federal funds interest rate, we anticipate that our net interest income and net interest margin (on a FTE basis) will remain under pressure in future periods.

44

The following tables present 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, 2022 and 2021. We derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

	Three months ended June 30,
	2022						2021
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	28,920	$	28	0.39	%	$	191,695	$	59	0.12	%
Investment securities (1)		1,164,625		6,338	2.18	%		800,812		3,192	1.60	%
Loans held for sale		31,878		250	3.15	%		71,447		402	2.26	%
Loans
Commercial:
Commercial and industrial		463,215		5,053	4.38	%		627,613		7,112	4.55	%
Real estate construction		44,627		449	4.04	%		42,511		454	4.28	%
Commercial real estate		601,765		5,701	3.80	%		568,827		5,256	3.71	%
Total commercial		1,109,607		11,203	4.05	%		1,238,951		12,822	4.15	%
Consumer
Residential real estate first mortgage		543,023		4,458	3.29	%		459,278		4,047	3.53	%
Residential real estate junior lien		132,082		1,528	4.64	%		129,544		1,479	4.58	%
Other revolving and installment		53,919		592	4.40	%		60,213		647	4.31	%
Total consumer		729,024		6,578	3.62	%		649,035		6,173	3.81	%
Total loans (1)		1,838,631		17,781	3.88	%		1,887,986		18,995	4.04	%
Federal Reserve/FHLB Stock		10,564		129	4.90	%		6,528		71	4.36	%
Total interest earning assets		3,074,618		24,526	3.20	%		2,958,468		22,719	3.08	%
Noninterest earning assets		184,037						161,272
Total assets	$	3,258,655					$	3,119,740
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	703,365	$	212	0.12	%	$	697,789	$	252	0.14	%
Money market and savings deposits		1,041,898		373	0.14	%		1,015,358		364	0.14	%
Time deposits		211,787		228	0.43	%		208,338		290	0.56	%
Fed funds purchased		81,506		240	1.18	%		—		—	—	%
Short-term borrowings		9,615		38	1.59	%		—		—	—	%
Long-term debt		58,876		559	3.81	%		58,996		538	3.66	%
Total interest-bearing liabilities		2,107,047		1,650	0.31	%		1,980,481		1,444	0.29	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		783,367						755,773
Other noninterest-bearing liabilities		55,726						44,047
Stockholders’ equity		312,515						339,439
Total liabilities and stockholders’ equity	$	3,258,655					$	3,119,740
Net interest income			$	22,876					$	21,275
Net interest rate spread					2.89	%					2.79	%
Net interest margin on FTE basis (1)					2.98	%					2.88	%

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

45

	Six months ended June 30,
	2022						2021
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	67,111	$	74	0.22	%	$	188,056	$	112	0.12	%
Investment securities (1)		1,190,298		12,051	2.04	%		731,995		5,892	1.62	%
Loans held for sale		28,287		407	2.90	%		76,818		834	2.19	%
Loans
Commercial:
Commercial and industrial		449,014		10,068	4.52	%		651,143		14,975	4.64	%
Real estate construction		42,893		844	3.97	%		43,880		925	4.25	%
Commercial real estate		601,397		11,100	3.72	%		564,928		10,499	3.75	%
Total commercial		1,093,304		22,012	4.06	%		1,259,951		26,399	4.23	%
Consumer
Residential real estate first mortgage		528,952		8,891	3.39	%		458,584		8,294	3.65	%
Residential real estate junior lien		129,056		2,910	4.55	%		133,622		3,129	4.72	%
Other revolving and installment		52,311		1,140	4.39	%		64,396		1,388	4.35	%
Total consumer		710,319		12,941	3.67	%		656,602		12,811	3.93	%
Total loans (1)		1,803,623		34,953	3.91	%		1,916,553		39,210	4.13	%
Federal Reserve/FHLB Stock		8,536		199	4.70	%		6,156		135	4.42	%
Total interest earning assets		3,097,855		47,684	3.10	%		2,919,578		46,183	3.19	%
Noninterest earning assets		174,799						164,124
Total assets	$	3,272,654					$	3,083,702
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	708,888	$	426	0.12	%	$	670,462	$	499	0.15	%
Money market and savings deposits		1,042,660		741	0.14	%		1,022,812		767	0.15	%
Time deposits		219,592		475	0.44	%		209,521		635	0.61	%
Fed funds purchased		40,978		240	1.18	%		—		—	—	%
Short-term borrowings		4,834		38	1.59	%		—		—	—	%
Long-term debt		58,892		1,121	3.84	%		42,429		826	3.93	%
Total interest-bearing liabilities		2,075,844		3,041	0.30	%		1,945,224		2,727	0.28	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		807,271						743,793
Other noninterest-bearing liabilities		58,114						57,855
Stockholders’ equity		331,425						336,830
Total liabilities and stockholders’ equity	$	3,272,654					$	3,083,702
Net interest income			$	44,643					$	43,456
Net interest rate spread					2.80	%					2.91	%
Net interest margin on FTE basis (1)					2.91	%					3.00	%

(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

46

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, 2022						Six months ended June 30, 2022
	Compared with						Compared with
	Three Months Ended June 30, 2021						Six months ended June 30, 2021
	Change due to:				Interest		Change due to:				Interest
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance		Volume		Rate		Variance
Interest earning assets
Interest-bearing deposits with banks	$	(49)	$	18	$	(31)	$	(72)	$	34	$	(38)
Investment securities		1,451		1,695		3,146		3,682		2,477		6,159
Loans held for sale		(223)		71		(152)		(527)		100		(427)
Loans
Commercial:
Commercial and industrial		(1,865)		(194)		(2,059)		(4,651)		(256)		(4,907)
Real estate construction		23		(28)		(5)		(21)		(60)		(81)
Commercial real estate		305		140		445		678		(77)		601
Total commercial		(1,537)		(82)		(1,619)		(3,994)		(393)		(4,387)
Consumer
Residential real estate first mortgage		737		(326)		411		1,274		(677)		597
Residential real estate junior lien		29		20		49		(107)		(112)		(219)
Other revolving and installment		(68)		13		(55)		(261)		13		(248)
Total consumer		698		(293)		405		906		(776)		130
Total loans		(839)		(375)		(1,214)		(3,088)		(1,169)		(4,257)
Federal Reserve/FHLB Stock		44		14		58		52		12		64
Total interest income		384		1,423		1,807		47		1,454		1,501
Interest-bearing liabilities
Interest-bearing demand deposits		2		(42)		(40)		29		(102)		(73)
Money market and savings deposits		9		—		9		15		(41)		(26)
Time deposits		5		(67)		(62)		30		(190)		(160)
Short-term borrowings		—		240		240		—		240		240
Long-term debt		(1)		22		21		321		(26)		295
Total interest expense		15		153		168		395		(119)		276
Change in net interest income	$	369	$	1,270	$	1,639	$	(348)	$	1,573	$	1,225

Provision for Loan Losses

The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

There was no provision expense recorded for the three and six months ended June 30, 2022, no change compared to the three and six months ended June 30, 2021. Management continues to see a decrease in criticized loan volume which supported the decision that no additional provision expense should be recognized.

Noninterest Income

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

47

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

	Three months ended						Six months ended
	June 30,						June 30,
(dollars in thousands)	2022			2021			2022			2021
Retirement and benefit services	$	16,293		$	17,871		$	33,939		$	35,126
Wealth management		5,548			5,138			10,874			10,124
Mortgage banking		6,038			12,287			10,969			29,419
Service charges on deposit accounts		412			330			775			668
Net gains (losses) on investment securities		—			—			—			114
Other		935			1,122			2,139			2,178
Total noninterest income	$	29,226		$	36,748		$	58,696		$	77,629
Noninterest income as a % of revenue		56.20	%		63.48	%		56.91	%		64.26	%

Total noninterest income for the three months ended June 30, 2022, was $29.2 million, a decrease of $7.5 million, or 20.5%, compared to $36.7 million for the three months ended June 30, 2021. The decrease in noninterest income was primarily driven by decreases of $6.2 million in mortgage banking revenue and $1.6 million in retirement and benefit services revenue, partially offset by a $410 thousand increase in wealth management revenue. Mortgage banking revenue decreased primarily due to a $276.0 million decrease in mortgage originations. Retirement and benefit services revenue decreased primarily due to decreases of $912 thousand in asset-based fees and $667 thousand in non-asset based fees. The asset based fees for retirement and benefit services decreased primarily due to a $5.2 billion decrease in the market value of assets under administration/management. Non-asset based fees decreased primarily due to a $316 thousand decrease in plan document fees. Wealth management revenue increased primarily due to a $608.8 million increase in assets under management.

Total noninterest income for the six months ended June 30, 2022, was $58.7 million, a $18.9 million, or 24.4%, decrease compared to $77.6 million for the six months ended June 30, 2021. The decrease in noninterest income was primarily driven by decreases of $18.5 million in mortgage banking revenue and $1.2 million in retirement and benefit services revenue, partially offset by a $750 thousand increase in wealth management revenue. The decrease in mortgage banking revenue was primarily due to a $607.3 million decrease in mortgage originations. Retirement and benefit services revenue decreased primarily due to decreases of $1.1 million in asset based fees, a result of a market value decrease in assets under administration/management. Wealth management revenue increased due to the increase in assets under management.

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

Noninterest income as a percentage of total operating revenue, which consists of net interest income plus noninterest income, was 56.2% for the three months ended June 30, 2022, compared to 63.5% for the three months ended June 30, 2021. The decrease was due to noninterest income decreasing 20.5%, while net interest income increased 7.7%.

Noninterest income as a percentage of total operating revenue was 56.9% for the six months ended June 30, 2022, compared to 64.3% for the six months ended June 30, 2021. The decrease was due to noninterest income decreasing 24.4%, while net interest income increased 2.9%.

See “NOTE 15 Segment Reporting” for additional discussion regarding our business lines.

48

Noninterest Expense

The following table presents noninterest expense for the three and six months ended June 30, 2022 and 2021:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Compensation	$	21,248	$	24,309	$	40,299	$	48,007
Employee taxes and benefits		5,787		5,572		11,949		11,385
Occupancy and equipment expense		1,737		1,918		3,788		4,149
Business services, software and technology expense		4,785		4,958		9,709		9,934
Intangible amortization expense		1,053		1,088		2,106		2,239
Professional fees and assessments		2,246		1,509		3,787		2,981
Marketing and business development		814		769		1,414		1,445
Supplies and postage		572		503		1,218		1,034
Travel		356		36		535		62
Mortgage and lending expenses		482		1,199		1,168		2,531
Other		904		689		2,082		1,825
Total noninterest expense	$	39,984	$	42,550	$	78,055	$	85,592

Total noninterest expense for the three months ended June 30, 2022 was $40.0 million, a $2.6 million, or 6.0%, decrease compared to $42.6 million for the three months ended June 30, 2021. The decrease in noninterest expense was primarily due to a $3.1 million decrease in compensation expense as well as a $717 thousand decrease in mortgage and lending expenses, partially offset by a $737 thousand increase in professional fees and assessments. The decreases in compensation and mortgage and lending expenses were primarily due to a $276.0 million decrease in mortgage originations. Professional fees and assessments increased primarily due to merger related expenses from our acquisition of MPB BHC, Inc.

Total noninterest expense for the six months ended June 30, 2022, was $78.1 million, a $7.5 million, or 8.8%, decrease compared to $85.6 million for the six months ended June 30, 2021. The decrease in noninterest expense was primarily driven by decreases of $7.7 million in compensation expense, $1.4 million in mortgage and lending expenses, and $361 thousand in occupancy and equipment expense, partially offset by increases of $806 thousand in professional fees and assessments and $564 thousand in employee taxes and benefits. The decrease in compensation and mortgage and lending expenses were driven by the decrease in mortgage originations. Occupancy and equipment expense decreased primarily as a result of a decrease in depreciation expense, a result of assets being fully depreciated. The increase in professional fees and assessments was primarily due to the merger related expenses previously stated. Employee taxes and benefits increased primarily due to an increase in group insurance.

Income Tax Expense

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

For the three months ended June 30, 2022, we recognized income tax expense of $2.7 million on $12.0 million of pre-tax income, resulting in an effective tax rate of 22.7%, compared to income tax expense of $3.6 million on $15.3 million of pre-tax income for the three months ended June 30, 2021, resulting in an effective tax rate of 23.7%.

For the six months ended June 30, 2022, we recognized income tax expense of $5.6 million on $25.1 million of pre-tax income, resulting in an effective tax rate of 22.3%, compared to income tax expense of $8.3 million on $35.2 million of pre-tax income for the six months ended June 30, 2021, resulting in an effective tax rate of 23.5%.

49

Financial Condition

Overview

Total assets were $3.3 billion as of June 30, 2022, a decrease of $97.6 million, or 2.9%, as compared to December 31, 2021. The overall change in assets included decreases of $205.3 million in cash and cash equivalents and $75.2 million in investment securities. Partially offsetting these decreases were increases of $132.2 million in loans held for investment and $21.2 million in deferred tax assets. Deferred tax assets increased primarily due to the deferred tax associated with the decrease in other comprehensive income attributable to investment securities available-for-sale. If PPP loans were excluded, loans held for investment would have increased $158.8 million from December 31, 2021.

Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and consumer loans. The goal of the overall portfolio mix is to diversify with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories. As of June 30, 2022, the portfolio mix was 25.6% commercial and industrial, 31.7% commercial real estate, 37.3% residential real estate and 5.4% in other categories.

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

	June 30, 2022				December 31, 2021
			Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent
Commercial
Commercial and industrial (1)	$	484,426	25.6	%	$	436,761	24.8	%	$	47,665	10.9	%
Real estate construction		48,870	2.6	%		40,619	2.3	%		8,251	20.3	%
Commercial real estate		599,737	31.7	%		598,893	34.1	%		844	0.1	%
Total commercial		1,133,033	59.9	%		1,076,273	61.2	%		56,760	5.3	%
Consumer
Residential real estate first mortgage		568,571	30.1	%		510,716	29.1	%		57,855	11.3	%
Residential real estate junior lien		135,255	7.2	%		125,668	7.1	%		9,587	7.6	%
Other revolving and installment		53,384	2.8	%		45,363	2.6	%		8,021	17.7	%
Total consumer		757,210	40.1	%		681,747	38.8	%		75,463	11.1	%
Total loans	$	1,890,243	100.0	%	$	1,758,020	100.0	%	$	132,223	7.5	%

(1) Included PPP loans of $6.9 million at June 30, 2022 and $33.6 million at December 31, 2021.

Total loans outstanding were $1.9 billion as of June 30, 2022, an increase of $132.2 million, or 7.5%, from December 31, 2021. This increase was primarily a result of increases of $57.9 million in residential real estate first mortgages and $47.7 million in commercial and industrial loans. If PPP loans were excluded, commercial and industrial loans would have increased $74.3 million, or 18.4%, from December 31, 2021, primarily as a result of organic loan growth.

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

50

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

	June 30, 2022
			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	$	149,940	$	239,770	$	93,895	$	821	$	484,426
Real estate construction		26,182		19,373		3,315		—		48,870
Commercial real estate		18,219		219,210		326,170		36,138		599,737
Total commercial		194,341		478,353		423,380		36,959		1,133,033
Consumer
Residential real estate first mortgage		2,628		18,060		45,595		502,288		568,571
Residential real estate junior lien		9,830		24,414		32,695		68,316		135,255
Other revolving and installment		11,123		40,172		2,089		—		53,384
Total consumer		23,581		82,646		80,379		570,604		757,210
Total loans	$	217,922	$	560,999	$	503,759	$	607,563	$	1,890,243
Loans with fixed interest rates:
Commercial
Commercial and industrial	$	21,871	$	204,302	$	75,965	$	—	$	302,138
Real estate construction		25,876		10,133		60		—		36,069
Commercial real estate		13,670		168,112		188,126		11,537		381,445
Total commercial		61,417		382,547		264,151		11,537		719,652
Consumer
Residential real estate first mortgage		2,302		15,620		42,326		341,524		401,772
Residential real estate junior lien		4,032		6,472		12,829		3,358		26,691
Other revolving and installment		1,664		26,086		2,089		—		29,839
Total consumer		7,998		48,178		57,244		344,882		458,302
Total loans with fixed interest rates	$	69,415	$	430,725	$	321,395	$	356,419	$	1,177,954
Loans with floating interest rates:
Commercial
Commercial and industrial	$	128,069	$	35,468	$	17,930	$	821	$	182,288
Real estate construction		306		9,240		3,255		—		12,801
Commercial real estate		4,549		51,098		138,044		24,601		218,292
Total commercial		132,924		95,806		159,229		25,422		413,381
Consumer
Residential real estate first mortgage		326		2,440		3,269		160,764		166,799
Residential real estate junior lien		5,798		17,942		19,866		64,958		108,564
Other revolving and installment		9,459		14,086		—		—		23,545
Total consumer		15,583		34,468		23,135		225,722		298,908
Total loans with floating interest rates	$	148,507	$	130,274	$	182,364	$	251,144	$	712,289

The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.

Asset Quality

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

51

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 Loan Losses” to the consolidated financial statements for a definition of each of the risk ratings.

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

	June 30,			December 31,
(dollars in thousands)	2022			2021
Commercial
Commercial and industrial	$	4,840		$	6,526
Real estate construction		—			—
Commercial real estate		10,185			13,602
Total commercial		15,025			20,128
Consumer
Residential real estate first mortgage		2,203			341
Residential real estate junior lien		718			770
Other revolving and installment		74			—
Total consumer		2,995			1,111
Total loans	$	18,020		$	21,239
Criticized loans as a percent of total loans		0.95	%		1.21	%

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

	June 30,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans	$	4,370		$	2,076
Accruing loans 90+ days past due		—			121
Total nonperforming loans		4,370			2,197
OREO and repossessed assets		860			885
Total nonperforming assets		5,230			3,082
Total restructured accruing loans		355			676
Total nonperforming assets and restructured accruing loans	$	5,585		$	3,758
Nonperforming loans to total loans		0.23	%		0.12	%
Nonperforming assets to total assets		0.16	%		0.09	%
Allowance for loan losses to nonperforming loans		718	%		1,437	%

Interest income lost on nonaccrual loans approximated $71 thousand and $32 thousand for the three months ended June 30, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended June 30, 2022 and 2021.

