2 0 2 0 A N N U A L R E P O R T
R I S I N G T H R OUGH
FI NANCIAL CO RPO RATIO N
Together, We Can Rise
Through Anything.
We took the challenges of 2020 head on and not only managed to maintain
our stability, but thrived to reach new goals. From tailored advice to
proactively adapting our processes, we provided exceptional value to our
clients while facing uncertain times. There are still challenges on the horizon,
but we’re optimistic about the bright future as One Alerus.
Our organic growth is a testament to the resilient mindset and tenacious
nature that every single one of us embodies.
CLIENT-ORIENTED
TAILORED
ADVICE
ONE
ALERUS
DIVERSIFIED
SERVICES
INCOME & BALANCE
SHEET GROWTH
OPPORTUNITIES
TECHNOLOGY
INVESTMENT
REINVENTION
OF PROCESSES
Randy L. Newman
Chairman, President, and
Chief Executive Officer
Alerus Financial Corporation
E
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D E A R FE LLOW STO C K H O LD E R S ,
Despite the unprecedented challenges
in 2020 brought on by the COVID-19
pandemic, our Alerus team rose to the
occasion, outperforming expectations
and identifying new opportunities
for continued long-term growth while
continuing to emphasize client service.
Their resiliency and commitment to
our One Alerus philosophy enabled
us to thrive under extraordinary
circumstances.
TO G E TH E R , W E R E AC H E D R E M A R K A B LE M I LE STO N E S .
TH E S E ACCO M P LI S H M E NT S I N C LU D E :
• Achieving record financial performance, as total revenue and net
income for the year ending December 31, 2020, were $233 million
and $44.7 million, respectively
• Proactively protecting the safety of our employees, clients, and
community while continuing to deliver strong levels of service
• Developing and implementing new processes and technologies to
succeed in a digital-focused environment
• Navigating complex programs to obtain much-needed funding for
existing and new clients
• Successfully closing a fee income acquisition in the Rocky
Mountain region
COV I D -19 I M PAC T S A N D R E S P O N S E
Like others, we were forced to take quick action in March as
COVID-19 began to rapidly spread throughout the country.
Unlike others, we had the experience of having endured
and survived a past crisis (a historic 100-year flood and fire
in Grand Forks, North Dakota) and were able to draw on
that experience to respond swiftly and confidently as the
pandemic unfolded.
Communication
We knew, for example, that quick action and steady
communication are paramount to maintaining successful
operations during a crisis. Our Business Continuity
Planning team was activated early to oversee the
implementation of our pandemic policy. Leadership
teams were in constant communication and frequent all-
company meetings were held virtually to share updates
and maintain employee engagement in a primarily remote
work environment.
D
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C
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Y
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L
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R
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V
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A
T
S
85%
Employees at home sites
21
Live all-company video calls in 2020
75%
Average employee attendance
rate for live calls
(all-company calls also recorded and available for
employees unable to attend live)
Compassion
Our response was also driven by our commitment to keep
employees and clients safe, to be a good community
partner by doing our part to help slow the spread of
the coronavirus, and to have compassion for others.
We were an early adopter of safety recommendations,
including travel restrictions, self-quarantine policies,
and temporarily closing our office lobbies. We made
the decision to enable as many staff as possible to
work from home, and our team displayed incredible
collaboration while successfully transitioning to have 85%
of our employees working from home in just one week.
Temporary on-site pay incentives were established for
essential workers who needed to remain in offices and
relief pay was provided for employees whose positions
were impacted by temporary office closures or daycare/
school closures. These measures enabled Alerus to live up
to its role as a responsible corporate citizen by protecting
the health and safety of its employees and clients and
providing peace of mind to employees during a
difficult time.
Technology
Our previous investments in technology provided a solid
foundation for teams to continue providing high levels
of client care, despite the sudden transition to remote
working environments. Other technology investments in
the pipeline were rapidly rolled out to simplify the client
experience, provide additional capabilities, and further
streamline digital offerings. Wealth management and
brokerage accounts were integrated into My Alerus. This
simplified the online account experience by allowing
clients to view their holistic financial picture with just one
login. Retirement statements and confirmations were
migrated to electronic formats as the default option,
further driving online engagement for Alerus clients.
We also rapidly implemented DocuSign for loan, wealth
management, and investment documents. Paperless
mortgage — an initiative that was scheduled to take a year
to implement — was achieved in just three weeks during
the first quarter, a transition that proved paramount in
our ability to serve the unprecedented mortgage volume
experienced later in the year.
As the Paycheck Protection Program launched, we further
leveraged DocuSign to develop a pre-filled, dynamic
forgiveness application. Process automation robots were
developed to ease the operational process workload
during a time of critical heightened demand. And by
integrating client documents with our CRM, team members
across various locations were able to quickly access client
information for a cohesive, seamless experience.
Client Care
We have always been clear about our commitment to do
right by our clients and employees, doing the right thing,
even if it’s not the easiest. Our team members exhibited
incredible dedication, innovation, and endurance
throughout 2020, while always acting with the clients’
best interests in mind.
Through the first round of the Paycheck Protection
Program, we helped 1,632 new and existing clients obtain
more than $364 million in much-needed relief, protecting
thousands of jobs across the country. Regular webinars
were held to share program requirement information and
guide clients through financial issues. Business advisors
proactively checked in with clients to pinpoint problem
areas and identify solutions. Retirement plan specialists
helped participants navigate their distributions and
alternative lending options. To ease hardships for
impacted clients, we worked with them to waive fees on
loan extensions, provide loan payment deferrals, and
assist with early CD withdrawals.
Our mortgage division was a sustained highlight
throughout 2020 as they experienced unprecedented
demand stemming from low interest rate levels and high
local market demand. The division ended the year with
a record $1.8 billion of originations, and helped nearly
6,000 homeowners buy or refinance.
H I S TO R I CA L M O R TG AG E
VO L U M E
M
7
.
9
7
7
$
M
4
.
6
4
9
$
B
8
.
1
$
2018
2019
2020
R E F R E S H E D M I S S I O N A N D
V I S I O N S T A T E M E N T S
2020 reaffirmed our commitment to holistically
serve clients with our collaborative One Alerus
culture. This laser-focused viewpoint spurred our
leadership team to update the company’s mission
and vision statements.
M I S S I O N :
V I S I O N :
To positively impact
To empower and guide
our clients’ financial
lasting financial well-
potential — through
being for all clients, now
holistic guidance,
and for the future.
unparalleled service,
and engaging technology.
Long-term Changes
One of the few bright spots of the pandemic has been
our ability to successfully serve clients in a remote work
environment. As we communicated with employees
throughout 2020 to ensure they had the adequate
resources and support to succeed, it became clear that
many employees had adapted so well that office space
may no longer be needed. This spurred an in-depth
analysis of our locations, client needs, and the feasibility
of performing certain job duties remotely. In addition,
we asked employees what they wanted. When surveyed,
40% of employees expressed a desire to work from home
permanently. Another 40% said they preferred office
worksites when it was safe to return, while 20% opted for a
hybrid work arrangement.
As a result of these efforts, we identified six offices that
were used for administrative work only and that housed
employees who overwhelmingly preferred working from
home and could efficiently perform their positions in
a remote environment. Closing these locations allows
us to streamline operational overhead costs, reinvest
the savings back into the company, maintain employee
satisfaction, and be an early adopter of the growing trend
toward embracing a largely permanent
remote workforce.
O N E A LE R U S
CONTINUED EXPANSION
As we’ve stated before, One Alerus is not only our five-
year plan, it is our way of life. To put it simply, One Alerus
is a shared commitment to work together and do what is
right for our clients. The One Alerus philosophy was on
full display throughout 2020. Our teamwork mentality
toward overcoming obstacles, our compassion for each
other and our clients, and our amplified commitment to
helping co-workers and clients navigate unique situations
were all driven by One Alerus.
Throughout 2020, we continued to break down silos by
utilizing our advisor-centric model to expand business
relationships across diverse business lines and products.
We embraced the digital environment by integrating
more products into My Alerus and developing webinars
that introduced targeted clients to additional services.
Advisors stayed in regular contact with clients to provide
holistic guidance.
Our unique One Alerus approach enabled us to achieve
record financial performance amid tremendous
adversity, with net income of $44.7 million. This
represents an incredible 51% increase over 2019.
Factors such as record mortgage originations and the
Paycheck Protection Program contributed greatly to this
achievement, and would not have been possible without
our team members across all markets working together
tirelessly to solve problems and serve clients despite the
personal and professional adversities brought on
by COVID-19.
Our initial public offering was held in 2019 to support
continued growth, both organically and through
acquisitions. 2020 was our first full year as a public
company and, despite the pandemic slowing mergers
and acquisitions to a near standstill industrywide, we
were able to hold true to our growth commitment. On
Dec. 18, we completed the acquisition of Retirement
Planning Services, Inc. (RPS), a Littleton, Colorado-
based provider of retirement and health benefits
administration for more than 1,000 plans, 48,000 plan
participants, 300 COBRA clients, and 10,000
COBRA members.
The deal represents our 11th acquisition in the
retirement and benefits vertical, increasing our assets
under administration/management to $34.2 billion,
and expanding our footprint to the Rocky Mountain
region. The acquisition perfectly matches with our
long-term growth strategy to align with companies
that share similar business models, values, and
culture. RPS’ talented team brings nearly 30 years
of experience to our robust retirement and benefits
division and we have already begun to learn much
from each other as we integrate our processes, clients,
and team members.
4
Retirement and Benefits Vertical
Acquisition Timeline
2 0 03
Pension Solutions, Inc.
St. Paul, MN
2 0 0 6
Stanton Trust Company
Minneapolis, MN
2 0 07
Acclaim Benefits, Inc. retirement
recordkeeping services unit
Minneapolis, MN
Stanton Investment Advisors
Minneapolis, MN
2 0 0 9
Eide Bailly, LLP retirement
plan practice
Minneapolis, MN
2 01 2
2 01 5
Interactive Retirement Systems, Ltd.
Bloomington, MN
2 01 6
Alliance Benefit Group North
Central States, Inc.
Albert Lea and Eden Prairie, MN
2 02 0
Retirement Planning Services,
Inc., doing business as RPS Plan
Administrators and 24HourFlex
Littleton, CO
Diversified Client Base
PensionTrend, Inc. and PensionTrend
Investment Advisers, LLC
Okemos, MI
• 48,200 consumers
• 10,400 businesses
2 013
Tegrit Administrators, LLC
2 014
Retirement Alliance, Inc.
Manchester, NH
• 7,500 employer-sponsored retirement plans
• 373,100 employer-sponsored retirement
plan participants
• 59,900 health savings account participants
• 46,700 flexible spending account/health
reimbursement arrangement participants
5
Talent and Tenacity
2020 upended many of our employees’ and clients’
lives, and challenged us all to take stock of our
purpose and priorities. Alerus, our clients, and our
stockholders benefited greatly from our company’s
tremendously talented and dedicated employees, and
for that we are extremely grateful. We’ve worked hard
to develop well-rounded teams made up of tenured
employees and new talent to bring the right balance of
company history, experience, and new perspectives to
every aspect of our business.
As part of our One Alerus growth strategy, we will
continue to recruit top talent in existing markets and
through acquisitions, as we did with the RPS acquisition.
We also successfully continue to foster and recruit new
talent from within and position Alerus as an employer
of choice. In 2020, our efforts were rewarded by being
named to several “best places to work” lists, including
American Banker’s Best Banks to Work For. The list is
compiled based on firsthand feedback from employees
via anonymous surveys, in addition to benefits and
policies reviews, and indicates employee satisfaction
levels throughout the company. Our employees are our
greatest asset, and we continue to be honored by their
commitment and service to our clients.
ALERUS LEADERSHIP COUNCIL
GENDER
GENDER
RATIO
RATIO
10 11
FEMALE MALEMALE
FEMALE
AVERAGE
AVERAGE
TENURE
TENURE
14
YEARS
YEARS
YEARS
YEARS
OF AGE
OF AGE
35-67
W ITH G R ATIT U D E
It is truly an honor and privilege to lead Alerus. I am incredibly proud and grateful of our team members’ agility,
collaboration, and willingness to persevere this past year. Equally notable is our management team and board of directors,
who faced adversity head on and navigated our company during times of great uncertainty. Thank you to all of our clients
and stockholders who continue to place their trust and confidence in us. We sincerely appreciate your investment in our
company as we look forward with confidence and optimism.
FA R E W E L L T O D I R E C T O R L L O Y D C A S E
We extend our sincerest appreciation to corporate director,
Lloyd Case, who will retire in May 2021. Lloyd joined Alerus
as a corporate director in 2005. Whether its opportunistically
growing Alerus through acquisitions shortly after the 2008
financial crisis, to the company becoming Nasdaq listed and
successfully raising $62.8 million in capital, Lloyd has made
significant contributions to our company. Thank you, Lloyd, for
sharing your talents and leadership with our organization.
W E L C O M E O U R N E W E S T
E X E C U T I V E
We are pleased to welcome Ryan
Goldberg to our C-suite executive team
as chief revenue officer. Mr. Goldberg
joined the company in March 2020 and
brings more than 25 years of successful sales
and business leadership to Alerus. Mr. Goldberg’s
ability to drive revenue across multiple business lines through
a client-centric approach is an ideal fit for our company as we
move forward.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001 - 39036
ALERUS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
401 Demers Avenue
Grand Forks, ND
(Address of principal executive offices)
45 - 0375407
(I.R.S. Employer Identification No.)
58201
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(701) 795 - 3200
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, par value $1.00 per share
Trading symbol
ALRS
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b - 2 of the
Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to his management's assessment of the effectiveness of its internal control over
financial reporting under section 404(b) of the Sarbanes-Oxley Act (U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). Yes ☐ No
The aggregate market value of the voting common equity held by non-affiliates, as of June 30, 2020, was approximately $315,239,085 (based on the closing price on
The Nasdaq Capital Market on that date of $18.80). The number of shares of the registrant’s common stock outstanding at February 28, 2021 was 17,131,902.
The information required by Part III is incorporated by reference to portions of the definitive proxy statement to be filed within 120 days after December 31, 2020,
pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 11, 2021.
DOCUMENTS INCORPORATED BY REFERENCE:
Table of Contents
PART I
Page
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
Item 16. Form 10-K Summary
Signatures
2
4
21
58
58
59
59
60
62
62
92
95
148
148
149
149
149
149
150
150
151
154
155
CAUTIONARY NOTE REGARDING FORWARD - LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe harbor
provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without
limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated
future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words
such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”,
“seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative
version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking
statements include, among others, statements we make regarding our projected growth, anticipated future financial
performance, financial condition, credit quality and management’s long-term performance goals and the future plans and
prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are
based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and
strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking
statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ
materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these
forward-looking statements. Important factors that could cause our actual results and financial condition to differ
materially from those indicated in the forward-looking statements include, among others, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses;
new or revised accounting standards, including as a result of the future implementation of the Current
Expected Credit Loss standard;
business and economic conditions in our market areas;
overall health of the local and national real estate market;
concentrations within our loan portfolio;
the level of nonperforming assets on our balance sheet;
the impact of economic or market conditions on our fee-based services;
our ability to implement our organic and acquisition growth strategies;
potential impairment to the goodwill we recorded in connections with our past acquisitions;
our ability to continue to grow our retirement and benefit services business;
our ability to continue to originate a sufficient volume of residential mortgages;
the occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity-related incidents;
interruptions involving our information technology and telecommunications systems or third-party
services;
developments and uncertainty related to the future use and availability of some reference rates, such as the
London Interbank Offered Rate, or LIBOR, as well as other alternative reference rates;
3
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
potential losses incurred in connection with mortgage loan repurchases;
the composition of our executive management team and our ability to attract and retain key personnel;
severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts
of war or terrorism, or other adverse external events;
any material weaknesses in our internal control over financial reporting;
our ability to success fully manage liquidity risk;
concentrations of large depositors;
our dependence on dividends from the Bank;
the effectiveness of our risk management framework;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against us
or to which we may become subject;
the extensive regulatory framework that applies to us;
the impact of recent and future legislative and regulatory changes;
the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and
our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in
connection with the pandemic;
interest rate risks associated with our business;
fluctuations in the values of the securities held in our securities portfolio;
governmental monetary, trade and fiscal policies; and
any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus
Financial Corporation with the Securities and Exchange Commission.
Any forward-looking statement made by us in this report is based only on information currently available to us
and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking
statement, whether written or oral, that may be made from time to time, whether as a result of new information, future
developments or otherwise.
ITEM 1. BUSINESS
Company Overview and History
Alerus Financial Corporation, or the Company, is a diversified financial services company headquartered in
Grand Forks, North Dakota. Through our subsidiary, Alerus Financial, National Association, or the Bank, we provide
innovative and comprehensive financial solutions to businesses and consumers through four distinct business
segments—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.
4
As of December 31, 2020, we had $3.0 billion of total assets, $2.0 billion of total loans, $2.6 billion of total
deposits, $330.2 million of stockholders’ equity, $34.2 billion of assets under administration/management in our
retirement and benefit services segment, and $3.3 billion of assets under administration/management in our wealth
management segment. For the year ended December 31, 2020, we had $1.8 billion of mortgage originations.
Our business model produces strong financial performance and a diversified revenue stream, which has helped
us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We believe
our client - first and advice - based philosophy, diversified business model and history of high performance and growth
distinguishes us from other financial service providers. We generate a majority of our overall revenue from noninterest
income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business
segments. The remainder of our revenue consists of net interest income, which we derive from offering our traditional
banking products and services.
Our operations date back to 1879, when we were originally founded as the Bank of Grand Forks, one of the first
banks chartered in the Dakota Territory. In 2000, we changed our name to Alerus Financial Corporation, reflecting our
evolution from a traditional community bank to a high - value financial services company focused on serving the needs of
businesses and consumers who desire comprehensive financial solutions delivered through relationship - based advice and
service. Since this rebranding, we have experienced significant growth, both organically and through a series of strategic
acquisitions. This growth has allowed us to build a diversified franchise and expand our geographic footprint into
growing metropolitan areas. We believe these initiatives have transformed our Company into a high - tech, high - touch
client service provider, increased our earnings and allowed us to return more value to stockholders.
Our Business Model and Products and Services
General
Our business model is client - centric, with a focus on offering a diversified range of solutions to clients who
desire an advice - based relationship, enabling us to become the preferred financial services provider to clients. Through
this approach, instead of focusing on the broader population, we target specific business and consumer segments that we
believe we can serve better than our competitors and that have meaningful growth potential. By offering sound financial
advice and a long - term partnership, we believe we align best with clients who are achievement - oriented in their purpose
and will allow us to play an active role in their success at all stages of their businesses and lives. We classify our
consumer clients based on age and income, aligning best with clients who have complex financial needs. Our business
clients are classified by industry, with a focus on specific high priority industries and client types, including professional
services, finance and insurance, wholesale, small business, construction, retail, and manufacturers. We target businesses
with sales between $2.0 million and $100.0 million.
Our commitment to delivering diversified solutions is driven by our “One Alerus” initiative, launched in 2017,
which enables us to bring all of our product and service offerings to clients in a cohesive and seamless manner.
Underlying the One Alerus initiative is our strategy of serving clients through a combination of technology and skilled
advisors—a “high - tech, high - touch” approach that we believe clients demand and deserve. One Alerus lays the strategic
foundation for current and future technology investments and the synergistic growth strategies of a diversified financial
services firm. It also brings together our product and service offerings in a unified way, which we believe differentiates
us from our competitors and allows us to impact clients more meaningfully and generate long - term value for our
Company. The primary components of One Alerus are:
•
•
•
•
providing proactive advice to clients;
offering an integrated client - access portal (My Alerus);
seeking additional ways to improve the client experience;
leveraging synergistic growth opportunities; and
5
•
focusing on process reinvention and efficiency.
Through One Alerus, we strive to provide each client with a primary point of contact—a trusted advisor—who
takes the time to develop an in - depth understanding of the client’s needs and goals. Our advisors work holistically with
clients in a guidance - based manner to proactively help them with their financial decisions. Our products and services
include traditional bank offerings such as checking accounts, debit cards, savings accounts, personal and business loans,
credit cards, online banking, mobile banking / wallet, private banking, deposit and payment solutions and mortgages, as
well as fee income services such as individual retirement accounts, or IRAs, 401(k) rollovers, retirement planning,
employer - sponsored plans, employee stock ownership plans, payroll and health savings account, or HSA, flex spending
account, or FSA, administration, government health insurance program services, and wealth management services such
as advisory, investment management and trust and fiduciary services. The advisor is equipped to tailor this diverse set of
products and services to each client’s unique goals and is empowered to reach across our organization to bring the client
in contact with product specialists as needed. One Alerus bridges the gaps between our business units with a focus on
client advocacy. We believe the One Alerus initiative will enable us to achieve future organic growth by leveraging our
existing client base and help us continue to provide strong returns to our stockholders.
The trusted advisor relationship is supported and enhanced through an integrated client - access portal we call
“My Alerus.” By collaborating with a key technology partner, we have integrated the diverse client applications of our
full product suite into a unified system and layered in new technology to bring a client’s entire financial picture into one
view. For example, a client who has multiple products with our Company, such as banking accounts, a mortgage, wealth
management accounts, a retirement account, and a health benefit account, can now access all of these accounts online
and effect transactions via one, single login through My Alerus. Instead of being forced to use different usernames and
passwords for each system, we’ve created a single login dashboard to access the most used information on client
accounts and coupled that with the ability to link into more detailed information within each transaction system
(banking, retirement, and benefits, wealth management and mortgage). Our clients can further personalize their
dashboard by integrating or linking financial accounts held at other institutions into My Alerus. Once our clients have
integrated or linked all of their financial information, the data can be used to create a custom financial fitness score to
help clients save for emergencies, plan for retirement, manage their debt, optimize health savings and protect them from
unexpected events with insurance.
Banking
Lending. Through our relationship - oriented lending approach, our strategy is to offer a broad range of
customized commercial and consumer lending products for the personal investment and business needs of our clients.
Our commercial lending products include commercial loans, business term loans and lines of credit for a diversified mix
of small and midsized businesses. We offer both owner occupied and non - owner occupied commercial real estate loans,
as well as construction and land development loans. Our consumer lending products include residential first mortgage
loans. In addition to originating these loans for our own portfolio, we originate and sell, primarily servicing - released,
whole loans in the secondary market. Our mortgage loan sales activities are primarily directed at originating single
family mortgages, which generally conform to Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation guidelines and are delivered to the investor shortly after funding. Additionally, we offer
installment loans and lines of credit, typically to facilitate investment opportunities for consumer clients whose financial
characteristics support the request. We also provide clients loans collateralized by cash and marketable securities.
Our loan portfolio includes commercial and industrial loans, commercial real estate loans, consumer loans,
which include residential real estate loans, indirect auto loans and other consumer loans, and a small amount of
agricultural loans. The principal risk associated with each category of loans we make is the creditworthiness of the
borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower and
the borrower’s market or industry. We underwrite for strong cash flow, multiple sources of repayment, adequate
collateral, borrower experience and backup guarantors. Attributes of the relevant business market or industry include the
competitive environment, client and supplier availability, the threat of substitutes, and barriers to entry and exit.
Deposits. We provide a broad range of deposit products and services, including demand deposits,
interest - bearing transaction accounts, money market accounts, time and savings deposits, and certificates of deposit.
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Core deposits, which consist of noninterest bearing deposits, interest - bearing checking accounts, certificates of deposit
less than $250,000, and money market accounts, provide our major source of funds from individuals, businesses and
local governments. As of December 31, 2020, core deposits totaled $2.5 billion or 97.5% of our total deposits. Our
deposit portfolio includes synergistic deposits from our retirement and benefits services and wealth management
segments. As of December 31, 2020, these synergistic deposits totaled $595.6 million. We also offer an HSA deposit
program to attract low cost deposits. As of December 31, 2020, we had $126.5 million of HSA deposits which are
included in the synergistic deposit total.
We offer a range of treasury management products, including electronic receivables management, remote
deposit capture, cash vault services, merchant services, and other cash management services. Deposit flows are
significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing
decisions and competition. Our deposits are primarily obtained from depositors located in our geographic footprint, and
we believe that we have attractive opportunities to capture additional deposits in our markets. In addition, we have
created a National Market to focus on growing the synergistic deposits from our retirement and benefits services and
wealth management segments. In order to attract and retain deposits, we rely on providing quality service, offering a
suite of consumer and commercial products and services and introducing new products and services that meet our
clients’ needs as they evolve.
Retirement and Benefit Services
Our retirement and benefit services business offers retirement plan administration and investment advisory
services, employee stock ownership plan, or ESOP, fiduciary services, payroll, HSA and other benefit services to clients
on a nationwide basis. A breakdown of these services is as follows:
• Advisory. We provide investment fiduciary services to retirement plans.
• Retirement. We provide recordkeeping and administration services to qualified retirement plans.
• ESOPs. We provide trustee, recordkeeping and administration services to employee stock ownership plans.
• Health and Welfare. We provide HSA, FSA, and government health insurance program recordkeeping
and administration services to employers.
• Payroll. We provide payroll and human resource information system services to employers.
Wealth Management
Our wealth management division provides fiduciary services to consumer and commercial clients. These
services include financial planning, investment management, personal and corporate trust services, estate administration,
and custody services. In addition, our wealth management division offers brokerage services to compliment the unique
needs of our clients. Our investment management services offer two unique and proprietary strategies called Dimension
and Blueprint, which are primarily targeted toward IRAs, and agency account relationships. A Dimension account is a
proprietary, separately managed account designed for individual investors, foundations, endowments and institutions
with assets typically greater than $500 thousand. Dimension accounts use actively managed portfolios consisting of
individual securities, mutual funds, and exchange traded funds selected and monitored by a centralized team of
investment professionals. A Blueprint account uses a series of models that are designed to help investors gain exposure
to a diversified, risk - based asset allocation. Portfolios in these accounts are comprised of mutual funds run by consistent,
low - cost fund managers, with the Bank conducting initial and ongoing fund monitoring of the model allocations and
rebalancing the portfolios on a regular basis.
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Mortgage
Our mortgage business offers first and second mortgage loans through a centralized mortgage unit located in
Minneapolis, Minnesota, as well as through our banking office locations. These loans typically enable borrowers to
purchase or refinance existing homes, most of which serve as the primary residence of the owner. In 2020,
approximately 45.2% of the loans made by our mortgage division were for the purchase of a residential property,
compared to 54.8% for the refinance of an existing mortgage. We source most of our residential mortgage loans from the
Minneapolis-St. Paul-Bloomington metropolitan statistical area, or the Twin Cities MSA, and for the year ended
December 31, 2020, approximately 89.3% of the total mortgage loans were attributable to that market, compared to
8.2% attributable to the North Dakota market and 2.5% attributable to the Phoenix-Mesa-Scottsdale metropolitan
statistical area, or the Phoenix MSA. We believe there is an opportunity to expand our mortgage loan pipeline in these
other markets, especially in the Phoenix MSA. Although we originate loans for our own portfolio, we also conduct
mortgage banking activities in which we originate and sell, servicing - released, whole loans in the secondary market.
Typically, loans with a fixed interest rate of greater than 10 years are available - for - sale and sold on the secondary
market. Our mortgage banking loan sales activities are primarily directed at originating single family mortgages that are
priced and underwritten to conform to previously agreed criteria before loan funding and are delivered to the investor
shortly after funding. The level of future loan originations, loan sales, and loan repayments depends on overall credit
availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing
industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily
driven by market conditions and changes in interest rates, as well as our pricing and asset liability management
strategies. As of December 31, 2020, we had mortgage loans held for sale of $122.4 million from the residential
mortgage loans we originated. For the year ended December 31, 2020, our mortgage segment originated $1.8 billion of
mortgage loans.
Our Banking Market Areas
Our primary banking market areas are the states of North Dakota, Minnesota, specifically, the Twin Cities
MSA, and Arizona, specifically, the Phoenix MSA. Our bank branch expansion into the Twin Cities MSA in 2007 and
the Phoenix MSA in 2009 was an intentional part of our strategic plan to diversify our geographic footprint and expand
into metropolitan markets outside of North Dakota. In addition to our offices located in our banking markets, our
retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota
and New Hampshire.
North Dakota
Our corporate headquarters, which is a full-service banking office located at 401 Demers Avenue, Grand Forks,
North Dakota 58201, primarily serves the eastern North Dakota market along with one other full-service banking office
located in Grand Forks, North Dakota, three full-service banking offices located in Fargo and West Fargo, North Dakota,
and one full-service banking office located in Northwood, North Dakota. The State of North Dakota’s economy is
strengthened by the Bakken oil region, which produces over 1.2 million barrels of oil per day. We believe this market is
rich in low - cost, core deposits, which we can use to fund loans in our higher growth metropolitan markets.
The State of North Dakota also features one of the only state - owned banks in the nation, the Bank of North
Dakota, which offers services, many of which are similar to those offered by a correspondent bank, only to banks like
ours that are headquartered in the state. The Bank of North Dakota expands our lending capacity by purchasing
participations from the Bank. In addition, the Bank of North Dakota offers us additional financing options such as bank
stock loans, lines of credit and subordinated debt at competitive rates. Finally, the Bank of North Dakota enables state
banks to take deposits and manage funds for municipal and county governments without meeting collateral
requirements, which are waived by a letter of credit from the Bank of North Dakota.
Minnesota
We serve the Minnesota market through six full - service banking offices all located in the Twin Cities MSA.
The Twin Cities MSA had total deposits of $218.0 billion as of June 30, 2020, and ranks as the 14th largest metropolitan
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statistical area in the United States in total deposits, based on FDIC data. The Twin Cities MSA is defined by attractive
market demographics, including strong household incomes, dense populations, low unemployment and the presence of a
diverse group of large and small national and international businesses making the Twin Cities MSA one of the most
economically vibrant and diverse markets in the country.
Arizona
We serve the Arizona market through our full - service banking offices located in Scottsdale and Mesa, Arizona.
The Phoenix MSA had total deposits of $134.8 billion as of June 30, 2020, and ranks as the 21th largest metropolitan
statistical area in the United States in total deposits, based on FDIC data. The Phoenix MSA is a large and growing
market, with a total population of approximately 4.9 million as of July 1, 2019, making it the 10th largest metropolitan
statistical area in the United States. The Phoenix MSA is defined by attractive market demographics, including a large
number of high net worth households, dense populations, low unemployment, and the presence of a diverse group of
small - to - medium sized businesses.
Our National Market
Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit
services at all of our banking offices located in our three primary market areas. In addition, we operate one retirement
and benefits services office in Minnesota, one in Colorado and one in Michigan. To help us track retirement and benefit
services business clients that reside outside of our banking markets, we recently formalized a “National Market” with a
separately appointed National Market President to oversee the development of the market’s client base. Retirement and
benefit services assets under administration/management, wealth management assets under administration/management,
loans and deposits attributable to the National Market were $25.0 billion, $495.9 million, $41.4 million and $597.6
million, respectively, as of December 31, 2020, representing approximately 76.0%, 14.9%, 2.1% and 23.2%,
respectively of our total retirement and benefit services assets under administration/management, wealth management
assets under administration/management, and deposits as of that date.
Competition
The financial services industry is highly competitive, and we compete in a number of areas, including
commercial and consumer banking, residential mortgages, wealth advisory, investment management, trust, and
record - keeping among others. We compete with other bank and nonbank institutions located within our market areas,
along with competitors situated regionally, nationally, and others with only an online presence. These include large
banks and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking
companies, and business leasing and finance companies, all actively engaged in providing various types of loans and
other financial services. We also face growing competition from online businesses with few or no physical locations,
including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and
investment services providers. Competition involves efforts to retain current clients, obtain new loans, deposits, and
advisory services, increase the scope and type of services offered, and offer competitive interest rates paid on deposits,
charged on loans, or charged for advisory services. We believe our integrated and high - touch service offering, along
with our sophisticated relationship - oriented approach sets us apart from our competitors.
Human Capital Resources
The Company and its subsidiaries employ a total of 851 employees, of which approximately
•
•
794 are full-time employees and
57 are part-time employees.
Our workforce further breaks into the following categories:
•
gender: male 290, female 561; and
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•
ethnicity: 771 white, 80 identify as either Native American Indian, Asian, African American,
Hispanic, or Latino.
The Company has four operating segments with the following employees:
• Banking: 89 employees;
• Mortgage: 98 employees;
• Retirement and Benefits: 242 employees;
• Wealth Management: 22 employees.
The client service divisions include
• Sales and Service 234 employees; and
• Client Service Center: 36 employees; and
• Staff areas consisting of Human Resources, Information Technology, Audit, Legal, Compliance, and
the Executives consist of 130 employees.
Banking is a people- and relationship-driven business and our employees are vital to our success in the financial
services industry. In short, our long-term success depends on our ability to attract and retain top performers in every
aspect of our business. We believe a diverse workforce better enables us to understand our client base, and to help our
clients meet their own goals and expectations.
Our culture is underpinned by our core values and fundamental beliefs: Do the Right Thing, Cherish People,
Empower with Knowledge, Respect Everyone, Serve with Passion and Embrace Change.
Our Talent Management Program is built on the foundation of our Alerus leadership essentials, which include
12 competencies, divided into four elements of success: Charting the Course, Achieving Results, Leading People, and
Managing Self. Through this program we build on strengths with continuous, real-time coaching and evaluation in areas
of development, all aligned with our Company’s goals and strategies.
The development, attraction and retention of employees is a critical success factor for the Company for
succession planning and sustaining our core values. To support the advancement of our employees, we offer training and
development programs encouraging advancement from within and continue to fill our team with strong and experienced
management talent. We leverage both formal and informal programs to identify, foster, and retain top talent at both the
corporate and operating unit level. Training programs are offered through our Alerus University platform which provides
a variety of courses in the areas of management, leadership, sales, technology, compliance, product knowledge, and on
the job training opportunities. Foundations is a development program designed to build future leaders by familiarizing
participants with a thorough understanding of Alerus and provides insights into a professional services company.
STRETCH is a leadership development program designed to further the personal and professional growth of high
performers through development assessments, a mentor program and in-depth knowledge of risk management, client
segmentation, project management and strategic planning and decision making. Manager Connection provides managers
across the Company an opportunity to learn together and share best practices for developing and leading teams.
The Company’s compensation programs are designed to align the compensation of our employees with the
Company’s performance and to provide the proper incentives to attract, retain and motivate employees to achieve
superior results. The structure of our compensation programs balances incentive earnings for both short-term and long-
term performance. Specifically, we compensate our employees through a combination of base salary, sales incentive
programs, an annual performance bonus program tied to individual, team and company success measures and a long-
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term equity program tied to Company long-term performance. Each element of compensation is designed to achieve a
compensation package that is competitive in our markets and within our industry. The Company hired compensation
consultants FW Cook to perform compensation analysis and benchmarking compared to the peer group for executive
compensation plans. For all other areas, the Company hired McGlagan a division of Aon, to provide benchmarking and
analysis for base salary structures and sales incentive programs.
