ALERUS FINANCIAL CORP

For the period ended Jun 30, 2024. Filed Aug 8, 2024.

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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.

Jun 30, 2024 · Filed Aug 8, 2024

ALRS$34.45+1.9%Stored close · as of Nov 9, 2026

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Contents

Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

The accompanying unaudited consolidated interim financial statements and notes thereto of the Company have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America, or GAAP, for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated balance sheets of Alerus Financial Corporation, or the Company, as of June 30, 2024 and December 31, 2023, the consolidated statements of income for the three and six months ended June 30, 2024 and 2023, consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023, the consolidated statements of changes in stockholders’ equity for the three and six months ended June 30, 2024 and 2023, and the consolidated statements of cash flows for the six months ended June 30, 2024 and 2023.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s principal operating subsidiary is Alerus Financial, National Association, or the Bank. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2024.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile. The last year the Company qualifies as an emerging growth company is 2024.

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

NOTE 2 Recent Accounting Pronouncements

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

Adopted Pronouncements

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

Pronouncements Not Yet Effective

In November 2023, the FASB issued guidance within ASU 2023-07, Segment Reporting (Topic 280). The amendments in this update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures related to significant segment expenses. The amendments do not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments, and all existing segment disclosure requirements in ASC 280 and other Codification topics remain unchanged. The amendments in this update are incremental and require public entities that report segment information to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss as well as other segment items. Annual disclosure of the title and position of the chief operating decision maker and how the reported measures of segment profit or loss are used to assess performance and allocation of resources is also required.

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

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU related to the rate reconciliation and income taxes paid disclosures, to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction disclosures. The amendments allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. The other amendments in this ASU improve the effectiveness and comparability of disclosures by adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (“SEC”) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this ASU should be applied on a prospective basis. Retrospective application is also permitted.

NOTE 3 Business Combinations

On May 15, 2024, the Company and HMN Financial, Inc. (“HMNF”), the holding company for Home Federal Savings Bank, jointly announced the signing of a merger agreement pursuant to which the Company will acquire HMNF. 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 Company’s wholly-owned subsidiary, Alerus Financial, National Association, in a transaction valued at approximately $123.7 million. The acquisition will further enhance the Company’s footprint in southern Minnesota.

Under the terms of the merger agreement, stockholders of HMNF 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 are not met at closing, and the merger is expected to qualify as a tax-free reorganization for HMNF’s stockholders. Based on the closing price of the Company’s common stock on May 14, 2024, the trading day immediately preceding the public announcement of the merger, of $20.69, the implied merger consideration that an HMNF stockholder would be entitled to receive for each share of HMNF common stock owned would be $25.86 with an aggregate transaction value of approximately $123.7 million. Upon closing of the transaction, stockholders of HMNF are expected to hold approximately 22.0% of the Company’s outstanding common stock.

The transaction has been unanimously approved by the Boards of Directors of both companies. Completion of the merger is subject to customary closing conditions, including receipt of required regulatory approvals and approval by the stockholders of both the Company and HMNF. Both the Company and HMNF will host special meetings of their respective stockholders on September 12, 2024, in order to seek approval of the transaction. The transaction is expected to close in the fourth quarter of 2024.

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.

NOTE 4 Investment Securities

Trading securities are reported on the Company’s consolidated balance sheet at fair value. As of June 30, 2024, the fair value of the Company’s trading securities was $2.9 million. There wereno trading securities as of December 31, 2023. Changes in fair value of trading securities are recorded in other noninterest income on the Company’s consolidated statements of income. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company’s deferred compensation plan for eligible employees, executives, and directors.

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


· · June 30, 2024
· · Amortized · · Unrealized · · Unrealized · · Allowance for · · Fair
(dollars in thousands) · Cost · · Gains · · Losses · · Credit Losses · Value
Available-for-sale
U.S. Treasury and agencies	$765	$3	$(2)	$—	$766
Mortgage backed securities
Residential agency	501,718	—	(93,930)	—	407,788
Commercial	1,465	—	(112)	—	1,353
Asset backed securities	22	—	(1)	—	21
Corporate bonds	57,990	—	(8,573)	—	49,417
Total available-for-sale investment securities	561,960	3	(102,618)	—	459,345
Held-to-maturity
Obligations of state and political agencies	123,273	—	(13,320)	94	109,953
Mortgage backed securities
Residential agency	163,410	—	(29,674)	57	133,736
Total held-to-maturity investment securities	286,683	—	(42,994)	151	243,689
Total investment securities	$848,643	$3	$(145,612)	$151	$703,034


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

The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of June 30, 2024 represented a credit loss impairment. As of both June 30, 2024 and December 31,2023, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions as of both June 30, 2024 and December 31, 2023; however, all such bonds had an investment grade rating as of both June 30, 2024 and December 31,2023. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

The ACL on HTM debt securities is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Using a probability of default and loss on given default analysis, the ACL on HTM debt securities was $151 thousand and $213 thousand as of June 30, 2024 and December 31, 2023, respectively.

Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of June 30, 2024, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.4 million and $1.3 million, respectively. As of December 31, 2023, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.5 million and $1.4 million, respectively.

The Company hadno sales or calls of AFS investment securities for the three and six months ended June 30, 2024 and 2023.

The Company hadno sales of HTM investment securities for the three and six months ended June 30, 2024 and 2023.

The following tables present investment securities with gross unrealized losses, for which an ACL has not been recorded at June 30, 2024 and December 31, 2023, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:

· · · · · · · · · · · · · · · · · · · ·
· · · · June 30, 2024
· · · · Less than 12 Months · · Over 12 Months · · Total
	Number of	Unrealized	Fair	Unrealized	Fair	Unrealized	Fair
(dollars in thousands) · Holdings · · Losses · Value · Losses · Value · Losses · Value
Available-for-sale · · · · · · · · · · · · · · · · · · · ·
U.S. Treasury and agencies	1	$(2)	$390	$—	$—	$(2)	$390
Mortgage backed securities
Residential agency	111	—	60	(93,930)	407,712	(93,930)	407,772
Commercial	1	—	—	(112)	1,353	(112)	1,353
Asset backed securities	3	—	—	(1)	21	(1)	21
Corporate bonds	12	—	—	(8,573)	49,417	(8,573)	49,417
Total available-for-sale investment securities	128	$(2)	$450	$(102,616)	$458,503	$(102,618)	$458,953


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

The Company determined that the expected credit loss on its HTM portfolio was $151 thousand and $213 thousand as of June 30, 2024, and December 31, 2023, respectively. The change in the ACL on HTM debt securities was due to a change in the provision for credit losses, withno charge-offs or recoveries for the three and six months ended June 30, 2024.

As of June 30, 2024 and December 31, 2023, none of the Company’s HTM debt securities were past due or on nonaccrual status. The Company did not recognize any interest income on nonaccrual HTM debt securities during the three months ended June 30, 2024 and 2023.

The following table presents the carrying value and fair value of HTM investment securities and the amortized cost and fair value of AFS investment securities as of June 30, 2024, by contractual maturity:


· · Held-to-maturity · · Available-for-sale
· · Carrying · · Fair · · Amortized · · Fair
(dollars in thousands) · Value · · Value · · Cost · Value
Due within one year or less	$7,992	$7,823	$—	$—
Due after one year through five years	51,078	46,779	1,868	1,754
Due after five years through ten years	52,362	45,159	57,995	49,421
Due after 10 years	11,841	10,192	379	382
	123,273	109,953	60,242	51,557
Mortgage-backed securities
Residential agency	163,410	133,736	501,718	407,788
Total investment securities	$286,683	$243,689	$561,960	$459,345

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment securities with a total carrying value of $525.8 million and $250.0 million were pledged as of June 30, 2024 and December 31, 2023, respectively, to secure public deposits and for other purposes required or permitted by law.

As of June 30, 2024 and December 31, 2023, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:

· · · · · ·
	June 30,	December 31,
(dollars in thousands) · 2024 · 2023
Federal Reserve	$4,623	$4,623
FHLB	11,614	16,566

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

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of June 30, 2024, the conversion ratio was 1.5875. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (10,992 Class A equivalents) that the Company owned as of June 30, 2024 and December 31, 2023, were carried at azero cost basis.

NOTE 5 Loans and Allowance for Credit Losses

The following table presents total loans outstanding, by portfolio segment, as of June 30, 2024 and December 31, 2023:


· June 30, · December 31,
(dollars in thousands)	2024		2023
Commercial
Commercial and industrial		$591,779		$562,180
Commercial real estate
Construction, land and development		161,751		124,034
Multifamily		242,041		245,103
Non-owner occupied		647,776		569,354
Owner occupied		283,356		271,623
Total commercial real estate		1,334,924		1,210,114
Agricultural
Land		41,410		40,832
Production		40,549		36,141
Total agricultural		81,959		76,973
Total commercial		2,008,662		1,849,267
Consumer
Residential real estate
First lien		686,286		697,900
Construction		22,573		28,979
HELOC		126,211		118,315
Junior lien		36,323		35,819
Total residential real estate		871,393		881,013
Other consumer		35,737		29,303
Total consumer		907,130		910,316
Total loans		$2,915,792		$2,759,583

Total loans included net deferred loan fees and costs of $264 thousand and $248 thousand at June 30, 2024 and December 31, 2023, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $3.9 million and $5.1 million as of June 30, 2024 and December 31, 2023, respectively.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $13.5 million at June 30, 2024 and $12.2 million at December 31, 2023.

