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 September 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 October 31, 2022 was 19,987,274.

Alerus Financial Corporation and Subsidiaries

Table of Contents

		Page
Part 1:	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	1
	Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021	3
	Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	6
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	63
Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
Signatures		67

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

	September 30,		December 31,
(dollars in thousands, except share and per share data)	2022		2021
Assets	(Unaudited)		(Audited)
Cash and cash equivalents	$	54,167	$	242,311
Investment securities
Available-for-sale, at fair value		729,110		853,649
Held-to-maturity, at carrying value		326,410		352,061
Fed funds sold		14,124		—
Loans held for sale		26,129		46,490
Loans		2,318,231		1,758,020
Allowance for loan losses		(30,968)		(31,572)
Net loans		2,287,263		1,726,448
Land, premises and equipment, net		17,067		18,370
Operating lease right-of-use assets		3,481		3,727
Accrued interest receivable		11,256		8,537
Bank-owned life insurance		33,777		33,156
Goodwill		46,060		31,490
Other intangible assets		23,779		20,250
Servicing rights		2,780		1,880
Deferred income taxes, net		45,889		11,614
Other assets		69,961		42,708
Total assets	$	3,691,253	$	3,392,691
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	905,228	$	938,840
Interest-bearing		2,056,583		1,981,711
Total deposits		2,961,811		2,920,551
Short-term borrowings		253,830		—
Long-term debt		58,836		58,933
Operating lease liabilities		3,802		4,275
Accrued expenses and other liabilities		68,135		49,529
Total liabilities		3,346,414		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: 19,987,274 and 17,212,588 issued and outstanding		19,987		17,213
Additional paid-in capital		154,629		92,878
Retained earnings		273,132		253,567
Accumulated other comprehensive income (loss)		(102,909)		(4,255)
Total stockholders’ equity		344,839		359,403
Total liabilities and stockholders’ equity	$	3,691,253	$	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				Nine months ended
	September 30,				September 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Interest Income
Loans, including fees	$	25,379	$	18,888	$	60,659	$	58,779
Investment securities
Taxable		5,939		3,249		17,447		8,547
Exempt from federal income taxes		209		225		638		694
Other		748		185		1,021		432
Total interest income		32,275		22,547		79,765		68,452
Interest Expense
Deposits		1,852		880		3,494		2,781
Short-term borrowings		1,516		—		1,794		—
Long-term debt		591		535		1,712		1,361
Total interest expense		3,959		1,415		7,000		4,142
Net interest income		28,316		21,132		72,765		64,310
Provision for loan losses		—		(2,000)		—		(2,000)
Net interest income after provision for loan losses		28,316		23,132		72,765		66,310
Noninterest Income
Retirement and benefit services		16,597		18,031		50,536		53,157
Wealth management		4,852		5,295		15,726		15,419
Mortgage banking		3,782		11,116		14,751		40,535
Service charges on deposit accounts		377		357		1,152		1,025
Net gains (losses) on investment securities		—		11		—		125
Other		1,402		1,230		3,541		3,408
Total noninterest income		27,010		36,040		85,706		113,669
Noninterest Expense
Compensation		21,168		23,291		61,467		71,298
Employee taxes and benefits		5,079		5,058		17,028		16,443
Occupancy and equipment expense		1,925		2,063		5,713		6,212
Business services, software and technology expense		5,373		5,332		15,082		15,266
Intangible amortization expense		1,324		1,088		3,430		3,327
Professional fees and assessments		3,126		1,503		6,913		4,484
Marketing and business development		890		865		2,304		2,310
Supplies and postage		588		549		1,806		1,583
Travel		291		174		826		236
Mortgage and lending expenses		409		1,231		1,577		3,762
Other		2,594		887		4,676		2,712
Total noninterest expense		42,767		42,041		120,822		127,633
Income before income taxes		12,559		17,131		37,649		52,346
Income tax expense		2,940		4,064		8,553		12,370
Net income	$	9,619	$	13,067	$	29,096	$	39,976
Per Common Share Data
Basic earnings per common share	$	0.48	$	0.75	$	1.58	$	2.29
Diluted earnings per common share	$	0.47	$	0.74	$	1.56	$	2.26
Dividends declared per common share	$	0.18	$	0.16	$	0.52	$	0.47
Average common shares outstanding		19,987		17,205		18,186		17,182
Diluted average common shares outstanding		20,230		17,499		18,431		17,488

See accompanying notes to consolidated financial statements (unaudited)

2

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Net Income	$	9,619	$	13,067	$	29,096	$	39,976
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities		(43,305)		(2,496)		(131,424)		(13,101)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity		(91)		(106)		(290)		(221)
Reclassification adjustment for losses (gains) realized in income		—		(11)		—		(125)
Total other comprehensive income (loss), before tax		(43,396)		(2,613)		(131,714)		(13,447)
Income tax expense (benefit) related to items of other comprehensive income		(10,892)		(656)		(33,060)		(3,375)
Other comprehensive income (loss), net of tax		(32,504)		(1,957)		(98,654)		(10,072)
Total comprehensive income (loss)	$	(22,885)	$	11,110	$	(69,558)	$	29,904

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 September 30, 2022
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars and shares in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of June 30, 2022	$	17,306	$	93,129	$	267,128	$	(70,405)	$	307,158
Net income		—		—		9,619		—		9,619
Other comprehensive income (loss)		—		—		—		(32,504)		(32,504)
Common stock repurchased		—		—		—		—		—
Common stock dividends		—		—		(3,615)		—		(3,615)
Stock issuance from the acquisition of Metro Phoenix Bank		2,681		61,149		—		—		63,830
Stock-based compensation expense		—		351		—		—		351
Vesting of restricted stock		—		—		—		—		—
Balance as of September 30, 2022	$	19,987	$	154,629	$	273,132	$	(102,909)	$	344,839

	Nine months ended September 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		—		—		29,096		—		29,096
Other comprehensive income (loss)		—		—		—		(98,654)		(98,654)
Common stock repurchased		(24)		(673)		—		—		(697)
Common stock dividends		—		—		(9,531)		—		(9,531)
Stock issuance from the acquisition of Metro Phoenix Bank		2,681		61,149		—		—		63,830
Share‑based compensation expense		10		1,382		—		—		1,392
Vesting of restricted stock		107		(107)		—		—		—
Balance as of September 30, 2022	$	19,987	$	154,629	$	273,132	$	(102,909)	$	344,839

	Three months ended September 30, 2021
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
(dollars in thousands)	Stock		Capital		Earnings		Income (Loss)		Total
Balance as of June 30, 2021	$	17,198	$	91,273	$	233,397	$	2,523	$	344,391
Net income		—		—		13,067		—		13,067
Other comprehensive income (loss)		—		—		—		(1,957)		(1,957)
Common stock repurchased		(2)		(23)		(50)		—		(75)
Common stock dividends		—		—		(2,776)		—		(2,776)
Stock-based compensation expense		—		545		—		—		545
Vesting of restricted stock		12		(12)		—		—		—
Balance as of September 30, 2021	$	17,208	$	91,783	$	243,638	$	566	$	353,195

4

	Nine months ended September 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		—		—		39,976		—		39,976
Other comprehensive income (loss)		—		—		—		(10,072)		(10,072)
Common stock repurchased		(18)		(157)		(346)		—		(521)
Common stock dividends		—		—		(8,155)		—		(8,155)
Share‑based compensation expense		8		1,796		—		—		1,804
Vesting of restricted stock		93		(93)		—		—		—
Balance as of September 30, 2021	$	17,208	$	91,783	$	243,638	$	566	$	353,195

See accompanying notes to consolidated financial statements (unaudited)

5

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended
	September 30,
(dollars in thousands)	2022		2021
Operating Activities
Net income	$	29,096	$	39,976
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		(1,215)		1,176
Provision for loan losses		—		(2,000)
Depreciation and amortization		6,116		6,726
Amortization and accretion of premiums/discounts on investment securities		2,778		2,506
Amortization of operating lease right-of-use assets		(65)		(40)
Stock-based compensation		1,392		1,804
Increase in value of bank-owned life insurance		(621)		(591)
Realized loss (gain) on sale of fixed assets		(33)		(62)
Realized loss (gain) on derivative instruments		1,031		6,612
Realized loss (gain) on loans sold		(10,062)		(39,940)
Realized loss (gain) on sale of foreclosed assets		(9)		(203)
Realized loss (gain) on sale of investment securities		—		(125)
Realized loss (gain) on servicing rights		(683)		(369)
Net change in:
Loans held for sale		30,193		101,482
Accrued interest receivable		(1,628)		826
Other assets		(13,903)		(1,951)
Accrued expenses and other liabilities		12,348		1,913
Net cash provided (used) by operating activities		54,735		117,740
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		—		13,189
Proceeds from maturities of investment securities available-for-sale		88,417		91,240
Purchases of investment securities available-for-sale		(96,968)		(331,785)
Proceeds from sales or calls of investment securities held-to-maturity		827		1,763
Proceeds from maturities of investment securities held-to-maturity		23,422		2,681
Purchases of investment securities held-to-maturity		—		(218,443)
Net (increase) decrease in loans		(290,565)		177,675
Net cash received for business combinations		101,585		—
Purchases of premises and equipment		(1,081)		(845)
Proceeds from sales of foreclosed assets		143		539
Net cash provided (used) by investing activities		(174,220)		(263,986)
Financing Activities
Net increase (decrease) in deposits		(312,425)		141,095
Net increase (decrease) in short-term borrowings		253,830		—
Repayments of long-term debt		(182)		(49,861)
Proceeds from the issuance of subordinated debt		—		50,000
Cash dividends paid on common stock		(9,185)		(7,975)
Repurchase of common stock		(697)		(521)
Net cash provided (used) by financing activities		(68,659)		132,738
Net change in cash and cash equivalents		(188,144)		(13,508)
Cash and cash equivalents at beginning of period		242,311		172,962
Cash and cash equivalents at end of period	$	54,167	$	159,454

See accompanying notes to consolidated financial statements (unaudited)

6

	Nine months ended
	September 30,
Supplemental Cash Flow Disclosures	2022		2021
Cash paid for:
Interest	$	7,269	$	3,498
Income taxes		8,713		12,075
Non-cash information
Loan collateral transferred to foreclosed assets		153		1,135
Unrealized gain (loss) on investment securities available-for-sale		(98,364)		(9,851)
Accretion of unrealized (gain) loss on investment securities held-to-maturity		(290)		(221)
Investment securities transferred to held-to-maturity		—		149,191
Right-of-use assets obtained in exchange for new operating leases		1,452		—
Acquisitions
Noncash assets acquired		297,667		—
Liabilities assumed		(354,358)		—
Issuance of stock for the acquisition of Metro Phoenix Bank		(64,019)		—
Net noncash acquired		(120,710)		—

See accompanying notes to consolidated financial statements (unaudited)

7

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.

8

Reclassifications

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

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, 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 September 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

9

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.

NOTE 3 Business Combinations

On July 1, 2022, the Company acquired MPB BHC, Inc, the bank holding company for Metro Phoenix Bank located in Phoenix, Arizona, for a total purchase price of $64.0 million in a stock-for-stock transaction. As part of the transaction, $7.6 million was allocated to a customer deposit intangible and $14.7 million to goodwill. The purchase

10

consisted of $270.4 million in loans and $353.7 million in deposits. The purchased assets and assumed liabilities were recorded at their respective acquisition date estimate fair values indicated in the following table:

	As recorded by		Preliminary Fair Value		As recorded by
(dollars in thousands)	Metro Phoenix Bank		Adjustments		the Company
Assets
Cash and cash equivalents	$	101,819	$	(45)	$	101,774
Fed funds sold		18,936		—		18,936
Core deposit intangible		—		7,592		7,592
Loans		273,843		(3,440)		270,403
Accrued interest receivable		1,091		—		1,091
Other assets		3,342		517		3,859
Total assets		399,031		4,624		403,655
Liabilities
Deposits		354,529		(844)		353,685
Other liabilities		673		—		673
Total liabilities		355,202		(844)		354,358
Excess assets over liabilities	$	43,829	$	5,468		49,297
Stock issued for MPB						64,019
Total goodwill recorded					$	14,722

NOTE 4 Investment Securities

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

	September 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,826	$	26	$	(19)	$	3,833
Mortgage backed securities
Residential agency		721,170		6		(124,187)		596,989
Commercial		72,584		—		(7,301)		65,283
Asset backed securities		35		—		—		35
Corporate bonds		69,528		—		(6,558)		62,970
Total available-for-sale investment securities		867,143		32		(138,065)		729,110
Held-to-maturity
Obligations of state and political agencies		138,664		—		(18,836)		119,828
Mortgage backed securities
Residential agency		187,746		—		(34,268)		153,478
Total held-to-maturity investment securities		326,410		—		(53,104)		273,306
Total investment securities	$	1,193,553	$	32	$	(191,169)	$	1,002,416

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	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 September 30, 2022 and December 31, 2021, were as follows:

	September 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	$	(19)	$	529	$	—	$	—	$	(19)	$	529
Mortgage backed securities
Residential agency		(60,983)		325,016		(63,204)		271,347		(124,187)		596,363
Commercial		(5,425)		54,666		(1,876)		10,618		(7,301)		65,284
Asset backed securities		—		22		—		2		—		24
Corporate bonds		(6,558)		62,945		—		—		(6,558)		62,945
Total available-for-sale investment securities		(72,985)		443,178		(65,080)		281,967		(138,065)		725,145
Held-to-maturity
Obligations of state and political agencies		(16,300)		94,902		(2,536)		24,926		(18,836)		119,828
Mortgage backed securities
Residential agency		—		—		(34,268)		153,478		(34,268)		153,478
Total held-to-maturity investment securities		(16,300)		94,902		(36,804)		178,404		(53,104)		273,306
Total investment securities	$	(89,285)	$	538,080	$	(101,884)	$	460,371	$	(191,169)	$	998,451

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	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 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 nine months ended September 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 September 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	$	6,808	$	6,742	$	11	$	11
Due after one year through five years		40,702		37,102		21,421		19,957
Due after five years through ten years		69,679		58,557		89,695		81,580
Due after 10 years		209,221		170,905		756,016		627,562
Total investment securities	$	326,410	$	273,306	$	867,143	$	729,110

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 $264.1 million and $192.8 million were pledged as of September 30, 2022 and December 31, 2021, respectively, to secure public deposits and for other purposes required or permitted by law.

13

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

	Three months ended				Nine months ended
	September 30,				September 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 nine months ended September 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	101	$	348	$	827	$	1,763
Realized gains		—		11		—		11
Realized losses		—		—		—		—

As of September 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:

	September 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	4,616	$	2,675
FHLB		15,554		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 September 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 September 30, 2022 and December 31, 2021, were carried at a zero cost basis.

14

NOTE 5 Loans and Allowance for Loan Losses

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	564,655	$	436,761
Real estate construction		89,215		40,619
Commercial real estate		819,068		598,893
Total commercial		1,472,938		1,076,273
Consumer
Residential real estate first mortgage		649,818		510,716
Residential real estate junior lien		143,681		125,668
Other revolving and installment		51,794		45,363
Total consumer		845,293		681,747
Total loans	$	2,318,231	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $2.9 million at September 30, 2022 and $33.6 million at December 31, 2021.

Total loans included net deferred loan fees and costs of $851 thousand and $231 thousand at September 30, 2022 and December 31, 2021, respectively. Deferred loan fees on PPP loans were $22 thousand at September 30, 2022 and $881 thousand at December 31, 2021. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $8.0 million as of September 30, 2022.

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status. 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 September 30, 2022 and December 31, 2021:

	September 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	$	561,865	$	311	$	1,000	$	1,479	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		818,439		—		—		629		819,068
Total commercial		1,469,519		311		1,000		2,108		1,472,938
Consumer
Residential real estate first mortgage		645,896		1,923		—		1,999		649,818
Residential real estate junior lien		143,491		2		—		188		143,681
Other revolving and installment		51,601		185		—		8		51,794
Total consumer		840,988		2,110		—		2,195		845,293
Total loans	$	2,310,507	$	2,421	$	1,000	$	4,303	$	2,318,231

15

	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.

16

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

	September 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	559,647	$	—	$	5,008	$	—	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		809,910		3,840		5,318		—		819,068
Total commercial		1,458,772		3,840		10,326		—		1,472,938
Consumer
Residential real estate first mortgage		647,517		64		2,237		—		649,818
Residential real estate junior lien		143,006		—		675		—		143,681
Other revolving and installment		51,786		—		8		—		51,794
Total consumer		842,309		64		2,920		—		845,293
Total loans	$	2,301,081	$	3,904	$	13,246	$	—	$	2,318,231

	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.

17

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

	Three months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,333	$	(845)	$	(672)	$	105	$	8,921
Real estate construction		878		378		—		76		1,332
Commercial real estate		10,834		1,335		—		101		12,270
Total commercial		22,045		868		(672)		282		22,523
Consumer
Residential real estate first mortgage		6,175		(584)		—		—		5,591
Residential real estate junior lien		1,467		(109)		—		7		1,365
Other revolving and installment		634		(75)		(75)		53		537
Total consumer		8,276		(768)		(75)		60		7,493
Unallocated		1,052		(100)		—		—		952
Total	$	31,373	$	—	$	(747)	$	342	$	30,968

	Nine months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	1,011	$	(1,336)	$	321	$	8,921
Real estate construction		783		473		—		76		1,332
Commercial real estate		12,376		(229)		—		123		12,270
Total commercial		22,084		1,255		(1,336)		520		22,523
Consumer
Residential real estate first mortgage		6,532		(941)		—		—		5,591
Residential real estate junior lien		1,295		(151)		—		221		1,365
Other revolving and installment		481		65		(130)		121		537
Total consumer		8,308		(1,027)		(130)		342		7,493
Unallocated		1,180		(228)		—		—		952
Total	$	31,572	$	—	$	(1,466)	$	862	$	30,968

	Three months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,620	$	(825)	$	(747)	$	1,052	$	9,100
Real estate construction		587		92		—		—		679
Commercial real estate		12,937		(413)		—		—		12,524
Total commercial		23,144		(1,146)		(747)		1,052		22,303
Consumer
Residential real estate first mortgage		6,176		625		—		—		6,801
Residential real estate junior lien		1,401		6		—		16		1,423
Other revolving and installment		574		(32)		(46)		27		523
Total consumer		8,151		599		(46)		43		8,747
Unallocated		2,469		(1,453)		—		—		1,016
Total	$	33,764	$	(2,000)	$	(793)	$	1,095	$	32,066

18

	Nine months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(1,378)	$	(1,224)	$	1,497	$	9,100
Real estate construction		658		21		—		—		679
Commercial real estate		14,105		(1,049)		(536)		4		12,524
Total commercial		24,968		(2,406)		(1,760)		1,501		22,303
Consumer
Residential real estate first mortgage		5,774		1,027		—		—		6,801
Residential real estate junior lien		1,373		(63)		—		113		1,423
Other revolving and installment		753		(196)		(139)		105		523
Total consumer		7,900		768		(139)		218		8,747
Unallocated		1,378		(362)		—		—		1,016
Total	$	34,246	$	(2,000)	$	(1,899)	$	1,719	$	32,066

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

	September 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	$	2,083	$	562,572	$	564,655	$	264	$	8,657	$	8,921
Real estate construction		—		89,215		89,215		—		1,332		1,332
Commercial real estate		800		818,268		819,068		—		12,270		12,270
Total commercial		2,883		1,470,055		1,472,938		264		22,259		22,523
Consumer
Residential real estate first mortgage		1,998		647,820		649,818		—		5,591		5,591
Residential real estate junior lien		188		143,493		143,681		—		1,365		1,365
Other revolving and installment		8		51,786		51,794		—		537		537
Total consumer		2,194		843,099		845,293		—		7,493		7,493
Unallocated		—		—		—		—		—		952
Total loans	$	5,077	$	2,313,154	$	2,318,231	$	264	$	29,752	$	30,968

	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

19

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

	September 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	$	712	$	744	$	264	$	445	$	464	$	278
Commercial real estate		—		—		—		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans with a valuation allowance		712		744		264		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		1,371		1,476		—		1,386		1,575		—
Commercial real estate		800		855		—		629		684		—
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans without a valuation allowance		4,365		4,627		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		2,083		2,220		264		1,831		2,039		278
Commercial real estate		800		855		—		809		887		5
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans	$	5,077	$	5,371	$	264	$	2,752	$	3,070	$	283

20

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

	Three months ended September 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	$	722	$	3	$	719	$	3
Commercial real estate		—		—		779		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		8		—
Other revolving and installment		—		—		4		—
Total impaired loans with a valuation allowance		722		3		1,510		5
Impaired loans without a valuation allowance
Commercial and industrial		1,371		7		2,016		5
Commercial real estate		801		2		3,793		—
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		166		—
Other revolving and installment		8		—		—		—
Total impaired loans without a valuation allowance		4,401		9		6,096		5
Total impaired loans
Commercial and industrial		2,093		10		2,735		8
Commercial real estate		801		2		4,572		2
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		174		—
Other revolving and installment		8		—		4		—
Total impaired loans	$	5,123	$	12	$	7,606	$	10

	Nine Months Ended September 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	$	833	$	8	$	818	$	10
Commercial real estate		—		—		782		6
Residential real estate junior lien		—		—		11		—
Other revolving and installment		—		—		3		—
Total impaired loans with a valuation allowance		833		8		1,614		16
Impaired loans without a valuation allowance
Commercial and industrial		1,291		21		2,061		15
Commercial real estate		805		5		3,980		—
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		190		—
Other revolving and installment		11		—		—		—
Total impaired loans without a valuation allowance		4,408		26		6,345		15
Total impaired loans
Commercial and industrial		2,124		29		2,879		25
Commercial real estate		805		5		4,762		6
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		201		—
Other revolving and installment		11		—		3		—
Total impaired loans	$	5,241	$	34	$	7,959	$	31

21

Loans with a carrying value of $1.4 billion as of September 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 third quarter of 2022 and 2021, there were no loans modified as a TDR.

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

NOTE 6 Goodwill and Other Intangible Assets

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	34,854	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	46,060	$	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 September 30, 2022.

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

	September 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	$	(24,920)	$	16,503	$	42,057	$	(21,807)	$	20,250
Core deposit intangible assets		7,592		(316)		7,276		—		—		—
Total intangible assets	$	49,015	$	(25,236)	$	23,779	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was $1.3 million and $1.1 million for the three months ended September 30, 2022, and 2021, respectively. Amortization of intangible assets was $3.4 million and $3.3 million for the nine months ended September 30, 2022, and 2021, respectively.

NOTE 7 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 $372.5 million and $345.8 million as of September 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.

