# Alerus Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Alerus Financial Corp](/companies/alrs.md) (CIK 903419)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 20:46 ET
- Period: 2023-09-30
- Accession: 0001558370-23-017441
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903419/000155837023017441/alrs-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903419/000155837023017441/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $21.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $53.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $7.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $9.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $26.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.46 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 20,095,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 20,193,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $30.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $11.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $4.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $64.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $3.87bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $3.52bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $58.9m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2023-09-30 | $515.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $349.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 86,459 characters.

### General

*The following discussion explains the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2023 and 2022. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 13, 2023.*

### Forward-Looking Statements

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

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

- interest rate risks, including the effects of recent and potential additional rate increases by the Federal Reserve;
- the Company’s ability to successfully manage credit risk and maintain an adequate level of allowance for credit losses;
- new or revised accounting standards, including as a result of the implementation of the new CECL accounting standard;
- business and economic conditions generally and in the financial services industry, nationally and within the Company’s market areas, including continued rising rates of inflation and possible recession, the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in the failure of those institutions;
- the Company’s ability to successfully manage liquidity risk, including the Company’s need to access higher cost sources of funds such as fed funds purchased and short-term borrowings;
- the concentration of large deposits from certain clients, who have balances above current Federal Deposit Insurance Corporation, or FDIC, insurance limits;
- fluctuations in the values of securities held in the Company’s securities portfolio, including as a result of changes in interest rates;
- the overall health of the local and national real estate market;
- concentrations within the Company’s loan portfolio;
- the level of nonperforming assets on the Company’s balance sheet;
- the Company’s ability to implement organic and acquisition growth strategies, including the integration of Metro Phoenix Bank which the Company acquired in 2022;
- the impact of economic or market conditions on the Company’s fee-based services;
- the Company’s ability to continue to grow retirement and benefit services business;
- the Company’s ability to continue to originate a sufficient volume of residential mortgages;
- the occurrence of fraudulent activity, breaches or failures of the Company’s information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools;
- interruptions involving the Company’s information technology and telecommunications systems or third-party servicers;
- potential losses incurred in connection with mortgage loan repurchases;
- the composition of the Company’s executive management team and the Company’s ability to attract and retain key personnel;
- the rapid technological change in the financial services industry;
- increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including digital asset service providers;
- the effectiveness of the Company’s risk management framework;
- the commencement and outcome of litigation and other legal proceedings and regulatory actions against the Company or to which the Company may become subject;
- potential impairment to the goodwill the Company recorded in connection with the Company’s past acquisitions; including the acquisition of Metro Phoenix Bank;
- the extensive regulatory framework that applies to us;
- the impact of recent and future legislative and regulatory changes, including in response to the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank;
- governmental monetary, trade and fiscal policies;
- risks related to climate change and the negative impact it may have on the Company’s customers and their businesses;
- severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic;
- acts of war or terrorism, including the Israeli-Palestinian conflict and the Russian invasion of Ukraine, or other adverse external events;
- any material weaknesses in the Company’s internal control over financial reporting;
- changes to U.S. or state tax laws, regulations and guidance, including the new 1.0% excise tax on stock buybacks to publicly traded companies;
- talent and labor shortages and employee turnover; the Company’s success at managing the risks involved in the foregoing items; and
- any other risks described in the “Risk Factors” sections of the reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

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

### Overview

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

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

### Critical Accounting Policies

The Company’s consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, or GAAP. The preparation of the Company’s consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2022. Effective January 1, 2023, through March 31, 2023, the significant accounting policy which the Company believes to be critical in preparing the Company’s consolidated financial is the determination of the allowance for credit losses.

Management considers the policies related to the allowance for credit losses critical to the financial statement presentation. The allowance for credit losses is established through the provision for credit losses charged to current earnings. The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 – Significant Accounting Policies in the accompanying notes to the consolidated financial statements for further discussion on the methodology in establishing the allowance for credit losses.

The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.

### Recent Developments

### Shareholder Dividend

On August 24, 2023, the Board of Directors of the Company declared a quarterly cash dividend of $0.19 per common share. This dividend was paid on October 13, 2023, to stockholders of record at the close of business on September 15, 2023.

### Operating Results Overview

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

*(dollars and shares in thousands, except per share data)*

| ​ ​ ​ Performance Ratios | ​ ​ ​ ​ | ​ ​ ​ Three months ended September 30, ​ 2023 ​ ​ | ​ ​ ​ June 30, ​ 2023 ​ ​ | ​ ​ ​ ​ September 30, ​ 2022 ​ ​ | ​ ​ ​ Nine months ended September 30, ​ 2023 ​ ​ | ​ ​ ​ ​ September 30, ​ 2022 ​ ​ |
| --- | --- | ---: | ---: | ---: | ---: | ---: |
| Return on average total assets | ​ | 0.95% | 0.96% | 1.02% | 0.93% | 1.13% |
| Return on average common equity | ​ | 10.05% | 10.14% | 10.25% | 9.79% | 11.27% |
| Return on average tangible common equity (1) | ​ | 13.51% | 13.71% | 13.89% | 13.27% | 14.59% |
| Noninterest income as a % of revenue | ​ | 58.21% | 53.69% | 48.82% | 54.51% | 54.08% |
| Net interest margin (taxable-equivalent basis) | ​ | 2.27% | 2.52% | 3.21% | 2.50% | 3.02% |
| Efficiency ratio (1) | ​ | 73.37% | 72.79% | 74.76% | 73.57% | 73.94% |
| Average equity to average assets | ​ | 9.47% | 9.52% | 9.95% | ​ 9.51% | ​ 10.06% |
| Net charge-offs/(recoveries) to average loans | ​ | ​ (0.09)% | (0.07)% | 0.07% | (0.04)% | 0.04% |
| Dividend payout ratio | ​ | 42.22% | ​ 42.22% | ​ 38.30% | ​ 43.08% | ​ 33.33% |
| **Per Common Share** | ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ |
| Earnings per common share - basic | ​ | $0.46 ​ | $0.45 ​ | $0.48 ​ | $1.31 ​ | $1.58 ​ |
| Earnings per common share - diluted | ​ | $0.45 ​ | $0.45 ​ | $0.47 ​ | $1.30 ​ | $1.56 ​ |
| Dividends declared per common share | ​ | $0.19 ​ | $0.19 ​ | $0.18 ​ | $0.56 ​ | $0.52 ​ |
| Book value per common share | ​ | $17.60 ​ | $17.96 ​ | $17.25 ​ | ​ ​ ​ | ​ ​ ​ |
| Tangible book value per common share (1) | ​ | $14.32 ​ | $14.60 ​ | $13.76 ​ | ​ ​ ​ | ​ ​ ​ |
| Average common shares outstanding - basic | ​ | 19,872 ​ | 20,033 ​ | 19,987 ​ | 19,977 ​ | 18,186 ​ |
| Average common shares outstanding - diluted | ​ | 20,095 ​ | 20,241 ​ | 20,230 ​ | 20,193 ​ | 18,431 ​ |
| **Other Data** | ​ | ​ ​ ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ |
| Retirement and benefit services assets under administration/management | ​ | $34,552,569 ​ | $35,052,652 ​ | $30,545,694 ​ | ​ ​ ​ | ​ ​ ​ |
| Wealth management assets under administration/management | ​ | $3,724,091 ​ | $3,857,710 ​ | $3,435,786 ​ | ​ ​ ​ | ​ ​ ​ |
| Mortgage originations | ​ | $109,637 ​ | $111,261 ​ | $229,901 ​ | $298,626 ​ | $686,060 ​ |

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

### Selected Financial Data

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

*(dollars in thousands)*

| ​ ​ ​ Selected Average Balance Sheet Data | ​ ​ ​ ​ | ​ ​ Three months ended September 30, 2023 ​ | ​ ​ ​ | ​ ​ June 30, 2023 ​ | ​ ​ ​ | ​ ​ September 30, 2022 ​ | ​ ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 ​ | ​ ​ ​ | ​ ​ September 30, 2022 ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Loans | ​ | $2,544,836 | ​ | $2,482,413 | ​ | $2,262,361 | ​ | $2,495,122 | ​ | $1,958,216 |
| Investment securities | ​ | 971,913 | ​ | 1,007,792 | ​ | 1,116,458 | ​ | 1,004,436 | ​ | 1,165,414 |
| Assets | ​ | 3,821,601 | ​ | 3,785,487 | ​ | 3,743,154 | ​ | 3,799,645 | ​ | 3,431,212 |
| Deposits | ​ | 2,844,758 | ​ | 2,940,216 | ​ | 2,995,071 | ​ | 2,905,675 | ​ | 2,851,425 |
| Fed funds purchased | ​ | 312,121 | ​ | 360,033 | ​ | 84,149 | ​ | 320,861 | ​ | 55,527 |
| Short-term borrowings | ​ | ​ 173,913 | ​ | ​ — | ​ | ​ 168,750 | ​ | ​ 84,982 | ​ | ​ 60,073 |
| Long-term debt | ​ | 58,914 | ​ | 58,886 | ​ | 58,843 | ​ | 58,886 | ​ | 58,875 |
| Stockholders’ equity | ​ | 361,735 | ​ | 360,216 | ​ | 372,274 | ​ | 361,260 | ​ | 345,192 |

*(dollars in thousands)*

| ​ ​ Selected Period End Balance Sheet Data | ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ June 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ December 31, 2022 ​ ​ | ​ ​ ​ | ​ ​ September 30, 2022 ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Loans | ​ | $2,606,430 | ​ | $2,533,522 | ​ | $2,443,994 | ​ | $2,318,231 |
| Allowance for credit losses on loans | ​ | (36,290) | ​ | (35,696) | ​ | (31,146) | ​ | (30,968) |
| Investment securities | ​ | 943,269 | ​ | 985,870 | ​ | 1,039,226 | ​ | 1,055,520 |
| Assets | ​ | 3,869,138 | ​ | 3,832,978 | ​ | 3,779,637 | ​ | 3,691,253 |
| Deposits | ​ | 2,872,184 | ​ | 2,852,855 | ​ | 2,915,484 | ​ | 2,961,811 |
| Long-term debt | ​ | 58,928 | ​ | 58,900 | ​ | 58,843 | ​ | 58,836 |
| Total stockholders’ equity | ​ | 349,402 | ​ | 357,685 | ​ | 356,872 | ​ | 344,839 |