Interest income lost on nonaccrual loans approximated $107 thousand and $112 thousand for the six months ended June 30, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the six months ended June 30, 2022 and 2021.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of incurred credit losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred losses in the loan portfolio given the conditions at the time. Management determines the

52

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

53

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

	Three months ended						Six months ended
	June 30,						June 30,
(dollars in thousands)	2022			2021			2022			2021
Balance—beginning of period	$	31,713		$	33,758		$	31,572		$	34,246
Commercial loan charge-offs
Commercial and Industrial		(637)			(273)			(664)			(477)
Real estate construction		—			—			—			—
Commercial real estate		—			—			—			(536)
Total commercial loan charge-offs		(637)			(273)			(664)			(1,013)
Consumer loan charge-offs
Residential real estate first mortgage		—			—			—			—
Residential real estate junior lien		—			—			—			—
Other revolving and installment		(37)			(49)			(55)			(93)
Total consumer loan charge-offs		(37)			(49)			(55)			(93)
Total loan charge-offs		(674)			(322)			(719)			(1,106)
Commercial loan recoveries
Commercial and Industrial		90			275			216			445
Real estate construction		—			—			—			—
Commercial real estate		11			1			22			4
Total commercial recoveries		101			276			238			449
Consumer loan recoveries
Residential real estate first mortgage		—			—			—			—
Residential real estate junior lien		201			14			214			97
Other revolving and installment		32			38			68			78
Total consumer loan recoveries		233			52			282			175
Total loan recoveries		334			328			520			624
Net loan charge-offs (recoveries)		340			(6)			199			482
Commercial loan provision
Commercial and Industrial		1,085			(869)			1,856			(553)
Real estate construction		68			(11)			95			(71)
Commercial real estate		(1,123)			(913)			(1,564)			(636)
Total commercial loan provision		30			(1,793)			387			(1,260)
Consumer loan provision
Residential real estate first mortgage		(486)			129			(357)			402
Residential real estate junior lien		(134)			99			(42)			(69)
Other revolving and installment		(5)			(81)			140			(164)
Total consumer loan provision		(625)			147			(259)			169
Unallocated provision expense		595			1,646			(128)			1,091
Total loan loss provision		—			—			—			—
Balance—end of period	$	31,373		$	33,764		$	31,373		$	33,764
Total loans	$	1,890,243		$	1,835,312		$	1,890,243		$	1,835,312
Average total loans		1,838,631			1,887,986			1,803,623			1,916,553
Allowance for loan losses to total loans		1.66	%		1.84	%		1.66	%		1.84	%
Net charge-offs/(recoveries) to average total loans (annualized)		0.07	%		—	%		0.02	%		0.05	%

The allowance for loan losses was $31.4 million as of June 30, 2022, compared to $31.6 million as of December 31, 2021. The $199 thousand decrease was the result of net charge-offs and no additional provision expense. As of June 30, 2022, the allowance for loan losses represented 1.66% of total loans.

54

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

	June 30, 2022				December 31, 2021
			Percentage				Percentage
	Allocated		of loans to		Allocated		of loans to
(dollars in thousands)	Allowance		total loans		Allowance		total loans
Commercial and industrial	$	10,333	25.6	%	$	8,925	24.8	%
Real estate construction		878	2.6	%		783	2.3	%
Commercial real estate		10,834	31.7	%		12,376	34.1	%
Residential real estate first mortgage		6,175	30.1	%		6,532	29.1	%
Residential real estate junior lien		1,467	7.2	%		1,295	7.1	%
Other revolving and installment		634	2.8	%		481	2.6	%
Unallocated		1,052	—	%		1,180	—	%
Total loans	$	31,373	100.0	%	$	31,572	100.0	%

In the ordinary course of business, we enter into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was $1.8 million as of June 30, 2022.

Investment Securities

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

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

	June 30, 2022				December 31, 2021
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Available-for-sale
U.S. Treasury and agencies	$	3,709	0.3	%	$	5,103	0.4	%
Mortgage backed securities
Residential agency		652,507	57.8	%		707,157	58.7	%
Commercial		76,130	6.7	%		90,913	7.5	%
Asset backed securities		40	—	%		54	—	%
Corporate bonds		66,411	5.9	%		50,422	4.2	%
Total available-for-sale investment securities		798,797	70.7	%		853,649	70.8	%
Held-to-maturity
Obligations of state and political agencies		139,102	12.3	%		144,543	12.0	%
Mortgage backed securities
Residential agency		192,639	17.0	%		207,518	17.2	%
Total held-to-maturity investment securities		331,741	29.3	%		352,061	29.2	%
Total investment securities	$	1,130,538	100.0	%	$	1,205,710	100.0	%

The investment securities presented in the following table are reported at fair value and by contractual maturity as of June 30, 2022. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and

55

collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis.

	Maturity as of June 30, 2022
	One year or less				One to five years				Five to ten years				After ten years
	Fair		Average		Fair		Average		Fair		Average		Fair		Average
(dollars in thousands)	Value		Yield		Value		Yield		Value		Yield		Value		Yield
Available-for-sale
U.S. Treasury and agencies	$	—	—	%	$	—	—	%	$	999	1.16	%	$	2,710	0.95	%
Mortgage backed securities
Residential agency		21	4.13	%		2,894	2.37	%		10,162	2.32	%		639,430	1.76	%
Commercial		—	—	%		18,123	2.77	%		13,936	2.90	%		44,071	2.50	%
Asset backed securities		—	—	%		—	—	%		14	5.39	%		26	5.28	%
Corporate bonds		—	—	%		—	—	%		66,411	3.84	%		—	—	%
Total available-for-sale investment securities		21	4.13	%		21,017	2.72	%		91,522	3.50	%		686,237	1.80	%
Held-to-maturity
Obligations of state and political agencies		6,794	1.22	%		33,922	1.09	%		65,003	1.86	%		20,458	2.23	%
Mortgage backed securities
Residential agency		—	—	%		—	—	%		—	—	%		167,772	2.06	%
Total held-to-maturity investment securities		6,794	1.22	%		33,922	1.09	%		65,003	1.86	%		188,230	2.08	%
Total investment securities	$	6,815	1.23	%	$	54,939	1.71	%	$	156,525	2.82	%	$	874,467	1.86	%

Deposits

Total deposits were $2.6 billion as of June 30, 2022, a decrease of $301.0 million, or 10.3%, from December 31, 2021. Interest-bearing deposits decreased $127.0 million while noninterest-bearing deposits decreased $174.0 million. The decrease in interest-bearing deposits included decreases of $72.0 million in interest-bearing demand deposits, $32.5 million in time deposits and $22.5 million in money market and savings deposits. The decrease in interest-bearing demand deposits was due to a seasonal decrease in our public deposits. Time deposits decreased primarily due to clients shifting balances to more liquid accounts. Synergistic deposits decreased $82.1 million from December 31, 2021. Excluding synergistic deposits, commercial transaction deposits decreased $178.0 million, or 14.1%, and consumer transaction deposits decreased $10.1 million, or 1.4% as compared to December 31, 2021.

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

	June 30, 2022				December 31, 2021
			Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Amount		Percent
Noninterest-bearing demand	$	764,808	29.2	%	$	938,840	32.1	%	$	(174,032)	(18.5)	%
Interest-bearing demand		642,641	24.5	%		714,669	24.5	%		(72,028)	(10.1)	%
Money market and savings		1,011,650	38.6	%		1,034,130	35.4	%		(22,480)	(2.2)	%
Time deposits		200,451	7.7	%		232,912	8.0	%		(32,461)	(13.9)	%
Total deposits	$	2,619,550	100.0	%	$	2,920,551	100.0	%	$	(301,001)	(10.3)	%

56

The following table presents the average balances and rates of our deposit portfolio for the three months ended June 30, 2022 and 2021:

	Three months ended June 30,
	2022				2021
	Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest-bearing demand	$	807,271	—	%	$	755,773	—	%
Interest-bearing demand		708,888	0.12	%		697,789	0.14	%
Money market and savings		1,042,660	0.14	%		1,015,358	0.14	%
Time deposits		219,592	0.43	%		208,338	0.56	%
Total deposits	$	2,778,411	0.12	%	$	2,677,258	0.14	%

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, 2022:

	June 30,
(dollars in thousands)	2022
Maturing in:
3 months or less	$	25,738
3 months to 6 months		36,606
6 months to 1 year		557
1 year or greater		271
Total	$	63,172

Borrowings

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

	June 30, 2022				December 31, 2021
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Fed funds purchased	$	117,350	39.0	%	$	—	—	%
FHLB Short-term advances		125,000	41.5	%		—	—	%
Subordinated notes		50,000	16.6	%		50,000	84.9	%
Junior subordinated debentures		8,787	2.9	%		8,730	14.8	%
Finance lease liability		83	—	%		203	0.3	%
Total borrowed funds	$	301,220	100.0	%	$	58,933	100.0	%

Capital Resources

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

Stockholders' equity decreased $52.2 million, or 14.5%, to $307.2 million as of June 30, 2022, compared to $359.4 million as of December 31, 2021, primarily due to a $66.2 million increase in other comprehensive loss, attributable to rising interest rates, which resulted in a lower fair value in our investment securities available-for-sale. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.96% as of June 30, 2022, from 9.21% as of December 31, 2021.

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

57

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

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

	June 30,		December 31,
Capital Ratios	2022		2021
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets	14.19	%	14.65	%
Tier 1 capital to risk weighted assets	14.56	%	15.06	%
Total capital to risk weighted assets	17.95	%	18.64	%
Tier 1 capital to average assets	10.80	%	9.79	%
Tangible common equity to tangible assets (1)	7.96	%	9.21	%
Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	13.64	%	13.87	%
Tier 1 capital to risk weighted assets	13.64	%	13.87	%
Total capital to risk weighted assets	14.89	%	15.12	%
Tier 1 capital to average assets	10.12	%	9.01	%

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

The capital ratios for the Company and the Bank, as of June 30, 2022, as shown in the above tables, were at levels above the regulatory minimums to be considered “well capitalized”. See “Note 18 Regulatory Matters” to the consolidated financial statements for additional information.

Off-Balance Sheet Arrangements

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

A summary of the contractual amounts of our exposure to off-balance sheet agreements as of June 30, 2022 and December 31, 2021, was as follows:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	635,320	$	668,115
Standby letters of credit		11,412		10,529
Total	$	646,732	$	678,644

58

Liquidity

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

As of June 30, 2022, we had on balance sheet liquidity of $832.6 million, compared to $1.1 billion as of December 31, 2021. 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, 2022, we had $117.4 million federal funds purchased, $125.0 million in short-term borrowings from the FHLB and $781.3 million of collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to $538.7 million from the FHLB. In addition, we can borrow up to $102.0 million through the unsecured lines of credit we have established with four other correspondent banks.

In addition, because the Bank is “well capitalized,” we can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or $659.0 million, as of June 30, 2022. Management believed that we had adequate resources to fund all of our commitments as of June 30, 2022 and December 31, 2021.

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures,

59

limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

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

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

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

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

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

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

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

	June 30, 2022				December 31, 2021
	Following		Following		Following		Following
	12 months		24 months		12 months		24 months
+400 basis points	−13.8	%	−2.4	%	−8.2	%	−2.9	%
+300 basis points	−10.4	%	−0.5	%	−6.1	%	−2.3	%
+200 basis points	−6.9	%	1.5	%	−4.1	%	−1.8	%
+100 basis points	−3.4	%	3.6	%	−2.0	%	−1.3	%
−100 basis points	−4.6	%	−3.7	%	−10.6	%	−15.7	%
−200 basis points	−9.4	%	−13.9	%	N/A	%	N/A	%

Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the

60

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, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates:

	June 30,		December 31,
	2022		2021
+400 basis points	−30.2	%	−26.0	%
+300 basis points	−22.2	%	−16.8	%
+200 basis points	−14.1	%	−8.2	%
+100 basis points	−6.1	%	−1.4	%
−100 basis points	−8.0	%	−31.2	%
−200 basis points	−21.8	%	N/A	%

Operational Risk

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

Compliance Risk

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

Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various risks, including those related to the development of new products and business initiatives.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our President and Chief Executive Officer, our Chief Financial Officer, and our Chief Accounting Officer have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer, our Chief Financial Officer and our 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

61

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 we or any of our subsidiaries are a party or to which our property is the subject. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries. ​

Item 1A – Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022.

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

Unregistered Sales of Equity Securities

None.

Issuer Repurchases of Equity Securities

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

				Total Number of	Maximum Number of
	Total Number	Average		Shares Purchased as	Shares that May
	of Shares	Price Paid		Part of Publicly	Yet be Purchased
(dollars in thousands, except per share data)	Purchased (1)	per Share		Announced Plans	Under the Plan (2)
April	—	$	—	—	770,000
May	1,207		25.55	—	770,000
June	2,426		24.21	—	770,000
Total	3,633	$	24.66	—	770,000

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

(2) On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months, until February 28, 2024. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended June 30, 2022, there were no shares repurchased under the Program.

Use of Proceeds from Registered Securities

62

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

None.

63

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 Jim Collins, dated June 1, 2022 – filed herewith.
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)

64

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 4, 2022	By:	/s/ Katie A. Lorenson
		Name:    Katie A. Lorenson
		Title:      President and Chief Executive Officer (Principal Executive Officer)
Date: August 4, 2022	By:	/s/ Alan A. Villalon
		Name:    Alan A. Villalon
		Title:      Executive Vice President and Chief Financial Officer (Principal Financial Officer)

65

EX-10.1

Exhibit 10.1

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and _Jim Collins_ (the “Employee”).

WHEREAS Employee is a key member of the management of the Company and has provided guidance, leadership, and direction in the growth, management, and development of the Company and has learned trade secrets, confidential procedures and information, and sensitive business plans of the Company;

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

NOW THEREFORE, in consideration of these premises, the mutual promises and undertakings set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Employee and the Company hereby agree as follows.

1. DEFINITIONS.  As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to:  (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(l), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

c. Change in Control shall mean a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as such change is defined under the default definition in Treasury Regulation §1.409A-3(i)(5) or any subsequently applicable Treasury Regulation.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

e. Disability or Disabled shall mean the Employee:  (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, is receiving income replacement benefits for a period of not less than three (3) months under a disability plan covering employees of the Company.

f. Good Reason shall mean:  (i) without the Employee’s express written consent, a material diminution in authority, duties or responsibilities (except after the Employee attains Retirement Age or in connection with the termination of the Employee’s employment for Disability, death, Cause, or by the Employee other than for Good Reason); (ii) any material reduction by the Company in the Employee’s Base Salary; (iii) any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Section 13 hereof; (iv) the Company’s material breach of this Agreement; or (v) the Company requiring the Employee to be permanently assigned to a location more than 35 miles from Employee’s current work location, except for required travel on Company business, or, in the event the Employee consents to any relocation, and such relocation is more than 35 miles from the Employee’s previous location, the failure by the Company to pay (or reimburse the Employee) for all reasonable moving expenses incurred by the Employee relating to a change of the Employee’s principal residence in connection with such relocation and to indemnify the Employee against any loss realized on the sale of the Employee’s principal residence in connection with any such change of residence. Employee must notify Company in writing of any Event that constitutes Good Reason hereunder within thirty days following Employee’s initial knowledge of the existence of such Event or such Event shall not constitute Good Reason under this Agreement. Employee must provide prior written notification in accordance with Section 4 of his intention to terminate his employment for Good Reason and the Termination Date and Company shall have thirty days from the date of receipt of such notice to effect a cure of the condition constituting Good Reason, and, upon cure thereof by the Company, such event shall no longer constitute Good Reason.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

2

month period that begins on the first day of January following the close of the identification period.

2. TERM.  The term of this Agreement shall commence upon the date this Agreement is executed by all parties (the “Effective Date”) and will continue for an initial term of twenty four months.  Thereafter, the term of this Agreement will automatically renew each day after the Effective Date for one additional day so that the term of the Agreement shall always be twenty four months.  Notwithstanding the forgoing, prior to a Change in Control, this Agreement may be terminated upon 120 days’ written notice of intent not to renew by either party; after a Change in Control, this Agreement shall automatically terminate upon the second anniversary of the closing on the event constituting the Change in Control.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

a. Except as permitted in writing by the Company, the Employee shall not at any time divulge, furnish or make accessible to anyone, or use in any way other than in the ordinary course of the business of the Company or its Affiliates, any confidential, proprietary, or secret knowledge or information of the Company or its Affiliates that the Employee has acquired or will acquire about the Company or its Affiliates, whether developed by himself or herself or by others, concerning (i) any trade secrets; (ii) any confidential, proprietary, or secret designs, programs, processes, formulae, plans, devices, or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company or of its Affiliates; (iii) any customer or supplier lists; (iv) any confidential, proprietary, or secret development or research work; (v) any strategic or other business, marketing, or sales plans; (vi) any financial data or plans; or (viii) any other confidential, proprietary, or secret information about any aspect of the business of the Company or of its Affiliates (collectively “Confidential Information”).

b. The Employee acknowledges that the knowledge and information described above constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company or its Affiliates would be wrongful and would cause irreparable harm to the Company. The Employee shall not intentionally commit any act that would materially reduce the value of such knowledge or information to the Company or its Affiliates. The Employee's obligations under this Agreement to maintain the confidentiality of the Company's confidential, proprietary, and secret information are in addition to any obligations of the Employee under applicable statutory or common law. The obligations of the Employee under this Section 3 shall survive the termination of this Agreement and the termination of the Employee’s employment with the Company.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that:  (i) is now or subsequently becomes generally publicly known,

3

other than as a direct or indirect result of the breach of this Agreement; (ii) is independently made available to the Employee in good faith by a third party who has not violated a confidential relationship with the Company or its Affiliates or any other entity; or (iii) is required to be disclosed by law or legal process.

d. If the Employee breaches any of the covenants in this Section 3, the Employee’s right to any of the payments specified in Section 5 after the date of the breach shall be forever forfeited and the right of the Employee’s designated beneficiary or estate to any payments under this Agreement shall likewise be forever forfeited. This forfeiture is in addition to and not instead of any injunctive or other relief that may be available to the Company.

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

a. the date specified in written notice from the Company to Employee notifying him of the termination of his employment for any reason, provided that if Employee’s employment is terminated by the Company without Cause (defined below), then the Company shall provide Employee at least thirty days’ notice of termination or pay in lieu of notice;

b. Employee providing to the Company not less than sixty nor more than ninety days’ prior written notice of his resignation of employment, including for Good Reason, effective at the end of such period, provided that the Company may in its sole discretion elect to relieve Employee from his duties and place him on paid leave during all or any portion of the notice period; or

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

a. Except as provided in Section 5(b), upon the termination of Employee’s employment by the Company other than for Cause prior to a Change in Control, the Employee shall be entitled to an amount equal to the aggregate of one times: (i) the annual rate of base salary then being paid to the Employee, plus (ii) the average of the past three years short term bonus pay, plus (iii) the Company’s portion of 12 months’ premiums under any health, disability and life insurance plan or program in which the Employee was entitled to participate immediately prior to the Termination Date (the aggregated amount, the “Severance Pay”), which shall be paid to Employee by the Company over a period of 12 months from the Termination Date in accordance with the Company’s regular payroll cycle, commencing on the first regular payroll date of the Company that occurs more than 60 days after the Termination Date (and including any installment that would have otherwise been paid on regular payroll dates during the period of 60 days following the Termination Date), provided the conditions specified in Section 5(c) have been satisfied.