22

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

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	2,064	$	1,964	$	1,880	$	1,987
Additions		604		84		622		195
Amortization		(110)		(195)		(367)		(580)
(Impairment)/Recovery		222		(77)		645		174
Balance, end of period	$	2,780	$	1,776	$	2,780	$	1,776

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

	September 30,			December 31,
(dollars in thousands)	2022			2021
Fair value of servicing rights	$	2,780		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		6.7	%		14.2	%
Discount rate		10.0	%		9.5	%

NOTE 8 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:

		September 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	$	3,481	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		—		87
Total lease right-of-use assets		$	3,481	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,802	$	4,275
Finance lease liabilities	Long-term debt		21		203
Total lease liabilities		$	3,823	$	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.

23

	September 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.4		3.4
Finance leases	—		0.8
Weighted-average discount rate
Operating leases	2.7	%	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 nine months ended September 30, 2022 and 2021:

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	425	$	429	$	1,250	$	1,417
Variable lease cost		187		192		550		583
Short-term lease cost		188		89		276		172
Finance lease cost
Interest on lease liabilities		2		7		7		22
Amortization of right-of-use assets		29		29		87		87
Sublease income		(63)		(51)		(179)		(163)
Net lease cost	$	768	$	695	$	1,991	$	2,118
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	400	$	411	$	1,184	$	1,372
Right-of-use assets obtained in exchange for new operating lease liabilities		1,065		—		1,452		—

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

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
September 30, 2023	$	21	$	1,582
September 30, 2024		—		827
September 30, 2025		—		541
September 30, 2026		—		402
September 30, 2027		—		309
Thereafter		—		441
Total future minimum lease payments	$	21	$	4,102
Amounts representing interest		—		(300)
Total operating lease liabilities	$	21	$	3,802

24

NOTE 9 Deposits

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	905,228	$	938,840
Interest-bearing
Interest-bearing demand		653,216		714,669
Savings accounts		101,820		96,825
Money market savings		1,079,520		937,305
Time deposits		222,027		232,912
Total interest-bearing		2,056,583		1,981,711
Total deposits	$	2,961,811	$	2,920,551

NOTE 10 Short-Term Borrowings

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	53,830	$	—
FHLB Short-term advances		200,000		—
Total	$	253,830	$	—

The following table presents information related to short-term borrowings for the three and nine months ended September 30, 2022 and 2021:

	Three months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		84,149			10
Maximum month-end balance		78,015			—
Weighted-average rate
During period		3.71	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		168,750			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

25

	Nine months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		55,527			3
Maximum month-end balance		117,350			—
Weighted-average rate
During period		2.47	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		60,073			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

NOTE 11 Long-Term Debt

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

	September 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		3,526	Three-month LIBOR + 3.10%	6.74	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,289	Three-month LIBOR + 1.80%	5.09	%	9/15/2036	9/15/2011
Finance lease liability		2,700		21	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,836

	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 12 Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The 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.

26

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	785,745	$	668,115
Standby letters of credit		11,414		10,529
Total	$	797,159	$	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 no letters of credit outstanding with the FHLB as of September 30, 2022. The Company had a $150 thousand letter of credit outstanding with the FHLB as of December 31, 2021. With the Bank of North Dakota, the Company had no letters of credit outstanding as of September 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 $224.0 million and $229.7 million as of September 30, 2022 and December 31, 2021, respectively.

NOTE 13 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 September 30, 2022, 922,010 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $351 thousand and $545 thousand for the three months ended September 30, 2022 and 2021, respectively. The compensation expense relating to awards under these plans was $1.4 million and $1.8 million for the nine months ended September 30, 2022 and 2021, respectively.

27

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

	Nine months ended September 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	102,265		25.44	66,664		26.63
Vested	(107,370)		19.19	(101,108)		20.46
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	245,121	$	23.57	290,586	$	20.77

As of September 30, 2022, there was $3.0 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 2.8 years.

NOTE 14 Income Taxes

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

	Three months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,637	21.0	%	$	3,598	21.0	%
Tax effect of:
Tax exempt income		(133)	(1.1)	%		(134)	(0.8)	%
State income taxes, net of federal benefits		406	3.2	%		756	4.4	%
Nondeductible items and other		30	0.2	%		(156)	(0.9)	%
Applicable income taxes	$	2,940	23.3	%	$	4,064	23.7	%

	Nine months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	7,906	21.0	%	$	10,993	21.0	%
Tax effect of:
Tax exempt income		(372)	(1.0)	%		(434)	(0.8)	%
State income taxes, net of federal benefits		1,515	4.0	%		2,407	4.6	%
Nondeductible items and other		(496)	(1.3)	%		(596)	(1.1)	%
Applicable income taxes	$	8,553	22.7	%	$	12,370	23.7	%

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

NOTE 15 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.

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

		September 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	$	15,559	$	7,906	$	6,999
Total		$	17,906	$	15,559	$	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 nine months ended three and nine months ended September 30, 2022 and 2021:

	Three months ended September 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	$	109	$	(146)	$	—	$	—
Total	$	109	$	(146)	$	—	$	—

(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.

	Nine months ended September 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	$	220	$	(303)	$	—	$	—
Total	$	220	$	(303)	$	—	$	—

(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 16 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.

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

	Three months ended September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	28,512	$	—	$	—	$	393	$	(589)	$	28,316
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,723		16,597		4,852		3,782		56		27,010
Noninterest expense		19,990		6,130		1,576		4,483		10,588		42,767
Net income before taxes	$	10,245	$	10,467	$	3,276	$	(308)	$	(11,121)	$	12,559

	Nine months ended September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	72,816	$	—	$	—	$	1,660	$	(1,711)	$	72,765
Provision for loan losses		—		—		—		—		—		—
Noninterest income		4,602		50,536		15,726		14,751		91		85,706
Noninterest expense		48,303		21,160		5,062		14,712		31,585		120,822
Net income before taxes	$	29,115	$	29,376	$	10,664	$	1,699	$	(33,205)	$	37,649

	Three months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,168	$	—	$	—	$	499	$	(535)	$	21,132
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		1,576		18,031		5,295		11,116		22		36,040
Noninterest expense		11,403		10,320		2,219		8,464		9,635		42,041
Net income before taxes	$	13,341	$	7,711	$	3,076	$	3,151	$	(10,148)	$	17,131

	Nine months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	64,236	$	—	$	—	$	1,435	$	(1,361)	$	64,310
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		4,564		53,157		15,419		40,535		(6)		113,669
Noninterest expense		33,401		30,420		6,682		29,978		27,152		127,633
Net income before taxes	$	37,399	$	22,737	$	8,737	$	11,992	$	(28,519)	$	52,346

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, and COBRA recordkeeping and administration services. 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.

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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 17 Earnings Per Share

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

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,619	$	13,067	$	29,096	$	39,976
Dividends and undistributed earnings allocated to participating securities		90		196		312		628
Net income available to common shareholders	$	9,529	$	12,871	$	28,784	$	39,348
Weighted-average common shares outstanding for basic earnings per share		19,987		17,205		18,186		17,182
Dilutive effect of stock-based awards		243		294		245		306
Weighted-average common shares outstanding for diluted earnings per share		20,230		17,499		18,431		17,488
Earnings per common share:
Basic earnings per common share	$	0.48	$	0.75	$	1.58	$	2.29
Diluted earnings per common share	$	0.47	$	0.74	$	1.56	$	2.26

NOTE 18 Derivative Instruments

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

The Company did not have any derivatives designated as hedging instruments as of September 30, 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 September 30, 2022 and December 31, 2021:

		September 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	$	6,608	$	43,784	$	1,366	$	44,826
Interest rate lock commitments	Other assets		—		—		1,507		52,316
Forward loan sales commitments	Other assets		10		333		490		13,418
TBA mortgage backed securities	Other assets		1,352		53,000		34		97,000
Total asset derivatives		$	7,970	$	97,117	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	6,608	$	43,784	$	1,368	$	44,826
Interest rate lock commitments	Accrued expenses and other liabilities		134		22,636		—		—
Total liability derivatives		$	6,742	$	66,420	$	1,368	$	44,826

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

		Three months ended				Nine months ended
	Consolidated Statements	September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	1	$	2	$	2
Interest rate lock commitments	Mortgage banking		(1,724)		(1,793)		(1,871)		(7,298)
Forward loan sales commitments	Mortgage banking		(532)		(499)		(480)		(2,061)
TBA mortgage backed securities	Mortgage banking		1,317		(690)		5,066		4,865
Total gain/(loss) from derivative instruments		$	(938)	$	(2,981)	$	2,717	$	(4,492)

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 zero at September 30, 2022 and $15 thousand at 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 19 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 September 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 September 30, 2022 and December 31, 2021:

	September 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	$	381,019	13.63	%	$	125,839	4.50	%	$	N/A	N/A
Bank		363,457	13.01	%		125,754	4.50	%		181,645	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		389,834	13.94	%		167,785	6.00	%		N/A	N/A
Bank		363,457	13.01	%		167,672	6.00	%		223,563	8.00	%
Total capital to risk weighted assets
Consolidated		470,802	16.84	%		223,713	8.00	%		N/A	N/A
Bank		394,425	14.11	%		223,562	8.00	%		279,454	10.00	%
Tier 1 capital to average assets
Consolidated		389,834	10.82	%		144,131	4.00	%		N/A	N/A
Bank		363,457	11.12	%		130,728	4.00	%		163,410	5.00	%

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	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 September 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 September 30, 2022, and December 31, 2021, the Company was in compliance with the aforementioned guidelines.

NOTE 20 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 nine months ended September 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 21 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

33

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 September 30, 2022 and December 31, 2021:

	September 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,833	$	—	$	3,833
Mortgage backed securities
Residential agency		—		596,989		—		596,989
Commercial		—		65,283		—		65,283
Asset backed securities		—		35		—		35
Corporate bonds		—		62,970		—		62,970
Total available-for-sale investment securities	$	—	$	729,110	$	—	$	729,110
Other assets
Derivatives	$	—	$	7,970	$	—	$	7,970
Other liabilities
Derivatives	$	—	$	6,742	$	—	$	6,742

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	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 September 30, 2022 and December 31, 2021 consisted of the following:

	September 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	26,129	$	—	$	26,129	$	—
Impaired loans		—		4,813		4,813		264
Foreclosed assets		—		904		904		—
Servicing rights		—		2,780		2,780		—

	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		—

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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 September 30, 2022, and December 31, 2021, were as follows:

			September 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	4,813	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		904	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,780	100-136		112
		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 September 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.

36

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.

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

	September 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	54,167	$	54,167	$	—	$	—	$	54,167
Investment securities held-to-maturity		326,410		—		273,306		—		273,306
Loans, net		2,287,263		—		—		2,256,887		2,256,887
Accrued interest receivable		11,256		11,256		—		—		11,256
Bank-owned life insurance		33,777		—		33,777		—		33,777
Financial Liabilities
Noninterest-bearing deposits	$	905,228	$	—	$	905,228	$	—	$	905,228
Interest-bearing deposits		1,834,556		—		1,834,556		—		1,834,556
Time deposits		222,027		—		—		217,974		217,974
Short-term borrowings		253,830		253,830		—		—		253,830
Long-term debt		58,836		—		55,480		—		55,480
Accrued interest payable		1,405		1,405		—		—		1,405

	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

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

General

The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, 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:

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

● 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;

39

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

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

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

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

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

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

● potential losses incurred in connection with mortgage loan repurchases;

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

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

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

● our ability to successfully manage liquidity risk;

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

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

● governmental monetary, trade and fiscal policies;

● rapid technological change in the financial services industry;

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

40

● our ability to manage mortgage pipeline risk;

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

● 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.

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

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

Recent Developments

Acquisition of Metro Phoenix Bank

On July 1, 2022, the Company acquired MPB BHC, Inc. the bank holding company for Metro Phoenix Bank, headquartered in Phoenix, Arizona. The transaction included $270.4 million in loans and $353.7 million in deposits acquired from Metro Phoenix Bank.

Shareholder Dividend

On September 13, 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 October 14, 2022, to stockholders of record at the close of business on September 30, 2022.

Operating Results Overview

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

	Three months ended									Nine months ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)	2022			2022			2021			2022			2021
Performance Ratios
Return on average total assets		1.02	%		1.14	%		1.62	%		1.13	%		1.71	%
Return on average common equity		10.25	%		11.93	%		14.68	%		11.27	%		15.61	%
Return on average tangible common equity (1)		13.89	%		15.25	%		18.13	%		14.59	%		19.44	%
Noninterest income as a % of revenue		48.82	%		56.20	%		63.04	%		54.08	%		63.87	%
Net interest margin (taxable-equivalent basis)		3.21	%		2.98	%		2.78	%		3.02	%		2.92	%
Efficiency ratio (1)		74.76	%		74.72	%		71.49	%		73.94	%		69.69	%
Average equity to average assets		9.95	%		9.59	%		11.07	%		10.06	%		10.97	%
Net charge-offs/(recoveries) to average loans		0.07	%		0.07	%		(0.06)	%		0.04	%		0.01	%
Dividend payout ratio		38.30	%		34.62	%		21.62	%		33.33	%		20.80	%
Per Common Share
Earnings per common share - basic	$	0.48		$	0.53		$	0.75		$	1.58		$	2.29
Earnings per common share - diluted	$	0.47		$	0.52		$	0.74		$	1.56		$	2.26
Dividends declared per common share	$	0.18		$	0.18		$	0.16		$	0.52		$	0.47
Book value per common share	$	17.25		$	17.75		$	20.54
Tangible book value per common share (1)	$	13.76		$	14.93		$	17.46
Average common shares outstanding - basic		19,987			17,297			17,205			18,186			17,182
Average common shares outstanding - diluted		20,230			17,532			17,499			18,431			17,488
Other Data
Retirement and benefit services assets under administration/management	$	30,545,694		$	31,749,157		$	36,202,553
Wealth management assets under administration/management	$	3,435,786		$	4,147,763		$	3,865,062
Mortgage originations	$	229,901		$	269,397		$	415,792		$	686,060		$	1,479,243

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

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Selected Financial Data

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

	Three months ended						Nine months ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(dollars in thousands)	2022		2022		2021		2022		2021
Selected Average Balance Sheet Data
Loans	$	2,262,361	$	1,838,631	$	1,820,871	$	1,958,216	$	1,884,308
Investment securities		1,116,458		1,164,625		869,421		1,165,414		778,307
Assets		3,743,154		3,258,655		3,190,877		3,431,212		3,119,819
Deposits		2,995,071		2,740,417		2,720,047		2,851,425		2,671,344
Fed funds purchased		84,149		81,506		10		55,527		3
Short-term borrowings		168,750		9,615		—		60,073		—
Long-term debt		58,843		58,876		58,968		58,875		48,002
Stockholders’ equity		372,274		312,515		353,196		345,192		342,344

	September 30,		June 30,		December 31,		September 30,
(dollars in thousands)	2022		2022		2021		2021
Selected Period End Balance Sheet Data
Loans	$	2,318,231	$	1,890,243	$	1,758,020	$	1,800,386
Allowance for loan losses		(30,968)		(31,373)		(31,572)		(32,066)
Investment securities		1,055,520		1,130,538		1,205,710		1,017,868
Assets		3,691,253		3,295,065		3,392,691		3,175,169
Deposits		2,961,811		2,619,550		2,920,551		2,713,088
Long-term debt		58,836		58,870		58,933		58,963
Total stockholders’ equity		344,839		307,158		359,403		353,195

	Three months ended						Nine months ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(dollars in thousands)	2022		2022		2021		2022		2021
Selected Income Statement Data
Net interest income	$	28,316	$	22,776	$	21,132	$	72,765	$	64,310
Provision for loan losses		—		—		(2,000)		—		(2,000)
Noninterest income		27,010		29,226		36,040		85,706		113,669
Noninterest expense		42,767		39,984		42,041		120,822		127,633
Income before income taxes		12,559		12,018		17,131		37,649		52,346
Income tax expense		2,940		2,725		4,064		8,553		12,370
Net income	$	9,619	$	9,293	$	13,067	$	29,096	$	39,976

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.

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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:

	September 30,			June 30,			December 31,			September 30,
(dollars and shares in thousands, except per share data)	2022			2022			2021			2021
Tangible common equity to tangible assets
Total common stockholders’ equity	$	344,839		$	307,158		$	359,403		$	353,195
Less: Goodwill		46,060			31,337			31,490			30,201
Less: Other intangible assets		23,779			17,511			20,250			22,593
Tangible common equity (a)		275,000			258,310			307,663			300,401
Total assets		3,691,253			3,295,065			3,392,691			3,175,169
Less: Goodwill		46,060			31,337			31,490			30,201
Less: Other intangible assets		23,779			17,511			20,250			22,593
Tangible assets (b)		3,621,414			3,246,217			3,340,951			3,122,375
Tangible common equity to tangible assets (a)/(b)		7.59	%		7.96	%		9.21	%		9.62	%
Tangible book value per common share
Total common stockholders’ equity	$	344,839		$	307,158		$	359,403		$	353,195
Less: Goodwill		46,060			31,337			31,490			30,201
Less: Other intangible assets		23,779			17,511			20,250			22,593
Tangible common equity (c)		275,000			258,310			307,663			300,401
Total common shares issued and outstanding (d)		19,987			17,306			17,213			17,208
Tangible book value per common share (c)/(d)	$	13.76		$	14.93		$	17.87		$	17.46

	Three months ended									Nine months ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)	2022			2022			2021			2022			2021
Return on average tangible common equity
Net income	$	9,619		$	9,293		$	13,067		$	29,096		$	39,976
Add: Intangible amortization expense (net of tax)		1,046			832			860			2,710			2,628
Net income, excluding intangible amortization (e)		10,665			10,125			13,927			31,806			42,604
Average total equity		372,274			312,515			353,196			345,192			342,344
Less: Average goodwill		48,141			31,488			30,201			37,101			30,201
Less: Average other intangible assets (net of tax)		19,466			14,737			18,272			16,605			19,124
Average tangible common equity (f)		304,667			266,290			304,723			291,486			293,019
Return on average tangible common equity (e)/(f)		13.89	%		15.25	%		18.13	%		14.59	%		19.44	%
Efficiency ratio
Noninterest expense	$	42,767		$	39,984		$	42,041		$	120,822		$	127,633
Less: Intangible amortization expense		1,324			1,053			1,088			3,430			3,327
Adjusted noninterest expense (g)		41,443			38,931			40,953			117,392			124,306
Net interest income		28,316			22,776			21,132			72,765			64,310
Noninterest income		27,010			29,226			36,040			85,706			113,669
Tax-equivalent adjustment		112			100			115			306			392
Total tax-equivalent revenue (h)		55,438			52,102			57,287			158,777			178,371
Efficiency ratio (g)/(h)		74.76	%		74.72	%		71.49	%		73.94	%		69.69	%

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Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended September 30, 2022 was $9.6 million, or $0.47 per diluted common share, a $3.4 million, or 26.4%, decrease as compared to $13.1 million, or $0.74 per diluted common share, for the three months ended September 30, 2021. Net income decreased primarily due to a $9.0 million decrease in noninterest income and a $726 thousand increase in noninterest expense, partially offset by a $7.2 million increase in net interest.

Net income for the nine months ended September 30, 2022 was $29.1 million, or $1.56 per diluted common share, a $10.9 million, or 27.2%, decrease as compared to $40.0 million, or $2.26 per diluted common share, for the nine months ended September 30, 2021. The decrease in net income was primarily driven by a $28.0 million decrease in noninterest income, partially offset by an $8.5 million increase in net interest income and a $6.8 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 nine months ended September 30, 2022 and 2021.

Net interest income for the three months ended September 30, 2022 was $28.3 million, a $7.2 million, or 34.0%, increase from $21.1 million for the three months ended September 30, 2021. Net interest income increased primarily due to a $9.8 million increase in interest income, due to a $6.5 million increase in interest income received from loans, the result of a $270.4 million increase in loans from the acquisition of Metro Phoenix Bank. Partially offsetting the increase of interest income was a $2.5 million increase in interest expense, primarily due to a $1.5 million increase in interest paid on short-term borrowings. Short-term borrowings increased primarily as a result of seasonally lower deposit balances.

Net interest income for the nine months ended September 30, 2022 was $72.8 million, an increase of $8.5 million, or 13.1%, as compared to the $64.3 million for the nine months ended September 30, 2021. Net interest income increased primarily due to an $8.8 million increase on interest income received from investment securities, partially offset by a $2.9 million increase in interest expense, driven by a $1.8 million increase in interest expense paid on short-term borrowings. Interest income received from investment securities increased, primarily due to an increase in the balance of investment securities available-for-sale. Interest expense paid on short-term borrowings increased primarily as a result of lower deposit balances.

Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended September 30, 2022 was 3.21%, compared to 2.78% for the same period in 2021. Excluding the acquisition of Metro Phoenix Bank, net interest margin was 3.04% for the third quarter of 2022. Net interest margin increased primarily due to a 69 basis point increase in the yield on interest earning assets, partially offset by a 38 basis point increase in the yield on interest-bearing liabilities. The rate earned on interest earning assets increased primarily due to increases of 186 basis points on the rate earned on interest-bearing deposits with banks, and 102 basis points on the rate earned on Federal Reserve/FHLB stock. The increase in the rate paid on interest-bearing liabilities was primarily due to an increase of 371 basis points in fed funds purchased, the result of a rising interest rate environment as well as seasonally lower deposit balances. Additionally, we saw increases of $441.5 million in average total loans and $275.0 million in average total deposits. Excluding the acquisition of Metro Phoenix Bank, average total loans increased $160.3 million and average total deposits decreased $52.0 million.

Our net interest margin (on a FTE basis) for the nine months ended September 30, 2022 was 3.02%, compared to 2.92% for the same period in 2021. Excluding the acquisition of Metro Phoenix Bank, net interest margin for the nine months ended September 30, 2022 was 2.95%. The increase in net interest margin was primarily due to a 19 basis point

45

increase on the interest earning asset yield, partially offset by a 15 basis point increase on the rate paid on interest-bearing liabilities. The rate earned on interest earning assets increased primarily due to increases of 72 basis points on the rate earned on interest-bearing deposits with banks and 67 basis points earned on Federal Reserve/FHLB stock. The increase in the rate paid on interest-bearing liabilities was primarily driven by a 247 basis point increase in the interest rate paid on fed funds purchased.

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.

