ALERUS FINANCIAL CORP

Previous wording

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

Current wording

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

Previous wording

The following discussion explains the Company’s financial condition and results of operations as of and for the three and six months ended June 30, 2024 and 2023. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 8, 2024.

Current wording

The following discussion explains the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2024 and 2023*. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company*’s Annual Report on Form 10-K for the year ended December 31, 2023*, filed with the SEC on March 8, 2024.*

Previous wording

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

Current wording

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

Previous wording

There have been no material changes to the Company’s critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2023. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for discussion of the Company’s critical accounting policies.

Current wording

There have been no material changes to the Company’s critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2023. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of the Company’s critical accounting policies.

Previous wording

Refer to “NOTE 2 Recent Accounting Pronouncements” of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

Current wording

Refer to “NOTE 2 Recent Accounting Pronouncements” of the consolidated financial statements included in this report for a discussion of accounting pronouncements issued but yet to be adopted and implemented.

Previous wording

On May 15, 2024, the Company and HMNF jointly announced the signing of a merger agreement pursuant to which the Company will acquire HMNF and its wholly-owned banking subsidiary, Home Federal Savings Bank. Under the terms of the merger agreement, HMNF will merge with and into the Company, and Home Federal Savings Bank will merge with and into the Bank. Under the terms of the merger agreement, HMNF stockholders will receive 1.25 shares of the Company’s common stock for each share of HMNF common stock, which exchange ratio is subject to potential downward adjustment if certain financial metrics of HMNF are not met at closing. The merger is expected to qualify as a tax-free reorganization for HMNF’s stockholders. Upon closing of the transaction, stockholders of HMNF are expected to hold approximately 22.0% of the Company’s outstanding common stock.

Current wording

On October 9, 2024, the Company completed the acquisition of HMNF and its wholly owned subsidiary, Home Federal Savings Bank. As a result of the transaction, HMNF merged with and into Alerus Financial Corporation, and Home Federal Savings Bank merged with and into Alerus Financial, National Association. The all-stock transaction was valued at approximately $128.8 million as of closing, based on the closing price of the Company’s common stock October 8, 2024, the trading day immediately preceding the closing of the merger, of $22.90. Former stockholders of HMNF received 1.25 shares of the Company’s common stock for each share of HMNF common stock, resulting in the issuance of 5,547,658 shares of the Company’s common stock. The merger was structured to qualify as a tax-free reorganization for HMNF’s stockholders. Following the transaction, former stockholders of HMNF now hold approximately 21.9% of the Company’s outstanding common stock.

Previous wording

During both the three and six months ended June 30, 2024, the Company incurred $0.6 million in pre-tax acquisition expenses related to the planned acquisition of HMNF, comprised of legal and professional fees included in professional fees and assessments expense in the consolidated statements of income.

Current wording

During the three and nine months ended September 30, 2024, the Company incurred $1.7 million and $2.3 million, respectively, in pre-tax acquisition expenses related to the acquisition of HMNF, comprised of legal and professional fees included in professional fees and assessments expense in the consolidated statements of income.

Previous wording

On July 1, 2024, the Company entered into a purchase agreement to sell its South Fargo branch in Fargo, North Dakota. The sale of this facility during 2024 is likely, and the Company expects to record a gain on the sale upon closing, since the offer of $5.3 million is greater than the property’s carrying value.

Current wording

On July 1, 2024, the Company entered into a purchase agreement to sell its South Fargo branch in Fargo, North Dakota. The completion of the sale of this facility is likely to occur in 2024, and the Company expects to record a gain on the sale upon closing, since the purchase price of $5.1 million is greater than the property’s carrying value of approximately $1.7 million. The Company’s West Fargo, North Dakota branch is listed for sale for $3.8 million and is expected to sell within the next 12 months. At September 30, 2024, the facility included assets with a carrying value of approximately $0.4 million. The Company expects to record a gain on the sale upon closing, as the expected sale price is greater than the property’s carrying value.