4

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

c. Notwithstanding the foregoing provisions of Section 5(a) and (b), the Company will not be obligated to make any payments to or on behalf of Employee under Section 5(a) and (b), as applicable, unless (i) Employee signs a release of claims in favor of the Company in a form as prepared by the Company (the “Release”) and delivered to Employee no later than five business days after the Termination Date, (ii) all applicable consideration periods and rescission periods provided by law with respect to the Release have expired without Employee rescinding the Release, and (iii) Employee is in strict compliance with the terms of this Agreement as of the dates of the payments.  The cessation of these payments will be in addition to, and not as an alternative to, any other remedies at law or in equity available to the Company, including without limitation the right to seek specific performance or an injunction.

d. If, when the Employee’s termination of employment occurs, the Employee is a specified employee within the meaning of section 409A of the Code, and if the Severance Pay would be considered deferred compensation under section 409A of the Code, and finally if an exemption from the six-month delay requirement of section 409A(a)(2)(B)(i) of the Code is not available, the Employee’s Severance Pay payments for the first six months following separation from service shall be paid to the Employee in a single lump sum on the first day of the seventh month after the month in which the Employee’s separation from service occurs.

e. In the event that the vesting, acceleration and payment of any equity awards or other compensation or benefits, together with all other payments and the value of any benefit received or to be received by the Employee under this Agreement would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the amounts due under Section 5(b) that the Company shall pay to the Employee shall be either (i) the full payment or (ii) such lesser amount determined by the Company in accordance with this Section 5(e) that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code.  In the event the amounts due under Section  are reduced, the amounts shall be reduced in the following order of priority: first, with respect to any amount that

5

does not constitute the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control and second, with respect to any amount that constitutes the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control first with respect to Company funded amounts and then the Employee’s deferrals, in each case only to the extent necessary to satisfy (ii) above. All determinations required to be made under this Section 5(e) shall be made by a nationally recognized accounting firm that is the Company’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax (the “Accounting Firm”).  The Company shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Company and Employee.  Notice must be given to the Accounting Firm within 15 business days after an event entitling Employee to an amount due under this Agreement.  All fees and expenses of the Accounting Firm shall be borne solely by the Company.  The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code).  For the purposes of all calculations under Section 280G of the Code and the application of this Section 5.1, all determination as to present value shall use 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded based on the nature of the payment, as in effect on the Date of Termination, but if not otherwise specified, compounded on a semiannual basis.  The determination by the Accounting Firm shall be final and binding on the Company and the Employee.

f. If Employee’s employment with the Company is terminated by the Company for Cause or for any reason not covered by Section 5(a) or 5(b), then the Company shall pay to Employee only his base salary and any accrued but unused vacation or PTO earned through the Termination Date.

g. In addition to the benefits otherwise provided in Section 5, the Employee shall be entitled to the following benefits and payments upon the Employee’s termination of employment: (i) the payment of the Employee’s base salary and any other form or type of compensation earned, vested and payable through the Date of Termination; (ii) the right to receive all benefits to which the Employee is vested on the Date of Termination in accordance with the terms under the Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits; and (iii) the right to exercise and to receive all rights in which the Employee is vested on the Date of Termination, in accordance with the terms of all awards under any Company stock purchase and stock incentive plans or programs, or any successor to any such plans or programs.

6

6. POST TERMINATION OBLIGATIONS.

a. Upon the Employee's termination of employment for any reason, or at any time upon the Company's request, the Employee shall promptly deliver to the Company all Company and Affiliate records and all Company and Affiliate property in the Employee’s possession or the Employee’s control, including without limitation manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables or calculations, and all copies thereof; documents that in whole or in part contain any Confidential Information of the Company or its Affiliates and all copies thereof; and keys, access cards, access codes, passwords, credit cards, personal or laptop computers, telephones, PDAs, smart phones, and other electronic equipment belonging to the Company or an Affiliate.

b. Unless otherwise requested by the Company in writing, upon Employee’s termination of employment with the Company for any reason Employee shall automatically resign as of the Termination Date from all titles, positions and appointments Employee then holds with the Company and any and all Affiliates, whether as an officer, director, trustee, fiduciary or employee (without any claim for compensation related thereto), and Employee hereby agrees to take all actions necessary to effectuate such resignations.

c. During the Term and thereafter during the 24 month period following termination of employment for any reason, to the fullest extent permitted by law, the Employee shall not make any statement that is disparaging or reflects negatively upon the Company or its Affiliates, or any of their officers, directors or employees, to, or that is likely to come to the attention of, (a) any customer, vendor, supplier, distributor or other trade related business relation of the Company or any of its Affiliates, (b) any employee of the Company or its Affiliates, or (c) any member of the media. Nothing herein shall prevent the Employee from responding truthfully to any inquiry from a governmental entity, engaging in any protected activities and/or from communicating with the Board and/or those employees with a need to know about personnel issues involving Company officers, directors and/or employees.

d. Following termination of Employee’s employment with the Company for any reason, Employee will, upon reasonable request of the Company or its designee and provided the Company is not in material breach of any provision of this Agreement, respond to inquiries and cooperate with the Company in connection with the transition of his duties and responsibilities for the Company for up to six months following the Termination Date; and be reasonably available at mutually convenient times, with or without subpoena, to be interviewed, review documents or things, give depositions, testify, or engage in other reasonable activities in connection with any litigation or investigation, with respect to matters that Employee then has or may have knowledge of by virtue of his employment by or service to the Company or any of its Affiliates.  In connection with such cooperation requested by the Company, the Company shall reimburse Employee

7

for reasonable out-of-pocket costs incurred as a result of his compliance with his obligations, and, with respect to such cooperation provided by Employee during any period for which he is not receiving payments under Section 5(a), the Company shall compensate Employee at a daily rate comparable to his regular base salary rate in effect as of the Termination Date.  The Company will endeavor to schedule such activities taking into account other obligations Employee may have and so as not to materially interfere with Employee’s then-current employment or other business activities.

7. REMEDIES.  Employee agrees that if Employee fails to fulfill Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3, the damages to the Company or any of its Affiliates would be very difficult or impossible to determine.  Therefore, in addition to any other rights or remedies available to the Company at law, in equity or by statute, Employee hereby consents to the specific enforcement by the Company of this Agreement through an injunction or restraining order issued by an appropriate court, without the necessity of proving actual damages, and Employee hereby waives as a defense to any equitable action the allegation that the Company has an adequate remedy at law.  The provisions of this Section shall not diminish the right of the Company to claim and recover damages or to obtain any equitable remedy in addition to injunctive relief to which the Company may otherwise be entitled.  The Employee understands and agrees that the Employee will also be responsible for all costs and attorney’s fees incurred by the Company in enforcing any of the provisions of this Agreement including, but not limited to, expert witness fees and deposition costs.

8. SEVERABILITY.  If, for any reason, any Section or portion of this Agreement shall be held by a court to be invalid or unenforceable, it is agreed that such holding shall not affect any other section or portion of this Agreement.  If the final judgment of a court of competent jurisdiction declares that any term or provision of this Agreement is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

9. ENTIRE AGREEMENT.  This Agreement constitutes the entire agreement between Company and the Employee concerning the subject matter and supersedes all prior agreements between the parties, including, without limitation, the Management Agreement, executed February 14, 2006 and amended December 31, 2008. No rights are granted to the Employee under this Agreement other than those specifically set forth herein.

10. NO EMPLOYMENT AGREEMENT.  This Agreement is not an employment policy or contract. It does not give the Employee the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Employee. It also does not

8

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

11. AMENDMENTS.  The parties agree that no modification of the Agreement may be made except by means of a written agreement signed by the parties.  However, if the Company determines to its reasonable satisfaction that an alteration or amendment of this Agreement is necessary or advisable so that the Agreement complies with the Code or any other applicable tax law, then, upon written notice to Employee, the Company may unilaterally amend this Agreement in such manner and to such extent as the Company reasonably considers necessary or advisable to ensure compliance with the Code or other applicable tax law. Nothing in this Section shall be deemed to limit the Company’s right to terminate this Agreement at any time and without stated cause.

12. ASSIGNMENT OF RIGHTS; SPENDTHRIFT CLAUSE.  None of the Employee, the Employee’s estate, or the Employee’s beneficiary shall have any right to sell, assign, transfer, pledge, attach, encumber, or otherwise convey the right to receive any payment hereunder. To the extent permitted by law, benefits payable under this Agreement shall not be subject to the claim of any creditor of the Employee, the Employee’s estate, or the Employee’s designated beneficiary or subject to any legal process by any creditor of the Employee, the Employee’s estate, or the Employee’s designated beneficiary.

13. BINDING EFFECT.  This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

14. SUCCESSORS; BINDING AGREEMENT.  By an assumption agreement in form and substance satisfactory to the Employee, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement had no succession occurred.

15. TAX WITHHOLDING.  If taxes are required by the Code or other applicable tax law to be withheld by the Company from payments under this Agreement, the Company shall withhold any taxes that are required to be withheld.

16. GOVERNING LAW.  This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES.  All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

401 DeMers Avenue

PO Box 6001

Grand Forks, North Dakota 58206-6001

9

Attention: General Counsel

b. In the case of the Employee shall be:

Either party may, by notice hereunder, designate a changed address. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed to have been given on the registered date or that date stamped on the certified mail receipt.

18. SEVERABILITY.  In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, it is hereby agreed that such invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions or portions hereof shall remain in full force and effect, and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable.

19. COMPLIANCE WITH CODE SECTION 409A.  The Company and the Employee intend that their exercise of authority or discretion under this Agreement shall comply with section 409A of the Code. Notwithstanding anything herein to the contrary in this Agreement, to the extent that any benefit under this Agreement that is nonqualified deferred compensation (within the meaning of section 409A of the Code) payable upon Employee’s termination of employment, such payment(s) shall be made only upon Employee’s “Separation from Service” pursuant to the default definition in Treasury Regulation section 1.409A-1(h).

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	6/1/2022	/s/ Jim Collins
		Employee
		Accepted for Alerus Financial Corporation:
Date:	6/1/2022	By:	/s/ Katie Lorenson
		Its: CEO & President

10

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as
Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Katie A. Lorenson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Alerus Financial Corporation (the “Registrant”);

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

	Alerus Financial Corporation
August 4, 2022	/s/ Katie A. Lorenson
	Katie A. LorensonPresident and Chief Executive Officer(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as
Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Alan A. Villalon, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Alerus Financial Corporation (the “Registrant”);

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

	Alerus Financial Corporation
August 4, 2022	/s/ Alan A. Villalon
	Alan A. VillalonExecutive Vice President and Chief Financial Officer(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Katie A. Lorenson, President and Chief Executive Officer of Alerus Financial Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	Alerus Financial Corporation
August 4, 2022	/s/ Katie A. Lorenson
	Katie A. LorensonPresident and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Alan A. Villalon, Executive Vice President and Chief Financial Officer of Alerus Financial Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	Alerus Financial Corporation
August 4, 2022	/s/ Alan A. Villalon
	Alan A. VillalonExecutive Vice President and Chief Financial Officer(Principal Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2022	Jul. 31, 2022
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Jun. 30, 2022
Document Transition Report	false
Entity File Number	001-39036
Entity Registrant Name	ALERUS FINANCIAL CORPORATION
Entity Incorporation, State	DE
Entity Tax Identification Number	45-0375407
Entity Address, Address Line One	401 Demers Avenue
Entity Address, City or Town	Grand Forks
Entity Address, State or Province	ND
Entity Address, Postal Zip Code	58201
City Area Code	701
Local Phone Number	795-3200
Title of 12(b) Security	Common Stock, par value $1.00 per share
Trading Symbol	ALRS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		19,987,017
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q2
Entity Central Index Key	0000903419
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Assets
Cash and cash equivalents	$ 37,043	$ 242,311
Available-for-sale, at fair value	798,797	853,649
Held-to-maturity, at carrying value	331,741	352,061
Loans held for sale	54,363	46,490
Loans	1,890,243	1,758,020
Allowance for loan losses	(31,373)	(31,572)
Net loans	1,858,870	1,726,448
Land, premises and equipment, net	17,180	18,370
Operating lease right-of-use assets	3,439	3,727
Accrued interest receivable	9,155	8,537
Bank-owned life insurance	33,564	33,156
Goodwill	31,337	31,490
Other intangible assets	17,511	20,250
Servicing rights	2,064	1,880
Deferred income taxes, net	32,814	11,614
Other assets	67,187	42,708
Total assets	3,295,065	3,392,691
Deposits
Noninterest-bearing	764,808	938,840
Interest-bearing	1,854,742	1,981,711
Total deposits	2,619,550	2,920,551
Short-term borrowings	242,350
Long-term debt	58,870	58,933
Operating lease liabilities	3,856	4,275
Accrued expenses and other liabilities	63,281	49,529
Total liabilities	2,987,907	3,033,288
Stockholders' equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding
Common stock, $1 par value, 30,000,000 shares authorized: 17,306,237 and 17,212,588 issued and outstanding	17,306	17,213
Additional paid-in capital	93,129	92,878
Retained earnings	267,128	253,567
Accumulated other comprehensive income (loss)	(70,405)	(4,255)
Total stockholders' equity	307,158	359,403
Total liabilities and stockholders' equity	$ 3,295,065	$ 3,392,691

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2022	Dec. 31, 2021
Consolidated Balance Sheets
Preferred stock, par value	$ 1	$ 1
Preferred Stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	17,306,237	17,212,588
Common stock, shares outstanding	17,306,237	17,212,588

XML

Consolidated Statements of Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Interest Income
Loans, including fees	$ 17,988	$ 19,324	$ 35,280	$ 39,891
Taxable	6,068	2,897	11,508	5,298
Exempt from federal income taxes	213	233	429	469
Other	157	130	273	247
Total interest income	24,426	22,584	47,490	45,905
Interest Expense
Deposits	813	906	1,642	1,901
Short-term borrowings	278		278
Long-term debt	559	538	1,121	826
Total interest expense	1,650	1,444	3,041	2,727
Net interest income	22,776	21,140	44,449	43,178
Net interest income after provision for loan losses	22,776	21,140	44,449	43,178
Noninterest Income
Mortgage banking	6,038	12,287	10,969	29,419
Net gains (losses) on investment securities				114
Other	935	1,122	2,139	2,178
Total noninterest income	29,226	36,748	58,696	77,629
Noninterest Expense
Compensation	21,248	24,309	40,299	48,007
Employee taxes and benefits	5,787	5,572	11,949	11,385
Occupancy and equipment expense	1,737	1,918	3,788	4,149
Business services, software and technology expense	4,785	4,958	9,709	9,934
Intangible amortization expense	1,053	1,088	2,106	2,239
Professional fees and assessments	2,246	1,509	3,787	2,981
Marketing and business development	814	769	1,414	1,445
Supplies and postage	572	503	1,218	1,034
Travel	356	36	535	62
Mortgage and lending expenses	482	1,199	1,168	2,531
Other	904	689	2,082	1,825
Total noninterest expense	39,984	42,550	78,055	85,592
Income before income taxes	12,018	15,338	25,090	35,215
Income tax expense	2,725	3,644	5,613	8,306
Net income	$ 9,293	$ 11,694	$ 19,477	$ 26,909
Per Common Share Data
Basic earnings per common share	$ 0.53	$ 0.67	$ 1.11	$ 1.54
Diluted earnings per common share	0.52	0.66	1.10	1.52
Dividends declared per common share	$ 0.18	$ 0.16	$ 0.34	$ 0.31
Average common shares outstanding	17,297	17,194	17,271	17,170
Diluted average common shares outstanding	17,532	17,497	17,517	17,482
Retirement and Benefit Services
Noninterest Income
Revenue	$ 16,293	$ 17,871	$ 33,939	$ 35,126
Wealth Management
Noninterest Income
Revenue	5,548	5,138	10,874	10,124
Deposit Account
Noninterest Income
Revenue	$ 412	$ 330	$ 775	$ 668

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Consolidated Statements of Comprehensive Income (Unaudited)
Net Income	$ 9,293	$ 11,694	$ 19,477	$ 26,909
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities	(37,394)	7,430	(88,119)	(10,606)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity	(97)	(115)	(199)	(115)
Reclassification adjustment for losses (gains) realized in income				(114)
Total other comprehensive income (loss), before tax	(37,491)	7,315	(88,318)	(10,835)
Income tax expense (benefit) related to items of other comprehensive income	(9,410)	1,836	(22,168)	(2,720)
Other comprehensive income (loss), net of tax	(28,081)	5,479	(66,150)	(8,115)
Total comprehensive income (loss)	$ (18,788)	$ 17,173	$ (46,673)	$ 18,794

XML

Consolidated Statements of Changes in Stockholders Equity (Unaudited) - USD ($) $ in Thousands	Common Stock	Additional Paid in Capital.	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Beginning balance at Dec. 31, 2020	$ 17,125	$ 90,237	$ 212,163	$ 10,638	$ 330,163
Net income			26,909		26,909
Other comprehensive income (loss)				(8,115)	(8,115)
Common stock repurchased	(16)	(134)	(296)		(446)
Common stock dividends			(5,379)		(5,379)
Share-based compensation expense	8	1,251			1,259
Vesting of restricted stock	81	(81)
Ending balance at Jun. 30, 2021	17,198	91,273	233,397	2,523	344,391
Beginning balance at Mar. 31, 2021	17,190	90,520	224,480	(2,956)	329,234
Net income			11,694		11,694
Other comprehensive income (loss)				5,479	5,479
Common stock dividends			(2,777)		(2,777)
Share-based compensation expense	8	753			761
Ending balance at Jun. 30, 2021	17,198	91,273	233,397	2,523	344,391
Beginning balance at Dec. 31, 2021	17,213	92,878	253,567	(4,255)	359,403
Net income			19,477		19,477
Other comprehensive income (loss)				(66,150)	(66,150)
Common stock repurchased	(24)	(673)			(697)
Common stock dividends			(5,916)		(5,916)
Share-based compensation expense	10	1,031			1,041
Vesting of restricted stock	107	(107)
Ending balance at Jun. 30, 2022	17,306	93,129	267,128	(70,405)	307,158
Beginning balance at Mar. 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)
Ending balance at Jun. 30, 2022	$ 17,306	$ 93,129	$ 267,128	$ (70,405)	$ 307,158

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021
Operating Activities
Net income	$ 19,477	$ 26,909
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes	968	606
Depreciation and amortization	3,999	4,555
Amortization and accretion of premiums/discounts on investment securities	1,829	1,674
Amortization of operating lease right-of-use assets	(51)	(22)
Stock-based compensation	1,041	1,259
Increase in value of bank-owned life insurance	(408)	(389)
Realized loss (gain) on sale of fixed assets		(62)
Realized loss (gain) on derivative instruments	(215)	4,803
Realized loss (gain) on loans sold	(6,037)	(27,206)
Realized loss (gain) on sale of foreclosed assets	(11)	(204)
Realized loss (gain) on sale of investment securities		(114)
Realized loss (gain) on servicing rights	(441)	(361)
Net change in:
Loans held for sale	(1,922)	82,713
Accrued interest receivable	(618)	1,199
Other assets	(19,936)	(5,632)
Accrued expenses and other liabilities	9,924	(5,404)
Net cash provided (used) by operating activities	7,599	84,324
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		13,189
Proceeds from maturities of investment securities available-for-sale	61,313	57,661
Purchases of investment securities available-for-sale	(95,600)	(291,361)
Proceeds from sales or calls of investment securities held-to-maturity	726	1,415
Proceeds from maturities of investment securities held-to-maturity	18,588	1,180
Net (increase) decrease in loans	(132,503)	142,510
Purchases of premises and equipment	(471)	(429)
Proceeds from sales of foreclosed assets	117	481
Net cash provided (used) by investing activities	(147,830)	(75,354)
Financing Activities
Net increase (decrease) in deposits	(301,001)	138,947
Net increase (decrease) in short-term borrowings	242,350
Repayments of long-term debt	(119)	(49,804)
Proceeds from the issuance of subordinated debt		50,000
Cash dividends paid on common stock	(5,570)	(5,199)
Repurchase of common stock	(697)	(446)
Net cash provided (used) by financing activities	(65,037)	133,498
Net change in cash and cash equivalents	(205,268)	142,468
Cash and cash equivalents at beginning of period	242,311	172,962
Cash and cash equivalents at end of period	37,043	315,430
Cash paid for:
Interest	3,913	2,521
Income taxes	4,677	9,072
Non-cash information
Loan collateral transferred to foreclosed assets	81	1,072
Unrealized gain (loss) on investment securities available-for-sale	(65,951)	(8,000)
Accretion of unrealized (gain) loss on investment securities held-to-maturity	$ (199)	(115)
Investment securities transferred to held-to-maturity		$ 149,191

XML

Significant Accounting Policies

6 Months Ended

Jun. 30, 2022

Significant Accounting Policies

Significant Accounting Policies

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

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 loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

Reclassifications

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

Other Information

As of June 30, 2022, the Coronavirus Disease, or COVID-19, pandemic was ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, with certain setbacks, started reopening and wider distribution of vaccines encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the continued distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full, long-term impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold.