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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 nine months ended September 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 September 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	$	72,157	$	368	2.02	%	$	281,768	$	114	0.16	%
Investment securities (1)		1,116,458		6,204	2.20	%		869,421		3,534	1.61	%
Fed funds sold		21,893		131	2.37	%		—		—	—	%
Loans held for sale		27,032		282	4.14	%		57,233		346	2.40	%
Loans
Commercial:
Commercial and industrial		566,987		7,729	5.41	%		544,811		6,803	4.95	%
Real estate construction		70,545		996	5.60	%		37,743		380	3.99	%
Commercial real estate		807,505		8,279	4.07	%		567,696		5,245	3.67	%
Total commercial		1,445,037		17,004	4.67	%		1,150,250		12,428	4.29	%
Consumer
Residential real estate first mortgage		624,826		5,580	3.54	%		487,699		4,077	3.32	%
Residential real estate junior lien		140,664		1,918	5.41	%		129,239		1,490	4.57	%
Other revolving and installment		51,834		651	4.98	%		53,683		602	4.45	%
Total consumer		817,324		8,149	3.96	%		670,621		6,169	3.65	%
Total loans (1)		2,262,361		25,153	4.41	%		1,820,871		18,597	4.05	%
Federal Reserve/FHLB Stock		18,449		249	5.35	%		6,505		71	4.33	%
Total interest earning assets		3,518,350		32,387	3.65	%		3,035,798		22,662	2.96	%
Noninterest earning assets		224,804						155,079
Total assets	$	3,743,154					$	3,190,877
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	659,696	$	211	0.13	%	$	692,873	$	240	0.14	%
Money market and savings deposits		1,180,576		1,202	0.40	%		1,009,564		365	0.14	%
Time deposits		234,459		439	0.74	%		217,756		275	0.50	%
Fed funds purchased		84,149		787	3.71	%		10		—	—	%
Short-term borrowings		168,750		729	1.71	%		—		—	—	%
Long-term debt		58,843		591	3.98	%		58,968		535	3.60	%
Total interest-bearing liabilities		2,386,473		3,959	0.66	%		1,979,171		1,415	0.28	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		920,340						799,854
Other noninterest-bearing liabilities		64,067						58,656
Stockholders’ equity		372,274						353,196
Total liabilities and stockholders’ equity	$	3,743,154					$	3,190,877
Net interest income			$	28,428					$	21,247
Net interest rate spread					2.99	%					2.68	%
Net interest margin on FTE basis (1)					3.21	%					2.78	%

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

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	Nine months ended September 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	$	68,811	$	442	0.86	%	$	219,636	$	227	0.14	%
Investment securities (1)		1,165,414		18,255	2.09	%		778,307		9,425	1.62	%
Fed funds sold		7,378		131	2.37	%		—		—	—	%
Loans held for sale		27,864		689	3.31	%		70,218		1,180	2.25	%
Loans
Commercial:
Commercial and industrial		488,771		17,797	4.87	%		615,310		21,780	4.73	%
Real estate construction		52,212		1,839	4.71	%		41,812		1,304	4.17	%
Commercial real estate		670,854		19,378	3.86	%		565,861		15,744	3.72	%
Total commercial		1,211,837		39,014	4.30	%		1,222,983		38,828	4.24	%
Consumer
Residential real estate first mortgage		561,261		14,472	3.45	%		468,395		12,371	3.53	%
Residential real estate junior lien		132,968		4,829	4.86	%		132,145		4,619	4.67	%
Other revolving and installment		52,150		1,791	4.59	%		60,785		1,989	4.37	%
Total consumer		746,379		21,092	3.78	%		661,325		18,979	3.84	%
Total loans (1)		1,958,216		60,106	4.10	%		1,884,308		57,807	4.10	%
Federal Reserve/FHLB Stock		11,877		448	5.04	%		6,273		205	4.37	%
Total interest earning assets		3,239,560		80,071	3.30	%		2,958,742		68,844	3.11	%
Noninterest earning assets		191,652						161,077
Total assets	$	3,431,212					$	3,119,819
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	692,310	$	637	0.12	%	$	678,015	$	740	0.15	%
Money market and savings deposits		1,089,137		1,943	0.24	%		1,018,347		1,131	0.15	%
Time deposits		224,603		914	0.54	%		212,297		910	0.57	%
Fed funds purchased		55,527		1,027	2.47	%		3		—	—	%
Short-term borrowings		60,073		767	1.71	%		—		—	—	%
Long-term debt		58,875		1,712	3.89	%		48,002		1,361	3.79	%
Total interest-bearing liabilities		2,180,525		7,000	0.43	%		1,956,664		4,142	0.28	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		845,375						762,685
Other noninterest-bearing liabilities		60,120						58,126
Stockholders’ equity		345,192						342,344
Total liabilities and stockholders’ equity	$	3,431,212					$	3,119,819
Net interest income			$	73,071					$	64,702
Net interest rate spread					2.87	%					2.83	%
Net interest margin on FTE basis (1)					3.02	%					2.92	%

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

Interest Rates and Operating Interest Differential

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

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

	Three Months Ended September 30, 2022						Nine months ended September 30, 2022
	Compared with						Compared with
	Three Months Ended September 30, 2021						Nine months ended September 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	$	(85)	$	339	$	254	$	(158)	$	373	$	215
Investment securities		1,002		1,668		2,670		4,690		4,140		8,830
Loans held for sale		(183)		119		(64)		(713)		222		(491)
Loans
Commercial:
Commercial and industrial		277		649		926		(4,477)		494		(3,983)
Real estate construction		330		286		616		324		211		535
Commercial real estate		2,218		816		3,034		2,921		713		3,634
Total commercial		2,825		1,751		4,576		(1,232)		1,418		186
Consumer
Residential real estate first mortgage		1,148		355		1,503		2,452		(351)		2,101
Residential real estate junior lien		132		296		428		29		181		210
Other revolving and installment		(21)		70		49		(282)		84		(198)
Total consumer		1,259		721		1,980		2,199		(86)		2,113
Total loans		4,084		2,472		6,556		967		1,332		2,299
Federal Reserve/FHLB Stock		130		48		178		183		60		243
Total interest income		4,948		4,646		9,594		4,969		6,127		11,096
Interest-bearing liabilities
Interest-bearing demand deposits		(12)		(17)		(29)		16		(119)		(103)
Money market and savings deposits		60		777		837		79		733		812
Time deposits		21		143		164		52		(48)		4
Short-term borrowings		—		787		787		—		1,027		1,027
Long-term debt		(1)		57		56		308		43		351
Total interest expense		68		1,747		1,815		455		1,636		2,091
Change in net interest income	$	4,880	$	2,899	$	7,779	$	4,514	$	4,491	$	9,005

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 nine months ended September 30, 2022. This was compared to a $2.0 million reversal of provision expense recorded for the three and nine months ended September 30, 2021. Although management saw increases in overall loan volume, based on the reduction of previous adjustments for pandemic related qualitative factors, management concluded no need for additional provision.

Noninterest Income

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

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

	Three months ended						Nine months ended
	September 30,						September 30,
(dollars in thousands)	2022			2021			2022			2021
Retirement and benefit services	$	16,597		$	18,031		$	50,536		$	53,157
Wealth management		4,852			5,295			15,726			15,419
Mortgage banking		3,782			11,116			14,751			40,535
Service charges on deposit accounts		377			357			1,152			1,025
Net gains (losses) on investment securities		—			11			—			125
Other		1,402			1,230			3,541			3,408
Total noninterest income	$	27,010		$	36,040		$	85,706		$	113,669
Noninterest income as a % of revenue		48.82	%		63.04	%		54.08	%		63.87	%

Total noninterest income for the three months ended September 30, 2022, was $27.0 million, a decrease of $9 million, or 25.1%, compared to $36.0 million for the three months ended September 30, 2021. The year over year decrease was primarily driven by decreases of $7.3 million in mortgage banking revenue, $1.4 million in retirement and benefit services revenue and $443 thousand in wealth management revenue. Mortgage banking revenue decreased primarily due to a $185.9 million, or 44.7%, decrease in mortgage originations, a result of the rising interest rate environment, and a 94 basis point decrease in the gain on sale margin. Retirement and benefit services revenue decreased primarily due to a $1.5 billion, or 21.5%, decrease in asset-based fees, the result of a $5.6 billion, or 15.6%, decrease in assets under administration/management. Wealth management revenue decreased primarily as a result of a $429.3 million decrease in assets under management, the result of an overall market value decrease.

Total noninterest income for the nine months ended September 30, 2022, was $85.7 million, a $28.0 million, or 24.6%, decrease compared to $113.7 million for the nine months ended September 30, 2021. The decrease in noninterest income was primarily driven by decreases of $25.8 million in mortgage banking revenue and $2.6 million in retirement and benefit services revenue, partially offset by a $307 thousand increase in wealth management revenue. Mortgage banking revenue decreased primarily due to a $793.2 million, or 53.6%, decrease in mortgage originations. Retirement and benefit services revenue decreased primarily due to a $2.6 million, or 12.5%, decrease in asset-based fees the result of the decrease in assets under administration/management. Wealth management revenue increased primarily due to a $469 thousand increase in blueprint fees.

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 48.8% for the three months ended September 30, 2022, compared to 63.0% for the three months ended September 30, 2021. The decrease was due to noninterest income decreasing 25.1%, while net interest income increased 34.0%.

Noninterest income as a percentage of total operating revenue was 54.1% for the nine months ended September 30, 2022, compared to 63.9% for the nine months ended September 30, 2021. The decrease was due to noninterest income decreasing 24.6%, while net interest income increased 13.1%.

See “NOTE 16 Segment Reporting” for additional discussion regarding our business lines.

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Noninterest Expense

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

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Compensation	$	21,168	$	23,291	$	61,467	$	71,298
Employee taxes and benefits		5,079		5,058		17,028		16,443
Occupancy and equipment expense		1,925		2,063		5,713		6,212
Business services, software and technology expense		5,373		5,332		15,082		15,266
Intangible amortization expense		1,324		1,088		3,430		3,327
Professional fees and assessments		3,126		1,503		6,913		4,484
Marketing and business development		890		865		2,304		2,310
Supplies and postage		588		549		1,806		1,583
Travel		291		174		826		236
Mortgage and lending expenses		409		1,231		1,577		3,762
Other		2,594		887		4,676		2,712
Total noninterest expense	$	42,767	$	42,041	$	120,822	$	127,633

Total noninterest expense for the three months ended September 30, 2022 was $42.8 million, a $726 thousand, or 1.7%, increase compared to $42.0 million for the three months ended September 30, 2021. The year over year increase in noninterest expense was primarily driven by increases of $1.7 million in other noninterest expense and $1.6 million in professional fees and assessments, partially offset by a $2.1 million decrease in compensation expense. Other noninterest expense increased primarily due to an $841 thousand increase in the provision for unused commitments, the result of new business generated within our real estate construction loans. Professional fees and assessments increased primarily due to a $1.8 million increase in merger and acquisition expenses associated with the acquisition of Metro Phoenix Bank. The year over year decrease in mortgage originations drove the overall decrease in compensation expense in the third quarter of 2022.

Total noninterest expense for the nine months ended September 30, 2022, was $120.8 million, a $6.8 million, or 5.3%, decrease compared to $127.6 million for the nine months ended September 30, 2021. The decrease in noninterest income was primarily due to decreases of $9.8 million in compensation expense and $2.2 million in mortgage and lending expenses, partially offset by a $2.4 million increase in professional fees and assessments. Both compensation expenses and mortgage and lending expenses decreased as a result of the decrease in mortgage originations. Professional fees and assessments increased primarily due to the $1.8 million increase in merger and acquisition expenses associated with the acquisition of Metro Phoenix Bank.

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 September 30, 2022, we recognized income tax expense of $2.9 million on $12.6 million of pre-tax income, resulting in an effective tax rate of 23.3%, compared to income tax expense of $4.1 million on $17.1 million of pre-tax income for the three months ended September 30, 2021, resulting in an effective tax rate of 23.7%.

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For the nine months ended September 30, 2022, we recognized income tax expense of $8.6 million on $37.6 million of pre-tax income, resulting in an effective tax rate of 22.7%, compared to income tax expense of $12.4 million on $52.3 million of pre-tax income for the nine months ended September 30, 2021, resulting in an effective tax rate of 23.7%.

Financial Condition

Overview

Total assets were $3.7 billion as of September 30, 2022, an increase of $298.6 million, or 8.8%, as compared to December 31, 2021. The overall increase in total assets included an increase of $560.2 million in loans held for investment, partially offset by decreases of $188.1 million in cash and cash equivalents and $150.2 million in investment securities.

Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and 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 September 30, 2022, the portfolio mix was 24.4% commercial and industrial, 35.4% commercial real estate, 34.2% residential real estate and 6.0% in other categories.

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

	September 30, 2022				December 31, 2021
			Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio			Amount	Percent
Commercial
Commercial and industrial (1)	$	564,655	24.4	%	$	436,761	24.8	%	$	127,894	29.3	%
Real estate construction		89,215	3.8	%		40,619	2.3	%		48,596	119.6	%
Commercial real estate		819,068	35.4	%		598,893	34.1	%		220,175	36.8	%
Total commercial		1,472,938	63.6	%		1,076,273	61.2	%		396,665	36.9	%
Consumer
Residential real estate first mortgage		649,818	28.0	%		510,716	29.1	%		139,102	27.2	%
Residential real estate junior lien		143,681	6.2	%		125,668	7.1	%		18,013	14.3	%
Other revolving and installment		51,794	2.2	%		45,363	2.6	%		6,431	14.2	%
Total consumer		845,293	36.4	%		681,747	38.8	%		163,546	24.0	%
Total loans	$	2,318,231	100.0	%	$	1,758,020	100.0	%	$	560,211	31.9	%

(1) Included PPP loans of $2.9 million at September 30, 2022 and $33.6 million at December 31, 2021.

Total loans outstanding were $2.3 billion as of September 30, 2022, an increase of $560.2 million, or 31.9%, from December 31, 2021. The increase was primarily due to increases of $270.4 million in total loans acquired from Metro Phoenix Bank and $289.8 million in organic loan growth. Excluding loans acquired from Metro Phoenix Bank, the increases in organic loan growth included increases of $119.5 million in residential real estate first mortgages, $91.9 million in commercial real estate loans and $31.3 million in commercial and industrial loans. Excluding the loans acquired from Metro Phoenix Bank and PPP loans, commercial and industrial loans increased $62.0 million.

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

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

	September 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	$	152,109	$	233,223	$	178,413	$	910	$	564,655
Real estate construction		47,538		31,473		8,582		1,622		89,215
Commercial real estate		23,752		304,615		441,000		49,701		819,068
Total commercial		223,399		569,311		627,995		52,233		1,472,938
Consumer
Residential real estate first mortgage		11,148		25,405		55,687		557,578		649,818
Residential real estate junior lien		9,618		23,722		33,729		76,612		143,681
Other revolving and installment		10,116		39,289		2,389		—		51,794
Total consumer		30,882		88,416		91,805		634,190		845,293
Total loans	$	254,281	$	657,727	$	719,800	$	686,423	$	2,318,231
Loans with fixed interest rates:
Commercial
Commercial and industrial	$	13,402	$	201,315	$	72,359	$	119	$	287,195
Real estate construction		28,411		12,346		5,262		—		46,019
Commercial real estate		20,601		226,380		245,213		13,755		505,949
Total commercial		62,414		440,041		322,834		13,874		839,163
Consumer
Residential real estate first mortgage		4,927		19,797		42,871		373,297		440,892
Residential real estate junior lien		2,529		6,571		12,897		4,417		26,414
Other revolving and installment		1,955		24,908		2,389		—		29,252
Total consumer		9,411		51,276		58,157		377,714		496,558
Total loans with fixed interest rates	$	71,825	$	491,317	$	380,991	$	391,588	$	1,335,721
Loans with floating interest rates:
Commercial
Commercial and industrial	$	138,707	$	31,908	$	106,054	$	791	$	277,460
Real estate construction		19,127		19,127		3,320		1,622		43,196
Commercial real estate		3,151		78,235		195,787		35,946		313,119
Total commercial		160,985		129,270		305,161		38,359		633,775
Consumer
Residential real estate first mortgage		6,221		5,608		12,816		184,281		208,926
Residential real estate junior lien		7,089		17,151		20,832		72,195		117,267
Other revolving and installment		8,161		14,381		—		—		22,542
Total consumer		21,471		37,140		33,648		256,476		348,735
Total loans with floating interest rates	$	182,456	$	166,410	$	338,809	$	294,835	$	982,510

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

Asset Quality

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

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Credit Quality Indicators

Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See “NOTE 5 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 September 30, 2022 and December 31, 2021:

	September 30,			December 31,
(dollars in thousands)	2022			2021
Commercial
Commercial and industrial	$	5,008		$	6,526
Real estate construction		—			—
Commercial real estate		9,158			13,602
Total commercial		14,166			20,128
Consumer
Residential real estate first mortgage		2,301			341
Residential real estate junior lien		675			770
Other revolving and installment		8			—
Total consumer		2,984			1,111
Total loans	$	17,150		$	21,239
Criticized loans as a percent of total loans		0.74	%		1.21	%

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

	September 30,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans	$	4,303		$	2,076
Accruing loans 90+ days past due		1,000			121
Total nonperforming loans		5,303			2,197
OREO and repossessed assets		904			885
Total nonperforming assets		6,207			3,082
Total restructured accruing loans		355			676
Total nonperforming assets and restructured accruing loans	$	6,562		$	3,758
Nonperforming loans to total loans		0.23	%		0.12	%
Nonperforming assets to total assets		0.17	%		0.09	%
Allowance for loan losses to nonperforming loans		584	%		1,437	%

Interest income lost on nonaccrual loans approximated $65 thousand and $85 thousand for the three months ended September 30, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended September 30, 2022 and 2021.

Interest income lost on nonaccrual loans approximated $172 thousand and $197 thousand for the nine months ended September 30, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the nine months ended September 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

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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.

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

	Three months ended						Nine months ended
	September 30,						September 30,
(dollars in thousands)	2022			2021			2022			2021
Balance—beginning of period	$	31,373		$	33,764		$	31,572		$	34,246
Commercial loan charge-offs
Commercial and Industrial		(672)			(747)			(1,336)			(1,224)
Real estate construction		—			—			—			—
Commercial real estate		—			—			—			(536)
Total commercial loan charge-offs		(672)			(747)			(1,336)			(1,760)
Consumer loan charge-offs
Residential real estate first mortgage		—			—			—			—
Residential real estate junior lien		—			—			—			—
Other revolving and installment		(75)			(46)			(130)			(139)
Total consumer loan charge-offs		(75)			(46)			(130)			(139)
Total loan charge-offs		(747)			(793)			(1,466)			(1,899)
Commercial loan recoveries
Commercial and Industrial		105			1,052			321			1,497
Real estate construction		76			—			76			—
Commercial real estate		101			—			123			4
Total commercial recoveries		282			1,052			520			1,501
Consumer loan recoveries
Residential real estate first mortgage		—			—			—			—
Residential real estate junior lien		7			16			221			113
Other revolving and installment		53			27			121			105
Total consumer loan recoveries		60			43			342			218
Total loan recoveries		342			1,095			862			1,719
Net loan charge-offs (recoveries)		405			(302)			604			180
Commercial loan provision
Commercial and Industrial		(845)			(825)			1,011			(1,378)
Real estate construction		378			92			473			21
Commercial real estate		1,335			(413)			(229)			(1,049)
Total commercial loan provision		868			(1,146)			1,255			(2,406)
Consumer loan provision
Residential real estate first mortgage		(584)			625			(941)			1,027
Residential real estate junior lien		(109)			6			(151)			(63)
Other revolving and installment		(75)			(32)			65			(196)
Total consumer loan provision		(768)			599			(1,027)			768
Unallocated provision expense		(100)			(1,453)			(228)			(362)
Total loan loss provision		—			(2,000)			—			(2,000)
Balance—end of period	$	30,968		$	32,066		$	30,968		$	32,066
Total loans	$	2,318,231		$	1,800,386		$	2,318,231		$	1,800,386
Average total loans		2,262,361			1,820,871			1,958,216			1,884,308
Allowance for loan losses to total loans		1.34	%		1.78	%		1.34	%		1.78	%
Net charge-offs/(recoveries) to average total loans (annualized)		0.07	%		(0.06)	%		0.04	%		0.01	%

The allowance for loan losses was $31.0 million as of September 30, 2022, compared to $31.6 million as of December 31, 2021. The $604 thousand increase was the result of $1.5 million in total charge-offs and no additional provision expense, partially offset by $862 thousand in recoveries. As of September 30, 2022, the allowance for loan losses represented 1.34% of total loans. Excluding the acquisition of loans from Metro Phoenix Bank the allowance for loans losses represented 1.51% of total loans.

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

	September 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	$	8,921	24.4	%	$	8,925	24.8	%
Real estate construction		1,332	3.8	%		783	2.3	%
Commercial real estate		12,270	35.4	%		12,376	34.1	%
Residential real estate first mortgage		5,591	28.0	%		6,532	29.1	%
Residential real estate junior lien		1,365	6.2	%		1,295	7.1	%
Other revolving and installment		537	2.2	%		481	2.6	%
Unallocated		952	—	%		1,180	—	%
Total loans	$	30,968	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 $2.9 million as of September 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 September 30, 2022 and December 31, 2021:

	September 30, 2022				December 31, 2021
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Available-for-sale
U.S. Treasury and agencies	$	3,833	0.4	%	$	5,103	0.4	%
Mortgage backed securities
Residential agency		596,989	56.5	%		707,157	58.7	%
Commercial		65,283	6.2	%		90,913	7.5	%
Asset backed securities		35	—	%		54	—	%
Corporate bonds		62,970	6.0	%		50,422	4.2	%
Total available-for-sale investment securities		729,110	69.1	%		853,649	70.8	%
Held-to-maturity
Obligations of state and political agencies		138,664	13.1	%		144,543	12.0	%
Mortgage backed securities
Residential agency		187,746	17.8	%		207,518	17.2	%
Total held-to-maturity investment securities		326,410	30.9	%		352,061	29.2	%
Total investment securities	$	1,055,520	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 September 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

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

	Maturity as of September 30, 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	$	—	—	%	$	—	—	%	$	1,370	3.01	%	$	2,463	2.19	%
Mortgage backed securities
Residential agency		11	3.92	%		2,963	2.42	%		9,401	2.49	%		584,614	1.78	%
Commercial		—	—	%		16,994	2.77	%		7,828	2.82	%		40,461	2.50	%
Asset backed securities		—	—	%		—	—	%		11	5.45	%		24	5.25	%
Corporate bonds		—	—	%		—	—	%		62,970	3.86	%		—	—	%
Total available-for-sale investment securities		11	3.92	%		19,957	2.72	%		81,580	3.59	%		627,562	1.83	%
Held-to-maturity
Obligations of state and political agencies		6,742	1.22	%		37,102	1.13	%		58,557	1.90	%		17,427	2.21	%
Mortgage backed securities
Residential agency		—	—	%		—	—	%		—	—	%		153,478	2.12	%
Total held-to-maturity investment securities		6,742	1.22	%		37,102	1.13	%		58,557	1.90	%		170,905	2.13	%
Total investment securities	$	6,753	1.23	%	$	57,059	1.69	%	$	140,137	2.88	%	$	798,467	1.89	%

Deposits

Total deposits were $3.0 billion as of September 30, 2022, an increase of $41.3 million, or 1.4%, from December 31, 2021. Interest-bearing deposits increased $74.9 million while noninterest-bearing deposits decreased $33.6 million. The increase in total deposits was primarily due to a $353.7 million increase in deposits acquired from Metro Phoenix Bank. Excluding deposits acquired from Metro Phoenix Bank, deposits decreased $312.4 million, or 10.7%. The decrease was primarily driven by decreases of $129.8 million in noninterest-bearing deposits, $80.0 million in interest-bearing demand deposits, and $59.3 million in time deposits. Noninterest-bearing deposits decreased primarily due to a decrease in synergistic deposits. The decrease in interest-bearing demand deposits was the result of seasonally lower balances in public deposits. Time deposits decreased due to clients shifting balances to more liquid accounts. Synergistic deposits decreased $35.5 million from December 31, 2021 primarily due to year-end seasonally higher temporary balances from retirement plan terminations. Excluding synergistic deposits, commercial transaction deposits increased $103.8 million, or 8.2%, primarily due to the acquisition of Metro Phoenix Bank.