Our benefits package provide employees medical, dental, vision, life, disability and accidental death insurance
and paid time off benefits. We also provide our employees with retirement benefits designed to assist our employees
with planning for and securing appropriate levels of income during retirement. We believe these plans help us attract and
retain quality employees by offering benefits comparative with those offered by our competitors.
The Company provides policies and training on ethical conduct. We maintain an open door policy to encourage
open communication, feedback and discussion about any matter of importance to any employees. The Company hired
Lighthouse Services to provide employees with a confidential reporting mechanism for misconduct, including
discrimination, ethics, harassment and hostility, human resource issues, privacy, security and safety.
Corporate Information
Our principal executive office is located at 401 Demers Avenue, Grand Forks, North Dakota 58201, and our
telephone number at that address is (701) 795 - 3200. Our website address is www.alerus.com. The information contained
on our website is not a part of, or incorporated by reference into, this report. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC, as the Company does. The website is www.sec.gov. The Company provides access to its SEC filings for
viewing or downloading free of charge through its website at www.alerus.com. After accessing the website, the filings
are available upon selecting “Investor Relations” and “SEC Filings.” Reports available include the Company’s proxy
statements, annual reports on Form 10-K, quarterly reports on From 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonable practicable after the documents and reports are electronically filed
with or furnished to the SEC.
General
SUPERVISION AND REGULATION
Alerus Financial Corporation, a financial holding company, and its subsidiary, Alerus Financial, N.A., a
national banking association, are extensively regulated under federal law. As a result, our growth and earnings
performance may be affected not only by management decisions and general economic conditions, but also by the
requirements of applicable statutes and by the regulations and policies of various bank regulatory agencies, including our
primary regulator, the Board of Governors of the Federal Reserve System, or Federal Reserve, and the Bank’s primary
regulator, the Office of the Comptroller of the Currency, or OCC, as well as the FDIC, as the insurer of our deposits, and
the Consumer Financial Protection Bureau, or CFPB, as the regulator of consumer financial services and their providers.
Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules
developed by the Financial Accounting Standards Board, or FASB, securities laws administered by the Securities and
Exchange Commission, or SEC, and state securities authorities, and anti-money laundering laws enforced by the U.S.
Department of the Treasury, or Treasury, have an impact on our business. The effect of these statutes, regulations,
regulatory policies and accounting rules are significant to our operations and results.
Federal and state banking laws impose a comprehensive system of supervision, regulation, and enforcement on
the operations of FDIC-insured institutions, their holding companies, and affiliates that is intended primarily for the
protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These federal and state laws,
and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our
business; the kinds and amounts of investments we may make; required capital levels relative to our assets; the nature
and amount of collateral for loans; the establishment of branches; our ability to merge, consolidate, and acquire; dealings
with our insiders and affiliates; and our payment of dividends. In reaction to the global financial crisis and particularly
following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank Act, we
11
experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically
important financial service providers, their influence filtered down in varying degrees to community banks over time and
caused our compliance and risk management processes, and the costs thereof, to increase. Then, in May 2018, the
Economic Growth, Regulatory Relief and Consumer Protection Act, the Regulatory Relief Act, was enacted by Congress
in part to provide regulatory relief for community banks and their holding companies. To that end, the law eliminated
questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us
of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s
complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable
to our operations.
The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to
regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not
publicly available and that can impact the conduct and growth of their business. These examinations consider not only
compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and
performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to
impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other
things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with
laws and regulations.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to
the Company and the Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking
industry. It does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it restate all of
the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular
statutory and regulatory provision.
COVID-19 Pandemic
The federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of
guidance responding to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks
navigate the pandemic and mitigate its impact. These include, without limitation; requiring banks to focus on business
continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers
and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on
swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to
work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community
Reinvestment Act, or CRA, for certain pandemic-related loans, investments and public service. Because of the need for
social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their
regulated institutions, including making greater use of off-site reviews.
Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount window
for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic
and announced numerous funding facilities. The FDIC also has acted to mitigate the deposit insurance assessment effects
of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity
Facility.
For information on CARES Act, PPP program and the Federal Reserve’s lending facilities and for discussions
of the economic impact of the COVID-19 pandemic, see “Management’s Discussion and analysis of Financial Condition
and Results of Operations.” In addition, information as to selected topics, such as the impact on capital requirements,
dividend payments, reserves and CRA, is contained in the relevant sections of this Supervision and Regulation
discussion provided below.
The Role of Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the
risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other
12
businesses, which directly affects our earnings capabilities. While capital has historically been one of the key measures
of the financial health of both bank holding companies and banks, its role became fundamentally more important in the
wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by
banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-
Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are
meaningfully more stringent than those in place previously.
Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by
the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by
“total assets". Capital guidelines for U.S. banks beginning in 1989 have been based upon international capital accords
known as “Basel rules” adopted by the Basel Committee on Banking Supervision, a committee of central banks and bank
supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank
regulatory agencies on an interagency basis. The accords recognized that bank assets for the purpose of the capital ratio
calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-
balance sheet exposures needed to be factored in the calculations. Following the global financial crisis the Group of
Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced
agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III,
to address deficiencies recognized in connection with the global financial crisis.
The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel
III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes
required by the Dodd-Frank Act, or the Basel III Rule. In contrast to capital requirements historically, which were in the
form of guidelines, Basel III was released in the form of binding regulations by each of the regulatory agencies. The
Basel III Rule increased the required quantity and quality control and required more detailed categories of risk weighting
of riskier, more opaque assets. For nearly every class of assets, the Basel III Rule requires a more complex, detailed and
calibrated assessment of risk in the calculation of risk weightings. The Basel III Rule is applicable to all banking
organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan
associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies”
generally certain holding companies with consolidated assets of less than $3 billion, and certain qualifying banking
organizations that may elect a simplified framework (which we have not done). Thus, the Company and the Bank are
each currently subject to the Basel III Rule as described below.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1,
2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common
Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained
earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also
changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered
Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier
2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). The Basel III Rule also
constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required
deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking
institution’s Common Equity Tier 1 Capital.
The Basel III Rule requires minimum capital ratios, as follows:
• A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of total risk-weighted assets;
• A ratio of minimum Tier 1 Capital equal to 6% of risk-weighted assets;
• A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-
weighted assets; and
• A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all
circumstances.
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In addition, institutions that seek the freedom to make capital distributions (including for dividends and
repurchases of stock) and pay discretionary bonuses to executive officers without restriction, must also maintain 2.5% in
Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to
ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial
and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for
Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital. The federal bank regulators
released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and liquidity
buffers were meant to give banks the means to support the economy in adverse situations, and that agencies would
support banks that use the buffers for that purpose if undertaken in a safe and sound manner.
Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking
organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold
more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for
banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For
example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required
notices or applications; and (iii) accept, roll-over, or renew brokered deposits. Higher capital levels could also be
required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above
the minimum levels.
Under the capital regulations of the Federal Reserve for the Company and the OCC for the Bank, in order to be
well - capitalized, we must maintain:
• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;
• A ratio of Total Capital to total risk-weighted assets of 10% or more; and
• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital
conservation buffer discussed above.
As of December 31, 2020: (i) the Bank was not subject to a directive from the OCC to increase its capital; and
(ii) the Bank was well-capitalized, as defined by OCC regulations. As of December 31, 2020, the Company had
regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-
capitalized. We also remain in compliance with the capital conservation buffer of 2.5%.
Prompt Corrective Action. The concept of being “well-capitalized” is part of a regulatory regime that provides
the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of
undercapitalized institutions based on the capital level of each particular institution. The extent of the regulators’ powers
depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital
category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to
submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the
institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions
between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi)
ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be
dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the
14
institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and
(xi) ultimately, appointing a receiver for the institution.
Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators
about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response,
Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section
201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single “Community Bank
Leverage Ratio”, or CBLR, of between 8 and 10%. Under the final rule, a community banking organization is eligible to
elect the new framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and
off-balance sheet exposures, and a CBLR greater than 9%. The bank regulatory agencies temporarily lowered the CBLR
to 8% as a result of the COVID-19 pandemic. We may elect the CBLR framework at any time but have not currently
determined to do so.
Supervision and Regulation of the Company
General. The Company, as the sole stockholder of the Bank, is a bank holding company that has elected
financial holding company status. As a bank holding company, we are registered with, and subject to regulation, and
supervision and enforcement by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the
BHCA. We are legally obligated to act as a source of financial and managerial strength to the Bank and to commit
resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to
periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports of our
operations and such additional information regarding the Company and the Bank as the Federal Reserve may require.
Acquisitions and Activities/ Financial Holding Company Election. The primary purpose of a bank holding
company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for
any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In
approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution
affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-
state institutions or their holding companies) and state laws that require that the target bank have been in existence for a
minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-
managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The
Role of Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of 5% or
more of the voting shares of any company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition
is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so
closely related to banking ... as to be a proper incident thereto.” This authority would permit us to engage in a variety of
banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in
consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and
mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of
nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and
elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of
nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other
activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is
financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be
complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-
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insured institutions or the financial system generally. We have elected to operate as a financial holding company. In
order to maintain our status as a financial holding company, both the Company and the Bank must be well-capitalized,
well-managed, and the Bank must have at least a satisfactory CRA rating. If the Federal Reserve determines that either
we or the Bank is not well-capitalized or well-managed, the Federal Reserve will provide a period of time in which to
achieve compliance, but during the period of noncompliance, the Federal Reserve may place any additional limitations
on us that deems appropriate. Furthermore, if non-compliance is based on the failure of the Bank to achieve a
satisfactory CRA rating, we would not be able to commence any new financial activities or acquire a company that
engages in such activities.
Change in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured
depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is
conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or
bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements. We are subject to the complex consolidated capital requirements, of the Basel III Rule,
see “—The Role of Capital” above.
Dividend Payments. Our ability to pay dividends to our stockholders may be affected by both general corporate
law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware
corporation, we are subject to the limitations of the Delaware General Corporation Law, or the DGCL. The DGCL
allows us to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the
DGCL) or if we have no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company
should eliminate, defer, or significantly reduce dividends to stockholders if: (i) the company’s net income available to
stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund
the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall
current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its
minimum regulatory capital adequacy ratios. These factors have come into consideration in the industry as a result of the
COVID-19 pandemic. The Federal Reserve also possesses enforcement powers over bank holding companies and their
nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank
holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay unrestricted dividends
will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The
Role of Capital” above.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of
financial or bank holding companies and their subsidiaries, and this is evidenced in its reaction to the COVID-19
pandemic. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in
U.S. government securities and changes in the discount rate on bank borrowings. These means are used in varying
combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may
affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Consequently, we are subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and
executive compensation matters that will affect most U.S. publicly traded companies. It increased stockholder influence
over boards of directors by requiring companies to give stockholders a nonbinding vote on executive compensation and
so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to
nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the
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Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies,
regardless of whether such companies are publicly traded.
Supervision and Regulation of the Bank
General. The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit
accounts of the Bank are insured by the DIF to the maximum extent provided under federal law and FDIC regulations,
currently $250,000 per insured depositor category, and the Bank is a member of the Federal Reserve System. As a
national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC,
the chartering authority for national banks. Our defined business lines of Banking, Mortgage, Retirement and Benefits
and Wealth Management are each subject to that authority. The FDIC, as administrator of the DIF, also has regulatory
authority over the Bank.
Supervision of Business Segments. As a national bank, the Bank is subject to examination and enforcement by
the OCC. The OCC examines the Bank’s Banking and Mortgage business segments as part of its safety and soundness
examinations, which consider not only compliance with applicable laws and regulations, but also capital levels, asset
quality (with rigorous loan portfolio reviews) and risk, management ability and performance, earnings, liquidity, and
various other factors. Many of these subjects are discussed further below.
The Bank’s Retirement and Benefits and Wealth Management business segments are subject to separate
examination as trust activities (generally on the same cycle as safety and soundness examinations). The OCC’s trust
examinations evaluate compliance with applicable law, management ability, operations, internal controls, and auditing,
earnings, compliance, and asset management. These business segments are subject to a multitude of state laws (trust law
is a state concept) and federal laws to which the Bank and each individual account are subject. These include trust
investment law, securities law, banking law, tax law, contract law, anti-money laundering requirements, environmental
law, consumer protection law, criminal law, and the U.S. Department of the Treasury’s Office of Foreign Assets Control
laws and regulations. The Employee Retirement Income Security Act of 1974, or ERISA, and the Internal Revenue Code
are the primary sources of law governing the structure, administration, and operation of employee benefit plans. The
U.S. Department of Labor is responsible for administering and enforcing the ERISA.
The OCC has broad enforcement authority to impose penalties, restrictions and limitations on the Bank where it
determines, among other things, that the Bank’s operations are unsafe or unsound, fail to comply with applicable law or
are otherwise inconsistent with laws and regulations.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium
assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay
insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large
and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The
total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC
updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following
notice and comment on proposed rulemaking.
The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank
Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated
amount of total insured deposits. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory
required minimum. As a result, the FDIC provided assessment credits to insured depository institutions, like the Bank,
with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to
growth in the reserve ratio between 1.15% and 1.5%. The FDIC applied the small bank credits for quarterly assessment
periods beginning July 1, 2019. However, the reserve ratio then fell to 1.30% in 2020 as a result of extraordinary insured
deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half
of 2020, stemming mainly from the COVID-19 pandemic. Although the FDIC could have ceased the small bank credits,
it waived the requirement that the reserve ratio be at least 1.35% for full remittance of the remaining assessment credits,
and it refunded all small bank credits as of September 30, 2020.
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Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the
operations of the OCC. The amount of the assessment is calculated using a formula that considers the bank’s size and its
supervisory condition. During the year ended December 31, 2020, the Bank paid supervisory assessments to the OCC
totaling $388 thousand.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For
a discussion of capital requirements, see “—The Role of Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be
converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations.
To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as
withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a
liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One
test, referred to as the Liquidity Coverage Ratio, or LCR, is designed to ensure that the banking entity has an adequate
stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into
cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable
Funding Ratio, or NSFR, is designed to promote more medium- and long-term funding of assets and activities of FDIC-
insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to
increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-
term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel
III LCR in 2014 and have proposed the NSFR. While these rules do not, and will not, apply to the Bank, we continue to
review our liquidity risk management policies in light of these developments.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the
National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as
the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay
dividends in any calendar year that, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s retained
net income for the two preceding years. The payment of dividends by any FDIC-insured institution is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an
FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution
would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines
as of December 31, 2020. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the
payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice. In
addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common
Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered
transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these
restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments
in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as
collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with
affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for
which collateral requirements regarding covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the
Company, and to “related interests” of such directors, officers, and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a
principal stockholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent
relationship.
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Safety and Soundness Standards/Risk Management. FDIC-insured institutions are expected to operate in a
safe and sound manner. The federal banking agencies have adopted operational and managerial standards to promote the
safety and soundness of such institutions that address internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality
and earnings.
In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each
institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to operate in a
safe and sound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency
cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the
FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution
to take any action the regulator deems appropriate under the circumstances. Operating in an unsafe or unsound manner
will also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and
desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound
risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions
they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities
and has become even more important as new technologies, product innovation, and the size and speed of financial
transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a
banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. The
OCC, in its 2021 supervisory plan, identified its supervision priorities for 2021, which include: (i) credit risk
management given projected weaker economic conditions and commercial and residential real estate concentration risk
management; (ii) the transition away from LIBOR (London Interbank Offered Rate) as a reference rate: (iii) compliance
risk management related to COVID-19 pandemic-related activities; (iv) Bank Secrecy Act/ anti-money laundering, or
AML, compliance; (v) cybersecurity and operational resilience; (vi) planning for and implementation of the current-
expected-credit-losses, or CECL, accounting standard; (vii) CRA performance. The Bank is expected to have active
board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement,
monitoring and management information systems; and comprehensive internal controls.
Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing
requirements for maintaining policies and procedures to protect non-public confidential information of their customers.
These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such
information and permit consumers to opt out of their ability to share information with unaffiliated third parties under
certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates
for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, as a part of its
operational risk mitigation, the Bank is required to implement a comprehensive information security program that
includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records
and information and to require the same of its service providers. These security and privacy policies and procedures, are
in effect across all business lines and geographic locations.
Branching Authority. National banks headquartered in North Dakota, such as the Bank, have the same
branching rights in North Dakota as banks chartered under North Dakota law, subject to OCC approval. North Dakota
law grants North Dakota-chartered banks the authority to establish branches anywhere in the State of North Dakota,
subject to receipt of all required regulatory approvals.
The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state
lines without legal impediments. However, while Federal law permits state and national banks to merge with banks in
other states, such mergers are subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and
(iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to
exceed five years) prior to the merger.
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Financial Subsidiaries. Under federal law and OCC regulations, national banks are authorized to engage,
through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that
the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to
any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking.
The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among
other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the
bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any
financial subsidiaries.
Federal Home Loan Bank System. The Bank is a member of the FHLB which serves as a central credit facility
for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It
makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully
collateralized as determined by the FHLB.
Transaction Account Reserves. Federal law requires FDIC-insured institutions to maintain reserves against
their transaction accounts (primarily NOW and regular checking accounts) to provide liquidity. Reserves are maintained
on deposit at the Federal Reserve Banks. The reserve requirements are subject to annual adjustment by the Federal
Reserve, and, for 2020, the Federal Reserve has determined that the first $16.9 million of otherwise reservable balances
had a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $110.6 million,
the reserve requirement was 3% percent of those transaction account balances; and for net transaction accounts in excess
of $110.6 million, the reserve requirement was 10% percent of the aggregate amount of total transaction account
balances in excess of $110.6 million. However, in March 2020, in an unprecedented move, the Federal Reserve
announced that the banking system had ample reserves, and as reserve requirement no longer played a significant role in
this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance
requirement. The action permits the Bank to loan or invest funds that were previously unavailable. The Federal Reserve
has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and
moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its
communities. Applications for acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting
its CRA requirements. In a joint statement responding to the COVID-19 pandemic, the bank regulatory agencies
announced favorable CRA consideration for banks providing retail banking services and lending activities in their
assessment areas, consistent with safe and sound banking practices, that are responsive to the needs of low- and
moderate-income individuals, small businesses, and small farms affected by the pandemic. Those activities include
waiving certain fees, easing restrictions on out-of-state and non-customer checks, expanding credit products, increasing
credit limits for creditworthy borrowers, providing alternative service options, and offering prudent payment
accommodations. The joint statement also provided favorable CRA consideration for certain pandemic-related
community development activities.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, is designed to deny terrorists and criminals
the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions,
brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act, along with other legal
authorities, mandates financial services companies to have policies and procedures with respect to measures designed to
address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist
financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and
(vi) cooperation between FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy
too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory
concern. The interagency Concentrations in Commercial Real Estate, or CRE, Lending, Sound Risk Management
Practices guidance, or CRE Guidance, provides supervisory criteria, including the following numerical indicators, to
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assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that
may warrant greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing 50% or more in the
preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance
does not limit banks’ levels of CRE lending activities, but rather guides institutions in developing risk management
practices and levels of capital that are commensurate with the level and nature of their CRE concentrations. On
December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices
related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased
competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal
bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-
management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-
insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.
Based on the Bank’s loan portfolio as of December 31, 2020, we did not exceed the guidelines for CRE
lending.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to
all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB
commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority
for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the
Bank, as well as the authority to prohibit “unfair, deceptive, or abusive” acts and practices. The CFPB has examination
and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion
or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the financial
crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-
related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded
underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law
combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd Frank Act imposed
new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to
strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance
for certain “qualified mortgages.” The CFPB has from time to time released additional rules as to qualified mortgages
and the borrower’s ability to repay, most recently in October of 2020.The CFPB’s rules have not had a significant impact
on the Bank’s operations, except for higher compliance costs.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. The material risks and uncertainties that
management believes affect us are described below. Before you decide to invest, you should carefully review and
consider the risks described below, together with all other information included in this report and other documents we
file with the SEC. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Summary
This is a summary of some of the material risks and uncertainties that management believes affects us. The list
is not exhaustive but provides a high-level summary of some of the material risks that are further described in this Item
1A. We encourage you to read Item 1A in its entirety.
Credit Risks
• Our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses;
•
new or revised accounting standards, including as a result of the future implementation of the Current
Expected Credit Loss standard;
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•
•
•
•
business and economic conditions in our market areas;
the overall health of the local and national real estate market;
concentrations within our loan portfolio; and
the level of nonperforming assets on our balance sheet.
Operational, Strategic and Reputational Risks
• The impact of economic or market conditions on our fee-based services;
•
•
•
•
•
•
•
•
•
•
•
our ability to implement our organic and acquisition growth strategies;
potential impairment to the goodwill we recorded in connection with our past acquisitions;
our ability to continue to grow our retirement and benefit services business;
our ability to continue to originate a sufficient volume of residential mortgages;
the occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity-related incidents;
interruptions involving our information technology and telecommunications systems or third-party
services;
developments and uncertainty related to the future use and availability of some reference rates, such as the
London Interbank Offered Rate, or LIBOR, as well as other alternative reference rates;
potential losses incurred in connection with mortgage loan repurchases;
the composition of our executive management team and our ability to attract and retain key personnel;
severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts
of war or terrorism, or other adverse external events; and
any material weaknesses in our internal control over financial reporting.
Liquidity and Funding Risks
• Our ability to successfully manage liquidity risk;
•
•
concentrations of large depositors; and
our dependence on dividends from the Bank.
Legal, Accounting and Compliance Risks
• The effectiveness of our risk management framework;
•
the commencement and outcome of litigation and other legal proceedings and regulatory actions against us
or to which we may become subject;
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•
•
the extensive regulatory framework that applies to us; and
the impact of recent and future legislative and regulatory changes.
COVID-19 Pandemic-Related Risks
• The effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and
our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in
connection with the pandemic.
Market and Interest Rate Risks
•
•
•
Interest rate risks associated with our business;
fluctuations in the values of the securities held in our securities portfolio; and
governmental monetary, trade and fiscal policies.
Credit Risks
Our business depends on our ability to manage credit risk.
As a bank, our business requires us to manage credit risk. As a lender, we are exposed to the risk that our
borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their
loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan,
including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan
underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with
individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely
manner, or may present inaccurate or incomplete information to us, as well as risks relating to the value of collateral. To
manage our credit risk, we must, among other actions, maintain disciplined and prudent underwriting standards and
ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an attempt to
attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, or
our inability to adequately adapt policies and procedures to changes in economic, or any other conditions affecting
borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures, and charge - offs and may
necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net
income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business,
financial condition, results of operations, and growth prospects.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We establish and maintain our allowance for loan losses at a level that management considers adequate to
absorb probable loan losses based on an analysis of our loan portfolio and current market environment. The allowance
for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon
relevant information available to us at such time. The allowance contains provisions for probable losses that have been
identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio that are
not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the
provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio,
historical loss experience and an evaluation of current economic conditions in our market area. The actual amount of
loan losses is affected by, among other things, changes in economic, operating, and other conditions within our markets,
which may be beyond our control, and such losses may exceed current estimates.
As of December 31, 2020, our allowance for loan losses as a percentage of total loans was 1.73% and as a
percentage of total nonperforming loans was 674.13%. Although management believes that the allowance for loan losses
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was adequate on such date to absorb probable losses on existing loans that may become uncollectible, losses in excess of
the existing allowance will reduce our net income and could have a material adverse effect on our business, financial
condition, results of operations and growth prospects. We may also be required to take additional provisions for loan
losses in the future to further supplement the allowance for loan losses, either due to management’s assessment that the
allowance is inadequate or as required by our banking regulators. Our banking regulators periodically review our
allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and
may require us to adjust our determination of the value for these items. These adjustments may have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
The Current Expected Credit Loss accounting standard could require us to increase our allowance for loan losses
and may have a material adverse effect on our financial condition and results of operations.
In June 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting standard that will
replace the current approach under accounting principles generally accepted in the United States, or GAAP, for
establishing the allowance for loan losses which generally considers only past events and current conditions, with a
forward - looking methodology that reflects the expected credit losses over the lives of financial assets, starting when
such assets are first originated or acquired. This standard, referred to as Current Expected Credit Loss, or CECL, will
require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the
expected credit losses as allowances for loan losses. Under the revised methodology, credit losses will be measured
based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the
collectability of financial assets. The new standard is expected to generally result in increases to allowance levels and
will require the application of the revised methodology to existing financial assets through a one - time adjustment to
retained earnings upon initial effectiveness. The change will also likely greatly increase the types of data we will need to
collect and analyze to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for
loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, will result in a
decrease in net income and capital and may have a material adverse effect on our financial condition and results of
operations. Moreover, the CECL model may create more volatility in our level of allowance for loan losses and could
result in the need for additional capital.
As an emerging growth company, this standard is expected to become applicable to us on January 1, 2023 after
the FASB recently elected to delay implementation for private companies. In connection with our initial public offering,
we elected to use the extended transition period available to emerging growth companies, which means that we are not
subject to all new or revised accounting standards generally applicable to public companies until those standards apply to
private companies.
A decline in the business and economic conditions in our market areas could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Our business activities and credit exposure, including real estate collateral for many of our loans, are
concentrated in North Dakota, Minnesota and Arizona, although we also pursue business opportunities nationally. As of
December 31, 2020, 93.5% of the loans in our loan portfolio were made to borrowers who live in or conduct business in
those states. This concentration imposes risks from lack of geographic diversification. Weak economic conditions in
North Dakota, Minnesota and Arizona may affect our business, financial condition, results of operations and growth
prospects, where adverse economic developments, among other things, could affect the volume of loan originations,
increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our
loans and loan servicing portfolio. Weak economic conditions are characterized by, among other indicators, state and
local government deficits, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets,
increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price
declines and lower home sales and commercial activity. Any regional or local economic downturn that affects North
Dakota, Minnesota or Arizona or existing or prospective borrowers or property values in such areas may affect us and
our profitability more significantly and more adversely than our competitors whose operations are less geographically
concentrated. Further, a general economic slowdown could decrease the value of the AUA and AUM of our retirement
and benefit services and wealth management businesses resulting in lower fee income, and clients could potentially seek
alternative investment opportunities with other providers, which could also result in lower fee income to us. Our
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business is also significantly affected by monetary, trade and other regulatory policies of the U.S. federal government, its
agencies and government - sponsored entities. Changes in any of these policies are influenced by macroeconomic
conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect
on our business, financial position, results of operations and growth prospects.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy
affecting real estate values and liquidity, as well as environmental factors, could impair the value of collateral
securing our real estate loans and result in loan and other losses.
At December 31, 2020, approximately 61.3% of our total loan portfolio was comprised of loans with real estate
as a primary or secondary component of collateral. The repayment of such loans is highly dependent on the ability of the
borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns that
can lead to (i) declines in the rents and, therefore, in the cash flows generated by those real properties on which the
borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it
more difficult for the borrowers to sell those real properties for amounts sufficient to repay their loans in full, and
(iii) job losses of residential home buyers, which makes it more difficult for these borrowers to fund their loan payments.
As a result, adverse developments affecting real estate values in our market areas could increase the credit risk
associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period
of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real
estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with
our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell
the collateral upon foreclosure without a loss or additional losses or our ability to sell those loans on the secondary
market. Such declines and losses would have a material adverse effect on our business, financial condition, results of
operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase
our allowance for loan losses, which would have a material adverse effect on our business, financial condition, results of
operations and growth prospects. In addition, adverse weather events, including tornados, wildfires, flooding, and
mudslides, can cause damage to the property pledged as collateral on loans, which could result in additional losses upon
a foreclosure.
In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real
estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as
well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to
address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the
affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. The remediation costs and any other financial
liabilities associated with an environmental hazard could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
Commercial and industrial loans represented 35.0% of our total loan portfolio at December 31, 2020. These
loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often
dependent on the successful operation of the business involved, repayment of such loans is often more sensitive than
other types of loans to the general business climate and economy. Accordingly, a challenging business and economic
environment may increase our risk related to commercial loans. Unlike residential mortgage loans, which generally are
made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are
secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the
basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. Our commercial and
industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral
underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and
equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the
business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.
Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as
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collateral that is generally less readily - marketable, losses incurred on a small number of commercial loans could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
Our loan portfolio has a large concentration of commercial real estate loans, which involve risks specific to real
estate values and the health of the real estate market generally.
As of December 31, 2020, we had $607.5 million of commercial real estate loans, consisting of $460.8 million
of loans secured by nonfarm nonresidential properties, $86.7 million of loans secured by multifamily residential
properties, $44.5 million of construction and land development loans and $15.5 million of loans secured by farmland.
Commercial real estate loans represented 30.7% of our total loan portfolio and 191.3% of the Bank’s total capital at
December 31, 2020. The market value of real estate securing our commercial real estate loans can fluctuate significantly
in a short period of time as a result of market conditions. Adverse developments affecting real estate values in our
market areas could increase the credit risk associated with our loan portfolio. Additionally, the repayment of commercial
real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to
cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the
borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans
that are collateralized by real estate become troubled during a time when market conditions are declining or have
declined, then we may not be able to realize the full value of the collateral that we anticipated at the time of originating
the loan, which could force us to take charge - offs or require us to increase our provision for loan losses, which could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Construction and land development loans are based upon estimates of costs and values associated with the complete
project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Construction and land development loans comprised approximately 3.0% of our total loan portfolio as of
December 31, 2020. Such lending involves additional risks because funds are advanced upon the security of the project,
which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate
markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the
completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related loan - to - value ratio. As a result, construction and
land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the
borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be
overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon
completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a
default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and
may have to hold the property for an unspecified period of time while we attempt to dispose of it.
Nonperforming assets take significant time to resolve and adversely affect our net interest income.
As of December 31, 2020, our nonperforming loans (which consist of nonaccrual loans and loans past due
90 days or more) totaled $5.1 million, or 0.26% of our total loan portfolio, and our nonperforming assets (which consist
of nonperforming loans, foreclosed assets and other real estate owned) totaled $5.1 million, or 0.17% of total assets If
Paycheck Protection Program, or PPP, loans were excluded from total loans, the nonperforming loans would have been
0.30% of our total loan portfolio, and nonperforming assets as a ratio of total assets would have been 0.19%. In addition,
we had $5.0 million in accruing loans that were 31 - 89 days delinquent as of December 31, 2020.
Our nonperforming assets adversely affect our net interest income in various ways. We do not record interest
income on nonaccrual loans or foreclosed assets, thereby adversely affecting our net income and returns on assets and
equity. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its
then - fair market value, which may result in a loss. These nonperforming loans and foreclosed assets also increase our
risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The
resolution of nonperforming assets requires significant time commitments from management, which increases our loan
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administration costs and adversely affects our efficiency ratio, and can be detrimental to the performance of their other
responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income
may be negatively impacted and our loan administration costs could increase, each of which could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
Our high concentration of large loans to certain borrowers may increase our credit risk.
We have developed relationships with certain individuals and businesses that have resulted in a concentration of
large loans to a small number of borrowers. As of December 31, 2020, our 10 largest borrowing relationships accounted
for approximately 5.6% of our total loan portfolio. We have established an informal, internal limit on loans to one
borrower, principal or guarantor, but we may, under certain circumstances, consider going above this internal limit in
situations where management’s understanding of the industry, the borrower’s business and the credit quality of the
borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as
the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers
presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a
result of business, economic or market conditions, or personal circumstances, such as divorce or death, our nonaccruing
loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments,
which may impair their ability to repay their loans.
We lend to small to midsized businesses, which generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities, frequently have smaller market share than their competition, may be more
vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience
substantial volatility in operating results, any of which may impair their ability to repay their loans. In addition, the
success of a small and midsized business often depends on the management talents and efforts of one or two people or a
small group of people, and the death, disability or resignation of one or more of these people could have a material
adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the
markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise
affected by adverse business developments, our business, financial condition, results of operations and growth prospects
may be materially adversely affected.
Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ
significantly from our foreclosed asset fair value appraisals.
As of December 31, 2020, we had $63 thousand of foreclosed assets, which consisted of properties that we
obtained through foreclosure. Assets acquired through loan foreclosure are included in other assets and are initially
recorded at estimated fair value less estimated selling costs. The estimated fair value of foreclosed assets is evaluated
regularly and any decreases in value along with holding costs, such as taxes, insurance and utilities, are reported in
noninterest expense.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other
than orderly disposition as part of our foreclosed asset disposition strategy, such as immediate liquidation sales. In this
event, as a result of the significant judgments required in estimating fair value and the variables involved in different
methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals,
comparable sales and other estimates used to determine the fair value of our foreclosed assets.
Our exposure to home equity lines of credit may increase the potential for loss.
Our mortgage loan portfolio consists, in part, of home equity lines of credit. A large portion of home equity
lines of credit are originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary
market, which we typically do not service if the loan is sold. By not servicing the first mortgage loans, we are unable to
track the delinquency status which may indicate whether such loans are at risk of foreclosure by others. In addition,
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home equity lines of credit are initially offered as “revolving” lines of credit whereby the borrowers are only required to
make scheduled interest payments during the initial terms of the loans, which is generally five or ten years. Thereafter,
the borrowers no longer have the ability to make principal draws from the lines and the loans convert to a
fully - amortizing basis, requiring scheduled principal and interest payments sufficient to repay the loans within a certain
period of time, which is generally 15 or 20 years. The conversion of a home equity line of credit to a fully amortizing
basis presents an increased level of default risk to us since the borrower no longer has the ability to make principal draws
on the line, and the amount of the required monthly payment could substantially increase to provide for scheduled
repayment of principal and interest.
Operational, Strategic and Reputational Risks
Noninterest income represents a significant portion of our total revenue and may be negatively impacted by changes
in economic or market conditions and competition.
A significant portion of our revenue results from fee - based services provided by our retirement and benefit
services business. This contrasts with many other community and regional banks that rely more heavily on interest - based
sources of revenue, such as loans and investment securities. For the year ended December 31, 2020, noninterest income
represented approximately 64.1% of our total revenue, which includes net interest income and noninterest income, a
significant portion of which is derived from our retirement and benefit services business. This fee income business
presents special risks not borne by other institutions that focus exclusively on banking. The level of these fees is
influenced by several factors, including the number of plans and participants we provide retirement, advisory and other
services for, the level of transactions within the plans, and the asset values of the plans whose fees are earned based on
the level of assets in the plans. If we are unable to maintain our number of plans, participants and AUA and AUM at
historical or greater levels, our fee income derived from this business may decline. For example, in a typical year we
expect to experience outflows in AUA and AUM due to withdrawals, client turnover, plan terminations, mergers and
acquisition activity. In 2020, we experienced outflows of $6.8 billion in our retirement and benefit services division
partially offset by inflows of $4.8 billion.