Emerging Growth Company

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

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

XML

Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2022

Recent Accounting Pronouncements

Recent Accounting Pronouncements

NOTE 2 Recent Accounting Pronouncements

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

Adopted Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,

2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. The Company adopted ASU 2019-12, as of January 2022. The new guidance did not have an impact on the Company’s consolidated financial statements.

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss, or CECL, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred cost” approach under GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including private companies and smaller reporting companies, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard but continues to work on its implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures to provide resources to monitor and assist stakeholders with the implementation of Topic 326. Post-Implementation Review (PIR) activities have included forming a Credit Losses Transition Resource group conducting outreach with stakeholders of all types, developing educational materials and staff question-and-answer guidance, conducting education workshops and performing an archival review of financial reports. As we move forward with the implementation of this standard, we are reviewing these resources for additional guidance.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2019-04.

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

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

XML

Investment Securities

6 Months Ended

Jun. 30, 2022

Investment Securities

Investment Securities

NOTE 3 Investment Securities

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

	June 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,643	$	66	$	—	$	3,709
Mortgage backed securities
Residential agency		740,734		27		(88,254)		652,507
Commercial		80,077		—		(3,947)		76,130
Asset backed securities		40		—		—		40
Corporate bonds		69,031		130		(2,750)		66,411
Total available-for-sale investment securities		893,525		223		(94,951)		798,797
Held-to-maturity
Obligations of state and political agencies		139,102		2		(12,927)		126,177
Mortgage backed securities
Residential agency		192,639		—		(24,867)		167,772
Total held-to-maturity investment securities		331,741		2		(37,794)		293,949
Total investment securities	$	1,225,266	$	225	$	(132,745)	$	1,092,746

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

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

	June 30, 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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities
Residential agency		(51,859)		436,234		(36,395)		214,079		(88,254)		650,313
Commercial		(3,947)		76,130		—		—		(3,947)		76,130
Asset backed securities		—		—		—		2		—		2
Corporate bonds		(2,750)		56,780		—		—		(2,750)		56,780
Total available-for-sale investment securities		(58,556)		569,144		(36,395)		214,081		(94,951)		783,225
Held-to-maturity
Obligations of state and political agencies		(12,927)		122,734		—		—		(12,927)		122,734
Mortgage backed securities
Residential agency		(24,867)		167,772		—		—		(24,867)		167,772
Total held-to-maturity investment securities		(37,794)		290,506		—		—		(37,794)		290,506
Total investment securities	$	(96,350)	$	859,650	$	(36,395)	$	214,081	$	(132,745)	$	1,073,731

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

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

For the three and six months ended June 30, 2022 and 2021, the Company did not recognize OTTI losses on its investment securities.

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

	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	6,831	$	6,794	$	20	$	21
Due after one year through five years		36,025		33,922		21,599		21,017
Due after five years through ten years		72,720		65,003		94,957		91,522
Due after 10 years		216,165		188,230		776,949		686,237
Total investment securities	$	331,741	$	293,949	$	893,525	$	798,797

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 $267.3 million and $192.8 million were pledged as of June 30, 2022 and December 31, 2021, respectively, to secure public deposits and for other purposes required or permitted by law.

Proceeds from the sale or call of available-for-sale investment securities, for the three and six months ended June 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	—	$	—	$	—	$	13,189
Realized gains		—		—		—		114
Realized losses		—		—		—		—

Proceeds from the call of held-to-maturity investment securities, for the three and six months ended June 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	211	$	—	$	726	$	1,415
Realized gains		—		—		—		—
Realized losses		—		—		—		—

As of June 30, 2022 and December 31, 2021, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	2,675	$	2,675
FHLB		13,938		3,806

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

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, 2022, the conversion ratio was 1.6059. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,119 Class A equivalents) that the Company owned as of June 30, 2022 and December 31, 2021, were carried at a zero cost basis.

XML

Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses

NOTE 4 Loans and Allowance for Loan Losses

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	484,426	$	436,761
Real estate construction		48,870		40,619
Commercial real estate		599,737		598,893
Total commercial		1,133,033		1,076,273
Consumer
Residential real estate first mortgage		568,571		510,716
Residential real estate junior lien		135,255		125,668
Other revolving and installment		53,384		45,363
Total consumer		757,210		681,747
Total loans	$	1,890,243	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $6.9 million at June 30, 2022 and $33.6 million at December 31, 2021.

Total loans included net deferred loan fees and costs of $928 thousand and $231 thousand at June 30, 2022 and December 31, 2021, respectively. Deferred loan fees on PPP loans were $106 thousand at June 30, 2022 and $881 thousand at December 31, 2021.

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

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

	June 30, 2022
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	482,743	$	82	$	—	$	1,601	$	484,426
Real estate construction		48,833		37		—		—		48,870
Commercial real estate		599,108		—		—		629		599,737
Total commercial		1,130,684		119		—		2,230		1,133,033
Consumer
Residential real estate first mortgage		565,443		1,255		—		1,873		568,571
Residential real estate junior lien		134,636		426		—		193		135,255
Other revolving and installment		53,123		187		—		74		53,384
Total consumer		753,202		1,868		—		2,140		757,210
Total loans	$	1,883,886	$	1,987	$	—	$	4,370	$	1,890,243

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

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

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

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

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

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

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

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

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

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

	June 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	479,586	$	1,204	$	3,636	$	—	$	484,426
Real estate construction		48,870		—		—		—		48,870
Commercial real estate		589,552		4,689		5,496		—		599,737
Total commercial		1,118,008		5,893		9,132		—		1,133,033
Consumer
Residential real estate first mortgage		566,368		65		2,138		—		568,571
Residential real estate junior lien		134,537		—		718		—		135,255
Other revolving and installment		53,310		—		74		—		53,384
Total consumer		754,215		65		2,930		—		757,210
Total loans	$	1,872,223	$	5,958	$	12,062	$	—	$	1,890,243

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

The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.

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

	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

	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

	Three months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,487	$	(869)	$	(273)	$	275	$	9,620
Real estate construction		598		(11)		—		—		587
Commercial real estate		13,849		(913)		—		1		12,937
Total commercial		24,934		(1,793)		(273)		276		23,144
Consumer
Residential real estate first mortgage		6,047		129		—		—		6,176
Residential real estate junior lien		1,288		99		—		14		1,401
Other revolving and installment		666		(81)		(49)		38		574
Total consumer		8,001		147		(49)		52		8,151
Unallocated		823		1,646		—		—		2,469
Total	$	33,758	$	—	$	(322)	$	328	$	33,764

	Six months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(553)	$	(477)	$	445	$	9,620
Real estate construction		658		(71)		—		—		587
Commercial real estate		14,105		(636)		(536)		4		12,937
Total commercial		24,968		(1,260)		(1,013)		449		23,144
Consumer
Residential real estate first mortgage		5,774		402		—		—		6,176
Residential real estate junior lien		1,373		(69)		—		97		1,401
Other revolving and installment		753		(164)		(93)		78		574
Total consumer		7,900		169		(93)		175		8,151
Unallocated		1,378		1,091		—		—		2,469
Total	$	34,246	$	—	$	(1,106)	$	624	$	33,764

The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of June 30, 2022 and December 31, 2021:

	June 30, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,769	$	482,657	$	484,426	$	828	$	9,505	$	10,333
Real estate construction		—		48,870		48,870		—		878		878
Commercial real estate		803		598,934		599,737		3		10,831		10,834
Total commercial		2,572		1,130,461		1,133,033		831		21,214		22,045
Consumer
Residential real estate first mortgage		1,873		566,698		568,571		—		6,175		6,175
Residential real estate junior lien		193		135,062		135,255		—		1,467		1,467
Other revolving and installment		74		53,310		53,384		27		607		634
Total consumer		2,140		755,070		757,210		27		8,249		8,276
Unallocated		—		—		—		—		—		1,052
Total loans	$	4,712	$	1,885,531	$	1,890,243	$	858	$	29,463	$	31,373

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

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

	June 30, 2022						December 31, 2021
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	1,008	$	1,036	$	828	$	445	$	464	$	278
Commercial real estate		174		195		3		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans with a valuation allowance		1,256		1,305		858		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		761		873		—		1,386		1,575		—
Commercial real estate		629		684		—		629		684		—
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans without a valuation allowance		3,456		3,693		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		1,769		1,909		828		1,831		2,039		278
Commercial real estate		803		879		3		809		887		5
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans	$	4,712	$	4,998	$	858	$	2,752	$	3,070	$	283

The table below presents the average recorded investment in impaired loans and interest income for the three and six months ended June 30, 2022 and 2021:

	Three months ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,018	$	2	$	1,548	$	3
Commercial real estate		176		2		188		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		27		—
Other revolving and installment		75		—		13		—
Total impaired loans with a valuation allowance		1,269		4		1,776		5
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,174		5
Commercial real estate		629		—		4,472		—
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		302		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,548		—		5,971		5
Total impaired loans
Commercial and industrial		1,779		2		2,722		8
Commercial real estate		805		2		4,660		2
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		329		—
Other revolving and installment		75		—		13		—
Total impaired loans	$	4,817	$	4	$	7,747	$	10

	Six Months Ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,156	$	6	$	1,637	$	6
Commercial real estate		177		3		190		4
Residential real estate junior lien		—		—		30		—
Other revolving and installment		157		—		14		—
Total impaired loans with a valuation allowance		1,490		9		1,871		10
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,187		11
Commercial real estate		629		—		4,662		—
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		303		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,541		—		6,176		11
Total impaired loans
Commercial and industrial		1,917		6		2,824		17
Commercial real estate		806		3		4,852		4
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		333		—
Other revolving and installment		157		—		14		—
Total impaired loans	$	5,031	$	9	$	8,047	$	21

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

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

During the second quarter of 2022, there were no loans modified as a TDR. During the second quarter of 2021, there were 3 loans modified as TDRs as a result of changing the terms allowing for the interest rate reductions and an extension of the maturity dates. As of June 30, 2021, the carrying value of the restructured loans was $795 thousand. The loans are not currently performing in compliance with the modified terms and were placed on nonaccrual. There was no specific reserve for loan losses allocated to the loans modified as TDRs.

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

XML

Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2022

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

NOTE 5 Goodwill and Other Intangible Assets

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	20,131	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	31,337	$	31,490

Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was no goodwill impairment as of June 30, 2022.

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

	June 30, 2022						December 31, 2021
(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Identifiable customer intangibles	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250
Total intangible assets	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was $1.0 million and $1.1 million for the three months ended June 30, 2022, and 2021, respectively. Amortization of intangible assets was $2.1 million and $2.2 million for the six months ended June 30, 2022, and 2021, respectively.

XML

Loan Servicing

6 Months Ended

Jun. 30, 2022

Loan Servicing

Loan Servicing

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 $317.7 million and $345.8 million as of June 30, 2022 and December 31, 2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

The following table summarizes the Company’s activity related to servicing rights for the three and six months ended June 30, 2022 and 2021:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	1,771	$	1,952	$	1,880	$	1,987
Additions		13		62		17		111
Amortization		(96)		(185)		(256)		(385)
(Impairment)/Recovery		376		135		423		251
Balance, end of period	$	2,064	$	1,964	$	2,064	$	1,964

The following is a summary of key data and assumptions used in the valuation of servicing rights as of June 30, 2022 and December 31, 2021. 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)	2022			2021
Fair value of servicing rights	$	2,064		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		7.1	%		14.2	%
Discount rate		10.0	%		9.5	%

XML

Leases

6 Months Ended

Jun. 30, 2022

Leases

Leases

NOTE 7 Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for offices and office equipment rentals with terms extending through 2027. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases. The Company has one existing finance lease for the Company’s headquarters building with a lease term through October 31, 2022.

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

		June 30,		December 31,
(dollars in thousands)		2022		2021
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,439	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		29		87
Total lease right-of-use assets		$	3,468	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,856	$	4,275
Finance lease liabilities	Long-term debt		83		203
Total lease liabilities		$	3,939	$	4,478

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

	June 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.3		3.4
Finance leases	0.3		0.8
Weighted-average discount rate
Operating leases	2.8	%	2.5	%
Finance leases	7.8	%	7.8	%

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

The following table presents lease costs and other lease information for the three and six months ending June 30, 2022 and 2021:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	414	$	492	$	825	$	988
Variable lease cost		150		158		363		391
Short-term lease cost		43		46		88		83
Finance lease cost
Interest on lease liabilities		1		7		5		15
Amortization of right-of-use assets		29		29		58		58
Sublease income		(59)		(52)		(116)		(112)
Net lease cost	$	578	$	680	$	1,223	$	1,423
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	393	$	474	$	784	$	961
Right-of-use assets obtained in exchange for new operating lease liabilities		—		—	$	—	$	—

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

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
June 30, 2023	$	84	$	1,644
June 30, 2024		—		932
June 30, 2025		—		467
June 30, 2026		—		375
June 30, 2027		—		252
Thereafter		—		511
Total future minimum lease payments	$	84	$	4,181
Amounts representing interest		(1)		(325)
Total operating lease liabilities	$	83	$	3,856

XML

Deposits

6 Months Ended

Jun. 30, 2022

Deposits.

Deposits

NOTE 8 Deposits

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

	June 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	764,808	$	938,840
Interest-bearing
Interest-bearing demand		642,641		714,669
Savings accounts		97,227		96,825
Money market savings		914,423		937,305
Time deposits		200,451		232,912
Total interest-bearing		1,854,742		1,981,711
Total deposits	$	2,619,550	$	2,920,551

XML

Short-Term Borrowings

6 Months Ended

Jun. 30, 2022

Short-Term Borrowings

Short-Term Borrowings

NOTE 9 Short-Term Borrowings

Short-term borrowings at June 30, 2022 and December 31, 2021 consisted of the following:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	117,350	$	—
FHLB Short-term advances		125,000		—
Total	$	242,350	$	—

The following table presents information related to short-term borrowings for the three and six months ending June 30, 2022 and 2021:

	Three months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		81,506			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		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		1.59	%		—	%
End of period		1.80	%		—	%

	Six months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		40,978			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		1.44	%		—	%
FHLB Short-term advances
Balance as of end of period	$	125,000		$	—
Average daily balance		4,834			—
Maximum month-end balance		125,000			—
Weighted-average rate
During period		1.59	%		—	%
End of period		1.80	%		—	%

XML

Long-Term Debt

6 Months Ended

Jun. 30, 2022

Long-Term Debt.

Long-Term Debt

NOTE 10 Long-Term Debt

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

	June 30, 2022
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,515	Three-month LIBOR + 3.10%	5.30	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,272	Three-month LIBOR + 1.80%	3.63	%	9/15/2036	9/15/2011
Finance lease liability		2,700		83	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,870

	December 31, 2021
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,492	Three-month LIBOR + 3.10%	3.32	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,238	Three-month LIBOR + 1.80%	2.00	%	9/15/2036	9/15/2011
Finance lease liability		2,700		203	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,933

XML

Financial Instruments with Off-Balance Sheet Risk

6 Months Ended

Jun. 30, 2022

Financial Instruments with Off-Balance Sheet Risk

Financial Instruments with Off-Balance Sheet Risk

NOTE 11 Financial Instruments with Off-Balance Sheet Risk

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

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of June 30, 2022 and December 31, 2021, respectively, was as follows:

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	635,320	$	668,115
Standby letters of credit		11,412		10,529
Total	$	646,732	$	678,644

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

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

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had a $150 thousand letter of credit outstanding with the FHLB as of June 30, 2022 and December 31, 2021. With the Bank of North Dakota, the Company had no letters of credit outstanding as of June 30, 2022 and December 31, 2021. Bank of North Dakota potential letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of $237.6 million and $229.7 million as of June 30, 2022 and December 31, 2021, respectively.

XML

Share-Based Compensation

6 Months Ended

Jun. 30, 2022

Share-Based Compensation

Share-Based Compensation

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 the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards and were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of June 30, 2022, 948,428 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $662 thousand and $761 thousand for the three months ended June 30, 2022 and 2021, respectively. The compensation expense relating to awards under these plans was $1.0 million and $1.3 million for the six months ended June 30, 2022 and 2021, respectively.

The following table presents the activity in the stock plans for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,
	2022			2021
		Weighted-			Weighted-
		Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period	260,850	$	21.04	325,030	$	19.48
Granted	94,592		19.01	66,664		26.63
Vested	(107,113)		19.19	(88,382)		21.38
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	237,705	$	20.95	303,312	$	20.49

As of June 30, 2022, there was $3.1 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.9 years.

XML

Income Taxes

6 Months Ended

Jun. 30, 2022

Income Taxes

Income Taxes

NOTE 13 Income Taxes

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

	Three months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,524	21.0	%	$	3,221	21.0	%
Tax effect of:
Tax exempt income		(122)	(1.0)	%		(148)	(1.0)	%
State income taxes, net of federal benefits		531	4.4	%		663	4.3	%
Nondeductible items and other		(208)	(1.7)	%		(92)	(0.6)	%
Applicable income taxes	$	2,725	22.7	%	$	3,644	23.7	%

	Six months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	5,269	21.0	%	$	7,395	21.0	%
Tax effect of:
Tax exempt income		(239)	(1.0)	%		(301)	(0.9)	%
State income taxes, net of federal benefits		1,109	4.4	%		1,516	4.3	%
Nondeductible items and other		(526)	(2.1)	%		(304)	(0.9)	%
Applicable income taxes	$	5,613	22.3	%	$	8,306	23.5	%

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

XML

Tax Credit Investments

6 Months Ended

Jun. 30, 2022

Tax Credit Investments.

Tax Credit Investments

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, 2022 and December 31, 2021:

		June 30, 2022				December 31, 2021
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	Accounting Method
Low income housing tax credit	Proportional amortization	$	17,906	$	16,402	$	7,906	$	6,999
Total		$	17,906	$	16,402	$	7,906	$	6,999

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, 2022 and 2021.

	Three months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	111	$	(156)	$	—	$	—

(1) The amortization expense for low income housing tax credit investments were included in income tax expense.

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

	Six months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	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.

XML

Segment Reporting

6 Months Ended

Jun. 30, 2022

Segment Reporting

Segment Reporting

NOTE 15 Segment Reporting

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

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

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

	Three months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	22,779	$	—	$	—	$	558	$	(561)	$	22,776
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,341		16,293		5,548		6,038		6		29,226
Noninterest expense		15,619		6,598		1,630		5,209		10,928		39,984
Net income before taxes	$	8,501	$	9,695	$	3,918	$	1,387	$	(11,483)	$	12,018

	Six months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	44,304	$	—	$	—	$	1,267	$	(1,122)	$	44,449
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,879		33,939		10,874		10,969		35		58,696
Noninterest expense		28,313		15,030		3,468		10,229		21,015		78,055
Net income before taxes	$	18,870	$	18,909	$	7,406	$	2,007	$	(22,102)	$	25,090

	Three months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,188	$	—	$	—	$	490	$	(538)	$	21,140
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,466		17,871		5,138		12,287		(14)		36,748
Noninterest expense		10,914		9,988		2,128		10,661		8,859		42,550
Net income before taxes	$	11,740	$	7,883	$	3,010	$	2,116	$	(9,411)	$	15,338

	Six months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	43,068	$	—	$	—	$	936	$	(826)	$	43,178
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,988		35,126		10,124		29,419		(28)		77,629
Noninterest expense		21,998		20,100		4,463		21,514		17,517		85,592
Net income before taxes	$	24,058	$	15,026	$	5,661	$	8,841	$	(18,371)	$	35,215

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

Wealth Management

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

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.