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

	September 30, 2022				December 31, 2021
			Percent of				Percent of		Change
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio		Amount		Percent
Noninterest-bearing demand	$	905,228	30.5	%	$	938,840	32.1	%	$	(33,612)	(3.6)	%
Interest-bearing demand		653,216	22.1	%		714,669	24.5	%		(61,453)	(8.6)	%
Money market and savings		1,181,340	39.9	%		1,034,130	35.4	%		147,210	14.2	%
Time deposits		222,027	7.5	%		232,912	8.0	%		(10,885)	(4.7)	%
Total deposits	$	2,961,811	100.0	%	$	2,920,551	100.0	%	$	41,260	1.4	%

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

	Three months ended September 30,
	2022				2021
	Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest-bearing demand	$	845,375	—	%	$	799,854	—	%
Interest-bearing demand		692,310	0.13	%		692,873	0.14	%
Money market and savings		1,089,137	0.40	%		1,009,564	0.14	%
Time deposits		224,603	0.74	%		217,756	0.50	%
Total deposits	$	2,851,425	0.25	%	$	2,720,047	0.13	%

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 September 30, 2022:

	September 30,
(dollars in thousands)	2022
Maturing in:
3 months or less	$	29,645
3 months to 6 months		24,627
6 months to 1 year		3,930
1 year or greater		2,787
Total	$	60,989

Borrowings

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

	September 30, 2022				December 31, 2021
			Percent of				Percent of
(dollars in thousands)	Balance		Portfolio		Balance		Portfolio
Fed funds purchased	$	53,830	17.2	%	$	—	—	%
FHLB Short-term advances		200,000	64.0	%		—	—	%
Subordinated notes		50,000	16.0	%		50,000	84.9	%
Junior subordinated debentures		8,815	2.8	%		8,730	14.8	%
Finance lease liability		21	—	%		203	0.3	%
Total borrowed funds	$	312,666	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 $14.6 million, or 4.1%, to $344.8 million as of September 30, 2022, compared to $359.4 million as of December 31, 2021, primarily due to a $98.7 million increase in accumulated other comprehensive loss, attributable to rising interest rates, which resulted in a lower fair value in our investment securities available-for-sale, partially offset by a $61.8 million increase in our additional paid-in capital as a result of the of Metro Phoenix Bank acquisition. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.59% as of September 30, 2022, from 9.21% as of December 31, 2021. Common equity tier 1 capital to risk weighted assets decreased to 13.63% as of September 30, 2022, from 14.65% 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

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balance sheet, recognizing that unexpected loss is the common denominator of risk, and that common equity has the greatest capacity to absorb unexpected loss.

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

At September 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 September 30, 2022 and December 31, 2021:

	September 30,		December 31,
Capital Ratios	2022		2021
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets	13.63	%	14.65	%
Tier 1 capital to risk weighted assets	13.94	%	15.06	%
Total capital to risk weighted assets	16.84	%	18.64	%
Tier 1 capital to average assets	10.82	%	9.79	%
Tangible common equity to tangible assets (1)	7.59	%	9.21	%
Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets	13.01	%	13.87	%
Tier 1 capital to risk weighted assets	13.01	%	13.87	%
Total capital to risk weighted assets	14.11	%	15.12	%
Tier 1 capital to average assets	11.12	%	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 September 30, 2022, as shown in the above tables, were at levels above the regulatory minimums to be considered “well capitalized”. See “Note 19 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 September 30, 2022 and December 31, 2021, was as follows:

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	785,745	$	668,115
Standby letters of credit		11,414		10,529
Total	$	797,159	$	678,644

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Liquidity

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

As of September 30, 2022, we had on balance sheet liquidity of $778.9 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 September 30, 2022, we had $53.8 million federal funds purchased, $200.0 million in short-term borrowings from the FHLB and $809.9 million of collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to $555.9 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 $738.3 million, as of September 30, 2022. Management believed that we had adequate resources to fund all of our commitments as of September 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 the recent rise in inflation and rising interest rates 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,

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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 September 30, 2022 and December 31, 2021, assuming immediate parallel moves in interest rates is presented in the table below:

	September 30, 2022				December 31, 2021
	Following		Following		Following		Following
	12 months		24 months		12 months		24 months
+400 basis points	−13.4	%	0.7	%	−8.2	%	−2.9	%
+300 basis points	−10.1	%	2.4	%	−6.1	%	−2.3	%
+200 basis points	−6.8	%	4.1	%	−4.1	%	−1.8	%
+100 basis points	−3.3	%	6.5	%	−2.0	%	−1.3	%
−100 basis points	2.2	%	8.3	%	−10.6	%	−15.7	%
−200 basis points	1.5	%	4.2	%	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

62

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 September 30, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates:

	September 30,		December 31,
	2022		2021
+400 basis points	−25.7	%	−26.0	%
+300 basis points	−19.1	%	−16.8	%
+200 basis points	−12.4	%	−8.2	%
+100 basis points	−5.5	%	−1.4	%
−100 basis points	0.6	%	−31.2	%
−200 basis points	−10.1	%	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

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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 third 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)
July	—	$	—	—	770,000
August	—		—	—	770,000
September	—		—	—	770,000
Total	—	$	—	—	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 September 30, 2022, there were no shares repurchased under the Program.

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Use of Proceeds from Registered Securities

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits

Exhibit No.	Description
3.1	Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019).
3.2	Second Amended and Restated Bylaws of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.2 on Form S-1 filed on August 16, 2019).
10.1	Executive Severance Agreement by and between Alerus Financial Corporation and Missy Keney, dated July 25, 2022 – filed herewith.
10.2	Executive Severance Agreement by and between Alerus Financial Corporation and Jon Hendry, dated July 25, 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)

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SIGNATURES

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

	ALERUS FINANCIAL CORPORATION
Date: November 3, 2022	By:	/s/ Katie A. Lorenson
		Name:    Katie A. Lorenson
		Title:      President and Chief Executive Officer (Principal Executive Officer)
Date: November 3, 2022	By:	/s/ Alan A. Villalon
		Name:    Alan A. Villalon
		Title:      Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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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 Missy Keney (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)

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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,

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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.

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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

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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.

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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

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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 56206-6001

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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:	7/25/2022	/s/ Missy Keney
		Employee
		Accepted for Alerus Financial Corporation:
Date:	7/25/2022	By:	/s/ Katie Lorenson
		Its: CEO & President

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EX-10.2

Exhibit 10.2

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Jon Hendry (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 56206-6001

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:	7/25/2022	/s/ Jon Hendry
		Employee
		Accepted for Alerus Financial Corporation:
Date:	7/25/2022	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
November 3, 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
November 3, 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 September 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
November 3, 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 September 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
November 3, 2022	/s/ Alan A. Villalon
	Alan A. VillalonExecutive Vice President and Chief Financial Officer(Principal Financial Officer)

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2022	Oct. 31, 2022
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 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		19,987,274
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q3
Entity Central Index Key	0000903419
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Assets
Cash and cash equivalents	$ 54,167	$ 242,311
Available-for-sale, at fair value	729,110	853,649
Held-to-maturity, at carrying value	326,410	352,061
Fed funds sold	14,124
Loans held for sale	26,129	46,490
Loans	2,318,231	1,758,020
Allowance for loan losses	(30,968)	(31,572)
Net loans	2,287,263	1,726,448
Land, premises and equipment, net	17,067	18,370
Operating lease right-of-use assets	3,481	3,727
Accrued interest receivable	11,256	8,537
Bank-owned life insurance	33,777	33,156
Goodwill	46,060	31,490
Other intangible assets	23,779	20,250
Servicing rights	2,780	1,880
Deferred income taxes, net	45,889	11,614
Other assets	69,961	42,708
Total assets	3,691,253	3,392,691
Deposits
Noninterest-bearing	905,228	938,840
Interest-bearing	2,056,583	1,981,711
Total deposits	2,961,811	2,920,551
Short-term borrowings	253,830
Long-term debt	58,836	58,933
Operating lease liabilities	3,802	4,275
Accrued expenses and other liabilities	68,135	49,529
Total liabilities	3,346,414	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: 19,987,274 and 17,212,588 issued and outstanding	19,987	17,213
Additional paid-in capital	154,629	92,878
Retained earnings	273,132	253,567
Accumulated other comprehensive income (loss)	(102,909)	(4,255)
Total stockholders' equity	344,839	359,403
Total liabilities and stockholders' equity	$ 3,691,253	$ 3,392,691

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 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	19,987,274	17,212,588
Common stock, shares outstanding	19,987,274	17,212,588

XML

Consolidated Statements of Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Interest Income
Loans, including fees	$ 25,379	$ 18,888	$ 60,659	$ 58,779
Taxable	5,939	3,249	17,447	8,547
Exempt from federal income taxes	209	225	638	694
Other	748	185	1,021	432
Total interest income	32,275	22,547	79,765	68,452
Interest Expense
Deposits	1,852	880	3,494	2,781
Short-term borrowings	1,516		1,794
Long-term debt	591	535	1,712	1,361
Total interest expense	3,959	1,415	7,000	4,142
Net interest income	28,316	21,132	72,765	64,310
Provision for loan losses		(2,000)		(2,000)
Net interest income after provision for loan losses	28,316	23,132	72,765	66,310
Noninterest Income
Mortgage banking	3,782	11,116	14,751	40,535
Net gains (losses) on investment securities		11		125
Other	1,402	1,230	3,541	3,408
Total noninterest income	27,010	36,040	85,706	113,669
Noninterest Expense
Compensation	21,168	23,291	61,467	71,298
Employee taxes and benefits	5,079	5,058	17,028	16,443
Occupancy and equipment expense	1,925	2,063	5,713	6,212
Business services, software and technology expense	5,373	5,332	15,082	15,266
Intangible amortization expense	1,324	1,088	3,430	3,327
Professional fees and assessments	3,126	1,503	6,913	4,484
Marketing and business development	890	865	2,304	2,310
Supplies and postage	588	549	1,806	1,583
Travel	291	174	826	236
Mortgage and lending expenses	409	1,231	1,577	3,762
Other	2,594	887	4,676	2,712
Total noninterest expense	42,767	42,041	120,822	127,633
Income before income taxes	12,559	17,131	37,649	52,346
Income tax expense	2,940	4,064	8,553	12,370
Net income	$ 9,619	$ 13,067	$ 29,096	$ 39,976
Per Common Share Data
Basic earnings per common share	$ 0.48	$ 0.75	$ 1.58	$ 2.29
Diluted earnings per common share	0.47	0.74	1.56	2.26
Dividends declared per common share	$ 0.18	$ 0.16	$ 0.52	$ 0.47
Average common shares outstanding	19,987	17,205	18,186	17,182
Diluted average common shares outstanding	20,230	17,499	18,431	17,488
Retirement and Benefit Services
Noninterest Income
Revenue	$ 16,597	$ 18,031	$ 50,536	$ 53,157
Wealth Management
Noninterest Income
Revenue	4,852	5,295	15,726	15,419
Deposit Account
Noninterest Income
Revenue	$ 377	$ 357	$ 1,152	$ 1,025

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Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Consolidated Statements of Comprehensive Income (Unaudited)
Net Income	$ 9,619	$ 13,067	$ 29,096	$ 39,976
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities	(43,305)	(2,496)	(131,424)	(13,101)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity	(91)	(106)	(290)	(221)
Reclassification adjustment for losses (gains) realized in income		(11)		(125)
Total other comprehensive income (loss), before tax	(43,396)	(2,613)	(131,714)	(13,447)
Income tax expense (benefit) related to items of other comprehensive income	(10,892)	(656)	(33,060)	(3,375)
Other comprehensive income (loss), net of tax	(32,504)	(1,957)	(98,654)	(10,072)
Total comprehensive income (loss)	$ (22,885)	$ 11,110	$ (69,558)	$ 29,904

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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			39,976		39,976
Other comprehensive income (loss)				(10,072)	(10,072)
Common stock repurchased	(18)	(157)	(346)		(521)
Common stock dividends			(8,155)		(8,155)
Share-based compensation expense	8	1,796			1,804
Vesting of restricted stock	93	(93)
Ending balance at Sep. 30, 2021	17,208	91,783	243,638	566	353,195
Beginning balance at Jun. 30, 2021	17,198	91,273	233,397	2,523	344,391
Net income			13,067		13,067
Other comprehensive income (loss)				(1,957)	(1,957)
Common stock repurchased	(2)	(23)	(50)		(75)
Common stock dividends			(2,776)		(2,776)
Share-based compensation expense		545			545
Vesting of restricted stock	12	(12)
Ending balance at Sep. 30, 2021	17,208	91,783	243,638	566	353,195
Beginning balance at Dec. 31, 2021	17,213	92,878	253,567	(4,255)	359,403
Net income			29,096		29,096
Other comprehensive income (loss)				(98,654)	(98,654)
Common stock repurchased	(24)	(673)			(697)
Common stock dividends			(9,531)		(9,531)
Stock issuance from the acquisition of Metro Phoenix Bank	2,681	61,149			63,830
Share-based compensation expense	10	1,382			1,392
Vesting of restricted stock	107	(107)
Ending balance at Sep. 30, 2022	19,987	154,629	273,132	(102,909)	344,839
Beginning balance at Jun. 30, 2022	17,306	93,129	267,128	(70,405)	307,158
Net income			9,619		9,619
Other comprehensive income (loss)				(32,504)	(32,504)
Common stock dividends			(3,615)		(3,615)
Stock issuance from the acquisition of Metro Phoenix Bank	2,681	61,149			63,830
Share-based compensation expense		351			351
Ending balance at Sep. 30, 2022	$ 19,987	$ 154,629	$ 273,132	$ (102,909)	$ 344,839

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
Operating Activities
Net income	$ 29,096	$ 39,976
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes	(1,215)	1,176
Provision for loan losses		(2,000)
Depreciation and amortization	6,116	6,726
Amortization and accretion of premiums/discounts on investment securities	2,778	2,506
Amortization of operating lease right-of-use assets	(65)	(40)
Stock-based compensation	1,392	1,804
Increase in value of bank-owned life insurance	(621)	(591)
Realized loss (gain) on sale of fixed assets	(33)	(62)
Realized loss (gain) on derivative instruments	1,031	6,612
Realized loss (gain) on loans sold	(10,062)	(39,940)
Realized loss (gain) on sale of foreclosed assets	(9)	(203)
Realized loss (gain) on sale of investment securities		(125)
Realized loss (gain) on servicing rights	(683)	(369)
Net change in:
Loans held for sale	30,193	101,482
Accrued interest receivable	(1,628)	826
Other assets	(13,903)	(1,951)
Accrued expenses and other liabilities	12,348	1,913
Net cash provided (used) by operating activities	54,735	117,740
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale		13,189
Proceeds from maturities of investment securities available-for-sale	88,417	91,240
Purchases of investment securities available-for-sale	(96,968)	(331,785)
Proceeds from sales or calls of investment securities held-to-maturity	827	1,763
Proceeds from maturities of investment securities held-to-maturity	23,422	2,681
Purchases of investment securities held-to-maturity		(218,443)
Net (increase) decrease in loans	(290,565)	177,675
Net cash received for business combinations	101,585
Purchases of premises and equipment	(1,081)	(845)
Proceeds from sales of foreclosed assets	143	539
Net cash provided (used) by investing activities	(174,220)	(263,986)
Financing Activities
Net increase (decrease) in deposits	(312,425)	141,095
Net increase (decrease) in short-term borrowings	253,830
Repayments of long-term debt	(182)	(49,861)
Proceeds from the issuance of subordinated debt		50,000
Cash dividends paid on common stock	(9,185)	(7,975)
Repurchase of common stock	(697)	(521)
Net cash provided (used) by financing activities	(68,659)	132,738
Net change in cash and cash equivalents	(188,144)	(13,508)
Cash and cash equivalents at beginning of period	242,311	172,962
Cash and cash equivalents at end of period	54,167	159,454
Cash paid for:
Interest	7,269	3,498
Income taxes	8,713	12,075
Non-cash information
Loan collateral transferred to foreclosed assets	153	1,135
Unrealized gain (loss) on investment securities available-for-sale	(98,364)	(9,851)
Accretion of unrealized (gain) loss on investment securities held-to-maturity	(290)	(221)
Investment securities transferred to held-to-maturity		$ 149,191
Right-of-use assets obtained in exchange for new operating leases	1,452
Noncash assets acquired	297,667
Liabilities assumed	(354,358)
Issuance of stock for the acquisition of Metro Phoenix Bank	(64,019)
Net noncash acquired	$ (120,710)

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Significant Accounting Policies

9 Months Ended

Sep. 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.

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.

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Recent Accounting Pronouncements

9 Months Ended

Sep. 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 September 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.

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Business Combinations

9 Months Ended

Sep. 30, 2022

Business Combinations

Business Combinations

NOTE 3 Business Combinations

On July 1, 2022, the Company acquired MPB BHC, Inc, the bank holding company for Metro Phoenix Bank located in Phoenix, Arizona, for a total purchase price of $64.0 million in a stock-for-stock transaction. As part of the transaction, $7.6 million was allocated to a customer deposit intangible and $14.7 million to goodwill. The purchase

consisted of $270.4 million in loans and $353.7 million in deposits. The purchased assets and assumed liabilities were recorded at their respective acquisition date estimate fair values indicated in the following table:

	As recorded by		Preliminary Fair Value		As recorded by
(dollars in thousands)	Metro Phoenix Bank		Adjustments		the Company
Assets
Cash and cash equivalents	$	101,819	$	(45)	$	101,774
Fed funds sold		18,936		—		18,936
Core deposit intangible		—		7,592		7,592
Loans		273,843		(3,440)		270,403
Accrued interest receivable		1,091		—		1,091
Other assets		3,342		517		3,859
Total assets		399,031		4,624		403,655
Liabilities
Deposits		354,529		(844)		353,685
Other liabilities		673		—		673
Total liabilities		355,202		(844)		354,358
Excess assets over liabilities	$	43,829	$	5,468		49,297
Stock issued for MPB						64,019
Total goodwill recorded					$	14,722

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Investment Securities

9 Months Ended

Sep. 30, 2022

Investment Securities

Investment Securities

NOTE 4 Investment Securities

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

	September 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,826	$	26	$	(19)	$	3,833
Mortgage backed securities
Residential agency		721,170		6		(124,187)		596,989
Commercial		72,584		—		(7,301)		65,283
Asset backed securities		35		—		—		35
Corporate bonds		69,528		—		(6,558)		62,970
Total available-for-sale investment securities		867,143		32		(138,065)		729,110
Held-to-maturity
Obligations of state and political agencies		138,664		—		(18,836)		119,828
Mortgage backed securities
Residential agency		187,746		—		(34,268)		153,478
Total held-to-maturity investment securities		326,410		—		(53,104)		273,306
Total investment securities	$	1,193,553	$	32	$	(191,169)	$	1,002,416

	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 September 30, 2022 and December 31, 2021, were as follows:

	September 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	$	(19)	$	529	$	—	$	—	$	(19)	$	529
Mortgage backed securities
Residential agency		(60,983)		325,016		(63,204)		271,347		(124,187)		596,363
Commercial		(5,425)		54,666		(1,876)		10,618		(7,301)		65,284
Asset backed securities		—		22		—		2		—		24
Corporate bonds		(6,558)		62,945		—		—		(6,558)		62,945
Total available-for-sale investment securities		(72,985)		443,178		(65,080)		281,967		(138,065)		725,145
Held-to-maturity
Obligations of state and political agencies		(16,300)		94,902		(2,536)		24,926		(18,836)		119,828
Mortgage backed securities
Residential agency		—		—		(34,268)		153,478		(34,268)		153,478
Total held-to-maturity investment securities		(16,300)		94,902		(36,804)		178,404		(53,104)		273,306
Total investment securities	$	(89,285)	$	538,080	$	(101,884)	$	460,371	$	(191,169)	$	998,451

	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 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 nine months ended September 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 September 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	$	6,808	$	6,742	$	11	$	11
Due after one year through five years		40,702		37,102		21,421		19,957
Due after five years through ten years		69,679		58,557		89,695		81,580
Due after 10 years		209,221		170,905		756,016		627,562
Total investment securities	$	326,410	$	273,306	$	867,143	$	729,110

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 $264.1 million and $192.8 million were pledged as of September 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 nine months ended September 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Nine months ended
	September 30,				September 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 nine months ended September 30, 2022 and 2021, are displayed in the table below:

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	101	$	348	$	827	$	1,763
Realized gains		—		11		—		11
Realized losses		—		—		—		—

As of September 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:

	September 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	4,616	$	2,675
FHLB		15,554		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 September 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 September 30, 2022 and December 31, 2021, were carried at a zero cost basis.

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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2022

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses

NOTE 5 Loans and Allowance for Loan Losses

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	564,655	$	436,761
Real estate construction		89,215		40,619
Commercial real estate		819,068		598,893
Total commercial		1,472,938		1,076,273
Consumer
Residential real estate first mortgage		649,818		510,716
Residential real estate junior lien		143,681		125,668
Other revolving and installment		51,794		45,363
Total consumer		845,293		681,747
Total loans	$	2,318,231	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $2.9 million at September 30, 2022 and $33.6 million at December 31, 2021.

Total loans included net deferred loan fees and costs of $851 thousand and $231 thousand at September 30, 2022 and December 31, 2021, respectively. Deferred loan fees on PPP loans were $22 thousand at September 30, 2022 and $881 thousand at December 31, 2021. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $8.0 million as of September 30, 2022.