In addition, economic, market or other factors that reduce the level or rates of savings in or with our clients,
either through reductions in financial asset valuations or through changes in investor preferences, could materially
reduce our fee revenue. The financial markets and businesses operating in the securities industry are highly volatile
(meaning that performance results can vary greatly within short periods of time) and are directly affected by, among
other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are
beyond our control. We cannot assure you that broad market performance will be favorable in the future. Declines in the
financial markets or a lack of sustained growth may result in a corresponding decline in our performance and may
adversely affect the value of the assets that we manage. A general economic slowdown could decrease the value of the
AUA and AUM in our retirement and benefit services and wealth management businesses and result in clients
potentially seeking alternative investment opportunities with other providers, which could result in lower fee income to
our Company.
Even when economic and market conditions are generally favorable, our investment performance may be
adversely affected by the investment style of our asset managers and the particular investments that they make. To the
extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and
profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be
impaired. In addition, our management contracts generally provide for fee payments for wealth management and trust
services based on the market value of AUM. Because most contracts provide for a fee based on market values of
securities, fluctuations in the underlying securities values may have a material adverse effect on our revenue. Fee
compression due to competitive pressures has resulted in and continues to result in significant pressure to reduce the fees
we charge for our services in both our retirement and benefit services and wealth management businesses.
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We may not be successful in implementing our organic growth strategy, which could have a material adverse effect
on our business, financial condition, results of operations and growth prospects.
Part of our business strategy is to focus on organic growth, which includes leveraging our business lines across
our entire client base, enhancing brand awareness and building our infrastructure. The success of our organic growth
strategy depends on our ability to increase loans, deposits, AUM and AUA at acceptable risk levels without incurring
offsetting increases in noninterest expense. We may not be successful in generating organic growth if we fail to
effectively execute our integrated One Alerus strategy, or as a result of other factors, including delays in introducing and
implementing new products and services and other impediments resulting from regulatory oversight or lack of qualified
personnel at our office locations. In addition, the success of our organic growth strategy will depend on maintaining
sufficient regulatory capital levels and on favorable economic conditions in our primary market areas. Failure to
adequately manage the risks associated with our anticipated organic growth could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
In addition to our organic growth strategy, we intend to expand our business by acquiring other banks and financial
services companies, but we may not be successful in doing so, either because of an inability to find suitable
acquisition candidates, constrained capital resources or otherwise.
While a key element of our business strategy is to grow our banking franchise and increase our market share
through organic growth, we intend to take advantage of opportunities to acquire other banks and financial services
companies, including wealth management and retirement administration businesses, as such opportunities present
themselves. Although we intend to continue to grow our business through organic growth and strategic acquisitions,
because certain of our market areas are comprised of mature, rural communities with limited population growth, we
anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition
growth strategy. However, we may not be able to identify suitable acquisition targets or even if we do, we may not
succeed in seizing such opportunities when they arise or in integrating any such banks or financial service companies
within our existing business framework. In addition, even if suitable targets are identified, we expect to compete for such
businesses with other potential bidders, many of which may have greater financial resources than we have, which may
adversely affect our ability to make acquisitions at attractive prices. Our ability to execute on acquisition opportunities
may require us to raise additional capital and to increase our capital position to support the growth of our franchise. It
will also depend on market conditions over which we have no control. Moreover, certain acquisitions may require the
approval of our bank regulators, and we may not be able to obtain such approvals on acceptable terms, if at all.
If we pursue additional acquisitions, it may expose us to financial, execution and operational risks that could have a
material adverse effect on our business, financial position, results of operations and growth prospects.
Since 2000, we have experienced significant growth, both organically and through acquisitions of banks and
other financial service providers, including wealth management and retirement administration businesses. We plan to
continue to grow our business by executing additional strategic acquisitions of all or parts of other banks or financial
institutions or through the hiring of teams of employees that fit within our overall strategy and that we believe make
financial and strategic sense. These acquisitions may result in us entering new markets.
If we grow through acquisitions, it may expose us to financial, execution and operational risks that could have a
material adverse effect on our business, financial position, results of operations and growth prospects. Acquiring other
banks and financial service providers involve risks commonly associated with acquisitions, including:
•
•
•
potential exposure to unknown or contingent liabilities of the banks and businesses we acquire;
exposure to potential asset and credit quality issues of the acquired bank or related business;
difficulty and expense of integrating the operations, culture and personnel of banks and businesses we
acquire, including higher than expected deposit attrition;
•
potential disruption to our business;
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•
•
•
•
potential restrictions on our business resulting from the regulatory approval process;
an inability to realize the expected revenue increases, costs savings, market presence or other anticipated
benefits;
potential diversion of our management’s time and attention; and
the possible loss of key employees and clients of the banks and businesses we acquire.
In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of
business or new products, or enter new geographic areas, in which we have little or no current experience, especially if
we lose key employees of the acquired operations. If we hire a new team of employees, we may incur additional
expenses relating to their compensation without any guarantee that such new team will be successful in generating new
business. In addition, if we later determine that the value of an acquired business has decreased and that the related
goodwill is impaired, an impairment of goodwill charge to earnings would be recognized.
Acquisitions involve inherent uncertainty and we cannot assure you that we will be successful in overcoming
these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated
with acquisitions could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
Our retirement and benefit services business relies on acquisitions to maintain and grow our AUA and AUM.
In 2020, our retirement and benefit services business experienced outflows of AUA and AUM of $6.8 billion,
due to withdrawals, client turnover, plan terminations, and mergers and acquisition activity. We believe this level of
runoff is typical in the industry. To maintain and grow this business, we believe we need to be an active acquirer and
seek to complete acquisitions of retirement administration providers if we are able to find quality acquisition
opportunities. If we are unable to source a pipeline of potential acquisitions of companies that we determine are a good
strategic fit for our Company, our retirement and benefit services business may fail to grow or even shrink, which could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We have a concentration of large clients in our retirement and benefit services business, and if one of these clients
were to terminate their business relationship with us or be acquired by another organization, it could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
For the year ended December 31, 2020, our 10 largest client relationships accounted for approximately 11.6%
of the revenue attributable to our retirement and benefit services business. During a typical year, our retirement and
benefit services business loses clients due to plan terminations, primarily as a result of merger and acquisition activity. If
any one of these larger clients terminates their business relationship with us, either voluntarily or as a result of being
acquired by another organization, it could decrease the revenue of this business line and have a material adverse effect
on our business, financial condition, results of operations and growth prospects.
If we are unable to continue to originate residential real estate loans and sell them into the secondary market for a
profit, our noninterest income could decrease.
We derive a portion of our noninterest income from the origination of residential real estate loans and the
subsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential real
estate loans at historical or greater levels, our residential real estate loan volume would decrease, which could decrease
our earnings. A rising interest rate environment, general economic conditions, market volatility or other factors beyond
our control could adversely affect our ability to originate residential real estate loans. Mortgage banking income is
highly influenced by the level and direction of mortgage interest rates and real estate and refinancing activity. In a lower
interest rate environment, the demand for mortgage loans and refinancing activity will tend to increase. This has the
effect of increasing fee income, but could adversely impact the estimated fair value of our Company’s mortgage
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servicing rights as the rate of loan prepayments increase. In a higher interest rate environment, the demand for mortgage
loans and refinancing activity will generally be lower. This has the effect of decreasing fee income opportunities.
The financial services industry is experiencing an increase in regulations and compliance requirements related
to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to
increase and we are unable to make technology upgrades, our ability to originate mortgage loans will be reduced or
eliminated. Additionally, we sell a large portion of our residential real estate loans to third party investors, and rising
interest rates could negatively affect our ability to generate suitable profits on the sale of such loans. If interest rates
increase after we originate the loans, our ability to market those loans is impaired as the profitability on the loans
decreases. These fluctuations can have an adverse effect on the revenue we generate from residential real estate loans
and in certain instances, could result in a loss on the sale of the loans.
In addition, a prolonged period of illiquidity in the secondary mortgage market, and an increase in interest rates,
could reduce the demand for residential mortgage loans and increase investor yield requirements for those loans. As a
result, we may be at higher risk of retaining a larger portion of mortgage loans than in other environments until they are
sold to investors. Our ability to retain residential mortgage loans is limited and could result in a reduction of loan
production volumes, which could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
The occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity - related incidents could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and
cybersecurity - related incidents that may be committed against us, our clients or third parties with whom we interact,
which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our
client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our
reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing,
social engineering and other dishonest acts. Information security breaches and cybersecurity - related incidents may
include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks
and malware or other cyber - attacks.
In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and
cyber - attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals
targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted
electronic fraudulent activity, security breaches and cybersecurity related incidents in recent periods. Moreover, in recent
periods, several large corporations, including financial institutions and retail companies, have suffered major data
breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial
and other personal information of their clients and employees and subjecting them to potential fraudulent activity. We
are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of
confidential or personally identifiable information as a result of a cyber - security breach or other act, however, some of
our clients may have been affected by these breaches, which could increase their risks of identity theft and other
fraudulent activity that could involve their accounts with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on networks and
systems maintained by us and certain third - party partners, such as our online banking, mobile banking, record keeping or
accounting systems. The secure maintenance and transmission of confidential information, as well as execution of
transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to
maintain the confidence of our clients. Breaches of information security also may occur through intentional or
unintentional acts by those having access to our systems or the confidential information of our clients, including
employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new
discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments
could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent
transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our
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clients to access our systems. Our third party partners’ inability to anticipate, or failure to adequately mitigate, breaches
of security could result in a number of negative events, including losses to us or our clients, loss of business or clients,
damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory
scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
We depend on information technology and telecommunications systems, and any systems failures, interruptions or
data breaches involving these systems could adversely affect our operations and financial condition.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology
and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and
financial intermediaries. The risks resulting from use of these systems result from a variety of factors, both internal and
external. We are vulnerable to the impact of failures of our systems to operate as needed or intended. Such failures could
include those resulting from human error, unexpected transaction volumes, or overall design or performance issues.
We outsource to third parties many of our major systems, such as data processing and mobile and online
banking. In addition, we partner with a leading financial technology company to create an online account portal that
integrates our diverse product applications into a user - friendly experience for our consumer clients. The failure of these
systems, or the termination of a third - party software license or service agreement on which any of these systems is
based, could interrupt our operations. Because our information technology and telecommunications systems interface
with and depend on third party systems, we could experience service denials if demand for such services exceeds
capacity or such third - party systems fail or experience interruptions. A system failure or service denial could result in a
deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to
operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result
in a loss of client business or subject us to additional regulatory scrutiny and possible financial liability, any of which
could have a material adverse effect on business, financial condition, results of operations and growth prospects. In
addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of
employees of any of these third parties, could disrupt our operations or adversely affect our reputation.
It may be difficult for us to replace some of our third - party vendors, particularly vendors providing our core
banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in
the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of clients.
Any such events could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
Our operations rely heavily on the secure processing, storage and transmission of information and the
monitoring of a large number of transactions on a minute - by - minute basis, and even a short interruption in service could
have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as
financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent
activity, computer break - ins and other cyber security breaches described above, and the cyber security measures that
they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.
Because financial entities and technology systems are becoming more interdependent and complex, a cyber
incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial
entities could have a material impact on counterparties or other market participants, including ourselves. As a result of
the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third
parties with whom we interact.
A transition away from LIBOR as a reference rate for financial contracts could negatively affect our income and
expenses and the value of various financial contracts.
LIBOR is used extensively in the United States and globally as a benchmark for various commercial and
financial contracts, including adjustable rate mortgages, corporate debt and interest rate swaps. LIBOR is set based on
interest rate information reported by certain banks, which may stop reporting such information after 2023. It is not
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certain at this time whether LIBOR will change or cease to exist, or the extent to which those entering into commercial
or financial contracts will transition to any particular new benchmark. Other benchmarks may perform differently than
LIBOR, or alternative benchmarks have performed in the past or have other consequences that cannot currently be
anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments
and which remain outstanding if LIBOR ceases to exist.
While there is no consensus on what rate, or rates, may become accepted alternatives to LIBOR, the Alternative
Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected by the
Federal Reserve Bank of New York, started in May 2018, to publish the Secured Overnight Financing Rate, or SOFR, as
an alternative to LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury
securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the
Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become an accepted alternative
to LIBOR.
We have loans, available-for-sale securities, derivative contracts, subordinated notes payable, and junior
subordinated debentures with terms that are either directly or indirectly dependent on LIBOR. The transition from
LIBOR to alternative rates such as SOFR, could create considerable costs and additional risk. Any such transition could:
(i) adversely affect the interest rates paid or received on, the revenue and expenses associated with, and the value of our
floating-rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, or other
securities or financial arrangements given LIBOR’s role in determining market interest rates globally; (ii) prompt
inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with
an alternative reference rate; (iii) result in disputes, litigation, or other actions with counterparties regarding the
interpretation and enforceability of certain fallback language in LIBOR-based securities; and (iv) require the transition to
or development of appropriate systems and analytics to effectively transition our risk management processes from
LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR. Since proposed
alternative rates are calculated differently, payments under contracts referencing new rates will differ from those
referencing LIBOR. The transition will change our market risk profile, requiring changes to risk and pricing models,
valuation tools, product design and hedging strategies. Further, a failure to adequately manage this transition process
with our customers could adversely affect our reputation. Although we are currently unable to assess the ultimate impact
of the transition from LIBOR, a failure to adequately manage the transition could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages
that we have sold into the secondary market may require us to increase our financial statement reserves in the future.
We engage in the origination and sale of residential real estate loans into the secondary market. In connection
with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such
loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations
and warranties vary based on the nature of the transaction and the purchaser’s or insurer’s requirements but generally
pertain to the ownership of the mortgage loan, the real property securing the loan and compliance with applicable laws
and applicable lender and government - sponsored entity underwriting guidelines in connection with the origination of the
loan. While we believe our mortgage lending practices and standards to be adequate, we may receive repurchase or
indemnification requests in the future, which could be material in volume. If that were to happen, we could incur losses
in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial
statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any
increases we might have to make to our reserves could have a material adverse effect on our business, financial position,
results of operations and growth prospects.
We are highly dependent on our executive management team, and the loss of any of our senior executive officers or
other key employees, or our inability to attract and retain qualified personnel, could harm our ability to implement
our strategic plan and impair our relationships with clients.
Our success is dependent, to a large degree, upon the continued service and skills of our executive management
team, which consists of Randy Newman, our Chairman, President and Chief Executive Officer, Katie Lorenson, our
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Chief Financial Officer, Ann McConn, our Chief Shared Services Officer, Ryan Goldberg, our Chief Revenue Officer,
and Karin Taylor, our Chief Risk Officer. Our business and growth strategies are built primarily upon our ability to
retain employees with experience and business relationships within our market areas. The loss of any of the members of
our executive management team or any of our other key personnel, including our client advisors, could have an adverse
impact on our business and growth because of their skills, years of industry experience, knowledge of our market areas,
the difficulty of finding qualified replacement personnel and any difficulties associated with transitioning of
responsibilities to any new members of the executive management team. As such, we need to continue to attract and
retain key personnel and to recruit qualified individuals who fit our culture to succeed existing key personnel and ensure
the continued growth and successful operation of our business. Leadership changes may occur from time to time, and we
cannot predict whether significant retirements or resignations will occur or whether we will be able to recruit additional
qualified personnel.
Competition for senior executives and skilled personnel in the financial services industry is intense, which
means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In addition, our ability
to effectively compete for senior executives and other qualified personnel by offering competitive compensation and
benefit arrangements may be restricted by applicable banking laws and regulations. The loss of the services of any senior
executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to
develop and implement a viable succession plan could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
Our ability to retain and recruit employees is critical to the success of our business strategy and any failure to do so
could impair our customer relationships and adversely affect our business, financial condition, results of operations
and growth prospects.
Our ability to retain and grow our loans, deposits and fee income depends upon the business generation
capabilities, reputation and relationship management skills of our employees. If we lose the services of any of our
employees, including successful employees employed by banks or other businesses that we may acquire, to a new or
existing competitor or otherwise, we may not be able to retain valuable relationships and some of our customers could
choose to use the services of a competitor instead of our services.
Our success and growth strategy also depends on our continued ability to attract and retain experienced
employees for all of our business lines. We may face difficulties in recruiting and retaining personnel of our desired
caliber, including as a result of competition from other financial institutions. Competition for high quality personnel is
strong and we may not be successful in attracting or retaining the personnel we require. In particular, many of our
competitors are significantly larger with greater financial resources, and may be able to offer more attractive
compensation packages and broader career opportunities. Additionally, we may incur significant expenses and expend
significant time and resources on training, integration and business development before we are able to determine whether
a new employee will be profitable or effective in his or her role. If we are unable to attract and retain a successful
customer development and management team or if our customer development and management team fails to meet our
expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and
our business, financial condition, results of operations and growth prospects may be negatively affected.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may
materially adversely affect our business and the value of our stock.
We rely, in part, on our reputation to attract clients and retain our client relationships. Damage to our reputation
could undermine the confidence of our current and potential clients in our ability to provide high - quality financial
services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our
ability to effect transactions. In particular, our ability to attract and retain clients and employees could be adversely
affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise
to reputational risk that could cause harm to us and our business prospects. These issues include, but are not limited to,
legal and regulatory requirements; privacy; client and other third - party fraud; properly maintaining and safeguarding
client and employee personal information; money - laundering; illegal or fraudulent sales practices; ethical issues;
appropriately addressing potential conflicts of interest; and the proper identification and disclosure of the legal,
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reputational, credit, liquidity, and market risks inherent in our products. Failure to appropriately address any of these
issues could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could, among
other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement
actions, fines, and penalties and cause us to incur related costs and expenses. In addition, our businesses are dependent
on the integrity of our relationship, asset managers and other employees. If a relationship manager, asset manager or
other employee were to misappropriate any client funds or client information, the reputation of our businesses could be
negatively affected, which may result in the loss of accounts and could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Maintenance of our reputation depends not only on our success in maintaining our service - focused culture and
controlling and mitigating the various risks described in this report, but also on our success in identifying and
appropriately addressing issues that may arise in the areas described above. Maintaining our reputation also depends on
our ability to successfully prevent third parties from infringing on the “Alerus” brand and associated trademarks and our
other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through
litigation, could result in costs that could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Our use of third - party vendors and our other ongoing third - party business relationships is subject to increasing
regulatory requirements and attention.
Our use of third party vendors, including the financial technology company we partner with to create a
customer portal, for certain information systems is subject to increasingly demanding regulatory requirements and
attention by our federal bank regulators. Recent regulations require us to enhance our due diligence, ongoing monitoring
and control over our third - party vendors and other ongoing third - party business relationships. In certain cases, we may
be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase
our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our
third - party relationships and in the performance of the parties with which we have these relationships. As a result, if our
regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other
ongoing third party business relationships or that such third parties have not performed appropriately, we could be
subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as
well as requirements for client remediation, any of which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
We have a continuing need for technological change, and we may not have the resources to effectively implement
new technology or we may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology - driven products and services. In addition to better serving clients, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to
address the needs of our clients by using technology to provide products and services that will satisfy client demands for
convenience as well as to create additional efficiencies in our operations. We may experience operational challenges as
we implement these new technology enhancements, which could result in us not fully realizing the anticipated benefits
from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements.
As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would
put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new
technology - driven products and services or be successful in marketing such products and services to our clients.
In addition, the implementation of technological changes and upgrades to maintain current systems and
integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and
may cause us to fail to comply with applicable laws. We expect that new technologies and business processes applicable
to the financial services industry will continue to emerge, and these new technologies and business processes may be
better than those we currently use. Because the pace of technological change is high and our industry is intensely
35
competitive, we may not be able to sustain our investment in new technology as critical systems and applications
become obsolete or as better ones become available. A failure to successfully keep pace with technological change
affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data
processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory
sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities
from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is
not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this
activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks,
including data processing system failures and errors and customer or employee fraud. If our internal controls fail to
prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could
have a material adverse effect on our business, financial condition results of operations and growth prospects.
Our dividend policy may change.
Although we have historically paid dividends to our stockholders and currently intend to maintain or increase
our current dividend levels in future quarters, we have no obligation to continue doing so and may change our dividend
policy at any time without notice to our stockholders. Holders of our common stock are only entitled to receive such
cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments.
Further, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other
factors, we have made, and will continue to make, capital management decisions and policies that could adversely
impact the amount of dividends paid to our common stockholders.
In addition, we are a financial holding company, and our ability to declare and pay dividends is dependent on
certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and
dividends. It is the policy of the Federal Reserve that bank and financial holding companies should generally pay
dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the
organization’s expected future needs, asset quality and financial condition.
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially
all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses.
Various federal and state laws and regulations limit the amount of dividends that the Bank and certain of our non - bank
subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive
regulatory approval or if its earnings are not sufficient to make dividend payments to us while maintaining adequate
capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be
materially and adversely impacted.
Future issuances of common stock could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of stock, up to the 30,000,000 shares of common
stock and 2,000,000 shares of preferred stock authorized in our certificate of incorporation, which in each case could be
increased by a vote of the holders of a majority of our shares of common stock. We may issue additional shares of our
common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock
or debt, or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our
common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could
have a material negative effect on the market price of our common stock.
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We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us
or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Although there are currently no shares of our preferred stock issued and outstanding, our certificate of
incorporation authorizes us to issue up to 2,000,000 shares of one or more series of preferred stock. Our board of
directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be
issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the
event of a dissolution, liquidation or winding up, and other terms. If we issue preferred stock in the future that has
preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding
up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the
holders of our common stock or the market price of our common stock could be adversely affected. In addition, the
ability of our board of directors to issue shares of preferred stock without any action on the part of our stockholders may
impede a takeover of us and prevent a transaction perceived to be favorable to our stockholders.
The holders of our debt obligations and preferred stock, if any, will have priority over our common stock with respect
to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and
dividends.
In any liquidation, dissolution or winding up of the Company, our common stock would rank junior in priority
to all claims of debt holders against us and claims of all of our outstanding shares of preferred stock. As of December 31,
2020, we had $50.0 million of subordinated notes payable and $10.3 million of junior subordinated debentures
outstanding. On January 29, 2021, the Company redeemed all $50.0 million of its subordinated notes payable. We do not
currently have any shares of preferred stock outstanding. As a result, holders of our common stock will not be entitled to
receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until
after all of our obligations to our debt holders have been satisfied and holders of senior equity securities, including any
preferred shares, if any, have received any payment or distribution due to them.
Our business and operations may be adversely affected in numerous and complex ways by weak economic conditions
and global trade.
Our businesses and operations, which primarily consist of lending money to clients in the form of commercial
and residential mortgage loans, borrowing money from clients in the form of deposits and savings accounts, investing in
securities, and providing wealth management, trust and fiduciary and recordkeeping services, are sensitive to general
business and economic conditions in the United States. If the United States economy weakens, our growth and
profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal
fiscal policymaking process, the medium- and long - term fiscal outlook of the federal government, and future tax rates is
a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign
countries and weakening global trade due to increased anti - globalization sentiment and recent tariff activity could affect
the stability of global financial markets, which could hinder the economic growth of the United States. There are also
concerns about the potential effects of coronavirus on international trade (including supply chains and export levels),
travel, and employee productivity and other economic activities. Weak economic conditions are characterized by
deflation, fluctuations in debt and equity capital markets, a lack of liquidity or depressed prices in the secondary market
for loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate
price declines and lower home sales and commercial activity. The current economic environment is also characterized by
interest rates remaining at historically low levels, which impacts our ability to attract deposits and to generate attractive
earnings through our investment portfolio. Further, a general economic slowdown could decrease the value of our AUA
and AUM resulting in clients potentially seeking alternative investment opportunities with other providers, which could
result in lower fee income. All of these factors are detrimental to our business, and the interplay between these factors
can be complex and unpredictable. Adverse economic conditions and government policy responses to such conditions
could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
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We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan
portfolio on an ongoing basis, we may rely on information furnished by or on behalf of clients and counterparties,
including financial statements, credit reports and other financial information. We may also rely on representations of
those clients or counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness
of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or
other financial or business information, or the failure to receive such information on a timely basis, could result in loan
losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and product enhancements
as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with
these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or
marketing new lines of business, products, product enhancements or services, we may invest significant time and
resources, although we may not assign the appropriate level of resources or expertise necessary to make these new lines
of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial
timetables for the introduction and development of new lines of business, products, product enhancements or services
may not be achieved, and price and profitability targets may not prove feasible.
External factors, such as compliance with regulations, competitive alternatives and shifting market preferences,
may also affect the successful implementation of a new line of business or offerings of new products, product
enhancements or services. Further, any new line of business, product, product enhancement or service or system
conversion could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of business or offerings of new products,
product enhancements or services could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
We face intense competition from other banks and financial services companies that could hurt our business.
We operate in the highly competitive financial services industry and face significant competition for clients
from financial institutions located both within and beyond our market areas. Overall, we compete with national
commercial banks, regional banks, private banks, mortgage companies, online lenders, savings banks, credit unions,
non - bank financial services companies, other financial institutions, including investment advisory and wealth
management firms, financial technology companies and securities brokerage firms, operating within or near the areas we
serve. Many of our non - bank competitors are not subject to the same extensive regulations that govern our activities and
may have greater flexibility in competing for business. The financial services industry could become even more
competitive as a result of legislative, regulatory and technological changes and continued consolidation.
In our banking business, we may not be able to compete successfully with other financial institutions in our
markets, particularly with larger financial institutions that have significantly greater resources than us, and we may have
to pay higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new
employees, resulting in lower net interest margins and reduced profitability. In addition, increased lending activity of
competing banks has also led to increased competitive pressures on loan rates and terms for high - quality credits.
Competition in the retirement and benefit services and wealth management businesses is especially strong in
our geographic market areas because there are numerous well - established, well - resourced, well - capitalized, and
successful investment management, wealth advisory and wealth management and trust firms in these areas. In addition,
the record keeping and administration industry is dominated by a small number of larger institutions that may charge
fees that are lower than we charge for similar services. Our ability to successfully attract and retain retirement and
benefit services and wealth management clients is dependent upon our ability to compete with competitors’ investment,
advisory, fiduciary and recordkeeping products and services, levels of investment performance and marketing and
38
distribution capabilities. If we are unable to compete effectively with other banking or other financial services
businesses, we could find it more difficult to attract new and retain existing clients and our noninterest income could
decline, which could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
We originate, sell and service residential mortgage loans. Our mortgage business faces vigorous competition
from banks and other financial institutions, including larger financial institutions and independent mortgage companies.
Our mortgage business competes on a number of factors including customer service, quality, range of products and
services offered, price, reputation, interest rates, closing process and duration, and loan origination fees. The ability to
attract and retain skilled mortgage origination professionals is critical to our mortgage origination business. Changes in
interest rates and pricing decisions by our loan competitors affect demand for our residential mortgage loan products, the
revenue realized on the sale of loans and revenues received from servicing such loans for others, ultimately reducing our
noninterest income. In addition, if we are unable to attract and retain enough skilled employees, our mortgage
origination volume may decline.
Our business and operations may be adversely affected in numerous and complex ways by external business
disruptors in the financial services industry.
The financial services industry is undergoing rapid change, as technology enables traditional banks to compete
in new ways and non - traditional entrants to compete in certain segments of the banking market, in some cases with
reduced regulation. As client preferences and expectations continue to evolve, technology has lowered barriers to entry
and made it possible for banks to expand their geographic reach by providing services over the internet and for
non - banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic
payment systems, online lending and low - cost investment advisory services. New entrants may use new technologies,
advanced data and analytic tools, lower cost to serve, reduced regulatory burden or faster processes to challenge
traditional banks. For example, new business models have been observed in retail payments, consumer and commercial
lending, foreign exchange and low - cost investment advisory services. While we closely monitor business disruptors and
seek to adapt to changing technologies, matching the pace of innovation exhibited by new and differently situated
competitors may require us and policy - makers to adapt at a greater pace. Because the financial services industry is
experiencing rapid changes in technology, our future success will depend in part on our ability to address our clients’
needs by using technology. Client loyalty can be influenced by a competitor’s new products, especially offerings that
could provide cost savings or a higher return to the client.
The investment management contracts we have with our clients are terminable without cause and on relatively short
notice by our clients, which makes us vulnerable to short - term declines in the performance of the securities under our
management.
Like most investment advisory and wealth management businesses, the investment advisory contracts we have
with our clients are typically terminable by the client without cause upon less than 30 days’ notice. As a result, even
short - term declines in the performance of the securities we manage, which can result from factors outside our control,
such as adverse changes in market or economic conditions or the poor performance of some of the investments we have
recommended to our clients, could lead some of our clients to move assets under our management to other asset classes
such as broad index funds or treasury securities, or to investment advisors which have investment product offerings or
investment strategies different than ours. Therefore, our operating results are heavily dependent on the financial
performance of our investment portfolios and the investment strategies we employ in our investment advisory businesses
and even short - term declines in the performance of the investment portfolios we manage for our clients, whatever the
cause, could result in a decline in AUM and a corresponding decline in investment management fees, which would
adversely affect our results of operations.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could
significantly impact our business.
Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse
external events could have a significant impact on our ability to conduct business. In addition, such events could affect
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the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral
securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The
coronavirus outbreak may have an adverse impact on our customers that are directly or indirectly engaged in industries
that could be affected by the outbreak, such as, international trade or hospitality. Their businesses may be adversely
affected by quarantines and travel restrictions in areas most affected by the coronavirus. In addition, entire industries,
such as agriculture, may be adversely impacted due to lower exports caused by reduced economic activity in the affected
areas. As a result, the coronavirus may materially and adversely impact various aspects of our operations and financial
results, by requiring us to take certain responsive actions, including but not limited to, increasing our loan loss reserves,
incurring costs for emergency preparedness, closing branch offices or branch operations and requiring that employees
work remotely, which may lead to personnel shortages. The occurrence of any of these events in the future could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
Our wealth management business is dependent on asset managers to produce investment returns and financial
advisors to solicit and retain clients, and the loss of a key asset manager or financial advisor could adversely affect
our wealth management business.
We rely on our asset managers to produce investment returns and financial advisors to advise clients of our
wealth management business. We believe that investment performance is an important factor for the growth of our
AUM. Poor investment performance could impair our revenues and growth because existing clients might withdraw
funds in favor of better performing products, which would result in lower investment management fees, or our ability to
attract funds from existing and new clients might diminish.
The market for asset managers and financial advisors is extremely competitive and is increasingly characterized
by frequent movement of these types of employees among different firms. In addition, our asset managers and financial
advisors often have regular direct contact with our clients, which can lead to a strong client relationship based on the
client’s trust in that individual manager or advisor. The loss of a key asset manager or financial advisor could jeopardize
our relationships with our clients and lead to the loss of client accounts. Losses of such accounts could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
We may be adversely affected by the soundness of certain securities brokerage firms.
At the end of 2018, we made the decision to no longer provide custodial services for our clients through our
broker - dealer subsidiary. Instead, client investment accounts are maintained under custodial arrangements with large,
well established securities brokerage firms or bank institutions that provide custodial services, either directly or through
arrangements made by us with those firms. As a result, the performance of, or even rumors or questions about the
integrity or performance of, any of those firms could adversely affect the confidence of our clients in the services
provided by those firms or otherwise adversely impact their custodial holdings. Such an occurrence could negatively
impact our ability to retain existing or attract new clients and, as a result, could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Liquidity and Funding Risks
Liquidity risks could affect our operations and jeopardize our business, financial condition, results of operations and
growth prospects.
Liquidity is essential to our business. Liquidity risk is the risk that we will not be able to meet our obligations,
including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through
deposits, borrowings, the sale of loans or investment securities, and from other sources could have a substantial negative
effect on our liquidity.
Our most important source of funds consists of our client deposits, which can decrease for a variety of reasons,
including when clients perceive alternative investments, such as the stock market, as providing a better risk/return
tradeoff. Our future growth will largely depend on our ability to maintain and grow a strong deposit base and our ability
to retain our largest retirement and benefit services and wealth management clients, many of whom are also depositors.
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If clients, including our retirement and benefit services and wealth management clients, move money out of bank
deposits and into other investments, we could lose a relatively low - cost source of funds, which would require us to seek
other funding alternatives, including increasing our dependence on wholesale funding sources, in order to continue to
grow, thereby increasing our funding costs and reducing our net interest income and net income.
Additionally, we access collateralized public funds, which are bank deposits of state and local municipalities.
These deposits are required to be secured by certain investment grade securities to ensure repayment, which reduces
standby liquidity by restricting the potential liquidity of the pledged collateral. As of December 31, 2020, we had
pledged $150.9 million of investment securities for this purpose, which represented approximately 25.5% of our total
securities portfolio. If we are unable to pledge sufficient collateral to secure public funding, we may lose access to this
source of liquidity that we have historically relied upon. In addition, the availability of and fluctuations in these funds
depends on the individual municipality’s fiscal policies and cash flow needs.
Other primary sources of funds consist of cash from operations, investment security maturities and sales and
proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by
repurchase agreements and the ability to borrow from the Federal Reserve and the FHLB. We may also borrow from
third - party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our
activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services
industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the
prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may
increase our cost of funding and limit access to certain customary sources of capital, including inter - bank borrowings,
repurchase agreements and borrowings from the discount window of the Federal Reserve. There is also the potential risk
that collateral calls with respect to our repurchase agreements could reduce our available liquidity.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan,
including originating loans and investing in securities, or to fulfill obligations such as paying our expenses, repaying our
borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
We may not be able to maintain a strong core deposit base or other low - cost funding sources.
We depend primarily on core deposits from our clients, which consist of noninterest bearing deposits, interest
bearing checking accounts, certificates of deposit less than $250,000 and money market savings accounts, as our primary
source of funding for our lending activities. Our future growth will largely depend on our ability to maintain and grow
this strong, core deposit base and our ability to retain our retirement and benefit and wealth management clients, many of
whom are also depositors. Deposit and account balances can decrease when clients perceive alternative investments,
such as the stock market or real estate, as providing a better risk/return tradeoff. If clients, including our retirement and
benefit and wealth management clients, move money out of bank deposits or money market accounts and into
investments (or similar deposit products at other institutions that may provide a higher rate of return), we could lose a
relatively low - cost source of funds, increasing our funding costs and reducing our net interest income and net income.
We supplement our core deposit funding with non - core, short - term funding sources, including FHLB advances
and fed funds purchased. As of December 31, 2020, we had no secured or unsecured FHLB advances or fed funds
purchased from the FHLB. Our maximum borrowing capacity from the FHLB is based on the amount of mortgage and
commercial loans we can pledge. As of December 31, 2020, our advances from the FHLB were collateralized by
$624.1 million of real estate loans. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we
may lose access to this source of liquidity. If we are unable to access any of these types of funding sources or if our costs
related to them increases, our liquidity and ability to support demand for loans could be materially adversely affected.
Our high concentration of large depositors may increase our liquidity risk.
We have developed relationships with certain individuals and businesses that have resulted in a concentration of
large deposits from a small number of clients. As of December 31, 2020, our 10 largest depositor relationships accounted
for approximately 10.5% of our total deposits. This high concentration of depositors presents a risk to our liquidity if one
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or more of them decides to change its relationship with us and to withdraw all or a significant portion of their accounts.