*(dollars in thousands)*

| ​ ​ ​ Selected Income Statement Data | ​ ​ ​ ​ | ​ ​ Three months ended September 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ June 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ September 30, 2022 ​ ​ | ​ ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ September 30, 2022 ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Net interest income | ​ | $20,395 | ​ | $22,234 | ​ | $28,316 | ​ | $66,287 | ​ | $72,765 |
| Provision for credit losses | ​ | — | ​ | — | ​ | — | ​ | 550 | ​ | — |
| Noninterest income | ​ | 28,407 | ​ | 25,778 | ​ | 27,010 | ​ | 79,439 | ​ | 85,706 |
| Noninterest expense | ​ | 37,260 | ​ | 36,373 | ​ | 42,767 | ​ | 111,503 | ​ | 120,822 |
| Income before income taxes | ​ | 11,542 | ​ | 11,639 | ​ | 12,559 | ​ | 33,673 | ​ | 37,649 |
| Income tax expense | ​ | 2,381 | ​ | 2,535 | ​ | 2,940 | ​ | 7,222 | ​ | 8,553 |
| Net income | ​ | $9,161 | ​ | $9,104 | ​ | $9,619 | ​ | $26,451 | ​ | $29,096 |

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

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

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

*(dollars and shares in thousands, except per share data)*

| ​ ​ Tangible common equity to tangible assets | ​ | ​ ​ ​ September 30, ​ 2023 ​ ​ | ​ ​ ​ June 30, ​ 2023 ​ ​ ​ | ​ ​ ​ December 31, ​ 2022 ​ ​ ​ | ​ ​ ​ September 30, ​ 2022 ​ ​ |
| --- | --- | ---: | ---: | ---: | ---: |
| Total common stockholders’ equity | ​ | $349,402 ​ | $357,685 ​ | $356,872 ​ | $344,839 ​ |
| Less: Goodwill | ​ | 46,783 ​ | 47,087 ​ | 47,087 ​ | 46,060 ​ |
| Less: Other intangible assets | ​ | 18,482 ​ | 19,806 ​ | 22,455 ​ | 23,779 ​ |
| Tangible common equity (a) | ​ | 284,137 ​ | 290,792 ​ | 287,330 ​ | 275,000 ​ |
| Total assets | ​ | 3,869,138 ​ | 3,832,978 ​ | 3,779,637 ​ | 3,691,253 ​ |
| Less: Goodwill | ​ | 46,783 ​ | 47,087 ​ | 47,087 ​ | 46,060 ​ |
| Less: Other intangible assets | ​ | 18,482 ​ | 19,806 ​ | 22,455 ​ | 23,779 ​ |
| Tangible assets (b) | ​ | 3,803,873 ​ | 3,766,085 ​ | 3,710,095 ​ | 3,621,414 ​ |
| Tangible common equity to tangible assets (a)/(b) | ​ | 7.47% | 7.72% | 7.74% | 7.59% |
| **Tangible book value per common share** | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Total common stockholders’ equity | ​ | $349,402 ​ | $357,685 ​ | $356,872 ​ | $344,839 ​ |
| Less: Goodwill | ​ | ​ 46,783 ​ | ​ 47,087 ​ | ​ 47,087 ​ | ​ 46,060 ​ |
| Less: Other intangible assets | ​ | ​ 18,482 ​ | ​ 19,806 ​ | ​ 22,455 ​ | ​ 23,779 ​ |
| Tangible common equity (c) | ​ | ​ 284,137 ​ | ​ 290,792 ​ | ​ 287,330 ​ | ​ 275,000 ​ |
| Total common shares issued and outstanding (d) | ​ | ​ 19,848 ​ | ​ 19,915 ​ | 19,992 ​ | 19,987 ​ |
| Tangible book value per common share (c)/(d) | ​ | $14.32 ​ | $14.60 ​ | $14.37 ​ | $13.76 ​ |

*(dollars and shares in thousands, except per share data)*

| ​ ​ ​ Return on average tangible common equity | ​ ​ ​ ​ | ​ ​ ​ Three months ended September 30, ​ 2023 ​ ​ ​ | ​ ​ ​ June 30, ​ 2023 ​ ​ ​ | ​ ​ ​ ​ September 30, ​ 2022 ​ ​ ​ | ​ ​ ​ Nine months ended September 30, ​ 2023 ​ ​ ​ | ​ ​ ​ ​ September 30, ​ 2022 ​ ​ ​ |
| --- | --- | ---: | ---: | ---: | ---: | ---: |
| Net income | ​ | $9,161 ​ | $9,104 ​ | $9,619 ​ | $26,451 ​ | $29,096 ​ |
| Add: Intangible amortization expense (net of tax) | ​ | 1,046 ​ | 1,046 ​ | 1,046 ​ | 3,138 ​ | 2,710 ​ |
| Net income, excluding intangible amortization (e) | ​ | 10,207 ​ | 10,150 ​ | 10,665 ​ | 29,589 ​ | 31,806 ​ |
| Average total equity | ​ | 361,735 ​ | 360,216 ​ | 372,274 ​ | 361,260 ​ | 345,192 ​ |
| Less: Average goodwill | ​ | 46,882 ​ | 47,087 ​ | 48,141 ​ | 47,018 ​ | 37,101 ​ |
| Less: Average other intangible assets (net of tax) | ​ | 15,109 ​ | 16,153 ​ | 19,466 ​ | 16,149 ​ | 16,605 ​ |
| Average tangible common equity (f) | ​ | 299,744 ​ | 296,976 ​ | 304,667 ​ | 298,093 ​ | 291,486 ​ |
| Return on average tangible common equity (e)/(f) | ​ | 13.51% | 13.71% | 13.89% | 13.27% | 14.59% |
| **Efficiency ratio** | ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ |
| Noninterest expense | ​ | $37,260 ​ | $36,373 ​ | $42,767 ​ | $111,503 ​ | $120,822 ​ |
| Less: Intangible amortization expense | ​ | 1,324 ​ | 1,324 ​ | 1,324 ​ | 3,972 ​ | 3,430 ​ |
| Adjusted noninterest expense (g) | ​ | 35,936 ​ | 35,049 ​ | 41,443 ​ | 107,531 ​ | 117,392 ​ |
| Net interest income | ​ | 20,395 ​ | 22,234 ​ | 28,316 ​ | 66,287 ​ | 72,765 ​ |
| Noninterest income | ​ | 28,407 ​ | 25,778 ​ | 27,010 ​ | 79,439 ​ | 85,706 ​ |
| Tax-equivalent adjustment | ​ | 180 ​ | 140 ​ | 112 ​ | 444 ​ | 306 ​ |
| Total tax-equivalent revenue (h) | ​ | 48,982 ​ | 48,152 ​ | 55,438 ​ | 146,170 ​ | 158,777 ​ |
| Efficiency ratio (g)/(h) | ​ | 73.37% | 72.79% | 74.76% | 73.57% | 73.94% |

### Discussion and Analysis of Results of Operations

### Net Income

Net income for the three months ended September 30, 2023, was $9.2 million, or $0.45 per diluted common share, a $0.5 million, or 4.8%, decrease compared to $9.6 million, or $0.47 per diluted common share, for the three months ended September 30, 2022. Earnings for the third quarter of 2023 compared to the third quarter of 2022 decreased primarily due to a $7.9 million decrease in net interest income. This negative result was partially offset by a $1.4 million increase in noninterest income and a $5.5 million decrease in noninterest expense.

Net income for the nine months ended September 30, 2023, was $26.5 million, or $1.30 per diluted common share, a $2.6 million, or 9.1%, decrease compared to $29.1 million, or $1.56 per diluted common share, for the nine months ended September 30, 2022. Earnings for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 decreased primarily due to a $6.5 million decrease in net interest income, a $550 thousand increase in provision for credit losses, and a $6.3 million decrease in noninterest income. These negative results were partially offset by a $9.3 million decrease in noninterest expense.

### Net Interest Income

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three and nine months ended September 30, 2023 and 2022.

Net interest income for the three months ended September 30, 2023, was $20.4 million, a decrease of $7.9 million, or 28.0%, compared to $28.3 million for the three months ended September 30, 2022. Net interest income for the third quarter of 2023 decreased compared to the third quarter of 2022 primarily due to the increasing cost of interest-bearing liabilities as interest expense increased $17.7 million mainly driven by an increase of 252 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $310.5 million. This was partially offset by a $9.8 million increase in interest income, as interest earning assets increased $73.1 million while the interest earning asset yield increased 101 basis points. The increase in interest earning assets was due to organic growth. The increase in interest-bearing liabilities was due to a decrease in deposits which were replaced with wholesale borrowings and a shift from noninterest-bearing deposits to interest-bearing deposits.

Net interest income for the nine months ended September 30, 2023, was $66.3 million, a decrease of $6.5 million, or 8.9%, compared to $72.8 million for the nine months ended September 30, 2022. Net interest income for the nine months ended September 30, 2023, decreased compared to the nine months ended September 30, 2022, primarily due to a 231 basis point increase in the average rate paid on interest-bearing liabilities in addition to an increase of $446.6 million in the average balance of interest-bearing liabilities. This was partially offset by increases of 121 basis points in the average rate paid on interest earning assets and the average balance of interest earning assets. The average balance of interest earning assets increased $335.1 million. The increase in interest earning assets was due to a combination of organic growth and the acquisition of Metro Phoenix Bank. The increase in interest-bearing liabilities was due to the acquisition of Metro Phoenix Bank and a decrease in noninterest-bearing liabilities.

Net interest margin (on a FTE basis) for the three months ended September 30, 2023, was 2.27%, compared to 3.21% for the same period in 2022.

Net interest margin (on a FTE basis) for the nine months ended September 30, 2023, was 2.50%, compared to 3.02% for the same period in 2022.