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status. 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 September 30, 2022 and December 31, 2021:

	September 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	$	561,865	$	311	$	1,000	$	1,479	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		818,439		—		—		629		819,068
Total commercial		1,469,519		311		1,000		2,108		1,472,938
Consumer
Residential real estate first mortgage		645,896		1,923		—		1,999		649,818
Residential real estate junior lien		143,491		2		—		188		143,681
Other revolving and installment		51,601		185		—		8		51,794
Total consumer		840,988		2,110		—		2,195		845,293
Total loans	$	2,310,507	$	2,421	$	1,000	$	4,303	$	2,318,231

	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 September 30, 2022 and December 31, 2021:

	September 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	559,647	$	—	$	5,008	$	—	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		809,910		3,840		5,318		—		819,068
Total commercial		1,458,772		3,840		10,326		—		1,472,938
Consumer
Residential real estate first mortgage		647,517		64		2,237		—		649,818
Residential real estate junior lien		143,006		—		675		—		143,681
Other revolving and installment		51,786		—		8		—		51,794
Total consumer		842,309		64		2,920		—		845,293
Total loans	$	2,301,081	$	3,904	$	13,246	$	—	$	2,318,231

	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 nine months ended September 30, 2022 and 2021:

	Three months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,333	$	(845)	$	(672)	$	105	$	8,921
Real estate construction		878		378		—		76		1,332
Commercial real estate		10,834		1,335		—		101		12,270
Total commercial		22,045		868		(672)		282		22,523
Consumer
Residential real estate first mortgage		6,175		(584)		—		—		5,591
Residential real estate junior lien		1,467		(109)		—		7		1,365
Other revolving and installment		634		(75)		(75)		53		537
Total consumer		8,276		(768)		(75)		60		7,493
Unallocated		1,052		(100)		—		—		952
Total	$	31,373	$	—	$	(747)	$	342	$	30,968

	Nine months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	1,011	$	(1,336)	$	321	$	8,921
Real estate construction		783		473		—		76		1,332
Commercial real estate		12,376		(229)		—		123		12,270
Total commercial		22,084		1,255		(1,336)		520		22,523
Consumer
Residential real estate first mortgage		6,532		(941)		—		—		5,591
Residential real estate junior lien		1,295		(151)		—		221		1,365
Other revolving and installment		481		65		(130)		121		537
Total consumer		8,308		(1,027)		(130)		342		7,493
Unallocated		1,180		(228)		—		—		952
Total	$	31,572	$	—	$	(1,466)	$	862	$	30,968

	Three months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,620	$	(825)	$	(747)	$	1,052	$	9,100
Real estate construction		587		92		—		—		679
Commercial real estate		12,937		(413)		—		—		12,524
Total commercial		23,144		(1,146)		(747)		1,052		22,303
Consumer
Residential real estate first mortgage		6,176		625		—		—		6,801
Residential real estate junior lien		1,401		6		—		16		1,423
Other revolving and installment		574		(32)		(46)		27		523
Total consumer		8,151		599		(46)		43		8,747
Unallocated		2,469		(1,453)		—		—		1,016
Total	$	33,764	$	(2,000)	$	(793)	$	1,095	$	32,066

	Nine months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(1,378)	$	(1,224)	$	1,497	$	9,100
Real estate construction		658		21		—		—		679
Commercial real estate		14,105		(1,049)		(536)		4		12,524
Total commercial		24,968		(2,406)		(1,760)		1,501		22,303
Consumer
Residential real estate first mortgage		5,774		1,027		—		—		6,801
Residential real estate junior lien		1,373		(63)		—		113		1,423
Other revolving and installment		753		(196)		(139)		105		523
Total consumer		7,900		768		(139)		218		8,747
Unallocated		1,378		(362)		—		—		1,016
Total	$	34,246	$	(2,000)	$	(1,899)	$	1,719	$	32,066

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

	September 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	$	2,083	$	562,572	$	564,655	$	264	$	8,657	$	8,921
Real estate construction		—		89,215		89,215		—		1,332		1,332
Commercial real estate		800		818,268		819,068		—		12,270		12,270
Total commercial		2,883		1,470,055		1,472,938		264		22,259		22,523
Consumer
Residential real estate first mortgage		1,998		647,820		649,818		—		5,591		5,591
Residential real estate junior lien		188		143,493		143,681		—		1,365		1,365
Other revolving and installment		8		51,786		51,794		—		537		537
Total consumer		2,194		843,099		845,293		—		7,493		7,493
Unallocated		—		—		—		—		—		952
Total loans	$	5,077	$	2,313,154	$	2,318,231	$	264	$	29,752	$	30,968

	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 table below summarizes key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses:

	September 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	$	712	$	744	$	264	$	445	$	464	$	278
Commercial real estate		—		—		—		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans with a valuation allowance		712		744		264		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		1,371		1,476		—		1,386		1,575		—
Commercial real estate		800		855		—		629		684		—
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans without a valuation allowance		4,365		4,627		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		2,083		2,220		264		1,831		2,039		278
Commercial real estate		800		855		—		809		887		5
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans	$	5,077	$	5,371	$	264	$	2,752	$	3,070	$	283

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

	Three months ended September 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	$	722	$	3	$	719	$	3
Commercial real estate		—		—		779		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		8		—
Other revolving and installment		—		—		4		—
Total impaired loans with a valuation allowance		722		3		1,510		5
Impaired loans without a valuation allowance
Commercial and industrial		1,371		7		2,016		5
Commercial real estate		801		2		3,793		—
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		166		—
Other revolving and installment		8		—		—		—
Total impaired loans without a valuation allowance		4,401		9		6,096		5
Total impaired loans
Commercial and industrial		2,093		10		2,735		8
Commercial real estate		801		2		4,572		2
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		174		—
Other revolving and installment		8		—		4		—
Total impaired loans	$	5,123	$	12	$	7,606	$	10

	Nine Months Ended September 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	$	833	$	8	$	818	$	10
Commercial real estate		—		—		782		6
Residential real estate junior lien		—		—		11		—
Other revolving and installment		—		—		3		—
Total impaired loans with a valuation allowance		833		8		1,614		16
Impaired loans without a valuation allowance
Commercial and industrial		1,291		21		2,061		15
Commercial real estate		805		5		3,980		—
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		190		—
Other revolving and installment		11		—		—		—
Total impaired loans without a valuation allowance		4,408		26		6,345		15
Total impaired loans
Commercial and industrial		2,124		29		2,879		25
Commercial real estate		805		5		4,762		6
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		201		—
Other revolving and installment		11		—		3		—
Total impaired loans	$	5,241	$	34	$	7,959	$	31

Loans with a carrying value of $1.4 billion as of September 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 third quarter of 2022 and 2021, there were no loans modified as a TDR.

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

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2022

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

NOTE 6 Goodwill and Other Intangible Assets

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	34,854	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	46,060	$	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 September 30, 2022.

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

	September 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	$	(24,920)	$	16,503	$	42,057	$	(21,807)	$	20,250
Core deposit intangible assets		7,592		(316)		7,276		—		—		—
Total intangible assets	$	49,015	$	(25,236)	$	23,779	$	42,057	$	(21,807)	$	20,250

Amortization of intangible assets was $1.3 million and $1.1 million for the three months ended September 30, 2022, and 2021, respectively. Amortization of intangible assets was $3.4 million and $3.3 million for the nine months ended September 30, 2022, and 2021, respectively.

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Loan Servicing

9 Months Ended

Sep. 30, 2022

Loan Servicing

Loan Servicing

NOTE 7 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 $372.5 million and $345.8 million as of September 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 nine months ended September 30, 2022 and 2021:

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	2,064	$	1,964	$	1,880	$	1,987
Additions		604		84		622		195
Amortization		(110)		(195)		(367)		(580)
(Impairment)/Recovery		222		(77)		645		174
Balance, end of period	$	2,780	$	1,776	$	2,780	$	1,776

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

	September 30,			December 31,
(dollars in thousands)	2022			2021
Fair value of servicing rights	$	2,780		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		6.7	%		14.2	%
Discount rate		10.0	%		9.5	%

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Leases

9 Months Ended

Sep. 30, 2022

Leases

Leases

NOTE 8 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:

		September 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	$	3,481	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		—		87
Total lease right-of-use assets		$	3,481	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,802	$	4,275
Finance lease liabilities	Long-term debt		21		203
Total lease liabilities		$	3,823	$	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.

	September 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.4		3.4
Finance leases	—		0.8
Weighted-average discount rate
Operating leases	2.7	%	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 nine months ended September 30, 2022 and 2021:

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	425	$	429	$	1,250	$	1,417
Variable lease cost		187		192		550		583
Short-term lease cost		188		89		276		172
Finance lease cost
Interest on lease liabilities		2		7		7		22
Amortization of right-of-use assets		29		29		87		87
Sublease income		(63)		(51)		(179)		(163)
Net lease cost	$	768	$	695	$	1,991	$	2,118
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	400	$	411	$	1,184	$	1,372
Right-of-use assets obtained in exchange for new operating lease liabilities		1,065		—		1,452		—

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

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
September 30, 2023	$	21	$	1,582
September 30, 2024		—		827
September 30, 2025		—		541
September 30, 2026		—		402
September 30, 2027		—		309
Thereafter		—		441
Total future minimum lease payments	$	21	$	4,102
Amounts representing interest		—		(300)
Total operating lease liabilities	$	21	$	3,802

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Deposits

9 Months Ended

Sep. 30, 2022

Deposits.

Deposits

NOTE 9 Deposits

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	905,228	$	938,840
Interest-bearing
Interest-bearing demand		653,216		714,669
Savings accounts		101,820		96,825
Money market savings		1,079,520		937,305
Time deposits		222,027		232,912
Total interest-bearing		2,056,583		1,981,711
Total deposits	$	2,961,811	$	2,920,551

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Short-Term Borrowings

9 Months Ended

Sep. 30, 2022

Short-Term Borrowings

Short-Term Borrowings

NOTE 10 Short-Term Borrowings

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

	September 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	53,830	$	—
FHLB Short-term advances		200,000		—
Total	$	253,830	$	—

The following table presents information related to short-term borrowings for the three and nine months ended September 30, 2022 and 2021:

	Three months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		84,149			10
Maximum month-end balance		78,015			—
Weighted-average rate
During period		3.71	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		168,750			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

	Nine months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		55,527			3
Maximum month-end balance		117,350			—
Weighted-average rate
During period		2.47	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		60,073			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

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Long-Term Debt

9 Months Ended

Sep. 30, 2022

Long-Term Debt.

Long-Term Debt

NOTE 11 Long-Term Debt

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

	September 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		3,526	Three-month LIBOR + 3.10%	6.74	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,289	Three-month LIBOR + 1.80%	5.09	%	9/15/2036	9/15/2011
Finance lease liability		2,700		21	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,836

	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

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Financial Instruments with Off-Balance Sheet Risk

9 Months Ended

Sep. 30, 2022

Financial Instruments with Off-Balance Sheet Risk

Financial Instruments with Off-Balance Sheet Risk

NOTE 12 Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The 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 September 30, 2022 and December 31, 2021, respectively, was as follows:

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	785,745	$	668,115
Standby letters of credit		11,414		10,529
Total	$	797,159	$	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 no letters of credit outstanding with the FHLB as of September 30, 2022. The Company had a $150 thousand letter of credit outstanding with the FHLB as of December 31, 2021. With the Bank of North Dakota, the Company had no letters of credit outstanding as of September 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 $224.0 million and $229.7 million as of September 30, 2022 and December 31, 2021, respectively.

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Share-Based Compensation

9 Months Ended

Sep. 30, 2022

Share-Based Compensation

Share-Based Compensation

NOTE 13 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 September 30, 2022, 922,010 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $351 thousand and $545 thousand for the three months ended September 30, 2022 and 2021, respectively. The compensation expense relating to awards under these plans was $1.4 million and $1.8 million for the nine months ended September 30, 2022 and 2021, respectively.

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

	Nine months ended September 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	102,265		25.44	66,664		26.63
Vested	(107,370)		19.19	(101,108)		20.46
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	245,121	$	23.57	290,586	$	20.77

As of September 30, 2022, there was $3.0 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 2.8 years.

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Income Taxes

9 Months Ended

Sep. 30, 2022

Income Taxes

Income Taxes

NOTE 14 Income Taxes

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

	Three months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,637	21.0	%	$	3,598	21.0	%
Tax effect of:
Tax exempt income		(133)	(1.1)	%		(134)	(0.8)	%
State income taxes, net of federal benefits		406	3.2	%		756	4.4	%
Nondeductible items and other		30	0.2	%		(156)	(0.9)	%
Applicable income taxes	$	2,940	23.3	%	$	4,064	23.7	%

	Nine months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	7,906	21.0	%	$	10,993	21.0	%
Tax effect of:
Tax exempt income		(372)	(1.0)	%		(434)	(0.8)	%
State income taxes, net of federal benefits		1,515	4.0	%		2,407	4.6	%
Nondeductible items and other		(496)	(1.3)	%		(596)	(1.1)	%
Applicable income taxes	$	8,553	22.7	%	$	12,370	23.7	%

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

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Tax Credit Investments

9 Months Ended

Sep. 30, 2022

Tax Credit Investments.

Tax Credit Investments

NOTE 15 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 September 30, 2022 and December 31, 2021:

		September 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	$	15,559	$	7,906	$	6,999
Total		$	17,906	$	15,559	$	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 nine months ended three and nine months ended September 30, 2022 and 2021:

	Three months ended September 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	$	109	$	(146)	$	—	$	—
Total	$	109	$	(146)	$	—	$	—

(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.

	Nine months ended September 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	$	220	$	(303)	$	—	$	—
Total	$	220	$	(303)	$	—	$	—

(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.

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Segment Reporting

9 Months Ended

Sep. 30, 2022

Segment Reporting

Segment Reporting

NOTE 16 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 September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	28,512	$	—	$	—	$	393	$	(589)	$	28,316
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,723		16,597		4,852		3,782		56		27,010
Noninterest expense		19,990		6,130		1,576		4,483		10,588		42,767
Net income before taxes	$	10,245	$	10,467	$	3,276	$	(308)	$	(11,121)	$	12,559

	Nine months ended September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	72,816	$	—	$	—	$	1,660	$	(1,711)	$	72,765
Provision for loan losses		—		—		—		—		—		—
Noninterest income		4,602		50,536		15,726		14,751		91		85,706
Noninterest expense		48,303		21,160		5,062		14,712		31,585		120,822
Net income before taxes	$	29,115	$	29,376	$	10,664	$	1,699	$	(33,205)	$	37,649

	Three months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,168	$	—	$	—	$	499	$	(535)	$	21,132
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		1,576		18,031		5,295		11,116		22		36,040
Noninterest expense		11,403		10,320		2,219		8,464		9,635		42,041
Net income before taxes	$	13,341	$	7,711	$	3,076	$	3,151	$	(10,148)	$	17,131

	Nine months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	64,236	$	—	$	—	$	1,435	$	(1,361)	$	64,310
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		4,564		53,157		15,419		40,535		(6)		113,669
Noninterest expense		33,401		30,420		6,682		29,978		27,152		127,633
Net income before taxes	$	37,399	$	22,737	$	8,737	$	11,992	$	(28,519)	$	52,346

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, and COBRA recordkeeping and administration services. 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.

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Earnings Per Share

9 Months Ended

Sep. 30, 2022

Earnings Per Share

Earnings Per Share

NOTE 17 Earnings Per Share

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

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,619	$	13,067	$	29,096	$	39,976
Dividends and undistributed earnings allocated to participating securities		90		196		312		628
Net income available to common shareholders	$	9,529	$	12,871	$	28,784	$	39,348
Weighted-average common shares outstanding for basic earnings per share		19,987		17,205		18,186		17,182
Dilutive effect of stock-based awards		243		294		245		306
Weighted-average common shares outstanding for diluted earnings per share		20,230		17,499		18,431		17,488
Earnings per common share:
Basic earnings per common share	$	0.48	$	0.75	$	1.58	$	2.29
Diluted earnings per common share	$	0.47	$	0.74	$	1.56	$	2.26

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Derivative Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments

Derivative Instruments

NOTE 18 Derivative Instruments

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

The Company did not have any derivatives designated as hedging instruments as of September 30, 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 September 30, 2022 and December 31, 2021:

		September 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	$	6,608	$	43,784	$	1,366	$	44,826
Interest rate lock commitments	Other assets		—		—		1,507		52,316
Forward loan sales commitments	Other assets		10		333		490		13,418
TBA mortgage backed securities	Other assets		1,352		53,000		34		97,000
Total asset derivatives		$	7,970	$	97,117	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	6,608	$	43,784	$	1,368	$	44,826
Interest rate lock commitments	Accrued expenses and other liabilities		134		22,636		—		—
Total liability derivatives		$	6,742	$	66,420	$	1,368	$	44,826

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

		Three months ended				Nine months ended
	Consolidated Statements	September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	1	$	2	$	2
Interest rate lock commitments	Mortgage banking		(1,724)		(1,793)		(1,871)		(7,298)
Forward loan sales commitments	Mortgage banking		(532)		(499)		(480)		(2,061)
TBA mortgage backed securities	Mortgage banking		1,317		(690)		5,066		4,865
Total gain/(loss) from derivative instruments		$	(938)	$	(2,981)	$	2,717	$	(4,492)

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 zero at September 30, 2022 and $15 thousand at 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.

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Regulatory Matters

9 Months Ended

Sep. 30, 2022

Regulatory Matters

Regulatory Matters

NOTE 19 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 September 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 September 30, 2022 and December 31, 2021:

	September 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	$	381,019	13.63	%	$	125,839	4.50	%	$	N/A	N/A
Bank		363,457	13.01	%		125,754	4.50	%		181,645	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		389,834	13.94	%		167,785	6.00	%		N/A	N/A
Bank		363,457	13.01	%		167,672	6.00	%		223,563	8.00	%
Total capital to risk weighted assets
Consolidated		470,802	16.84	%		223,713	8.00	%		N/A	N/A
Bank		394,425	14.11	%		223,562	8.00	%		279,454	10.00	%
Tier 1 capital to average assets
Consolidated		389,834	10.82	%		144,131	4.00	%		N/A	N/A
Bank		363,457	11.12	%		130,728	4.00	%		163,410	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 September 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 September 30, 2022, and December 31, 2021, the Company was in compliance with the aforementioned guidelines.

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Stock Repurchase Program

9 Months Ended

Sep. 30, 2022

Stock Repurchase Program

Stock Repurchase Program

NOTE 20 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 nine months ended September 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.

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Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2022

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

NOTE 21 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 September 30, 2022 and December 31, 2021:

	September 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,833	$	—	$	3,833
Mortgage backed securities
Residential agency		—		596,989		—		596,989
Commercial		—		65,283		—		65,283
Asset backed securities		—		35		—		35
Corporate bonds		—		62,970		—		62,970
Total available-for-sale investment securities	$	—	$	729,110	$	—	$	729,110
Other assets
Derivatives	$	—	$	7,970	$	—	$	7,970
Other liabilities
Derivatives	$	—	$	6,742	$	—	$	6,742

	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 September 30, 2022 and December 31, 2021 consisted of the following:

	September 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	26,129	$	—	$	26,129	$	—
Impaired loans		—		4,813		4,813		264
Foreclosed assets		—		904		904		—
Servicing rights		—		2,780		2,780		—

	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 September 30, 2022, and December 31, 2021, were as follows:

			September 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	4,813	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		904	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,780	100-136		112
		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 September 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:

	September 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	54,167	$	54,167	$	—	$	—	$	54,167
Investment securities held-to-maturity		326,410		—		273,306		—		273,306
Loans, net		2,287,263		—		—		2,256,887		2,256,887
Accrued interest receivable		11,256		11,256		—		—		11,256
Bank-owned life insurance		33,777		—		33,777		—		33,777
Financial Liabilities
Noninterest-bearing deposits	$	905,228	$	—	$	905,228	$	—	$	905,228
Interest-bearing deposits		1,834,556		—		1,834,556		—		1,834,556
Time deposits		222,027		—		—		217,974		217,974
Short-term borrowings		253,830		253,830		—		—		253,830
Long-term debt		58,836		—		55,480		—		55,480
Accrued interest payable		1,405		1,405		—		—		1,405

	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

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 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.

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.

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Business Combinations (Tables)

9 Months Ended

Sep. 30, 2022

Business Combinations

Schedule of purchased assets and assumed liabilities recorded at their respective acquisition date estimate fair values

	As recorded by		Preliminary Fair Value		As recorded by
(dollars in thousands)	Metro Phoenix Bank		Adjustments		the Company
Assets
Cash and cash equivalents	$	101,819	$	(45)	$	101,774
Fed funds sold		18,936		—		18,936
Core deposit intangible		—		7,592		7,592
Loans		273,843		(3,440)		270,403
Accrued interest receivable		1,091		—		1,091
Other assets		3,342		517		3,859
Total assets		399,031		4,624		403,655
Liabilities
Deposits		354,529		(844)		353,685
Other liabilities		673		—		673
Total liabilities		355,202		(844)		354,358
Excess assets over liabilities	$	43,829	$	5,468		49,297
Stock issued for MPB						64,019
Total goodwill recorded					$	14,722

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2022

Investment Securities

Schedule of amortized cost of investment securities to estimated fair values

	September 30, 2022
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,826	$	26	$	(19)	$	3,833
Mortgage backed securities
Residential agency		721,170		6		(124,187)		596,989
Commercial		72,584		—		(7,301)		65,283
Asset backed securities		35		—		—		35
Corporate bonds		69,528		—		(6,558)		62,970
Total available-for-sale investment securities		867,143		32		(138,065)		729,110
Held-to-maturity
Obligations of state and political agencies		138,664		—		(18,836)		119,828
Mortgage backed securities
Residential agency		187,746		—		(34,268)		153,478
Total held-to-maturity investment securities		326,410		—		(53,104)		273,306
Total investment securities	$	1,193,553	$	32	$	(191,169)	$	1,002,416

	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

	September 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	$	(19)	$	529	$	—	$	—	$	(19)	$	529
Mortgage backed securities
Residential agency		(60,983)		325,016		(63,204)		271,347		(124,187)		596,363
Commercial		(5,425)		54,666		(1,876)		10,618		(7,301)		65,284
Asset backed securities		—		22		—		2		—		24
Corporate bonds		(6,558)		62,945		—		—		(6,558)		62,945
Total available-for-sale investment securities		(72,985)		443,178		(65,080)		281,967		(138,065)		725,145
Held-to-maturity
Obligations of state and political agencies		(16,300)		94,902		(2,536)		24,926		(18,836)		119,828
Mortgage backed securities
Residential agency		—		—		(34,268)		153,478		(34,268)		153,478
Total held-to-maturity investment securities		(16,300)		94,902		(36,804)		178,404		(53,104)		273,306
Total investment securities	$	(89,285)	$	538,080	$	(101,884)	$	460,371	$	(191,169)	$	998,451

	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	$	6,808	$	6,742	$	11	$	11
Due after one year through five years		40,702		37,102		21,421		19,957
Due after five years through ten years		69,679		58,557		89,695		81,580
Due after 10 years		209,221		170,905		756,016		627,562
Total investment securities	$	326,410	$	273,306	$	867,143	$	729,110

Schedule of proceeds from the sale of available for sale securities

	Three months ended				Nine months ended
	September 30,				September 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				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds	$	101	$	348	$	827	$	1,763
Realized gains		—		11		—		11
Realized losses		—		—		—		—

Schedule of federal home loan bank

	September 30,		December 31,
(dollars in thousands)	2022		2021
Federal Reserve	$	4,616	$	2,675
FHLB		15,554		3,806

XML

Loans and Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2022

Loans and Allowance for Loan Losses

Schedule of total loans outstanding by portfolio segment

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commercial
Commercial and industrial (1)	$	564,655	$	436,761
Real estate construction		89,215		40,619
Commercial real estate		819,068		598,893
Total commercial		1,472,938		1,076,273
Consumer
Residential real estate first mortgage		649,818		510,716
Residential real estate junior lien		143,681		125,668
Other revolving and installment		51,794		45,363
Total consumer		845,293		681,747
Total loans	$	2,318,231	$	1,758,020

(1) Included Paycheck Protection Program, or PPP, loans of $2.9 million at September 30, 2022 and $33.6 million at December 31, 2021.