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

●

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

●

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

●	The adequacy of the ACL is overseen by the ACL Governance Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including

Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking. The ACL Governance Committee supports the oversight efforts of the Board of Directors.

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

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

Loans with a carrying value of $2.1 billion as of June 30, 2024 and December 31, 2023, were pledged to secure public deposits, and for other purposes required or permitted by law.

ACL on Loans

The following tables present, by loan portfolio segment, a summary of the changes in the ACL on loans for the three and six months ended June 30, 2024 and 2023:


· · Three months ended June 30, 2024
· · Beginning · · Provision for · · Loan · · Loan · · Ending
(dollars in thousands) · Balance · Credit Losses(1) · Charge-offs · Recoveries · Balance
Commercial · · · · ·
Commercial and industrial	$9,508	$(663)	$(2,730)	$119	$6,234
Commercial real estate
Construction, land and development	5,922	4,898	—	—	10,820
Multifamily	2,148	282	—	—	2,430
Non-owner occupied	8,104	668	—	—	8,772
Owner occupied	2,461	(190)	—	9	2,280
Total commercial real estate	18,635	5,658	—	9	24,302
Agricultural
Land	248	11	—	—	259
Production	219	(34)	—	—	185
Total agricultural	467	(23)	—	—	444
Total commercial	28,610	4,972	(2,730)	128	30,980
Consumer
Residential real estate
First lien	6,152	(786)	—	—	5,366
Construction	489	(31)	—	—	458
HELOC	864	22	—	—	886
Junior lien	284	(41)	(3)	74	314
Total residential real estate	7,789	(836)	(3)	74	7,024
Other consumer	185	134	(1)	10	328
Total consumer	7,974	(702)	(4)	84	7,352
Total	$36,584	$4,270	$(2,734)	$212	$38,332

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $275 thousand related to off-balance sheet credit exposure and $(56) thousand related to HTM investment securities.


· · Six months ended June 30, 2024
· · Beginning · · Provision for · · Loan · · Loan · · Ending
(dollars in thousands) · Balance · Credit Losses(1) · Charge-offs · Recoveries · Balance
Commercial · · · · ·
Commercial and industrial	$9,705	$(819)	$(2,894)	$242	$6,234
Commercial real estate
Construction, land and development	6,135	4,685	—	—	10,820
Multifamily	1,776	654	—	—	2,430
Non-owner occupied	7,726	1,046	—	—	8,772
Owner occupied	2,449	(160)	(29)	20	2,280
Total commercial real estate	18,086	6,225	(29)	20	24,302
Agricultural
Land	96	163	—	—	259
Production	84	101	—	—	185
Total agricultural	180	264	—	—	444
Total commercial	27,971	5,670	(2,923)	262	30,980
Consumer
Residential real estate
First lien	6,087	(721)	—	—	5,366
Construction	485	(27)	—	—	458
HELOC	835	51	—	—	886
Junior lien	264	(21)	(3)	74	314
Total residential real estate	7,671	(718)	(3)	74	7,024
Other consumer	201	117	(13)	23	328
Total consumer	7,872	(601)	(16)	97	7,352
Total	$35,843	$5,069	$(2,939)	$359	$38,332

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of ($518) thousand related to off-balance sheet credit exposure and $(62) thousand related to HTM investment securities.


· · Three months ended June 30, 2023
· · Beginning · · Provision for · · Loan · · Loan · · Ending
(dollars in thousands) · Balance · Credit Losses(1) · Charge-offs · Recoveries · · Balance
Commercial
Commercial and industrial	$7,954	$(137)	$(85)	$438	$8,170
Commercial real estate
Construction, land and development	4,349	(618)	—	—	3,731
Multifamily	1,562	429	—	—	1,991
Non-owner occupied	8,045	510	—	—	8,555
Owner occupied	2,900	(17)	—	11	2,894
Total commercial real estate	16,856	304	—	11	17,171
Agricultural
Land	192	(56)	—	1	137
Production	152	(49)	—	—	103
Total agricultural	344	(105)	—	1	240
Total commercial	25,154	62	(85)	450	25,581
Consumer
Residential real estate
First lien	7,389	182	—	—	7,571
Construction	908	(123)	—	—	785
HELOC	1,038	79	—	—	1,117
Junior lien	290	(5)	—	46	331
Total residential real estate	9,625	133	—	46	9,804
Other consumer	323	(4)	(23)	15	311
Total consumer	9,948	129	(23)	61	10,115
Total	$35,102	$191	$(108)	$511	$35,696

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $186 thousand related to off-balance sheet credit exposure and $5 thousand related to HTM investment securities.


· · Six months ended June 30, 2023
· · Beginning · · Adoption · · Provision for · · Loan · · Loan · · Ending
(dollars in thousands) · Balance · of ASC 326 · Credit Losses(1) · Charge-offs · Recoveries · · Balance
Commercial
Commercial and industrial	$8,690	$(535)	$(219)	$(260)	$494	$8,170
Commercial real estate
Construction, land and development	1,458	2,551	(278)	—	—	3,731
Multifamily	1,062	(162)	1,091	—	—	1,991
Non-owner occupied	7,543	1,344	(332)	—	—	8,555
Owner occupied	4,188	(1,324)	8	—	22	2,894
Total commercial real estate	14,251	2,409	489	—	22	17,171
Agricultural
Land	281	(86)	(59)	—	1	137
Production	250	(76)	(71)	—	—	103
Total agricultural	531	(162)	(130)	—	1	240
Total commercial	23,472	1,712	140	(260)	517	25,581
Consumer
Residential real estate
First lien	5,495	1,800	274	—	2	7,571
Construction	345	468	(28)	—	—	785
HELOC	951	59	104	—	3	1,117
Junior lien	352	(85)	92	(77)	49	331
Total residential real estate	7,143	2,242	442	(77)	54	9,804
Other consumer	531	(97)	(122)	(28)	27	311
Total consumer	7,674	2,145	320	(105)	81	10,115
Total	$31,146	$3,857	$460	$(365)	$598	$35,696

(1)	The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $44 thousand related to off-balance sheet credit exposure and $46 thousand related to HTM investment securities.

The ACL on loans at June 30, 2024 was $38.3 million, an increase of $2.5 million, or 6.9%, from December 31, 2023. The increase was primarily due to a combined ACL increase of $5.7 million in the provision for credit losses on construction, land and development and non-owner occupied commercial real estate (“CRE”) loans. This increase was primarily due to organic loan growth and an increased reserve related to an individually evaluated construction, land and development CRE loan. This was partially offset by a decreased ACL for commercial and industrial loans. This decrease was primarily driven by a $2.6 million charge-off ofone loan.

Credit Concentrations

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes and state and county codes. Property type coding is used for investment real estate. As of June 30, 2024, the Company’s total exposure to the general business industry was 10.0% of total loans. There were no other industry concentrations exceeding 10% of the Company’s total loan portfolio as of June 30, 2024.

Credit Quality Indicators

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

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

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

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

●

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

●

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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

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

The following tables set forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of June 30, 2024 and December 31, 2023:


· · · · · · · · · · · · · · · · · · · · Revolving · · ·
(dollars in thousands) · Term Loans Amortized Cost Basis by Origination Year · · Loans Amortized · · ·
As of June 30, 2024 · · 2024 · · 2023 · · 2022 · · 2021 · · 2020 · · Prior · · Cost Basis · · Total
Commercial and industrial · · · · · · · · · · · · · · · · ·
Pass	$80,726	$163,047	$75,992	$51,180	$49,204	$42,627	$109,070	$571,846
Special mention	—	534	—	7,634	—	10	3	8,181
Substandard	—	685	—	2,469	3,084	2,158	3,356	11,752
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$80,726	$164,266	$75,992	$61,283	$52,288	$44,795	$112,429	$591,779
Gross charge-offs for the period ended	$—	$85	$—	$—	$2,566	$243	$—	$2,894
CRE − Construction, land and development
Pass	$23,657	$40,253	$63,103	$5,113	$17	$915	$7,218	$140,276
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	21,475	—	—	—	—	21,475
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$23,657	$40,253	$84,578	$5,113	$17	$915	$7,218	$161,751
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Multifamily
Pass	$22,571	$67,366	$66,831	$19,364	$31,879	$20,581	$261	$228,853
Special mention	—	—	—	—	12,884	—	—	12,884
Substandard	—	—	—	—	—	304	—	304
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$22,571	$67,366	$66,831	$19,364	$44,763	$20,885	$261	$242,041
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Non-owner occupied
Pass	$49,799	$161,500	$145,403	$64,835	$61,646	$139,166	$5,179	$627,528
Special mention	—	—	—	7,070	—	1,109	—	8,179
Substandard	—	5,717	—	2,592	—	3,760	—	12,069
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$49,799	$167,217	$145,403	$74,497	$61,646	$144,035	$5,179	$647,776
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Owner occupied
Pass	$27,824	$30,586	$52,609	$42,915	$35,143	$82,351	$2,523	$273,951
Special mention	—	—	—	—	—	339	—	339
Substandard	—	244	97	2,506	—	6,219	—	9,066
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$27,824	$30,830	$52,706	$45,421	$35,143	$88,909	$2,523	$283,356
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$29	$—	$29
Agricultural − Land
Pass	$3,308	$5,769	$12,754	$4,581	$5,709	$6,819	$—	$38,940
Special mention	—	—	—	—	—	—	—	—
Substandard	—	304	2,166	—	—	—	—	2,470
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$3,308	$6,073	$14,920	$4,581	$5,709	$6,819	$—	$41,410
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Agricultural − Production
Pass	$6,650	$6,451	$4,868	$620	$1,513	$715	$18,385	$39,202
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	1,347	—	—	—	—	1,347
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$6,650	$6,451	$6,215	$620	$1,513	$715	$18,385	$40,549
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − First lien
Performing	$11,419	$61,592	$189,493	$210,737	$104,462	$107,778	$180	$685,661
Nonperforming	—	—	—	7	12	606	—	625
Subtotal	$11,419	$61,592	$189,493	$210,744	$104,474	$108,384	$180	$686,286
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − Construction
Performing	$1,162	$10,085	$10,022	$1,304	$—	$—	$—	$22,573
Nonperforming	—	—	—	—	—	—	—	—
Subtotal	$1,162	$10,085	$10,022	$1,304	$—	$—	$—	$22,573
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − HELOC
Performing	$1,505	$6,663	$6,403	$1,245	$1,052	$1,248	$107,932	$126,048
Nonperforming	—	—	—	—	—	163	—	163
Subtotal	$1,505	$6,663	$6,403	$1,245	$1,052	$1,411	$107,932	$126,211
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − Junior lien
Performing	$3,796	$9,981	$8,277	$4,712	$3,035	$4,596	$1,807	$36,204
Nonperforming	—	—	—	107	—	12	—	119
Subtotal	$3,796	$9,981	$8,277	$4,819	$3,035	$4,608	$1,807	$36,323
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$3	$—	$3
Other consumer
Performing	$5,002	$4,131	$5,415	$704	$2,807	$1,236	$16,442	$35,737
Nonperforming	—	—	—	—	—	—	—	—
Subtotal	$5,002	$4,131	$5,415	$704	$2,807	$1,236	$16,442	$35,737
Gross charge-offs for the period ended	$—	$—	$3	$—	$—	$10	$—	$13
Total loans	$237,419	$574,908	$666,255	$429,695	$312,447	$422,712	$272,356	$2,915,792
Gross charge-offs for the period ended	$—	$85	$3	$—	$2,566	$285	$—	$2,939


· · · · · · · · · · · · · · · · · · · · Revolving · · ·
(dollars in thousands) · Term Loans Amortized Cost Basis by Origination Year · · Loans Amortized · · ·
As of December 31, 2023 · · 2023 · · 2022 · · 2021 · · 2020 · · 2019 · · Prior · · Cost Basis · · Total
Commercial and industrial · · · · · · · · · · · · · · · · ·
Pass	$189,643	$83,233	$66,837	$62,367	$31,859	$14,879	$83,522	$532,340
Special mention	—	—	—	—	—	—	—	—
Substandard	464	4,844	236	6,328	94	2,513	15,361	29,840
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$190,107	$88,077	$67,073	$68,695	$31,953	$17,392	$98,883	$562,180
Gross charge-offs for the period ended	$39	$—	$49	$11	$247	$90	$—	$436
CRE − Construction, land and development
Pass	$29,902	$57,944	$14,326	$122	$—	$952	$121	$103,367
Special mention	—	—	—	—	—	—	—	—
Substandard	—	20,667	—	—	—	—	—	20,667
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$29,902	$78,611	$14,326	$122	$—	$952	$121	$124,034
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Multifamily
Pass	$71,994	$67,368	$16,637	$48,643	$24,581	$15,435	$135	$244,793
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	310	—	310
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$71,994	$67,368	$16,637	$48,643	$24,581	$15,745	$135	$245,103
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Non-owner occupied
Pass	$154,813	$127,550	$79,046	$62,857	$69,269	$69,680	$5,121	$568,336
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	875	143	—	1,018
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$154,813	$127,550	$79,046	$62,857	$70,144	$69,823	$5,121	$569,354
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
CRE − Owner occupied
Pass	$39,030	$55,337	$41,623	$36,339	$22,340	$66,574	$2,538	$263,781
Special mention	—	—	—	—	—	262	—	262
Substandard	—	587	2,872	—	2,815	1,306	—	7,580
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$39,030	$55,924	$44,495	$36,339	$25,155	$68,142	$2,538	$271,623
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Agricultural − Land
Pass	$6,424	$15,294	$4,721	$5,958	$672	$7,763	$—	$40,832
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$6,424	$15,294	$4,721	$5,958	$672	$7,763	$—	$40,832
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Agricultural − Production
Pass	$7,890	$5,858	$854	$1,904	$2,744	$174	$16,717	$36,141
Special mention	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—
Subtotal	$7,890	$5,858	$854	$1,904	$2,744	$174	$16,717	$36,141
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − First lien
Performing	$61,201	$190,749	$217,146	$108,100	$33,102	$87,213	$284	$697,795
Nonperforming	—	—	—	—	—	105	—	105
Subtotal	$61,201	$190,749	$217,146	$108,100	$33,102	$87,318	$284	$697,900
Gross charge-offs for the period ended	$—	$—	$9	$—	$—	$—	$—	$9
Residential real estate − Construction
Performing	$10,978	$16,428	$1,573	$—	$—	$—	$—	$28,979
Nonperforming	—	—	—	—	—	—	—	—
Subtotal	$10,978	$16,428	$1,573	$—	$—	$—	$—	$28,979
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$—	$—	$—
Residential real estate − HELOC
Performing	$7,470	$6,835	$789	$1,184	$308	$1,341	$100,388	$118,315
Nonperforming	—	—	—	—	—	—	—	—
Subtotal	$7,470	$6,835	$789	$1,184	$308	$1,341	$100,388	$118,315
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$40	$—	$40
Residential real estate − Junior lien
Performing	$10,938	$8,820	$5,157	$3,673	$1,461	$3,939	$50	$34,038
Nonperforming	—	—	—	—	—	—	1,781	1,781
Subtotal	$10,938	$8,820	$5,157	$3,673	$1,461	$3,939	$1,831	$35,819
Gross charge-offs for the period ended	$—	$—	$—	$—	$—	$77	$—	$77
Other consumer
Performing	$5,320	$6,395	$980	$4,489	$1,554	$952	$9,613	$29,303
Nonperforming	—	—	—	—	—	—	—	—
Subtotal	$5,320	$6,395	$980	$4,489	$1,554	$952	$9,613	$29,303
Gross charge-offs for the period ended	$4	$2	$—	$31	$6	$8	$—	$51
Total loans	$596,067	$667,909	$452,797	$341,964	$191,674	$273,541	$235,631	$2,759,583
Gross charge-offs for the period ended	$43	$2	$58	$42	$253	$215	$—	$613

Past Due and Nonaccrual Loans

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

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of June 30, 2024 and December 31, 2023:


· · June 30, 2024
· · · · · · · · · · · 90 Days · · · · · ·
· · Accruing · · 30 - 59 Days · · 60 - 89 Days · · or More · · · · · Total
(dollars in thousands) · Current · Past Due · Past Due · Past Due · Nonaccrual · Loans
Commercial · · · · · ·
Commercial and industrial	$586,979	$1,594	$128	$—	$3,078	$591,779
Commercial real estate
Construction, land and development	140,276	—	—	—	21,475	161,751
Multifamily	242,041	—	—	—	—	242,041
Non-owner occupied	641,975	—	5,801	—	—	647,776
Owner occupied	280,989	279	—	—	2,088	283,356
Total commercial real estate	1,305,281	279	5,801	—	23,563	1,334,924
Agricultural
Land	41,410	—	—	—	—	41,410
Production	40,479	—	—	—	70	40,549
Total agricultural	81,889	—	—	—	70	81,959
Total commercial	1,974,149	1,873	5,929	—	26,711	2,008,662
Consumer
Residential real estate
First lien	684,325	877	460	—	624	686,286
Construction	17,893	—	4,680	—	—	22,573
HELOC	124,392	274	1,382	—	163	126,211
Junior lien	35,648	108	447	—	120	36,323
Total residential real estate	862,258	1,259	6,969	—	907	871,393
Other consumer	35,309	132	296	—	—	35,737
Total consumer	897,567	1,391	7,265	—	907	907,130
Total	$2,871,716	$3,264	$13,194	$—	$27,618	$2,915,792