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

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three and nine months ended September 30, 2023 and 2022. The Company derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

*(dollars in thousands)*

| ​ ​ ​ ​ ​ Interest Earning Assets | ​ ​ ​ ​ ​ ​ | ​ ​ Three months ended September 30, 2023 ​ ​ Average Balance ​ ​ | ​ ​ ​ ​ | ​ ​ Interest Income/ Expense ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Average ​ Yield/ ​ Rate ​ ​ | ​ ​ 2022 ​ ​ Average Balance ​ ​ | ​ ​ ​ ​ | ​ ​ Interest Income/ Expense ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Average ​ Yield/ ​ Rate ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Interest-bearing deposits with banks | ​ | $29,450 | ​ | $229 |  | 3.09% | $72,157 | ​ | $368 |  | 2.02% |
| Investment securities (1) | ​ | 971,913 | ​ | 6,377 |  | 2.60% | 1,116,458 | ​ | 6,204 |  | 2.20% |
| Fed funds sold | ​ | ​ — | ​ | ​ — | ​ | —% | ​ 21,893 | ​ | ​ 131 | ​ | 2.37% |
| Loans held for sale | ​ | 16,518 | ​ | 231 |  | 5.55% | 27,032 | ​ | 282 |  | 4.14% |
| Loans | ​ |  | ​ |  |  | ​ |  | ​ |  |  | ​ |
| Commercial: | ​ |  | ​ | ​ |  | ​ |  | ​ | ​ |  | ​ |
| Commercial and industrial | ​ | 555,649 | ​ | 9,258 |  | 6.61% | 566,987 | ​ | 7,729 |  | 5.41% |
| Real estate construction | ​ | 88,450 | ​ | 1,900 |  | 8.52% | 70,545 | ​ | 996 |  | 5.60% |
| Commercial real estate | ​ | 998,636 | ​ | 13,219 |  | 5.25% | 807,505 | ​ | 8,279 |  | 4.07% |
| Total commercial | ​ | 1,642,735 | ​ | 24,377 |  | 5.89% | 1,445,037 | ​ | 17,004 |  | 4.67% |
| Consumer | ​ |  | ​ |  |  | ​ |  | ​ |  |  | ​ |
| Residential real estate first mortgage | ​ | 714,874 | ​ | 7,007 |  | 3.89% | 624,826 | ​ | 5,580 |  | 3.54% |
| Residential real estate junior lien | ​ | 154,939 | ​ | 3,004 |  | 7.69% | 140,664 | ​ | 1,918 |  | 5.41% |
| Other revolving and installment | ​ | 32,288 | ​ | 497 |  | 6.11% | 51,834 | ​ | 651 |  | 4.98% |
| Total consumer | ​ | 902,101 | ​ | 10,508 |  | 4.62% | 817,324 | ​ | 8,149 |  | 3.96% |
| Total loans (1) | ​ | 2,544,836 | ​ | 34,885 |  | 5.44% | 2,262,361 | ​ | 25,153 |  | 4.41% |
| Federal Reserve/FHLB Stock | ​ | 28,761 | ​ | 495 |  | 6.83% | 18,449 | ​ | 249 |  | 5.35% |
| Total interest earning assets | ​ | 3,591,478 | ​ | ​ 42,217 |  | 4.66% | 3,518,350 | ​ | 32,387 |  | 3.65% |
| Noninterest earning assets | ​ | ​ 230,123 | ​ | ​ ​ | ​ | ​ ​ | ​ 224,804 | ​ | ​ ​ | ​ | ​ ​ |
| Total assets | ​ | $3,821,601 | ​ | ​ |  | ​ | $3,743,154 | ​ |  |  | ​ |
| **Interest-Bearing Liabilities** | ​ |  | ​ |  |  | ​ |  | ​ |  |  | ​ |
| Interest-bearing demand deposits | ​ | $751,455 | ​ | $2,534 |  | 1.34% | $659,696 | ​ | $211 |  | 0.13% |
| Money market and savings deposits | ​ | 1,073,297 | ​ | 8,650 |  | 3.20% | 1,180,576 | ​ | 1,202 |  | 0.40% |
| Time deposits | ​ | 327,264 | ​ | 3,252 |  | 3.94% | 234,459 | ​ | 439 |  | 0.74% |
| Fed funds purchased | ​ | 312,121 | ​ | 4,327 |  | 5.50% | 84,149 | ​ | 787 |  | 3.71% |
| Short-term borrowings | ​ | ​ 173,913 | ​ | 2,201 |  | 5.02% | 168,750 | ​ | 729 |  | 1.71% |
| Long-term debt | ​ | 58,914 | ​ | 679 |  | 4.57% | 58,843 | ​ | 591 |  | 3.98% |
| Total interest-bearing liabilities | ​ | 2,696,964 | ​ | 21,643 |  | 3.18% | 2,386,473 | ​ | 3,959 |  | 0.66% |
| **Noninterest-Bearing Liabilities and Stockholders' Equity** | ​ | ​ | ​ | ​ ​ |  | ​ | ​ | ​ |  |  | ​ |
| Noninterest-bearing deposits | ​ | 692,742 | ​ | ​ ​ |  | ​ | 920,340 | ​ |  |  | ​ |
| Other noninterest-bearing liabilities | ​ | 70,160 | ​ | ​ ​ |  | ​ | 64,067 | ​ |  |  | ​ |
| Stockholders’ equity | ​ | 361,735 | ​ | ​ ​ |  | ​ | 372,274 | ​ |  |  | ​ |
| Total liabilities and stockholders’ equity | ​ | $3,821,601 | ​ | ​ ​ |  | ​ | $3,743,154 | ​ |  |  | ​ |
| Net interest income | ​ | ​ ​ | ​ | $20,574 |  | ​ |  | ​ | $28,428 |  | ​ |
| Net interest rate spread | ​ | ​ | ​ | ​ | ​ | 1.48% |  | ​ |  |  | 2.99% |
| Net interest margin on FTE basis (1) | ​ | ​ | ​ | ​ | ​ | 2.27% |  | ​ |  |  | 3.21% |

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

*(dollars in thousands)*

| ​ ​ ​ ​ ​ Interest Earning Assets | ​ ​ ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 ​ ​ Average Balance ​ | ​ ​ ​ | ​ ​ Interest Income/ Expense ​ | ​ ​ ​ | ​ ​ ​ Average Yield/ ​ Rate ​ | ​ ​ 2022 ​ ​ Average Balance ​ | ​ ​ ​ | ​ ​ Interest Income/ Expense ​ | ​ ​ ​ | ​ ​ ​ ​ Average ​ Yield/ ​ Rate ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Interest-bearing deposits with banks | ​ | $35,892 | ​ | $927 | ​ | 3.45% | $68,811 | ​ | $442 | ​ | 0.86% |
| Investment securities (1) | ​ | 1,004,436 | ​ | 18,928 | ​ | 2.52% | 1,165,414 | ​ | 18,255 | ​ | 2.09% |
| Fed funds sold | ​ | ​ — | ​ | ​ — | ​ | —% | ​ 7,378 | ​ | ​ 131 | ​ | 2.37% |
| Loans held for sale | ​ | 13,822 | ​ | 547 | ​ | 5.29% | 27,864 | ​ | 689 | ​ | 3.31% |
| Loans | ​ |  | ​ |  | ​ | ​ |  | ​ |  | ​ | ​ |
| Commercial: | ​ |  | ​ | ​ | ​ | ​ |  | ​ | ​ | ​ | ​ |
| Commercial and industrial | ​ | 553,460 | ​ | 27,037 | ​ | 6.53% | 488,771 | ​ | 17,797 | ​ | 4.87% |
| Real estate construction | ​ | 93,098 | ​ | 5,197 | ​ | 7.46% | 52,212 | ​ | 1,839 | ​ | 4.71% |
| Commercial real estate | ​ | 956,018 | ​ | 36,485 | ​ | 5.10% | 670,854 | ​ | 19,378 | ​ | 3.86% |
| Total commercial | ​ | 1,602,576 | ​ | 68,719 | ​ | 5.73% | 1,211,837 | ​ | 39,014 | ​ | 4.30% |
| Consumer | ​ |  | ​ |  | ​ | ​ |  | ​ |  | ​ | ​ |
| Residential real estate first mortgage | ​ | 700,734 | ​ | 19,942 | ​ | 3.80% | 561,261 | ​ | 14,472 | ​ | 3.45% |
| Residential real estate junior lien | ​ | 153,664 | ​ | 8,565 | ​ | 7.45% | 132,968 | ​ | 4,829 | ​ | 4.86% |
| Other revolving and installment | ​ | 38,148 | ​ | 1,708 | ​ | 5.99% | 52,150 | ​ | 1,791 | ​ | 4.59% |
| Total consumer | ​ | 892,546 | ​ | 30,215 | ​ | 4.53% | 746,379 | ​ | 21,092 | ​ | 3.78% |
| Total loans (1) | ​ | 2,495,122 | ​ | 98,934 | ​ | 5.30% | 1,958,216 | ​ | 60,106 | ​ | 4.10% |
| Federal Reserve/FHLB Stock | ​ | 25,403 | ​ | 1,294 | ​ | 6.81% | 11,877 | ​ | 448 | ​ | 5.04% |
| Total interest earning assets | ​ | 3,574,675 | ​ | 120,630 | ​ | 4.51% | 3,239,560 | ​ | 80,071 | ​ | 3.30% |
| Noninterest earning assets | ​ | ​ 224,970 | ​ | ​ ​ | ​ | ​ ​ | ​ 191,652 | ​ | ​ ​ | ​ | ​ ​ |
| Total assets | ​ | $3,799,645 | ​ |  | ​ | ​ | $3,431,212 | ​ |  | ​ | ​ |
| **Interest-Bearing Liabilities** | ​ |  | ​ |  | ​ | ​ |  | ​ |  | ​ | ​ |
| Interest-bearing demand deposits | ​ | $757,995 | ​ | $6,559 | ​ | 1.16% | $692,310 | ​ | $637 | ​ | 0.12% |
| Money market and savings deposits | ​ | 1,127,630 | ​ | 22,915 | ​ | 2.72% | 1,089,137 | ​ | 1,943 | ​ | 0.24% |
| Time deposits | ​ | 276,797 | ​ | 6,744 | ​ | 3.26% | 224,603 | ​ | 914 | ​ | 0.54% |
| Fed funds purchased | ​ | 320,861 | ​ | 12,556 | ​ | 5.23% | 55,527 | ​ | 1,027 | ​ | 2.47% |
| Short-term borrowings | ​ | ​ 84,982 | ​ | 3,128 | ​ | 4.92% | 60,073 | ​ | 767 | ​ | 1.71% |
| Long-term debt | ​ | 58,886 | ​ | 1,999 | ​ | 4.54% | 58,875 | ​ | 1,712 | ​ | 3.89% |
| Total interest-bearing liabilities | ​ | 2,627,151 | ​ | 53,901 | ​ | 2.74% | 2,180,525 | ​ | 7,000 | ​ | 0.43% |
| **Noninterest-Bearing Liabilities and Stockholders' Equity** | ​ | ​ | ​ |  | ​ | ​ | ​ | ​ |  | ​ | ​ |
| Noninterest-bearing deposits | ​ | ​ 743,253 | ​ |  | ​ | ​ | 845,375 | ​ | ​ ​ | ​ | ​ ​ |
| Other noninterest-bearing liabilities | ​ | 67,981 | ​ |  | ​ | ​ | 60,120 | ​ |  | ​ | ​ |
| Stockholders’ equity | ​ | 361,260 | ​ |  | ​ | ​ | 345,192 | ​ |  | ​ | ​ |
| Total liabilities and stockholders’ equity | ​ | $3,799,645 | ​ |  | ​ | ​ | $3,431,212 | ​ |  | ​ | ​ |
| Net interest income | ​ |  | ​ | $66,729 | ​ | ​ |  | ​ | $73,071 | ​ | ​ |
| Net interest rate spread | ​ |  | ​ |  | ​ | 1.77% |  | ​ |  | ​ | 2.87% |
| Net interest margin on FTE basis (1) | ​ |  | ​ |  | ​ | 2.50% |  | ​ |  | ​ | 3.02% |

