ALERUS FINANCIAL CORP

Previous wording

The following discussion explains the Company’s financial condition and results of operations as of and for the three months ended March 31, 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 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.

Previous wording

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 the Company make regarding the Company’s projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.

Current wording

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 the Company makes regarding the Company’s projected growth, anticipated future financial performance, financial condition, credit quality, management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.

Previous wording

The Company is a commercial wealth bank and national retirement services provider headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, or the Bank, the Company provides financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth management. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.

Current wording

The Company is a commercial wealth bank and national retirement services provider headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, the Company provides financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth management. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.

Previous wording

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

Current wording

On May 22, 2024, the Board of Directors of the Company declared a quarterly cash dividend of $0.20 per common share. This dividend was paid on July 12, 2024, to stockholders of record at the close of business on June 14, 2024.

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, adjusted efficiency ratio, adjusted noninterest income, 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) adjusted efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment less net gains (losses) on investment securities; (viii) adjusted noninterest income as noninterest income adjusted for net gains (losses) on investment securities; and (ix) adjusted net interest margin (tax equivalent) as net interest income less cash interest income and interest expense related to BTFP, adjusted for tax equivalent related to loans and securities, and adjust interest earning assets less average cash proceeds balance from BTFP.

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, 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.

Previous wording

Net income for the three months ended March 31, 2024, was $6.4 million, or $0.32 per diluted common share, a $1.8 million, or 21.4%, decrease compared to $8.2 million, or $0.40 per diluted common share, for the three months ended March 31, 2023. Earnings for the first quarter of 2024 compared to the first quarter of 2023 decreased primarily due to a $1.4 million decrease in net interest income and $1.2 million increase in noninterest expense. This negative result was partially offset by a $0.6 million decrease in provision for credit losses expense.

Current 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.

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 months ended March 31, 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 six months ended June 30, 2024 and 2023.

Previous wording

Net interest income for the three months ended March 31, 2024, was $22.2 million, a decrease of $1.4 million, or 6.1%, compared to $23.7 million for the three months ended March 31, 2023. Net interest income for the first quarter of 2024 decreased compared to the first quarter of 2023 primarily due to the increasing cost of interest-bearing liabilities as interest expense increased $12.7 million mainly driven by an increase of 133 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $456.3 million. This was partially offset by an $11.2 million increase in interest income, as interest earning assets increased $354.1 million while the interest earning asset yield increased 74 basis points. 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 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.

Previous wording

Net interest margin (on a tax-equivalent basis) for the three months ended March 31, 2024, was 2.30%, compared to 2.70% 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 opportunity. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings, was 2.44% for the first quarter of 2024, a 26 basis point decrease from 2.70% for the first quarter of 2023. The decrease in adjusted net interest margin (on a tax-equivalent basis) (non-GAAP) from the year reflected higher cost of funds from continued growth on interest-bearing deposits, partially offset by higher yields on new loans.

Current 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.

Previous wording

The higher 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 recover in future periods as interest-earning assets remix 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 continue to recover in future periods as interest earning assets reprice at higher rates and the increases in deposit costs slow.

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 months ended March 31, 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 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.

Previous wording

The following table presents the Company’s noninterest income for the three months ended March 31, 2024 and 2023:

Current wording

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

Previous wording

Total noninterest income for the three months ended March 31, 2024 was $25.3 million, a $70 thousand, or 0.3%, increase compared to $25.3 million for the three months ended March 31, 2023. The increase in noninterest income was primarily driven by an increase of $0.9 million in wealth management revenue and $0.2 million in retirement and benefit services revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets. This increase was offset by a $1.1 million decrease in other noninterest income, primarily due to $1.2 million in proceeds on a bank-owned life insurance claim in the first quarter of 2023. Noninterest income for the three months ended March 31, 2023, included revenue of $0.9 million related to the ESOP trustee business that was subsequently divested in the third quarter of 2023.

Current 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.

Previous wording

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

Current 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.

Previous wording

The following table presents noninterest expense for the three months ended March 31, 2024 and 2023:

Current wording

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

Previous wording

Total noninterest expense for the three months ended March 31, 2024, was $39.0 million, a $1.2 million, or 3.0%, increase compared to $37.9 million for the three months ended March 31, 2023. The year over year increase was primarily driven by higher professional fees and assessments due to an increase in FDIC assessments and an increase in recruitment expense driven by talent acquisitions in the first quarter of 2024.

Current 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.

Previous wording

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

Current wording

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

Previous wording

For the three months ended March 31, 2024, the Company recognized income tax expense of $2.1 million on $8.5 million of pre-tax income, resulting in an effective tax rate of 24.5%, compared to income tax expense of $2.3 million on $10.5 million of pre-tax income for the three months ended March 31, 2023, resulting in an effective tax rate of 22.0%.

Current 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%.

Previous wording

Total assets were $4.3 billion as of March 31, 2024, an increase of $430.4 million, or 11.0%, compared to December 31, 2023. The increase was primarily due to a $415.9 million increase in cash and cash equivalents and a $39.9 million increase in loans, partially offset by a decrease of $17.5 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 $4.4 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.

Previous wording

The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance

Current wording

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

Previous wording

The investment securities presented in the following table are reported at fair value and by contractual maturity as of March 31, 2024. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis, assuming a 21.00% income tax rate.

Current 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

Previous wording

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

Current 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.

Previous wording

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

Current 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.

Previous wording

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

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 2024 for the commercial and industrial and CRE loan portfolios as a result of recently added production talent.

Previous wording

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

Current wording

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

Previous 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

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

Previous wording

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

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

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

Current wording

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

Previous 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. Residential real estate loans also include home equity loans and lines of credit that are secured by a first or second lien on the borrower’s residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

Current 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.

Previous wording

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

Current wording

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

Previous wording

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

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 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.

Previous wording

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

Current 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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

The following table presents the allocation of the ACL on loans as of the dates presented:

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 $6.6 million and $5.4 million as of March 31, 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 $6.9 million and $5.2 million as of June 30, 2024 and 2023, respectively.

Previous wording

Total deposits were $3.3 billion as of March 31, 2024, an increase of $189.4 million, or 6.1%, from December 31, 2023. Interest-bearing deposits increased $224.9 million while noninterest-bearing deposits decreased $35.6 million. The increase in total deposits was due to both seasonal inflows of public funds deposit balances and expanded commercial deposit relationships, along with time deposit and synergistic deposit growth. Noninterest-bearing deposits decreased from 23.5% of total deposits to 21.1% as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.

Current 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.

Previous wording

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 March 31, 2024:

Current wording

The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $250,000 and over, that were outstanding as of June 30, 2024:

Previous wording

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

Current wording

The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.2 billion at June 30, 2024, and approximately $1.1 billion at December 31, 2023. These amounts were estimated based on the same methodologies used for regulatory reporting purposes.

Previous wording

Stockholders' equity increased $2.5 million, or 0.7%, to $371.6 million as of March 31, 2024, compared to $369.1 million as of December 31, 2023. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.23% as of March 31, 2024, from 7.94% as of December 31, 2023. Common equity tier 1 capital to risk weighted assets increased to 11.86% as of March 31, 2024, from 11.82% as of December 31, 2023.

Current wording

Stockholders’ equity increased $4.1 million, or 1.1%, to $373.2 million as of June 30, 2024, compared to $369.1 million as of December 31, 2023. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.26% as of June 30, 2024, from 7.94% as of December 31, 2023. Common equity tier 1 capital to risk weighted assets decreased to 11.80% as of June 30, 2024, from 11.82% as of December 31, 2023.