Previous wording

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

Current wording

In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, adjusted tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, pre-provision net revenue, adjusted noninterest income, adjusted noninterest expense, adjusted pre-provision net revenue, adjusted efficiency ratio, adjusted net income, adjusted return on average assets, adjusted return on average tangible common equity, net interest margin (tax-equivalent), and adjusted net interest margin (tax-equivalent). Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders’ equity less goodwill and other intangible assets; (ii) adjusted tangible common equity as total common stockholders’ equity less goodwill, other intangible assets, and cash proceeds from BTFP; (iii) tangible book value per common share as tangible common equity divided by shares of common stock outstanding; (iv) tangible assets as total assets, less goodwill and other intangible assets; (v) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment; (vii) pre-provision net revenue as net interest income plus noninterest income less noninterest expense; (viii) adjusted noninterest income as noninterest income less BOLI mortality proceeds less gain on sale of ESOP trustee business less net gain on sale of premises and equipment; (ix) adjusted noninterest expense as noninterest expense less HMNF merger- and acquisition-related expenses less severance and signing bonus; (x) adjusted pre-provision net revenue as net interest income plus adjusted noninterest income less adjusted noninterest expense; (xii) adjusted efficiency ratio as adjusted noninterest expense less intangible amortization expense, divided by net interest income plus adjusted noninterest income plus a tax-equivalent adjustment; (xiii) adjusted net income as net income less adjusted noninterest income items net of tax plus adjusted noninterest expense items net of tax; (xiv) adjusted return on average assets as adjusted net income divided by average total assets; (xv) adjusted return on average tangible common equity as adjusted net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (xvi) adjusted net interest margin (tax equivalent) as net inter…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Net income for the three months ended June 30, 2024, was $6.2 million, or $0.31 per diluted common share, a $2.9 million, or 31.8%, decrease compared to $9.1 million, or $0.45 per diluted common share, for the three months ended June 30, 2023. Earnings for the second quarter of 2024 compared to the second quarter of 2023 decreased primarily due to a $4.5 million increase in provision for credit losses and $2.4 million increase in noninterest expense. This negative result was partially offset by a $1.8 million increase in net interest income and $1.6 million increase in noninterest income.

Current wording

Net income for the three months ended September 30, 2024, was $5.2 million, or $0.26 per diluted common share, a $4.0 million, or 43.2%, decrease compared to $9.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2023. Earnings for the third quarter of 2024 compared to the third quarter of 2023 decreased primarily due to a $5.2 million increase in noninterest expense and $1.7 million increase in provision for credit losses. This negative result was partially offset by a $2.1 million increase in net interest income.

Previous wording

Net income for the six months ended June 30, 2024, was $12.6 million, or $0.63 per diluted common share, a $4.7 million, or 26.9%, decrease compared to $17.3 million, or $0.85 per diluted common share, for the six months ended June 30, 2023. Earnings for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 decreased primarily due to a $3.9 million increase in provision for credit losses and $3.5 million increase in noninterest expense. This negative result was partially offset by a $1.7 million increase in noninterest income.

Current wording

Net income for the nine months ended September 30, 2024, was $17.8 million, or $0.89 per diluted common share, a $8.6 million, or 32.5%, decrease compared to $26.5 million, or $1.30 per diluted common share, for the nine months ended September 30, 2023. Earnings for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 decreased primarily due to an $8.7 million increase in noninterest expense and a $5.6 million increase in provision for credit losses. This negative result was partially offset by a $2.5 million increase in net interest income and a $1.6 million increase in noninterest income.

Previous wording

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

Current wording

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, 2024 and 2023.

Previous wording

Net interest income for the three months ended June 30, 2024 was $24.0 million, an increase of $1.8 million, or 7.9%, compared to $22.2 million for the three months ended June 30, 2023. Net interest income for the second quarter of 2024 increased compared to the second quarter of 2023 primarily due to a $12.7 million increase in interest income, as interest earning assets increased $510.1 million while the average interest earning asset yield increased 71 basis points. This was partially offset by the increasing cost of interest-bearing liabilities as interest expense increased $10.9 million, mainly driven by an increase of 88 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $579.8 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Current wording