XML

Earnings Per Share

6 Months Ended

Jun. 30, 2022

Earnings Per Share

Earnings Per Share

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 ending June 30, 2022 and 2021 are presented below:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,293	$	11,694	$	19,477	$	26,909
Dividends and undistributed earnings allocated to participating securities		101		179		225		432
Net income available to common shareholders	$	9,192	$	11,515	$	19,252	$	26,477
Weighted-average common shares outstanding for basic earnings per share		17,297		17,194		17,271		17,170
Dilutive effect of stock-based awards		235		303		246		312
Weighted-average common shares outstanding for diluted earnings per share		17,532		17,497		17,517		17,482
Earnings per common share:
Basic earnings per common share	$	0.53	$	0.67	$	1.11	$	1.54
Diluted earnings per common share	$	0.52	$	0.66	$	1.10	$	1.52

XML

Derivative Instruments

6 Months Ended

Jun. 30, 2022

Derivative Instruments

Derivative Instruments

NOTE 17 Derivative Instruments

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

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

		June 30, 2022				December 31, 2021
		Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount
Asset Derivatives	Consolidated Balance Sheet Location
Interest rate swaps	Other assets	$	4,850	$	44,133	$	1,366	$	44,826
Interest rate lock commitments	Other assets		1,445		53,871		1,507		52,316
Forward loan sales commitments	Other assets		542		16,560		490		13,418
TBA mortgage backed securities	Other assets		343		113,000		34		97,000
Total asset derivatives		$	7,180	$	227,564	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	4,851	$	44,133	$	1,368	$	44,826
TBA mortgage backed securities	Accrued expenses and other liabilities		—		—		—		—
Total liability derivatives		$	4,851	$	44,133	$	1,368	$	44,826

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

		Three months ended				Six months ended
	Consolidated Statements	June 30,		June 30,		June 30,		June 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	(1)	$	1	$	1
Interest rate lock commitments	Mortgage banking		563		740		(147)		(5,505)
Forward loan sales commitments	Mortgage banking		542		73		52		(1,562)
TBA mortgage backed securities	Mortgage banking		1,246		(3,405)		3,749		5,556
Total gain/(loss) from derivative instruments		$	2,352	$	(2,593)	$	3,655	$	(1,510)

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $19 thousand at June 30, 2022 and December 31, 2021. 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.

XML

Regulatory Matters

6 Months Ended

Jun. 30, 2022

Regulatory Matters

Regulatory Matters

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, 2022 and December 31, 2021, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

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

	June 30, 2022
										Minimum to be
						Requirements				Well Capitalized
						for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	331,692	14.19	%	$	105,214	4.50	%	$	N/A	N/A
Bank		318,704	13.64	%		105,115	4.50	%		151,833	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		340,479	14.56	%		140,285	6.00	%		N/A	N/A
Bank		318,704	13.64	%		140,154	6.00	%		186,872	8.00	%
Total capital to risk weighted assets
Consolidated		419,279	17.95	%		187,047	8.00	%		N/A	N/A
Bank		347,929	14.89	%		186,872	8.00	%		233,590	10.00	%
Tier 1 capital to average assets
Consolidated		340,479	10.80	%		126,051	4.00	%		N/A	N/A
Bank		318,704	10.12	%		125,962	4.00	%		157,453	5.00	%

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

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules 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, 2022, 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, 2022, and December 31, 2021, the Company was in compliance with the aforementioned guidelines.

XML

Stock Repurchase Program

6 Months Ended

Jun. 30, 2022

Stock Repurchase Program

Stock Repurchase Program

NOTE 19 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the six months ended June 30, 2022, there were no shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

XML

Fair Value of Assets and Liabilities

6 Months Ended

Jun. 30, 2022

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

NOTE 20 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.

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of June 30, 2022 and December 31, 2021:

	June 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,709	$	—	$	3,709
Mortgage backed securities
Residential agency		—		652,507		—		652,507
Commercial		—		76,130		—		76,130
Asset backed securities		—		40		—		40
Corporate bonds		—		66,411		—		66,411
Total available-for-sale investment securities	$	—	$	798,797	$	—	$	798,797
Other assets
Derivatives	$	—	$	7,180	$	—	$	7,180
Other liabilities
Derivatives	$	—	$	4,851	$	—	$	4,851

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

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

Investment Securities, Available-for-Sale

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

Derivatives

All of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts.

Nonrecurring Basis

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

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

	June 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	54,363	$	—	$	54,363	$	—
Impaired loans		—		3,854		3,854		858
Foreclosed assets		—		860		860		—
Servicing rights		—		2,064		2,064		—

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

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, 2022, and December 31, 2021, were as follows:

			June 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	3,854	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		860	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,064	109-155		119
		Discount rate			10.0	%	10.0	%

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

Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all non-financial 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, 2022 and December 31, 2021, were not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the consolidated balance sheets approximate those assets’ 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 value of fixed-rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance Sheet Credit-Related Commitments

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

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

	June 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	37,043	$	37,043	$	—	$	—	$	37,043
Investment securities held-to-maturity		331,741		—		293,949		—		293,949
Loans, net		1,858,870		—		—		1,848,251		1,848,251
Accrued interest receivable		9,155		9,155		—		—		9,155
Bank-owned life insurance		33,564		—		33,564		—		33,564
Financial Liabilities
Noninterest-bearing deposits	$	764,808	$	—	$	764,808	$	—	$	764,808
Interest-bearing deposits		1,654,291		—		1,654,291		—		1,654,291
Time deposits		200,451		—		—		198,278		198,278
Short-term borrowings		242,350		242,350		—		—		242,350
Long-term debt		58,870		—		86,271		—		86,271
Accrued interest payable		802		802		—		—		802

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

XML

Subsequent Events

6 Months Ended

Jun. 30, 2022

Subsequent Events.

Subsequent Events

NOTE 21 Subsequent Events

On July 1, 2022, the Company completed the merger with MPB BHC, Inc. (“MPHX”) (OTCPK: MPHX), the banking holding company for Metro Phoenix Bank (the “Merger”), pursuant to the Agreement of Plan of Merger, dated December 8, 2021, by and between the Company and MPHX. On July 1, 2022, MPHX merged with and into the Company, with the Company as the surviving entity in the merger.

Pursuant to the terms of the Merger, at the effective time of the Merger, each common share of MPHX issued and outstanding immediately prior to the effective time, was converted into the right to receive 0.74 shares of the Company’s common stock.

As of June 30, 2022, MPHX, had total assets of $399.0 million which included $277.6 million in gross loans, $354.5 million in total deposits, and $43.8 million in total equity.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2022

Significant Accounting Policies

Organization

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

Basis of Presentation

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

Principles of Consolidation

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

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 loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

Reclassifications

Reclassifications

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

Other Information

Other Information

As of June 30, 2022, the Coronavirus Disease, or COVID-19, pandemic was ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, with certain setbacks, started reopening and wider distribution of vaccines encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the continued distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full, long-term impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold.

Emerging Growth Company

Emerging Growth Company

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

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

XML

Investment Securities (Tables)

6 Months Ended

Jun. 30, 2022

Investment Securities

Schedule of amortized cost of investment securities to estimated fair values

	June 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,643	$	66	$	—	$	3,709
Mortgage backed securities
Residential agency		740,734		27		(88,254)		652,507
Commercial		80,077		—		(3,947)		76,130
Asset backed securities		40		—		—		40
Corporate bonds		69,031		130		(2,750)		66,411
Total available-for-sale investment securities		893,525		223		(94,951)		798,797
Held-to-maturity
Obligations of state and political agencies		139,102		2		(12,927)		126,177
Mortgage backed securities
Residential agency		192,639		—		(24,867)		167,772
Total held-to-maturity investment securities		331,741		2		(37,794)		293,949
Total investment securities	$	1,225,266	$	225	$	(132,745)	$	1,092,746

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

Schedule of investment securities with gross unrealized losses

	June 30, 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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities
Residential agency		(51,859)		436,234		(36,395)		214,079		(88,254)		650,313
Commercial		(3,947)		76,130		—		—		(3,947)		76,130
Asset backed securities		—		—		—		2		—		2
Corporate bonds		(2,750)		56,780		—		—		(2,750)		56,780
Total available-for-sale investment securities		(58,556)		569,144		(36,395)		214,081		(94,951)		783,225
Held-to-maturity
Obligations of state and political agencies		(12,927)		122,734		—		—		(12,927)		122,734
Mortgage backed securities
Residential agency		(24,867)		167,772		—		—		(24,867)		167,772
Total held-to-maturity investment securities		(37,794)		290,506		—		—		(37,794)		290,506
Total investment securities	$	(96,350)	$	859,650	$	(36,395)	$	214,081	$	(132,745)	$	1,073,731

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

Schedule of contractual maturity of amortized cost and estimated fair value

	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	6,831	$	6,794	$	20	$	21
Due after one year through five years		36,025		33,922		21,599		21,017
Due after five years through ten years		72,720		65,003		94,957		91,522
Due after 10 years		216,165		188,230		776,949		686,237
Total investment securities	$	331,741	$	293,949	$	893,525	$	798,797

Schedule of proceeds from the sale of available for sale securities

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	—	$	—	$	—	$	13,189
Realized gains		—		—		—		114
Realized losses		—		—		—		—

Schedule of proceeds from the call of held-to-maturity investment securities

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	211	$	—	$	726	$	1,415
Realized gains		—		—		—		—
Realized losses		—		—		—		—

Schedule of federal home loan bank

	June 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	2,675	$	2,675
FHLB		13,938		3,806

XML

Loans and Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2022

Loans and Allowance for Loan Losses

Schedule of total loans outstanding by portfolio segment

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	484,426	$	436,761
Real estate construction		48,870		40,619
Commercial real estate		599,737		598,893
Total commercial		1,133,033		1,076,273
Consumer
Residential real estate first mortgage		568,571		510,716
Residential real estate junior lien		135,255		125,668
Other revolving and installment		53,384		45,363
Total consumer		757,210		681,747
Total loans	$	1,890,243	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $6.9 million at June 30, 2022 and $33.6 million at December 31, 2021.

Schedule of past due aging analysis of the loan portfolio

	June 30, 2022
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	482,743	$	82	$	—	$	1,601	$	484,426
Real estate construction		48,833		37		—		—		48,870
Commercial real estate		599,108		—		—		629		599,737
Total commercial		1,130,684		119		—		2,230		1,133,033
Consumer
Residential real estate first mortgage		565,443		1,255		—		1,873		568,571
Residential real estate junior lien		134,636		426		—		193		135,255
Other revolving and installment		53,123		187		—		74		53,384
Total consumer		753,202		1,868		—		2,140		757,210
Total loans	$	1,883,886	$	1,987	$	—	$	4,370	$	1,890,243

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

Schedule of loans outstanding, by portfolio segment and risk category

	June 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	479,586	$	1,204	$	3,636	$	—	$	484,426
Real estate construction		48,870		—		—		—		48,870
Commercial real estate		589,552		4,689		5,496		—		599,737
Total commercial		1,118,008		5,893		9,132		—		1,133,033
Consumer
Residential real estate first mortgage		566,368		65		2,138		—		568,571
Residential real estate junior lien		134,537		—		718		—		135,255
Other revolving and installment		53,310		—		74		—		53,384
Total consumer		754,215		65		2,930		—		757,210
Total loans	$	1,872,223	$	5,958	$	12,062	$	—	$	1,890,243

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

Summary of changes in allowances

	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

	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

	Three months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,487	$	(869)	$	(273)	$	275	$	9,620
Real estate construction		598		(11)		—		—		587
Commercial real estate		13,849		(913)		—		1		12,937
Total commercial		24,934		(1,793)		(273)		276		23,144
Consumer
Residential real estate first mortgage		6,047		129		—		—		6,176
Residential real estate junior lien		1,288		99		—		14		1,401
Other revolving and installment		666		(81)		(49)		38		574
Total consumer		8,001		147		(49)		52		8,151
Unallocated		823		1,646		—		—		2,469
Total	$	33,758	$	—	$	(322)	$	328	$	33,764

	Six months ended June 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(553)	$	(477)	$	445	$	9,620
Real estate construction		658		(71)		—		—		587
Commercial real estate		14,105		(636)		(536)		4		12,937
Total commercial		24,968		(1,260)		(1,013)		449		23,144
Consumer
Residential real estate first mortgage		5,774		402		—		—		6,176
Residential real estate junior lien		1,373		(69)		—		97		1,401
Other revolving and installment		753		(164)		(93)		78		574
Total consumer		7,900		169		(93)		175		8,151
Unallocated		1,378		1,091		—		—		2,469
Total	$	34,246	$	—	$	(1,106)	$	624	$	33,764

Schedule of loans distributed by portfolio segment and impairment methodology

	June 30, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,769	$	482,657	$	484,426	$	828	$	9,505	$	10,333
Real estate construction		—		48,870		48,870		—		878		878
Commercial real estate		803		598,934		599,737		3		10,831		10,834
Total commercial		2,572		1,130,461		1,133,033		831		21,214		22,045
Consumer
Residential real estate first mortgage		1,873		566,698		568,571		—		6,175		6,175
Residential real estate junior lien		193		135,062		135,255		—		1,467		1,467
Other revolving and installment		74		53,310		53,384		27		607		634
Total consumer		2,140		755,070		757,210		27		8,249		8,276
Unallocated		—		—		—		—		—		1,052
Total loans	$	4,712	$	1,885,531	$	1,890,243	$	858	$	29,463	$	31,373

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

Schedule of impaired loans

	June 30, 2022						December 31, 2021
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	1,008	$	1,036	$	828	$	445	$	464	$	278
Commercial real estate		174		195		3		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans with a valuation allowance		1,256		1,305		858		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		761		873		—		1,386		1,575		—
Commercial real estate		629		684		—		629		684		—
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans without a valuation allowance		3,456		3,693		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		1,769		1,909		828		1,831		2,039		278
Commercial real estate		803		879		3		809		887		5
Residential real estate first mortgage		1,873		1,910		—		21		24		—
Residential real estate junior lien		193		226		—		91		120		—
Other revolving and installment		74		74		27		—		—		—
Total impaired loans	$	4,712	$	4,998	$	858	$	2,752	$	3,070	$	283

The table below presents the average recorded investment in impaired loans and interest income for the three and six months ended June 30, 2022 and 2021:

	Three months ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,018	$	2	$	1,548	$	3
Commercial real estate		176		2		188		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		27		—
Other revolving and installment		75		—		13		—
Total impaired loans with a valuation allowance		1,269		4		1,776		5
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,174		5
Commercial real estate		629		—		4,472		—
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		302		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,548		—		5,971		5
Total impaired loans
Commercial and industrial		1,779		2		2,722		8
Commercial real estate		805		2		4,660		2
Residential real estate first mortgage		1,962		—		23		—
Residential real estate junior lien		196		—		329		—
Other revolving and installment		75		—		13		—
Total impaired loans	$	4,817	$	4	$	7,747	$	10

	Six Months Ended June 30,
	2022				2021
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,156	$	6	$	1,637	$	6
Commercial real estate		177		3		190		4
Residential real estate junior lien		—		—		30		—
Other revolving and installment		157		—		14		—
Total impaired loans with a valuation allowance		1,490		9		1,871		10
Impaired loans without a valuation allowance
Commercial and industrial		761		—		1,187		11
Commercial real estate		629		—		4,662		—
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		303		—
Other revolving and installment		—		—		—		—
Total impaired loans without a valuation allowance		3,541		—		6,176		11
Total impaired loans
Commercial and industrial		1,917		6		2,824		17
Commercial real estate		806		3		4,852		4
Residential real estate first mortgage		1,953		—		24		—
Residential real estate junior lien		198		—		333		—
Other revolving and installment		157		—		14		—
Total impaired loans	$	5,031	$	9	$	8,047	$	21

XML

Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2022

Goodwill and Other Intangible Assets

Schedule of goodwill by segment

	June 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	20,131	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	31,337	$	31,490

Schedule of identifiable intangible assets

	June 30, 2022						December 31, 2021
(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Identifiable customer intangibles	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250
Total intangible assets	$	41,423	$	(23,912)	$	17,511	$	42,057	$	(21,807)	$	20,250

XML

Loan Servicing (Tables)

6 Months Ended

Jun. 30, 2022

Loan Servicing

Summary of activity related to loan servicing

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	1,771	$	1,952	$	1,880	$	1,987
Additions		13		62		17		111
Amortization		(96)		(185)		(256)		(385)
(Impairment)/Recovery		376		135		423		251
Balance, end of period	$	2,064	$	1,964	$	2,064	$	1,964

Summary of key economic assumptions

	June 30,			December 31,
(dollars in thousands)	2022			2021
Fair value of servicing rights	$	2,064		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		7.1	%		14.2	%
Discount rate		10.0	%		9.5	%

XML

Leases (Tables)

6 Months Ended

Jun. 30, 2022

Leases

Schedule of right-of-use assets and lease liabilities

		June 30,		December 31,
(dollars in thousands)		2022		2021
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,439	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		29		87
Total lease right-of-use assets		$	3,468	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,856	$	4,275
Finance lease liabilities	Long-term debt		83		203
Total lease liabilities		$	3,939	$	4,478

Schedule of weighted average remaining lease term and average discount rate

	June 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.3		3.4
Finance leases	0.3		0.8
Weighted-average discount rate
Operating leases	2.8	%	2.5	%
Finance leases	7.8	%	7.8	%

Schedule of lease costs and other lease information

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	414	$	492	$	825	$	988
Variable lease cost		150		158		363		391
Short-term lease cost		43		46		88		83
Finance lease cost
Interest on lease liabilities		1		7		5		15
Amortization of right-of-use assets		29		29		58		58
Sublease income		(59)		(52)		(116)		(112)
Net lease cost	$	578	$	680	$	1,223	$	1,423
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	393	$	474	$	784	$	961
Right-of-use assets obtained in exchange for new operating lease liabilities		—		—	$	—	$	—

Schedule of future minimum payments for finance leases

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

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
June 30, 2023	$	84	$	1,644
June 30, 2024		—		932
June 30, 2025		—		467
June 30, 2026		—		375
June 30, 2027		—		252
Thereafter		—		511
Total future minimum lease payments	$	84	$	4,181
Amounts representing interest		(1)		(325)
Total operating lease liabilities	$	83	$	3,856

Schedule of future minimum payments for operating leases

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
June 30, 2023	$	84	$	1,644
June 30, 2024		—		932
June 30, 2025		—		467
June 30, 2026		—		375
June 30, 2027		—		252
Thereafter		—		511
Total future minimum lease payments	$	84	$	4,181
Amounts representing interest		(1)		(325)
Total operating lease liabilities	$	83	$	3,856

XML

Deposits (Tables)

6 Months Ended

Jun. 30, 2022

Deposits.