If such an event occurs, we may need to seek out alternative sources of funding that may not be on the same terms as the
deposits being replaced, which could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Our liquidity is largely dependent on dividends from the Bank.
The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow,
including cash flow to pay principal and interest on our debt, comes from dividends the Company receives from the
Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the
Company. As of December 31, 2020, the Bank had the capacity to pay the Company a dividend of up to $63.3 million
without the need to obtain prior regulatory approval. Also, the Company’s right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event
the Bank is unable to pay dividends to us, we may not be able to service our debt, which could have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to
losses, an inability to raise additional capital or otherwise, our business, financial condition, results of operations and
growth prospects, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise
additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and
business needs, which could include the possibility of financing acquisitions. We do not have any current plans,
arrangements or understandings to make any additional acquisitions. In addition, our Company, on a consolidated basis,
and the Bank, on a stand - alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity.
Regulatory capital requirements could increase from current levels, which could require us to raise additional capital or
contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic
conditions and a number of other factors, including investor perceptions regarding the banking industry, market
conditions and governmental activities, our credit ratings, our ability to maintain a listing on Nasdaq and our financial
condition and performance. If we fail to maintain an investment grade credit rating, it may adversely impact our ability
to raise capital or incur additional debt. Accordingly, we cannot assure you that we will be able to raise additional capital
if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business,
financial condition, results of operations and growth prospects would be materially and adversely affected.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial
institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment,
liquidity management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution
could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial
soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other
relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to
market - wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect
financial intermediaries with which we interact on a daily basis or key funding providers such as the FHLB, any of
which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
We receive substantial deposits and AUM as a result of referrals by professionals, such as attorneys, accountants, and
doctors, and such referrals are dependent upon the continued positive interaction with and financial health of those
referral sources.
Many of our deposit clients and clients of our wealth management business are individuals involved in
professional vocations, such as lawyers, accountants, and doctors. These clients are a significant source of referrals for
new clients in both the deposit and wealth management areas. If we fail to adequately serve these professional clients
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with our deposit services, lending, wealth management products and other services, this source of referrals may
diminish, which could have a negative impact on our financial results. Further, if the economy in the geographic areas
that we serve is negatively impacted, the amount of deposits and services that these professional individuals will utilize
and the number of referrals that they will make may decrease, which may have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Legal, Accounting and Compliance Risks
Our risk management framework may not be effective in mitigating risks or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to
manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and
compliance. Our framework also includes financial or other modeling methodologies that involve management
assumptions and judgment. Our risk management framework may not be effective under all circumstances and it may
not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and
our business, financial condition, results of operations and growth prospects could be materially and adversely affected.
We may also be subject to potentially adverse regulatory consequences.
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques
and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to the way we record and report our financial condition
and results of operations. Our management must exercise judgment in selecting and applying many of these accounting
policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to
report our financial condition and results of operations. In some cases, management must select the accounting policy or
method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may
result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They
require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially
different amounts could be reported under different conditions or using different assumptions or estimates. If our
underlying assumptions or estimates prove to be incorrect, it could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Our risk management processes, internal controls, disclosure controls and corporate governance policies and
procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the
objectives of the system are met. Any failure or circumvention of our controls, processes and procedures or failure to
comply with regulations related to controls, processes and procedures could necessitate changes in those controls,
processes and procedures, which may increase our compliance costs, divert management attention from our business or
subject us to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
Changes in accounting policies or standards could materially impact our financial statements.
From time to time, the FASB or the Securities and Exchange Commission, or SEC, may change the financial
accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in
us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the
accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on
how these standards should be applied. These changes may be beyond our control, can be hard to predict and can
materially impact how we record and report our financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, or apply an existing standard differently, in each case resulting
in our needing to revise or restate prior period financial statements.
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The obligations associated with being a public company require significant resources and management attention,
which divert time and attention from our business operations.
As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes - Oxley
Act of 2002, or the Sarbanes - Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports
with respect to our business and financial condition with the SEC. The Sarbanes - Oxley Act requires, among other
things, that we establish and maintain effective internal controls and procedures for financial reporting. Compliance with
these reporting requirements and other rules of the SEC could increase our legal and financial compliance costs and
make some activities more time consuming and costly, which could negatively affect our efficiency ratio. Further, the
need to maintain the corporate infrastructure demanded of a public company may divert management’s attention from
implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and
improving our business, results of operations and financial condition.
As an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS
Act, we are taking advantage of certain temporary exemptions from various reporting requirements, including reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an exemption
from the requirement to obtain an attestation from our auditors on management’s assessment of our internal control over
financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and devote increased
management effort toward ensuring compliance with them.
The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional
information we are required to disclose as a publicly listed company.
As a public company, we are subject to heightened financial reporting standards under GAAP and SEC rules,
including more extensive levels of disclosure. Complying with these standards required enhancements to the design and
operation of our internal control over financial reporting as well as additional financial reporting and accounting staff
with appropriate training and experience in GAAP and SEC rules and regulations.
If we are unable to meet the demands required of us as a public company, including the requirements of the
Sarbanes - Oxley Act, we may be unable to report our financial results accurately, or report them within the timeframes
required by law or stock exchange regulations. Failure to comply with the Sarbanes - Oxley Act, when and as applicable,
could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material
weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be
impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of
our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the
Nasdaq Capital Market, and could have a material adverse effect on our business, financial condition, results of
operations and growth prospects. Even if we are able to report our financial statements accurately and in a timely
manner, any disclosure of material weaknesses in our future filings with the SEC could cause our reputation to be
harmed and our stock price to decline significantly.
We did not perform an evaluation of our internal control over financial reporting, as contemplated by
Section 404 of Sarbanes - Oxley, nor did we engage our independent registered public accounting firm to perform an
audit of our internal control over financial reporting under the standards of the Public Company Accounting Oversight
Board, or PCAOB, as of any balance sheet date reported in our financial statements as of December 31, 2020. Had we
performed such an evaluation or had our independent registered public accounting firm performed an audit of our
internal control over financial reporting under the standards of PCAOB, material weaknesses may have been identified.
In addition, the JOBS Act provides that, so long as we qualify as an emerging growth company, we will be exempt from
the provisions of Section 404(b) of Sarbanes - Oxley, which would require that our independent registered public
accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting under
the standards of PCAOB. We may take advantage of this exemption so long as we qualify as an emerging growth
company.
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Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines,
penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to increased litigation and regulatory risks because of a number of factors, including the
highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the
financial services industry generally. This focus has only intensified since the financial crisis, with regulators and
prosecutors focusing on a variety of financial institution practices and requirements, including foreclosure practices,
compliance with applicable consumer protection laws, classification of “held for sale” assets and compliance with
anti - money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets
Control of the U.S. Department of the Treasury, or U.S. Treasury.
In the normal course of business, from time to time, we have in the past and may in the future be named as a
defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our
current or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages
or claims for indeterminate amounts of damages. We may also, from time to time, be the subject of subpoenas, requests
for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding
our current or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory
or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements
resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters,
whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause
significant harm to our reputation and divert management attention from the operation of our business. Further, any
settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by
government agencies may result in litigation, investigations or proceedings as other litigants and government agencies
begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
Moreover, U.S. authorities have been increasingly focused on “conduct risk,” a term that is used to describe the
risks associated with behavior by employees and agents, including third - party vendors, that could harm clients,
consumers, investors or the markets, such as failures to safeguard consumers’ and investors’ personal information,
failures to identify and manage conflicts of interest and improperly creating, selling and marketing products and
services. In addition to increasing compliance risks, this focus on conduct risk could lead to more regulatory or other
enforcement proceedings and litigation, including for practices which historically were acceptable but are now receiving
greater scrutiny. Further, while we take numerous steps to prevent and detect conduct by employees and agents that
could potentially harm clients, investors or the markets, such behavior may not always be deterred or prevented. Banking
regulators have also focused on the overall culture of financial services firms. In addition to regulatory restrictions or
structural changes that could result from perceived deficiencies in our culture, such focus could also lead to additional
regulatory proceedings.
If the goodwill that we recorded in connection with our recent acquisitions becomes impaired, it could have a
negative impact on our financial condition and results of operations.
As of December 31, 2020, we had goodwill of $30.2 million, or 9.1% of our total stockholders’ equity. The
excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for
impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not
that an impairment has occurred. In testing for impairment, we conduct a qualitative assessment, and we also estimate
the fair value of net assets based on analyses of our market value, discounted cash flows and peer values. Consequently,
the determination of the fair value of goodwill is sensitive to market - based economics and other key assumptions.
Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a
non - cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
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We are subject to extensive regulation, and the regulatory framework that applies to us, together with any future
legislative or regulatory changes, may significantly affect our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations
that are intended primarily for the protection of depositors, clients, federal deposit insurance funds and the banking
system as a whole, not for the protection of our stockholders. Our Company is subject to supervision and regulation by
the Federal Reserve, and the Bank is subject to supervision and regulation by the OCC and the FDIC. The laws and
regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and
investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against
deposits we take, the types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the
control of us and our Bank, restrictions on dividends and establishment of new offices. We must obtain approval from
our regulators before engaging in certain activities, and there is the risk that such approvals may not be obtained, either
in a timely manner or at all. Our regulators also have the ability to compel us to take certain actions, or restrict us from
taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking
practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such
laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation,
all of which could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
Since the financial crisis, federal and state banking laws and regulations, as well as interpretations and
implementations of these laws and regulations, have undergone substantial review and change. In particular, the
Dodd - Frank Act drastically revised the laws and regulations under which we operate. As an institution with less than
$10 billion in assets, certain elements of the Dodd - Frank Act have not been applied to us and provisions of the
Regulatory Relief Act are intended to result in meaningful regulatory relief for community banks and their holding
companies. While we endeavor to maintain safe banking practices and controls beyond the regulatory requirements
applicable to us, our internal controls may not match those of larger banking institutions that are subject to increased
regulatory oversight.
Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. This
increased regulatory burden has resulted, and may continue to result in, increased costs of doing business, and may in the
future, result in decreased revenues and net income, reduce our ability to compete effectively, to attract and retain
clients, or make it less attractive for us to continue providing certain products and services. Any changes in federal and
state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us
in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse
effect on our business, financial condition, results of operations and growth prospects. For example, in December 2019,
the United States Congress enacted the Setting Every Community up for Retirement Enhancement, or SECURE Act.
The SECURE Act made significant changes to provisions of existing law governing retirement plans and IRAs. Some of
the changes in law made by the SECURE Act are complex and unclear in application. Moreover, many of the provisions
were effective on January 1, 2020, while other provisions are effective on later dates, including some that are not
effective until action is taken to modify underlying retirement plan documents. We cannot predict what impact the
SECURE Act will ultimately have on our business. In addition, political developments, including changes in law
introduced by the Biden administration in the United States in 2021 add uncertainty to the implementation, scope and
timing of regulatory reforms.
Our retirement and benefit services and wealth management businesses are highly regulated, and the regulators have
the ability to limit or restrict our activities and impose fines or suspensions on the conduct of our business.
Our retirement and benefit services and wealth management businesses are highly regulated, primarily at the
federal level. The failure of any of our businesses that provide investment management or wealth management and trust
services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other
sanctions. We are also subject to the provisions and regulations of the Employee Retirement Income Security Act of
1974, or ERISA, to the extent that we act as a “fiduciary” under ERISA with respect to certain of our clients. ERISA and
the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISA
and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions
46
by the fiduciaries (and certain other related parties) to such plans. Changes in these laws or regulations could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
We may be subject to claims and litigation relating to our fiduciary responsibilities.
Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our
clients and others. From time to time, third parties make claims and take legal action against us pertaining to the
performance of our fiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to
us, we may be exposed to significant financial liability or our reputation could be damaged. Either of these results may
adversely impact demand for our products and services or otherwise have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have
a material adverse effect on our business, financial condition, results of operations and growth prospects.
We operate in an environment that imposes income taxes on our operations at both the federal and state levels
to varying degrees. We engage in certain strategies to minimize the impact of these taxes. Consequently, any change in
tax laws or regulations, or new interpretation of an existing law or regulation, could significantly alter the effectiveness
of these strategies.
The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions
from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these
deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax
asset is measured by applying currently - enacted income tax rates to the accounting period during which the tax benefit is
expected to be realized. As of December 31, 2020, our net deferred tax asset was $9.4 million.
There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations
in the United States that may directly affect financial institutions and the global economy.
Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes
following elections, which lead to changes involving the level of oversight and focus on the financial services industry.
The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework
affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our
operating environment and therefore our business, financial condition, results of operations and growth prospects.
We are subject to stringent capital requirements.
Banking institutions are required to hold more capital as a percentage of assets than most industries. In the wake
of the global financial crisis, our capital requirements increased, both in the amount of capital we must hold and in the
quality of the capital to absorb losses. Holding high amounts of capital compresses our earnings and constrains growth.
In addition, the failure to meet applicable regulatory capital requirements could result in one or more of our regulators
placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of
new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs and our
ability to make acquisitions and result in a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Federal regulators periodically examine our business, and we may be required to remediate adverse examination
findings.
The Federal Reserve and the OCC periodically examine us, including our operations and our compliance with
laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition,
capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity to market risk
or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or
regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the
47
power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital,
to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that
such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance
and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect
on our business, financial condition, results of operations and growth prospects.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair
lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA requires the Bank, consistent with safe and sound operations, to ascertain and meet the credit needs of
its entire community, including low and moderate - income areas. Our failure to comply with the CRA could, among
other things, result in the denial or delay of certain corporate applications filed by us, including applications for branch
openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding
company. In addition, the CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and
regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal
banking agencies and other federal agencies are responsible for enforcing these laws and regulations. A successful
challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions,
including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity,
restrictions on expansion and restrictions on entering new business lines. Private parties may also challenge an
institution’s performance under fair lending laws in private class action litigation. In addition, new regulations, increased
regulatory reviews or changes in the structure of the secondary mortgage markets which we utilize to sell mortgage loans
may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination
business. Any of the actions described above could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
Noncompliance with the Bank Secrecy Act and other anti - money laundering statutes and regulations could result in
fines or sanctions against us.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain effective anti - money laundering programs and to file reports such as suspicious
activity and currency transaction reports. We are required to comply with these and other anti - money laundering
requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance with the rules enforced by
the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient or the policies,
procedures and systems of any financial institution we acquire in the future are deemed deficient, we would be subject to
liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the
necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisitions.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing
could also have serious reputational consequences for us. Any of these results could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how
we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements
concerning security breach notification, and we could be negatively affected by these laws. For example, our business is
subject to the Gramm - Leach - Bliley Act which, among other things (i) imposes certain limitations on our ability to share
nonpublic personal information about our clients with nonaffiliated third parties, (ii) requires that we provide certain
disclosures to clients about our information collection, sharing and security practices and afford clients the right to “opt
out” of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires that we
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develop, implement and maintain a written comprehensive information security program containing appropriate
safeguards based on our size and complexity, the nature and scope of our activities and the sensitivity of client
information we process, as well as plans for responding to data security breaches. Various state and federal banking
regulators and states have also enacted data security breach notification requirements with varying levels of individual,
consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.
Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information
security and data protection laws that potentially could have a significant impact on our current and planned privacy,
data protection and information security - related practices, our collection, use, sharing, retention and safeguarding of
consumer or employee information and some of our current or planned business activities. This could also increase our
costs of compliance and business operations and could reduce income from certain business initiatives. This includes
increased privacy - related enforcement activity at the federal level, by the Federal Trade Commission and the CFPB, as
well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those
regarding security breach notification) affecting client or employee data to which we are subject could result in higher
compliance and technology costs and could restrict our ability to provide certain products and services, which could
have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our
failure to comply with privacy, data protection and information security laws could result in potentially significant
regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which
could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a financial holding company to act as a source of financial
and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd - Frank
Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength”
doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary
bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit
resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the
resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding
company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank.
Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment
over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any
borrowing that must be done by our Company to make a required capital injection becomes more difficult and expensive
and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer
protection laws, may have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes
and to issue new regulations but, with respect to institutions of our size, does not have primary examination and
enforcement authority with respect to such laws and regulations. The authority to examine depository institutions with
$10.0 billion or less in assets, like us, for compliance with federal consumer laws remains largely with our primary
federal regulator, the OCC. However, the CFPB may participate in examinations of smaller institutions on a “sampling
basis” and may refer potential enforcement actions against such institutions to their primary regulators. In some cases,
regulators such as the Federal Trade Commission and the Department of Justice also retain certain rulemaking or
enforcement authority, and we also remain subject to certain state consumer protection laws. As an independent bureau
within the Federal Reserve, the CFPB may impose requirements more severe than the previous bank regulatory agencies.
The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer
complaint database to encourage consumers to file complaints they may have against financial institutions. We are
49
expected to monitor and respond to these complaints, including those that we deem frivolous, and doing so may require
management to reallocate resources away from more profitable endeavors.
The level of our commercial real estate portfolio may subject us to heightened regulatory scrutiny.
The federal banking regulators have issued the Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices guidance, or CRE Guidance, which provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate
loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of
capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans
exceeding 100% of capital. The CRE Guidance does not limit the Bank’s levels of commercial real estate lending
activities, but rather, guides institutions in developing risk management practices and levels of capital that are
commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the
federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending,
having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising
CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-
insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify,
measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain
capital commensurate with the level and nature of their CRE concentration risk.
As of December 31, 2020, the Bank did not exceed these guidelines.
We are an emerging growth company within the meaning of the Securities Act and because we have decided to take
advantage of certain exemptions from various reporting and other requirements applicable to emerging growth
companies, our common stock could be less attractive to investors.
For as long as we remain an emerging growth company, as defined in the JOBS Act, we will have the option to
take advantage of certain exemptions from various reporting and other requirements that are applicable to other public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes - Oxley Act, being permitted to have an extended transition period for
adopting any new or revised accounting standards that may be issued by the FASB or the SEC, reduced disclosure
obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no
longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the
fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year
following the fifth anniversary of the date of the first sale of common equity securities under our registration statement
on Form S-1, which was declared effective by the SEC on September 12, 2019, (iii) the date on which we have, during
the previous three - year period, issued more than $1.0 billion in non - convertible debt and (iv) the end of the first fiscal
year in which (A) the market value of our equity securities that are held by non - affiliates exceeds $700 million as of
June 30 of that year, (B) we have been a public reporting company under the Exchange Act for at least twelve calendar
months and (C) we have filed at least one annual report on Form 10 - K.
Because we have elected to use the extended transition period for complying with new or revised accounting
standards for an emerging growth company, our financial statements may not be comparable to companies that
comply with these accounting standards as of the public company effective dates.
We have elected to use the extended transition period for complying with new or revised accounting standards
under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised
accounting standards that have different effective dates for public and private companies until those standards apply to
private companies. As a result of this election, our financial statements may not be comparable to companies that comply
with these accounting standards as of the public company effective dates. Because our financial statements may not be
comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or
comparing our business, financial results or prospects in comparison to other public companies, which may have a
50
negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common
stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Certain banking laws and certain provisions of our certificate of incorporation and bylaws may have an anti - takeover
effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a
third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. In general,
acquisitions of 10% or more of any class of voting stock of a bank holding company or depository institution generally
creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository institution. Also, a
bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring
direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank.
There are also provisions in our certificate of incorporation and bylaws that could have the effect of delaying,
deferring or discouraging another party from acquiring control of us, even if such acquisition would be viewed by our
stockholders to be in their best interests. These include supermajority stockholder voting thresholds and requirements
relating to stockholder meetings and nominations or proposals. We are also subject to a statutory antitakeover provision
included in the DGCL. In addition, our board of directors is authorized under our certificate of incorporation to issue
shares of preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without
stockholder approval. These provisions may effectively inhibit a non - negotiated merger or other business combination,
which, in turn, could have a material adverse effect on the market price of our common stock.
Our certificate of incorporation has an exclusive forum provision, which could limit a stockholder’s ability to obtain
a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation has an exclusive forum provision providing that the Court of Chancery of the
State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf;
(ii) any action asserting a claim of breach of fiduciary duty by any of our directors, officers, employees or agents;
(iii) any action asserting a claim arising pursuant to the DGCL, our certificate of incorporation or our bylaws; or (iv) any
action asserting a claim that is governed by the internal affairs doctrine. However, Section 27 of the Exchange Act
creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act
or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to
enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive
jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over
all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As
a result, there is uncertainty as to whether a court would enforce such a provision, and our stockholders will not be
deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.
Our stockholders approved this provision at our annual stockholders’ meeting held on May 13, 2014. Any
person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of
and to have consented to this provision of our certificate of incorporation. The exclusive forum provision, if enforced,
may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our
directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the
exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated
with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
The California Consumer Privacy Act of 2018 or other such laws could result in increased operating expenses as well
as additional exposure to the risk of litigation by or on behalf of customers.
In June of 2018, the Governor of California signed into law The California Consumer Privacy Act of 2018, or
the CCPA. This new law becomes effective on January 1, 2020 and provides consumers with expansive rights and
control over their personal information, which is obtained by or shared with “covered businesses,” including for-profit
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businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will
give consumers the right to request disclosure of information collected about them and whether that information has
been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the
right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against because
of choices regarding the consumer’s personal information.
The CCPA provides for certain monetary penalties and for its enforcement by the California Attorney General
or consumers whose rights under the law are not observed. It also provides for damages as well as injunctive or
declaratory relief if there has been unauthorized access, theft, or disclosure of personal information due to failure to
implement reasonable security procedures. We have not yet determined the potential impact of the CCPA on our
business, but it could result in increased operating expenses as well as additional exposure to the risk of litigation by or
on behalf of consumers. It is also possible that other states where we have customers could enact similar laws.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures
that could significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of
the global environment. As a result, political and social attention to the issue of climate change has increased. In recent
years, governments across the world have entered into international agreements to attempt to reduce global temperatures,
in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory
agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the
effects of climate change. These agreements and measures may result in the imposition of taxes and fees, the required
purchase of emission credits, and the implementation of significant operational changes, each of which may require us to
expend significant capital and incur compliance, operating, maintenance, and remediation costs. Consumers and
businesses may also change their behavior on their own as a result of these concerns. The impact on our customers will
likely vary depending on their specific attributes, including reliance on, or role in, carbon intensive activities. Our efforts
to take these risks into account in making lending and other decisions, including by increasing our business with climate-
friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or
changes in consumer or business behavior.
Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to
predict how climate change may impact our financial condition and operations; however, as a banking organization, the
physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local
climates, and other disruptions related to climate change may adversely affect the value of real properties securing our
loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local
economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest
capital in these areas and communities.
COVID-19 Pandemic-Related Risks
The outbreak of the Coronavirus Disease 2019, or COVID-19, has led to an economic recession and had other severe
effects on the U.S. economy and has disrupted our operations. The ongoing COVID-19 pandemic has also adversely
impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations
to us. The ultimate impact of the COVID-19 pandemic on our business remains uncertain but may have a material
and adverse effect on our business, financial condition, results of operations and growth prospects.
The COVID-19 pandemic continues to negatively impact the United States and the world. The spread of
COVID-19 has negatively impacted the U.S. economy at large, and small businesses in particular, and has disrupted our
operations. The responses on the part of the U.S. and global governments and populations have created a recessionary
environment, reduced economic activity and caused significant volatility in the global stock markets. We have
experienced significant disruptions across our business due to these effects, which may in future periods lead to
decreased earnings, significant loan defaults and slowdowns in our loan collections. We expect retirement and benefit
services and wealth management asset-based revenue will be adversely affected by reduced market values in assets
under administration and assets under management, and we also expect increased unemployment and recessionary
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concerns will adversely affect mortgage originations and mortgage banking revenue in future periods. The ultimate
impact of the COVID-19 pandemic on our business remains uncertain but may have a material and adverse effect on our
business, financial condition, results of operations and growth prospects.
The outbreak of COVID-19 has resulted in a decline in the businesses of certain of our clients, a decrease in
consumer confidence, an increase in unemployment, and a disruption in the services provided by our vendors. Continued
disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures, and losses on
our loans and declines in assets under management and wealth management revenues, negatively impact regional
economic conditions, result in declines in local loan demand, liquidity of loan guarantors, the value of loan collateral
(particularly in real estate), loan originations, and deposit availability and negatively impact the implementation of our
growth strategy. Although the U.S. government introduced a number of programs designed to soften the impact of
COVID-19 on small businesses, our borrowers may still not be able to satisfy their financial obligations to us.
In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and
consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in, or have
exposure to, the retail, restaurant, and hospitality industries and are located in areas that are, or were, quarantined or
under stay-at-home orders. COVID-19 may also have an adverse effect on our commercial real estate portfolio,
particularly with respect to real estate with exposure to these industries, and our consumer loan portfolios. As COVID-19
cases have begun to surge in recent months, any new or prolonged quarantine or stay-at-home orders would have a
negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet
their financial obligations to us and could result in loan defaults.
The ultimate extent of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily
including the speed and extent of any recovery from the related economic recession. Among other things, this will
depend on the duration of the COVID-19 pandemic, particularly in our markets, the development, distribution and
supply of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of
federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-
home orders in our markets in response to the recent surge in the number of COVID-19 cases.
The initial distribution of vaccines has been slow, and there may continue to be challenges with producing and
distributing sufficient quantities of the vaccines. If the general public is unwilling or unable to access effective vaccines
and therapies, this may also prolong the COVID-19 pandemic. In addition, new variants of COVID-19 may increase the
spread or severity of COVID-19 and previously developed vaccines and therapies may not be as effective against new
COVID-19 variants.
As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of
other factors, including but not limited to:
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a sustained decline in our stock price or the occurrence of what management would deem to be a triggering
event that could, under certain circumstances, cause management to perform impairment testing on our
goodwill and other intangible assets that could result in an impairment charge being recorded for that
period, and adversely impact our results of operations and the ability of the Bank to pay dividends to us;
the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment
deferrals due to the COVID-19 crisis:
increased demand on our liquidity as we meet borrowers’ needs, experience significant credit deterioration,
and cover expenses related to our business continuity plan;
the potential for reduced liquidity and its negative affect on our capital and leverage ratios;
the modification of our business practices, including with respect to branch operations, employee travel,
employee work locations, participation in meetings, events and conferences, and related changes for our
vendors and other business partners;
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the disruption of our acquisition strategy due to the uncertainties created by the pandemic and challenges to
our own business, which could limit or delay our future growth plans;
increases in federal and state taxes as a result of the effects of the pandemic and stimulus programs on
governmental budgets;
an increase in FDIC premiums if the agency experiences additional resolution costs relating to bank
failures;
increased cyber and payment fraud risk due to increased online and remote activity; and
other operational failures due to changes in our normal business practices because of the pandemic and
governmental actions to contain it.
Overall, we believe that the economic impact from COVID-19 will be severe and could have a material and
adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and
materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to
experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19
pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may
occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19
as the global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to
change.
The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented
actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our
business and results of operations.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act,
or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals,
supplemental unemployment insurance benefits and a $349.0 billion loan program administered through the SBA
referred to as the PPP. In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act,
2021, a $900.0 billion COVID-19 relief package that includes an additional $284.0 billion in PPP funding. In addition to
implementing the programs contemplated by these acts, the federal bank regulatory agencies have issued a steady stream
of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks
navigate the pandemic and mitigate its impact. These include, without limitation:
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requiring banks to focus on business continuity and pandemic planning;
adding pandemic scenarios to stress testing;
encouraging bank use of capital conservation buffers and reserves in lending programs;
permitting certain regulatory reporting extensions;
reducing margin requirements on swaps;
permitting certain otherwise prohibited investments in investment funds;
issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan
workouts; and
providing credit under the CRA for certain pandemic-related loans, investments, and public service.
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The COVID-19 pandemic has significantly affected the financial markets and the Federal Reserve has taken a
number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and
announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the
COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect
that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income, our net
interest margin and our profitability. The Federal Reserve also launched the Main Street Lending Program, which offers
deferred interest on four-year loans to small and mid-sized businesses. The Main Street Lending Program terminated on
January 8, 2021. The impact of the COVID-19 pandemic on our business activities as a result of new government and
regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but
may ultimately have a material adverse effect on our business and results of operations.
COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially
create widespread business continuity issues for us.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in
banking and other financial transactions in the geographic areas in which we operate and could create widespread
business continuity issues for us. We also could be adversely affected if key personnel or a significant number of
employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19
pandemic in our market areas, including because of illness, quarantines, government actions or other restrictions in
connection with the COVID-19 pandemic. Although we have a business continuity plan and other safeguards in place,
there is no assurance that such plan and safeguards will be effective. Further, we rely upon third-party vendors to
conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to
provide us with these services, it could negatively impact our ability to serve our clients.
As a participating lender in the PPP, we are subject to additional risks of litigation from our clients or other parties
regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.
The CARES Act included a $349.0 billion loan program administered through the SBA referred to as the PPP.
Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and
other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria.
The Bank participated as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short
timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws,
rules, and guidance regarding the operation of the PPP, which exposed us to risks relating to noncompliance with the
PPP. On April 24, 2020, an additional $310.0 billion in funding for PPP loans was authorized and such funds became
available for PPP loans beginning on April 27, 2020. In addition, on December 27, 2020, President Trump signed the
Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that includes an additional $284.0
billion in PPP funding.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process
and procedures that such banks used in processing applications for the PPP and claims related to agent fees. If any such
litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability
or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability,
litigation costs, or reputational damage caused by the PPP related litigation could have a material adverse impact on our
business, financial condition, and results of operations. Also, it has been reported that many borrowers fraudulently
obtained PPP loans through the program. We may be subject to regulatory and litigation risk if any of our PPP borrowers
used fraudulent means to obtain a PPP loan.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the
manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a
borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance
regarding the operation of the PPP, or if the borrowers fraudulently obtained a PPP loan. In the event of a loss resulting
from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP
loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of
the guaranty, or if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
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Market and Interest Rate Risks
Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings.
Fluctuations in interest rates may negatively affect our business and may weaken demand for some of our
products. Our earnings and cash flows are dependent, in part, on our net interest income, which is the difference between
the interest income that we earn on interest earning assets, such as loans and investment securities, and the interest
expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates might also
impact the values of equity and debt securities under management and administration by our retirement and benefit
services and wealth management businesses which may have a negative impact on our fee income. Additionally,
changes in interest rates also affect our ability to fund our operations with client deposits and the fair value of securities
in our investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal
and monetary policies, could have a material adverse effect on our business, financial condition, results of operations
and growth prospects.
Our interest earning assets and interest - bearing liabilities may react in different degrees to changes in market
interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may
cause differing spreads on interest earning assets and interest - bearing liabilities. We cannot control or accurately predict
changes in market rates of interest. If short - term interest rates remain at the current low levels for a prolonged period,
and if longer term interest rates fall, we could experience net interest margin compression as our interest - earning assets
would continue to reprice downward while our interest - bearing liability rates could fail to decline in tandem. This could
have a material adverse effect on our net interest income and our results of operations.
Interest rates are volatile and highly sensitive to many factors that are beyond our control, such as economic
conditions and policies of various governmental and regulatory agencies, and, in particular U.S. monetary policy. For
example, we face uncertainty regarding the interest rate risk, and resulting effect on our portfolio, that could result when
the Federal Reserve reduces the amount of securities it holds on its balance sheet. In recent years, it has been the policy
of the Federal Reserve to maintain interest rates at historically low levels through a targeted federal funds rate and the
purchase of U.S. Treasury and mortgage - backed securities. As a result, yields on securities we have purchased, and
market rates on the loans we have originated, have generally been at levels lower than were available prior to the
financial crisis. Consequently, the average yield on our interest - earning assets has generally decreased during the current
low interest rate environment. If a low interest rate environment persists, we may be unable to increase our net interest
income.
In addition, we could be prevented from increasing the interest rates we charge on loans or from reducing the
interest rates we offer on deposits and money market savings accounts due to “price” competition from other banks and
financial institutions with which we compete. As of December 31, 2020, we had $754.7 million of non-maturity,
noninterest bearing deposit accounts and $1.6 billion of non - maturity interest-bearing deposit accounts. Interest rates for
interest-bearing accounts have been at historically low levels due to market conditions, although in recent periods, banks
and financial institutions started to increase rates in response to a series of increases made by the Federal Reserve in the
targeted fed funds rate from 2015 through 2018 and market competition. We do not know what market rates will
eventually be, especially given the recent cuts made by the Federal Reserve to its target interest rate in 2020, and the
emergency interest rate cuts (and possibility of additional cuts) made by the Federal Reserve in response to the
coronavirus. We have started to offer higher interest rates to maintain current clients or attract new clients, and as a
result, our interest expense has increased in recent periods and may increase further, perhaps materially. If we fail to
offer interest in a sufficient amount to keep these non - maturity deposits, our core deposits may be reduced, which would
require us to obtain funding in other ways or risk slowing our future asset growth.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or
economic and market conditions deteriorate.
As of December 31, 2020, the fair value of our securities portfolio was approximately $592.3 million, or 19.7%
of our total assets. Factors beyond our control can significantly influence and cause potential adverse changes to the fair
56
value of securities in our portfolio. For example, fixed - rate securities acquired by us are generally subject to decreases in
market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the
securities or our own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect
to the underlying securities and instability in the credit markets. Any of the foregoing factors, as well as changing
economic and market conditions and other factors, could cause other - than - temporary impairments and realized or
unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse
effect on our business, financial condition, results of operations and growth prospects. The process for determining
whether impairment is other - than - temporary usually requires complex, subjective judgments, which could subsequently
prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any
collateral underlying the security and whether and the extent to which the principal and interest on the security will
ultimately be paid in accordance with its payment terms.
Monetary policies and regulations of the Federal Reserve could adversely affect our operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the
policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit
conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market
purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve
requirements against bank deposits. These instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged
on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies
upon our business, financial condition, results of operations and growth prospects cannot be predicted.
Our stock is relatively thinly traded.
Although our common stock is traded on the Nasdaq Stock Market, the average daily trading volume of our
common stock is relatively low compared to many public companies. The desired market characteristics of depth,
liquidity, and orderliness require the substantial presence of willing buyers and sellers in the marketplace at any given
time. In our case, this presence depends on the individual decisions of a relatively small number of investors and general
economic and market conditions over which we have no control. Due to the relatively low trading volume of our
common stock, significant sales of our common stock, or the expectation of these sales, could cause the stock price to
fall more than would be justified by the inherent worth of the Company. Conversely, attempts to purchase a significant
amount of our stock could cause the market price to rise above the reasonable inherent worth of the Company.