· · December 31, 2023
· · · · · · · · · · · 90 Days · · · · · ·
· · Accruing · · 30 - 59 Days · · 60 - 89 Days · · or More · · · · · Total
(dollars in thousands) · Current · Past Due · Past Due · Past Due · Nonaccrual · Loans
Commercial · · · · · ·
Commercial and industrial	$554,602	$844	$—	$139	$6,595	$562,180
Commercial real estate
Construction, land and development	124,034	—	—	—	—	124,034
Multifamily	245,103	—	—	—	—	245,103
Non-owner occupied	569,267	87	—	—	—	569,354
Owner occupied	270,467	41	—	—	1,115	271,623
Total commercial real estate	1,208,871	128	—	—	1,115	1,210,114
Agricultural
Land	40,832	—	—	—	—	40,832
Production	36,061	80	—	—	—	36,141
Total agricultural	76,893	80	—	—	—	76,973
Total commercial	1,840,366	1,052	—	139	7,710	1,849,267
Consumer
Residential real estate
First lien	695,807	901	554	—	638	697,900
Construction	28,979	—	—	—	—	28,979
HELOC	117,540	597	—	—	178	118,315
Junior lien	35,680	69	—	—	70	35,819
Total residential real estate	878,006	1,567	554	—	886	881,013
Other consumer	29,086	170	47	—	—	29,303
Total consumer	907,092	1,737	601	—	886	910,316
Total	$2,747,458	$2,789	$601	$139	$8,596	$2,759,583

In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following tables present the amortized cost basis on nonaccrual status loans and loans 90 days or more past due and still accruing as of June 30, 2024 and December 31, 2023:


· · As of June 30, 2024
· · · · · · · 90 Days
· · Nonaccrual · · · · · or More
· · with no Allowance · · · · · Past Due
(dollars in thousands) · · for Credit Losses · · Nonaccrual · · and Accruing
Commercial
Commercial and industrial	$3,061	$3,078	$—
Commercial real estate
Construction, land and development	—	21,475	—
Multifamily	—	—	—
Non-owner occupied	—	—	—
Owner occupied	1,446	2,088	—
Total commercial real estate	1,446	23,563	—
Agricultural
Land	—	—	—
Production	70	70	—
Total agricultural	70	70	—
Total commercial	4,577	26,711	—
Consumer
Residential real estate
First lien	618	624	—
Construction	—	—	—
HELOC	163	163	—
Junior lien	120	120	—
Total residential real estate	901	907	—
Other consumer	—	—	—
Total consumer	901	907	—
Total	$5,478	$27,618	$—


· · December 31, 2023
· · · · · · · 90 Days
· · Nonaccrual · · · · · or More
· · with no Allowance · · · · · Past Due
(dollars in thousands) · · for Credit Losses · · Nonaccrual · · and Accruing
Commercial
Commercial and industrial	$79	$6,595	$139
Commercial real estate
Construction, land and development	—	—	—
Multifamily	—	—	—
Non-owner occupied	—	—	—
Owner occupied	95	1,115	—
Total commercial real estate	95	1,115	—
Agricultural
Land	—	—	—
Production	—	—	—
Total agricultural	—	—	—
Total commercial	174	7,710	139
Consumer
Residential real estate
First lien	632	638	—
Construction	—	—	—
HELOC	115	178	—
Junior lien	70	70	—
Total residential real estate	817	886	—
Other consumer	—	—	—
Total consumer	817	886	—
Total	$991	$8,596	$139

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended June 30, 2024 and 2023, is estimated to have been $188 thousand and $63 thousand, respectively.

The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual status. As a result, the Company did not record any interest income on its nonaccrual loans for the three months ended June 30, 2024 or 2023. At June 30, 2024 and December 31, 2023, total accrued interest receivable on loans, which had been excluded from reported amortized cost basis on loans, was $13.5 million and $12.2 million, respectively, and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

In cases where a borrower experiences financial difficulty, the Company may make certain concessions for which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During both the three and six months ended June 30, 2024 and 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.

The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of June 30, 2024 and December 31, 2023:


· · As of June 30, 2024
· · Primary Type of Collateral
· · · · · · · · · · · · · · Allowance for
(dollars in thousands) · · Real estate · · Equipment · · Other · · Total · · Credit Losses
Commercial
Commercial and industrial	$2,790	$—	$—	$2,790	$—
Commercial real estate
Construction, land and development	21,475	—	—	21,475	5,756
Multifamily	—	—	—	—	—
Non-owner occupied	—	—	—	—	—
Owner occupied	828	—	29	857	328
Total commercial real estate	22,303	—	29	22,332	6,084
Agricultural
Land	—	—	—	—	—
Production	—	70	—	70	—
Total agricultural	—	70	—	70	—
Total commercial	25,093	70	29	25,192	6,084
Consumer
Residential real estate
First lien	624	—	—	624	3
Construction	—	—	—	—	—
HELOC	163	—	—	163	—
Junior lien	107	6	—	113	—
Total residential real estate	894	6	—	900	3
Other consumer	—	—	—	—	—
Total consumer	894	6	—	900	3
Total	$25,987	$76	$29	$26,092	$6,087


· · As of December 31, 2023
· · Primary Type of Collateral
· · · · · · · · · · · · · · Allowance for
(dollars in thousands) · · Real estate · · Equipment · · Other · · Total · · Credit Losses
Commercial
Commercial and industrial	$6,124	$—	$—	$6,124	$2,384
Commercial real estate
Construction, land and development	—	—	—	—	—
Multifamily	—		—	—	—
Non-owner occupied	—		—	—	—
Owner occupied	695		96	791	601
Total commercial real estate	695	—	96	791	601
Agricultural
Land	—	—	—	—	—
Production	—	—	—	—	—
Total agricultural	—	—	—	—	—
Total commercial	6,819	—	96	6,915	2,985
Consumer
Residential real estate
First lien	638	—	—	638	3
Construction	—		—	—	—
HELOC	64	22	—	86	—
Junior lien	70	—	93	163	6
Total residential real estate	772	22	93	887	9
Other consumer	—	—	—	—	—
Total consumer	772	22	93	887	9
Total	$7,591	$22	$189	$7,802	$2,994

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

NOTE 6 Land, Premises and Equipment, Net

Components of land, premises and equipment at June 30, 2024 and December 31, 2023 were as follows:


· · June 30, · · December 31,
(dollars in thousands) · 2024 · 2023
Land (1)	$3,036	$4,542
Buildings and improvements (1)	23,177	28,172
Leasehold improvements	2,657	2,657
Furniture, fixtures, and equipment	36,136	34,086
	65,006	69,457
Less accumulated depreciation	(47,678)	(51,517)
Total	$17,328	$17,940

(1)	Excludes assets held for sale.

Depreciation expense was $0.7 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively. Depreciation expense was $1.3 million and $1.2 million for the six months ended June 30, 2024 and 2023, respectively.

On July 1, 2024, the Company entered into a purchase agreement to sell its South Fargo branch in Fargo, North Dakota. At June 30, 2024, the facility included assets with a carrying value of approximately $1.7 million. 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. On February 6, 2024, the Company entered into a purchase agreement to sell its branch in Shorewood, Minnesota for $2.8 million. 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 $2.8 million is greater than the property’s carrying value of $2.1 million. Total assets held for sale by the Company at June 30, 2024 were $3.8 million and were included in other assets on the Company’s consolidated balance sheet and not included in the table above.

NOTE 7 Goodwill and Other Intangible Assets

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


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

Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there wasno goodwill impairment as of June 30, 2024.

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


· · June 30, 2024 · · December 31, 2023
(dollars in thousands) · Gross Carrying Amount · Accumulated Amortization · Total · Gross Carrying Amount · Accumulated Amortization · Total
Identifiable customer intangibles	$41,423	$(31,974)	$9,449	$41,423	$(29,959)	$11,464
Core deposit intangible assets	7,592	(2,531)	5,061	7,592	(1,898)	5,694
Total intangible assets	$49,015	$(34,505)	$14,510	$49,015	$(31,857)	$17,158

Amortization of intangible assets was $1.3 million for both the three months ended June 30, 2024 and 2023. Amortization of intangible assets was $2.6 million for both the six months ended June 30, 2024 and 2023.

NOTE 8 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $184.3 million and $190.0 million as of June 30, 2024 and December 31, 2023, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

The following table summarizes the Company’s activity related to servicing rights for the three and six months ended June 30, 2024 and 2023:


· Three months ended · Six months ended
· · June 30, · · June 30,
(dollars in thousands)	2024		2023		2024		2023
Servicing Assets:
Balance at beginning of period		$1,983		$2,421		$2,052		$2,643
Additions, net of valuation reserve (1)		320		312		341		274
Amortization (2)		(133)		(134)		(223)		(318)
Balance at end of period		2,170		2,599		2,170		2,599
Less valuation reserve (3)		(207)		(248)		(207)		(248)
Balance at end of period, net of valuation reserve		$1,963		$2,351		$1,963		$2,351
Fair value, beginning of period		$2,083		$2,421		$2,062		$2,643
Fair value, end of period		$2,082		$2,351		$2,082		$2,351

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

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

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

The following is a summary of key data and assumptions used in the valuation of servicing rights as of June 30, 2024 and December 31, 2023. Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements.