Schedule of past due aging analysis of the loan portfolio

	September 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	$	561,865	$	311	$	1,000	$	1,479	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		818,439		—		—		629		819,068
Total commercial		1,469,519		311		1,000		2,108		1,472,938
Consumer
Residential real estate first mortgage		645,896		1,923		—		1,999		649,818
Residential real estate junior lien		143,491		2		—		188		143,681
Other revolving and installment		51,601		185		—		8		51,794
Total consumer		840,988		2,110		—		2,195		845,293
Total loans	$	2,310,507	$	2,421	$	1,000	$	4,303	$	2,318,231

	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

	September 30, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	559,647	$	—	$	5,008	$	—	$	564,655
Real estate construction		89,215		—		—		—		89,215
Commercial real estate		809,910		3,840		5,318		—		819,068
Total commercial		1,458,772		3,840		10,326		—		1,472,938
Consumer
Residential real estate first mortgage		647,517		64		2,237		—		649,818
Residential real estate junior lien		143,006		—		675		—		143,681
Other revolving and installment		51,786		—		8		—		51,794
Total consumer		842,309		64		2,920		—		845,293
Total loans	$	2,301,081	$	3,904	$	13,246	$	—	$	2,318,231

	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 September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,333	$	(845)	$	(672)	$	105	$	8,921
Real estate construction		878		378		—		76		1,332
Commercial real estate		10,834		1,335		—		101		12,270
Total commercial		22,045		868		(672)		282		22,523
Consumer
Residential real estate first mortgage		6,175		(584)		—		—		5,591
Residential real estate junior lien		1,467		(109)		—		7		1,365
Other revolving and installment		634		(75)		(75)		53		537
Total consumer		8,276		(768)		(75)		60		7,493
Unallocated		1,052		(100)		—		—		952
Total	$	31,373	$	—	$	(747)	$	342	$	30,968

	Nine months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	1,011	$	(1,336)	$	321	$	8,921
Real estate construction		783		473		—		76		1,332
Commercial real estate		12,376		(229)		—		123		12,270
Total commercial		22,084		1,255		(1,336)		520		22,523
Consumer
Residential real estate first mortgage		6,532		(941)		—		—		5,591
Residential real estate junior lien		1,295		(151)		—		221		1,365
Other revolving and installment		481		65		(130)		121		537
Total consumer		8,308		(1,027)		(130)		342		7,493
Unallocated		1,180		(228)		—		—		952
Total	$	31,572	$	—	$	(1,466)	$	862	$	30,968

	Three months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,620	$	(825)	$	(747)	$	1,052	$	9,100
Real estate construction		587		92		—		—		679
Commercial real estate		12,937		(413)		—		—		12,524
Total commercial		23,144		(1,146)		(747)		1,052		22,303
Consumer
Residential real estate first mortgage		6,176		625		—		—		6,801
Residential real estate junior lien		1,401		6		—		16		1,423
Other revolving and installment		574		(32)		(46)		27		523
Total consumer		8,151		599		(46)		43		8,747
Unallocated		2,469		(1,453)		—		—		1,016
Total	$	33,764	$	(2,000)	$	(793)	$	1,095	$	32,066

	Nine months ended September 30, 2021
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,205	$	(1,378)	$	(1,224)	$	1,497	$	9,100
Real estate construction		658		21		—		—		679
Commercial real estate		14,105		(1,049)		(536)		4		12,524
Total commercial		24,968		(2,406)		(1,760)		1,501		22,303
Consumer
Residential real estate first mortgage		5,774		1,027		—		—		6,801
Residential real estate junior lien		1,373		(63)		—		113		1,423
Other revolving and installment		753		(196)		(139)		105		523
Total consumer		7,900		768		(139)		218		8,747
Unallocated		1,378		(362)		—		—		1,016
Total	$	34,246	$	(2,000)	$	(1,899)	$	1,719	$	32,066

Schedule of loans distributed by portfolio segment and impairment methodology

	September 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	$	2,083	$	562,572	$	564,655	$	264	$	8,657	$	8,921
Real estate construction		—		89,215		89,215		—		1,332		1,332
Commercial real estate		800		818,268		819,068		—		12,270		12,270
Total commercial		2,883		1,470,055		1,472,938		264		22,259		22,523
Consumer
Residential real estate first mortgage		1,998		647,820		649,818		—		5,591		5,591
Residential real estate junior lien		188		143,493		143,681		—		1,365		1,365
Other revolving and installment		8		51,786		51,794		—		537		537
Total consumer		2,194		843,099		845,293		—		7,493		7,493
Unallocated		—		—		—		—		—		952
Total loans	$	5,077	$	2,313,154	$	2,318,231	$	264	$	29,752	$	30,968

	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

	September 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	$	712	$	744	$	264	$	445	$	464	$	278
Commercial real estate		—		—		—		180		203		5
Residential real estate junior lien		—		—		—		—		—		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans with a valuation allowance		712		744		264		625		667		283
Impaired loans without a valuation allowance
Commercial and industrial		1,371		1,476		—		1,386		1,575		—
Commercial real estate		800		855		—		629		684		—
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans without a valuation allowance		4,365		4,627		—		2,127		2,403		—
Total impaired loans
Commercial and industrial		2,083		2,220		264		1,831		2,039		278
Commercial real estate		800		855		—		809		887		5
Residential real estate first mortgage		1,998		2,077		—		21		24		—
Residential real estate junior lien		188		211		—		91		120		—
Other revolving and installment		8		8		—		—		—		—
Total impaired loans	$	5,077	$	5,371	$	264	$	2,752	$	3,070	$	283

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

	Three months ended September 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	$	722	$	3	$	719	$	3
Commercial real estate		—		—		779		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		8		—
Other revolving and installment		—		—		4		—
Total impaired loans with a valuation allowance		722		3		1,510		5
Impaired loans without a valuation allowance
Commercial and industrial		1,371		7		2,016		5
Commercial real estate		801		2		3,793		—
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		166		—
Other revolving and installment		8		—		—		—
Total impaired loans without a valuation allowance		4,401		9		6,096		5
Total impaired loans
Commercial and industrial		2,093		10		2,735		8
Commercial real estate		801		2		4,572		2
Residential real estate first mortgage		2,032		—		121		—
Residential real estate junior lien		189		—		174		—
Other revolving and installment		8		—		4		—
Total impaired loans	$	5,123	$	12	$	7,606	$	10

	Nine Months Ended September 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	$	833	$	8	$	818	$	10
Commercial real estate		—		—		782		6
Residential real estate junior lien		—		—		11		—
Other revolving and installment		—		—		3		—
Total impaired loans with a valuation allowance		833		8		1,614		16
Impaired loans without a valuation allowance
Commercial and industrial		1,291		21		2,061		15
Commercial real estate		805		5		3,980		—
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		190		—
Other revolving and installment		11		—		—		—
Total impaired loans without a valuation allowance		4,408		26		6,345		15
Total impaired loans
Commercial and industrial		2,124		29		2,879		25
Commercial real estate		805		5		4,762		6
Residential real estate first mortgage		2,108		—		114		—
Residential real estate junior lien		193		—		201		—
Other revolving and installment		11		—		3		—
Total impaired loans	$	5,241	$	34	$	7,959	$	31

XML

Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2022

Goodwill and Other Intangible Assets

Schedule of goodwill by segment

	September 30,		December 31,
(dollars in thousands)	2022		2021
Banking	$	34,854	$	20,131
Retirement and benefit services		11,206		11,359
Total goodwill	$	46,060	$	31,490

Schedule of identifiable intangible assets

	September 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	$	(24,920)	$	16,503	$	42,057	$	(21,807)	$	20,250
Core deposit intangible assets		7,592		(316)		7,276		—		—		—
Total intangible assets	$	49,015	$	(25,236)	$	23,779	$	42,057	$	(21,807)	$	20,250

XML

Loan Servicing (Tables)

9 Months Ended

Sep. 30, 2022

Loan Servicing

Summary of activity related to loan servicing

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	2,064	$	1,964	$	1,880	$	1,987
Additions		604		84		622		195
Amortization		(110)		(195)		(367)		(580)
(Impairment)/Recovery		222		(77)		645		174
Balance, end of period	$	2,780	$	1,776	$	2,780	$	1,776

Summary of key economic assumptions

	September 30,			December 31,
(dollars in thousands)	2022			2021
Fair value of servicing rights	$	2,780		$	1,880
Weighted-average remaining term, years		20.6			20.3
Prepayment speeds		6.7	%		14.2	%
Discount rate		10.0	%		9.5	%

XML

Leases (Tables)

9 Months Ended

Sep. 30, 2022

Leases

Schedule of right-of-use assets and lease liabilities

		September 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	$	3,481	$	3,727
Finance lease right-of-use assets	Land, premises and equipment, net		—		87
Total lease right-of-use assets		$	3,481	$	3,814
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	3,802	$	4,275
Finance lease liabilities	Long-term debt		21		203
Total lease liabilities		$	3,823	$	4,478

Schedule of weighted average remaining lease term and average discount rate

	September 30,		December 31,
	2022		2021
Weighted-average remaining lease term, years
Operating leases	4.4		3.4
Finance leases	—		0.8
Weighted-average discount rate
Operating leases	2.7	%	2.5	%
Finance leases	7.8	%	7.8	%

Schedule of lease costs and other lease information

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Lease costs
Operating lease cost	$	425	$	429	$	1,250	$	1,417
Variable lease cost		187		192		550		583
Short-term lease cost		188		89		276		172
Finance lease cost
Interest on lease liabilities		2		7		7		22
Amortization of right-of-use assets		29		29		87		87
Sublease income		(63)		(51)		(179)		(163)
Net lease cost	$	768	$	695	$	1,991	$	2,118
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	400	$	411	$	1,184	$	1,372
Right-of-use assets obtained in exchange for new operating lease liabilities		1,065		—		1,452		—

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 September 30, 2022 were as follows:

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
September 30, 2023	$	21	$	1,582
September 30, 2024		—		827
September 30, 2025		—		541
September 30, 2026		—		402
September 30, 2027		—		309
Thereafter		—		441
Total future minimum lease payments	$	21	$	4,102
Amounts representing interest		—		(300)
Total operating lease liabilities	$	21	$	3,802

Schedule of future minimum payments for operating leases

	Finance		Operating
(dollars in thousands)	Leases		Leases
Twelve months ended
September 30, 2023	$	21	$	1,582
September 30, 2024		—		827
September 30, 2025		—		541
September 30, 2026		—		402
September 30, 2027		—		309
Thereafter		—		441
Total future minimum lease payments	$	21	$	4,102
Amounts representing interest		—		(300)
Total operating lease liabilities	$	21	$	3,802

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Deposits (Tables)

9 Months Ended

Sep. 30, 2022

Deposits.

Schedule of components of deposits

	September 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest-bearing	$	905,228	$	938,840
Interest-bearing
Interest-bearing demand		653,216		714,669
Savings accounts		101,820		96,825
Money market savings		1,079,520		937,305
Time deposits		222,027		232,912
Total interest-bearing		2,056,583		1,981,711
Total deposits	$	2,961,811	$	2,920,551

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Short-Term Borrowings (Tables)

9 Months Ended

Sep. 30, 2022

Short-Term Borrowings

Schedule of short-term borrowings

	September 30,		December 31,
(dollars in thousands)	2022		2021
Fed funds purchased	$	53,830	$	—
FHLB Short-term advances		200,000		—
Total	$	253,830	$	—

Schedule of additional information related to short term borrowings

	Three months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		84,149			10
Maximum month-end balance		78,015			—
Weighted-average rate
During period		3.71	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		168,750			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

	Nine months ended
	September 30,
(dollars in thousands)	2022			2021
Fed funds purchased
Balance as of end of period	$	53,830		$	—
Average daily balance		55,527			3
Maximum month-end balance		117,350			—
Weighted-average rate
During period		2.47	%		—	%
End of period		3.25	%		—	%
FHLB Short-term advances
Balance as of end of period	$	200,000		$	—
Average daily balance		60,073			—
Maximum month-end balance		200,000			—
Weighted-average rate
During period		1.71	%		—	%
End of period		3.20	%		—	%

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Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2022

Long-Term Debt.

Schedule of long-term debt

	September 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		3,526	Three-month LIBOR + 3.10%	6.74	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,289	Three-month LIBOR + 1.80%	5.09	%	9/15/2036	9/15/2011
Finance lease liability		2,700		21	Fixed	7.81	%	10/31/2022	N/A
Total long-term debt	$	63,010	$	58,836

	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

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Financial Instruments with Off-Balance Sheet Risk (Tables)

9 Months Ended

Sep. 30, 2022

Financial Instruments with Off-Balance Sheet Risk

Schedule of financial instruments whose contract amount represents credit risk

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit	$	785,745	$	668,115
Standby letters of credit		11,414		10,529
Total	$	797,159	$	678,644

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Share-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2022

Share-Based Compensation

Schedule of stock plan activity

	Nine months ended September 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	102,265		25.44	66,664		26.63
Vested	(107,370)		19.19	(101,108)		20.46
Forfeited or cancelled	(10,624)		23.71	—		—
Outstanding at end of period	245,121	$	23.57	290,586	$	20.77

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2022

Income Taxes

Schedule of components of income tax expense

	Three months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	2,637	21.0	%	$	3,598	21.0	%
Tax effect of:
Tax exempt income		(133)	(1.1)	%		(134)	(0.8)	%
State income taxes, net of federal benefits		406	3.2	%		756	4.4	%
Nondeductible items and other		30	0.2	%		(156)	(0.9)	%
Applicable income taxes	$	2,940	23.3	%	$	4,064	23.7	%

	Nine months ended September 30,
	2022				2021
			Percent of				Percent of
(dollars in thousands)	Amount		Pretax Income		Amount		Pretax Income
Taxes at statutory federal income tax rate	$	7,906	21.0	%	$	10,993	21.0	%
Tax effect of:
Tax exempt income		(372)	(1.0)	%		(434)	(0.8)	%
State income taxes, net of federal benefits		1,515	4.0	%		2,407	4.6	%
Nondeductible items and other		(496)	(1.3)	%		(596)	(1.1)	%
Applicable income taxes	$	8,553	22.7	%	$	12,370	23.7	%

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Tax Credit Investments (Tables)

9 Months Ended

Sep. 30, 2022

Tax Credit Investments.

Schedule of tax credits

		September 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	$	15,559	$	7,906	$	6,999
Total		$	17,906	$	15,559	$	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 nine months ended three and nine months ended September 30, 2022 and 2021:

	Three months ended September 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	$	109	$	(146)	$	—	$	—
Total	$	109	$	(146)	$	—	$	—

(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.

	Nine months ended September 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	$	220	$	(303)	$	—	$	—
Total	$	220	$	(303)	$	—	$	—

(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.

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Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2022

Segment Reporting

Schedule of key metrics related to segments

	Three months ended September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	28,512	$	—	$	—	$	393	$	(589)	$	28,316
Provision for loan losses		—		—		—		—		—		—
Noninterest income		1,723		16,597		4,852		3,782		56		27,010
Noninterest expense		19,990		6,130		1,576		4,483		10,588		42,767
Net income before taxes	$	10,245	$	10,467	$	3,276	$	(308)	$	(11,121)	$	12,559

	Nine months ended September 30, 2022
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	72,816	$	—	$	—	$	1,660	$	(1,711)	$	72,765
Provision for loan losses		—		—		—		—		—		—
Noninterest income		4,602		50,536		15,726		14,751		91		85,706
Noninterest expense		48,303		21,160		5,062		14,712		31,585		120,822
Net income before taxes	$	29,115	$	29,376	$	10,664	$	1,699	$	(33,205)	$	37,649

	Three months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	21,168	$	—	$	—	$	499	$	(535)	$	21,132
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		1,576		18,031		5,295		11,116		22		36,040
Noninterest expense		11,403		10,320		2,219		8,464		9,635		42,041
Net income before taxes	$	13,341	$	7,711	$	3,076	$	3,151	$	(10,148)	$	17,131

	Nine months ended September 30, 2021
			Retirement and		Wealth				Corporate
(dollars in thousands)	Banking		Benefit Services		Management		Mortgage		Administration		Consolidated
Net interest income	$	64,236	$	—	$	—	$	1,435	$	(1,361)	$	64,310
Provision for loan losses		(2,000)		—		—		—		—		(2,000)
Noninterest income		4,564		53,157		15,419		40,535		(6)		113,669
Noninterest expense		33,401		30,420		6,682		29,978		27,152		127,633
Net income before taxes	$	37,399	$	22,737	$	8,737	$	11,992	$	(28,519)	$	52,346

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2022

Earnings Per Share

Schedule of basic and diluted earnings per share

	Three months ended				Nine months ended
	September 30,				September 30,
(dollars and shares in thousands, except per share data)	2022		2021		2022		2021
Net income	$	9,619	$	13,067	$	29,096	$	39,976
Dividends and undistributed earnings allocated to participating securities		90		196		312		628
Net income available to common shareholders	$	9,529	$	12,871	$	28,784	$	39,348
Weighted-average common shares outstanding for basic earnings per share		19,987		17,205		18,186		17,182
Dilutive effect of stock-based awards		243		294		245		306
Weighted-average common shares outstanding for diluted earnings per share		20,230		17,499		18,431		17,488
Earnings per common share:
Basic earnings per common share	$	0.48	$	0.75	$	1.58	$	2.29
Diluted earnings per common share	$	0.47	$	0.74	$	1.56	$	2.26

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Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2022

Derivative Instruments

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

		September 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	$	6,608	$	43,784	$	1,366	$	44,826
Interest rate lock commitments	Other assets		—		—		1,507		52,316
Forward loan sales commitments	Other assets		10		333		490		13,418
TBA mortgage backed securities	Other assets		1,352		53,000		34		97,000
Total asset derivatives		$	7,970	$	97,117	$	3,397	$	207,560
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	6,608	$	43,784	$	1,368	$	44,826
Interest rate lock commitments	Accrued expenses and other liabilities		134		22,636		—		—
Total liability derivatives		$	6,742	$	66,420	$	1,368	$	44,826

Schedule of gain (loss) recognized on derivatives instruments

		Three months ended				Nine months ended
	Consolidated Statements	September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	of Income Location	2022		2021		2022		2021
Interest rate swaps	Other noninterest income	$	1	$	1	$	2	$	2
Interest rate lock commitments	Mortgage banking		(1,724)		(1,793)		(1,871)		(7,298)
Forward loan sales commitments	Mortgage banking		(532)		(499)		(480)		(2,061)
TBA mortgage backed securities	Mortgage banking		1,317		(690)		5,066		4,865
Total gain/(loss) from derivative instruments		$	(938)	$	(2,981)	$	2,717	$	(4,492)

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Regulatory Matters (Tables)

9 Months Ended

Sep. 30, 2022

Regulatory Matters

Schedule of Bank's actual capital amounts and ratios

	September 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	$	381,019	13.63	%	$	125,839	4.50	%	$	N/A	N/A
Bank		363,457	13.01	%		125,754	4.50	%		181,645	6.50	%
Tier 1 capital to risk weighted assets										.
Consolidated		389,834	13.94	%		167,785	6.00	%		N/A	N/A
Bank		363,457	13.01	%		167,672	6.00	%		223,563	8.00	%
Total capital to risk weighted assets
Consolidated		470,802	16.84	%		223,713	8.00	%		N/A	N/A
Bank		394,425	14.11	%		223,562	8.00	%		279,454	10.00	%
Tier 1 capital to average assets
Consolidated		389,834	10.82	%		144,131	4.00	%		N/A	N/A
Bank		363,457	11.12	%		130,728	4.00	%		163,410	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	%

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Fair Value of Assets and Liabilities (Tables)

9 Months Ended

Sep. 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

	September 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale
U.S. treasury and government agencies	$	—	$	3,833	$	—	$	3,833
Mortgage backed securities
Residential agency		—		596,989		—		596,989
Commercial		—		65,283		—		65,283
Asset backed securities		—		35		—		35
Corporate bonds		—		62,970		—		62,970
Total available-for-sale investment securities	$	—	$	729,110	$	—	$	729,110
Other assets
Derivatives	$	—	$	7,970	$	—	$	7,970
Other liabilities
Derivatives	$	—	$	6,742	$	—	$	6,742

	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

	September 30, 2022
(dollars in thousands)	Level 2		Level 3		Total		Impairment
Loans held for sale	$	26,129	$	—	$	26,129	$	—
Impaired loans		—		4,813		4,813		264
Foreclosed assets		—		904		904		—
Servicing rights		—		2,780		2,780		—

	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

			September 30, 2022
(dollars in thousands)							Weighted
Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range		Average
Impaired loans	Appraisal value	Property specific adjustment	$	4,813	N/A		N/A
Foreclosed assets	Appraisal value	Property specific adjustment		904	N/A		N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,780	100-136		112
		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

	September 30, 2022
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	54,167	$	54,167	$	—	$	—	$	54,167
Investment securities held-to-maturity		326,410		—		273,306		—		273,306
Loans, net		2,287,263		—		—		2,256,887		2,256,887
Accrued interest receivable		11,256		11,256		—		—		11,256
Bank-owned life insurance		33,777		—		33,777		—		33,777
Financial Liabilities
Noninterest-bearing deposits	$	905,228	$	—	$	905,228	$	—	$	905,228
Interest-bearing deposits		1,834,556		—		1,834,556		—		1,834,556
Time deposits		222,027		—		—		217,974		217,974
Short-term borrowings		253,830		253,830		—		—		253,830
Long-term debt		58,836		—		55,480		—		55,480
Accrued interest payable		1,405		1,405		—		—		1,405

	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

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Significant Accounting Policies (Details)	9 Months Ended
	Sep. 30, 2022 segment
Significant Accounting Policies
Number of operating segments	4

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Business Combinations (Details) - USD ($) $ in Thousands	Jul. 01, 2022	Sep. 30, 2022	Jun. 30, 2022	Dec. 31, 2021
Business Combinations
Goodwill		$ 46,060		$ 31,490
MPB
Business Combinations
Total purchase price	$ 64,000
Customer deposit intangible	7,592
Goodwill	14,722
Loans	270,403		$ 273,843
Deposits	$ 353,685		$ 354,529