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

### Interest Rates and Operating Interest Differential

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

*(tax-equivalent basis, dollars in thousands)*

| ​ ​ ​ ​ ​ Interest earning assets | ​ ​ ​ ​ ​ ​ | ​ ​ Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022 Change due to: Volume ​ ​ | ​ ​ | ​ ​ Rate ​ ​ | ​ ​ ​ | ​ ​ Interest Variance ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 Compared with Nine months ended September 30, 2022 Change due to: Volume ​ | ​ | ​ ​ Rate ​ | ​ ​ | ​ ​ Interest Variance ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Interest-bearing deposits with banks | ​ | $(217) | ​ | $78 | ​ | $(139) | ​ | $(212) | ​ | $697 | ​ | $485 |
| Investment securities | ​ | (802) | ​ | 975 | ​ | 173 | ​ | (2,516) | ​ | 3,189 | ​ | 673 |
| Loans held for sale | ​ | ​ (131) | ​ | ​ — | ​ | ​ (131) | ​ | ​ (131) | ​ | ​ — | ​ | ​ (131) |
| Loans held for sale | ​ | (110) | ​ | 59 | ​ | (51) | ​ | (348) | ​ | 206 | ​ | (142) |
| Loans | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |
| Commercial: | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |
| Commercial and industrial | ​ | (155) | ​ | 1,684 | ​ | 1,529 | ​ | 2,356 | ​ | 6,884 | ​ | 9,240 |
| Real estate construction | ​ | 253 | ​ | 651 | ​ | 904 | ​ | 1,440 | ​ | 1,918 | ​ | 3,358 |
| Commercial real estate | ​ | 1,961 | ​ | 2,979 | ​ | 4,940 | ​ | 8,233 | ​ | 8,874 | ​ | 17,107 |
| Total commercial | ​ | 2,059 | ​ | 5,314 | ​ | 7,373 | ​ | 12,029 | ​ | 17,676 | ​ | 29,705 |
| Consumer | ​ | ​ | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |
| Residential real estate first mortgage | ​ | 803 | ​ | 624 | ​ | 1,427 | ​ | 3,599 | ​ | 1,871 | ​ | 5,470 |
| Residential real estate junior lien | ​ | 195 | ​ | 891 | ​ | 1,086 | ​ | 752 | ​ | 2,984 | ​ | 3,736 |
| Other revolving and installment | ​ | (245) | ​ | 91 | ​ | (154) | ​ | (481) | ​ | 398 | ​ | (83) |
| Total consumer | ​ | 753 | ​ | 1,606 | ​ | 2,359 | ​ | 3,870 | ​ | 5,253 | ​ | 9,123 |
| Total loans | ​ | 2,812 | ​ | 6,920 | ​ | 9,732 | ​ | 15,899 | ​ | 22,929 | ​ | 38,828 |
| Federal Reserve/FHLB Stock | ​ | 139 | ​ | 107 | ​ | 246 | ​ | 510 | ​ | 336 | ​ | 846 |
| Total interest income | ​ | 1,691 | ​ | 8,139 | ​ | 9,830 | ​ | 13,202 | ​ | 27,357 | ​ | 40,559 |
| **Interest-bearing liabilities** | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  |
| Interest-bearing demand deposits | ​ | 30 | ​ | 2,293 | ​ | 2,323 | ​ | 59 | ​ | 5,863 | ​ | 5,922 |
| Money market and savings deposits | ​ | (108) | ​ | 7,556 | ​ | 7,448 | ​ | 69 | ​ | 20,903 | ​ | 20,972 |
| Time deposits | ​ | 173 | ​ | 2,640 | ​ | 2,813 | ​ | 211 | ​ | 5,619 | ​ | 5,830 |
| Fed funds purchased | ​ | 2,132 | ​ | 1,408 | ​ | 3,540 | ​ | 4,902 | ​ | 6,627 | ​ | 11,529 |
| Short-term borrowings | ​ | ​ 22 | ​ | 1,450 | ​ | 1,472 | ​ | 319 | ​ | 2,042 | ​ | 2,361 |
| Long-term debt | ​ | 1 | ​ | 87 | ​ | 88 | ​ | — | ​ | 287 | ​ | 287 |
| Total interest expense | ​ | 2,250 | ​ | 15,434 | ​ | 17,684 | ​ | 5,560 | ​ | 41,341 | ​ | 46,901 |
| Change in net interest income | ​ | $(559) | ​ | $(7,295) | ​ | $(7,854) | ​ | $7,642 | ​ | $(13,984) | ​ | $(6,342) |

### Provision for Credit Losses

The Company recorded no provision for credit loss expense for the three months ending September 30, 2023 and September 30, 2022.

The Company recorded a provision for credit loss expense of $550 thousand for the nine months ended September 30, 2023, a $550 thousand increase compared to the nine months ended September 30, 2022. The provision for credit loss expense for the nine months ended September 30, 2023 included $460 thousand in provision for credit loss on loans, $44 thousand in provision for credit loss on unfunded commitments and $46 thousand in provision for credit loss on investment securities held-to-maturity. The CECL accounting standard requires the Company to recognize losses over the expected life of the loan as opposed to the losses expected to already have been incurred. The increase in provision for credit losses is primarily a result of a change in forecasting assumptions brought about by the new methodology.

### Noninterest Income

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

The following table presents the Company’s noninterest income for the three and nine months ended September 30, 2023 and 2022:

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2023 | ​ ​ ​ ​ ​ 2022 | ​ ​ ​ Nine months ended September 30, 2023 | ​ ​ ​ ​ ​ 2022 |
| --- | --- | ---: | ---: | ---: | ---: |
| Retirement and benefit services | ​ | $18,605 ​ | $16,597 ​ | $49,977 ​ | $50,536 ​ |
| Wealth management | ​ | 5,271 ​ | 4,852 ​ | 15,915 ​ | 15,726 ​ |
| Mortgage banking | ​ | 2,510 ​ | 3,782 ​ | 7,132 ​ | 14,751 ​ |
| Service charges on deposit accounts | ​ | 328 ​ | 377 ​ | 940 ​ | 1,152 ​ |
| Other | ​ | 1,693 ​ | 1,402 ​ | 5,475 ​ | 3,541 ​ |
| Total noninterest income | ​ | $28,407 ​ | $27,010 ​ | $79,439 ​ | $85,706 ​ |
| Noninterest income as a % of revenue | ​ | ​ 58.21% | ​ 48.82% | ​ 54.51% | ​ 54.08% |

Total noninterest income for the three months ended September 30, 2023 was $28.4 million, a $1.4 million, or 5.2%, increase compared to $27.0 million for the three months ended September 30, 2022. The increase in noninterest income was primarily driven by an increase of $2.0 million in retirement and benefit services due to the divestiture of the ESOP trustee business and increased assets under administration/management. Assets under administration/management were higher due to an increase in overall plans and participants coupled with improved equity and bond markets.

Total noninterest income for the nine months ended September 30, 2023, was $79.4 million, a $6.3 million, or 7.3%, decrease compared to $85.7 million for the nine months ended September 30, 2022. The decrease in noninterest income was primarily driven by a decrease of $7.6 million in mortgage banking revenue as mortgage originations decreased compared to 2022 as higher interest rates dramatically impacted demand.

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

See “NOTE 15 Segment Reporting” of the consolidated financial statements for additional discussion regarding the Company’s business lines.