Net interest income for the three months ended September 30, 2024 was $22.5 million, an increase of $2.1 million, or 10.5%, compared to $20.4 million for the three months ended September 30, 2023. Net interest income for the third quarter of 2024 increased compared to the third quarter of 2023 primarily due to a $10.2 million increase in interest income, as interest earning assets increased $486.2 million while the average interest earning asset yield increased 46 basis points. This was partially offset by the increasing cost of interest-bearing liabilities as interest expense increased $8.0 million, mainly driven by an increase of 48 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $525.6 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Previous wording

Net interest income for the six months ended June 30, 2024 was $46.2 million, an increase of $0.3 million, or 0.7%, compared to $45.9 million for the six months ended June 30, 2023. Net interest income for the first six months of 2024 increased compared to the first six months of 2023 primarily due to a $23.9 million increase in interest income, as average interest earning assets increased $432.1 million while the average interest earning asset yield increased 73 basis points. This was partially offset by the increasing cost of interest-bearing liabilities as interest expense increased $23.6 million, mainly driven by an increase of 110 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $517.9 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Current wording

Net interest income for the nine months ended September 30, 2024 was $68.8 million, an increase of $2.5 million, or 3.7%, compared to $66.3 million for the nine months ended September 30, 2023. Net interest income for the first nine months of 2024 increased compared to the first nine months of 2023 primarily due to a $34.1 million increase in interest income, as average interest earning assets increased $450.3 million while the average interest earning asset yield increased 64 basis points. This was partially offset by the increased cost of interest-bearing liabilities as interest expense increased $31.6 million, mainly driven by an increase of 89 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $520.4 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Previous wording

Net interest margin (on a tax-equivalent basis) for the three months ended June 30, 2024 was 2.39%, compared to 2.52% for the same period in 2023. The decrease in net interest margin (on a tax-equivalent basis) was mainly attributable to higher earning assets at lower yields resulting from the BTFP funding as those proceeds are held at the Federal Reserve Bank. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings, was 2.57% for the second quarter of 2024, a 5 basis point increase from 2.52% for the second quarter of 2023.

Current wording

Net interest margin (on a tax-equivalent basis) for the three months ended September 30, 2024 was 2.23%, compared to 2.27% for the same period in 2023. The decrease in net interest margin (on a tax-equivalent basis) was mainly attributable to higher earning assets at lower yields resulting from the BTFP funding as those proceeds were held at the Federal Reserve Bank. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings and purchase accounting accretion, was 2.35% for the third quarter of 2024, a 11 basis point increase from 2.24% for the third quarter of 2023.

Previous wording

The high target federal funds interest rate continues to pressure funding costs. However, the Company anticipates that net interest income and net interest margin (on an adjusted tax equivalent basis) will continue to recover in future periods as interest earning assets reprice at higher rates and the increases in deposit costs slow.

Current wording

The high target federal funds interest rate continues to pressure funding costs. However, the Company anticipates that net interest income and net interest margin (on an adjusted tax equivalent basis) will increase in future periods as the impact of recent and anticipated interest rate cuts lower funding costs and fixed interest rate derivatives mature.

Previous wording

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three and six months ended June 30, 2024 and 2023. The Company derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual status, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a fully taxable equivalent (“FTE”) basis.

Current wording

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three and nine months ended September 30, 2024 and 2023. The Company derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual status, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax‑exempt assets in order to present tax‑exempt income and fully taxable income on a fully taxable equivalent (“FTE”) basis.

Previous wording

The Company recorded a provision for credit losses of $4.5 million for the second quarter of 2024, compared to no provision for the second quarter of 2023. The increase in the provision for credit losses was primarily driven by loan growth, as well as an increased reserve related to a $21.5 million construction, land and development loan which moved to nonaccrual status during the second quarter of 2024.

Current wording

The Company recorded a provision for credit losses of $1.7 million for the third quarter of 2024, compared to no provision for the third quarter of 2023. The increase in the provision for credit losses was primarily driven by loan growth and an increase in nonaccrual loans.