Schedule of components of deposits

	June 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	764,808	$	938,840
Interest-bearing
Interest-bearing demand		642,641		714,669
Savings accounts		97,227		96,825
Money market savings		914,423		937,305
Time deposits		200,451		232,912
Total interest-bearing		1,854,742		1,981,711
Total deposits	$	2,619,550	$	2,920,551

XML

Short-Term Borrowings (Tables)

6 Months Ended

Jun. 30, 2022

Short-Term Borrowings

Schedule of short-term borrowings

	June 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	117,350	$	—
FHLB Short-term advances		125,000		—
Total	$	242,350	$	—

Schedule of additional information related to short term borrowings

	Three months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		81,506			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		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		1.59	%		—	%
End of period		1.80	%		—	%

	Six months ended
	June 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	117,350		$	—
Average daily balance		40,978			—
Maximum month-end balance		117,350			—
Weighted-average rate
During period		1.18	%		—	%
End of period		1.44	%		—	%
FHLB Short-term advances
Balance as of end of period	$	125,000		$	—
Average daily balance		4,834			—
Maximum month-end balance		125,000			—
Weighted-average rate
During period		1.59	%		—	%
End of period		1.80	%		—	%

XML

Long-Term Debt (Tables)

6 Months Ended

Jun. 30, 2022

Long-Term Debt.

Schedule of long-term debt

	June 30, 2022
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,515	Three-month LIBOR + 3.10%	5.30	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,272	Three-month LIBOR + 1.80%	3.63	%	9/15/2036	9/15/2011
Finance lease liability		2,700		83	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,870

	December 31, 2021
						Period End
	Face		Carrying			Interest		Maturity
(dollars in thousands)	Value		Value		Interest Rate	Rate		Date	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed	3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,492	Three-month LIBOR + 3.10%	3.32	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,238	Three-month LIBOR + 1.80%	2.00	%	9/15/2036	9/15/2011
Finance lease liability		2,700		203	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,933

XML

Financial Instruments with Off-Balance Sheet Risk (Tables)

6 Months Ended

Jun. 30, 2022

Financial Instruments with Off-Balance Sheet Risk

Schedule of financial instruments whose contract amount represents credit risk

	June 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	635,320	$	668,115
Standby letters of credit		11,412		10,529
Total	$	646,732	$	678,644

XML

Share-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2022

Share-Based Compensation

Schedule of stock plan activity

	Six months ended June 30,
	2022			2021
		Weighted-			Weighted-
		Average Grant			Average Grant
	Awards	Date Fair Value		Awards	Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period	260,850	$	21.04	325,030	$	19.48
Granted	94,592		19.01	66,664		26.63
Vested	(107,113)		19.19	(88,382)		21.38
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	237,705	$	20.95	303,312	$	20.49

XML

Income Taxes (Tables)

6 Months Ended

Jun. 30, 2022

Income Taxes

Schedule of components of income tax expense

	Three months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,524	21.0	%	$	3,221	21.0	%
Tax effect of:
Tax exempt income		(122)	(1.0)	%		(148)	(1.0)	%
State income taxes, net of federal benefits		531	4.4	%		663	4.3	%
Nondeductible items and other		(208)	(1.7)	%		(92)	(0.6)	%
Applicable income taxes	$	2,725	22.7	%	$	3,644	23.7	%

	Six months ended June 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	5,269	21.0	%	$	7,395	21.0	%
Tax effect of:
Tax exempt income		(239)	(1.0)	%		(301)	(0.9)	%
State income taxes, net of federal benefits		1,109	4.4	%		1,516	4.3	%
Nondeductible items and other		(526)	(2.1)	%		(304)	(0.9)	%
Applicable income taxes	$	5,613	22.3	%	$	8,306	23.5	%

XML

Tax Credit Investments (Tables)

6 Months Ended

Jun. 30, 2022

Tax Credit Investments.

Schedule of tax credits

		June 30, 2022				December 31, 2021
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	Accounting Method
Low income housing tax credit	Proportional amortization	$	17,906	$	16,402	$	7,906	$	6,999
Total		$	17,906	$	16,402	$	7,906	$	6,999

Summary of amortization expense and tax benefit

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, 2022 and 2021.

	Three months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	111	$	(156)	$	—	$	—

(1) The amortization expense for low income housing tax credit investments were included in income tax expense.

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

	Six months ended June 30,
	2022				2021
	Amortization		Tax Benefit		Amortization		Tax Benefit
(dollars in thousands)	Expense (1)		Recognized (2)		Expense (1)		Recognized (2)
Low income housing tax credit	$	111	$	(156)	$	—	$	—
Total	$	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.

XML

Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2022

Segment Reporting

Schedule of key metrics related to segments

	Three months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	22,779	$	—	$	—	$	558	$	(561)	$	22,776
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,341		16,293		5,548		6,038		6		29,226
Noninterest expense		15,619		6,598		1,630		5,209		10,928		39,984
Net income before taxes	$	8,501	$	9,695	$	3,918	$	1,387	$	(11,483)	$	12,018

	Six months ended June 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	44,304	$	—	$	—	$	1,267	$	(1,122)	$	44,449
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,879		33,939		10,874		10,969		35		58,696
Noninterest expense		28,313		15,030		3,468		10,229		21,015		78,055
Net income before taxes	$	18,870	$	18,909	$	7,406	$	2,007	$	(22,102)	$	25,090

	Three months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,188	$	—	$	—	$	490	$	(538)	$	21,140
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,466		17,871		5,138		12,287		(14)		36,748
Noninterest expense		10,914		9,988		2,128		10,661		8,859		42,550
Net income before taxes	$	11,740	$	7,883	$	3,010	$	2,116	$	(9,411)	$	15,338

	Six months ended June 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	43,068	$	—	$	—	$	936	$	(826)	$	43,178
Provision for loan losses		—		—		—		—		—		—
Noninterest income		2,988		35,126		10,124		29,419		(28)		77,629
Noninterest expense		21,998		20,100		4,463		21,514		17,517		85,592
Net income before taxes	$	24,058	$	15,026	$	5,661	$	8,841	$	(18,371)	$	35,215

XML

Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2022

Earnings Per Share

Schedule of basic and diluted earnings per share

	Three months ended				Six months ended
	June 30,				June 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,293	$	11,694	$	19,477	$	26,909
Dividends and undistributed earnings allocated to participating securities		101		179		225		432
Net income available to common shareholders	$	9,192	$	11,515	$	19,252	$	26,477
Weighted-average common shares outstanding for basic earnings per share		17,297		17,194		17,271		17,170
Dilutive effect of stock-based awards		235		303		246		312
Weighted-average common shares outstanding for diluted earnings per share		17,532		17,497		17,517		17,482
Earnings per common share:
Basic earnings per common share	$	0.53	$	0.67	$	1.11	$	1.54
Diluted earnings per common share	$	0.52	$	0.66	$	1.10	$	1.52

XML

Derivative Instruments (Tables)

6 Months Ended

Jun. 30, 2022

Derivative Instruments

Schedule of amounts recorded in the Company's consolidated balance sheets for derivatives not designated as hedging instruments

		June 30, 2022				December 31, 2021
		Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount
Asset Derivatives	Consolidated Balance Sheet Location
Interest rate swaps	Other assets	$	4,850	$	44,133	$	1,366	$	44,826
Interest rate lock commitments	Other assets		1,445		53,871		1,507		52,316
Forward loan sales commitments	Other assets		542		16,560		490		13,418
TBA mortgage backed securities	Other assets		343		113,000		34		97,000
Total asset derivatives		$	7,180	$	227,564	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	4,851	$	44,133	$	1,368	$	44,826
TBA mortgage backed securities	Accrued expenses and other liabilities		—		—		—		—
Total liability derivatives		$	4,851	$	44,133	$	1,368	$	44,826

Schedule of gain (loss) recognized on derivatives instruments

		Three months ended				Six months ended
	Consolidated Statements	June 30,		June 30,		June 30,		June 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	(1)	$	1	$	1
Interest rate lock commitments	Mortgage banking		563		740		(147)		(5,505)
Forward loan sales commitments	Mortgage banking		542		73		52		(1,562)
TBA mortgage backed securities	Mortgage banking		1,246		(3,405)		3,749		5,556
Total gain/(loss) from derivative instruments		$	2,352	$	(2,593)	$	3,655	$	(1,510)

XML

Regulatory Matters (Tables)

6 Months Ended

Jun. 30, 2022

Regulatory Matters

Schedule of Bank's actual capital amounts and ratios

	June 30, 2022
										Minimum to be
						Requirements				Well Capitalized
						for Capital				Under Prompt
	Actual				Adequacy Purposes				Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated	$	331,692	14.19	%	$	105,214	4.50	%	$	N/A	N/A
Bank		318,704	13.64	%		105,115	4.50	%		151,833	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		340,479	14.56	%		140,285	6.00	%		N/A	N/A
Bank		318,704	13.64	%		140,154	6.00	%		186,872	8.00	%
Total capital to risk weighted assets
Consolidated		419,279	17.95	%		187,047	8.00	%		N/A	N/A
Bank		347,929	14.89	%		186,872	8.00	%		233,590	10.00	%
Tier 1 capital to average assets
Consolidated		340,479	10.80	%		126,051	4.00	%		N/A	N/A
Bank		318,704	10.12	%		125,962	4.00	%		157,453	5.00	%

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

XML

Fair Value of Assets and Liabilities (Tables)

6 Months Ended

Jun. 30, 2022

Fair Value of Assets and Liabilities

Summary of balances of the assets and liabilities measured at estimated fair value on a recurring basis

	June 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,709	$	—	$	3,709
Mortgage backed securities
Residential agency		—		652,507		—		652,507
Commercial		—		76,130		—		76,130
Asset backed securities		—		40		—		40
Corporate bonds		—		66,411		—		66,411
Total available-for-sale investment securities	$	—	$	798,797	$	—	$	798,797
Other assets
Derivatives	$	—	$	7,180	$	—	$	7,180
Other liabilities
Derivatives	$	—	$	4,851	$	—	$	4,851

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

Schedule of net impairment losses related to nonrecurring estimated fair value measurements of certain assets

	June 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	54,363	$	—	$	54,363	$	—
Impaired loans		—		3,854		3,854		858
Foreclosed assets		—		860		860		—
Servicing rights		—		2,064		2,064		—

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

Schedule of valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values

			June 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	3,854	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		860	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,064	109-155		119
		Discount rate			10.0	%	10.0	%

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

Summary of estimated fair values and related carrying or notional amounts, of the Company's financial instruments

	June 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	37,043	$	37,043	$	—	$	—	$	37,043
Investment securities held-to-maturity		331,741		—		293,949		—		293,949
Loans, net		1,858,870		—		—		1,848,251		1,848,251
Accrued interest receivable		9,155		9,155		—		—		9,155
Bank-owned life insurance		33,564		—		33,564		—		33,564
Financial Liabilities
Noninterest-bearing deposits	$	764,808	$	—	$	764,808	$	—	$	764,808
Interest-bearing deposits		1,654,291		—		1,654,291		—		1,654,291
Time deposits		200,451		—		—		198,278		198,278
Short-term borrowings		242,350		242,350		—		—		242,350
Long-term debt		58,870		—		86,271		—		86,271
Accrued interest payable		802		802		—		—		802

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

XML

Significant Accounting Policies (Details)	6 Months Ended
	Jun. 30, 2022 segment
Significant Accounting Policies
Number of operating segments	4

XML

Investment Securities (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Investment securities available-for-sale
Amortized Cost	$ 893,525	$ 860,258
Unrealized Gains	223	5,362
Unrealized Losses	(94,951)	(11,971)
Fair Value	798,797	853,649
Amortized Cost	331,741	352,061
Unrealized Gains	2	1,110
Unrealized Losses	(37,794)	(3,494)
Fair Value	293,949	349,677
Amortized Cost	1,225,266	1,212,319
Unrealized Gains	225	6,472
Unrealized Losses	(132,745)	(15,465)
Fair Value	1,092,746	1,203,326
U. S. Treasury and agencies
Investment securities available-for-sale
Amortized Cost	3,643	5,028
Unrealized Gains	66	75
Fair Value	3,709	5,103
Obligations of state and political agencies.
Investment securities available-for-sale
Amortized Cost	139,102	144,543
Unrealized Gains	2	1,110
Unrealized Losses	(12,927)	(349)
Fair Value	126,177	145,304
Mortgage backed securities - Residential agency
Investment securities available-for-sale
Amortized Cost	740,734	717,781
Unrealized Gains	27	1,213
Unrealized Losses	(88,254)	(11,837)
Fair Value	652,507	707,157
Amortized Cost	192,639	207,518
Unrealized Losses	(24,867)	(3,145)
Fair Value	167,772	204,373
Mortgage backed securities - Commercial
Investment securities available-for-sale
Amortized Cost	80,077	88,362
Unrealized Gains		2,674
Unrealized Losses	(3,947)	(123)
Fair Value	76,130	90,913
Asset backed securities
Investment securities available-for-sale
Amortized Cost	40	52
Unrealized Gains		2
Fair Value	40	54
Corporate bonds
Investment securities available-for-sale
Amortized Cost	69,031	49,035
Unrealized Gains	130	1,398
Unrealized Losses	(2,750)	(11)
Fair Value	$ 66,411	$ 50,422

XML

Investment Securities - Gross unrealized losses (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Investment securities available-for-sale
Unrealized losses less than 12 months	$ (58,556)	$ (10,290)
Fair value less than 12 months	569,144	578,270
Unrealized losses over 12 months	(36,395)	(1,681)
Fair value over 12 months	214,081	55,084
Total Unrealized losses	(94,951)	(11,971)
Total Fair value	783,225	633,354
Held-to-maturity investment securities
Unrealized losses less than 12 months	(37,794)	(3,494)
Fair value less than 12 months	290,506	257,583
Total Unrealized losses	(37,794)	(3,494)
Total Fair value	290,506	257,583
Unrealized losses less than 12 months	(96,350)	(13,784)
Fair value less than 12 months	859,650	835,853
Unrealized losses over 12 months	(36,395)	(1,681)
Fair value over 12 months	214,081	55,084
Total Unrealized losses	(132,745)	(15,465)
Total Fair value	1,073,731	890,937
Obligations of state and political agencies.
Held-to-maturity investment securities
Unrealized losses less than 12 months	(12,927)	(349)
Fair value less than 12 months	122,734	53,210
Total Unrealized losses	(12,927)	(349)
Total Fair value	122,734	53,210
Mortgage backed securities - Residential agency
Investment securities available-for-sale
Unrealized losses less than 12 months	(51,859)	(10,156)
Fair value less than 12 months	436,234	554,811
Unrealized losses over 12 months	(36,395)	(1,681)
Fair value over 12 months	214,079	55,082
Total Unrealized losses	(88,254)	(11,837)
Total Fair value	650,313	609,893
Held-to-maturity investment securities
Unrealized losses less than 12 months	(24,867)	(3,145)
Fair value less than 12 months	167,772	204,373
Total Unrealized losses	(24,867)	(3,145)
Total Fair value	167,772	204,373
Mortgage backed securities - Commercial
Investment securities available-for-sale
Unrealized losses less than 12 months	(3,947)	(123)
Fair value less than 12 months	76,130	17,470
Total Unrealized losses	(3,947)	(123)
Total Fair value	76,130	17,470
Asset backed securities
Investment securities available-for-sale
Fair value over 12 months	2	2
Total Fair value	2	2
Corporate bonds
Investment securities available-for-sale
Unrealized losses less than 12 months	(2,750)	(11)
Fair value less than 12 months	56,780	5,989
Total Unrealized losses	(2,750)	(11)
Total Fair value	$ 56,780	$ 5,989

XML

Investment Securities - Amortized cost and estimated fair value (Details) $ in Thousands	Jun. 30, 2022 USD ($)
Carrying Value
Due within one year or less	$ 6,831
Due after one year through five years	36,025
Due after five years through ten years	72,720
Due after 10 years	216,165
Total investment securities	331,741
Estimated Fair Value
Due within one year or less	6,794
Due after one year through five years	33,922
Due after five years through ten years	65,003
Due after 10 years	188,230
Total investment securities	293,949
Amortized Cost
Due within one year or less	20
Due after one year through five years	21,599
Due after five years through ten years	94,957
Due after 10 years	776,949
Total investment securities available-for-sale	893,525
Fair Value
Due within one year or less	21
Due after one year through five years	21,017
Due after five years through ten years	91,522
Due after 10 years	686,237
Total investment securities available-for-sale	$ 798,797

XML

Investment Securities - Pledged (Details) - USD ($) $ in Millions	Jun. 30, 2022	Dec. 31, 2021
Investment Securities
Investment securities with carrying value	$ 267.3	$ 192.8

XML

Investment Securities - Proceeds from sale of available for sale securities (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2021 USD ($)
Investment Securities
Proceeds	$ 13,189
Realized gains	$ 114

XML

Investment Securities - Proceeds from the call of held-to-maturity investment securities (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2022	Jun. 30, 2021
Investment Securities
Proceeds	$ 211	$ 726	$ 1,415

XML

Investment Securities - Carrying value (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Investment Securities
Federal Reserve	$ 2,675	$ 2,675
FHLB	$ 13,938	$ 3,806

XML

Investment Securities - Visa Class B Restricted Shares (Details) - Visa $ in Thousands	6 Months Ended
	Jun. 30, 2022 USD ($) shares	Dec. 31, 2021 USD ($)
Common Class A
Securities
Investment shares owned, if converted	11,119
Common Class B
Securities
Conversion ratio	1.6059
Investment shares owned	6,924
Cost basis | $	$ 0	$ 0

XML

Loans and Allowance for Loan Losses - Loans outstanding by portfolio segment (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Loans and Allowance for Loan Losses
Total loans	$ 1,890,243	$ 1,758,020
Deferred loan fees and costs	928	231
Commercial
Loans and Allowance for Loan Losses
Total loans	1,133,033	1,076,273
Consumer
Loans and Allowance for Loan Losses
Total loans	757,210	681,747
Commercial and industrial | Commercial
Loans and Allowance for Loan Losses
Total loans	484,426	436,761
Commercial and industrial | Commercial | PPP Loans
Loans and Allowance for Loan Losses
Total loans	6,900	33,600
Deferred loan fees and costs	106	881
Real estate construction | Commercial
Loans and Allowance for Loan Losses
Total loans	48,870	40,619
Residential | Consumer | Real estate first mortgage
Loans and Allowance for Loan Losses
Total loans	568,571	510,716
Residential | Consumer | Real estate junior lien
Loans and Allowance for Loan Losses
Total loans	135,255	125,668
Commercial real estate | Commercial
Loans and Allowance for Loan Losses
Total loans	599,737	598,893
Other revolving and installment | Consumer
Loans and Allowance for Loan Losses
Total loans	$ 53,384	$ 45,363