### Noninterest Expense

The following table presents noninterest expense for the three and nine months ended September 30, 2023 and 2022:

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Compensation | ​ | $19,071 | ​ | $21,168 | ​ | $57,076 | ​ | $61,467 |
| Employee taxes and benefits | ​ | 4,895 | ​ | 5,079 | ​ | 15,472 | ​ | 17,028 |
| Occupancy and equipment expense | ​ | 1,883 | ​ | 1,925 | ​ | 5,619 | ​ | 5,713 |
| Business services, software and technology expense | ​ | 4,774 | ​ | 5,373 | ​ | 15,367 | ​ | 15,082 |
| Intangible amortization expense | ​ | 1,324 | ​ | 1,324 | ​ | 3,972 | ​ | 3,430 |
| Professional fees and assessments | ​ | ​ 1,716 | ​ | 3,126 | ​ | 4,397 | ​ | 6,913 |
| Marketing and business development | ​ | ​ 692 | ​ | 890 | ​ | 2,026 | ​ | 2,304 |
| Supplies and postage | ​ | ​ 410 | ​ | 588 | ​ | 1,275 | ​ | 1,806 |
| Travel | ​ | ​ 322 | ​ | 291 | ​ | 876 | ​ | 826 |
| Mortgage and lending expenses | ​ | ​ 689 | ​ | 409 | ​ | 1,401 | ​ | 1,577 |
| Other | ​ | 1,484 | ​ | 2,594 | ​ | 4,022 | ​ | 4,676 |
| Total noninterest expense | ​ | $37,260 | ​ | $42,767 | ​ | $111,503 | ​ | $120,822 |

Total noninterest expense for the three months ended September 30, 2023, was $37.3 million, a $5.5 million, or 12.9%, decrease compared to $42.8 million for the three months ended September 30, 2022. The year over year decrease was primarily due to a $2.1 million decrease in compensation and $1.4 million decrease in professional fees and assessments. Compensation decreased primarily due to a decrease in overall headcount and due to lower mortgage related incentive compensation as a result of lower mortgage originations. The decrease in professional fees and assessments was due to merger-related expenses incurred in the third quarter of 2022, in connection with the acquisition of Metro Phoenix Bank.

Total noninterest expense for the nine months ended September 30, 2023, was $111.5 million, a $9.3 million, or 7.7%, decrease compared to $120.8 million for the nine months ended September 30, 2022. The decrease was driven by decreases of $4.4 million in compensation, $1.6 million in employee taxes and benefits, and $2.5 million in professional fees and assessments. The decrease in compensation expense was primarily due to a decrease in overall headcount and due to a lower mortgage related incentive compensation as a result of lower mortgage originations, which was also the primary driver for the decrease in mortgage and lending expenses. The decrease in employee taxes and benefits was primarily due to lower group insurance claims driven by a reduction in headcount along with a decrease in taxes driven by lower compensation expense. The decrease in professional fees and assessments was primarily driven by lower merger and acquisition and recruitment expenses offset by an increase in FDIC assessments.

### Income Tax Expense

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

For the three months ended September 30, 2023, the Company recognized income tax expense of $2.4 million on $11.5 million of pre-tax income, resulting in an effective tax rate of 20.6%, compared to income tax expense of $2.9 million on $12.6 million of pre-tax income for the three months ended September 30, 2022, resulting in an effective tax rate of 23.3%.

For the nine months ended September 30, 2023, the Company recognized income tax expense of $7.2 million on $33.7 million of pre-tax income, resulting in an effective tax rate of 21.4%, compared to income tax expense of $8.6 million on $37.6 million of pre-tax income for the nine months ended September 30, 2022, resulting in an effective tax rate of 22.7%.

### Financial Condition

### Overview

Total assets were $3.9 billion as of September 30, 2023, an increase of $89.5 million, or 2.4%, compared to December 31, 2022. The increase was primarily due to a $162.4 million increase in loans, $6.9 million increase in loans held for sale and $6.5 million increase in cash and cash equivalents, offset by a decrease of $96.0 million in investment securities and a $5.1 million increase in the allowance for credit losses.

### Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and other revolving and installment loans. As of September 30, 2023, the portfolio mix was 22.3% commercial and industrial, 39.3% commercial real estate, 33.4% residential real estate and 5.0% in other categories.

The following table presents the composition of total loans outstanding by portfolio segment as of September 30, 2023 and December 31, 2022:

*(dollars in thousands)*

| ​ ​ ​ Commercial | ​ ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ Balance ​ ​ | ​ ​ | ​ ​ ​ Percent of ​ Portfolio ​ ​ ​ | ​ ​ ​ | ​ ​ December 31, 2022 ​ ​ Balance ​ ​ | ​ ​ | ​ ​ ​ Percent of ​ Portfolio ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Change ​ Amount ​ ​ | ​ ​ ​ | ​ ​ ​ ​ ​ Percent ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Commercial and industrial |  | $582,387 | ​ | 22.3% | ​ | $583,876 | ​ | 23.9% | ​ | $(1,489) | ​ | (0.3)% |
| Real estate construction | ​ | 97,742 | ​ | 3.8% | ​ | 97,810 | ​ | 4.0% | ​ | (68) | ​ | (0.1)% |
| Commercial real estate | ​ | 1,025,014 | ​ | 39.3% | ​ | 881,670 | ​ | 36.0% | ​ | 143,344 | ​ | 16.3% |
| Total commercial | ​ | 1,705,143 | ​ | 65.4% | ​ | 1,563,356 | ​ | 63.9% | ​ | 141,787 | ​ | 9.1% |
| **Consumer** | ​ | ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ |
| Residential real estate first mortgage | ​ | 717,793 | ​ | 27.5% | ​ | 679,551 | ​ | 27.8% | ​ | 38,242 | ​ | 5.6% |
| Residential real estate junior lien | ​ | 152,677 | ​ | 5.9% | ​ | 150,479 | ​ | 6.2% | ​ | 2,198 | ​ | 1.5% |
| Other revolving and installment | ​ | 30,817 | ​ | 1.2% | ​ | 50,608 | ​ | 2.1% | ​ | (19,791) | ​ | (39.1)% |
| Total consumer | ​ | 901,287 | ​ | 34.6% | ​ | 880,638 | ​ | 36.1% | ​ | 20,649 | ​ | 2.3% |
| Total loans | ​ | $2,606,430 | ​ | 100.0% | ​ | $2,443,994 | ​ | 100.0% | ​ | $162,436 | ​ | 6.6% |

Total loans outstanding were $2.6 billion as of September 30, 2023, an increase of $162.4 million, or 6.6%, from December 31, 2022. The increase was primarily driven by a $143.3 million increase in commercial real estate and a $38.2 million increase in residential real estate loans, offset by a $19.8 million decrease in other consumer revolving and installment loans.

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

The following table presents the maturities and types of interest rates for the loan portfolio as of September 30, 2023:

*(dollars in thousands)*

| ​ ​ ​ ​ Commercial | ​ ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ One year or less ​ | ​ ​ ​ | ​ ​ After one but within five years ​ | ​ ​ ​ | ​ ​ After five but within fifteen years ​ | ​ ​ ​ ​ ​ | ​ ​ ​ ​ After fifteen years ​ ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Total ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Commercial and industrial | ​ | $168,974 | ​ | $252,223 | ​ | $161,190 | ​ | $— | ​ | $582,387 |
| Real estate construction | ​ | 25,538 | ​ | 63,442 | ​ | 6,567 | ​ | 2,195 | ​ | 97,742 |
| Commercial real estate | ​ | 67,108 | ​ | 449,764 | ​ | 445,426 | ​ | 62,716 | ​ | 1,025,014 |
| Total commercial | ​ | 261,620 | ​ | 765,429 | ​ | 613,183 | ​ | 64,911 | ​ | 1,705,143 |
| **Consumer** | ​ |  | ​ |  | ​ |  | ​ | ​ | ​ |  |
| Residential real estate first mortgage | ​ | 5,829 | ​ | 30,107 | ​ | 45,676 | ​ | 636,181 | ​ | 717,793 |
| Residential real estate junior lien | ​ | 8,708 | ​ | 22,360 | ​ | 34,557 | ​ | 87,052 | ​ | 152,677 |
| Other revolving and installment | ​ | 8,734 | ​ | 19,242 | ​ | 2,841 | ​ | — | ​ | 30,817 |
| Total consumer | ​ | 23,271 | ​ | 71,709 | ​ | 83,074 | ​ | 723,233 | ​ | 901,287 |
| Total loans | ​ | $284,891 | ​ | $837,138 | ​ | $696,257 | ​ | $788,144 | ​ | $2,606,430 |
| **Loans with fixed interest rates:** | ​ | ​ |  | ​ |  | ​ | ​ | ​ ​ |  | ​ |
| **Commercial** |  | ​ |  | ​ |  | ​ | ​ | ​ ​ |  | ​ |
| Commercial and industrial | ​ | $14,337 | ​ | $217,039 | ​ | $59,857 | ​ | $— | ​ | $291,233 |
| Real estate construction | ​ | 5,837 | ​ | 15,930 | ​ | 3,973 | ​ | — | ​ | 25,740 |
| Commercial real estate | ​ | 48,842 | ​ | 330,527 | ​ | 284,539 | ​ | 22,740 | ​ | 686,648 |
| Total commercial | ​ | 69,016 | ​ | 563,496 | ​ | 348,369 | ​ | 22,740 | ​ | 1,003,621 |
| **Consumer** | ​ |  | ​ |  | ​ |  | ​ | ​ | ​ |  |
| Residential real estate first mortgage | ​ | 4,269 | ​ | 26,273 | ​ | 38,048 | ​ | 419,213 | ​ | 487,803 |
| Residential real estate junior lien | ​ | 1,451 | ​ | 6,899 | ​ | 22,487 | ​ | 15,828 | ​ | 46,665 |
| Other revolving and installment | ​ | 3,231 | ​ | 16,797 | ​ | 2,841 | ​ | — | ​ | 22,869 |
| Total consumer | ​ | 8,951 | ​ | 49,969 | ​ | 63,376 | ​ | 435,041 | ​ | 557,337 |
| Total loans with fixed interest rates | ​ | $77,967 | ​ | $613,465 | ​ | $411,745 | ​ | $457,781 | ​ | $1,560,958 |
| **Loans with floating interest rates:** |  | ​ |  | ​ |  | ​ | ​ | ​ ​ |  | ​ |
| **Commercial** | ​ | ​ |  | ​ |  | ​ | ​ | ​ ​ |  | ​ |
| Commercial and industrial | ​ | $154,637 | ​ | $35,184 | ​ | $101,333 | ​ | $— | ​ | $291,154 |
| Real estate construction | ​ | 19,701 | ​ | 47,512 | ​ | 2,594 | ​ | 2,195 | ​ | 72,002 |
| Commercial real estate | ​ | 18,266 | ​ | 119,237 | ​ | 160,887 | ​ | 39,976 | ​ | 338,366 |
| Total commercial | ​ | 192,604 | ​ | 201,933 | ​ | 264,814 | ​ | 42,171 | ​ | 701,522 |
| **Consumer** | ​ |  | ​ |  | ​ |  | ​ | ​ | ​ |  |
| Residential real estate first mortgage | ​ | 1,560 | ​ | 3,834 | ​ | 7,628 | ​ | ​ 216,968 | ​ | 229,990 |
| Residential real estate junior lien | ​ | 7,257 | ​ | 15,461 | ​ | 12,070 | ​ | 71,224 | ​ | 106,012 |
| Other revolving and installment | ​ | 5,503 | ​ | 2,445 | ​ | — | ​ | — | ​ | 7,948 |
| Total consumer | ​ | 14,320 | ​ | 21,740 | ​ | 19,698 | ​ | 288,192 | ​ | 343,950 |
| Total loans with floating interest rates | ​ | $206,924 | ​ | $223,673 | ​ | $284,512 | ​ | $330,363 | ​ | $1,045,472 |

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

### Asset Quality

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

### Credit Quality Indicators

Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See “NOTE 4 Loans and Allowance for Credit Losses” to the consolidated financial statements for a definition of each of the risk ratings.