Previous wording

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

Current wording

The following table presents the Company’s noninterest income for the three and nine months ended September 30, 2024 and 2023:

Previous wording

Total noninterest income for the three months ended June 30, 2024 was $27.4 million, a $1.6 million, or 6.2%, increase compared to $25.8 million for the three months ended June 30, 2023. The increase in noninterest income was primarily driven by an increase of $0.9 million in wealth management revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets, and an increase of $0.7 million in other noninterest income due to client swap fees in the second quarter of 2024. This increase was partially offset by a $0.4 million decrease in mortgage revenue, primarily due to timing differences related to the mortgage pipeline hedging.

Current wording

Total noninterest income for the nine months ended September 30, 2024 was $81.1 million, a $1.6 million, or 2.0%, increase compared to $79.4 million for the nine months ended September 30, 2023. The increase in noninterest income was primarily driven by an increase of $3.2 million in wealth management revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets. Other noninterest income increased $0.4 million, primarily driven by a gain on the sale of fixed assets related to the sale of the Shorewood, Minnesota branch. This increase was partially offset by a $2.1 million decrease in retirement and benefits services, primarily driven by the divestiture of the ESOP trustee business included in the nine months ended September 30, 2023, which resulted in a recognized gain of $2.8 million.

Previous wording

The Company anticipates that noninterest income will continue to be significantly adversely affected in future periods if interest rates remain high and inflationary pressure continues. These factors have adversely affected mortgage originations and mortgage banking revenue in recent periods.

Current wording

The Company anticipates that noninterest income will continue to be adversely affected in future periods if interest rates remain higher than in periods prior to the Fed's rate hikes beginning in 2022 and inflationary pressure continues. These factors have adversely affected mortgage originations and mortgage banking revenue in recent periods. The Company believes mortgage revenue will increase in future periods as a result of recent and anticipated interest rate cuts.

Previous wording

See “NOTE 17 Segment Reporting” of the consolidated financial statements for additional discussion regarding the Company’s business lines.

Current wording

See “NOTE 17 Segment Reporting” of the consolidated financial statements and Segment Reporting section below for additional discussion regarding the Company’s business lines.

Previous wording

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

Current wording

The following table presents noninterest expense for the three and nine months ended September 30, 2024 and 2023:

Previous wording

Total noninterest expense for the three months ended June 30, 2024 was $38.8 million, a $2.4 million, or 6.5%, increase compared to $36.4 million for the three months ended June 30, 2023. The year over year increase was primarily driven by higher compensation expenses due to labor costs and higher professional fees and assessments due to increased merger-related expenses in connection with the pending acquisition of HMNF and an increase in FDIC assessments.

Current wording

Total noninterest expense for the three months ended September 30, 2024 was $42.4 million, a $5.2 million, or 13.9%, increase compared to $37.3 million for the three months ended September 30, 2023. The year over year increase was primarily driven by higher professional fees and assessments, compensation, and employee taxes and benefits expenses. Professional fees and assessments increased primarily due to increased merger-related expenses of $1.7 million in connection with the acquisition of HMNF and an increase in FDIC assessments. Compensation expense increased primarily due to increased labor costs. Employee taxes and benefits expense increased primarily due to increased costs related to group insurance.

Previous wording

Total noninterest expense for the six months ended June 30, 2024 was $77.8 million, a $3.5 million, or 4.8%, increase compared to $74.2 million for the six months ended June 30, 2023. The increase was primarily driven by increases of $1.7 million in professional fees and assessments, $1.6 million in compensation, and $0.7 million in employee taxes and benefits. The increase in professional fees and assessments was primarily due to increased merger-related expenses in connection with the pending acquisition of HMNF and an increase in FDIC assessments. The increase in compensation expense was primarily due to rising labor costs. The increase in employee taxes and benefits was primarily due to increased payroll taxes. These increases were partially offset by a $0.6 million decrease in business services, software and technology expense primarily due to reduced core processing and computer supplies expenses.