The price of our common stock could be volatile, and other factors could cause our stock price to decline.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in
response to various factors, some of which are beyond our control. These factors include, among other things:
•
•
•
•
•
actual or anticipated variations in our quarterly results of operations;
recommendations or research reports about us or the financial services industry in general published by
securities analysts;
the failure of securities analysts to cover us;
operating and stock price performance of other companies that investors or analysts deem comparable to
us;
news reports relating to trends, concerns, and other issues in the financial services industry;
57
•
•
•
•
•
•
•
•
•
perceptions in the marketplace regarding us, our competitors, or other financial institutions;
future sales of our common stock;
departures of members of our executive management team or other key personnel;
new technologies used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital
commitments by or involving us or our competitors;
the effects of, and changes in, trade, monetary, and fiscal policies, including the interest rate policies of the
Federal Reserve;
changes or proposed changes in laws or regulations, or differing interpretations of existing laws and
regulations, affecting our business, or enforcement of these laws and regulations;
litigation and governmental investigations; and
geopolitical conditions such as pandemics, acts or threats of terrorism, or military conflicts.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if
unsuccessful, could be costly to defend and a distraction to management.
In addition, the stock market and, in particular, the market for financial institution stocks have experienced
substantial fluctuations in recent years, which in many cases, have been unrelated to the operating performance and
prospects of particular companies. If the market of stocks in our industry, or the stock market in general, experiences a
loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business,
financial condition results of operations or growth prospects. In addition, significant fluctuations in the trading volume in
our common stock may cause significant price variations to occur. Increased market volatility may materially and
adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volumes,
prices, and times desired.
An investment in our common stock is not an insured deposit and is subject to risk of loss.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the
FDIC, the deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently
risky for the reasons described in this report, and is subject to the same market forces that affect the price of common
stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
ITEM 1.B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 401 Demers Avenue, Grand Forks, North Dakota 58201. In addition
to our corporate headquarters, which includes a full service banking office, we operate one other full - service banking
office located in Grand Forks, North Dakota, three full - service banking offices located in Fargo and West Fargo, North
Dakota, one full - service banking office located in Northwood, North Dakota, six full - service banking offices located in
the Twin Cities MSA, one full - service banking office located in the Phoenix MSA and one full - service banking office
located in Mesa, Arizona. We offer retirement and benefits, wealth management and mortgage products and services at
all of our full - service banking offices. In addition, we operate one retirement and benefits services office in Minnesota,
58
one in Colorado and one in Michigan. We monitor client behavior and interactions with our banking and other offices,
and in recent periods, we have shifted financial resources away from physical locations to technology solutions, as client
demands continue to change. In 2020, we closed one bank branch in Grand Forks, North Dakota and a loan and deposit
production office in the Twin Cities MSA due to our transition to a more remote workforce. We also closed one
retirement and benefit services office in Minnesota and one in Michigan. We have remodeled several locations to utilize
our spaces in a more efficient manner. As of December 31, 2020, seven of our office properties were owned and 10 of
our offices properties were leased.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any
material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The
Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its
subsidiaries.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
59
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the Nasdaq Stock Market, or Nasdaq, under the symbol “ALRS”.
Shareholders
As of February 28, 2021, the Company had 246 holders of record of the Company’s common stock and an
estimated 1,103 additional beneficial holders of the Company’s common stock whose stock was held in street name by
brokerages or fiduciaries.
Performance Graph
The following graph compares the percentage change in the cumulative stockholder return of the Company’s
common stock during the period from the date of our initial public offering and listing on Nasdaq through December 31,
2020, with the cumulative return of the Nasdaq Composite Index and the total return of the SNL-U.S. Banks, Midwest
Region Index. This comparison assumes $100.00 was invested on September 13, 2019 and the comparison groups and
assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.
Total Return Performance
e
u
l
a
V
x
e
d
n
I
$160.00
$150.00
$140.00
$130.00
$120.00
$110.00
$100.00
$90.00
09/13/2019
12/31/2019
Period Ending
12/31/2020
Alerus Financial Corporation
Nasdaq Composite Index
SNL-U.S. Banks, Midwest Region Index
Alerus Financial Corporation
Nasdaq Composite Index
SNL-U.S. Banks, Midwest Region Index
60
September 13, December 31, December 31,
2019
105.21 $
109.73
107.90
2019
100.00 $
100.00
100.00
2020
129.70
157.62
92.65
$
The banks in the custom peer group, SNL-U.S. Banks, Midwest Region Index, include all major exchange
(NYSE, NYSE American, NASDAQ) banks in SNL’s coverage universe headquartered in Iowa, Indiana, Illinois,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.
Dividend Policy
It has been our policy to pay quarterly dividends to holders of our common stock, and although our board of
directors is closely monitoring the impacts of the COVID-19 pandemic, we currently intend to maintain or increase our
current dividend levels in future quarters. Our dividend policy and practice may change in the future, however, and our
board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our
stockholders. Any future determination to pay dividends to holders of our common stock will depend on our results of
operations, financial condition, economic conditions, capital requirements, banking regulations, contractual restrictions
and any other factors that our board of directors may deem relevant.
Dividend Restrictions
As a Delaware corporation, we are subject to certain restrictions on dividends under the DGCL. In general, a
Delaware corporation may only pay dividends either out of surplus (as defined and computed in accordance with the
provisions of the DGCL) or out of the current or the immediately preceding year’s net profits. Surplus is defined as the
excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The
value of a corporation’s assets can be measured in a number of ways and may not necessarily equal their book value.
Under the terms of our junior subordinated debentures issued to our two statutory trusts, we are not permitted to
pay dividends on our capital stock if an event of default occurs under the terms of the debentures, we are otherwise in
default with respect to our payment obligations or we have elected to defer interest payments on the debentures.
In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws,
regulations and policies. See “SUPERVISION AND REGULATION—Supervision and Regulation of the Company—
Dividend Payments.” Because we are a holding company and do not engage directly in business activities of a material
nature, our ability to pay dividends to our stockholders depends, in large part, upon our receipt of dividends from the
Bank, which is also subject to numerous limitations on the payment of dividends under federal banking laws, regulations
and policies. See “SUPERVISION AND REGULATION—Supervision and Regulation of the Bank—Dividend
Payments.”
Use of Proceeds
On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On
September 25, 2019, the Company sold 429,000 additional shares of common stock pursuant to the exercise in full by
the underwriters of their option to purchase additional shares to cover over-allotments. All of the shares were sold
pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-233339), which was declared
effective by the SEC on September 12, 2019. The Company’s common stock is currently traded on the Nasdaq Capital
Market under the symbol “ALRS”.
There has been no material change in the planned use of proceeds from the initial public offering as described
in the Company’s prospectus filed with the SEC on September 13, 2019, pursuant to Rule 424(b)(4) under the Securities
Act of 1933. From the effective date of the registration statement through December 31, 2020, the Company has
maintained the net proceeds of the initial public offering on deposit with the Bank. The Bank has used the deposits of the
Company to pay down short-term borrowings.
61
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with the “Selected Financial Data” and our audited consolidated financial statements and related notes
included elsewhere in this report. In addition to historical information, this discussion and analysis contains
forward - looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other
factors, including but not limited to those set forth under “Cautionary Note Regarding Forward - Looking Statements,”
“Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the
forward - looking statements. We assume no obligation to update any of these forward - looking statements.
Overview
We are a diversified financial services company headquartered in Grand Forks, North Dakota. Through our
subsidiary, Alerus Financial, National Association, we provide innovative and comprehensive financial solutions to
businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth
management and mortgage. These solutions are delivered through a relationship - oriented primary point of contact along
with responsive and client - friendly technology.
Our primary banking market areas are the states of North Dakota, Minnesota, specifically, the Twin Cities
MSA, and Arizona, specifically, the Phoenix MSA. In addition to our offices located in our banking markets, our
retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota
and Colorado.
Our business model produces strong financial performance and a diversified revenue stream, which has helped
us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We believe
our client - first and advice - based philosophy, diversified business model and history of high performance and growth
distinguishes us from other financial service providers. We generate a majority of our overall revenue from noninterest
income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business
lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional
banking products and services.
As of December 31, 2020, we had $3.0 billion of total assets, $2.0 billion of total loans, $2.6 billion of total
deposits, $330.2 million of stockholders’ equity, $34.2 billion of AUA/AUM in our retirement and benefit services
segment, and $3.3 billion of AUA/AUM in our wealth management segment. For the year ended December 31, 2020, we
had $1.8 billion of mortgage originations.
Recent Developments
Impact of COVID-19
The progression of the COVID-19 pandemic in the United States has not had an adverse impact on our financial
condition and results of operations as of and for the year ending December 31, 2020, but it is expected to have a complex
and significant impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a
high degree of uncertainty.
62
Effects on Our Market Areas. Our primary banking market areas are the states of North Dakota, Minnesota, and
Arizona. Our retirement and benefit services segment serves clients in all 50 states. We offer retirement and benefit
services at all of our banking offices located in our three primary market areas. In addition, we operate two retirement
and benefits services offices in Minnesota, one in Michigan and one in Colorado.
In Minnesota, at the start of the pandemic, the Governor ordered individuals to stay at home and non-essential
businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 2,
2020, and was in effect until May 18, 2020. The state has now implemented a four phase stay safe plan to reopen
businesses in the area. Similarly, in Arizona, the Governor ordered individuals to stay at home and non-essential
businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 31,
2020, and expired on May 15, 2020, and the Governor announced new guidance for protecting businesses and their
customers as they reopen. The state has implemented a four phase reopening plan that requires benchmarks be met for a
certain period of time before transitioning from one phase to another. In North Dakota, the Governor did not issue an
order requiring individuals to stay at home, but placed certain restrictions on bars, restaurants and gyms. These orders
have been lifted and North Dakota is now working toward a “Smart Restart” program to encourage businesses to open
safely and take precautions to slow the spread of COVID-19. In response to these orders, the Bank has been serving its
customers through its drive-up windows at various branch locations and through online and mobile banking. The Bank is
also permitting certain visits to its branches on a limited basis and by appointment only. In Minnesota and Arizona, the
Bank is offering appointments to clients to meet with safeguards in place that materially comply with the CDC guidance.
In North Dakota, offices have re-opened for business with safeguards in place that materially comply with CDC
guidance.
Each state experienced a dramatic and sudden increase in unemployment levels as a result of the curtailment of
business activities. According to data released by the U.S. Department of Labor, initial claims for unemployment
insurance initially spiked in each of the states in our banking markets. We expect claims for unemployment insurance to
remain at elevated levels for the foreseeable future until restrictions are lifted and the pandemic’s effects have subsided.
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have
enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
• The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020,
and by another 1.00% on March 16, 2020, reaching a current range of 0.00-0.25%.
• On March 27. 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security
Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments
to individuals, supplemental unemployment insurance benefits and a $349 billion loan program
administered through the U.S. Small Business Administration, or SBA, referred to as the Paycheck
Protection Program, or PPP. On April 24, 2020, an additional $310 billion in funding for PPP loans was
authorized, with such funds available for PPP loans beginning on April 27, 2020. In addition, the CARES
Act, as extended by the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (a part
of the Consolidated Appropriations Act, 2021), provides financial institutions the option to temporarily
suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the
effects of COVID-19. See “Note 6 Loans and Allowance for Loan Losses” for additional discussion
regarding TDRs.
• On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications
and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to
work prudently with borrowers who are or may be unable to meet their contractual payment obligations
because of the effects of COVID-19, and stated that institutions generally do not need to categorize
COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to
automatically categorize all COVID-19 related loan modifications as TDRs. See “Note 6 Loans and
Allowance for Loan Losses” for additional discussion regarding TDRs.
63
• On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and
midsized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve
announced the Main Street Business Lending Program, which established two new loan facilities intended
to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility, or MSNLF,
and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans
originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans
originated before April 8, 2020. The combined size of the program is $600 billion.
• On August 3, 2020, the FFIEC issued a joint statement on Additional Loan Accommodations Related to
COVID-19, which among other things, encouraged financial institutions to consider prudent additional
loan accommodation options when borrowers are unable to meet their obligations due to continuing
financial challenges. Accommodation options should be based on prudent risk management and consumer
protection principles.
• On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0
billion COVID-19 relief package that includes an additional $284.0 billion in PPP funding.
•
In addition to the policy responses described above, the federal bank regulatory agencies, along with their
state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken
a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These
include without limitation: requiring banks to focus on business continuity and pandemic planning; adding
pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending
programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps;
permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage
banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit
under the Community Reinvestment Act, or CRA, for certain pandemic-related loans, investments and
public service. Moreover, because of the need for social distancing measures the agencies have revamped
the manner in which they conduct periodic examinations of their regulated institutions, including making
greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions
to utilize their discount window for loans and intraday credit extended by their Reserve Banks to help
households and businesses impacted by the pandemic and announced numerous funding facilities. The
FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the
PPPL Facility and Money Market Mutual Fund Liquidity Facility.
Effect on our Business. We currently expect that the COVID-19 pandemic and the specific developments
referred to above will continue to have a significant impact on our business. In particular, we anticipate that a significant
portion of the Bank’s borrowers in the retail, restaurant, and hospitality industries will continue to endure significant
economic distress, which could cause them to draw on their existing lines of credit and could adversely affect their
ability and willingness to repay existing indebtedness, and is expected to adversely impact of the value of collateral.
These developments, together with economic conditions generally, are also expected to impact our commercial real
estate portfolio, particularly with respect to real estate with exposure to the retail, office and hospitality industries, our
consumer loan business and loan portfolio, and the value of certain collateral securing our loans. In addition, we expect
to see decreases in our total AUA/AUM and a decrease in mortgage loan originations. As a result, we anticipate that our
financial condition, capital levels and results of operations will be significantly and adversely affected, as described in
this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Response. We took numerous steps in response to the COVID-19 pandemic, including the following:
• First and foremost, we have prioritized the safety, health and well-being of our employees, clients and
communities. We have implemented a work from home policy and certain of our offices remain closed. We
continue to effectively serve our clients in all markets; virtually, digitally, via drive-thru and in-person as
conditions allow. Our work place strategy includes various phases of expanding service to clients,
reopening offices, and determining long-term work arrangements for employees. This approach allows us
64
to incrementally expand in-person services to clients and provides flexibility between markets based on
local conditions, guidelines, and restrictions.
• We offered payment deferrals and interest only payment options for consumer, small business, and
commercial customers for initial terms of up to 90 days. We offered payment extensions for mortgage
customers for initial terms of up to 90 days. As of December 31, 2020, we had entered into principal and
interest deferrals on 577 loans, representing $153.6 million in principal balances. Of those loans, 18 loans
with a total outstanding principal balance of $8.4 million have been granted second deferrals, 21 loans with
a total outstanding principal balance of $3.7 million remain on the first deferral and the remaining loans
have been returned to normal payment status.
• The Business Continuity Planning COVID-19 Response team and Alerus leadership team meet regularly to
manage the Company’s response to the pandemic and the effect on our business. In addition, a cross
functional task force team meets regularly to address specific issues such as employee and client
communications, facilities, reopening offices, and long-term work arrangements. The Risk Committee of
the Board meets regularly with management to receive updates on the Company’s response and discuss the
effect on our business.
• We participated as a lender in the SBA’s PPP. We have assisted 1,632 borrowers receive approval for
funding of $363.6 million in PPP loans. As of December 31, 2020, we had submitted, to the SBA, 711
forgiveness applications totaling $179.9 million and have received approval and forgiveness on 432
applications totaling $84.1 million.
Net Interest Income
Net interest income represents interest income less interest expense. We generate interest income on
interest - earning assets, primarily loans and available - for - sale securities. We incur interest expense on interest - bearing
liabilities, primarily interest - bearing deposits and borrowings. To evaluate net interest income, we measure and monitor:
(i) yields on loans, available - for - sale securities and other interest - earning assets; (ii) the costs of deposits and other
funding sources; (iii) the rates incurred on borrowings and other interest - bearing liabilities; and (iv) the regulatory risk
weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along
with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances along
with the volume and type of interest - bearing liabilities. Net interest income is primarily impacted by changes in market
interest rates, the slope of the yield curve, and interest we earn on interest - earning assets or pay on interest - bearing
liabilities.
Noninterest Income
Noninterest income primarily consists of the following:
• Our retirement and benefit services business, which includes retirement plan administration, retirement
plan investment advisory, HSA, ESOP, payroll and other benefit services, is our Company’s largest source
of noninterest income. Over half of our retirement and benefit services fees are transaction or participant
based fees and are impacted by the number of plans and participants. The remainder of noninterest income
is based on the market value of the related AUA and AUM and impacted by the level of contributions,
withdrawals, new business, lost business and fluctuation in market values.
• Wealth management includes personal trust, investment and brokerage services. Our Company earns trust,
investment, and IRA fees from managing assets, including corporate trusts, personal trusts, and separately
managed accounts. Trust and investment management fees are primarily based on a tiered scale relative to
the market value of the AUM. Trust and investment management fees are primarily impacted by rates
charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client
advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.
65
• Mortgage noninterest income consists of gains on originating and selling mortgages and origination fees.
Mortgage gains are primarily impacted by the level of originations, amount of loans sold, the type of loans
sold and market conditions.
• Service charges on deposit accounts are comprised of income generated through deposit account related
service charges such as: electronic transfer fees, treasury management fees, bill pay fees, and other banking
fees. Banking fees are primarily impacted by the level of business activities and cash movement activities
of our clients.
• Other noninterest income consists of debit card interchange income, income earned on the growth of the
cash surrender value of life insurance policies we hold on certain key employees, loan servicing income net
of the related amortization, and any other income which does not fit within one of the specific noninterest
income lines described above. Other noninterest income is generally impacted by business activities and
level of transactions.
Noninterest Expense
Noninterest expense is comprised primarily of the following:
• Compensation and employee taxes and benefits—include all forms of personnel related expenses including
salary, commissions, incentive compensation, payroll related taxes, stock - based compensation, benefit
plans, health insurance, 401(k) plan match costs, ESOP and other benefit related expenses. Compensation
and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits
costs.
• Occupancy and equipment—costs related to owning and leasing our office space, depreciation charges for
the furniture, fixtures and equipment, amortization of leasehold improvements, utilities and other
occupancy - related expenses. Occupancy and equipment costs are primarily impacted by the number and
size of the locations we occupy.
• Business services, software and technology—costs related to contracts with core system and third - party
data processing providers, software and information technology services to support office activities and
internal networks. We believe our technology spending enhances the efficiency of our employees and
enables us to provide outstanding service to our clients. Technology and information system costs are
primarily impacted by the number of locations we occupy, the number of employees, clients and volume of
transactions we have and the level of service we require from our third - party technology vendors.
•
Intangible amortization expense is the result of acquisitions of fee income and banking companies.
Identified intangible assets with definite lives consist of client relationship intangibles and are amortized on
a straight - line basis over the period representing the estimated remaining lives of the assets. The amount of
expense is impacted by the timing of acquisitions and the estimated remaining lives of the assets.
• Professional fees and assessments—costs related to legal, accounting, tax, consulting, personnel recruiting,
directors fees, insurance and other outsourcing arrangements. Professional services costs are primarily
impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in
this line and represents the assessments that we pay to the FDIC for deposit insurance.
• Other operational expenses—includes costs related to marketing, donations, promotions, and expenses
associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships,
costs to maintain or prepare other real estate owned, or OREO, for sale, and other general corporate
expenses that do not fit within one of the specific noninterest expense lines described above. Other
operational expenses are generally impacted by our business activities and needs.
66
Operating Segments
We measure the overall profitability of business operations based on income before income tax. We allocate
costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the
products and services within banking, retirement and benefit services, wealth management, and mortgage. We measure
the profitability of each segment based on the direct allocations of expense as we believe it better approximates the
contribution generated by our reportable operating segments. All indirect overhead allocations and income tax expense is
allocated to corporate administration. A description of each segment is provided in Note 22 (Segment Reporting) of the
Company’s audited consolidated financial statements included elsewhere in this report.
Critical Accounting Policies
As a result of the complex and dynamic nature of our business, management must exercise judgment in
selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision
process not only ensures compliance with current GAAP, but also reflects management’s discretion with regard to
choosing the most suitable methodology for reporting our financial performance. It is management’s opinion that the
accounting estimates covering certain aspects of the business have more significance than others due to the relative
importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates
affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting
period. Actual results could differ from these estimates. The most critical of the accounting policies are discussed below.
Investment securities—Investment securities can be classified as trading, available - for - sale, and equity. The
appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s
intentions with respect to either holding or selling the securities. The classification of investment securities is significant
since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on
available - for - sale securities are recorded in accumulated other comprehensive income or loss, as a separate component
of stockholders’ equity, and do not affect earnings until realized. The fair values of investment securities are generally
determined by reference to quoted market prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of
interest rates and volatility. Investment securities with significant declines in fair value are evaluated to determine
whether they should be considered other - than - temporarily impaired. An unrealized loss is generally deemed to be
other - than - temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less
than the amortized cost basis of the debt security. The credit loss component of an other - than - temporary impairment
write - down is recorded in current earnings, while the remaining portion of the impairment loss is recognized in other
comprehensive income (loss), provided we do not intend to sell the underlying debt security, and it is not likely that we
will be required to sell the debt security prior to recovery of the full value of its amortized cost basis.
Allowance for loan losses—The allowance for loan losses reflects management’s best estimate of probable
loan losses in our loan portfolio. Determination of the allowance for loan losses is inherently subjective. It requires
significant estimates, including the amounts and timing of expected future cash flows on impaired loans, appraisal values
of underlying collateral for collateralized loans, and the amount of estimated losses on pools of homogeneous loans
which is based on historical loss experience, expected duration and consideration of current economic trends, all of
which may be susceptible to significant change.
Intangible assets—As a result of acquisitions, we carry goodwill and identifiable intangible assets. Goodwill
represents the cost of acquired companies in excess of the fair value of net assets at the acquisition date. Goodwill is
evaluated at least annually or when business conditions suggest impairment may have occurred. Should impairment
occur, goodwill will be reduced to its revised carrying value through a charge to earnings. Core deposits and other
identifiable intangible assets are amortized to expense over their estimated useful lives. The determination of whether or
not impairment exists is based upon discounted cash flow modeling techniques that require management to make
estimates regarding the amount and timing of expected future cash flows. It also requires them to select a discount rate
that reflects the current return requirements of the market in relation to present risk - free interest rates, required equity
market premiums, and company - specific performance and risk metrics, all of which are susceptible to change based on
changes in economic and market conditions and other factors. Future events or changes in the estimates used to
67
determine the carrying value of goodwill and identifiable intangible assets could have a material impact on our results of
operations.
Income taxes—Income tax expense or benefit is the total of the current year income tax due or refundable and
the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for
the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position
is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. Interest and penalties related to income tax matters are recognized in income
tax expense.
On December 22, 2017, the U.S government enacted Public Law 115-97, commonly known as, the Tax Cuts
and Jobs Act, a comprehensive tax legislation, which reduced the federal income tax rate for C corporations from 35% to
21%, effective January 1, 2018. As a result of the reduction in the U.S corporate income tax rate from 35% to 21%, we
re - measured our deferred tax assets and recognized $4.8 million of tax expense in the Consolidated Statement of Income
for the year ended December 31, 2017. See Note 21 (Income Taxes) of the Company’s audited consolidated financial
statements included elsewhere in this report.
Fair value measurements—Fair value is the price that would be received to sell an asset, or paid to transfer a
liability, in the principal or most advantageous market for an asset or liability in an orderly transaction between market
participants at the measurement date. The degree of management judgment involved in determining the fair value of a
financial instrument is dependent upon the availability of quoted market prices, or observable market inputs. For
financial instruments that are traded actively and have quoted market prices or observable market inputs, there is
minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs
are not fully available, significant management judgement may be necessary to estimate fair value. In developing our fair
value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial assets that are recorded at fair value on a recurring basis include investment securities and derivative
financial instruments. As of December 31, 2020 and 2019, $605.7 million or 20.1% and $314.8 million or 13.4%,
respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these
financial assets consisted of available-for-sale investment securities. The fair value of financial assets on a recurring
basis are classified in either Levels 1 or 2 of the fair value hierarchy. Financial liabilities that are recorded at fair value
on a recurring basis are comprised of derivative financial instruments. As of December 31, 2020 and 2019, $2.9 million
and $109 thousand, respectively represented less than 1% of our total liabilities in those years and were classified as
Level 2 of the fair value hierarchy. We have no fair value assets or liabilities classified in Level 3 of the fair value
hierarchy.
A further discussion regarding the fair value of assets and liabilities, and the classification of Level 1, 2, and 3
hierarchies, is disclosed in Note 27 (Fair Value of Assets and Liabilities) of the Company’s audited consolidated
financial statements included elsewhere in this report.
A summary of the accounting policies used by management is disclosed in Note 1 (Significant Accounting
Policies) of the Company’s audited consolidated financial statements included elsewhere in this report.
Selected Financial Data
The following consolidated selected financial data is derived from the Company’s audited consolidated
financial statements as of and for the five years ended December 31, 2020.
The consolidated selected financial data presented below contains financial measures that are not presented in
accordance with accounting principles generally accepted in the United States and have not been audited. See “Non-
GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures” below.
68
(dollars and shares in thousands, except per share data)
Selected Income Statement Data
2020
As of and for the year ended December 31,
2018
2017
2019
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income (1)
Less: preferred stock dividends
Net income attributable to common
stockholders
Per Common Share Data
$
83,846 $
10,900
149,371
163,799
58,518
13,843
44,675
—
74,551 $
7,312
114,194
142,537
38,896
9,356
29,540
—
75,224 $
8,610
102,749
136,325
33,038
7,172
25,866
—
67,670 $
3,280
103,045
134,920
32,515
17,514
15,001
—
2016
62,940
3,060
105,089
143,792
21,177
7,141
14,036
25
$
44,675 $
29,540 $
25,866 $
15,001 $
14,011
Earnings - basic
Earnings - diluted
Dividends declared
Tangible book value per common share (1)(2)
Average shares outstanding - basic
Average shares outstanding - diluted
$
$
$
$
Selected Performance Ratios
Return on average total assets (1)
Return on average common equity (1)
Return on average tangible common equity (1)(2)
Noninterest income as a % of revenue
Net interest margin (taxable-equivalent basis) (2)
Efficiency ratio (2)
Dividend payout ratio
Average equity to average assets
Selected Balance Sheet Data - Period Ending
2.57 $
2.52 $
0.60 $
16.00 $
17,106
17,438
1.61 %
14.40 %
17.74 %
64.05 %
3.22 %
68.40 %
23.81 %
11.18 %
1.96 $
1.91 $
0.57 $
14.08 $
14,736
15,093
1.88 $
1.84 $
0.53 $
10.68 $
13,763
14,063
1.10 $
1.07 $
0.48 $
9.14 $
13,653
14,007
1.04
1.00
0.44
7.99
13,495
14,000
1.34 %
12.78 %
17.46 %
60.50 %
3.65 %
73.22 %
29.84 %
10.45 %
1.21 %
13.81 %
21.02 %
57.73 %
3.84 %
73.80 %
28.82 %
8.80 %
0.75 %
8.49 %
18.04 %
60.36 %
3.74 %
75.36 %
44.82 %
8.83 %
0.72 %
8.46 %
15.81 %
62.54 %
3.62 %
81.12 %
43.97 %
8.67 %
Loans (3)
Allowance for loan losses
Investment securities
Assets
Deposits (4)
Long-term debt
Total stockholders’ equity (5)
Asset Quality Ratios
$ 1,979,375 $ 1,721,279 $ 1,701,850 $ 1,574,474 $ 1,366,952
(15,615)
278,911
2,050,045
1,785,209
58,813
168,251
(22,174)
254,878
2,179,070
1,775,096
58,824
196,954
(34,246)
592,342
3,013,771
2,571,993
58,735
330,163
(23,924)
313,158
2,356,878
1,971,316
58,769
285,728
(16,564)
274,411
2,136,081
1,834,962
58,819
179,594
Net charge-offs/(recoveries) to average loans
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming loans
0.03 %
0.26 %
0.17 %
1.73 %
674.13 %
0.33 %
0.45 %
0.33 %
1.39 %
305.66 %
0.18 %
0.41 %
0.33 %
1.30 %
318.45 %
0.16 %
0.37 %
0.30 %
1.05 %
282.04 %
0.16 %
0.56 %
0.47 %
1.14 %
205.03 %
Other Data
Retirement and benefit services assets under
administration/management
Wealth management assets under
administration/management
Mortgage originations
$ 34,199,954 $ 31,904,648 $ 27,812,149 $ 29,366,365 $ 26,111,299
3,338,594
1,778,977
3,103,056
946,441
2,626,815
779,708
2,701,966
867,253
2,298,992
1,065,132
(1)
(2)
(3)
(4)
(5)
Excluding a one-time $4.8 million expense related to the revaluation of our deferred tax assets in 2017, our net income, ROAA, ROAE, and
ROATCE would have been $19.8 million, 0.99%, 11.21%, and 18.04%, respectively. These adjusted metrics represent non-GAAP financial
measures. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”
Represents a Non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial
Measures.”
Excludes loans held for branch sale at 2018.
Excludes deposits held for sale at 2018.
Includes ESOP-owned shares.
69
Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, we routinely supplement our evaluation with an
analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible
common equity to tangible assets, tangible common equity per share, return on average tangible common equity, net
interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its
analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar
measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common
stockholders’ equity, less goodwill and other intangible assets; (ii) tangible common equity per 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; (v) net interest margin (tax-equivalent) as net interest income
plus a tax-equivalent adjustment, divided by average earning assets; and (vi) efficiency ratio 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 for the periods indicated.
Tangible common equity to tangible assets
Total common stockholders’ equity
Less: Goodwill
Less: Other intangible assets
Tangible common equity (a)
Total assets
Less: Goodwill
Less: Other intangible assets
Tangible assets (b)
Tangible common equity to tangible assets
(a)/(b)
Tangible book value per common share
Total common stockholders’ equity
Less: Goodwill
Less: Other intangible assets
Tangible common equity (c)
Total common shares issued and outstanding (d)
December 31,
December 31, December 31,
2020
2019
2018
December 31,
2017
December 31,
2016
$
330,163 $
30,201
25,919
274,043
3,013,771
30,201
25,919
2,957,651
285,728 $
27,329
18,391
240,008
2,356,878
27,329
18,391
2,311,158
196,954 $
27,329
22,473
147,152
2,179,070
27,329
22,473
2,129,268
179,594 $
27,329
27,111
125,154
2,136,081
27,329
27,111
2,081,641
168,251
27,329
32,729
108,193
2,050,045
27,329
32,729
1,989,987
9.27 %
10.38 %
6.91 %
6.01 %
5.44 %
$
330,163 $
30,201
25,919
274,043
17,125
285,728 $
27,329
18,391
240,008
17,050
14.08 $
196,954 $
27,329
22,473
147,152
13,775
10.68 $
179,594 $
27,329
27,111
125,154
13,699
9.14 $
168,251
27,329
32,729
108,193
13,534
7.99
Tangible book value per common share (c)/(d)
$
16.00 $
70
Return on average tangible common equity
Net income
Less: Preferred stock dividends
Add: Intangible amortization expense (net of tax)
Remeasurement due to tax reform
$
Net income, excluding intangible amortization (e)
Average total equity
Less: Average preferred stock
Less: Average goodwill
Less: Average other intangible assets (net of tax)
Average tangible common equity (f)
Return on average tangible common equity
(e)/(f)
Net interest margin (tax-equivalent)
Net interest income
Tax-equivalent adjustment
Tax-equivalent net interest income (g)
Average earning assets (h)
December 31, December 31, December 31, December 31, December 31,
2018
2017
2020
2019
2016
44,675 $
—
3,129
—
47,804
310,208
—
27,439
13,309
269,460
29,540 $
—
3,224
—
32,764
231,084
—
27,329
16,101
187,654
25,866 $
—
3,664
—
29,530
187,341
—
27,329
19,522
140,490
15,001 $
—
3,655
4,818
23,474
176,779
—
27,329
19,358
130,092
14,036
25
4,553
—
18,564
168,039
2,514
25,698
22,372
117,455
17.74 %
17.46 %
21.02 %
18.04 %
15.81 %
$
83,846 $
455
84,301
2,618,427
74,551 $
347
74,898
2,052,758
75,224 $
462
75,686
1,970,004
67,670 $
865
68,535
1,833,002
62,940
599
63,539
1,755,283
Net interest margin (tax-equivalent) (g)/(h)
3.22 %
3.65 %
3.84 %
3.74 %
3.62 %
Efficiency ratio
Noninterest expense
Less: Intangible amortization expense
Adjusted noninterest expense (i)
Net interest income
Noninterest income
Tax-equivalent adjustment
Total tax-equivalent revenue (j)
Efficiency ratio (i)/(j)
Adjusted net income and ratios for 2017 tax
reform
Net income
Remeasurement due to tax reform
Adjusted net income (k)
Average assets (l)
Average equity (m)
Adjusted return on average assets (excluding the
remeasurement due to tax reform) (k)/(l)
Adjusted return on average equity (excluding the
remeasurement due to tax reform) (k)/(m)
Results of Operations
$
163,799 $
3,961
159,838
83,846
149,371
455
233,672
142,537 $
4,081
138,456
74,551
114,194
347
189,092
136,325 $
4,638
131,687
75,224
102,749
462
178,435
134,920 $
5,623
129,297
67,670
103,045
865
171,580
143,792
7,005
136,787
62,940
105,089
599
168,628
68.40 %
73.22 %
73.80 %
75.36 %
81.12 %
$
$
15,001
4,818
19,819
2,001,503
176,779
0.99 %
11.21 %
The following discussion describes the consolidated operations and financial condition of the Company and the
Bank. Results of operations for the year ended December 31, 2020 are compared to the results for the year ended
December 31, 2019, and the consolidated financial condition of the Company as of December 31, 2020 is compared to
December 31, 2019. Results of operations for the year ended December 31, 2019 compared to results for the year ended
December 31, 2018, can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations of the Company’s 2019 annual report on Form 10-K filed with the SEC on March 26, 2020.
Summary
Net income for the year ended December 31, 2020 was $44.7 million, an increase of $15.1 million, or 51.2%,
compared to $29.5 million for the year ended December 31, 2019. Diluted earnings per common share were $2.52 in
2020, compared to $1.91 for 2019. Return on average total assets was 1.61% in 2020, compared to 1.34% for 2019. The
71
increase in net income was primarily due to an increase of $35.2 million in noninterest income and an increase of $9.3
million in net interest income. The increase in noninterest income was primarily driven by an increase in mortgage
banking revenue and the increase in net interest income was primarily due to a $6.5 million decrease in interest expense
along with a $2.4 million increase in interest income from investment securities. These improvements were partially
offset by a $21.3 million, or 14.9%, increase in noninterest expense driven by a $15.2 million increase in compensation
expense, $2.7 million in business services, software and technology expense, and $2.2 million in mortgage and lending
expenses. The increases in compensation and mortgage and lending expenses were directly correlated to the increase in
mortgage banking revenue as mortgage originations totaled $1.8 billion for the year. The provision for loan losses
increased $3.6 million in 2020 compared to 2019, as concerns regarding an economic slowdown related to COVID-19
increased qualitative factors.