· · · · · · ·
· June 30, · December 31,
(dollars in thousands)	2024	2023
Fair value of servicing rights	$2,082	$2,062
Weighted-average remaining term, years	18.9	18.8
Prepayment speeds	6.3%	6.2%
Discount rate	11.1%	11.1%

NOTE 9 Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee are comprised of real property for offices and office equipment rentals with terms extending through 2037. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases. The Company hasno existing finance leases.

The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial statements as of June 30, 2024 and December 31, 2023:

· · · · · · · ·
· June 30, · December 31,
(dollars in thousands) · · 2024 · 2023
Lease Right-of-Use Assets · · Classification · · · · · ·
Operating lease right-of-use assets	Operating lease right-of-use assets	$4,871	$5,436
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$5,197	$5,751

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

· · · · ·
		June 30,		December 31,
· 2024 · 2023 ·
Weighted-average remaining lease term, years · · · · ·
Operating leases	7.4		7.3
Weighted-average discount rate
Operating leases	3.8%		3.9%

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

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


· Three months ended · Six months ended
· · June 30, · · June 30,
(dollars in thousands) · 2024 · 2023 · 2024 · · 2023
Lease costs · · · · · · · · ·
Operating lease cost	$442	$354	$903	$935
Variable lease cost	206	474	472	699
Short-term lease cost	67	39	104	82
Finance lease cost
Interest on lease liabilities	—	—	—	—
Amortization of right-of-use assets	—	—	—	—
Sublease income	(51)	(60)	(99)	(119)
Net lease cost	$664	$807	$1,380	$1,597
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$460	$474	$920	$953
Right-of-use assets obtained in exchange for new operating lease liabilities	210	2,029	318	2,286

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

· · ·
		Operating
(dollars in thousands)	Leases
Twelve months ended · · ·
June 30, 2025		$1,664
June 30, 2026		1,313
June 30, 2027		1,135
June 30, 2028		588
June 30, 2029		383
Thereafter		1,845
Total future minimum lease payments		$6,928
Amounts representing interest		(1,731)
Total operating lease liabilities		$5,197

NOTE 10 Deposits

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

· · · · · ·
	June 30,	December 31,
(dollars in thousands) · 2024 · 2023
Noninterest-bearing	$701,428	$728,082
Interest-bearing
Interest-bearing demand	1,003,585	840,711
Savings accounts	79,747	82,485
Money market savings	1,022,470	1,032,771
Time deposits	491,345	411,562
Total interest-bearing	2,597,147	2,367,529
Total deposits	$3,298,575	$3,095,611

Certificates of deposit in excess of $250,000 totaled $190.8 million and $121.8 million at June 30, 2024 and December 31, 2023, respectively.

NOTE 11 Short-Term Borrowings

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


· · June 30, · · December 31,
(dollars in thousands) · 2024 · 2023
Fed funds purchased	$—	$114,170
Bank Term Funding Program (1)	355,000	—
FHLB short-term advances	200,000	200,000
Total	$555,000	$314,170

(1)

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

NOTE 12 Long-Term Debt

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

· · · · · · · · · · · · · ·
· · June 30, 2024
· · · · · · · · · · Period End · · · ·
	Face		Carrying		Interest		Maturity
(dollars in thousands) · Value · Value · Interest Rate · Rate · Date · Call Date
Subordinated notes payable	$50,000		$50,000	Fixed	3.50%	3/30/2031		3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,605	Three-month CME SOFR + 0.26% + 3.10%		8.70%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,408	Three-month CME SOFR + 0.26% + 1.80%		7.40%	9/15/2036	9/15/2011
Total long-term debt	$60,310		$59,013

· · · · · · · · · · · · · ·
· · December 31, 2023
· · · · · · · · · · Period End · · · ·
· · Face · · Carrying · · · · Interest · · Maturity · ·
(dollars in thousands) · Value · Value · Interest Rate · Rate · Date · Call Date
Subordinated notes payable	$50,000	$50,000	Fixed	3.50%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)	4,124	3,583	Three-month CME SOFR + 0.26% + 3.10%	8.72%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)	6,186	5,373	Three-month CME SOFR + 0.26% + 1.80%	7.45%	9/15/2036	9/15/2011
Total long-term debt	$60,310	$58,956

NOTE 13 Commitments and Contingencies

Commitments

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

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

· · · · · ·
	June 30,	December 31,
(dollars in thousands) · 2024 · 2023
Commitments to extend credit	$925,260	$942,413
Standby letters of credit	15,853	10,045
Total	$941,113	$952,458

The Company establishes an ACL on unfunded commitments, except those that are unconditionally cancellable by the Company. As of June 30, 2024 and December 31, 2023, the ACL on unfunded commitments was $6.9 million and $7.4 million, respectively. The ACL on unfunded commitments was presented within accrued expenses and other liabilities on the consolidated balance sheet. For the six months ended June 30, 2024 and 2023, the provision for credit losses on unfunded commitments was ($518) thousand and $44 thousand, respectively.

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

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

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company hadno letters of credit outstanding with the FHLB as of June 30, 2024 or December 31, 2023. With the Bank of North Dakota, the Company had letters of credit outstanding in the amount of $200.0 million and $182.0 million as of June 30, 2024 and December 31, 2023, respectively. Letters of credit with the Bank of North Dakota were collateralized by loans pledged to the Bank of North Dakota in the amount of $456.8 million and $454.6 million as of June 30, 2024 and December 31, 2023, respectively.

Legal Contingencies

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

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

be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.

The Company did not have any material loss contingencies that were provided for and/or that were required to be disclosed as of June 30, 2024 and December 31, 2023, respectively.

NOTE 14 Share-Based Compensation

On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Since inception, all awards issued under the plan have been restricted stock and restricted stock units. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Restricted stock units issued do not participate in dividends and recipients are not entitled to vote these restricted stock units until shares of the Company’s common stock are delivered after vesting of the restricted stock units. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. Awards issued to Company directors are not subject to any service requirements and vest immediately. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of June 30, 2024,687,308 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $121 thousand and $656 thousand for the three months ended June 30, 2024 and 2023, respectively. The compensation expense relating to awards under these plans was $714 thousand and $815 thousand for the six months ended June 30, 2024 and 2023, respectively.

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


· · Six months ended June 30,
· · 2024 · · 2023
· · · · Weighted- · · · · Weighted-
· · · Average Grant · · · · Average Grant
· Awards · Date Fair Value · Awards · Date Fair Value
Restricted Stock and Restricted Stock Unit Awards · · · · · · ·
Outstanding at beginning of period	231,657	$22.96	238,929	$23.66
Granted	90,585	21.33	82,810	20.85
Vested	(39,335)	25.71	(91,867)	21.29
Forfeited or cancelled	—	—	(22,204)	21.39
Outstanding at end of period	282,907	$22.03	207,668	$23.83

As of June 30, 2024, there was $3.4 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.3 years.

NOTE 15 Income Taxes

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


· · Three months ended June 30, ·
· · 2024 · · · 2023 ·
· · · Percent of · · · Percent of
(dollars in thousands) · · Amount · · Pretax Income · · Amount · · Pretax Income
Taxes at statutory federal income tax rate	$1,708	21.0%	$2,444	21.0%
Tax effect of:
Tax exempt income	(239)	(2.9)%	(156)	(1.3)%
State income taxes, net of federal benefits	398	4.9%	485	4.1%
Nondeductible items and other	56	0.7%	(238)	(2.0)%
Applicable income taxes	$1,923	23.7%	$2,535	21.8%

· · · · · · · · · · · ·
· · Six months ended June 30, ·
· · 2024 · · · 2023 ·
· · · Percent of · · · Percent of
(dollars in thousands) · · Amount · · Pretax Income · · Amount · · Pretax Income
Taxes at statutory federal income tax rate	$3,497	21.0%	$4,648	21.0%
Tax effect of:
Tax exempt income	(468)	(2.8)%	(300)	(1.4)%
State income taxes, net of federal benefits	812	4.9%	946	4.3%
Nondeductible items and other	173	1.0%	(453)	(2.0)%
Applicable income taxes	$4,014	24.1%	$4,841	21.9%

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

NOTE 16 Tax Credit Investments

The Company invests in qualified affordable housing projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.