Current wording

Total noninterest expense for the nine months ended September 30, 2024 was $120.2 million, a $8.7 million, or 7.8%, increase compared to $111.5 million for the nine months ended September 30, 2023. The increase was primarily driven by increases of $4.2 million in professional fees and assessments, $3.6 million in compensation, and $1.3 million in employee taxes and benefits expense. The increase in professional fees and assessments was primarily due to increased merger-related expenses in connection with the acquisition of HMNF and an increase in FDIC assessments. The increase in compensation expense was primarily due to rising labor costs. The increase in employee taxes and benefits expense was primarily due to increased costs related to group insurance and payroll taxes. These increases were partially offset by a $0.5 million decrease in business services, software and technology expense primarily due to reduced core processing and information technology hardware expenses.

Previous wording

For the three months ended June 30, 2024, the Company recognized income tax expense of $1.9 million on $8.1 million of pre-tax income, resulting in an effective tax rate of 23.7%, compared to income tax expense of $2.5 million on $11.6 million of pre-tax income for the three months ended June 30, 2023, resulting in an effective tax rate of 21.8%.

Current wording

For the three months ended September 30, 2024, the Company recognized income tax expense of $1.6 million on $6.8 million of pre-tax income, resulting in an effective tax rate of 23.4%, compared to income tax expense of $2.4 million on $11.5 million of pre-tax income for the three months ended September 30, 2023, resulting in an effective tax rate of 20.6%.

Previous wording

For the six months ended June 30, 2024, the Company recognized income tax expense of $4.0 million on $16.7 million of pre-tax income, resulting in an effective tax rate of 24.1%, compared to income tax expense of $4.8 million on $22.1 million of pre-tax income for the six months ended June 30, 2023, resulting in an effective tax rate of 21.9%.

Current wording

For the nine months ended September 30, 2024, the Company recognized income tax expense of $5.6 million on $23.5 million of pre-tax income, resulting in an effective tax rate of 23.9%, compared to income tax expense of $7.2 million on $33.7 million of pre-tax income for the nine months ended September 30, 2023, resulting in an effective tax rate of 21.4%.

Previous wording

Total assets were $4.4 billion as of June 30, 2024, an increase of $450.9 million, or 11.5%, compared to December 31, 2023. The increase was primarily due to a $308.2 million increase in cash and cash equivalents and a $156.2 million increase in loans, partially offset by a decrease of $37.5 million in investment securities. The increase in cash and cash equivalents was primarily driven by the net proceeds from BTFP borrowings.

Current wording

Total assets were $4.1 billion as of September 30, 2024, an increase of $176.9 million, or 4.5%, compared to December 31, 2023. The increase was primarily due to a $272.8 million increase in loans, partially offset by a decrease of $63.9 million in cash and cash equivalents and a decrease of $35.6 million in investment securities.

Previous wording

The investment securities presented in the following table are reported at fair value and by contractual maturity as of June 30, 2024. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and

Current wording

The investment securities presented in the following table are reported at fair value and by contractual maturity as of September 30, 2024. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis, assuming a 21.0% income tax rate.

Previous wording

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

Current wording

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, agricultural, and consumer loans.

Previous wording

Total loans outstanding were $2.9 billion as of June 30, 2024, an increase of $156.2 million, or 5.7%, from December 31, 2023. The increase was primarily driven by a $78.4 million increase in non-owner occupied CRE loans, a $37.7 million increase in construction, land and development CRE loans, and a $29.6 million increase in commercial and industrial loans, partially offset by $11.6 million and $6.4 million decreases in residential real estate first lien and residential real estate construction loans, respectively.

Current wording

Total loans outstanding were $3.0 billion as of September 30, 2024, an increase of $272.8 million, or 9.9%, from December 31, 2023. The increase was primarily driven by a $116.7 million increase in non-owner occupied CRE loans, a $49.6 million increase in construction, land and development CRE loans, a $44.1 million increase in commercial and industrial loans, a $30.3 million increase in multifamily CRE loans, and a $24.7 million increase in owner occupied CRE loans, partially offset by $7.4 million and $17.2 million decreases in residential real estate first lien and residential real estate construction loans, respectively.

Previous wording

The Company’s loan portfolio is highly diversified. As of June 30, 2024, approximately 20.3% of loans outstanding were commercial and industrial, 45.8% of loans outstanding were CRE, 2.8 % were agricultural, and 31.1% of loans outstanding were consumer.