The table below presents criticized loans outstanding by loan portfolio segment as of September 30, 2023 and December 31, 2022:

*(dollars in thousands)*

| ​ ​ Commercial | ​ ​ | ​ ​ ​ September 30, ​ 2023 ​ ​ | ​ ​ ​ December 31, ​ 2022 ​ ​ ​ |
| --- | --- | ---: | --- |
| Commercial and industrial | ​ | $31,682 ​ | $25,182 ​ |
| Real estate construction | ​ | 15,131 ​ | ​ 262 ​ |
| Commercial real estate | ​ | 6,932 ​ | ​ 8,400 ​ |
| Total commercial | ​ | 53,745 ​ | ​ 33,844 ​ |
| Consumer | ​ | ​ | ​ ​ ​ |
| Residential real estate first mortgage | ​ | 107 ​ | ​ 808 ​ |
| Residential real estate junior lien | ​ | 1,922 ​ | ​ 632 ​ |
| Other revolving and installment | ​ | ​ — ​ | ​ 1 ​ |
| Total consumer | ​ | 2,029 ​ | ​ 1,441 ​ |
| Total loans | ​ | $55,774 ​ | $35,285 ​ |
| Criticized loans as a percent of total loans | ​ | ​ 2.14% | ​ 1.44% |

The following table presents information regarding nonperforming assets as of September 30, 2023 and December 31, 2022:

*(dollars in thousands)*

| ​ ​ | ​ ​ | ​ ​ ​ September 30, ​ 2023 | ​ ​ ​ December 31, ​ 2022 |
| --- | --- | ---: | ---: |
| Nonaccrual loans |  | $9,007 | $3,794 |
| Accruing loans 90+ days past due |  | ​ — | ​ — |
| Total nonperforming loans | ​ | ​ 9,007 ​ | ​ 3,794 ​ |
| OREO and repossessed assets | ​ | 3 ​ | 30 ​ |
| Total nonperforming assets | ​ | ​ 9,010 ​ | ​ 3,824 ​ |
| Total restructured accruing loans | ​ | ​ — ​ | ​ 151 ​ |
| Total nonperforming assets and restructured accruing loans | ​ | $9,010 ​ | $3,975 ​ |
| Nonperforming loans to total loans | ​ | 0.35% | 0.16% |
| Nonperforming assets to total assets | ​ | 0.23% | 0.10% |
| Allowance for credit losses on loans to nonperforming loans | ​ | 403% | 821% |

Interest income lost on nonaccrual loans approximated $287 thousand and $172 thousand for the nine months ended September 30, 2023 and 2022, respectively. There was no interest income included in net interest income related to nonaccrual loans for the nine months ended September 30, 2023 and 2022.

### Allowance for Credit Losses on Loans

The allowance for credit losses is a significant estimate in the Company’s Consolidated Balance Sheet, affecting both earnings and capital. Its methodology influences and is influenced by the Company’s overall credit risk management processes. The allowance for credit losses is managed in accordance with GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The allowance for credit losses is established through provision for credit loss expense charged to income.

The Company calculates the allowance for credit losses at each reporting date. The Company recognizes an allowance for the lifetime expected credit losses for the amount the Company does not expect to collect. Subsequent changes in expected credit losses are recognized immediately in earnings. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic and other conditions. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, expected loss experience, and other relevant information from internal and external sources which management feels deserve recognition in establishing an appropriate reserve. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change.

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

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2023 | ​ ​ ​ ​ ​ 2022 | ​ ​ ​ Nine months ended September 30, 2023 | ​ ​ ​ ​ ​ 2022 |
| --- | --- | ---: | ---: | ---: | ---: |
| **Balance—beginning of period** | ​ | $35,696 ​ | $31,373 ​ | $35,003 ​ | $31,572 ​ |
| Commercial loan charge-offs | ​ | ​ | ​ | ​ | ​ |
| Commercial and Industrial | ​ | (134) ​ | (672) ​ | (394) ​ | (1,336) ​ |
| Real estate construction | ​ | — ​ | — ​ | — ​ | — ​ |
| Commercial real estate | ​ | — ​ | — ​ | — ​ | — ​ |
| Total commercial loan charge-offs | ​ | (134) ​ | (672) ​ | (394) ​ | (1,336) ​ |
| Consumer loan charge-offs | ​ | ​ | ​ | ​ | ​ |
| Residential real estate first mortgage | ​ | (9) ​ | — ​ | (9) ​ | — ​ |
| Residential real estate junior lien | ​ | — ​ | — ​ | (77) ​ | — ​ |
| Other revolving and installment | ​ | (8) ​ | (75) ​ | (36) ​ | (130) ​ |
| Total consumer loan charge-offs | ​ | (17) ​ | (75) ​ | (122) ​ | (130) ​ |
| Total loan charge-offs | ​ | (151) ​ | (747) ​ | (516) ​ | (1,466) ​ |
| Commercial loan recoveries | ​ | ​ | ​ | ​ | ​ |
| Commercial and Industrial | ​ | 456 ​ | 105 ​ | 950 ​ | 321 ​ |
| Real estate construction | ​ | — ​ | 76 ​ | — ​ | 76 ​ |
| Commercial real estate | ​ | 11 ​ | 101 ​ | 34 ​ | 123 ​ |
| Total commercial recoveries | ​ | 467 ​ | 282 ​ | 984 ​ | 520 ​ |
| Consumer loan recoveries | ​ | ​ | ​ | ​ | ​ |
| Residential real estate first mortgage | ​ | 254 ​ | — ​ | 256 ​ | — ​ |
| Residential real estate junior lien | ​ | — ​ | 7 ​ | 52 ​ | 221 ​ |
| Other revolving and installment | ​ | 24 ​ | 53 ​ | 51 ​ | 121 ​ |
| Total consumer loan recoveries | ​ | 278 ​ | 60 ​ | 359 ​ | 342 ​ |
| Total loan recoveries | ​ | 745 ​ | 342 ​ | 1,343 ​ | 862 ​ |
| Net loan charge-offs (recoveries) | ​ | (594) ​ | 405 ​ | (827) ​ | 604 ​ |
| Commercial loan provision | ​ | ​ | ​ | ​ | ​ |
| Commercial and Industrial | ​ | 442 ​ | (845) ​ | (275) ​ | 1,011 ​ |
| Real estate construction | ​ | 1,063 ​ | 378 ​ | 745 ​ | 473 ​ |
| Commercial real estate | ​ | (270) ​ | 1,335 ​ | 408 ​ | (229) ​ |
| Total commercial loan provision | ​ | 1,235 ​ | 868 ​ | 878 ​ | 1,255 ​ |
| Consumer loan provision | ​ | ​ | ​ | ​ | ​ |
| Residential real estate first mortgage | ​ | (389) ​ | (584) ​ | (339) ​ | (941) ​ |
| Residential real estate junior lien | ​ | (14) ​ | (109) ​ | 140 ​ | (151) ​ |
| Other revolving and installment | ​ | (58) ​ | (75) ​ | (188) ​ | 65 ​ |
| Total consumer loan provision | ​ | (461) ​ | (768) ​ | (387) ​ | (1,027) ​ |
| Unallocated provision expense | ​ | (774) ​ | (100) ​ | (31) ​ | (228) ​ |
| Total provision for credit losses on loans | ​ | — ​ | — ​ | 460 ​ | — ​ |
| **Balance—end of period** | ​ | $36,290 ​ | $30,968 ​ | $36,290 ​ | $30,968 ​ |
| Total loans | ​ | $2,606,430 ​ | $2,318,231 ​ | $2,606,430 ​ | $2,318,231 ​ |
| Average total loans | ​ | ​ 2,544,836 ​ | ​ 2,262,361 ​ | ​ 2,495,122 ​ | ​ 1,958,216 ​ |
| Allowance for credit losses on loans to total loans | ​ | 1.39% | 1.34% | 1.39% | 1.34% |
| Net charge-offs/(recoveries) to average total loans (annualized) | ​ | (0.09)% | 0.07% | (0.04)% | 0.04% |

Effective January 1, 2023, the Company adopted the new CECL accounting standard. The adoption of the CECL accounting standard resulted in the Company’s allowance for credit losses increasing by approximately $5.9 million relative to the allowance held as of December 31, 2022. The adoption of the CECL accounting standard resulted in an additional allowance of $3.9 million in the allowance for credit losses on loans and $1.9 million in additional allowance for credit losses on unfunded commitments. The allowance for credit losses on loans was $36.3 million as of September 30, 2023, compared to $31.1 million as of December 31, 2022. The $5.1 million increase was the result of a $3.9 million increase from the adoption of the CECL accounting standard as well as a $550 thousand provision for credit losses on loans expense. As of September 30, 2023, the allowance for credit losses on loans represented 1.39% of total loans.