Net Interest Income—With Nontaxable Income Converted to Fully Taxable Equivalent, or FTE
Net interest income totaled $83.8 million in 2020, an increase of $9.3 million, or 12.5%, from 2019. Net interest
margin decreased 43 basis points to 3.22%, in 2020, from the 3.65% reported in 2019. The decrease in net interest
margin was primarily a result of an 87 basis point decrease in the average yield on interest earning assets which was
partially offset by a corresponding decrease of 60 basis points in the average rate paid on interest-bearing liabilities.
These decreases were largely driven by a historically low interest rate environment as the Federal Open Market
Committee decreased the target fed funds rate 150 basis points in reaction to the economic impact related to COVID-19.
Also contributing to the decrease in net interest margin was a shift in balance sheet mix with a higher percentage of
average balances in lower yielding deposits with banks and investment securities. The increase in these balances was due
to an influx of liquidity from PPP loans, government stimulus and market uncertainty.
The following table sets forth information related to our average balance sheet, average yields on assets, and
average rates of liabilities for the periods indicated. We derived these yields by dividing income or expense by the
average balance of the corresponding assets or liabilities. We derived average balances from the daily balances
throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while
72
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.
2020
Year ended December 31,
2019
2018
Average
Balance
Interest Average
Income/ Yield/
Expense Rate
Average
Balance
Interest Average
Income/ Yield/
Expense Rate
Average
Balance
Interest Average
Income/ Yield/
Expense Rate
$ 162,616 $
425,219
79,201
664
8,999
1,948
0.41 % $
2.12 %
2.46 %
34,876 $
266,204
36,035
656
6,586
1,138
1.88 %
2.47 %
3.16 %
8,336 $
255,247
19,255
166
6,232
607
1.99 %
2.44 %
3.15 %
32,804
687,266 31,600
1,488
523,219 21,884
1,243,289 54,972
4.60 %
4.54 %
4.18 %
4.42 %
23,625
500,652 27,288
1,287
448,869 22,237
973,146 50,812
5.45 %
5.45 %
4.95 %
5.22 %
39,024
483,182 25,019
2,161
475,778 22,853
997,984 50,033
463,174 18,391
7,696
159,844
3,621
79,238
702,256 29,708
1,945,545 84,680
266
2,618,427 96,557
5,846
156,713
$ 2,775,140
93,226
455,635 19,257
3.97 %
184,972 10,422
4.81 %
4,336
4.57 %
4.23 %
733,833 34,015
4.35 % 1,706,979 84,827
4.55 %
440
3.69 % 2,052,758 93,647
159,235
$ 2,211,993
8,664
88,605
400,458 16,420
4.23 %
190,838 10,305
5.63 %
3,929
4.65 %
4.64 %
679,901 30,654
4.97 % 1,677,885 80,687
5.08 %
473
4.56 % 1,970,004 88,165
159,402
$ 2,129,406
9,281
5.18 %
5.54 %
4.80 %
5.01 %
4.10 %
5.40 %
4.43 %
4.51 %
4.81 %
5.10 %
4.48 %
$ 551,861 $ 1,624
4,863
2,356
—
3,413
1,734,168 12,256
920,072
203,413
80
58,742
0.29 % $ 428,162 $ 1,995
8,320
681,621
0.53 %
3,019
186,781
1.16 %
1,805
71,421
— %
5.81 %
3,610
58,789
0.71 % 1,426,774 18,749
0.47 % $ 405,512 $ 1,034
3,950
626,041
1.22 %
2,008
206,846
1.62 %
1,896
86,851
2.53 %
6.14 %
3,591
58,813
1.31 % 1,384,063 12,479
0.25 %
0.63 %
0.97 %
2.18 %
6.11 %
0.90 %
(dollars in thousands)
Interest Earning Assets
Interest-bearing deposits with banks
Investment securities (3)
Loans held for sale
Loans
Commercial:
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans (1)(3)
Federal Reserve/FHLB Stock
Total interest earning assets
Noninterest earning assets
Total assets
Interest-Bearing Liabilities
Interest-bearing demand deposits (2)
Money market and savings deposits (2)
Time deposits (2)
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-Bearing Liabilities and
Stockholders' Equity
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Stockholders’ equity
673,676
57,088
310,208
Total liabilities and stockholders’ equity $ 2,775,140
512,586
41,549
231,084
$ 2,211,993
528,552
29,450
187,341
$ 2,129,406
Net interest income
Net interest rate spread
Net interest margin on FTE basis (3)
$ 84,301
$ 74,898
$ 75,686
2.98 %
3.22 %
3.25 %
3.65 %
3.58 %
3.84 %
(1)
(2)
(3)
Includes loans held for branch sale at 2018.
Includes deposits held for sale at 2018.
Fully tax - equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0% .
73
Rate/Volume Analysis
The table below presents the effect of volume and rate changes on interest income and expense for the periods
indicated. Changes in volume are changes in the average balance multiplied by the previous year’s average rate. Changes
in rate are changes in the average rate multiplied by the average balance from the previous year. The net changes
attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to
volume and the changes due to rate.
Year ended December 31, 2020
Compared with
Year ended December 31, 2019
Change due to:
Interest
Year ended December 31, 2019
Compared with
Year ended December 31, 2018
Change due to:
Interest
Variance
Volume
Rate
Variance Volume
Rate
$
2,402 $
3,928
1,364
(2,394) $
(1,515)
(554)
8 $
2,413
810
528 $
267
529
(38) $
87
2
490
354
531
10,170
500
3,680
14,350
(5,858)
(299)
(4,033)
(10,190)
319
(1,415)
(650)
(1,746)
12,604
(143)
20,155
581
2,909
269
(1,805)
(3)
1,951
(1,185)
(1,311)
(65)
(2,561)
(12,751)
(31)
(17,245)
(952)
(6,366)
(932)
—
(194)
(8,444)
(8,801) $
$ 18,204 $
4,312
201
(353)
4,160
(866)
(2,726)
(715)
(4,307)
(147)
(174)
2,910
(371)
(3,457)
(663)
(1,805)
(197)
(6,493)
9,403
905
(853)
(1,292)
(1,240)
2,262
(317)
205
2,150
910
(31)
2,203
1,364
(21)
676
2,019
575
434
202
1,211
3,230
(2)
3,279
57
350
(195)
(336)
(1)
(125)
2,328 $
904
4,020
1,206
245
20
6,395
(3,116) $
2,269
(874)
(616)
779
2,837
117
407
3,361
4,140
(33)
5,482
961
4,370
1,011
(91)
19
6,270
(788)
(tax-equivalent basis, dollars in thousands)
Interest earning assets
Interest-bearing deposits with banks
Investment securities
Loans held for sale
Loans
Commercial:
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans (1)
Federal Reserve/FHLB Stock
Total interest income
Interest-bearing liabilities
Interest-bearing demand deposits (2)
Money market and savings deposits (2)
Time deposits (2)
Short-term borrowings
Long-term debt
Total interest expense
Change in net interest income
(1)
(2)
Includes loans held for branch sale at 2018.
Includes deposits held for sale at 2018.
Provision for Loan Losses
The provision for loan losses was $10.9 million for the year ended December 31, 2020, compared to
$7.3 million for the year ended December 31, 2019. The increase in provision for loan losses in 2020 was primarily due
to increased qualitative factors related to the economic uncertainty resulting from COVID-19, partially offset by $1.9
million less provision for specific reserves on impaired loans and $717 thousand less provision related to the decrease in
criticized loan balances.
The provision for loan losses on off - balance sheet items, a component of “other expense” in our Consolidated
Statements of Income, reflects management’s assessment of the adequacy of the allowance for loan losses on
lending - related commitments. See “Financial Condition—Allowance for Loan Losses.”
74
Noninterest Income
The following table presents noninterest income for the years ended December 31, 2020, 2019, and 2018.
Year ended December 31,
(dollars in thousands)
Retirement and benefit services
Wealth management
Mortgage banking
Service charges on deposit accounts
Net gains (losses) on investment
2020
$ 60,956
17,451
61,641
1,409
2019
$ 63,811
15,502
25,805
1,772
$ Change % Change
2019
$ (2,855)
1,949
35,836
(363)
(4.5)% $ 63,811
15,502
12.6 %
25,805
138.9 %
1,772
(20.5)%
$
2018
$ 63,316
14,900
17,630
1,808
$ Change % Change
0.8 %
4.0 %
46.4 %
(2.0)%
495
602
8,175
(36)
securities
Other
Total noninterest income
2,737
5,177
$ 149,371
357
6,947
$ 114,194
2,380
(1,770)
$ 35,177
357
666.7 %
(25.5)%
6,947
30.8 % $ 114,194
85
5,010
$ 102,749
272
1,937
$ 11,445
320.0 %
38.7 %
11.1 %
Noninterest income as a % of revenue
64.1 %
60.5 %
60.5 %
57.7 %
Total noninterest income increased by $35.2 million, or 30.8%, to $149.4 million in 2020, from $114.2 for
2019. The increase in noninterest income was primarily due to a $35.8 million increase in mortgage banking revenue.
The increase in mortgage banking revenue was due to historically high mortgage originations. Mortgage originations for
2020 were $1.8 billion, an $832.5 million, or 88.0% increase from 2019. Also contributing to the increase in mortgage
banking revenue, was a $7.1 million increase in the change in fair value of derivatives and a 50 basis point increase in
the gain on sale margin. Wealth management revenue increased $1.9 million due to an increase of $235.5 million in
wealth management assets under administration/management. We also realized a $2.4 million increase in gains on the
sale of investment securities. These increases were offset by a $2.9 decrease in retirement and benefit services revenue
and a $1.8 million decrease in other noninterest income. The decrease in retirement and benefit services revenue was
primarily due to expected plan attrition exceeding new business generation and a transition away from revenue sharing.
The decrease in other noninterest income was primarily due to the gain on branch sale recognized in 2019.
Noninterest income as a percent of total operating revenue, which consists of net interest income plus
noninterest income, was 64.1% in 2020, up from 60.5% the prior year. The increase in 2020 was due to a 30.8% increase
in noninterest income while net interest income increased by 12.5%.
Noninterest Expense
The following table presents noninterest expense for the years ended December 31, 2020, 2019, and 2018.
(dollars in thousands)
Compensation
Employee taxes and benefits
Occupancy and equipment expense
Business services, software and technology
expense
Intangible amortization expense
Professional fees and assessments
Marketing and business development
Supplies and postage
Travel
Mortgage and lending expenses
Other
Total noninterest expense
2020
2019
$ Change % Change
2019
2018
Year ended December 31,
$ 89,206 $ 74,018 $ 15,188
594
322
20,050
11,073
19,456
10,751
20.5 % $ 74,018 $ 69,403 $ 4,615
1,590
(335)
19,456
10,751
17,866
11,086
3.1 %
3.0 %
$ Change % Change
6.6 %
8.9 %
(3.0)%
19,124
3,961
4,700
3,133
2,169
359
5,039
4,985
2,743
(120)
689
(29)
(553)
(1,428)
2,186
1,670
$ 163,799 $ 142,537 $ 21,262
16,381
4,081
4,011
3,162
2,722
1,787
2,853
3,315
1,856
16.7 %
(557)
(2.9) %
(1,087)
17.2 %
(297)
(0.9) %
(15)
(20.3) %
49
(79.9) %
700
76.6 %
50.4 %
(307)
14.9 % $ 142,537 $ 136,325 $ 6,212
16,381
4,081
4,011
3,162
2,722
1,787
2,853
3,315
14,525
4,638
5,098
3,459
2,737
1,738
2,153
3,622
12.8 %
(12.0)%
(21.3)%
(8.6)%
(0.5)%
2.8 %
32.5 %
(8.5)%
4.6 %
Total noninterest expense increased $21.3 million, or 14.9%, to $163.8 million for the year ended December 31,
2020, from $142.5 million for 2019. The increase in noninterest expense was primarily due to increases of $15.2 million
in compensation expense, $2.7 million in business services, software and technology expense, $2.2 million in mortgage
and lending expenses, $1.7 million in other noninterest expense and $594 thousand in employee taxes and benefits. The
increases in compensation expense, mortgage and lending expenses and employee taxes and benefits were a direct result
of the increase in mortgage originations. Business services, software and technology increased due to purchases of
computer equipment, supplies and allowances for home office equipment as the Company shifted more of its employees
75
to a remote work model in response to the COVID-19 pandemic. The increase in other noninterest expense was
primarily driven by a $1.1 million increase in the provision for unfunded commitments as line of credit utilization
decreased 38.6%. These increases were partially offset by a $1.4 million decrease in travel expense as a result of the
COVID-19 pandemic and a $553 thousand decrease in supplies and postage as we transitioned many of our clients to
electronic statements.
Income Taxes
For the year ended December 31, 2020, we recognized income tax expense of $13.8 million on $58.5 million of
pre - tax income resulting in an effective tax rate of 23.7%, compared to the same period in 2019, in which we recognized
an income tax expense of $9.4 million on $38.9 million of pre - tax income, resulting in an effective tax rate of 24.1%.
The decrease in the effective tax rate was primarily due to an increase in tax exempt interest income, additional
deductions from stock-based compensation, and reduced add backs from a reduction in entertainment and meal expense
due to a curtailed travel budget stemming from COVID-19.
Segment Reporting
We determine reportable segments based on the significance of the services offered, the significance of those
services to our financial condition and operating results, and our regular review of the operating results of those services.
We have four operating segments—banking, retirement and benefit services, wealth management, and mortgage. These
segments are components for which financial information is prepared and evaluated regularly by management in
deciding how to allocate resources and assess performance.
The selected financial information presented for each segment sets forth net interest income, provision for loan
losses, noninterest income, and direct noninterest expense before indirect overhead allocations. Corporate administration
includes the indirect overhead and is set forth in the table below along with income tax expense and the consolidated net
income. The segment net income before taxes represents direct revenue and expense before indirect allocations and
income taxes. Certain reclassification adjustments have been made between corporate administration and the various
lines of business for consistency in presentation.
For additional financial information on our segments see Note 22 (Segment Reporting) of the Company’s
audited consolidated financial statements included elsewhere in this report.
Banking
The banking segment offers a complete line of loan, deposit, cash management, and treasury services through
14 offices in North Dakota, Minnesota, and Arizona. These products and services are supported through various digital
applications. The majority of our assets and liabilities are on the banking segment balance sheet.
The banking segment reported net income before taxes and indirect allocations of $37.4 million for the year
ended December 31, 2020, an increase of $4.0 million compared to 2019. The increase was driven primarily by increases
of $8.3 million in net interest income and $3.0 million in noninterest income offset by increases of $3.7 million in
noninterest expense and $3.6 million in provision for loan losses.
Retirement and Benefit Services
Retirement and benefit services provides the following services nationally: recordkeeping and administration
services to qualified retirement plans; ESOP trustee, recordkeeping and administration; investment fiduciary services to
retirement plans; HSA, flex spending account, and government health insurance program recordkeeping and
administration services to employers; payroll and human resource information system services for employers. The
division services approximately 7,500 retirement plans and more than 373,100 plan participants. In addition, the division
employs nearly 300 professionals, and operates within our banking markets as well as Lansing, Michigan, Littleton,
Colorado.
76
The retirement and benefit services segment reported net income before taxes and indirect allocations of $25.7
million for the year ended December 31, 2020, a decrease of $2.7 million from the $28.4 million for 2019. Revenue of
$61.0 million, comprised of $25.6 million in asset based revenue and $35.4 million in participant and transaction
revenues, decreased $2.9 million or 4.5% primarily due to expected plan attrition exceeding new business generation and
a 3 basis point reduction in yield.
The following table presents changes in the combined AUA and AUM for our retirement and benefit services
segment for the periods presented.
(dollars in thousands)
AUA & AUM balance beginning of period
Acquired assets
Inflows (1)
Outflows (2)
Market impact (3)
AUA & AUM balance end of period
Yield (4)
2020
$ 31,904,648
1,258,382
4,829,449
(6,828,573)
3,036,048
$ 34,199,954
Year ended
December 31,
2019
$ 27,812,149
—
5,009,789
(5,406,667)
4,489,377
$ 31,904,648
2018
$ 29,366,365
—
4,637,646
(4,981,204)
(1,210,658)
$ 27,812,149
0.18 %
0.21 %
0.22 %
(1)
(2)
(3)
(4)
Inflows include new account assets, contributions, dividends and interest.
Outflows include closed account assets, withdrawals and client fees.
Market impact reflects gains and losses on portfolio investments.
Retirement and benefit services noninterest income divided by simple average ending balances.
AUA and AUM for the retirement and benefit services segment were $34.2 billion at December 31, 2020, an
increase of $2.3 billion compared to the total at December 31, 2019. The increase was primarily driven by an increase of
$3.0 billion related to the market impact and $1.3 billion in acquired assets from the 2020 acquisition of Retirement
Planning Services, Inc., offset by outflows outpacing inflows.
Wealth Management
The wealth management division provides advisory and planning services, investment management, and trust
and fiduciary services to clients across our Company’s footprint.
Wealth management reported net income before taxes and indirect allocations of $9.2 million for the year ended
December 31, 2020, an increase of $848 thousand, or 10.2% from 2019. Noninterest income increased $1.9 million, or
12.6%, as compared to 2019, primarily due to an increase in combined AUA and AUM, partially offset by a 4 basis
points reduction in yield. Wealth management noninterest expense of $8.3 million increased $1.1 million or 15.3% from
2019 primarily due to an increase in direct allocation expenses.
77
The following table presents changes in the wealth management combined AUA and AUM, disaggregated by
product, for the periods presented.
(dollars in thousands)
Dimension balance beginning of period
Inflows (1)
Outflows (2)
Market impact (3)
Dimension balance end of period
Yield (4)(6)
Blue Print balance beginning of period
Inflows (1)
Outflows (2)
Market impact (3)
Blue Print balance end of period
Yield (4)(6)
Trust balance beginning of period
Inflows (1)
Outflows (2)
Market impact (3)
Trust balance end of period
Yield (4)(6)
Total Wealth Management balance beginning of period
Inflows (1)
Outflows (2)
Market impact (3)
Total Wealth Management balance end of period (5)
Yield (4)(6)
$
$
$
$
$
$
$
$
2020
1,652,454
402,787
(539,485)
238,891
1,754,647
$
0.49 %
$
469,937
131,436
(83,142)
51,705
569,936
290,677
194,897
(254,542)
19,438
250,470
$
0.92 %
$
$
0.57 %
$
2,413,068
729,120
(877,169)
310,034
2,575,053
$
0.59 %
$
Year ended
December 31,
2019
1,276,905
545,606
(329,974)
159,917
1,652,454
$
$
0.54 %
$
348,605
117,846
(58,832)
62,318
469,937
226,305
200,766
(187,648)
51,254
290,677
$
0.98 %
$
$
0.60 %
$
1,851,815
864,218
(576,454)
273,489
2,413,068
$
2018
1,369,580
218,171
(199,187)
(111,659)
1,276,905
0.57 %
334,648
104,643
(55,938)
(34,748)
348,605
1.04 %
222,738
251,327
(297,514)
49,754
226,305
0.65 %
1,926,966
574,141
(552,639)
(96,653)
1,851,815
0.63 %
0.66 %
(1)
(2)
(3)
(4)
(5)
(6)
Inflows include new account assets, contributions, dividends and interest.
Outflows include closed account assets, withdrawals and client fees.
Market impact reflects gains and losses on portfolio investments.
Wealth management noninterest income divided by simple average ending balances.
Total wealth management does not include brokerage assets of $760.5 million, $690.0 million, and $775.0 million for the years ending
December 31, 2020, 2019 and 2018, respectively.
Yield does not include brokerage revenue of $2.7 million, $2.1 million, and $2.4 million for the years ending December 31, 2020, 2019 and
2018, respectively.
AUA and AUM for the wealth management segment was $2.6 billion, excluding $760.5 million of brokerage
assets, at December 31, 2020, an increase of $162.0 million, or 6.7%, compared to the total at December 31, 2019. The
increase was driven by an increase of $310.0 million related to the market impact, offset by outflows out pacing inflows
by $148.0 million.
Mortgage
The mortgage division offers first and second mortgage loans through a centralized mortgage unit in
Minneapolis, Minnesota as well as through the banking office locations.
Mortgage reported net income before taxes and indirect allocations of $27.4 million for the year ended
December 31, 2020, an increase of $22.2 million from the $5.2 million reported in 2019. Mortgage noninterest income
for 2020 of $61.6 million increased $35.8 million, or 138.9%, from the same period in 2019. The increase was primarily
driven by an increase in mortgage originations which totaled $1.8 billion, for the year ended December 31, 2020, an
$832.5 million increase from 2019. In addition, mortgage recognized a $7.1 million increase in the change in fair value
of secondary market derivatives as well as a 50 basis point increase in the gain on sale margin. The increase in
noninterest income was offset by an increase of $14.4 million in noninterest expense, primarily due to increased
incentive compensation directly related to the increase in mortgage originations.
78
Financial Condition
Overview
Total assets were $3.0 billion at December 31, 2020, an increase of $656.9 million compared to $2.4 billion at
December 31, 2019. The increase in total assets was primarily due to increases of $282.0 million in available-for-sale
investment securities, $247.8 million in net loans, $75.6 million in loans held for sale, $29.0 million in cash and cash
equivalents and $14.2 million in other assets. The increase in loans held for sale was due to increased mortgage loan
originations and our decision to hold loans longer to utilize liquidity and provide for an increase in earning asset yield
compared to alternative short-term investments. The increase in loans was primarily driven by $268.4 million of PPP
loans. The increase in securities available - for - sale was a result of management’s decision to utilize liquidity and provide
for an increase in earning asset yield compared to alternative short-term investments.
Investment Securities
The following table presents the fair value of our investment securities portfolio for the periods indicated:
December 31, 2020
December 31, 2019
December 31, 2018
(dollars in thousands)
Trading
Available-for-sale
U.S. Treasury and agencies
Obligations of state and political agencies
Mortgage backed securities
Residential Agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale
Equity
Total investment securities
Percent
of
Percent
of
Balance
$
—
Portfolio Balance
— % $
—
Portfolio Balance
— % $
1,539
Percent
of
Portfolio
5,907
153,773
1.0 %
26.0 %
21,240
68,648
6.8 %
21.9 %
19,142
66,387
262,004
139,693
115
30,850
592,342
—
$ 592,342
44.2 %
23.6 %
— %
5.2 %
100.0 %
— %
182,538
30,685
144
7,095
310,350
2,808
100.0 % $ 313,158
58.3 %
9.8 %
— %
2.3 %
99.1 %
0.9 %
126,998
28,767
399
8,481
250,174
3,165
100.0 % $ 254,878
0.6 %
7.5 %
26.0 %
49.9 %
11.3 %
0.2 %
3.3 %
98.2 %
1.2 %
100.0 %
The composition of our investment securities portfolio reflects our investment strategy of maintaining an
appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment
portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while
providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as
collateral.
At December 31, 2020 total investment securities were $592.3 million compared to $313.2 million at
December 31, 2019. Investment securities as a percentage of total assets were 19.7% and 13.3%, as of December 31,
2020 and December 31, 2019, respectively. The decision to increase investment securities was strategically done to
utilize excess liquidity and provide for an increase in earning asset yield compared to alternative short-term investments.
Securities with a carrying value of $160.8 million were pledged at December 31, 2020, to secure public deposits and for
other purposes required or permitted by law.
The net pre - tax unrealized market value gain on the available - for - sale investment portfolio as of December 31,
2020 was $14.2 million, as compared to $2.6 million as of December 31, 2019. This increase is indicative of the interest
rate environment and changes in the size and composition of the portfolio.
The investment portfolio is principally composed of U.S. Treasury debentures, U.S. Agency mortgage - backed
pass - throughs, U.S. Agency, Commercial Mortgage Obligations, or CMOs, and municipal bonds. The portfolio does not
include any private label mortgage - backed securities or private label collateralized mortgage obligations.
79
As of December 31, 2020, the Bank held 112 tax - exempt state and local municipal securities totaling
$50.1 million. As of December 31, 2019, the Bank held 114 tax - exempt state and local municipal securities totaling
$49.6 million. Other than the aforementioned investments, at December 31, 2020 and December 31, 2019, there were no
holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10%
of stockholders’ equity.
As of December 31, 2020 and December 31, 2019, all of the available - for - sale debt securities in an unrealized
loss position were investment grade. For the years ended December 31, 2020 and 2019, we evaluated all of our debt
securities for credit impairment and determined there were no credit losses evident and we did not record any
other - than - temporary impairment. Furthermore, we do not intend to sell and it is more likely than not that we will not be
required to sell these debt securities before the anticipated recovery of the amortized cost basis.
Periodic reviews are conducted to identify and evaluate each investment that has an unrealized loss for
other - than - temporary impairment. An unrealized loss exists when the current estimated fair value of an individual
security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are
recorded, net of tax, in accumulated other comprehensive income for available - for - sale securities.
The securities available - for - sale presented in the following table are reported at fair value and by contractual
maturity as of December 31, 2020. 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, the mortgage backed securities
receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent
basis.
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
Maturity as of December 31, 2020
$
—
— % $
—
— % $
1,530
0.92 % $
4,377
0.71 %
2,468
1.39 % 28,747
1.34 %
74,666
1.79 %
47,892
2.31 %
2
—
—
1,016
$ 3,486
1,760
3.59 %
1,749
— %
—
— %
—
2.77 %
1.79 % $ 32,256
2.62 %
3.23 %
— %
— %
49,658
4,774
—
29,834
1.51 % $ 160,462
2.32 % 210,584
2.25 % 133,170
115
— %
4.49 %
—
2.46 % $ 396,138
1.85 %
1.15 %
5.40 %
— %
1.66 %
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Obligations of state and
political agencies
Mortgage backed securities
Residential Agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale
Loans
The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial
real estate, residential real estate, and consumer financing loans.
Commercial and industrial loans include financing for commercial purposes in various lines of businesses,
including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally
secured with the assets of the company and/or the personal guarantee of the business owners.
Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as
office and industrial buildings, retail shopping centers and apartment buildings, as well as commercial real estate
construction loans that are offered to builders and developers.
Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These
loans are generally financed over a 15- to 30 - year term and, in most cases, are extended to borrowers to finance their
primary residence with both fixed - rate and adjustable - rate terms. Real estate construction loans are also offered to
consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of
80
the construction phase, which is typically twelve months. Residential real estate loans also include home equity loans
and lines of credit that are secured by a first- or second - lien on the borrower’s residence. Home equity lines of credit
consist mainly of revolving lines of credit secured by residential real estate.
Consumer loans include loans made to individuals not secured by real estate, including loans secured by
automobiles or watercraft, and personal unsecured loans.
Loans outstanding, by type, as of the dates presented are as follows:
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
35.0 % $ 479,144
26,378
2.2 %
494,703
28.5 %
65.7 % 1,000,225
27.8 % $ 510,706
18,965
1.5 %
439,963
28.8 %
969,634
58.1 %
30.0 % $ 480,595
22,348
1.1 %
444,857
25.9 %
947,800
57.0 %
30.5 % $
1.4 %
28.3 %
60.2 %
472,449
35,174
391,533
899,156
34.6 %
2.6 %
28.6 %
65.8 %
Balance
(dollars in thousands)
Commercial
Commercial and industrial (1) $ 691,858
Real estate construction
44,451
Commercial real estate
563,007
Total commercial
1,299,316
Consumer
Residential real estate first
mortgage
Residential real estate junior
lien
Other revolving and
installment
Total consumer
Total loans
463,370
23.4 %
457,155
26.6 %
448,143
26.3 %
348,964
22.2 %
202,217
14.8 %
143,416
7.2 %
177,373
10.3 %
188,855
11.1 %
195,103
12.4 %
178,795
13.1 %
73,273
680,059
$ 1,979,375
3.7 %
34.3 %
86,526
721,054
100.0 % $ 1,721,279
5.0 %
41.9 %
95,218
732,216
100.0 % $ 1,701,850
5.6 %
43.0 %
82,607
626,674
100.0 % $ 1,574,474
5.2 %
39.8 %
86,784
467,796
100.0 % $ 1,366,952
6.3 %
34.2 %
100.0 %
(1)
Includes PPP loans of $268.4 million as of December 31, 2020.
Total loans outstanding of $2.0 billion as of December 31, 2020, increased $258.1 million, or 15.0%, from
December 31, 2019. The increase was primarily due to increases of $212.7 million in commercial and industrial loans
and $68.3 million in our commercial real estate loan portfolio, partially offset by $41.0 million decrease in our consumer
loan portfolio. The increase in commercial and industrial loans was due to an increase of $268.4 million in net PPP loans
offset by a decrease in commercial lines of credit due to low line utilization. The decrease in our consumer portfolio was
primarily due to a decrease in residential real estate junior liens due to a large number of refinances as a result of the
historically low interest rates.
Our loan portfolio is highly diversified. The long-term goal of the overall portfolio mix is to retain balance with
approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential
real estate categories. As of December 31, 2020, approximately 35.0% of loans outstanding were commercial and
industrial, while 28.5% of loans outstanding were commercial real estate, and 30.6% of loans outstanding were
residential real estate. The commercial lending portfolio is also broadly diversified by industry type as demonstrated by
the following distributions at December 31, 2020: real estate (32%), retail trade (12%), healthcare (7%), finance &
insurance (6%),wholesale trade (6%), construction (6%), professional services (6%), manufacturing (5%),
transportation (3%), agriculture, forestry, fishing and hunting (3%), restaurant & lodging (2%), accommodation and food
services (2%) management of companies (2%), educational services (1%), and administrative and support (1%). A
variety of other industries with less than a 1% share of the total portfolio comprise the remaining 6%. The loan portfolio
is also diversified by market distribution with 48.4% of the portfolio in the Twin Cities MSA, 39.8% in the eastern North
Dakota cities of Grand Forks and Fargo, 9.7% in the Phoenix MSA and 2.1% in our national market, as of December 31,
2020.
We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting
guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, as well as
home equity loans and lines of credit that are secured by first or junior liens. Most of our fixed rate residential loans,
along with some of our adjustable rate mortgages are sold to other financial institutions with which we have established
a correspondent lending relationship.
81
Our consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are
underwritten to conform to secondary market standards. Volume in this portion of the loan portfolio has been strong over
the last few years due to low long - term interest rates and comparatively stable real estate valuations in our primary
markets. As of December 31, 2020, our consumer mortgage portfolio was $606.8 million which was a slight decline
from $634.5 million as of December 31, 2019. Consumer mortgages had slightly decreased in 2019. Market interest
rates, expected duration, and our overall interest rate sensitivity profile continue to be the most significant factors in
determining whether we choose to retain versus sell portions of new consumer mortgage originations.
The combined total of general - purpose business lending to commercial, industrial, non - profit and municipal
customers, mortgages on commercial property and dealer floor plan financing is characterized as commercial lending
activity. As of December 31, 2020, the commercial loan portfolio was $1.3 billion, an increase of $299.1 million, or
29.9%, from $1.0 billion as of December 31, 2019. The increase was primarily due to $268.4 million in PPP loans.
Highly competitive conditions continue to prevail in the small and middle market commercial segments in which we
primarily operate. We maintain a commitment to generating growth in our business portfolio in a manner that adheres to
our twin goals of maintaining strong asset quality and producing profitable margins. We continue to invest in additional
personnel, technology, and business development resources to further strengthen our capabilities in this important
product category.
Consistent with regulatory guidance urging banks to work with borrowers during this unprecedented situation,
the Company offered a payment deferral program for its lending clients that have been adversely affected by COVID-19.
These deferrals were generally no more than 90 days in duration. During 2020, the Company had entered into principal
and interest deferrals on 577 loans, representing $153.6 million in principal balances. Of those loans, 18 loans with a
total outstanding principal balance of $8.4 million have been granted second deferrals, 21 loans with a total outstanding
principal balance of $3.7 million remain on the first deferral and the remaining loans have been returned to normal
payment status. In accordance with the Interagency Statement on Loan Modifications and Reporting for Financial
Institutions as issued on April 7, 2020, these short-term deferrals were not considered TDRs. See “Note 6 Loans and
Allowance for Loan Losses” to the consolidated financial statements for additional information regarding TDRs.
We anticipate that loan demand will be under pressure in the future for our commercial and industrial,
commercial real estate, residential real estate, and consumer loan portfolios as a result of COVID-19 and the related
decline in economic conditions in our market areas.
The following table shows the maturities and type of interest rates for the loan portfolio as of December 31,
2020:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
Sensitivity of loans to changes in interest rates
Fixed interest rates
Floating interest rates
Total
December 31, 2020
One year
or less
After one
but within
five years
After
five years
Total
$ 121,551 $ 516,471 $
6,091
41,419
169,061
15,957
221,197
753,625
53,836 $
22,403
300,391
376,630
691,858
44,451
563,007
1,299,316
18,698
15,518
9,225
43,441
463,370
143,416
73,273
680,059
$ 212,502 $ 872,575 $ 894,298 $ 1,979,375
18,064
48,798
52,088
118,950
426,608
79,100
11,960
517,668
$ 739,727 $ 416,886
477,412
$ 872,575 $ 894,298
132,848
82
As of December 31, 2020, 61.8% of the loan portfolio bears interest at fixed rates and 38.2% at floating rates.
The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to
curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to
contractual maturities of the underlying loans.
Asset Quality
Our strategy for credit risk management includes well - defined, centralized credit policies; uniform underwriting
criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The
strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and
management reviews of loans experiencing deterioration of credit quality. We strive to identify potential problem loans
early, take necessary charge - offs promptly, and maintain adequate reserve levels for probable loan losses inherent in the
portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy
of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies
for the management of individual nonperforming loans.
Nonperforming assets consist of loans 90 days or more past due, nonaccrual loans, foreclosed assets and other
real estate owned. We do not consider performing troubled debt restructurings, or TDRs, to be nonperforming assets, but
they are included as part of impaired assets. The level of nonaccrual loans is an important element in assessing asset
quality. Loans are classified as nonaccrual when principal or interest is in default for 90 days or more, unless in the
opinion of management, the loan is well secured and in the process of collection. Exclusive of any delinquency, a loan
will be placed in nonaccrual when there is deterioration in the financial condition of the borrower and full payment of
principal and interest is not expected.
A loan is categorized as a TDR if a concession is granted, such as to provide for the reduction of either interest
or principal due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the
interest rate on the loan to a rate considered lower than market and other modification of terms including forgiveness of
a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments
to interest - only payments for a certain period. Loans are not classified as TDRs when the modification is short - term or
results in only an insignificant delay or shortfall in the payments to be received. See “Note 6 Loans and Allowance for
Loan Losses” to the consolidated financial statements for additional information regarding TDRs.