XML

Loans and Allowance for Loan Losses - Past due aging analysis (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Past due aging analysis of loans
Nonaccrual	$ 4,370	$ 2,076
Loans and Leases Receivable, Gross, Total	1,890,243	1,758,020
30 - 89 Days Past Due
Past due aging analysis of loans
Loans	1,987	2,226
90 Days or More Past Due
Past due aging analysis of loans
Loans		121
Current
Past due aging analysis of loans
Loans	1,883,886	1,753,597
Commercial
Past due aging analysis of loans
Nonaccrual	2,230	1,966
Loans and Leases Receivable, Gross, Total	1,133,033	1,076,273
Commercial | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	119	168
Commercial | 90 Days or More Past Due
Past due aging analysis of loans
Loans		121
Commercial | Current
Past due aging analysis of loans
Loans	1,130,684	1,074,018
Commercial | Commercial and industrial
Past due aging analysis of loans
Nonaccrual	1,601	1,337
Loans and Leases Receivable, Gross, Total	484,426	436,761
Commercial | Commercial and industrial | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	82	168
Commercial | Commercial and industrial | 90 Days or More Past Due
Past due aging analysis of loans
Loans		121
Commercial | Commercial and industrial | Current
Past due aging analysis of loans
Loans	482,743	435,135
Commercial | Real estate construction
Past due aging analysis of loans
Loans and Leases Receivable, Gross, Total	48,870	40,619
Commercial | Real estate construction | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	37
Commercial | Real estate construction | Current
Past due aging analysis of loans
Loans	48,833	40,619
Commercial | Commercial real estate
Past due aging analysis of loans
Nonaccrual	629	629
Loans and Leases Receivable, Gross, Total	599,737	598,893
Commercial | Commercial real estate | Current
Past due aging analysis of loans
Loans	599,108	598,264
Consumer
Past due aging analysis of loans
Nonaccrual	2,140	110
Loans and Leases Receivable, Gross, Total	757,210	681,747
Consumer | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	1,868	2,058
Consumer | Current
Past due aging analysis of loans
Loans	753,202	679,579
Consumer | Residential | Real estate first mortgage
Past due aging analysis of loans
Nonaccrual	1,873	21
Loans and Leases Receivable, Gross, Total	568,571	510,716
Consumer | Residential | Real estate first mortgage | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	1,255	1,770
Consumer | Residential | Real estate first mortgage | Current
Past due aging analysis of loans
Loans	565,443	508,925
Consumer | Residential | Real estate junior lien
Past due aging analysis of loans
Nonaccrual	193	89
Loans and Leases Receivable, Gross, Total	135,255	125,668
Consumer | Residential | Real estate junior lien | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	426	167
Consumer | Residential | Real estate junior lien | Current
Past due aging analysis of loans
Loans	134,636	125,412
Consumer | Other revolving and installment
Past due aging analysis of loans
Nonaccrual	74
Loans and Leases Receivable, Gross, Total	53,384	45,363
Consumer | Other revolving and installment | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	187	121
Consumer | Other revolving and installment | Current
Past due aging analysis of loans
Loans	$ 53,123	$ 45,242

XML

Loans and Allowance for Loan Losses - Loans by risk category (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Loans outstanding by loan portfolio segment and risk category
Loans	$ 1,890,243	$ 1,758,020
Pass
Loans outstanding by loan portfolio segment and risk category
Loans	1,872,223	1,736,781
Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	5,958	480
Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	12,062	20,759
Commercial
Loans outstanding by loan portfolio segment and risk category
Loans	1,133,033	1,076,273
Commercial | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	1,118,008	1,056,145
Commercial | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	5,893	480
Commercial | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	9,132	19,648
Commercial | Commercial and industrial
Loans outstanding by loan portfolio segment and risk category
Loans	484,426	436,761
Commercial | Commercial and industrial | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	479,586	430,235
Commercial | Commercial and industrial | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	1,204	480
Commercial | Commercial and industrial | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	3,636	6,046
Commercial | Real estate construction
Loans outstanding by loan portfolio segment and risk category
Loans	48,870	40,619
Commercial | Real estate construction | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	48,870	40,619
Commercial | Commercial real estate
Loans outstanding by loan portfolio segment and risk category
Loans	599,737	598,893
Commercial | Commercial real estate | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	589,552	585,291
Commercial | Commercial real estate | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	4,689
Commercial | Commercial real estate | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	5,496	13,602
Consumer
Loans outstanding by loan portfolio segment and risk category
Loans	757,210	681,747
Consumer | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	754,215	680,636
Consumer | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	65
Consumer | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	2,930	1,111
Consumer | Residential | Real estate first mortgage
Loans outstanding by loan portfolio segment and risk category
Loans	568,571	510,716
Consumer | Residential | Real estate first mortgage | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	566,368	510,375
Consumer | Residential | Real estate first mortgage | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	65
Consumer | Residential | Real estate first mortgage | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	2,138	341
Consumer | Residential | Real estate junior lien
Loans outstanding by loan portfolio segment and risk category
Loans	135,255	125,668
Consumer | Residential | Real estate junior lien | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	134,537	124,898
Consumer | Residential | Real estate junior lien | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	718	770
Consumer | Other revolving and installment
Loans outstanding by loan portfolio segment and risk category
Loans	53,384	45,363
Consumer | Other revolving and installment | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	53,310	$ 45,363
Consumer | Other revolving and installment | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	$ 74

XML

Loans and Allowance for Loan Losses - Changes in allowance (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Changes in the allowance
Beginning Balance	$ 31,713	$ 33,758	$ 31,572	$ 34,246
Loan charge-offs	(674)	(322)	(719)	(1,106)
Loan recoveries	334	328	520	624
Ending Balance	31,373	33,764	31,373	33,764
Unallocated
Changes in the allowance
Beginning Balance	457	823	1,180	1,378
Provision for loan losses	595	1,646	(128)	1,091
Ending Balance	1,052	2,469	1,052	2,469
Commercial
Changes in the allowance
Beginning Balance	22,551	24,934	22,084	24,968
Provision for loan losses	30	(1,793)	387	(1,260)
Loan charge-offs	(637)	(273)	(664)	(1,013)
Loan recoveries	101	276	238	449
Ending Balance	22,045	23,144	22,045	23,144
Commercial | Commercial and industrial
Changes in the allowance
Beginning Balance	9,795	10,487	8,925	10,205
Provision for loan losses	1,085	(869)	1,856	(553)
Loan charge-offs	(637)	(273)	(664)	(477)
Loan recoveries	90	275	216	445
Ending Balance	10,333	9,620	10,333	9,620
Commercial | Real estate construction
Changes in the allowance
Beginning Balance	810	598	783	658
Provision for loan losses	68	(11)	95	(71)
Ending Balance	878	587	878	587
Commercial | Commercial real estate
Changes in the allowance
Beginning Balance	11,946	13,849	12,376	14,105
Provision for loan losses	(1,123)	(913)	(1,564)	(636)
Loan charge-offs				(536)
Loan recoveries	11	1	22	4
Ending Balance	10,834	12,937	10,834	12,937
Consumer
Changes in the allowance
Beginning Balance	8,705	8,001	8,308	7,900
Provision for loan losses	(625)	147	(259)	169
Loan charge-offs	(37)	(49)	(55)	(93)
Loan recoveries	233	52	282	175
Ending Balance	8,276	8,151	8,276	8,151
Consumer | Residential | Real estate first mortgage
Changes in the allowance
Beginning Balance	6,661	6,047	6,532	5,774
Provision for loan losses	(486)	129	(357)	402
Ending Balance	6,175	6,176	6,175	6,176
Consumer | Residential | Real estate junior lien
Changes in the allowance
Beginning Balance	1,400	1,288	1,295	1,373
Provision for loan losses	(134)	99	(42)	(69)
Loan recoveries	201	14	214	97
Ending Balance	1,467	1,401	1,467	1,401
Consumer | Other revolving and installment
Changes in the allowance
Beginning Balance	644	666	481	753
Provision for loan losses	(5)	(81)	140	(164)
Loan charge-offs	(37)	(49)	(55)	(93)
Loan recoveries	32	38	68	78
Ending Balance	$ 634	$ 574	$ 634	$ 574

XML

Loans and Allowance for Loan Losses - Components of loans and associated allowance (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	$ 4,712		$ 2,752
Recorded Investment, Collectively Evaluated	1,885,531		1,755,268
Loans and Leases Receivable, Gross, Total	1,890,243		1,758,020
Allowance for Loan Losses, Individually Evaluated	858		283
Allowance for Loan Losses, Collectively Evaluated	29,463		30,109
Loans and Leases Receivable, Allowance, Total	31,373	$ 31,713	31,572	$ 33,764	$ 33,758	$ 34,246
Unallocated
Loans and Allowance for Loan Losses
Loans and Leases Receivable, Allowance, Total	1,052	457	1,180	2,469	823	1,378
Commercial
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	2,572		2,640
Recorded Investment, Collectively Evaluated	1,130,461		1,073,633
Loans and Leases Receivable, Gross, Total	1,133,033		1,076,273
Allowance for Loan Losses, Individually Evaluated	831		283
Allowance for Loan Losses, Collectively Evaluated	21,214		21,801
Loans and Leases Receivable, Allowance, Total	22,045	22,551	22,084	23,144	24,934	24,968
Commercial | Commercial and industrial
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	1,769		1,831
Recorded Investment, Collectively Evaluated	482,657		434,930
Loans and Leases Receivable, Gross, Total	484,426		436,761
Allowance for Loan Losses, Individually Evaluated	828		278
Allowance for Loan Losses, Collectively Evaluated	9,505		8,647
Loans and Leases Receivable, Allowance, Total	10,333	9,795	8,925	9,620	10,487	10,205
Commercial | Real estate construction
Loans and Allowance for Loan Losses
Recorded Investment, Collectively Evaluated	48,870		40,619
Loans and Leases Receivable, Gross, Total	48,870		40,619
Allowance for Loan Losses, Collectively Evaluated	878		783
Loans and Leases Receivable, Allowance, Total	878	810	783	587	598	658
Commercial | Commercial real estate
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	803		809
Recorded Investment, Collectively Evaluated	598,934		598,084
Loans and Leases Receivable, Gross, Total	599,737		598,893
Allowance for Loan Losses, Individually Evaluated	3		5
Allowance for Loan Losses, Collectively Evaluated	10,831		12,371
Loans and Leases Receivable, Allowance, Total	10,834	11,946	12,376	12,937	13,849	14,105
Consumer
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	2,140		112
Recorded Investment, Collectively Evaluated	755,070		681,635
Loans and Leases Receivable, Gross, Total	757,210		681,747
Allowance for Loan Losses, Individually Evaluated	27
Allowance for Loan Losses, Collectively Evaluated	8,249		8,308
Loans and Leases Receivable, Allowance, Total	8,276	8,705	8,308	8,151	8,001	7,900
Consumer | Residential | Real estate first mortgage
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	1,873		21
Recorded Investment, Collectively Evaluated	566,698		510,695
Loans and Leases Receivable, Gross, Total	568,571		510,716
Allowance for Loan Losses, Collectively Evaluated	6,175		6,532
Loans and Leases Receivable, Allowance, Total	6,175	6,661	6,532	6,176	6,047	5,774
Consumer | Residential | Real estate junior lien
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	193		91
Recorded Investment, Collectively Evaluated	135,062		125,577
Loans and Leases Receivable, Gross, Total	135,255		125,668
Allowance for Loan Losses, Collectively Evaluated	1,467		1,295
Loans and Leases Receivable, Allowance, Total	1,467	1,400	1,295	1,401	1,288	1,373
Consumer | Other revolving and installment
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	74
Recorded Investment, Collectively Evaluated	53,310		45,363
Loans and Leases Receivable, Gross, Total	53,384		45,363
Allowance for Loan Losses, Individually Evaluated	27
Allowance for Loan Losses, Collectively Evaluated	607		481
Loans and Leases Receivable, Allowance, Total	$ 634	$ 644	$ 481	$ 574	$ 666	$ 753

XML

Loans and Allowance for Loan Losses - Impaired loans (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Impaired
Loans with related allowance for loan losses, Recorded investment	$ 1,256	$ 625
Loans with related allowance for loan losses, unpaid principal	1,305	667
Loans with related allowance for loan losses, Related Allowance	858	283
Loans with no related allowance for loan losses, Recorded investment	3,456	2,127
Loans with no related allowance for loan losses, unpaid principal	3,693	2,403
Recorded investment	4,712	2,752
Unpaid principal balance	4,998	3,070
Commercial | Commercial and industrial
Impaired
Loans with related allowance for loan losses, Recorded investment	1,008	445
Loans with related allowance for loan losses, unpaid principal	1,036	464
Loans with related allowance for loan losses, Related Allowance	828	278
Loans with no related allowance for loan losses, Recorded investment	761	1,386
Loans with no related allowance for loan losses, unpaid principal	873	1,575
Recorded investment	1,769	1,831
Unpaid principal balance	1,909	2,039
Commercial | Commercial real estate
Impaired
Loans with related allowance for loan losses, Recorded investment	174	180
Loans with related allowance for loan losses, unpaid principal	195	203
Loans with related allowance for loan losses, Related Allowance	3	5
Loans with no related allowance for loan losses, Recorded investment	629	629
Loans with no related allowance for loan losses, unpaid principal	684	684
Recorded investment	803	809
Unpaid principal balance	879	887
Consumer | Residential | Real estate first mortgage
Impaired
Loans with no related allowance for loan losses, Recorded investment	1,873	21
Loans with no related allowance for loan losses, unpaid principal	1,910	24
Recorded investment	1,873	21
Unpaid principal balance	1,910	24
Consumer | Residential | Real estate junior lien
Impaired
Loans with no related allowance for loan losses, Recorded investment	193	91
Loans with no related allowance for loan losses, unpaid principal	226	120
Recorded investment	193	91
Unpaid principal balance	226	$ 120
Consumer | Other revolving and installment
Impaired
Loans with related allowance for loan losses, Recorded investment	74
Loans with related allowance for loan losses, unpaid principal	74
Loans with related allowance for loan losses, Related Allowance	27
Recorded investment	74
Unpaid principal balance	$ 74

XML

Loans and Allowance for Loan Losses - Interest Income (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Impaired
Loans with related allowance for loan losses, Average recorded investment	$ 1,269	$ 1,776	$ 1,490	$ 1,871
Loans with no related allowance for loan losses, Average recorded investment	3,548	5,971	3,541	6,176
Loans, Average recorded investment	4,817	7,747	5,031	8,047
Loans with related allowance for loan losses, Interest income	4	5	9	10
Loans with no related allowance for loan losses, Interest income		5		11
Loans, Interest income	4	10	9	21
Commercial | Commercial and industrial
Impaired
Loans with related allowance for loan losses, Average recorded investment	1,018	1,548	1,156	1,637
Loans with no related allowance for loan losses, Average recorded investment	761	1,174	761	1,187
Loans, Average recorded investment	1,779	2,722	1,917	2,824
Loans with related allowance for loan losses, Interest income	2	3	6	6
Loans with no related allowance for loan losses, Interest income		5		11
Loans, Interest income	2	8	6	17
Commercial | Commercial real estate
Impaired
Loans with related allowance for loan losses, Average recorded investment	176	188	177	190
Loans with no related allowance for loan losses, Average recorded investment	629	4,472	629	4,662
Loans, Average recorded investment	805	4,660	806	4,852
Loans with related allowance for loan losses, Interest income	2	2	3	4
Loans, Interest income	2	2	3	4
Consumer | Residential | Real estate first mortgage
Impaired
Loans with no related allowance for loan losses, Average recorded investment	1,962	23	1,953	24
Loans, Average recorded investment	1,962	23	1,953	24
Consumer | Residential | Real estate junior lien
Impaired
Loans with related allowance for loan losses, Average recorded investment		27		30
Loans with no related allowance for loan losses, Average recorded investment	196	302	198	303
Loans, Average recorded investment	196	329	198	333
Consumer | Other revolving and installment
Impaired
Loans with related allowance for loan losses, Average recorded investment	75	13	157	14
Loans, Average recorded investment	$ 75	$ 13	$ 157	$ 14

XML

Loans and Allowance for Loan Losses - Pledged (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Loans and Allowance for Loan Losses
Total loans	$ 1,890,243	$ 1,758,020
Pledged
Loans and Allowance for Loan Losses
Total loans	$ 1,300,000	$ 1,200,000

XML

Loans and Allowance for Loan Losses - Troubled Debt Restructurings (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022 USD ($) loan	Jun. 30, 2021 loan	Jun. 30, 2021 USD ($)
Troubled debt restructuring
Number of loans modified as a troubled debt restructuring | loan	0	3
Extending Maturity
Troubled debt restructuring
Carrying value of restructured loan			$ 795
Specific reserve for loan losses allocated	$ 0

XML

Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Goodwill
Total goodwill	$ 31,337	$ 31,490
Banking
Goodwill
Total goodwill	20,131	20,131
Retirement and Benefit Services
Goodwill
Total goodwill	$ 11,206	$ 11,359

XML

Goodwill and Other Intangible Assets - Amortization (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Goodwill
Gross Carrying Amount	$ 41,423		$ 41,423		$ 42,057
Accumulated Amortization	(23,912)		(23,912)		(21,807)
Total	17,511		17,511		20,250
Intangible amortization expense	1,053	$ 1,088	2,106	$ 2,239
Goodwill, Impairment Loss			0
Identifiable customer intangibles
Goodwill
Gross Carrying Amount	41,423		41,423		42,057
Accumulated Amortization	(23,912)		(23,912)		(21,807)
Total	$ 17,511		$ 17,511		$ 20,250

XML

Loan Servicing (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Loan Servicing
Loans serviced for others	$ 317,700		$ 317,700		$ 345,800
Servicing Asset at Fair Value, Amount
Balance, beginning of period	1,771	$ 1,952	1,880	$ 1,987
Additions	13	62	17	111
Amortization	(96)	(185)	(256)	(385)
(Impairment)/Recovery	376	135	423	251
Balance, end of period	$ 2,064	$ 1,964	$ 2,064	$ 1,964

XML

Loan Servicing - Key economic assumptions (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Loan Servicing
Fair value of servicing rights	$ 2,064	$ 1,880
Weighted-average remaining term, years	20 years 7 months 6 days	20 years 3 months 18 days
Prepayment speeds	7.10%	14.20%
Discount rate	10.00%	9.50%

XML

Leases - Lease right-of-use assets and liabilities (Details) $ in Thousands	Jun. 30, 2022 USD ($) item	Dec. 31, 2021 USD ($)
Leases
Number of finance leases | item	1
Lease Right-of-Use Assets
Operating lease right-of-use assets	$ 3,439	$ 3,727
Finance lease right-of-use assets	$ 29	$ 87
Finance Lease, Right-of-Use Asset, balance sheet location	Land, premises and equipment, net	Land, premises and equipment, net
Lease right-of-use assets	$ 3,468	$ 3,814
Operating lease liabilities	3,856	4,275
Finance lease liabilities	$ 83	$ 203
Finance lease liabilities, balance sheet location	Long-term debt	Long-term debt
Lease liabilities	$ 3,939	$ 4,478

XML

Leases - Weighted-average remaining lease term and average discount rate (Details) - item	6 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Leases
Minimum number of options to renew lease agreements	1
Weighted-average remaining lease term, Operating leases	4 years 3 months 18 days	3 years 4 months 24 days
Weighted-average remaining lease term, Finance leases	3 months 18 days	9 months 18 days
Weighted-average discount rate, Operating leases	2.80%	2.50%
Weighted-average discount rate, Finance leases	7.80%	7.80%

XML

Leases - Lease costs and other lease information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Lease costs
Operating lease cost	$ 414	$ 492	$ 825	$ 988
Variable lease cost	150	158	363	391
Short-term lease cost	43	46	88	83
Finance lease cost
Interest on lease liabilities	1	7	5	15
Amortization of right-of-use assets	29	29	58	58
Sublease Income	(59)	(52)	(116)	(112)
Net lease cost	578	680	1,223	1,423
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$ 393	$ 474	$ 784	$ 961

XML

Leases - Future minimum payments for finance and operating leases (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Finance leases
June 30, 2023	$ 84
Total future minimum lease payments	84
Amounts representing interest	(1)
Total finance lease liabilities	83	$ 203
Operating leases
June 30, 2023	1,644
June 30, 2024	932
June 30, 2025	467
June 30, 2026	375
June 30, 2027	252
Thereafter	511
Total future minimum lease payments	4,181
Amounts representing interest	(325)
Total operating lease liabilities	$ 3,856	$ 4,275

XML

Deposits (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Deposits.
Noninterest-bearing	$ 764,808	$ 938,840
Interest-bearing demand	642,641	714,669
Savings accounts	97,227	96,825
Money market savings	914,423	937,305
Time deposits	200,451	232,912
Total interest-bearing	1,854,742	1,981,711
Total deposits	$ 2,619,550	$ 2,920,551