The following table summarizes the activity in the allowance for credit losses on loans for the periods indicated:

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2023 ​ | ​ ​ ​ ​ ​ 2022 ​ | ​ ​ ​ Nine months ended September 30, 2023 | ​ ​ ​ ​ ​ 2022 ​ |
| --- | --- | --- | --- | --- | --- |
| **Balance—beginning of period** | ​ | $35,696 ​ | $31,373 ​ | $35,003 ​ | $31,572 ​ |
| Net charge-offs (recoveries): |  | ​ ​ | ​ ​ | ​ ​ | ​ ​ |
| Commercial net charge-offs (recoveries) | ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ |
| Commercial and Industrial | ​ | (322) ​ | ​ 567 ​ | (556) ​ | ​ 1,015 ​ |
| Real estate construction | ​ | ​ — ​ | ​ (76) ​ | ​ — ​ | ​ (76) ​ |
| Commercial real estate | ​ | ​ (11) ​ | ​ (101) ​ | ​ (34) ​ | ​ (123) ​ |
| Total commercial net charge-offs (recoveries) | ​ | ​ (333) ​ | ​ 390 ​ | ​ (590) ​ | ​ 816 ​ |
| Consumer net charge-offs (recoveries) | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Residential real estate first mortgage | ​ | ​ (245) ​ | ​ — ​ | ​ (247) ​ | ​ — ​ |
| Residential real estate junior lien | ​ | ​ — ​ | ​ (7) ​ | ​ 25 ​ | ​ (221) ​ |
| Other revolving and installment | ​ | ​ (16) ​ | ​ 22 ​ | ​ (15) ​ | ​ 9 ​ |
| Total consumer net charge-offs (recoveries) | ​ | ​ (261) ​ | ​ 15 ​ | ​ (237) ​ | ​ (212) ​ |
| Total net charge-offs (recoveries) | ​ | ​ (594) ​ | ​ 405 ​ | ​ (827) ​ | ​ 604 ​ |
| Provision for credit losses on loans | ​ | ​ — ​ | ​ — ​ | ​ 460 ​ | ​ — ​ |
| **Balance—end of period** | ​ | $36,290 ​ | $30,968 ​ | $36,290 ​ | $30,968 ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Net charge-offs (recoveries) to average loans | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Commercial net charge-offs (recoveries) to average loans | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Commercial and Industrial | ​ | ​ (0.05)% | ​ 0.10% | ​ (0.03)% | ​ 0.07% |
| Real estate construction | ​ | ​ —% | ​ (0.01)% | ​ —% | ​ (0.01)% |
| Commercial real estate | ​ | ​ —% | ​ (0.02)% | ​ —% | ​ (0.01)% |
| Total commercial net charge-offs (recoveries) to average loans | ​ | ​ (0.05)% | ​ 0.07% | ​ (0.03)% | ​ 0.06% |
| Consumer net charge-offs (recoveries) to average loans | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Residential real estate first mortgage | ​ | ​ (0.04)% | ​ —% | ​ (0.01)% | ​ —% |
| Residential real estate junior lien | ​ | ​ —% | ​ —% | ​ —% | ​ (0.02)% |
| Other revolving and installment | ​ | ​ —% | ​ —% | ​ —% | ​ —% |
| Total consumer net charge-offs (recoveries) to average loans | ​ | ​ (0.04)% | ​ —% | ​ (0.01)% | ​ (0.01)% |
| Total net charge-offs (recoveries) to average loans | ​ | ​ (0.09)% | ​ 0.07% | ​ (0.04)% | ​ 0.04% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |
| Allowance for credit losses on loans to total loans | ​ | ​ 1.39% | ​ 1.34% | ​ 1.39% | ​ 1.34% |
| Allowance for credit losses on loans to nonaccrual loans | ​ | ​ 403% | ​ 816% | ​ 403% | ​ 816% |
| Allowance for credit losses on loans to nonperforming loans | ​ | ​ 403% | ​ 821% | ​ 403% | ​ 821% |

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

*(dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ Allocated Allowance | ​ ​ ​ | ​ ​ ​ Percentage ​ of loans to ​ total loans ​ | ​ ​ ​ ​ | ​ ​ December 31, 2022 ​ ​ Allocated Allowance | ​ ​ ​ | ​ ​ ​ Percentage ​ of loans to ​ total loans ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Commercial and industrial | ​ | $8,577 | ​ | 22.3% | ​ | $9,158 | ​ | 23.9% |
| Real estate construction | ​ | 4,709 | ​ | 3.8% | ​ | 1,446 | ​ | 4.0% |
| Commercial real estate | ​ | 12,706 | ​ | 39.3% | ​ | 12,688 | ​ | 36.0% |
| Residential real estate first mortgage | ​ | 7,757 | ​ | 27.5% | ​ | 5,769 | ​ | 27.8% |
| Residential real estate junior lien | ​ | 1,337 | ​ | 5.9% | ​ | 1,289 | ​ | 6.2% |
| Other revolving and installment | ​ | 251 | ​ | 1.2% | ​ | 528 | ​ | 2.1% |
| Unallocated | ​ | 953 | ​ | —% | ​ | 268 | ​ | —% |
| Total loans | ​ | $36,290 | ​ | 100.0% | ​ | $31,146 | ​ | 100.0% |

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. An allowance was established for off-balance sheet credit exposures as part of the adoption of the CECL accounting standard and is measured using similar internal and external assumptions.

This allowance is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was $5.2 million as of September 30, 2023.

### Investment Securities

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

The following table presents the fair value composition of the Company’s investment securities portfolio as of September 30, 2023 and December 31, 2022:

*(dollars in thousands)*

| ​ ​ ​ Available-for-sale | ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ Balance ​ | ​ ​ ​ | ​ ​ Percent of ​ Portfolio ​ ​ | ​ ​ December 31, 2022 ​ ​ Balance ​ ​ | ​ ​ ​ | ​ ​ Percent of ​ Portfolio ​ ​ |
| --- | --- | --- | --- | ---: | --- | --- | ---: |
| U.S. Treasury and agencies | ​ | $2,665 | ​ | 0.3% | $3,520 | ​ | 0.3% |
| Mortgage backed securities | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ |
| Residential agency | ​ | ​ 521,623 | ​ | 55.3% | ​ 587,679 | ​ | 56.6% |
| Commercial | ​ | ​ 58,685 | ​ | 6.2% | ​ 63,558 | ​ | 6.1% |
| Asset backed securities | ​ | ​ 27 | ​ | —% | ​ 34 | ​ | —% |
| Corporate bonds | ​ | ​ 57,001 | ​ | 6.0% | ​ 62,533 | ​ | 6.0% |
| Total available-for-sale investment securities | ​ | 640,001 | ​ | 67.8% | 717,324 | ​ | 69.0% |
| Held-to-maturity | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ |
| Obligations of state and political agencies | ​ | 130,088 | ​ | 13.8% | 137,787 | ​ | 13.3% |
| Mortgage backed securities | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ |
| Residential agency | ​ | ​ 173,398 | ​ | 18.4% | ​ 184,115 | ​ | 17.7% |
| Total held-to-maturity investment securities | ​ | ​ 303,486 | ​ | 32.2% | ​ 321,902 | ​ | 31.0% |
| Total investment securities | ​ | $943,487 | ​ | 100.0% | $1,039,226 | ​ | 100.0% |

The investment securities presented in the following table are reported at fair value and by contractual maturity as of September 30, 2023. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis.

*(dollars in thousands)*

| ​ ​ ​ ​ Available-for-sale | ​ ​ ​ ​ | ​ ​ Maturity as of September 30, 2023 One year or less Fair Value ​ | ​ ​ | ​ ​ ​ Average Yield ​ | ​ ​ One to five years Fair Value ​ | ​ ​ | ​ ​ ​ Average Yield ​ | ​ ​ Five to ten years Fair Value ​ | ​ ​ | ​ ​ ​ Average Yield ​ | ​ ​ After ten years Fair Value ​ | ​ ​ | ​ ​ Average Yield ​ |
| --- | --- | ---: | --- | ---: | ---: | --- | ---: | ---: | --- | ---: | ---: | --- | ---: |
| U.S. Treasury and agencies | ​ | $— |  | —% | $390 |  | 4.26% | $590 |  | 5.68% | $1,685 |  | 5.66% |
| Mortgage backed securities | ​ |  |  | ​ |  |  | ​ ​ |  |  | ​ |  |  | ​ |
| Residential agency | ​ | 15 |  | 3.11% | 3,248 |  | 2.22% | 5,416 |  | 2.77% | 512,944 |  | 1.82% |
| Commercial | ​ | — |  | —% | 15,316 |  | 2.77% | 9,179 |  | 2.88% | 34,190 |  | 2.42% |
| Asset backed securities | ​ | — |  | —% | — |  | —% | 8 |  | 5.20% | 19 |  | 5.04% |
| Corporate bonds | ​ | — |  | —% | — |  | —% | 57,001 |  | 3.83% | — |  | —% |
| Total available-for-sale investment securities | ​ | ​ 15 |  | 3.11% | ​ 18,954 |  | 2.71% | ​ 72,194 |  | 3.66% | ​ 548,838 |  | 1.87% |
| Held-to-maturity | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ |
| Obligations of state and political agencies | ​ | ​ 5,875 | ​ | 0.60% | ​ 45,878 | ​ | 1.38% | ​ 49,427 | ​ | 2.04% | ​ 10,257 | ​ | 2.21% |
| Mortgage backed securities | ​ |  |  | ​ |  |  | ​ ​ |  |  | ​ |  |  | ​ |
| Residential agency | ​ | — |  | —% | — |  | —% | — |  | —% | 136,802 |  | 2.17% |
| Total held-to-maturity investment securities | ​ | ​ 5,875 | ​ | 0.60% | ​ 45,878 | ​ | 1.38% | ​ 49,427 | ​ | 2.04% | ​ 147,059 | ​ | 2.17% |
| Total investment securities | ​ | $5,890 | ​ | 0.61% | $64,832 | ​ | 1.77% | $121,621 | ​ | 2.99% | $695,897 | ​ | 1.93% |

### Deposits

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and economic conditions, and fluctuations in the Company’s customers’ own liquidity needs and may also be influenced by recent developments in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank, and First Republic Bank that resulted in the failure of those institutions.