Credit Quality Indicators
Loans are categorized into risk 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. A risk rating is assigned to all commercial loans, except
pools of homogeneous loans. We periodically perform detailed internal and external reviews of risk rated loans over a
certain threshold to identify credit risks and to assess the overall collectability of the portfolio. During the internal
reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries
in which the borrowers operate, and the estimated fair values of collateral securing the loans. These credit quality
indicators are used to assign a risk rating to each individual loan. The following definitions are used for risk ratings:
Pass. Higher quality loans that do not fit any of the other categories described below. This category includes
loans risk rated with the following ratings: minimal credit risk, modest credit risk, average credit risk, acceptable credit
risk, acceptable with risk and management attention.
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s
close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for
the loan or of the institution’s credit position.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well - defined weakness or
83
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Criticized loans represent loans that are categorized as special mention, substandard, and doubtful. The
following table presents criticized loans by type as of December 31, 2020, 2019, and 2018:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
Criticized loans as a percent of total loans
December 31,
2020
December 31,
2019
December 31,
2018
$
$
$
22,256
—
29,274
51,530
2,149
2,955
37
5,141
56,671
$
2.86 %
$
30,838
1,259
32,409
64,506
797
1,251
6
2,054
66,560
$
3.87 %
51,141
1,055
32,785
84,981
19
2,485
—
2,504
87,485
5.14 %
The following table presents information regarding nonperforming assets as of the dates presented:
(dollars in thousands)
Nonaccrual loans
Accruing loans 90+ days past due
Total nonperforming loans
OREO and repossessed assets
Total nonperforming assets
Total restructured accruing loans
December 31, December 31, December 31,
December 31, December 31,
2020
2019
2018
2017
2016
$
5,050 $
30
7,379 $
448
6,963 $
—
5,873 $
—
5,080
63
5,143
3,427
7,827
8
7,835
957
6,963
204
7,167
823
5,873
483
6,356
240
7,616
48
7,664
1,917
9,581
576
Total nonperforming assets and restructured
accruing loans
$
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to nonperforming loans
8,570 $
0.26 %
0.17 %
674 %
8,792 $
0.45 %
0.33 %
306 %
7,990 $
0.41 %
0.34 %
318 %
6,596 $
0.37 %
0.30 %
282 %
10,157
0.56 %
0.47 %
205 %
(1)
Nonaccrual loans included nonperforming TDRs of $0.0 million, $0.0 million, $0.2 million, $0.7 million, and $1.5 million at the respective
dates indicated above.
Interest income lost on nonaccrual loans approximated $0.5 million, $0.4 million, and $0.3 million for the years
ended December 31, 2020, 2019, and 2018, respectively. There was no interest income included in net income related to
nonaccrual loans for the years ended December 31, 2020, 2019, and 2018.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred
losses in the loan portfolio given the conditions at the time. Management determines the adequacy of the allowance
based on periodic evaluations of the loan portfolio and other factors. These evaluations are inherently subjective as they
require management to make material estimates, all of which may be susceptible to significant change. The allowance is
increased by provisions charged to expense and decreased by actual charge - offs, net of recoveries.
84
The allowance for loan losses represents management’s assessment of probable credit losses inherent in the
loan portfolio. The allowance for loan losses consists of specific components, based on individual evaluation of certain
loans, and general components for homogeneous pools of loans with similar risk characteristics.
Impaired loans include loans placed on nonaccrual status and TDRs. Loans are considered impaired when,
based on current information and events, it is probable that all amounts due, in accordance with the original contractual
terms of the loan agreement, will not be collected. When determining if all amounts due in accordance with the original
contractual terms of the loan agreement will be collected, the borrower’s overall financial condition, resources and
payment record, support from guarantors, and the realizable value of any collateral, are taken into consideration. Loans
that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case - by - case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and
interest owed.
All impaired loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if
repayment is collateral dependent.
The allowance for non - impaired loans is based on historical losses adjusted for current qualitative factors. The
historical loss experience is determined by portfolio segment and is based on the actual loss history over the most recent
five years. This actual loss experience is adjusted for economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge - offs and recoveries; trends in volume and terms of loans; effects of any
changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices;
experience, ability, and depth of lending management and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in credit concentrations. These factors are inherently subjective
and are driven by the repayment risk associated with each portfolio segment. These portfolio segments include
commercial and industrial, real estate construction, commercial real estate, residential real estate first mortgage,
residential real estate junior liens, and other revolving and installment.
In the ordinary course of business, we enter into commitments to extend credit, including commitments under
credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded
when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization
assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets.
The provision for unfunded commitments was an expense of $800 thousand for the year ended December 31, 2020
compared to a reversal of $308 thousand for the year ended December 31, 2019.
85
The following table presents, by loan type, the changes in the allowance for loan losses for the periods
presented.
(dollars in thousands)
Balance—beginning of period
Commercial loan charge-offs
Commercial and Industrial
Real estate construction
Commercial real estate
Total commercial loan charge-offs
Consumer loan charge-offs
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer loan charge-offs
Total loan charge-offs
Commercial loan recoveries
Commercial and Industrial
Real estate construction
Commercial real estate
Total commercial recoveries
Consumer loan recoveries
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer loan recoveries
Total loan recoveries
Net loan charge-offs (recoveries)
Commercial loan provision
Commercial and Industrial
Real estate construction
Commercial real estate
Total commercial loan provision
Consumer loan provision
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer loan provision
Unallocated provision expense
Total loan loss provision
Balance—end of period
Total loans
Average total loans
Allowance for loan losses to total loans
Net charge-offs/(recoveries) to average total loans
(annualized)
2020
23,924
$
$
Year ended
December 31,
2018
16,564 $
2019
22,174 $
2017
15,615 $
2016
14,688
(4,249)
—
(865)
(5,114)
—
(12)
(242)
(254)
(5,368)
4,352
—
97
4,449
5
207
129
341
4,790
578
(2,168)
355
8,185
6,372
(6,540)
(1)
—
(6,541)
—
(465)
(572)
(1,037)
(7,578)
1,470
3
150
1,623
—
232
161
393
2,016
5,562
5,213
51
259
5,523
(3,123)
(60)
(600)
(3,783)
(29)
(133)
(308)
(470)
(4,253)
750
2
81
833
—
207
213
420
1,253
3,000
6,911
(35)
1,889
8,765
(3,287)
—
—
(3,287)
—
(1,124)
(429)
(1,553)
(4,840)
930
279
73
1,282
103
872
252
1,227
2,509
2,331
3,244
(416)
352
3,180
(1,629)
(1,655)
(43)
(3,327)
—
(829)
(280)
(1,109)
(4,436)
1,084
587
188
1,859
211
94
139
444
2,303
2,133
507
1,304
269
2,080
4,321
507
514
5,342
(814)
10,900
$
34,246
$ 1,979,375
1,945,545
292
99
383
774
1,015
7,312
23,924 $
(328)
453
16
141
839
3,060
$
15,615
$ 1,721,279 $ 1,701,850 $ 1,574,474 $ 1,366,952
1,345,208
1,706,979
182
247
276
705
(605)
3,280
16,564 $
(226)
(171)
(24)
(421)
266
8,610
22,174 $
1,475,042
1,677,885
1.73 %
1.39 %
1.30 %
1.05 %
1.14 %
0.03 %
0.33 %
0.18 %
0.16 %
0.16 %
The allowance for loan losses was $34.2 million at December 31, 2020, compared to $23.9 million at
December 31, 2019. The $10.3 million increase in the allowance for loan losses was due to additional provision for loan
losses of $10.9 million due to additional qualitative factors related to borrowers impacted by COVID-19, offset by net
loan charge - offs of $578 thousand. The ratio of nonperforming loans to total loans at December 31, 2020 was 0.26%,
compared to 0.45% at December 31, 2019. If PPP loans were excluded, the ratio of nonperforming loans to total loans
was at December 31, 2020 would have been 0.30%. The allowance for loan losses to total loans was 1.73% at
December 31, 2020, compared to 1.39% at December 31, 2019. If PPP loans were excluded, the allowance for loan
losses to total loans would have been 2.00% at December 31, 2020.
86
The following table presents the allocation of the allowance for loan losses as of the dates presented.
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2016
December 31, 2015
Allocated
Percentage
of loans to
Allocated
Percentage
of loans to
Allocated
Percentage
of loans to
Allocated
Percentage
of loans to
Allocated
Percentage
of loans to
Allowance total loans Allowance total loans Allowance total loans Allowance total loans Allowance total loans
10,205
658
14,105
35.0 % $
2.2 %
28.5 %
12,270
303
6,688
27.8 % $
1.5 %
28.8 %
12,127
250
6,279
30.0 % $
1.1 %
25.9 %
7,589
343
4,909
30.5 % $
1.4 %
28.3 %
6,509
674
4,484
34.6 %
2.6 %
28.6 %
5,774
23.4 %
1,448
26.6 %
1,156
26.3 %
1,411
22.2 %
1,037
14.8 %
1,373
7.2 %
671
10.3 %
805
11.1 %
902
12.4 %
907
13.1 %
$
(dollars in thousands)
Commercial and
industrial
Real estate construction
Commercial real estate
Residential real estate
first mortgage
Residential real estate
junior lien
Other revolving and
753
1,378
34,246
$
3.7 %
— %
100.0 % $
352
2,192
23,924
5.0 %
— %
100.0 % $
380
1,177
22,174
5.6 %
— %
100.0 % $
499
911
16,564
5.2 %
— %
100.0 % $
488
1,516
15,615
6.3 %
— %
100.0 %
installment
Unallocated
Total loans
Deposits
Total deposits were $2.57 billion as of December 31, 2020, an increase of $600.7 million, or 30.5%, from
December 31, 2019. Interest-bearing deposits increased $423.7 million while noninterest-bearing deposits increased
$177.0 million. Key drivers of the increase in deposits included strong deposit production of deposits from new and
existing PPP loan clients, synergistic deposit growth, inflows from government stimulus programs and higher depositor
balances due to the uncertain economic environment and financial markets. The increase in interest-bearing deposits
included a $184.0 million increase in synergistic deposits including HSA deposits from our retirement and benefit
services and wealth management segments, bringing our total deposits sourced outside of our branch footprint to $595.6
million. Commercial transaction deposits increased $289.5 million, or 35.5%, while consumer transaction deposits
increased $108.1 million, or 20.2%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total
deposits were 29.3% as of December 31, 2020 and 2019.
Interest - bearing deposit costs were 0.53% and 1.03% for the years ended December 31, 2020 and 2019,
respectively. The decrease in interest - bearing deposit costs resulted from the low interest rate environment due to the
Federal Reserve’s response to COVID-19.
We compete for local deposits by offering products with competitive rates and rely on the deposit portfolio to
fund loans and other asset growth. Management understands the importance of core deposits as a stable source of
funding and may periodically implement various deposit promotion strategies to encourage core deposit growth. For
periods of rising interest rates, management has modeled the aggregate yields for non - maturity deposits and time
deposits to increase at a slower pace than the increase in underlying market rates, which results in net interest margin
expansion and projections of an increase in net interest income. The mix of average deposits has been changing
throughout the last several years. The weighting of core funds (noninterest checking, interest checking, savings, and
money market accounts) has increased, while time deposits’ weighting has decreased. This change in deposit mix
reflects our focus on expanding core account relationships and customers’ preference for unrestricted accounts in the low
interest rate environment.
The following table details the average balance and rate of our deposit portfolio by category for the periods
indicated.
(dollars in thousands)
Noninterest-bearing demand
Interest-bearing demand
Money market and savings
Time deposits
Total deposits (1)
(1)
Includes deposits held for sale at 2018.
Average
Balance
$
673,676
551,861
920,072
203,413
$ 2,349,022
Year ended
December 31, 2020
Year ended
December 31, 2019
Year ended
December 31, 2018
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
512,586
— % $
428,162
0.29 %
681,621
0.53 %
1.16 %
186,781
0.38 % $ 1,809,150
528,552
— % $
405,512
0.47 %
626,041
1.22 %
1.62 %
206,846
0.74 % $ 1,766,951
— %
0.25 %
0.63 %
0.97 %
0.56 %
87
The following table shows the contractual maturity of time deposits, including certificate of deposit account
registry services, or CDARS, and IRA deposits of $100 thousand and over, that were outstanding as of the date
presented.
(dollars in thousands)
Maturing in:
3 months or less
3 months to 6 months
6 months to 1 year
1 year or greater
Total
Borrowings and Subordinated Debt
December 31,
2020
$
$
49,627
62,809
6,718
8,818
127,972
We utilize both short - term and long - term borrowings as part of our asset/liability management and funding
strategies. Short - term borrowings consists of FHLB advances and federal funds purchased. We had no short - term
borrowings outstanding at December 31, 2020 or December 31, 2019.
FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of
approximately $943.5 million and $881.2 million at December 31, 2020 and 2019, respectively.
Long - term debt is utilized to fund longer term assets and as a source of regulatory capital. At December 31,
2020, we had $50.0 million of outstanding 5.75% Fixed to Floating Rate Subordinated Notes due 2025, or Subordinated
Notes. The Subordinated Notes currently bear interest at a fixed rate of 5.75% per year, payable semi - annually through
December 30, 2020, and then convert automatically to floating rate notes that reset quarterly to an interest rate equal to
the three - month LIBOR plus 412 basis points. The Subordinated Notes mature on December 30, 2025, and we have the
option to redeem or prepay any or all of the Subordinated Notes without premium or penalty any time after
December 30, 2020 or at any time in the event of certain changes that affect the deductibility of interest for tax purposes
or the treatment of the notes as Tier 2 Capital.
On December 29, 2020, we gave notice pursuant to Section 4(b) of the Subordinated Notes, that the entire
aggregate $50.0 million outstanding principal amount of the Subordinated Notes is being called for redemption on
Friday, January 29, 2021, the Redemption Date. On the Redemption Date, holders of record of the Subordinated Notes
were paid 100 % of the outstanding principal amount of each Subordinated Note plus accrued and unpaid interest
thereon to, but excluding, the Redemption Date. See Note 32 (Subsequent Events) of the Company’s audited
consolidated financial statements included elsewhere in this report.
Junior subordinated debentures issued to capital trusts that issued trust preferred securities were $8.6 million as
of December 31, 2020, compared to $8.5 million as of December 31, 2019. The increase was due to purchase accounting
amortization on the junior subordinated notes assumed in the Beacon Bank acquisition. See Note 14 (Long - Term Debt)
of the Company’s audited consolidated financial statements included elsewhere in this report.
Selected financial information pertaining to the components of our borrowings and subordinated debt as of the
dates indicated is as follows:
(dollars in thousands)
Fed funds purchased
Subordinated notes
Junior subordinated debentures
Finance lease liability
Total borrowed funds
December 31, 2020
December 31, 2019
December 31, 2018
Percent of
Percent of
Balance
$
—
49,688
8,617
430
$ 58,735
Portfolio Balance
— % $
84.6 %
14.7 %
0.7 %
—
49,625
8,504
640
100.0 % $ 58,769
Portfolio Balance
— % $ 93,460
49,562
84.4 %
8,392
14.5 %
870
1.1 %
100.0 % $ 152,284
Percent of
Portfolio
61.4 %
32.5 %
5.5 %
0.6 %
100.0 %
88
Capital Resources
The following table summarizes the changes in our stockholders’ equity for the periods indicated.
(dollars in thousands)
Beginning balance
Net income
Other comprehensive income (loss)
Common stock repurchased
Common stock dividends
Stock - based compensation expense
Initial public offering of 3,289,000 shares of common stock net of issuance costs
Ending balance
For the years ended December 31,
2018
2019
2020
$ 285,728 $ 196,954 $ 179,594
25,866
(2,541)
(356)
(7,456)
1,847
—
$ 330,163 $ 285,728 $ 196,954
44,675
8,702
(482)
(10,387)
1,927
—
29,540
5,537
(1,948)
(8,909)
1,750
62,804
Total stockholders’ equity was $330.2 million at December 31, 2020, compared to $285.7 million at
December 31, 2019. The increase was primarily due to $44.7 million of net income and $8.7 million in accumulated
other comprehensive income and partially offset by $10.4 million in common stock dividends.
We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the
same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in our
balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the
greatest capacity to absorb unexpected loss.
We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to
meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that
involve quantitative measures of assets, liabilities, and certain off - balance sheet items as calculated under regulatory
accounting policies. We have consistently maintained regulatory capital ratios at or above the well - capitalized standards.
During the first quarter of 2015, regulations implementing the Basel III regulatory capital framework and the
Dodd - Frank Act became effective, which include requirements that were subject to a multi - year phase - in period. These
rules modified the calculation of the various capital ratios, added a new ratio, the Common Equity Tier 1 Capital ratio,
and revised the adequately and well capitalized thresholds. As of January 1, 2019, the rules require us to maintain a
capital conservation buffer of common equity capital that exceeds by more than 2.50% the minimum risk weighted asset
ratios. The capital conservation buffer requirement was 2.50%, 2.50%, and 1.875% as of December 31, 2020, 2019, and
2018, respectively, which is not reflected in the table below.
At December 31, 2020, 2019, and 2018, we met all the capital adequacy requirements to which we were
subject.
89
The table below sets forth the capital ratios for the Company and the Bank as of the dates indicated. See
Note 26 (Regulatory Matters) for additional disclosures.
Capital Ratios
Alerus Financial Corporation
Common equity tier 1 capital to risk weighted assets
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Tier 1 capital to average assets
Tangible common equity to tangible assets (1)
Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Tier 1 capital to average assets
December 31, December 31, December 31,
2020
2019
2018
12.75 %
13.15 %
16.79 %
9.24 %
9.27 %
12.10 %
12.10 %
13.36 %
8.50 %
12.48 %
12.90 %
16.73 %
11.05 %
10.38 %
11.91 %
11.91 %
13.15 %
10.20 %
8.43 %
8.87 %
12.86 %
7.51 %
6.91 %
11.39 %
11.39 %
12.62 %
9.63 %
(1)
Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial
Measures.”
Contractual Obligations and Off - Balance Sheet Arrangements
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions to meet the financing needs of clients,
which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include
commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance
sheets. Most of these commitments are expected to expire without being drawn upon. All off-balance sheet commitments
are included in the determination of the amount of risk-based capital that the Company and the Bank are required to
hold.
Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual
or notional amount of those instruments. We decrease our exposure to losses under these commitments by subjecting
them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to
extend credit and establishes a liability for probable credit losses.
Further information related to financial instruments can be found in Note 16 (Financial Instruments with Off-
Balance Sheet Risk) in the notes to the consolidated financial statements found elsewhere in this report.
90
Contractual Obligations
In the ordinary course of our operations, we enter into certain contractual obligations. The following table
presents our contractual obligations as of December 31, 2020.
(dollars in thousands)
Operating lease obligations
Time deposits
Subordinated notes payable
Junior subordinated debenture (Trust I)
Junior subordinated debenture (Trust II)
Finance lease liability
Total contractual obligations
Liquidity
Less than
one year
$
$
1,788
183,811
—
—
—
251
185,850
One to
three years
December 31, 2020
Three to
five years
Over
five years
$
$
3,410
15,018
—
—
—
209
18,637
$
$
1,492
5,897
49,688
—
—
—
57,077
$
$
1,597
4,612
—
3,447
5,170
—
14,826
Total
8,287
209,338
49,688
3,447
5,170
460
276,390
$
$
Liquidity management is the process by which we manage the flow of funds necessary to meet our financial
commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities.
These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our
operations, and capital expenditures. Liquidity is monitored and closely managed by our asset and liability committee, or
ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and
lending areas. It is ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations
as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly
identified, and management has plans in place to respond. 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.
At December 31, 2020, we had on balance sheet liquidity of $511.1 million, compared to $250.7 million at
December 31, 2019 and $152.1 million at December 31, 2018. On balance sheet liquidity includes total due from banks,
federal funds sold, interest - bearing deposits with banks, unencumbered securities available - for - sale and over
collateralized securities pledging position.
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. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB.
As of December 31, 2020 we had $943.5 million of collateral pledged to the FHLB. Based on this collateral we are
eligible to borrow up to $631.7 million and had $631.7 million available capacity as of December 31, 2020. In addition,
we can borrow up to $102.0 million through unsecured lines of credit we have established with four other banks.
In addition, because the Bank is “well capitalized,” we can accept wholesale deposits up to 20.0% of total assets
based on current policy limits. Management believed that we had adequate resources to fund all of our commitments as
of December 31, 2020 and December 31, 2019.
Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to
collateralize additional funding. At December 31, 2020, we had $173.0 million of cash and cash equivalents of which
$143.3 million were interest - earning deposits held at the Federal Reserve, FHLB and other correspondent banks.
Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of
COVID-19 could place increased demand on our liquidity if we experience significant credit deterioration and as we
meet borrower’s needs. Accordingly, management has addressed this issue by formulating a liquidity contingency plan,
which has been reviewed and approved by both the Bank’s board of directors and the ALCO. The plan addresses the
actions that we would take in response to both a short-term and long-term funding crisis.
91
A short - term funding crisis would most likely result from a shock to the financial system, either internal or
external, which disrupts orderly short - term funding operations. Such a crisis would likely be temporary in nature and
would not involve a change in credit ratings. A long - term funding crisis would most likely be the result of both external
and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential
circumstances have been fully addressed through detailed action plans and the establishment of trigger points for
monitoring such events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to
changes in interest rates. Interest - rate risk is the risk to earnings and equity value arising from changes in market interest
rates and arises in the normal course of business to the extent that there is a divergence between the amount of
interest - earning assets and the amount of interest - bearing liabilities that are prepaid/withdrawn, re - price, or mature in
specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility
arising from shifts in market interest rates. Our Asset and Liability Committee, or 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. The objectives of interest rate risk management are to control
exposure of net interest income changes associated with interest rate movements and to achieve sustainable growth in net
interest income. Effective interest rate risk management begins with understanding the dynamic characteristics of assets
and liabilities and determining the appropriate interest rate risk position given business activities, management
objectives, market expectations and ALCO policy limits and guidelines.
Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option
risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences
in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse
consequence resulting from unequal change in the spread between two or more rates for different instruments with the
same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between
two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises
from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided
to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early
redemptions.
Management regularly reviews our exposure to changes in interest rates. Among the factors considered are
changes in the mix of interest - earning assets and interest - bearing liabilities, interest rate spreads and repricing periods.
ALCO reviews, on at least a quarterly basis, the interest rate risk position.
The interest - rate risk position is measured and monitored at the Bank using net interest income simulation
models and economic value of equity sensitivity analysis that capture both short - term and long - term interest - rate risk
exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest
rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these
measurements rely on estimates of the potential impact that changes in interest rates may have on the value and
prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash
flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling
process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported
position and the impact that potential changes in interest rates may have on net interest income and the economic value
of our equity.
92
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios
including instantaneous shocks.
The estimated impact on our net interest income in hypothetical rising and declining rate scenarios assuming
immediate, parallel moves in interest rates, calculated as of December 31, 2020 and December 31, 2019, are presented in
the table below.
December 31, 2020
December 31, 2019
Following Following Following Following
24 months
24 months
12 months
12 months
+400 basis points
+300 basis points
+200 basis points
+100 basis points
−100 basis points
−200 basis points
10.2 %
7.9 %
5.5 %
3.2 %
−4.9 %
N/A %
7.3 %
3.2 %
−1.0 %
−5.3 %
−18.8 %
N/A %
5.5 %
4.2 %
2.9 %
1.5 %
−5.4 %
N/A %
12.2 %
9.0 %
5.7 %
2.4 %
−11.9 %
N/A %
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of
December 31, 2020, demonstrating that an increase in interest rates would have a positive impact on net interest income
over the next 12 and 24 months. The balance sheet was more asset sensitive in a rising-rate environment as of December
31, 2020 than it was as of December 31, 2019. The increase is primarily related to a change in the mix and repricing
characteristics of our liabilities along with an increase cash and cash equivalents.
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 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 December 31, 2020 and
December 31, 2019, assuming immediate parallel shifts in interest rates.
+400 basis points
+300 basis points
+200 basis points
+100 basis points
−100 basis points
−200 basis points
Operational Risk
December 31,
2020
December 31,
2019
12.1 %
12.6 %
11.9 %
9.5 %
−51.0 %
N/A %
12.8 %
11.4 %
9.2 %
6.1 %
−23.2 %
N/A %
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls,
and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management
continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and
employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.
93
Compliance Risk
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from
failure to comply with rules and regulations issued by the various banking agencies and standards of good banking
practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the
prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending
challenges resulting from the expansion of our banking center network, employment and tax matters.
Strategic and/or Reputation Risk
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully
develop and execute business plans, failure to assess current and new opportunities in business, markets and products,
and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements
that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and
report on various risks, including those related to the development of new products and business initiatives.
94
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alerus Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alerus Financial Corporation and Subsidiaries (the
“Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our
audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting in accordance with
the standards of the PCAOB. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CliftonLarsonAllen LLP
Minneapolis, Minnesota
March 12, 2021
We have served as the Company’s auditor since 2014.
95
Alerus Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
Assets
Cash and cash equivalents
Investment securities, at fair value
Available-for-sale
Equity
Loans held for sale
Loans
Allowance for loan losses
Net loans
Land, premises and equipment, net
Operating lease right-of-use assets
Accrued interest receivable
Bank-owned life insurance
Goodwill
Other intangible assets
Servicing rights
Deferred income taxes, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Long-term debt
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding
Common stock, $1 par value, 30,000,000 shares authorized: 17,125,270 and 17,049,551 issued
and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31, December 31,
2020
2019
$
172,962
$
144,006
592,342
—
122,440
1,979,375
(34,246)
1,945,129
20,289
6,918
9,662
32,363
30,201
25,919
1,987
9,409
44,150
$ 3,013,771
310,350
2,808
46,846
1,721,279
(23,924)
1,697,355
20,629
8,343
7,551
31,566
27,329
18,391
3,845
7,891
29,968
$ 2,356,878
$
754,716
1,817,277
2,571,993
58,735
7,861
45,019
2,683,608
$
577,704
1,393,612
1,971,316
58,769
8,864
32,201
2,071,150
—
—
17,125
90,237
212,163
10,638
330,163
$ 3,013,771
17,050
88,650
178,092
1,936
285,728
$ 2,356,878
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
96
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Income
(dollars and shares in thousands, except per share data)
Interest Income
Loans, including fees
Investment securities
Taxable
Exempt from federal income taxes
Other
Total interest income
Interest Expense
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Retirement and benefit services
Wealth management
Mortgage banking
Service charges on deposit accounts
Net gains (losses) on investment securities
Other
Total noninterest income
Noninterest Expense
Compensation
Employee taxes and benefits
Occupancy and equipment expense
Business services, software and technology expense
Intangible amortization expense
Professional fees and assessments
Marketing and business development
Supplies and postage
Travel
Mortgage and lending expenses
Other
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Per Common Share Data
Basic earnings per common share
Diluted earnings per common share
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Year ended
December 31,
2019
2018
2020
$
86,425
$
85,830
$
81,159
7,798
949
930
96,102
8,843
—
3,413
12,256
83,846
10,900
72,946
60,956
17,451
61,641
1,409
2,737
5,177
149,371
89,206
20,050
11,073
19,124
3,961
4,700
3,133
2,169
359
5,039
4,985
163,799
58,518
13,843
44,675
2.57
2.52
0.60
17,106
17,438
$
$
$
$
5,576
798
1,096
93,300
13,334
1,805
3,610
18,749
74,551
7,312
67,239
63,811
15,502
25,805
1,772
357
6,947
114,194
74,018
19,456
10,751
16,381
4,081
4,011
3,162
2,722
1,787
2,853
3,315
142,537
38,896
9,356
29,540
1.96
1.91
0.57
14,736
15,093
$
$
$
$
4,670
1,234
639
87,702
6,991
1,896
3,591
12,478
75,224
8,610
66,614
63,316
14,900
17,630
1,808
85
5,010
102,749
69,403
17,866
11,086
14,525
4,638
5,098
3,459
2,737
1,738
2,153
3,622
136,325
33,038
7,172
25,866
1.88
1.84
0.53
13,763
14,063
$
$
$
$
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
97
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for losses (gains) realized in income
Total other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other comprehensive income
Other comprehensive income (loss), net of tax
Total comprehensive income
2020
44,675
$
Year ended
December 31,
2019
29,540
$
2018
25,866
$
14,355
(2,737)
11,618
2,916
8,702
53,377
$
7,751
(357)
7,394
1,857
5,537
35,077
$
(3,277)
(116)
(3,393)
(852)
(2,541)
23,325
$
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
98
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Year ended December 31, 2020
Accumulated
(dollars and shares in thousands)
Balance as of December 31, 2019
Net income
Other comprehensive income (loss)
Common stock repurchased
Common stock dividends
Share - based compensation expense
Vesting of restricted stock
Balance as of December 31, 2020
(dollars in thousands)
Balance as of December 31, 2018
Net income
Other comprehensive income (loss)
Common stock repurchased
Common stock dividends
ESOP repurchase obligation termination
Initial public offering of 3,289,000 shares of
common stock net of issuance costs
Share - based compensation expense
Vesting of restricted stock
Balance as of December 31, 2019
(dollars and shares in thousands)
Balance December 31, 2017
Net income
Adjustment for adoption of ASU 2016-01
Other comprehensive income (loss)
Common stock repurchased
Common stock dividends
Net change in fair value of ESOP shares
Share - based compensation expense
Vesting of restricted stock
Balance as of December 31, 2018
Common
Stock
Additional
Paid-in
Capital
ESOP-
Retained Comprehensive
Owned
Earnings Income (Loss) Shares
Other
$ 17,050 $ 88,650 $ 178,092 $
—
—
(16)
—
14
77
—
—
(249)
—
1,913
(77)
44,675
—
(217)
(10,387)
—
—
$ 17,125 $ 90,237 $ 212,163 $
1,936 $
—
8,702
—
—
—
—
10,638 $
Year ended December 31, 2019
Accumulated
Total
— $ 285,728
44,675
—
8,702
—
—
(482)
(10,387)
—
—
1,927
—
—
— $ 330,163
Common
Stock
Additional
Paid-in
Capital
ESOP-
Retained Comprehensive
Owned
Earnings Income (Loss) Shares
Other
Total
$ 13,775 $ 27,743 $ 159,037 $
—
—
(81)
—
—
—
—
(291)
—
—
29,540
—
(1,576)
(8,909)
—
(3,601) $ (34,494) $ 162,460
29,540
5,537
(1,948)
(8,909)
34,494
—
—
—
—
34,494
—
5,537
—
—
—
3,289
13
54
59,515
1,737
(54)
—
—
$ 17,050 $ 88,650 $ 178,092 $
—
—
1,936 $
62,804
1,750
—
—
—
— $ 285,728
Year ended December 31, 2018
Accumulated
Common
Stock
Additional
Paid-in
Capital
ESOP-
Owned
Retained Comprehensive
Earnings Income (Loss) Shares
Other
Total
$ 13,699 $ 26,040 $ 140,986 $
—
—
—
(15)
—
—
11
80
—
—
—
(53)
—
—
1,836
(80)
25,866
(71)
—
(288)
(7,456)
—
—
—
$ 13,775 $ 27,743 $ 159,037 $
—
71
(2,541)
—
—
—
—
—
(1,131) $ (31,491) $ 148,103
25,866
—
(2,541)
(356)
(7,456)
(3,003)
1,847
—
(3,601) $ (34,494) $ 162,460
—
—
—
—
—
(3,003)
—
—
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
99
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes
Provision for loan losses
Provision for foreclosed asset losses
Depreciation and amortization
Amortization and accretion of premiums/discounts on investment securities
Amortization of operating lease right-of-use assets
Stock-based compensation
Increase in value of bank-owned life insurance
Realized loss (gain) on sale of branch
Realized loss (gain) on sale of fixed assets
Realized loss (gain) on derivative instruments
Realized loss (gain) on loans sold
Realized loss (gain) on sale of foreclosed assets
Realized loss (gain) on sale of investment securities
Realized loss (gain) on servicing rights
Net change in:
Securities held for trading
Loans held for sale
Accrued interest receivable
Other assets
Accrued expenses and other liabilities
Net cash provided (used) by operating activities
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale
Proceeds from maturities of investment securities available-for-sale
Purchases of investment securities available-for-sale
Net (increase) decrease in equity securities
Net (increase) decrease in loans
Payment to FDIC for termination of loss share agreements
Net cash paid for business combinations
Proceeds from sale of branch
Proceeds from sale of fixed assets
Purchases of premises and equipment
Proceeds from sales of foreclosed assets
Net cash provided (used) by investing activities
Financing Activities
Net increase (decrease) in deposits
Net increase (decrease) in short-term borrowings
Repayments of long-term debt
Cash dividends paid on common stock
Repurchase of common stock
Proceeds from the issuance of common stock in initial public offering net of issuance costs
Net cash provided (used) by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year ended
December 31,
2019
2018
2020
$
44,675 $
29,540 $
25,866
(4,434)
10,900
—
8,950
1,760
(25)
1,927
(797)
—
707
1,927
(57,070)
(28)
(2,737)
936
—
(18,621)
(2,111)
(2,694)
(5,527)
(22,262)
337
7,312
—
8,768
1,127
—
1,750
(803)
(1,544)
(541)
(2,051)
(18,942)
(122)
(357)
(209)
1,539
(13,146)
12
4,399
2,179
19,248
75,647
69,680
(414,724)
2,808
(259,130)
—
(9,279)
—
—
(3,811)
429
(538,380)
600,677
—
(210)
(10,387)
(482)
—
589,598
28,956
144,006
32,565
37,109
(123,226)
357
(21,898)
—
—
10,379
875
(2,901)
1,146
(65,594)
191,444
(93,460)
(230)
(8,909)
(1,948)
62,804
149,701
103,355
40,651
(20)
8,610
245
8,729
1,570
—
1,847
(804)
—
(11)
1
(8,672)
(114)
(129)
(577)
406
12,124
(828)
4,478
832
53,553
6,488
35,082
(29,556)
2,280
(163,156)
(3,000)
—
—
11
(3,753)
896
(154,708)
(35,669)
63,460
(171)
(7,456)
(356)
—
19,808
(81,347)
121,998
40,651
$ 172,962 $ 144,006 $
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
100
Supplemental Cash Flow Disclosures
Cash paid for:
Interest
Income taxes
Cash and cash equivalents acquired
Non-cash information
Loan collateral transferred to foreclosed assets
Unrealized gain (loss) on investment securities available-for-sale
Initial recognition of operating lease right-of-use assets
Initial recognition of operating lease liabilities
Right-of-use assets obtained in exchange for new operating leases
ESOP repurchase obligation termination
Loans transferred to held for sale
Deposits transferred to held for sale
Acquisitions
Noncash assets acquired
Liabilities assumed
Net noncash acquired
Year ended
December 31,
2019
2018
2020
$
12,641 $
13,582
513
18,431 $
7,219
—
12,315
5,347
—
456
8,702
—
—
1,555
—
—
—
14,627
(5,348)
9,279
828
5,537
10,485
11,006
—
34,494
—
—
—
—
—
748
(2,541)
—
—
—
—
32,031
(24,197)
—
—
—
See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation
101
NOTE 1 Significant Accounting Policies
Notes to Consolidated Financial Statement
Alerus Financial Corporation is a financial holding company organized under the laws of Delaware. Alerus
Financial Corporation and its subsidiaries, or the Company is a diversified financial services company headquartered in
Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, or the Bank, the Company
provides innovative and comprehensive financial solutions to businesses and consumers through four distinct business
lines – banking, retirement and benefit services, wealth management, and mortgage.