XML

Short-Term Borrowings (Details) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2022 USD ($)	Jun. 30, 2022 USD ($)
Short-term borrowings
Balance as of end of period	$ 242,350	$ 242,350
Federal Funds Purchased
Short-term borrowings
Balance as of end of period	117,350	117,350
Average daily balance	81,506	40,978
Maximum month-end balance	$ 117,350	$ 117,350
During period	1.18%	1.18%
End of period	1.44%	1.44%
FHLB Short-term advances
Short-term borrowings
Balance as of end of period	$ 125,000	$ 125,000
Average daily balance	9,615	4,834
Maximum month-end balance	$ 125,000	$ 125,000
During period	1.59%	1.59%
End of period	1.80%	1.80%

XML

Long-Term Debt (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Long-Term Debt
Face Value	$ 63,010	$ 63,010
Carrying Amount	58,870	58,933
Subordinated notes payable
Long-Term Debt
Face Value	50,000	50,000
Carrying Amount	$ 50,000	$ 50,000
Fixed interest rate	3.50%	3.50%
Junior subordinated debenture (Trust I)
Long-Term Debt
Face Value	$ 4,124	$ 4,124
Carrying Amount	$ 3,515	$ 3,492
Period End Interest Rate	5.30%	3.32%
Junior subordinated debenture (Trust I) | Three - month LIBOR
Long-Term Debt
Interest Rate	3.10%	3.10%
Junior subordinated debenture (Trust II)
Long-Term Debt
Face Value	$ 6,186	$ 6,186
Carrying Amount	$ 5,272	$ 5,238
Period End Interest Rate	3.63%	2.00%
Junior subordinated debenture (Trust II) | Three - month LIBOR
Long-Term Debt
Interest Rate	1.80%	1.80%
Finance lease liability
Long-Term Debt
Face Value	$ 2,700	$ 2,700
Carrying Amount	$ 83	$ 203
Fixed interest rate	7.81%	7.81%

XML

Financial Instruments with Off-Balance Sheet Risk (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	$ 646,732	$ 678,644
Commitments to extend credit
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	635,320	668,115
Standby letters of credit
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	$ 11,412	$ 10,529

XML

Financial Instruments with Off Balance Sheet Risk - Narrative (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Letter of credit with FHLB
Financial Instruments with Off Balance Sheet Risk
Outstanding letters of credit	$ 150	$ 150
Letter of credit with Bank of North Dakota
Financial Instruments with Off Balance Sheet Risk
Outstanding letters of credit	0	0
Collateralized loans	$ 237,600	$ 229,700

XML

Share-Based Compensation - Plan Information (Details) - 2019 Equity Incentive Plan - shares	6 Months Ended
	Jun. 30, 2022	May 06, 2019
Share-Based Compensation
Awards authorized		1,100,000
Restricted stock awards
Share-Based Compensation
Awards issued	948,428

XML

Share-Based Compensation - Activity in stock (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Additional disclosures
Compensation expense	$ 662	$ 761	$ 1,000	$ 1,300
Restricted Stock Awards and Units.
Restricted Stock Awards and Units
Outstanding at beginning of period			260,850	325,030
Granted			94,592	66,664
Vested			(107,113)	(88,382)
Forfeited or cancelled			(10,624)
Outstanding at end of period	237,705	303,312	237,705	303,312
Weighted Average Grant Date Fair Value
Outstanding at beginning of period			$ 21.04	$ 19.48
Granted			19.01	26.63
Vested			19.19	21.38
Forfeited or cancelled			23.71
Outstanding at end of period	$ 20.95	$ 20.49	$ 20.95	$ 20.49
Additional disclosures
Unrecognized compensation cost	$ 3,100		$ 3,100
Weighted average period			2 years 10 months 24 days

XML

Income Taxes - Reconciliation between applicable income taxes and statutory federal tax rate (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Tax amount
Taxes at statutory federal income tax rate	$ 2,524	$ 3,221	$ 5,269	$ 7,395
Tax exempt income	(122)	(148)	(239)	(301)
State income taxes, net of federal benefits	531	663	1,109	1,516
Nondeductible items and other	(208)	(92)	(526)	(304)
Applicable income taxes	$ 2,725	$ 3,644	$ 5,613	$ 8,306
Percentage of pretax income
Taxes at statutory federal income tax rate (as percentage)	21.00%	21.00%	21.00%	21.00%
Tax exempt income (as percentage)	(1.00%)	(1.00%)	(1.00%)	(0.90%)
State income taxes, net of federal benefits (as percentage)	4.40%	4.30%	4.40%	4.30%
Nondeductible items and other (as percentage)	(1.70%)	(0.60%)	(2.10%)	(0.90%)
Applicable income taxes (as percentage)	22.70%	23.70%	22.30%	23.50%

XML

Income Taxes - Uncertain Tax Positions (Details) $ in Thousands	Jun. 30, 2022 USD ($)
Income Taxes
Unrecognized tax benefits	$ 0

XML

Tax Credit Investments - Tax credits (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Tax Credit Investments [Line items]
Investment	$ 17,906	$ 7,906
Unfunded Commitment	16,402	6,999
Proportional amortization
Tax Credit Investments [Line items]
Investment	17,906	7,906
Unfunded Commitment	$ 16,402	$ 6,999

XML

Tax Credit Investments - Amortization expense and tax benefit recognized (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Tax Credit Investments [Line items]
Intangible amortization expense	$ 1,053	$ 1,088	$ 2,106	$ 2,239
Income tax benefit	(2,725)	$ (3,644)	(5,613)	$ (8,306)
Housing projects
Tax Credit Investments [Line items]
Intangible amortization expense	111		111
Income tax benefit	(156)		(156)
Low income housing tax credit | Housing projects
Tax Credit Investments [Line items]
Intangible amortization expense	111		111
Income tax benefit	$ (156)		$ (156)

XML

Segment Reporting (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022 USD ($)	Jun. 30, 2021 USD ($)	Jun. 30, 2022 USD ($) item segment	Jun. 30, 2021 USD ($)
Segment Reporting
Number of operating segments | segment			4
Number of banking offices | item			14
Key metrics related to segments
Net interest income	$ 22,776	$ 21,140	$ 44,449	$ 43,178
Noninterest income	29,226	36,748	58,696	77,629
Noninterest expense	39,984	42,550	78,055	85,592
Net income before taxes	12,018	15,338	25,090	35,215
Corporate Administration
Key metrics related to segments
Net interest income	(561)	(538)	(1,122)	(826)
Noninterest income	6	(14)	35	(28)
Noninterest expense	10,928	8,859	21,015	17,517
Net income before taxes	(11,483)	(9,411)	(22,102)	(18,371)
Banking | Operating Segments
Key metrics related to segments
Net interest income	22,779	21,188	44,304	43,068
Noninterest income	1,341	1,466	2,879	2,988
Noninterest expense	15,619	10,914	28,313	21,998
Net income before taxes	8,501	11,740	18,870	24,058
Retirement and Benefit Services | Operating Segments
Key metrics related to segments
Noninterest income	16,293	17,871	33,939	35,126
Noninterest expense	6,598	9,988	15,030	20,100
Net income before taxes	9,695	7,883	18,909	15,026
Wealth Management | Operating Segments
Key metrics related to segments
Noninterest income	5,548	5,138	10,874	10,124
Noninterest expense	1,630	2,128	3,468	4,463
Net income before taxes	3,918	3,010	7,406	5,661
Mortgage | Operating Segments
Key metrics related to segments
Net interest income	558	490	1,267	936
Noninterest income	6,038	12,287	10,969	29,419
Noninterest expense	5,209	10,661	10,229	21,514
Net income before taxes	$ 1,387	$ 2,116	$ 2,007	$ 8,841

XML

Earnings Per Share - Two-class method (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Earnings Per Share
Net Income	$ 9,293	$ 11,694	$ 19,477	$ 26,909
Dividends and undistributed earnings allocated to participating securities	101	179	225	432
Net income available to common shareholders	$ 9,192	$ 11,515	$ 19,252	$ 26,477
Weighted-average common shares outstanding for basic earnings per share	17,297	17,194	17,271	17,170
Dilutive effect of stock-based awards	235	303	246	312
Weighted-average common shares outstanding for diluted earnings per share	17,532	17,497	17,517	17,482
Earnings per common share:
Basic earnings per common share	$ 0.53	$ 0.67	$ 1.11	$ 1.54
Diluted earnings per common share	$ 0.52	$ 0.66	$ 1.10	$ 1.52

XML

Derivative Instruments (Details) - Not designated as hedging - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Derivative Instruments
Fair Value, Derivative Assets	$ 7,180	$ 3,397
Fair Value, Derivative Liabilities	4,851	1,368
Notional Amount, Derivative Assets	227,564	207,560
Notional Amount, Derivative Liabilities	44,133	44,826
Interest rate swaps | Other assets
Derivative Instruments
Fair Value, Derivative Assets	4,850	1,366
Notional Amount, Derivative Assets	44,133	44,826
Interest rate swaps | Accrued expenses and other liabilities
Derivative Instruments
Fair Value, Derivative Liabilities	4,851	1,368
Notional Amount, Derivative Liabilities	44,133	44,826
Interest rate lock commitments | Other assets
Derivative Instruments
Fair Value, Derivative Assets	1,445	1,507
Notional Amount, Derivative Assets	53,871	52,316
Forward loan sales commitments | Other assets
Derivative Instruments
Fair Value, Derivative Assets	542	490
Notional Amount, Derivative Assets	16,560	13,418
TBA mortgage backed securities | Other assets
Derivative Instruments
Fair Value, Derivative Assets	343	34
Notional Amount, Derivative Assets	$ 113,000	$ 97,000

XML

Derivative Instruments - Gain (loss) recognized on derivatives instruments (Details) - Not designated as hedging - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	$ 2,352	$ (2,593)	$ 3,655	$ (1,510)
Interest rate swaps | Other noninterest income
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	1	(1)	1	1
Interest rate lock commitments | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	563	740	(147)	(5,505)
Forward loan sales commitments | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	542	73	52	(1,562)
TBA mortgage backed securities | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	$ 1,246	$ (3,405)	$ 3,749	$ 5,556

XML

Derivative Instruments - Collateral (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Derivative Instruments
Collateral held by third parties	$ 19	$ 19

XML

Regulatory Matters (Details) $ in Thousands	Jun. 30, 2022 USD ($)	Dec. 31, 2021 USD ($)
Common equity tier 1 capital to risk weighted assets
Actual (Amount)	$ 331,692	$ 314,628
Requirements for Capital Adequacy Purposes (Amount)	$ 105,214	$ 96,647
Actual (Ratio)	0.1419	0.1465
Requirements for Capital Adequacy Purposes (Ratio)	0.0450	0.0450
Tier 1 capital to risk weighted assets
Actual (Amount)	$ 340,479	$ 323,358
Requirements for Capital Adequacy Purposes (Amount)	$ 140,285	$ 128,862
Actual (Ratio)	0.1456	0.1506
Requirements for Capital Adequacy Purposes (Ratio)	0.0600	0.0600
Total capital to risk weighted assets
Actual (Amount)	$ 419,279	$ 400,263
Requirements for Capital Adequacy Purposes (Amount)	$ 187,047	$ 171,816
Actual (Ratio)	0.1795	0.1864
Requirements for Capital Adequacy Purposes (Ratio)	0.0800	0.0800
Tier 1 capital to average assets
Actual (Amount)	$ 340,479	$ 323,358
Requirements for Capital Adequacy Purposes (Amount)	$ 126,051	$ 132,112
Actual (Ratio)	0.1080	0.0979
Requirements for Capital Adequacy Purposes (Ratio)	0.0400	0.0400
Bank
Common equity tier 1 capital to risk weighted assets
Actual (Amount)	$ 318,704	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	105,115	96,538
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 151,833	$ 139,444
Actual (Ratio)	0.1364	0.1387
Requirements for Capital Adequacy Purposes (Ratio)	0.0450	0.0450
Minimum to be Well Capitalized Under Prompt Corrective Action (Ratio)	0.0650	0.0650
Tier 1 capital to risk weighted assets
Actual (Amount)	$ 318,704	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	140,154	128,718
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 186,872	$ 171,624
Actual (Ratio)	0.1364	0.1387
Requirements for Capital Adequacy Purposes (Ratio)	0.0600	0.0600
Minimum to be Well Capitalized Under Prompt Corrective Action (Ratio)	0.0800	0.0800
Total capital to risk weighted assets
Actual (Amount)	$ 347,929	$ 324,328
Requirements for Capital Adequacy Purposes (Amount)	186,872	171,624
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 233,590	$ 214,530
Actual (Ratio)	0.1489	0.1512
Requirements for Capital Adequacy Purposes (Ratio)	0.0800	0.0800
Minimum to be Well Capitalized Under Prompt Corrective Action (Ratio)	0.1000	0.1000
Tier 1 capital to average assets
Actual (Amount)	$ 318,704	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	125,962	132,039
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 157,453	$ 165,049
Actual (Ratio)	0.1012	0.0901
Requirements for Capital Adequacy Purposes (Ratio)	0.0400	0.0400
Minimum to be Well Capitalized Under Prompt Corrective Action (Ratio)	0.0500	0.0500

XML

Stock Repurchase Program (Details) - shares		6 Months Ended
	Feb. 18, 2021	Jun. 30, 2022
Stock Repurchase Program
Number of shares authorized for repurchase	770,000
Repurchase program period	36 months
Shares repurchased		0

XML

Fair Value of Assets and Liabilities - Recurring Basis (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	$ 798,797	$ 853,649
Mortgage backed securities - Residential agency
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	652,507	707,157
Mortgage backed securities - Commercial
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	76,130	90,913
Asset backed securities
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	40	54
Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	66,411	50,422
Recurring
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	798,797	853,649
Derivative instruments	7,180	3,397
Derivative liabilities	4,851	1,368
Recurring | U.S. treasury and government agencies
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	3,709	5,103
Recurring | Mortgage backed securities - Residential agency
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	652,507	707,157
Recurring | Mortgage backed securities - Commercial
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	76,130	90,913
Recurring | Asset backed securities
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	40	54
Recurring | Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	66,411	50,422
Recurring | Level 2
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	798,797	853,649
Derivative instruments	7,180	3,397
Derivative liabilities	4,851	1,368
Recurring | Level 2 | U.S. treasury and government agencies
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	3,709	5,103
Recurring | Level 2 | Mortgage backed securities - Residential agency
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	652,507	707,157
Recurring | Level 2 | Mortgage backed securities - Commercial
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	76,130	90,913
Recurring | Level 2 | Asset backed securities
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	40	54
Recurring | Level 2 | Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	$ 66,411	$ 50,422

XML

Fair Value of Assets and Liabilities - Nonrecurring Basis (Details) - Non recurring - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Fair value, assets and liabilities measured on recurring and non recurring basis
Impaired loans	$ 3,854	$ 2,469
Foreclosed assets	860	885
Servicing rights	2,064	1,880
Loans held for sale
Fair value, assets and liabilities measured on recurring and non recurring basis
Loans held for sale	54,363	46,490
Impaired loans
Fair value, assets and liabilities measured on recurring and non recurring basis
Net impairment	858	283
Level 2 | Loans held for sale
Fair value, assets and liabilities measured on recurring and non recurring basis
Loans held for sale	54,363	46,490
Level 3
Fair value, assets and liabilities measured on recurring and non recurring basis
Impaired loans	3,854	2,469
Foreclosed assets	860	885
Servicing rights	$ 2,064	$ 1,880

XML

Fair Value of Assets and Liabilities - Valuation Technique (Details) - Level 3 $ in Thousands	Jun. 30, 2022 USD ($)	Dec. 31, 2021 USD ($)
Impaired loans | Appraisal value | Property specific adjustment
Valuation techniques and significant unobservable inputs
Impaired loans	$ 3,854	$ 2,469
Foreclosed assets | Appraisal value | Property specific adjustment
Valuation techniques and significant unobservable inputs
Foreclosed assets	$ 860	$ 885
Servicing rights
Valuation techniques and significant unobservable inputs
Loans Held-for-sale, Valuation Technique [Extensible List]	us-gaap:ValuationTechniqueDiscountedCashFlowMember	us-gaap:ValuationTechniqueDiscountedCashFlowMember
Servicing rights | Prepayment speed assumptions
Valuation techniques and significant unobservable inputs
Servicing rights	$ 2,064	$ 1,880
Servicing rights | Prepayment speed assumptions | Minimum
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	109	161
Servicing rights | Prepayment speed assumptions | Maximum
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	155	327
Servicing rights | Prepayment speed assumptions | Weighted average
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	119	237
Servicing rights | Discount rate
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	10.0	9.5
Servicing rights | Discount rate | Weighted average
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	10.0	9.5

XML

Fair Value of Assets and Liabilities - Off-Balance Sheet Credit-Related Commitments (Details) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Financial Assets
Investment securities held-to-maturity	$ 293,949	$ 349,677
Carrying Amount
Financial Assets
Cash and cash equivalents	37,043	242,311
Investment securities held-to-maturity	331,741	352,061
Loans, net	1,858,870	1,726,448
Accrued interest receivable	9,155	8,537
Bank-owned life insurance	33,564	33,156
Financial Liabilities
Noninterest-bearing deposits	764,808	938,840
Interest-bearing deposits	1,654,291	1,748,799
Time deposits	200,451	232,912
Short-term borrowings	242,350
Long-term debt	58,870	58,933
Accrued interest payable	802	1,674
Estimated Fair Value
Financial Assets
Cash and cash equivalents	37,043	242,311
Investment securities held-to-maturity	293,949	349,677
Loans, net	1,848,251	1,760,784
Accrued interest receivable	9,155	8,537
Bank-owned life insurance	33,564	33,156
Financial Liabilities
Noninterest-bearing deposits	764,808	938,840
Interest-bearing deposits	1,654,291	1,748,799
Time deposits	198,278	232,970
Short-term borrowings	242,350
Long-term debt	86,271	57,772
Accrued interest payable	802	1,674
Level 1 | Estimated Fair Value
Financial Assets
Cash and cash equivalents	37,043	242,311
Accrued interest receivable	9,155	8,537
Financial Liabilities
Short-term borrowings	242,350
Accrued interest payable	802	1,674
Level 2 | Estimated Fair Value
Financial Assets
Investment securities held-to-maturity	293,949	349,677
Bank-owned life insurance	33,564	33,156
Financial Liabilities
Noninterest-bearing deposits	764,808	938,840
Interest-bearing deposits	1,654,291	1,748,799
Long-term debt	86,271	57,772
Level 3 | Estimated Fair Value
Financial Assets
Loans, net	1,848,251	1,760,784
Financial Liabilities
Time deposits	$ 198,278	$ 232,970

XML

Subsequent Events (Details) $ in Thousands	Jul. 01, 2022	Jun. 30, 2022 USD ($)	Mar. 31, 2022 USD ($)	Dec. 31, 2021 USD ($)	Jun. 30, 2021 USD ($)	Mar. 31, 2021 USD ($)	Dec. 31, 2020 USD ($)
Subsequent Events
Total assets		$ 3,295,065		$ 3,392,691
Loans		1,890,243		1,758,020
Deposits		2,619,550		2,920,551
Total stockholders' equity		307,158	$ 328,505	$ 359,403	$ 344,391	$ 329,234	$ 330,163
MPHX
Subsequent Events
Total assets		399,000
Loans		277,600
Deposits		354,500
Total stockholders' equity		$ 43,800
Subsequent Events | MPHX
Subsequent Events
Merger common share exchange ratio	0.74