Total deposits were $2.9 billion as of September 30, 2023, a decrease of $43.3 million, or 1.5%, from December 31, 2022. Interest-bearing deposits increased $99.7 million while noninterest-bearing deposits decreased $143.0 million. The decrease in total deposits was due to both public unit depositor seasonality and clients using excess liquidity and paying down revolving debt. Noninterest-bearing deposits decreased from 29.5% of total deposits to 25.0% as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.

The following table presents the composition of the Company’s deposit portfolio as of September 30, 2023 and December 31, 2022:

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ | ​ ​ September 30, 2023 ​ ​ Balance | ​ ​ | ​ ​ ​ Percent of ​ Portfolio | ​ ​ December 31, 2022 ​ ​ Balance | ​ ​ | ​ ​ ​ Percent of ​ Portfolio | ​ ​ ​ ​ Change Amount | ​ ​ | ​ ​ ​ ​ ​ Percent |
| --- | --- | ---: | --- | ---: | ---: | --- | ---: | ---: | --- | ---: |
| Noninterest-bearing demand | ​ | $717,990 | ​ | 25.0% | $860,987 | ​ | 29.5% | $(142,997) | ​ | (16.6)% |
| Interest-bearing demand | ​ | 759,812 | ​ | 26.5% | 706,275 | ​ | 24.2% | 53,537 | ​ | 7.6% |
| Money market and savings | ​ | 1,047,447 | ​ | 36.4% | 1,135,863 | ​ | 39.0% | (88,416) | ​ | (7.8)% |
| Time deposits | ​ | 346,935 | ​ | 12.1% | 212,359 | ​ | 7.3% | 134,576 | ​ | 63.4% |
| Total deposits | ​ | $2,872,184 | ​ | 100.0% | $2,915,484 | ​ | 100.0% | $(43,300) | ​ | (1.5)% |

The following table presents the average balances and rates of the Company’s deposit portfolio for the three months ended September 30, 2023 and 2022:

*(dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Three months ended September 30, 2023 Average Balance | ​ ​ | ​ ​ ​ Average ​ Rate | ​ ​ 2022 Average Balance | ​ ​ | ​ ​ ​ ​ Average ​ Rate |
| --- | --- | --- | --- | ---: | --- | --- | ---: |
| Noninterest-bearing demand | ​ | $743,253 | ​ | —% | $845,375 | ​ | —% |
| Interest-bearing demand | ​ | ​ 757,995 | ​ | 1.34% | ​ 692,310 | ​ | 0.13% |
| Money market and savings | ​ | ​ 1,127,630 | ​ | 3.20% | ​ 1,089,137 | ​ | 0.40% |
| Time deposits | ​ | ​ 276,797 | ​ | 3.94% | ​ 224,603 | ​ | 0.74% |
| Total deposits | ​ | $2,905,675 | ​ | 1.97% | $2,851,425 | ​ | 0.25% |

The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $250 thousand and over, that were outstanding as of September 30, 2023:

*(dollars in thousands)*

| ​ ​ Maturing in: | ​ ​ | ​ ​ September 30, 2023 ​ |
| --- | --- | ---: |
| 3 months or less | ​ | $34,094 |
| 3 months to 6 months | ​ | 42,811 |
| 6 months to 1 year | ​ | 17,753 |
| 1 year or greater | ​ | 4,044 |
| Total | ​ | $98,702 |

The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.0 billion at September 30, 2023 These amounts were estimated based on the same methodologies used for regulatory reporting purposes.

### Borrowings

Borrowings as of September 30, 2023 and December 31, 2022 were as follows:

*(dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ September 30, 2023 ​ ​ Balance | ​ ​ | ​ ​ ​ Percent of ​ Portfolio | ​ ​ December 31, 2022 ​ ​ Balance | ​ ​ | ​ ​ ​ Percent of ​ Portfolio |
| --- | --- | ---: | --- | ---: | --- | --- | ---: |
| Fed funds purchased |  | $315,470 |  | 54.9% | $153,080 | ​ | 35.0% |
| FHLB Short-term advances | ​ | ​ 200,000 | ​ | 34.8% | ​ 225,000 | ​ | 51.6% |
| Subordinated notes | ​ | ​ 50,000 | ​ | 8.7% | ​ 50,000 | ​ | 11.4% |
| Junior subordinated debentures | ​ | 8,928 | ​ | 1.6% | ​ 8,843 | ​ | 2.0% |
| Total borrowed funds | ​ | $574,398 | ​ | 100.0% | $436,923 | ​ | 100.0% |

### Capital Resources

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

Stockholders' equity decreased $7.5 million, or 2.1%, to $349.4 million as of September 30, 2023, compared to $356.9 million as of December 31, 2022. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.47% as of September 30, 2023, from 7.74% as of December 31, 2022. Common equity tier 1 capital to risk weighted assets decreased to 13.01% as of September 30, 2023, from 13.39% as of December 31, 2022.

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

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

At September 30, 2023 and December 31, 2022, the Company met all the capital adequacy requirements to which the Company was subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of September 30, 2023 and December 31, 2022:

| ​ ​ Capital Ratios Alerus Financial Corporation Consolidated | ​ ​ | ​ ​ September 30, ​ 2023 | ​ ​ December 31, ​ 2022 |
| --- | --- | ---: | ---: |
| Common equity tier 1 capital to risk weighted assets | ​ | 13.01% | 13.39% |
| Tier 1 capital to risk weighted assets | ​ | 13.30% | 13.69% |
| Total capital to risk weighted assets | ​ | 16.10% | 16.48% |
| Tier 1 capital to average assets | ​ | 11.14% | 11.25% |
| Tangible common equity to tangible assets (1) | ​ | 7.47% | 7.74% |
| ​ | ​ | ​ | ​ |
| Alerus Financial, National Association | ​ | ​ | ​ |
| Common equity tier 1 capital to risk weighted assets | ​ | 12.68% | 12.76% |
| Tier 1 capital to risk weighted assets | ​ | 12.68% | 12.76% |
| Total capital to risk weighted assets | ​ | 13.86% | 13.83% |
| Tier 1 capital to average assets | ​ | 10.72% | 10.48% |

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

The capital ratios for the Company and the Bank, as of September 30, 2023, as shown in the above table, were at levels above the regulatory minimums to be considered “well capitalized”. See “NOTE 18 Regulatory Matters” to the consolidated financial statements for additional information.

### Off-Balance Sheet Arrangements

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

A summary of the contractual amounts of the Company’s exposure to off-balance sheet agreements as of September 30, 2023 and December 31, 2022, was as follows:

*(dollars in thousands)*

| ​ ​ | ​ ​ | ​ ​ September 30, 2023 | ​ ​ | ​ ​ December 31, 2022 |
| --- | --- | ---: | --- | ---: |
| Commitments to extend credit | ​ | $786,233 | ​ | $806,431 |
| Standby letters of credit | ​ | 9,734 | ​ | 13,089 |
| Total | ​ | $795,967 | ​ | $819,520 |

### Liquidity

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

As of September 30, 2023, the Company had on balance sheet liquidity of $623.4 million, compared to $778.9 million as of December 31, 2022. On balance sheet liquidity includes cash and cash equivalents, federal funds sold, unencumbered securities available-for-sale, and over collateralized securities pledging positions available-for-sale.

The Bank is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate related assets and other select collateral, most typically in the form of debt securities. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2023, the Company had $315.5 million in federal funds purchased and $200.0 million in short-term borrowings from the FHLB. As of September 30, 2023, the Company had $1.5 billion of collateral pledged to the FHLB and based on this collateral, the Company was eligible to borrow up to an additional $477.1 million from the FHLB. In addition, the Company can borrow up to $107.0 million through the unsecured lines of credit the Company has established with four other correspondent banks.

In addition, because the Bank is “well capitalized,” the Company can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or $773.8 million, as of September 30, 2023. Management believed that the Company had adequate resources to fund all of the Company’s commitments as of September 30, 2023 and December 31, 2022.

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

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

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

## Market risk

As filed, 7,721 characters.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.

### Interest Rate Risk

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

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

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

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

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

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

The estimated impact on the Company’s net interest income as of September 30, 2023 and December 31, 2022, assuming immediate parallel moves in interest rates, is presented in the table below:

| ​ ​ ​ ​ ​ ​ ​ +400 basis points +300 basis points +200 basis points +100 basis points | ​ ​ September 30, 2023 Following 12 months ​ −6.3% −4.9% −3.3% −1.4% | ​ ​ ​ Following 24 months ​ −6.7% −5.5% −3.7% −1.3% | ​ ​ December 31, 2022 Following 12 months ​ −25.1% −18.9% −12.7% −6.2% | ​ ​ Following 24 months −8.2% −6.4% −4.4% −1.8% |
| --- | ---: | ---: | ---: | ---: |
| −100 basis points | 0.6% | 0.2% | 5.2% | 0.5% |
| −200 basis points | 0.4% | −0.9% | 7.9% | −1.7% |

Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

Management uses an economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.

The table below presents the change in the economic value of equity as of September 30, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates:

| ​ ​ ​ ​ ​ +400 basis points +300 basis points +200 basis points +100 basis points | ​ ​ September 30, ​ 2023 −23.1% −18.5% −12.3% −5.5% | ​ ​ December 31, 2022 −19.5% −15.3% −10.4% −4.9% |
| --- | ---: | ---: |
| −100 basis points | 4.1% | 4.0% |
| −200 basis points | 6.5% | 5.0% |

### Operational Risk

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

### Compliance Risk

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

### Strategic and/or Reputation Risk

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

## Controls and procedures

As filed, 1,727 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s management, including the President and Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer, its Chief Financial Officer and its Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 147 characters.

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2023.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-017441. Last ingested by Listed: Oct 24, 2026, 15:00 ET. No prices; not investment advice.