The following table presents a summary of the Company’s investments in qualified affordable housing project tax credits as of June 30, 2024 and December 31, 2023:

· · · · · · · · · · · · · ·
· · June 30, 2024 · · December 31, 2023
(dollars in thousands) · · · Investment · · Unfunded Commitment · · Investment · · Unfunded Commitment
Investment · · Accounting Method · · · · · · · · · · · ·
Low income housing tax credit	Proportional amortization	$17,906	$7,010	$17,906	$12,347

The following tables present a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects for the three and six months ended June 30, 2024 and 2023:

· · · · · · · · · · · · ·
· · Three months ended June 30, ·
	2024		2023
· · Amortization · · Tax Benefit · · Amortization · · Tax Benefit ·
(dollars in thousands)	Expense (1)	Recognized (2)	Expense (1)	Recognized (2)
Low income housing tax credit	$432	$(370)	$278	$(509)

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

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

· · · · · · · · · · · ·
· · Six months ended June 30,
· · 2024 · · 2023
· · Amortization · · Tax Benefit · · Amortization · · Tax Benefit
(dollars in thousands) · · Expense (1) · · Recognized (2) · · Expense (1) · · Recognized (2)
Low income housing tax credit	$864	$(751)	$639	$(735)

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

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

NOTE 17 Segment Reporting

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

The financial information presented for each segment includes net interest income, provision for credit losses, noninterest income, and direct and indirect noninterest expense. Corporate Administration includes all remaining income and expenses not allocated to thethree operating segments.

The following tables present key metrics related to the Company’s segments for the periods presented:

· · · · · · · · · · · · · · ·
· · Three months ended June 30, 2024
		Retirement and	Wealth		Corporate
(dollars in thousands) · Banking · Benefit Services · Management · Administration · Consolidated
Net interest income (loss)	$24,684	$—		$—		$(683)	$24,001
Provision for credit losses	4,489	—		—		—	4,489
Noninterest income (loss)	4,999	16,078		6,360		(66)	27,371
Noninterest expense	19,165	13,649		3,953		1,985	38,752
Net income (loss) before taxes	$6,029	$2,429		$2,407		$(2,734)	$8,131
Total assets	$4,282,868	$34,695		$5,125		$35,935	$4,358,623


	Six months ended June 30, 2024
· · · · · Retirement and · · Wealth · · Corporate · · ·
(dollars in thousands) · Banking · Benefit Services · Management · Administration · Consolidated
Net interest income (loss)		$47,581	$—	$—	$(1,361)	$46,220
Provision for credit losses		4,489	—	—	—	4,489
Noninterest income (loss)		8,489	31,733	12,477	(5)	52,694
Noninterest expense		37,831	27,838	7,703	4,399	77,771
Net income (loss) before taxes		$13,750	$3,895	$4,774	$(5,765)	$16,654
Total assets		$4,282,868	$34,695	$5,125	$35,935	$4,358,623


· · Three months ended June 30, 2023
· · · · · Retirement and · · Wealth · · Corporate · · ·
(dollars in thousands) · Banking · Benefit Services · Management · Administration · Consolidated
Net interest income (loss)	$22,899	$—	$—	$(665)	$22,234
Provision for credit losses	—	—	—	—	—
Noninterest income	4,242	15,890	5,449	197	25,778
Noninterest expense	19,301	12,651	2,990	1,431	36,373
Net income (loss) before taxes	$7,840	$3,239	$2,459	$(1,899)	$11,639
Total assets	$3,764,246	$37,114	$4,384	$27,234	$3,832,978

· · · · · · · · · · · · · · ·
	Six months ended June 30, 2023
			Retirement and	Wealth		Corporate
(dollars in thousands) · Banking · Benefit Services · Management · Administration · Consolidated
Net interest income (loss)		$47,212	$—		$—		$(1,320)	$45,892
Provision for credit losses		550	—		—		—	550
Noninterest income		8,780	31,372		10,644		235	51,031
Noninterest expense		37,951	26,246		6,352		3,693	74,242
Net income (loss) before taxes		$17,491	$5,126		$4,292		$(4,778)	$22,131
Total assets		$3,764,246	$37,114		$4,384		$27,234	$3,832,978

Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through fourteen offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segment’s balance sheet.

Retirement and Benefit Services

Retirement and Benefit Services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; recordkeeping and administration services to other types of retirement plans; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, and COBRA recordkeeping and administration services. The division operates within each of the banking markets, as well as in Lansing, Michigan and Littleton, Colorado.

Wealth Management

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

NOTE 18 Earnings Per Share

The calculation of basic and diluted earnings per share using the two-class method for the three and six months ended June 30, 2024 and 2023 are presented below:


· · Three months ended · · Six months ended ·
· · June 30, · · June 30, ·
(dollars and shares in thousands, except per share data) · 2024 · 2023 · 2024 · 2023 ·
Net income	$6,208	$9,104	$12,640	$17,290
Dividends and undistributed earnings allocated to participating securities	38	62	78	120
Net income available to common stockholders	$6,170	$9,042	$12,562	$17,170
Weighted-average common shares outstanding for basic earnings per share	19,777	20,033	19,758	20,030
Dilutive effect of stock-based awards	273	208	260	213
Weighted-average common shares outstanding for diluted earnings per share	20,050	20,241	20,018	20,243
Earnings per common share:
Basic earnings per common share	$0.31	$0.45	$0.64	$0.86
Diluted earnings per common share	$0.31	$0.45	$0.63	$0.85

NOTE 19 Derivative Instruments

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

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

Derivatives Designated as Hedging Instruments

The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s). As of June 30, 2024, the Company only used fair value and cash flow hedges.

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

Cash flow hedges: These derivatives are interest rate swaps the Company uses to hedge the variability of expected future cash flows due to market interest changes. The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), or OCI, until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in OCI is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in OCI is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within accumulated other comprehensive income (loss), or AOCI. The Company estimates that an additional $0.4 million will be reclassified as a decrease to interest expense over the next 12 months. All cash flow hedges were highly effective for the three and six months ended June 30, 2024. As of June 30, 2024, the maximum length of time over which forecasted transactions are hedged is 7 months.

Derivatives Not Designated as Hedging Instruments

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

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

The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of June 30, 2024 and December 31, 2023:


· · Derivative Assets (1) · · Derivative Liabilities (2)
· · Notional · · Fair · · Notional · · Fair
(dollars in thousands)	Amount		Value		Amount		Value
June 30, 2024
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps		$600,000		$1,975		$600,000		$—
Cash flow hedges:
Interest rate swaps		200,000		412		200,000		—
Total derivatives designated as hedging instruments		$800,000		$2,387		$800,000		$—
Not designated as hedging instruments:
Interest rate swaps (3)		$154,244		$6,773		$154,244		$6,773
Interest rate lock commitments		27,749		434		—		—
Forward loan sales commitments		8,299		176		—		—
To-be-announced mortgage backed securities		—		—		56,250		25
Total asset derivatives not designated as hedging instruments		$190,292		$7,383		$210,494		$6,798
December 31, 2023
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps		$600,000		$—		$600,000		$352
Cash flow hedges:
Interest rate swaps		200,000		—		200,000		297
Total derivatives designated as hedging instruments		$800,000		$—		$800,000		$649
Not designated as hedging instruments:
Interest rate swaps (3)		$120,671		$8,327		$120,671		$8,348
Interest rate lock commitments		8,126		179		—		—
Forward loan sales commitments		190		6		—		—
To-be-announced mortgage backed securities		—		—		20,500		183
Total asset derivatives not designated as hedging instruments		$128,987		$8,512		$141,171		$8,531

(1)	Derivative assets are included in other assets on the Company’s consolidated balance sheet.

(2)	Derivative liabilities are included in accrued expenses and other liabilities on the Company’s consolidated balance sheet.

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

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


· · · · Gains (Losses)
· · Gains (Losses) · · Reclassified
· · Recognized in · · from OCI
(dollars in thousands) · · OCI · · into Earnings
Derivatives designated as hedging instruments
For the three months ended June 30, 2024
Cash flow hedges:
Interest rate swaps	$296	$270

For the three months ended June 30, 2023
Cash flow hedges:
Interest rate swaps	$—	$—

For the six months ended June 30, 2024
Cash flow hedges:
Interest rate swaps	$1,241	$532

For the six months ended June 30, 2023
Cash flow hedges:
Interest rate swaps	$—	$—

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


· · Location and Amount of Gains (Losses) Recognized in Income
· · Interest Income · · Interest Expense
· · Loans, · · Investment · ·
· · including · · securities - · · Short-term
(dollars in thousands)	fees		Taxable		borrowings
For the three months ended June 30, 2024
Total amounts in the Consolidated Statements of Income		$41,663		$4,845		$7,053
Fair value hedges:
Interest rate swaps		168		659		—
Cash flow hedges:
Interest rate swaps		—		—		(270)
For the three months ended June 30, 2023
Total amounts in the Consolidated Statements of Income		$33,267		$6,125		$4,763
Fair value hedges:
Interest rate swaps		—		470		—
Cash flow hedges:
Interest rate swaps		—		—		—

For the six months ended June 30, 2024
Total amounts in the Consolidated Statements of Income		$80,958		$9,413		$13,042
Fair value hedges:
Interest rate swaps		321		1,301		—
Cash flow hedges:
Interest rate swaps		—		—		(532)
For the six months ended June 30, 2023
Total amounts in the Consolidated Statements of Income		$64,200		$12,076		$9,156
Fair value hedges:
Interest rate swaps		—		623		—
Cash flow hedges:
Interest rate swaps		—		—		—

The following tables show the notional amount, carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships at June 30, 2024 and December 31, 2023, respectively:


· · June 30, 2024
· · · · · · · · Cumulative Fair
· · · · · · · · Value Hedging
· · · · · · · · Adjustment in the
· · · · Carrying Amount · · Carrying Amount of
· · Notional · · of Hedged Assets/ · · Hedged Assets/
(dollars in thousands) · · Amount · · Liabilities · · Liabilities
Mortgage-backed securities · · · · · · ·
Residential agency (1)	$200,000	$198,046	$(1,954)
Mortgage loan pools (2)	400,000	399,955	(45)
Total	$600,000	$598,001	$(1,999)

(1)	Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At June 30, 2024, the amortized cost of the closed portfolios used in these hedging relationships was $313.0 million.