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Business Combinations - Purchased assets and assumed liabilities at fair value (Details) - USD ($) $ in Thousands	Jul. 01, 2022	Sep. 30, 2022	Jun. 30, 2022	Dec. 31, 2021
Liabilities
Goodwill		$ 46,060		$ 31,490
MPB
Assets
Cash and cash equivalents acquired	$ 101,774		$ 101,819
Fed funds sold	18,936		18,936
Customer deposit intangible	7,592
Loans	270,403		273,843
Accrued interest receivable	1,091		1,091
Other assets	3,859		3,342
Total assets	403,655		399,031
Liabilities
Deposits	353,685		354,529
Other liabilities	673		673
Total liabilities	354,358		355,202
Excess assets over liabilities	49,297		$ 43,829
Stock issued for MPB	64,019
Goodwill	14,722
Assets
Cash and cash equivalents	(45)
Core deposit intangible	7,592
Loans	(3,440)
Other assets	517
Total assets	4,624
Liabilities
Deposits	(844)
Total liabilities	(844)
Excess assets over liabilities	$ 5,468

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Investment Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Investment securities available-for-sale
Amortized Cost	$ 867,143	$ 860,258
Unrealized Gains	32	5,362
Unrealized Losses	(138,065)	(11,971)
Fair Value	729,110	853,649
Amortized Cost	326,410	352,061
Unrealized Gains		1,110
Unrealized Losses	(53,104)	(3,494)
Fair Value	273,306	349,677
Amortized Cost	1,193,553	1,212,319
Unrealized Gains	32	6,472
Unrealized Losses	(191,169)	(15,465)
Fair Value	1,002,416	1,203,326
U. S. Treasury and agencies
Investment securities available-for-sale
Amortized Cost	3,826	5,028
Unrealized Gains	26	75
Unrealized Losses	(19)
Fair Value	3,833	5,103
Mortgage backed securities - Residential agency
Investment securities available-for-sale
Amortized Cost	721,170	717,781
Unrealized Gains	6	1,213
Unrealized Losses	(124,187)	(11,837)
Fair Value	596,989	707,157
Amortized Cost	187,746	207,518
Unrealized Losses	(34,268)	(3,145)
Fair Value	153,478	204,373
Mortgage backed securities - Commercial
Investment securities available-for-sale
Amortized Cost	72,584	88,362
Unrealized Gains		2,674
Unrealized Losses	(7,301)	(123)
Fair Value	65,283	90,913
Asset backed securities
Investment securities available-for-sale
Amortized Cost	35	52
Unrealized Gains		2
Fair Value	35	54
Corporate bonds
Investment securities available-for-sale
Amortized Cost	69,528	49,035
Unrealized Gains		1,398
Unrealized Losses	(6,558)	(11)
Fair Value	62,970	50,422
Obligations of state and political agencies.
Investment securities available-for-sale
Amortized Cost	138,664	144,543
Unrealized Gains		1,110
Unrealized Losses	(18,836)	(349)
Fair Value	$ 119,828	$ 145,304

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Investment Securities - Gross unrealized losses (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Investment securities available-for-sale
Unrealized losses less than 12 months	$ (72,985)	$ (10,290)
Fair value less than 12 months	443,178	578,270
Unrealized losses over 12 months	(65,080)	(1,681)
Fair value over 12 months	281,967	55,084
Total Unrealized losses	(138,065)	(11,971)
Total Fair value	725,145	633,354
Held-to-maturity investment securities
Unrealized losses less than 12 months	(16,300)	(3,494)
Fair value less than 12 months	94,902	257,583
Unrealized losses over 12 months	(36,804)
Fair value over 12 months	178,404
Total Unrealized losses	(53,104)	(3,494)
Total Fair value	273,306	257,583
Unrealized losses less than 12 months	(89,285)	(13,784)
Fair value less than 12 months	538,080	835,853
Unrealized losses over 12 months	(101,884)	(1,681)
Fair value over 12 months	460,371	55,084
Total Unrealized losses	(191,169)	(15,465)
Total Fair value	998,451	890,937
U. S. Treasury and agencies
Investment securities available-for-sale
Unrealized losses less than 12 months	(19)
Fair value less than 12 months	529
Total Unrealized losses	(19)
Total Fair value	529
Mortgage backed securities - Residential agency
Investment securities available-for-sale
Unrealized losses less than 12 months	(60,983)	(10,156)
Fair value less than 12 months	325,016	554,811
Unrealized losses over 12 months	(63,204)	(1,681)
Fair value over 12 months	271,347	55,082
Total Unrealized losses	(124,187)	(11,837)
Total Fair value	596,363	609,893
Held-to-maturity investment securities
Unrealized losses less than 12 months		(3,145)
Fair value less than 12 months		204,373
Unrealized losses over 12 months	(34,268)
Fair value over 12 months	153,478
Total Unrealized losses	(34,268)	(3,145)
Total Fair value	153,478	204,373
Mortgage backed securities - Commercial
Investment securities available-for-sale
Unrealized losses less than 12 months	(5,425)	(123)
Fair value less than 12 months	54,666	17,470
Unrealized losses over 12 months	(1,876)
Fair value over 12 months	10,618
Total Unrealized losses	(7,301)	(123)
Total Fair value	65,284	17,470
Asset backed securities
Investment securities available-for-sale
Fair value less than 12 months	22
Fair value over 12 months	2	2
Total Fair value	24	2
Corporate bonds
Investment securities available-for-sale
Unrealized losses less than 12 months	(6,558)	(11)
Fair value less than 12 months	62,945	5,989
Total Unrealized losses	(6,558)	(11)
Total Fair value	62,945	5,989
Obligations of state and political agencies.
Held-to-maturity investment securities
Unrealized losses less than 12 months	(16,300)	(349)
Fair value less than 12 months	94,902	53,210
Unrealized losses over 12 months	(2,536)
Fair value over 12 months	24,926
Total Unrealized losses	(18,836)	(349)
Total Fair value	$ 119,828	$ 53,210

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Investment Securities - Amortized cost and estimated fair value (Details) $ in Thousands	Sep. 30, 2022 USD ($)
Carrying Value
Due within one year or less	$ 6,808
Due after one year through five years	40,702
Due after five years through ten years	69,679
Due after 10 years	209,221
Total investment securities	326,410
Estimated Fair Value
Due within one year or less	6,742
Due after one year through five years	37,102
Due after five years through ten years	58,557
Due after 10 years	170,905
Total investment securities	273,306
Amortized Cost
Due within one year or less	11
Due after one year through five years	21,421
Due after five years through ten years	89,695
Due after 10 years	756,016
Total investment securities available-for-sale	867,143
Fair Value
Due within one year or less	11
Due after one year through five years	19,957
Due after five years through ten years	81,580
Due after 10 years	627,562
Total investment securities available-for-sale	$ 729,110

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Investment Securities - Pledged (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Investment Securities
Investment securities with carrying value	$ 264.1	$ 192.8

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Investment Securities - Proceeds from sale of available for sale securities (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2021 USD ($)
Investment Securities
Proceeds	$ 13,189
Realized gains	$ 114

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Investment Securities - Proceeds from the call of held-to-maturity investment securities (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Investment Securities
Proceeds	$ 101	$ 348	$ 827	$ 1,763
Realized gains		$ 11		$ 11

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Investment Securities - Carrying value (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Investment Securities
Federal Reserve	$ 4,616	$ 2,675
FHLB	$ 15,554	$ 3,806

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Investment Securities - Visa Class B Restricted Shares (Details) - Visa $ in Thousands	9 Months Ended
	Sep. 30, 2022 USD ($) shares	Dec. 31, 2021 USD ($) shares
Common Class A
Securities
Investment shares owned, if converted	11,119	11,119
Common Class B
Securities
Conversion ratio	1.6059
Investment shares owned	6,924	6,924
Cost basis | $	$ 0	$ 0

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Loans and Allowance for Loan Losses - Loans outstanding by portfolio segment (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Loans and Allowance for Loan Losses
Total loans	$ 2,318,231	$ 1,758,020
Deferred loan fees and costs	851	231
MPB
Loans and Allowance for Loan Losses
Unearned discount	8,000
Commercial
Loans and Allowance for Loan Losses
Total loans	1,472,938	1,076,273
Consumer
Loans and Allowance for Loan Losses
Total loans	845,293	681,747
Commercial and industrial | Commercial
Loans and Allowance for Loan Losses
Total loans	564,655	436,761
Commercial and industrial | Commercial | PPP Loans
Loans and Allowance for Loan Losses
Total loans	2,900	33,600
Deferred loan fees and costs	22	881
Real estate construction | Commercial
Loans and Allowance for Loan Losses
Total loans	89,215	40,619
Residential | Consumer | Real estate first mortgage
Loans and Allowance for Loan Losses
Total loans	649,818	510,716
Residential | Consumer | Real estate junior lien
Loans and Allowance for Loan Losses
Total loans	143,681	125,668
Commercial real estate | Commercial
Loans and Allowance for Loan Losses
Total loans	819,068	598,893
Other revolving and installment | Consumer
Loans and Allowance for Loan Losses
Total loans	$ 51,794	$ 45,363

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Loans and Allowance for Loan Losses - Past due aging analysis (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Past due aging analysis of loans
Nonaccrual	$ 4,303	$ 2,076
Loans and Leases Receivable, Gross, Total	2,318,231	1,758,020
30 - 89 Days Past Due
Past due aging analysis of loans
Loans	2,421	2,226
90 Days or More Past Due
Past due aging analysis of loans
Loans	1,000	121
Current
Past due aging analysis of loans
Loans	2,310,507	1,753,597
Commercial
Past due aging analysis of loans
Nonaccrual	2,108	1,966
Loans and Leases Receivable, Gross, Total	1,472,938	1,076,273
Commercial | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	311	168
Commercial | 90 Days or More Past Due
Past due aging analysis of loans
Loans	1,000	121
Commercial | Current
Past due aging analysis of loans
Loans	1,469,519	1,074,018
Commercial | Commercial and industrial
Past due aging analysis of loans
Nonaccrual	1,479	1,337
Loans and Leases Receivable, Gross, Total	564,655	436,761
Commercial | Commercial and industrial | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	311	168
Commercial | Commercial and industrial | 90 Days or More Past Due
Past due aging analysis of loans
Loans	1,000	121
Commercial | Commercial and industrial | Current
Past due aging analysis of loans
Loans	561,865	435,135
Commercial | Real estate construction
Past due aging analysis of loans
Loans and Leases Receivable, Gross, Total	89,215	40,619
Commercial | Real estate construction | Current
Past due aging analysis of loans
Loans	89,215	40,619
Commercial | Commercial real estate
Past due aging analysis of loans
Nonaccrual	629	629
Loans and Leases Receivable, Gross, Total	819,068	598,893
Commercial | Commercial real estate | Current
Past due aging analysis of loans
Loans	818,439	598,264
Consumer
Past due aging analysis of loans
Nonaccrual	2,195	110
Loans and Leases Receivable, Gross, Total	845,293	681,747
Consumer | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	2,110	2,058
Consumer | Current
Past due aging analysis of loans
Loans	840,988	679,579
Consumer | Residential | Real estate first mortgage
Past due aging analysis of loans
Nonaccrual	1,999	21
Loans and Leases Receivable, Gross, Total	649,818	510,716
Consumer | Residential | Real estate first mortgage | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	1,923	1,770
Consumer | Residential | Real estate first mortgage | Current
Past due aging analysis of loans
Loans	645,896	508,925
Consumer | Residential | Real estate junior lien
Past due aging analysis of loans
Nonaccrual	188	89
Loans and Leases Receivable, Gross, Total	143,681	125,668
Consumer | Residential | Real estate junior lien | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	2	167
Consumer | Residential | Real estate junior lien | Current
Past due aging analysis of loans
Loans	143,491	125,412
Consumer | Other revolving and installment
Past due aging analysis of loans
Nonaccrual	8
Loans and Leases Receivable, Gross, Total	51,794	45,363
Consumer | Other revolving and installment | 30 - 89 Days Past Due
Past due aging analysis of loans
Loans	185	121
Consumer | Other revolving and installment | Current
Past due aging analysis of loans
Loans	$ 51,601	$ 45,242

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Loans and Allowance for Loan Losses - Loans by risk category (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Loans outstanding by loan portfolio segment and risk category
Loans	$ 2,318,231	$ 1,758,020
Pass
Loans outstanding by loan portfolio segment and risk category
Loans	2,301,081	1,736,781
Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	3,904	480
Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	13,246	20,759
Commercial
Loans outstanding by loan portfolio segment and risk category
Loans	1,472,938	1,076,273
Commercial | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	1,458,772	1,056,145
Commercial | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	3,840	480
Commercial | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	10,326	19,648
Commercial | Commercial and industrial
Loans outstanding by loan portfolio segment and risk category
Loans	564,655	436,761
Commercial | Commercial and industrial | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	559,647	430,235
Commercial | Commercial and industrial | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans		480
Commercial | Commercial and industrial | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	5,008	6,046
Commercial | Real estate construction
Loans outstanding by loan portfolio segment and risk category
Loans	89,215	40,619
Commercial | Real estate construction | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	89,215	40,619
Commercial | Commercial real estate
Loans outstanding by loan portfolio segment and risk category
Loans	819,068	598,893
Commercial | Commercial real estate | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	809,910	585,291
Commercial | Commercial real estate | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	3,840
Commercial | Commercial real estate | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	5,318	13,602
Consumer
Loans outstanding by loan portfolio segment and risk category
Loans	845,293	681,747
Consumer | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	842,309	680,636
Consumer | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	64
Consumer | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	2,920	1,111
Consumer | Residential | Real estate first mortgage
Loans outstanding by loan portfolio segment and risk category
Loans	649,818	510,716
Consumer | Residential | Real estate first mortgage | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	647,517	510,375
Consumer | Residential | Real estate first mortgage | Special Mention
Loans outstanding by loan portfolio segment and risk category
Loans	64
Consumer | Residential | Real estate first mortgage | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	2,237	341
Consumer | Residential | Real estate junior lien
Loans outstanding by loan portfolio segment and risk category
Loans	143,681	125,668
Consumer | Residential | Real estate junior lien | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	143,006	124,898
Consumer | Residential | Real estate junior lien | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	675	770
Consumer | Other revolving and installment
Loans outstanding by loan portfolio segment and risk category
Loans	51,794	45,363
Consumer | Other revolving and installment | Pass
Loans outstanding by loan portfolio segment and risk category
Loans	51,786	$ 45,363
Consumer | Other revolving and installment | Substandard
Loans outstanding by loan portfolio segment and risk category
Loans	$ 8

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Loans and Allowance for Loan Losses - Changes in allowance (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Changes in the allowance
Beginning Balance	$ 31,373	$ 33,764	$ 31,572	$ 34,246
Provision for loan losses		(2,000)		(2,000)
Loan charge-offs	(747)	(793)	(1,466)	(1,899)
Loan recoveries	342	1,095	862	1,719
Ending Balance	30,968	32,066	30,968	32,066
Unallocated
Changes in the allowance
Beginning Balance	1,052	2,469	1,180	1,378
Provision for loan losses	(100)	(1,453)	(228)	(362)
Ending Balance	952	1,016	952	1,016
Commercial
Changes in the allowance
Beginning Balance	22,045	23,144	22,084	24,968
Provision for loan losses	868	(1,146)	1,255	(2,406)
Loan charge-offs	(672)	(747)	(1,336)	(1,760)
Loan recoveries	282	1,052	520	1,501
Ending Balance	22,523	22,303	22,523	22,303
Commercial | Commercial and industrial
Changes in the allowance
Beginning Balance	10,333	9,620	8,925	10,205
Provision for loan losses	(845)	(825)	1,011	(1,378)
Loan charge-offs	(672)	(747)	(1,336)	(1,224)
Loan recoveries	105	1,052	321	1,497
Ending Balance	8,921	9,100	8,921	9,100
Commercial | Real estate construction
Changes in the allowance
Beginning Balance	878	587	783	658
Provision for loan losses	378	92	473	21
Loan recoveries	76		76
Ending Balance	1,332	679	1,332	679
Commercial | Commercial real estate
Changes in the allowance
Beginning Balance	10,834	12,937	12,376	14,105
Provision for loan losses	1,335	(413)	(229)	(1,049)
Loan charge-offs				(536)
Loan recoveries	101		123	4
Ending Balance	12,270	12,524	12,270	12,524
Consumer
Changes in the allowance
Beginning Balance	8,276	8,151	8,308	7,900
Provision for loan losses	(768)	599	(1,027)	768
Loan charge-offs	(75)	(46)	(130)	(139)
Loan recoveries	60	43	342	218
Ending Balance	7,493	8,747	7,493	8,747
Consumer | Residential | Real estate first mortgage
Changes in the allowance
Beginning Balance	6,175	6,176	6,532	5,774
Provision for loan losses	(584)	625	(941)	1,027
Ending Balance	5,591	6,801	5,591	6,801
Consumer | Residential | Real estate junior lien
Changes in the allowance
Beginning Balance	1,467	1,401	1,295	1,373
Provision for loan losses	(109)	6	(151)	(63)
Loan recoveries	7	16	221	113
Ending Balance	1,365	1,423	1,365	1,423
Consumer | Other revolving and installment
Changes in the allowance
Beginning Balance	634	574	481	753
Provision for loan losses	(75)	(32)	65	(196)
Loan charge-offs	(75)	(46)	(130)	(139)
Loan recoveries	53	27	121	105
Ending Balance	$ 537	$ 523	$ 537	$ 523

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Loans and Allowance for Loan Losses - Components of loans and associated allowance (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Jun. 30, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Dec. 31, 2020
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	$ 5,077		$ 2,752
Recorded Investment, Collectively Evaluated	2,313,154		1,755,268
Loans and Leases Receivable, Gross, Total	2,318,231		1,758,020
Allowance for Loan Losses, Individually Evaluated	264		283
Allowance for Loan Losses, Collectively Evaluated	29,752		30,109
Loans and Leases Receivable, Allowance, Total	30,968	$ 31,373	31,572	$ 32,066	$ 33,764	$ 34,246
Unallocated
Loans and Allowance for Loan Losses
Loans and Leases Receivable, Allowance, Total	952	1,052	1,180	1,016	2,469	1,378
Commercial
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	2,883		2,640
Recorded Investment, Collectively Evaluated	1,470,055		1,073,633
Loans and Leases Receivable, Gross, Total	1,472,938		1,076,273
Allowance for Loan Losses, Individually Evaluated	264		283
Allowance for Loan Losses, Collectively Evaluated	22,259		21,801
Loans and Leases Receivable, Allowance, Total	22,523	22,045	22,084	22,303	23,144	24,968
Commercial | Commercial and industrial
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	2,083		1,831
Recorded Investment, Collectively Evaluated	562,572		434,930
Loans and Leases Receivable, Gross, Total	564,655		436,761
Allowance for Loan Losses, Individually Evaluated	264		278
Allowance for Loan Losses, Collectively Evaluated	8,657		8,647
Loans and Leases Receivable, Allowance, Total	8,921	10,333	8,925	9,100	9,620	10,205
Commercial | Real estate construction
Loans and Allowance for Loan Losses
Recorded Investment, Collectively Evaluated	89,215		40,619
Loans and Leases Receivable, Gross, Total	89,215		40,619
Allowance for Loan Losses, Collectively Evaluated	1,332		783
Loans and Leases Receivable, Allowance, Total	1,332	878	783	679	587	658
Commercial | Commercial real estate
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	800		809
Recorded Investment, Collectively Evaluated	818,268		598,084
Loans and Leases Receivable, Gross, Total	819,068		598,893
Allowance for Loan Losses, Individually Evaluated			5
Allowance for Loan Losses, Collectively Evaluated	12,270		12,371
Loans and Leases Receivable, Allowance, Total	12,270	10,834	12,376	12,524	12,937	14,105
Consumer
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	2,194		112
Recorded Investment, Collectively Evaluated	843,099		681,635
Loans and Leases Receivable, Gross, Total	845,293		681,747
Allowance for Loan Losses, Collectively Evaluated	7,493		8,308
Loans and Leases Receivable, Allowance, Total	7,493	8,276	8,308	8,747	8,151	7,900
Consumer | Residential | Real estate first mortgage
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	1,998		21
Recorded Investment, Collectively Evaluated	647,820		510,695
Loans and Leases Receivable, Gross, Total	649,818		510,716
Allowance for Loan Losses, Collectively Evaluated	5,591		6,532
Loans and Leases Receivable, Allowance, Total	5,591	6,175	6,532	6,801	6,176	5,774
Consumer | Residential | Real estate junior lien
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	188		91
Recorded Investment, Collectively Evaluated	143,493		125,577
Loans and Leases Receivable, Gross, Total	143,681		125,668
Allowance for Loan Losses, Collectively Evaluated	1,365		1,295
Loans and Leases Receivable, Allowance, Total	1,365	1,467	1,295	1,423	1,401	1,373
Consumer | Other revolving and installment
Loans and Allowance for Loan Losses
Recorded Investment, Individually Evaluated	8
Recorded Investment, Collectively Evaluated	51,786		45,363
Loans and Leases Receivable, Gross, Total	51,794		45,363
Allowance for Loan Losses, Collectively Evaluated	537		481
Loans and Leases Receivable, Allowance, Total	$ 537	$ 634	$ 481	$ 523	$ 574	$ 753

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Loans and Allowance for Loan Losses - Impaired loans (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Impaired
Loans with related allowance for loan losses, Recorded investment	$ 712	$ 625
Loans with related allowance for loan losses, unpaid principal	744	667
Loans with related allowance for loan losses, Related Allowance	264	283
Loans with no related allowance for loan losses, Recorded investment	4,365	2,127
Loans with no related allowance for loan losses, unpaid principal	4,627	2,403
Recorded investment	5,077	2,752
Unpaid principal balance	5,371	3,070
Commercial | Commercial and industrial
Impaired
Loans with related allowance for loan losses, Recorded investment	712	445
Loans with related allowance for loan losses, unpaid principal	744	464
Loans with related allowance for loan losses, Related Allowance	264	278
Loans with no related allowance for loan losses, Recorded investment	1,371	1,386
Loans with no related allowance for loan losses, unpaid principal	1,476	1,575
Recorded investment	2,083	1,831
Unpaid principal balance	2,220	2,039
Commercial | Commercial real estate
Impaired
Loans with related allowance for loan losses, Recorded investment		180
Loans with related allowance for loan losses, unpaid principal		203
Loans with related allowance for loan losses, Related Allowance		5
Loans with no related allowance for loan losses, Recorded investment	800	629
Loans with no related allowance for loan losses, unpaid principal	855	684
Recorded investment	800	809
Unpaid principal balance	855	887
Consumer | Residential | Real estate first mortgage
Impaired
Loans with no related allowance for loan losses, Recorded investment	1,998	21
Loans with no related allowance for loan losses, unpaid principal	2,077	24
Recorded investment	1,998	21
Unpaid principal balance	2,077	24
Consumer | Residential | Real estate junior lien
Impaired
Loans with no related allowance for loan losses, Recorded investment	188	91
Loans with no related allowance for loan losses, unpaid principal	211	120
Recorded investment	188	91
Unpaid principal balance	211	$ 120
Consumer | Other revolving and installment
Impaired
Loans with no related allowance for loan losses, Recorded investment	8
Loans with no related allowance for loan losses, unpaid principal	8
Recorded investment	8
Unpaid principal balance	$ 8