Current wording

The Company’s loan portfolio is highly diversified. As of September 30, 2024, approximately 19.9% of loans outstanding were commercial and industrial, 47.3% of loans outstanding were CRE, 2.8% of loans outstanding were agricultural, and 30.0% of loans outstanding were consumer.

Previous wording

Despite headwinds from a higher interest rate environment and competition in the Company’s market areas, the Company anticipates continued loan growth in 2024 for the commercial and industrial and CRE loan portfolios as a result of recently added production talent.

Current wording

Despite headwinds from a higher interest rate environment and competition in the Company’s market areas, the Company anticipates continued loan growth in the remainder of 2024 for the commercial and industrial and CRE loan portfolios as a result of recently added production talent.

Previous wording

investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite. Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product type and are monitored quarterly by the Bank’s Credit Governance Committee and Bank Board of Directors.

Current wording

CRE loans consist of term loans secured by a mortgage lien on real property and include both owner occupied CRE loans as well as non-owner occupied loans. Non-owner occupied CRE loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and other specific use properties as well as CRE construction loans that are offered to builders and developers generally within the Bank’s geographical footprint. The primary risk characteristics in the non-owner occupied portfolio include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite. Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product type and are monitored quarterly by the Bank’s Credit Governance Committee and Bank Board of Directors.

Previous wording

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

Current wording

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

Previous wording

The Company’s RRE loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of June 30, 2024, the Company’s RRE portfolio was $871.4 million, representing a $9.6 million, or 1.1%, decrease from $881.0 million as of December 31, 2023. Market interest rates, expected duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.

Current wording

The Company’s RRE loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of September 30, 2024, the Company’s RRE portfolio was $873.0 million, representing a $8.0 million, or 0.9%, decrease from $881.0 million as of December 31, 2023. Market interest rates, expected duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.

Previous wording

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

Current wording

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

Previous wording

Interest income lost on nonaccrual loans approximated $839 thousand and $101 thousand for the six months ended June 30, 2024 and 2023, respectively. There was no interest income included in net interest income related to nonaccrual loans for the six months ended June 30, 2024 and 2023.

Current wording

Interest income lost on nonaccrual loans approximated $2.8 million and $0.3 million for the nine months ended September 30, 2024 and 2023, respectively. There was no interest income included in net interest income related to nonaccrual loans for the nine months ended September 30, 2024 and 2023.

Previous wording

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. An ACL on off-balance sheet credit exposures is measured using similar internal and external assumptions as the ACL on loans. This allowance is located in accrued expenses and other liabilities on the consolidated balance sheets. The ACL for unfunded commitments was $6.9 million and $5.2 million as of June 30, 2024 and 2023, respectively.

Current wording

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. An ACL on off-balance sheet credit exposures is measured using similar internal and external assumptions as the ACL on loans. This allowance is located in accrued expenses and other liabilities on the consolidated balance sheets. The ACL for unfunded commitments was $7.4 million and $5.2 million as of September 30, 2024 and 2023, respectively.

Previous wording

Total deposits were $3.3 billion as of June 30, 2024, an increase of $203.0 million, or 6.6%, from December 31, 2023. Interest-bearing deposits increased $229.6 million during this period, while noninterest-bearing deposits decreased $26.7 million. The increase in total deposits was due to both expanded and new commercial deposit relationships, along with time deposit and synergistic deposit growth. Noninterest-bearing deposits decreased from 23.5% of total deposits as of December 31, 2023 to 21.3% as of June 30, 2024, as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted such funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.

Current wording

Total deposits were $3.3 billion as of September 30, 2024, an increase of $227.9 million, or 7.4%, from December 31, 2023. Interest-bearing deposits increased $300.4 million during this period, while noninterest-bearing deposits decreased $67.9 million. The increase in total deposits was due to both expanded and new commercial deposit relationships, along with time deposit and synergistic deposit growth. Noninterest-bearing deposits decreased from 23.5% of total deposits as of December 31, 2023 to 19.8% as of September 30, 2024, as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted such funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.