(2)

These amounts include the amortized cost basis of residential real estate loans that were used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2024, the amortized cost basis of the residential real estate loans used in these hedging relationships was $644.7 million.


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

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

(2)

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

The gain (loss) recognized on derivatives not designated as hedging relationships for the three and six months ended June 30, 2024 and 2023 was as follows:

· · · · · · · · · · · · · ·
· · · · · · · · · · · · · ·
(dollars in thousands) · · · · Three months ended June 30, · · Six months ended June 30,
Derivatives not designated as hedging instruments · Consolidated Statements of Income Location · 2024 · 2023 · 2024 · 2023
Interest rate swaps	Other noninterest income	$—	$—	$21	$—
Interest rate lock commitments	Mortgage banking	59	89	210	429
Forward loan sales commitments	Mortgage banking	176	70	171	64
To-be-announced mortgage backed securities	Mortgage banking	84	302	126	129
Total gain (loss) from derivatives not designated as hedging instruments		$319	$461	$528	$622

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. These requirements are dependent on certain specified credit measures. There wasno collateral posted with third parties at June 30, 2024. The amount of collateral posted with third parties was $550 thousand at December 31, 2023. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.

Credit Risk-Related Contingent Features

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

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

As of June 30, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which included accrued interest but excluded any adjustment for non-performance risk, related to these agreements was $0 and $649 thousand, respectively. As of June 30, 2024 and December 31, 2023, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $550 thousand, respectively. If the Company had breached any of these provisions at June 30, 2024 or December 31, 2023, it could have been required to settle its obligations under the agreements at their termination value of $0 and $649 thousand, respectively.

Balance Sheet Offsetting

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


· · · · · · · · · · · Gross Amount · · ·
· · · · · · · · · · · Not Offset in the · · ·
· · · · · · · · · · · Consolidated · · ·
· · · · · · · · · · · Balance Sheets · · ·
· · Gross Amount · · Gross Amount · · Net Amount · · · · ·
· · Recognized in the · · Offset in the · · Presented in the · · · · ·
· · Consolidated · · Consolidated · · Consolidated · · Cash Collateral · · ·
(dollars in thousands) · · Balance Sheets · · Balance Sheets · · Balance Sheets · · Pledged (Received) · · Net Amount
June 30, 2024
Derivative assets:
Interest rate swaps − Company (1)	$2,387	$—	$2,387	$(2,720)	$(333)
Interest rate swaps − dealer bank (1)	6,773	—	6,773	(4,620)	2,153
To-be-announced mortgage backed securities	—	—	—	—	—
Total	$9,160	$—	$9,160	$(7,340)	$1,820
Derivative liabilities:
Interest rate swaps − Company (1)	$—	$—	$—	$—	$—
Interest rate swaps − customer (2)	6,773	—	6,773	—	6,773
To-be-announced mortgage backed securities	25	—	25	—	25
Total	$6,798	$—	$6,798	$—	$6,798

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

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


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

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

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

NOTE 20 Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes that, at June 30, 2024 and December 31, 2023, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

The following tables present the Company’s and the Bank’s actual capital amounts and ratios as of June 30, 2024 and December 31, 2023:

· · · · · · · · · · · · · · · ·
· · June 30, 2024
· · · · · · · · · · · · Minimum to be ·
						Minimum Required		Well Capitalized
						for Capital		Under Prompt
· · Actual · · Adequacy Purposes · · Corrective Action (1)
(dollars in thousands) · Amount · Ratio · Amount · Ratio · Amount · Ratio
Common equity tier 1 capital to risk weighted assets · · · ·
Consolidated (1)	$391,268	11.66%	$150,986	4.50%	$	N/A	N/A
Bank	375,208	11.23%	150,305	4.50%		217,108	6.50%
Tier 1 capital to risk weighted assets						.
Consolidated (1)	400,281	11.93%	201,315	6.00%		N/A	N/A
Bank	375,208	11.23%	200,407	6.00%		267,209	8.00%
Total capital to risk weighted assets
Consolidated (1)	492,264	14.67%	268,420	8.00%		N/A	N/A
Bank	417,004	12.48%	267,209	8.00%		334,012	10.00%
Tier 1 capital to average assets
Consolidated (1)	400,281	9.44%	169,612	4.00%		N/A	N/A
Bank	375,208	9.05%	165,909	4.00%		207,386	5.00%

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

· · · · · · · · · · · · · · · ·
· · December 31, 2023
· · · · · · · · · · · · Minimum to be ·
						Minimum Required		Well Capitalized
						for Capital		Under Prompt
· · Actual · · Adequacy Purposes · · Corrective Action (1)
(dollars in thousands) · Amount · Ratio · Amount · Ratio · Amount · Ratio
Common equity tier 1 capital to risk weighted assets · · · ·
Consolidated (1)	$382,578	11.82%	$145,605	4.50%	$	N/A	N/A
Bank	367,445	11.40%	145,101	4.50%		209,590	6.50%
Tier 1 capital to risk weighted assets						.
Consolidated (1)	391,534	12.10%	194,139	6.00%		N/A	N/A
Bank	367,445	11.40%	193,468	6.00%		257,957	8.00%
Total capital to risk weighted assets
Consolidated (1)	477,590	14.76%	258,853	8.00%		N/A	N/A
Bank	403,501	12.51%	257,957	8.00%		322,446	10.00%
Tier 1 capital to average assets
Consolidated (1)	391,534	10.57%	148,111	4.00%		N/A	N/A
Bank	367,445	9.92%	148,186	4.00%		185,232	5.00%

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

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules include a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of June 30, 2024, the capital ratios for the Company and the Bank were sufficient to meet the conservation buffer. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development, or HUD, regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of June 30, 2024 and December 31, 2023, the Company was in compliance with the aforementioned guidelines.

NOTE 21 Other Comprehensive Income (Loss)

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


· · For the Three Months Ended
· June 30, 2024 · June 30, 2023
· · · · Tax · · · · · · Tax · ·
· · Pre-Tax · · (Expense) · · After-Tax · · Pre-Tax · · (Expense) · · After-Tax
(dollars in thousands) · · Amount · · Benefit · · Amount · · Amount · · Benefit · · Amount
Debt Securities:
Change in fair value	$(1,153)	$290	$(863)	$(9,636)	$2,419	$(7,217)
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM (1)	68	(17)	51	84	(21)	63
Less: reclassification adjustment for net realized losses (2)	—	—	—	—	—	—
Net change	(1,221)	307	(914)	(9,720)	2,440	(7,280)
Cash Flow Hedges:
Change in fair value	295	(109)	186	—	—	—
Less: reclassified AOCI gain (loss) into interest expense (3)	270	(68)	202	—	—	—
Net change	25	(41)	(16)	—	—	—
Other Derivatives:
Change in fair value	164	(7)	157	3,794	(949)	2,845
Less: reclassified AOCI gain (loss) into interest expense (4)	—	—	—	—	—	—
Net change	164	(7)	157	3,794	(949)	2,845
Other comprehensive income (loss)	$(1,032)	$259	$(773)	$(5,926)	$1,491	$(4,435)

(1)	Reclassified into taxable and/or exempt from federal income taxes interest income on investment securities on the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

(2)	Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

(3)	Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.

(4)	Reclassified into interest income on loans, including fees and/or interest income on taxable investment securities on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.