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Loans and Allowance for Loan Losses - Interest Income (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Impaired
Loans with related allowance for loan losses, Average recorded investment	$ 722	$ 1,510	$ 833	$ 1,614
Loans with no related allowance for loan losses, Average recorded investment	4,401	6,096	4,408	6,345
Loans, Average recorded investment	5,123	7,606	5,241	7,959
Loans with related allowance for loan losses, Interest income	3	5	8	16
Loans with no related allowance for loan losses, Interest income	9	5	26	15
Loans, Interest income	12	10	34	31
Commercial | Commercial and industrial
Impaired
Loans with related allowance for loan losses, Average recorded investment	722	719	833	818
Loans with no related allowance for loan losses, Average recorded investment	1,371	2,016	1,291	2,061
Loans, Average recorded investment	2,093	2,735	2,124	2,879
Loans with related allowance for loan losses, Interest income	3	3	8	10
Loans with no related allowance for loan losses, Interest income	7	5	21	15
Loans, Interest income	10	8	29	25
Commercial | Commercial real estate
Impaired
Loans with related allowance for loan losses, Average recorded investment		779		782
Loans with no related allowance for loan losses, Average recorded investment	801	3,793	805	3,980
Loans, Average recorded investment	801	4,572	805	4,762
Loans with related allowance for loan losses, Interest income		2		6
Loans with no related allowance for loan losses, Interest income	2		5
Loans, Interest income	2	2	5	6
Consumer | Residential | Real estate first mortgage
Impaired
Loans with no related allowance for loan losses, Average recorded investment	2,032	121	2,108	114
Loans, Average recorded investment	2,032	121	2,108	114
Consumer | Residential | Real estate junior lien
Impaired
Loans with related allowance for loan losses, Average recorded investment		8		11
Loans with no related allowance for loan losses, Average recorded investment	189	166	193	190
Loans, Average recorded investment	189	174	193	201
Consumer | Other revolving and installment
Impaired
Loans with related allowance for loan losses, Average recorded investment		4		3
Loans with no related allowance for loan losses, Average recorded investment	8		11
Loans, Average recorded investment	$ 8	$ 4	$ 11	$ 3

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Loans and Allowance for Loan Losses - Pledged (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Loans and Allowance for Loan Losses
Total loans	$ 2,318,231	$ 1,758,020
Pledged
Loans and Allowance for Loan Losses
Total loans	$ 1,400,000	$ 1,200,000

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Loans and Allowance for Loan Losses - Troubled Debt Restructurings (Details) - loan	3 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
Loans and Allowance for Loan Losses
Number of loans modified as a troubled debt restructuring	0	0

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Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Goodwill
Total goodwill	$ 46,060	$ 31,490
Banking
Goodwill
Total goodwill	34,854	20,131
Retirement and Benefit Services
Goodwill
Total goodwill	$ 11,206	$ 11,359

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Goodwill and Other Intangible Assets - Amortization (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Goodwill
Gross Carrying Amount	$ 49,015		$ 49,015		$ 42,057
Accumulated Amortization	(25,236)		(25,236)		(21,807)
Total	23,779		23,779		20,250
Intangible amortization expense	1,324	$ 1,088	3,430	$ 3,327
Goodwill, Impairment Loss			0
Identifiable customer intangibles
Goodwill
Gross Carrying Amount	41,423		41,423		42,057
Accumulated Amortization	(24,920)		(24,920)		(21,807)
Total	16,503		16,503		$ 20,250
Core deposit intangible assets
Goodwill
Gross Carrying Amount	7,592		7,592
Accumulated Amortization	(316)		(316)
Total	$ 7,276		$ 7,276

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Loan Servicing (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Loan Servicing
Loans serviced for others	$ 372,500		$ 372,500		$ 345,800
Servicing Asset at Fair Value, Amount
Balance, beginning of period	2,064	$ 1,964	1,880	$ 1,987
Additions	604	84	622	195
Amortization	(110)	(195)	(367)	(580)
(Impairment)/Recovery	222	(77)	645	174
Balance, end of period	$ 2,780	$ 1,776	$ 2,780	$ 1,776

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Loan Servicing - Key economic assumptions (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021
Loan Servicing
Fair value of servicing rights	$ 2,780	$ 1,880
Weighted-average remaining term, years	20 years 7 months 6 days	20 years 3 months 18 days
Prepayment speeds	6.70%	14.20%
Discount rate	10.00%	9.50%

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Leases - Lease right-of-use assets and liabilities (Details) $ in Thousands	Sep. 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	$ 3,481	$ 3,727
Finance lease right-of-use assets		$ 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	$ 3,481	$ 3,814
Operating lease liabilities	3,802	4,275
Finance lease liabilities	$ 21	$ 203
Finance lease liabilities, balance sheet location	Long-term debt	Long-term debt
Lease liabilities	$ 3,823	$ 4,478

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Leases - Weighted-average remaining lease term and average discount rate (Details) - item	9 Months Ended
	Sep. 30, 2022	Dec. 31, 2021
Leases
Minimum number of options to renew lease agreements	1
Weighted-average remaining lease term, Operating leases	4 years 4 months 24 days	3 years 4 months 24 days
Weighted-average remaining lease term, Finance leases		9 months 18 days
Weighted-average discount rate, Operating leases	2.70%	2.50%
Weighted-average discount rate, Finance leases	7.80%	7.80%

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Leases - Lease costs and other lease information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Lease costs
Operating lease cost	$ 425	$ 429	$ 1,250	$ 1,417
Variable lease cost	187	192	550	583
Short-term lease cost	188	89	276	172
Finance lease cost
Interest on lease liabilities	2	7	7	22
Amortization of right-of-use assets	29	29	87	87
Sublease Income	(63)	(51)	(179)	(163)
Net lease cost	768	695	1,991	2,118
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	400	$ 411	1,184	$ 1,372
Right-of-use assets obtained in exchange for new operating lease liabilities	$ 1,065		$ 1,452

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Leases - Future minimum payments for finance and operating leases (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Finance leases
September 30, 2023	$ 21
Total future minimum lease payments	21
Total finance lease liabilities	21	$ 203
Operating leases
June 30, 2023	1,582
June 30, 2024	827
June 30, 2025	541
June 30, 2026	402
June 30, 2027	309
Thereafter	441
Total future minimum lease payments	4,102
Amounts representing interest	(300)
Total operating lease liabilities	$ 3,802	$ 4,275

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Deposits (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Deposits.
Noninterest-bearing	$ 905,228	$ 938,840
Interest-bearing demand	653,216	714,669
Savings accounts	101,820	96,825
Money market savings	1,079,520	937,305
Time deposits	222,027	232,912
Total interest-bearing	2,056,583	1,981,711
Total deposits	$ 2,961,811	$ 2,920,551

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Short-Term Borrowings (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Short-term borrowings
Balance as of end of period	$ 253,830		$ 253,830
Federal Funds Purchased
Short-term borrowings
Balance as of end of period	53,830		53,830
Average daily balance	84,149	$ 10	55,527	$ 3
Maximum month-end balance	$ 78,015		$ 117,350
During period	3.71%		2.47%
End of period	3.25%		3.25%
FHLB Short-term advances
Short-term borrowings
Balance as of end of period	$ 200,000		$ 200,000
Average daily balance	168,750		60,073
Maximum month-end balance	$ 200,000		$ 200,000
During period	1.71%		1.71%
End of period	3.20%		3.20%

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Long-Term Debt (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021
Long-Term Debt
Face Value	$ 63,010	$ 63,010
Carrying Amount	58,836	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	$ 3,526	$ 3,492
Period End Interest Rate	6.74%	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	$ 5,289	$ 5,238
Period End Interest Rate	5.09%	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	$ 21	$ 203
Fixed interest rate	7.81%	7.81%

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Financial Instruments with Off-Balance Sheet Risk (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	$ 797,159	$ 678,644
Commitments to extend credit
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	785,745	668,115
Standby letters of credit
Financial Instruments with Off Balance Sheet Risk
Amount of credit risk	$ 11,414	$ 10,529

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Financial Instruments with Off Balance Sheet Risk - Narrative (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Letter of credit with FHLB
Financial Instruments with Off Balance Sheet Risk
Outstanding letters of credit	$ 0	$ 150
Letter of credit with Bank of North Dakota
Financial Instruments with Off Balance Sheet Risk
Outstanding letters of credit	0	0
Collateralized loans	$ 224,000	$ 229,700

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Share-Based Compensation - Plan Information (Details) - 2019 Equity Incentive Plan - shares	9 Months Ended
	Sep. 30, 2022	May 06, 2019
Share-Based Compensation
Awards authorized		1,100,000
Restricted stock awards
Share-Based Compensation
Awards issued	922,010

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Share-Based Compensation - Activity in stock (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Additional disclosures
Compensation expense	$ 351	$ 545	$ 1,400	$ 1,800
Restricted Stock Awards and Units.
Restricted Stock Awards and Units
Outstanding at beginning of period			260,850	325,030
Granted			102,265	66,664
Vested			(107,370)	(101,108)
Forfeited or cancelled			(10,624)
Outstanding at end of period	245,121	290,586	245,121	290,586
Weighted Average Grant Date Fair Value
Outstanding at beginning of period			$ 21.04	$ 19.48
Granted			25.44	26.63
Vested			19.19	20.46
Forfeited or cancelled			23.71
Outstanding at end of period	$ 23.57	$ 20.77	$ 23.57	$ 20.77
Additional disclosures
Unrecognized compensation cost	$ 3,000		$ 3,000
Weighted average period			2 years 9 months 18 days

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Income Taxes - Reconciliation between applicable income taxes and statutory federal tax rate (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Tax amount
Taxes at statutory federal income tax rate	$ 2,637	$ 3,598	$ 7,906	$ 10,993
Tax exempt income	(133)	(134)	(372)	(434)
State income taxes, net of federal benefits	406	756	1,515	2,407
Nondeductible items and other	30	(156)	(496)	(596)
Applicable income taxes	$ 2,940	$ 4,064	$ 8,553	$ 12,370
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)	(1.10%)	(0.80%)	(1.00%)	(0.80%)
State income taxes, net of federal benefits (as percentage)	3.20%	4.40%	4.00%	4.60%
Nondeductible items and other (as percentage)	0.20%	(0.90%)	(1.30%)	(1.10%)
Applicable income taxes (as percentage)	23.30%	23.70%	22.70%	23.70%

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

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Tax Credit Investments - Tax credits (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Tax Credit Investments [Line items]
Investment	$ 17,906	$ 7,906
Unfunded Commitment	15,559	6,999
Proportional amortization
Tax Credit Investments [Line items]
Investment	17,906	7,906
Unfunded Commitment	$ 15,559	$ 6,999

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Tax Credit Investments - Amortization expense and tax benefit recognized (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Tax Credit Investments [Line items]
Intangible amortization expense	$ 1,324	$ 1,088	$ 3,430	$ 3,327
Income tax benefit	2,940	$ 4,064	8,553	$ 12,370
Housing projects
Tax Credit Investments [Line items]
Intangible amortization expense	109		220
Income tax benefit	(146)		(303)
Low income housing tax credit | Housing projects
Tax Credit Investments [Line items]
Intangible amortization expense	109		220
Income tax benefit	$ (146)		$ (303)

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Segment Reporting (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) segment item	Sep. 30, 2021 USD ($)
Segment Reporting
Number of operating segments | segment			4
Number of banking offices | item			14
Key metrics related to segments
Net interest income	$ 28,316	$ 21,132	$ 72,765	$ 64,310
Provision for loan losses		(2,000)		(2,000)
Noninterest income	27,010	36,040	85,706	113,669
Noninterest expense	42,767	42,041	120,822	127,633
Net income before taxes	12,559	17,131	37,649	52,346
Corporate Administration
Key metrics related to segments
Net interest income	(589)	(535)	(1,711)	(1,361)
Noninterest income	56	22	91	(6)
Noninterest expense	10,588	9,635	31,585	27,152
Net income before taxes	(11,121)	(10,148)	(33,205)	(28,519)
Banking | Operating Segments
Key metrics related to segments
Net interest income	28,512	21,168	72,816	64,236
Provision for loan losses		(2,000)		(2,000)
Noninterest income	1,723	1,576	4,602	4,564
Noninterest expense	19,990	11,403	48,303	33,401
Net income before taxes	10,245	13,341	29,115	37,399
Retirement and Benefit Services | Operating Segments
Key metrics related to segments
Noninterest income	16,597	18,031	50,536	53,157
Noninterest expense	6,130	10,320	21,160	30,420
Net income before taxes	10,467	7,711	29,376	22,737
Wealth Management | Operating Segments
Key metrics related to segments
Noninterest income	4,852	5,295	15,726	15,419
Noninterest expense	1,576	2,219	5,062	6,682
Net income before taxes	3,276	3,076	10,664	8,737
Mortgage | Operating Segments
Key metrics related to segments
Net interest income	393	499	1,660	1,435
Noninterest income	3,782	11,116	14,751	40,535
Noninterest expense	4,483	8,464	14,712	29,978
Net income before taxes	$ (308)	$ 3,151	$ 1,699	$ 11,992

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Earnings Per Share - Two-class method (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Earnings Per Share
Net Income	$ 9,619	$ 13,067	$ 29,096	$ 39,976
Dividends and undistributed earnings allocated to participating securities	90	196	312	628
Net income available to common shareholders	$ 9,529	$ 12,871	$ 28,784	$ 39,348
Weighted-average common shares outstanding for basic earnings per share	19,987	17,205	18,186	17,182
Dilutive effect of stock-based awards	243	294	245	306
Weighted-average common shares outstanding for diluted earnings per share	20,230	17,499	18,431	17,488
Earnings per common share:
Basic earnings per common share	$ 0.48	$ 0.75	$ 1.58	$ 2.29
Diluted earnings per common share	$ 0.47	$ 0.74	$ 1.56	$ 2.26

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Derivative Instruments (Details) - Not designated as hedging - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Derivative Instruments
Fair Value, Derivative Assets	$ 7,970	$ 3,397
Fair Value, Derivative Liabilities	6,742	1,368
Notional Amount, Derivative Assets	97,117	207,560
Notional Amount, Derivative Liabilities	66,420	44,826
Interest rate swaps | Other assets
Derivative Instruments
Fair Value, Derivative Assets	6,608	1,366
Notional Amount, Derivative Assets	43,784	44,826
Interest rate swaps | Accrued expenses and other liabilities
Derivative Instruments
Fair Value, Derivative Liabilities	6,608	1,368
Notional Amount, Derivative Liabilities	43,784	44,826
Interest rate lock commitments | Other assets
Derivative Instruments
Fair Value, Derivative Assets		1,507
Notional Amount, Derivative Assets		52,316
Interest rate lock commitments | Accrued expenses and other liabilities
Derivative Instruments
Fair Value, Derivative Liabilities	134
Notional Amount, Derivative Liabilities	22,636
Forward loan sales commitments | Other assets
Derivative Instruments
Fair Value, Derivative Assets	10	490
Notional Amount, Derivative Assets	333	13,418
TBA mortgage backed securities | Other assets
Derivative Instruments
Fair Value, Derivative Assets	1,352	34
Notional Amount, Derivative Assets	$ 53,000	$ 97,000

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Derivative Instruments - Gain (loss) recognized on derivatives instruments (Details) - Not designated as hedging - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	$ (938)	$ (2,981)	$ 2,717	$ (4,492)
Interest rate swaps | Other noninterest income
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	1	1	2	2
Interest rate lock commitments | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	(1,724)	(1,793)	(1,871)	(7,298)
Forward loan sales commitments | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	(532)	(499)	(480)	(2,061)
TBA mortgage backed securities | Mortgage banking
Gain (loss) recognized on derivative instruments
Total gain/(loss) from derivative instruments	$ 1,317	$ (690)	$ 5,066	$ 4,865

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Derivative Instruments - Collateral (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Derivative Instruments
Collateral held by third parties	$ 0	$ 15

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Regulatory Matters (Details) $ in Thousands	Sep. 30, 2022 USD ($)	Dec. 31, 2021 USD ($)
Common equity tier 1 capital to risk weighted assets
Actual (Amount)	$ 381,019	$ 314,628
Requirements for Capital Adequacy Purposes (Amount)	$ 125,839	$ 96,647
Actual (Ratio)	0.1363	0.1465
Requirements for Capital Adequacy Purposes (Ratio)	0.0450	0.0450
Tier 1 capital to risk weighted assets
Actual (Amount)	$ 389,834	$ 323,358
Requirements for Capital Adequacy Purposes (Amount)	$ 167,785	$ 128,862
Actual (Ratio)	0.1394	0.1506
Requirements for Capital Adequacy Purposes (Ratio)	0.0600	0.0600
Total capital to risk weighted assets
Actual (Amount)	$ 470,802	$ 400,263
Requirements for Capital Adequacy Purposes (Amount)	$ 223,713	$ 171,816
Actual (Ratio)	0.1684	0.1864
Requirements for Capital Adequacy Purposes (Ratio)	0.0800	0.0800
Tier 1 capital to average assets
Actual (Amount)	$ 389,834	$ 323,358
Requirements for Capital Adequacy Purposes (Amount)	$ 144,131	$ 132,112
Actual (Ratio)	0.1082	0.0979
Requirements for Capital Adequacy Purposes (Ratio)	0.0400	0.0400
Bank
Common equity tier 1 capital to risk weighted assets
Actual (Amount)	$ 363,457	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	125,754	96,538
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 181,645	$ 139,444
Actual (Ratio)	0.1301	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)	$ 363,457	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	167,672	128,718
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 223,563	$ 171,624
Actual (Ratio)	0.1301	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)	$ 394,425	$ 324,328
Requirements for Capital Adequacy Purposes (Amount)	223,562	171,624
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 279,454	$ 214,530
Actual (Ratio)	0.1411	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)	$ 363,457	$ 297,453
Requirements for Capital Adequacy Purposes (Amount)	130,728	132,039
Minimum to be Well Capitalized Under Prompt Corrective Action (Amount)	$ 163,410	$ 165,049
Actual (Ratio)	0.1112	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

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Stock Repurchase Program (Details) - shares		9 Months Ended
	Feb. 18, 2021	Sep. 30, 2022
Stock Repurchase Program
Number of shares authorized for repurchase	770,000
Repurchase program period	36 months
Shares repurchased		0

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Fair Value of Assets and Liabilities - Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	$ 729,110	$ 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	596,989	707,157
Mortgage backed securities - Commercial
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	65,283	90,913
Asset backed securities
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	35	54
Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	62,970	50,422
Recurring
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	729,110	853,649
Derivative instruments	7,970	3,397
Derivative liabilities	6,742	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	3,833	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	596,989	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	65,283	90,913
Recurring | Asset backed securities
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	35	54
Recurring | Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	62,970	50,422
Recurring | Level 2
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	729,110	853,649
Derivative instruments	7,970	3,397
Derivative liabilities	6,742	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	3,833	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	596,989	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	65,283	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	35	54
Recurring | Level 2 | Corporate bonds
Fair value, assets and liabilities measured on recurring and non recurring basis
Available-for-sale, at fair value	$ 62,970	$ 50,422

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Fair Value of Assets and Liabilities - Nonrecurring Basis (Details) - Non recurring - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Fair value, assets and liabilities measured on recurring and non recurring basis
Impaired loans	$ 4,813	$ 2,469
Foreclosed assets	904	885
Servicing rights	2,780	1,880
Loans held for sale
Fair value, assets and liabilities measured on recurring and non recurring basis
Loans held for sale	26,129	46,490
Impaired loans
Fair value, assets and liabilities measured on recurring and non recurring basis
Net impairment	264	283
Level 2 | Loans held for sale
Fair value, assets and liabilities measured on recurring and non recurring basis
Loans held for sale	26,129	46,490
Level 3
Fair value, assets and liabilities measured on recurring and non recurring basis
Impaired loans	4,813	2,469
Foreclosed assets	904	885
Servicing rights	$ 2,780	$ 1,880

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Fair Value of Assets and Liabilities - Valuation Technique (Details) - Level 3 $ in Thousands	Sep. 30, 2022 USD ($)	Dec. 31, 2021 USD ($)
Impaired loans | Appraisal value | Property specific adjustment
Valuation techniques and significant unobservable inputs
Impaired loans	$ 4,813	$ 2,469
Foreclosed assets | Appraisal value | Property specific adjustment
Valuation techniques and significant unobservable inputs
Foreclosed assets	$ 904	$ 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	$ 2,780	$ 1,880
Servicing rights | Prepayment speed assumptions | Minimum
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	100	161
Servicing rights | Prepayment speed assumptions | Maximum
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	136	327
Servicing rights | Prepayment speed assumptions | Weighted average
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	112	237
Servicing rights | Discount rate
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	0.100	0.095
Servicing rights | Discount rate | Weighted average
Valuation techniques and significant unobservable inputs
Servicing Asset, Measurement Input	0.100	0.095

XML

Fair Value of Assets and Liabilities - Off-Balance Sheet Credit-Related Commitments (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Financial Assets
Investment securities held-to-maturity	$ 273,306	$ 349,677
Carrying Amount
Financial Assets
Cash and cash equivalents	54,167	242,311
Investment securities held-to-maturity	326,410	352,061
Loans, net	2,287,263	1,726,448
Accrued interest receivable	11,256	8,537
Bank-owned life insurance	33,777	33,156
Financial Liabilities
Noninterest-bearing deposits	905,228	938,840
Interest-bearing deposits	1,834,556	1,748,799
Time deposits	222,027	232,912
Short-term borrowings	253,830
Long-term debt	58,836	58,933
Accrued interest payable	1,405	1,674
Estimated Fair Value
Financial Assets
Cash and cash equivalents	54,167	242,311
Investment securities held-to-maturity	273,306	349,677
Loans, net	2,256,887	1,760,784
Accrued interest receivable	11,256	8,537
Bank-owned life insurance	33,777	33,156
Financial Liabilities
Noninterest-bearing deposits	905,228	938,840
Interest-bearing deposits	1,834,556	1,748,799
Time deposits	217,974	232,970
Short-term borrowings	253,830
Long-term debt	55,480	57,772
Accrued interest payable	1,405	1,674
Level 1 | Estimated Fair Value
Financial Assets
Cash and cash equivalents	54,167	242,311
Accrued interest receivable	11,256	8,537
Financial Liabilities
Short-term borrowings	253,830
Accrued interest payable	1,405	1,674
Level 2 | Estimated Fair Value
Financial Assets
Investment securities held-to-maturity	273,306	349,677
Bank-owned life insurance	33,777	33,156
Financial Liabilities
Noninterest-bearing deposits	905,228	938,840
Interest-bearing deposits	1,834,556	1,748,799
Long-term debt	55,480	57,772
Level 3 | Estimated Fair Value
Financial Assets
Loans, net	2,256,887	1,760,784
Financial Liabilities
Time deposits	$ 217,974	$ 232,970