· · For the Six Months Ended
· June 30, 2024 · June 30, 2023
· · · · Tax · · · · · · Tax · ·
· · Pre-Tax · · (Expense) · · After-Tax · · Pre-Tax · · (Expense) · · After-Tax
(dollars in thousands) · · Amount · · Benefit · · Amount · · Amount · · Benefit · · Amount
Debt Securities:
Change in fair value	$(4,597)	$1,154	$(3,443)	$(4,708)	$1,182	$(3,526)
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM	142	(36)	106	171	(43)	128
Less: reclassification adjustment for net realized losses	—	—	—	—	—	—
Net change	(4,739)	1,190	(3,549)	(4,879)	1,225	(3,654)
Cash Flow Hedges:
Change in fair value	1,241	(685)	556	—	—	—
Less: reclassified AOCI gain (loss) into interest expense (3)	532	(134)	398	—	—	—
Net change	709	(551)	158	—	—	—
Other Derivatives:
Change in fair value	2,195	(178)	2,017	2,069	(516)	1,553
Less: reclassified AOCI gain (loss) into interest expense (4)	—	—	—	—	—	—
Net change	2,195	(178)	2,017	2,069	(516)	1,553
Other comprehensive income (loss)	$(1,835)	$461	$(1,374)	$(2,810)	$709	$(2,101)

(1)	Reclassified into taxable and/or exempt from federal income taxes interest income on investment securities on the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

(2)	Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

(3)	Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.

(4)	Reclassified into interest income on loans, including fees and/or interest income on taxable investment securities on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.


· · · · · Net Unrealized · · Net Unrealized · ·
· · Net Unrealized · · Gains (Losses) on · · Gains (Losses) · · ·
· · Gains (Losses) on · · Cash Flow · · on Other · ·
(dollars in thousands)	Debt Securities (1)		Hedges (1)		Derivatives (1)		AOCI (1)
For the Three Months Ended June 30, 2024
Balance at March 31, 2024		$(75,793)		$(63)		$1,600		$(74,256)
Other comprehensive income (loss) before reclassifications		(863)		186		157		(520)
Less: Amounts reclassified from AOCI		51		202		—		253
Other comprehensive income (loss)		(914)		(16)		157		(773)
Balance at June 30, 2024		$(76,707)		(79)		1,757		(75,029)
For the Six Months Ended June 30, 2024
Balance at December 31, 2023		$(73,158)		$(237)		$(260)		$(73,655)
Other comprehensive income (loss) before reclassifications		(3,443)		556		2,017		(870)
Less: Amounts reclassified from AOCI		106		398		—		504
Other comprehensive income (loss)		(3,549)		158		2,017		(1,374)
Balance at June 30, 2024		$(76,707)		(79)		1,757		(75,029)

For the Three Months Ended June 30, 2023
Balance at March 31, 2023		$(94,921)		$—		$(1,386)		$(96,307)
Other comprehensive income (loss) before reclassifications		(7,217)		—		2,845		(4,372)
Less: Amounts reclassified from AOCI		63		—		—		63
Other comprehensive income (loss)		(7,280)		—		2,845		(4,435)
Balance at June 30, 2023		$(102,201)		—		1,459		(100,742)
For the Six Months Ended June 30, 2023
Balance at December 31, 2022		$(98,547)		$—		$(94)		$(98,641)
Other comprehensive income (loss) before reclassifications		(3,526)		—		1,553		(1,973)
Less: Amounts reclassified from AOCI		128		—		—		128
Other comprehensive income (loss)		(3,654)		—		1,553		(2,101)
Balance at June 30, 2023		$(102,201)		$—		$1,459		$(100,742)

(1)	All amounts net of tax.

NOTE 22 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Old Stock Repurchase Program, which authorized the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Old Stock Repurchase Program expired on February 18, 2024.

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

The New Stock Repurchase Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the six months ended June 30, 2024, there wereno shares repurchased under the Old Stock Repurchase Program or the New Stock Repurchase Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 23 Fair Value of Assets and Liabilities

The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized based on the following inputs to the valuation techniques as follows:

*Level 1—*Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.

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

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

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

Recurring Basis

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

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


	June 30, 2024
(dollars in thousands) · Level 1 · Level 2 · Level 3 · Total
Trading		$2,868	$—	$—	$2,868
Available-for-sale
U.S. treasury and government agencies		—	766	—	766
Mortgage backed securities
Residential agency		—	407,788	—	407,788
Commercial		—	1,353	—	1,353
Asset backed securities		—	21	—	21
Corporate bonds		—	49,417	—	49,417
Total available-for-sale investment securities		$—	$459,345	$—	$459,345
Other assets
Derivatives		$—	$9,770	$—	$9,770
Other liabilities
Derivatives		$—	$6,798	$—	$6,798

· · · · · · · · · · · ·
· · December 31, 2023
(dollars in thousands) · Level 1 · Level 2 · Level 3 · Total
Available-for-sale · · · ·
U.S. treasury and government agencies	$—	$1,120	$—	$1,120
Mortgage backed securities
Residential agency	—	435,594	—	435,594
Commercial	—	1,353	—	1,353
Asset backed securities	—	25	—	25
Corporate bonds	—	48,644	—	48,644
Total available-for-sale investment securities	$—	$486,736	$—	$486,736
Other assets
Derivatives	$—	$8,512	$—	$8,512
Other liabilities
Derivatives	$—	$9,180	$—	$9,180

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

Investment Securities, Trading for Deferred Compensation

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

Investment Securities, Available-for-Sale

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

Derivatives

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

Nonrecurring Basis

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

The estimated fair value of certain assets on a nonrecurring basis as of June 30, 2024 and December 31, 2023 consisted of the following:

· · · · · · · · · · · ·
· · June 30, 2024
(dollars in thousands) · Level 1 · Level 2 · Level 3 · Total
Collateral dependent loans	$—	$—	$16,869	$16,869
Servicing rights	—	—	2,082	2,082

· · · · · · · · · · · ·
· · December 31, 2023
(dollars in thousands) · Level 1 · Level 2 · Level 3 · Total
Collateral dependent loans	$—	$—	$3,998	$3,998
Foreclosed assets	—	—	32	32
Servicing rights	—	—	2,062	2,062

Loans Held for Sale

Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.

Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value represent additional net write-downs during the period to record these loans at the lower of cost or estimated fair value, subsequent to their initial classification as loans held for sale.

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

· · · · · · · · · · ·
· · · · · June 30, 2024 ·
(dollars in thousands) · · · · · · · · · · Weighted ·
Asset Type	Valuation Technique	Unobservable Input	Fair Value	Range	Average
Individually evaluated	Appraisal value	Property specific adjustment	$16,869	10.0%	10.0%
Servicing rights	Discounted cash flows	Prepayment speed assumptions	2,082	82-189	105
		Discount rate		11.1%	11.1%

· · · · · · · · · · ·
					December 31, 2023
(dollars in thousands) · · · · · · · · · · Weighted
Asset Type · Valuation Technique · Unobservable Input · Fair Value · Range · Average
Individually evaluated	Appraisal value	Property specific adjustment	$3,998	10.0%	10.0%
Foreclosed assets	Appraisal value	Property specific adjustment (1)	32	N/A	N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions	2,062	85-151	104
		Discount rate		11.1%	11.1%

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

Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all non-financial instruments, are excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balances, as of June 30, 2024 and December 31, 2023, were not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the consolidated balance sheets approximate those assets and liabilities estimated fair values.

Investment Securities, Held-to-Maturity

The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, estimated fair values are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Bank-Owned Life Insurance

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

Deposits

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

Short-Term Borrowings and Long-Term Debt

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

Off-Balance Sheet Credit-Related Commitments

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

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


· · June 30, 2024
· · Carrying · · Estimated Fair Value
(dollars in thousands) · Amount · Level 1 · Level 2 · Level 3 · Total
Financial Assets · · · · ·
Cash and cash equivalents	$438,141	$438,141	$—	$—	$438,141
Investment securities held-to-maturity	286,532	—	243,689	—	243,689
Loans, net	2,877,460	—	—	2,753,648	2,753,648
Accrued interest receivable	16,877	16,877	—	—	16,877
Bank-owned life insurance	35,508	—	35,508	—	35,508
Financial Liabilities
Noninterest-bearing deposits	$701,428	$—	$701,428	$—	$701,428
Interest-bearing deposits	2,105,802	—	2,105,802	—	2,105,802
Time deposits	491,345	—	496,430	—	496,430
Short-term borrowings	555,000	555,000	—	—	555,000
Long-term debt	59,013	—	58,067	—	58,067
Accrued interest payable	14,947	14,947	—	—	14,947


· · December 31, 2023
· · Carrying · · Estimated Fair Value
(dollars in thousands) · Amount · Level 1 · Level 2 · Level 3 · Total
Financial Assets · · · · ·
Cash and cash equivalents	$129,893	$129,893	$—	$—	$129,893
Investment securities held-to-maturity	299,728	—	258,617	—	258,617
Loans, net	2,723,740	—	—	2,590,535	2,590,535
Accrued interest receivable	15,700	15,700	—	—	15,700
Bank-owned life insurance	33,236	—	33,236	—	33,236
Financial Liabilities
Noninterest-bearing deposits	$728,082	$—	$728,082	$—	$728,082
Interest-bearing deposits	1,955,967	—	1,955,967	—	1,955,967
Time deposits	411,562	—	408,910	—	408,910
Short-term borrowings	314,170	314,170	—	—	314,170
Long-term debt	58,956	—	57,437	—	57,437
Accrued interest payable	6,826	6,826	—	—	6,826

ContentsView on SEC.gov

The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.