The Bank operates under a national charter and provides full banking services. As a national bank, the Bank is
subject to regulation by the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation.
Initial Public Offering
On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On
September 25, 2019, the Company sold an additional 429,000 shares of common stock pursuant to the exercise in full,
by the underwriters, of their option to purchase additional shares. The aggregate offering price for the shares sold by the
Company was $69.1 million, and after deducting $4.7 million of underwriting discounts and $1.6 million of offering
expenses paid to third parties, the Company received total net proceeds of $62.8 million.
Policies which materially affect the determination of financial position, cash flows, and results of operations are
summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries in which the
Company has a controlling interest. Significant intercompany balances and transactions have been eliminated in
consolidation.
In the normal course of business, the Company may enter into a transaction with a variable interest entity, or
VIE. VIEs are legal entities whose investors lack the ability to make decisions about the entity’s activities, or whose
equity investors do not have the right to receive the residual returns of the entity. The applicable accounting guidance
requires the Company to perform ongoing quantitative and qualitative analysis to determine whether it must consolidate
any VIE. The Company does not have any ownership interest in or exert any control over any VIE, and thus no VIEs are
included in the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term include the valuation
of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of
testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial
instruments.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of
2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are
102
applicable to public companies that are not emerging growth companies, including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-
Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company
complies with the greater obligations of public companies that are not emerging growth companies, the Company may
avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long
as the Company is an emerging growth company. The Company will continue to be an emerging growth company until
the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of
common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by
the U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; (2) the last day of the fiscal year in
which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a
“large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on
which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in
non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less
attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the
Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and
the Company’s stock price may be more volatile.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised
accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. The Company elected to take advantage of
the benefits of this extended transition period.
Concentrations of Credit Risk
Substantially all of the Company’s lending activities are with clients located within North Dakota, Minnesota,
and Arizona. At December 31, 2020 and 2019 respectively, 35.0% and 27.8% of the Company’s loan portfolio consisted
of commercial and industrial loans that were not secured by real estate. The Company does not have any significant loan
concentrations in any one industry or with any one client. Note 6 discusses the Company’s loan portfolio.
The Company invests in a variety of investment securities and does not have any significant concentrations in
any one industry or to any one issuer. Note 5 discusses the Company’s investment securities portfolio.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and due from banks includes cash and cash
equivalents, balances due from banks, and federal funds sold, all of which have an original maturity within 90 days.
Cash flows from loans and deposits are reported net.
Interest - bearing deposits in banks are carried at cost.
Investment Securities
Debt securities that are held for short - term resale are classified as trading securities and carried at estimated fair
value, with increases and decreases in estimated fair value recognized in net gains (losses) on investment securities
within the statements of income. Other marketable securities are classified as available - for - sale and are carried at
estimated fair value. Realized gains (losses) on investment securities available - for - sale are included in net gains (losses)
on investment securities and, when applicable, are reported as a reclassification adjustment, net of tax, in other
comprehensive income. Gains (losses) on sales of investment securities are determined using the specific identification
method on the trade date. The amortization of premiums and accretion of discounts are recognized in interest income
using methods approximating the interest method over the period to maturity.
103
Declines in the estimated fair value of individual available - for - sale investment securities below their cost that
are other than temporary, result in write - downs of the individual investment securities to their estimated fair value. The
Company monitors the investment security portfolio for impairment on an individual security basis and has a process in
place to identify investment securities that could potentially have a credit impairment that is other than temporary.
This process involves analyzing the length of time and the extent to which the estimated fair value has been less
than the amortized cost basis, the market liquidity for the security, the financial condition and near - term prospects of the
issuer, expected cash flows, and the Company’s intent and ability to hold the investment for a period of time sufficient to
recover the temporary loss. The ability to hold is determined by whether it is more likely than not that the Company will
be required to sell the security before its anticipated recovery. A decline in value due to a credit event that is considered
other than temporary is recorded as a loss in noninterest income.
Equity investments for which readily determinable values are unavailable are carried at cost in other assets on
the consolidated balance sheet.
Nonmarketable Equity Securities
Nonmarketable equity securities include the Bank’s required investments in the stock of the Federal Home
Loan Bank of Des Moines, or the FHLB and the Federal Reserve Bank, or the FRB. The Bank is a member of the FHLB
as well as its regional FRB. Members are required to own a certain amount of stock based of the level of borrowing and
other factors, and may invest in additional amounts. FHLB stock and FRB stock are carried at cost, classified as other
assets, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends
are reported as income.
Loans Held for Sale/Branch Sale
Loans originated and intended for sale in the secondary market or loans transferred to held for branch sale are
carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains (losses) on loan sales are recorded in mortgage banking revenue on the
consolidated statements of income. Refer to Note 30 (Branch Sale) for additional details on loans held for branch sale.
Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Loans that
management has the intent and ability to hold for the foreseeable future, until maturity or pay - off, generally are reported
at their outstanding unpaid principal balances adjusted for charge - offs, and the allowance for loan losses. Loan fees
received that are associated with originating or acquiring certain loans are deferred, net of costs, and amortized over the
life of the loan as a yield adjustment to interest income.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is
well - secured and in process of collection. Consumer loans are typically charged - off no later than 120 days past due. Past
due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged - off at an
earlier date if collection of principal or interest in considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged - off is reversed against
interest income. The interest on these loans is accounted for on the cash - basis or cost - recovery method until qualifying
for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses (allowance) is an estimate of loan losses inherent in the Company’s loan
portfolio. The allowance is established through a provision for loan losses which is charged to expense. Additions to the
allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses
104
are charged - off against the allowance when the Company determines the loan balance to be uncollectible. Cash received
on previously charged - off amounts is recorded as a recovery to the allowance.
The allowance consists of three primary components, general reserves, specific reserves related to impaired
loans, and unallocated reserves. The general component covers non - impaired loans and is based on historical losses
adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment and is based on
the actual loss history experienced by the Company over the most recent five years. This actual loss experience is
adjusted for economic factors based on the risks present for each portfolio segment. These economic factors include
consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in
charge - offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions; industry conditions;
and effects of changes in credit concentrations. These factors are inherently subjective and are driven by the repayment
risk associated with each portfolio segment.
A loan is considered impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is
impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the
original contractual interest rate, except that as a practical expedient, it may measure impairment based on an observable
market price for the estimated fair value of the collateral if collateral dependent. A loan is collateral dependent if the
repayment is expected to be provided solely by the underlying collateral.
Allowance allocations other than general and specific are included in the unallocated portion. While allocations
are made for loans based upon historical loss analysis, the unallocated portion is designed to cover the uncertainty of
how current economic conditions and other uncertainties may impact the existing loan portfolio. Factors to consider
include national and state economic conditions such as unemployment or real estate lending values. The unallocated
reserve addresses inherent probable losses not included elsewhere in the allowance for loan losses.
The Company maintains a separate general valuation allowance for each portfolio segment. These portfolio
segments include commercial and industrial, real estate construction, commercial real estate, residential real estate first
mortgage, residential real estate junior liens, and other revolving and installment with risk characteristics described as
follows:
Commercial and Industrial: Commercial and industrial loans consist of all commercial and industrial loans as
well as agricultural production and other commercial loans. Commercial and industrial loans generally possess a lower
inherent risk of loss than real estate portfolio segments as these loans are generally underwritten based on the cash flows
of the operating business. Repayment is provided by business cash flows and is influenced by economic trends such as
unemployment rates and other key economic factors. Agricultural loans generally possess a lower inherent risk of loss
than real estate portfolio segments for the same reasons as commercial and industrial loans. However, they generally
possess greater volatility of risk due to commodity pricing, which can lead to cash flow and collateral shortfalls.
Real Estate Construction: Real estate construction loans generally possess a higher inherent risk of loss than
commercial and retail real estate portfolio segments. Significant inherent risks are project completion, cost overruns, and
adherence to construction schedule. Additionally, real estate values could significantly impact the credit quality of these
loans.
Commercial Real Estate: Commercial real estate loans generally possess a higher inherent risk of loss than
other real estate portfolio segments, except real estate construction and agricultural land loans. Adverse economic
developments such as high vacancy rates or decreasing real estate values may impact commercial real estate credit
quality. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Risks associated
with farmland include volatility of real estate values driven by commodity prices, among other economic trends.
105
Residential real estate first and junior liens: The degree of risk in residential mortgage lending depends
primarily on the loan amount in relation to collateral value, the interest rate, and the borrower’s ability to repay in an
orderly fashion. These loans generally possess a lower inherent risk of loss than commercial real estate portfolio
segments. Credit quality is impacted by unemployment rates and other key economic indicators.
Other Revolving and Installment: The consumer loan portfolio is primarily comprised of homogenous loans.
Credit quality is impacted by unemployment rates and other key economic indicators.
Although management believes the allowance to be adequate, actual losses may vary from its estimates. On a
quarterly basis, management reviews the adequacy of the allowance, including consideration of the relevant risks in the
portfolio, current economic conditions, and other factors. If the board of directors and management determine that
changes are warranted based on those reviews, the allowance is adjusted.
Off - Balance Sheet Credit Related Financial Instruments
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. The Company establishes a reserve for unfunded commitments using
historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on
the Consolidated Balance Sheets.
Land, Premises and Equipment, Net
Land is carried at cost. Other premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed on a straight - line method based principally on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains
(losses) on dispositions are included in current operations.
Bank - Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank - owned life insurance is
recorded at its cash surrender value, or the amount that can be realized, if lower.
Goodwill and Other Intangibles, Net
Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually. As part of its
testing, the Company first assesses the qualitative factors to determine whether it is more likely than not that the
estimated fair value of a reporting unit is less than its carrying amount. If the Company determines the estimated fair
value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the
estimated fair value of the goodwill with its carrying amount, and then measures impairment loss by comparing the
estimated fair value of goodwill with the carrying amount of that goodwill.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing
cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating
general economic and market conditions, and selecting an appropriate control premium. At December 31, 2020, the
Company believes it did not have any indications of potential impairment based on the estimated fair value of the
reporting units.
Intangible assets determined to have definite lives are amortized over the remaining useful lives. Intangible and
other long - lived assets are reviewed for impairment whenever events occur or circumstances indicate that the carrying
amount may not be recoverable.
106
Servicing Rights
Servicing rights are recognized as separate assets when rights are acquired through the sale of loans. Servicing
rights are initially recorded at estimated fair value based on assumptions provided by a third - party valuation service. The
valuation model incorporates assumptions that market participants would use in estimating future net servicing income,
such as servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment
speeds, and default rates and losses. Loan servicing income is recorded on the accrual basis and includes servicing fees
from investors and certain charges collected from borrowers, such as late payment fees, and is net of estimated fair value
adjustments to capitalized mortgage servicing rights. Capitalized servicing rights are amortized into noninterest income
in proportion to, and over the period of, the estimated future servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the estimated fair value of the rights as compared to
amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and
terms. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that estimated fair
value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the
impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to
income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a
contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned.
The amortization of servicing rights is netted against loan servicing fee income.
Impairment of Long - Lived Assets
The Company tests long - lived assets for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the
asset.
In the event such an asset is considered impaired, the impairment to be recognized is measured by the amount
by which the carrying value of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying value of estimated fair value less estimated costs to sell.
Foreclosed Assets
Assets acquired through loan foreclosure are included in other assets and are initially recorded at estimated fair
value less estimated selling costs. The estimated fair value of foreclosed assets is evaluated regularly and any decreases
in value along with holding costs, such as taxes, insurance and utilities, are reported in noninterest expense.
Transfers of Financial Assets and Participating Interests
Transfers of financial assets are accounted for as sales when control over assets has been surrendered or in the
case of loan participation, a portion of the asset has been surrendered and meets the definition of a “participating
interest.” Control over transferred assets is deemed to be surrendered when 1) the assets have been isolated from the
Company, 2) the transferee obtains the rights to pledge or exchange the transferred assets, and 3) the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Should the transfer not meet these three criteria, the transaction is treated as a secured financing.
Loans serviced for others are not included in the accompanying consolidated balance sheets. Servicing loans for
others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to
investors and collection and foreclosure processing.
107
Derivatives and Hedging Activities
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and
to accommodate the business requirements of its clients.
Derivative instruments are reported in other assets or other liabilities at estimated fair value. Changes in a
derivative’s estimated fair value are recognized currently in earnings unless specific hedge accounting criteria are met.
Deposits Held for Sale
Deposits held for sale are stated at the lower of cost or fair value on an aggregate basis. Refer to Note 30
(Branch Sale) for additional details on deposits held for sale.
Noninterest Income
Specific guidelines are established for recognition of certain noninterest income components related to the
Company’s consolidated financial statements. In accordance with Topic 606, revenues are recognized when control of
promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects
to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an
entity determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the
contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as)
the Company satisfies a performance obligation.
The Company only applies the five - step model to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception,
once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are
promised within each contract and identifies those that contain performance obligations, and assesses whether each
promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The material
groups of noninterest income that this methodology is applied to are defined as follows:
Retirement and benefit services: Retirement and benefit services income is primarily comprised of fees earned
from the administration of retirement plans, record - keeping, compliance services, payroll processing, health savings
accounts, and flexible benefit plans. Fees are earned based on a combination of the market value of assets under
administration and transaction based fees for services provided. Fees that are determined based on the market value of
the assets under administration are generally billed monthly or quarterly in arrears and recognized monthly as the
Company’s performance obligations are met. Other transaction based fees are recognized monthly as the performance
obligation is satisfied.
Wealth management: Wealth management income is earned from a variety of sources including trust
administration and other related fiduciary services, custody, investment management and advisory services, and
brokerage. Fees are based on the market value of the assets under management and are generally billed monthly in
arrears and recognized monthly as the Company’s performance obligations are met. Commissions on transactions are
recognized on a trade - date basis as the performance obligation is satisfied at the point in time in which the trade is
processed. Other related services are based on a fixed fee schedule and the revenue is recognized when the services are
rendered, which is when the Company has satisfied its performance obligation.
Service charges on deposit accounts: Service charges on deposit accounts primarily consist of account analysis
fees, monthly maintenance fees, overdraft fees, and other deposit account related fees. Overdraft fees and certain service
charges are fixed and the performance obligation is typically satisfied at the time of the related transaction. The
consideration for analysis fees and monthly maintenance fees are variable as the fee can be reduced if the customer
meets certain qualifying metrics. The Company’s performance obligations are satisfied at the time of the transaction or
over the course of a month.
108
Other noninterest income: Other noninterest income components include debit card interchange fees,
bank - owned life insurance income and miscellaneous transactional fees. Income earned from these revenue streams is
generally recognized concurrently with the satisfaction of the performance obligation.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance would be recognized if it is “more likely than not” that the deferred tax asset would not be realized.
These calculations are based on many complex factors including estimates of the timing of reversals of
temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences
between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from
the estimates and interpretations used in determining the current and deferred income tax liabilities.
The Company follows standards related to Accounting for Uncertainty in Income Taxes. These rules establish a
higher standard for tax benefits to meet before they can be recognized in a Company’s consolidated financial statements.
The Company can recognize in financial statements the impact of a tax position taken, or expected to be taken, if it is
more likely than not that the position will be sustained on an audit based on the technical merit of the position. See
Note 21 (Income Taxes) for additional disclosures. The Company recognizes both interest and penalties as components
of other operating expenses.
The amount of the uncertain tax position was not determined to be material. It is not expected that the
unrecognized tax benefit will be material within the next 12 months. The Company did not recognize any interest or
penalties in 2020, 2019, or 2018.
The Company files consolidated federal and state income tax returns. The Company is no longer subject to U.S.
federal or state tax examinations by tax authorities for years before 2017.
Comprehensive Income
Recognized revenue, expenses, gains, and losses are included in net income. Certain changes in assets and
liabilities, such as unrealized gains (losses) on investment securities available - for - sale, are reported as a separate
component of the equity section of the consolidated balance sheets, such items, along with net income, are components
of comprehensive income.
Stock Compensation Plans
Stock compensation accounting guidance requires that the compensation cost relating to share - based payment
transactions be recognized in financial statements. The cost will be measured based on the grant date estimated fair value
of the equity or liability instruments issued. The grant date estimated fair value is determined using the 20 day
weighted - average closing price of the Company’s common stock. The stock compensation accounting guidance requires
that compensation cost for all stock awards be calculated and recognized over the employee’s service period, generally
defined as the vesting period. For awards with graded - vesting, compensation cost is recognized on a straight - line basis
over the requisite service period for the entire award.
109
Earnings per Share
Earnings per share are calculated utilizing the two-class method. Basic earnings per share is calculated by
dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common
shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share are calculated
by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common
shareholders by the weighted-average number of share adjusted for the dilutive effect of common stock awards.
NOTE 2 New Accounting Pronouncements
The following Financial Accounting Standards Board, or FASB, Accounting Standards Updates, or ASUs are
divided into pronouncements which have been adopted by the Company since January 1, 2020, and those which are not
yet effective and have been evaluated or are currently being evaluated by management, as of December 31, 2020.
Adopted Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be
required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is
the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the
new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct
financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account
for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor
accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases
to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be
required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement
the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing
activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018.
All entities are required to use a modified retrospective approach for leases that exist or are entered into after the
beginning of the earliest comparative period in the financial statements. As the Company elected the transition option
provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019. The Company also
elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to
separate lease and non-lease components and instead to account for them as a single lease component, and the option not
to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve
months or less). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight
when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as
branch locations, which are considered operating leases, and therefore, were not previously recognized on the
Company’s consolidated balance sheets. The new guidance requires these lease agreements to be recognized on the
consolidated balance sheets as a right-of-use asset and a corresponding lease liability. The new guidance did not have a
material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 10
(Leases) for more information.
In January 2017, the FASB issued ASU No. 2017 - 04, Simplifying the Test for Goodwill Impairment. This ASU
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the
amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of
a reporting unit exceeds its estimated fair value, not to exceed the carrying amount of goodwill. For public business
entities that are US Securities and Exchange Commission filers, ASU 2017 - 04 is effective for interim and annual
reporting periods beginning after December 15, 2019. The Company adopted ASU 2017-04 effective January 1, 2020,
and the new guidance did not have an impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt
Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to
the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual
110
life of the security. ASU 2017-08 does not change the accounting for purchased callable debt securities held at a
discount as the discount will continue to be accreted to maturity. ASU 2017-08 is effective for public business entities
for the interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The
guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made
to retained earnings as of the beginning of the first reporting period in which ASU 2017-08 is adopted. The Company
adopted this standard as of January 1, 2019, and has evaluated the provisions of ASU 2017-08 and determined there is
no impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging
Activities.” This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to
financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting
for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the
application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods
beginning after December 15, 2018. The Company currently does not designate any derivative financial instruments as
formal hedging relationships, and therefore, does not currently utilize hedge accounting. As such, ASU No. 2017-12 did
not impact the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018 - 07, Compensation (Topic 718): Improvements to Nonemployee
Share - Based Payment Accounting. This ASU has been issued as part of a simplification initiative which will expand the
scope of Topic 718 to include share - based payment transactions for the acquiring of goods and services from
non - employees and expands the scope through the amendments to address and improve aspects of the accounting for
non - employee share - based payment transactions. The amendments will be effective for public business entities for
interim and annual reporting periods beginning after December 15, 2018. The Company adopted ASU 2018 - 07 effective
January 1, 2019, and has evaluated the provisions of ASU 2018 - 07 and determined there was no significant impact on its
consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018 - 13, Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU eliminates, adds, and modifies certain disclosure requirements for
estimated fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and
reasons for transfer between Level 1 and Level 2 of the estimated fair value hierarchy, but will be required to disclose
the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value
measurements. ASU 2018 - 13 is effective for all entities for interim and annual reporting periods beginning after
December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020, and the revised disclosure
requirements did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal Use Software
(Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that
is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for
the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-
15 was effective for the Company on January 1, 2020, and did not have an impact on the Company’s consolidated
financial statements.
Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016 - 13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the
current expected credit loss, or CECL which significantly changes the way impairment of financial instruments is
recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of
financial instruments. The main provisions of ASU 2016 - 13 include (1) replacing the “incurred cost” approach under
GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an
allowance for credit losses related to available - for - sale debt securities rather than a direct write - down of the carrying
amount of the investments, as is required by the other - than - temporary impairment model under current GAAP, and (3) a
111
simplified accounting model for purchase credit - impaired debt securities and loans. In November 2019, the FASB issued
ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU
No. 2016-13 for certain entities, including private companies and smaller reporting companies, until fiscal years
beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted.
As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the
amended effective date. The Company does not plan to early adopt this standard but continues to work on its
implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss
estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the
impact will be influenced by the composition, characteristics, and quality of our loan portfolio, as we as the general
economic conditions and forecasts as of the adoption date.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a
variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting
guidance. This update is not expected to have a significant impact on the Company’s consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief to provide entities with an option
to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments. In
November 2019, the FASB issued ASU 2019-10, which amends the effective date of this ASU for certain entities,
including private companies and smaller reporting companies until after December 15, 2022, including interim periods
within those fiscal years. As an emerging growth company, the Company can take advantage of this delay and plans to
adopt the standard with the amended effective date. This update is not expected to have a significant impact on the
Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the
accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments
also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending
existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning
after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for
which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the
retrospective, modified retrospective, or prospective basis. The Company is currently reviewing the provisions of this
new pronouncement, but does not expect adoption of this guidance to have a material impact on the Company’s
consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments
– Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions
between Topic 321, Topic 323, and Topic 815. The ASU is based on a consensus of the Emerging Issues Task Force and
is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to
accounting for financial instruments, including providing an entity the ability to measure certain equity securities
without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable
price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the
amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue
the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The
Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial
statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This
ASU represents changes to clarify or improve the Accounting Standards Codification, or ASU, related to seven topics.
The amendments make the ASC easier to understand and easier to apply by eliminating inconsistencies and providing
clarifications. Issues 1, 2, 3, 4 and 5 are conforming amendments and for public business entities effective upon the
issuance of the standard. Issues 6 and 7 are amendments that affect the guidance in ASU 2016-13. The Company will
consider these clarifications and improvements in determining the appropriate adoption of ASU 2016-13. In October
2020, the FASB issued ASU No. 2020-10, Codification Improvements removing Section A which included issues 1-16
112
because the issues in that section will be addressed in a separate ASU. The Company will not be affected by ASU 2020-
03 for any remaining sections and will continue to review new standards as they are issued.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the
potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for
applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference
LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global
market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through
December 31, 2022. In January 2021, the FASB issue ASU 2021-01. Reference Rate Reform (Topic 848) in response to
concerns about structural risks in accounting for reference rate reform. The ASU clarifies certain optional expedients and
exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that affected by the
discontinuing transition. The Company is assessing both of the ASU’s and their impact on the Company’s transition
away from LIBOR for its loan and other financial instruments.
NOTE 3 Business Combinations
On December 18, 2020, the Company acquired Retirement Planning Services, Inc, or RPS, located in Littleton,
Colorado for a total purchase price of $13.4 million, which included cash consideration of $9.8 million and an earn out
liability of $3.6 million. As part of the transaction, $11.5 million was allocated to an identified customer intangible and
$2.9 million to goodwill. The purchase consisted of approximately 1,000 retirement and health benefit administration
plans, with more than 48,000 plan participants, 300 COBRA clients, and 10,000 COBRA members and $1.3 billion in
assets under administration/management. The purchased assets and assumed liabilities were recorded at their respective
acquisition date estimate fair values indicated in the following table:
(dollars in thousands)
Assets
Cash and cash equivalents
Land premises and equipment, net
Other intangible assets
Other assets
Total assets
Liabilities
Other liabilities
Total liabilities
Excess assets over liabilities
Cash paid for RPS
Total goodwill recorded
As recorded by
RPS
Fair Value
Adjustments
As recorded by
the Company
$
$
513
16
99
304
932
1,418
1,418
(486)
$
$
—
(16)
11,390
(38)
11,336
3,930
3,930
7,406
$
$
513
—
11,489
266
12,268
5,348
5,348
6,920
9,792
2,872
NOTE 4 Restrictions on Cash and Due from Banks
Banking regulators require bank subsidiaries to maintain minimum average reserve balances, either in the form
of vault cash or reserve balances held with central banks or other financial institutions. The amount of required reserve
balances were approximately $0 and $13.8 million at December 31, 2020 and 2019, respectively, and represent those
required to be held at the Federal Reserve Bank. In addition to vault cash, the Company held balances at the Federal
Reserve Bank and other financial institutions of $145.6 million and $109.4 million at December 31, 2020 and 2019,
respectively, to meet these requirements. The balances are included in cash and cash equivalents on the Consolidated
Balance Sheets.
113
NOTE 5 Investment Securities
The amortized cost of investment securities and their estimated fair values, with gross unrealized gains (losses)
at December 31, 2020 and 2019 are as follows:
(dollars in thousands)
U.S. Treasury and agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
(dollars in thousands)
U.S. Treasury and agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
December 31, 2020
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
5,926
148,491
$
—
5,282
$
$
(19)
—
5,907
153,773
254,002
139,059
109
30,553
578,140
$
8,002
1,070
6
387
14,747
$
—
(436)
—
(90)
(545)
$
262,004
139,693
115
30,850
592,342
December 31, 2019
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
21,246
68,162
$
9
647
$
(15)
(161)
$
21,240
68,648
180,411
30,752
139
7,054
307,764
$
2,258
101
5
41
3,061
$
(131)
(168)
—
—
(475)
$
182,538
30,685
144
7,095
310,350
$
$
$
The amortized cost and estimated fair value of investment securities at December 31, 2020, by contractual
maturity are as follows:
(dollars in thousands)
Due within one year or less
Due after one year through five years
Due after five years through ten years
Due after 10 years
Total available-for-sale investment securities
Amortized
Cost
$
$
3,469
31,607
155,141
387,923
578,140
Fair
Value
3,486
32,256
160,462
396,138
592,342
$
$
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Investment securities with carrying value of $160.8 million and $136.2 million, were pledged at December 31,
2020 and 2019, respectively, to secure public deposits and for other purposes required or permitted by law.
Proceeds from the sale of available - for - sale securities for the years ended December 31, 2020, 2019, and 2018
are displayed in the table below:
(dollars in thousands)
Proceeds
Realized gains
Realized losses
$
2020
$
75,647
2,737
—
Year ended
December 31,
2019
$
32,565
357
(22)
2018
6,488
144
(15)
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Information pertaining to investment securities with gross unrealized losses that are not deemed to be
other - than - temporarily impaired at December 31, 2020 and 2019 aggregated by investment category and length of time
that individual investment securities have been in a continuous loss position, follows:
(dollars in thousands)
U.S. Treasury and agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
$
Less than 12 Months
Fair
Value
Unrealized
Losses
$
December 31, 2020
Over 12 Months
Total
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
(10) $
—
4,509 $
—
(9) $
—
1,309 $
—
(19) $
—
5,818
—
—
(432)
—
(90)
(532) $ 89,457 $
—
68,494
—
16,454
—
(4)
—
—
(13) $
—
2,356
2
—
3,667 $
—
—
70,850
(436)
2
—
16,454
(90)
(545) $ 93,124
(dollars in thousands)
U.S. Treasury and agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
(140)
11,959
(52)
(116)
—
—
17,131
15,235
2
—
Less than 12 Months
Fair
Value
Unrealized
Losses
$
(5) $
1,740 $
December 31, 2019
Over 12 Months
Total
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
(10) $
(21)
9,990 $
5,798
(15) $ 11,730
17,757
(161)
(79)
(52)
—
—
14,036
6,195
—
—
(131)
(168)
—
—
31,167
21,430
2
—
(475) $ 82,086
Total available-for-sale investment securities
$
(313) $ 46,067 $
(162) $ 36,019 $
For all of the above investment securities, the unrealized losses were generally due to changes in interest rates
and unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach
maturity. The Company evaluates securities for other-than-temporary impairment, or OTTI, on a quarterly basis, at a
minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses,
consideration is given to the severity and duration of the impairment; the financial condition and near-term prospects of
the issuer, which for debt securities, considers external credit ratings and recent downgrades and the intent and ability of
the Company to hold the security for a period of time sufficient for a recovery in value.
For the year ended December 31, 2020 and 2019, the Company did not believe any OTTI existed and therefore
did not recognize any OTTI losses on its investment securities.
As of December 31, 2020 and 2019, the carrying value of the Company’s Federal Reserve Bank stock and
FHLB stock was as follows:
(dollars in thousands)
Federal Reserve
FHLB
December 31,
2020
December 31,
2019
$
2,675
3,090
$
2,675
3,080
These securities can only be redeemed or sold at their par value and only to the respective issuing institution or
to another member institution. Management considers these non-marketable equity securities to be long-term
investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate
recoverability of the par value rather than recognizing temporary declines in value.
115
Visa Class B Restricted Shares
In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These
shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A
common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by
Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these
litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund
additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted
Class A shares. As of December 31, 2020, the conversion ratio was 1.6228. Based on the existing transfer restriction and
the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,236 Class A
equivalents) that the Company owned as of December 31, 2020 and 2019, are carried at a zero cost basis.
NOTE 6 Loans and Allowance for Loan Losses
The following table presents total loans outstanding, by portfolio segment, as of December 31, 2020 and 2019:
(dollars in thousands)
Commercial
Commercial and industrial (1)
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
December 31, December 31,
2020
2019
$
691,858
44,451
563,007
1,299,316
$
479,144
26,378
494,703
1,000,225
463,370
143,416
73,273
680,059
$ 1,979,375
457,155
177,373
86,526
721,054
$ 1,721,279
(1)
Includes PPP loans of $268.4 million at December 31, 2020.
Total loans include net deferred loan fees and costs of $4.7 million and $1.0 million at December 31, 2020 and
2019, respectively.
Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurement of delinquency
and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify
loans for nonaccrual status.
116
The following tables present past due aging analysis of total loans outstanding, by portfolio segment, as of
December 31, 2020 and 2019, respectively:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
Accruing
Current
30 - 89 Days
Past Due
December 31, 2020
90 Days
or More
Past Due
Nonaccrual
Total
Loans
$
689,340
44,451
558,127
1,291,918
461,179
143,060
73,128
677,367
$ 1,969,285
$
$
500
—
2,449
2,949
1,752
191
118
2,061
5,010
$
$
30
—
—
30
—
—
—
—
30
$
$
1,988
—
2,431
4,419
439
165
27
631
5,050
$
691,858
44,451
563,007
1,299,316
463,370
143,416
73,273
680,059
$ 1,979,375
Accruing
Current
30 - 89 Days
Past Due
December 31, 2019
90 Days
or More
Past Due
Nonaccrual
Total
Loans
$
473,900
26,251
492,707
992,858
455,244
176,915
86,172
718,331
$ 1,711,189
$
$
382
127
556
1,065
666
184
348
1,198
2,263
$
$
—
—
—
—
448
—
—
448
448
$
$
4,862
—
1,440
6,302
797
274
6
1,077
7,379
$
479,144
26,378
494,703
1,000,225
457,155
177,373
86,526
721,054
$ 1,721,279
Interest income foregone on nonaccrual loans approximated $0.5 million, $0.4 million, and $0.3 million for
the years ended December 31, 2020, 2019, and 2018, respectively.
The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are
relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The
Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended
nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual
amounts, and actual losses incurred.
The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and
periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit
risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the
Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of
borrowers and guarantors, trends in the industries in which the borrowers operate, and the estimated fair values of
collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.
The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special
mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:
Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close
attention.
117
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s
close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the
loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do
not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well - defined
weakness or weaknesses that jeopardize the repayment of the debt. Well - defined weaknesses include a borrower’s lack
of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to
fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss
if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and charged off immediately.
The tables below present total loans outstanding, by portfolio segment and risk category, as of December 31,
2020 and 2019:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
December 31, 2020
Criticized
Pass
Special
Mention
Substandard
Doubtful
Total
$
669,602
44,451
533,733
1,247,786
461,221
140,461
73,236
674,918
$ 1,922,704
$
$
5,415
—
6,686
12,101
1,406
1,819
—
3,225
15,326
$
$
16,841
—
22,588
39,429
743
1,136
37
1,916
41,345
$
$
—
—
—
—
—
—
—
—
—
$
691,858
44,451
563,007
1,299,316
463,370
143,416
73,273
680,059
$ 1,979,375
December 31, 2019
Criticized
Pass
Special
Mention
Substandard
Doubtful
Total
$
448,306
25,119
462,294
935,719
456,358
176,122
86,520
719,000
$ 1,654,719
$
$
9,585
282
2,359
12,226
—
—
—
—
12,226
$
$
21,253
977
30,050
52,280
797
1,251
6
2,054
54,334
$
$
—
—
—
—
—
—
—
—
—
$
479,144
26,378
494,703
1,000,225
457,155
177,373
86,526
721,054
$ 1,721,279
The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan
losses includes a specific component related to loans that are individually evaluated for impairment and a general
component related to loans that are segregated into homogeneous pool and collectively evaluated for impairment. The
factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical
118
net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends,
and conditions. The adjustments include consideration of the following: changes in lending policies and procedures,
economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of
past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans,
concentrations, and other external factors.
The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan
losses for the three years ending December 31, 2020, 2019, and 2018:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Unallocated
Total
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Unallocated
Total
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Unallocated
Total
Beginning
Balance
Year ended December 31, 2020
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$ 12,270 $
303
6,688
19,261
1,448
671
352
2,471
2,192
$ 23,924 $
(2,168) $
355
8,185
6,372
(4,249) $
—
(865)
(5,114)
4,352 $ 10,205
658
14,105
24,968
—
97
4,449
4,321
507
514
5,342
(814)
10,900 $
—
(12)
(242)
(254)
—
(5,368) $
5
207
129
341
—
5,774
1,373
753
7,900
1,378
4,790 $ 34,246
Beginning
Balance
Year ended December 31, 2019
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$ 12,127 $
250
6,279
18,656
1,156
805
380
2,341
1,177
$ 22,174 $
5,213 $
51
259
5,523
(6,540) $
(1)
—
(6,541)
1,470 $ 12,270
303
6,688
19,261
3
150
1,623
292
99
383
774
1,015
7,312 $
—
(465)
(572)
(1,037)
—
(7,578) $
—
232
161
393
—
1,448
671
352
2,471
2,192
2,016 $ 23,924
Beginning
Balance
Year ended December 31, 2018
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$
7,589 $
343
4,909
12,841
6,911 $
(35)
1,889
8,765
(3,123) $
(60)
(600)
(3,783)
750 $ 12,127
250
6,279
18,656
2
81
833
1,411
902
499
2,812
911
$ 16,564 $
(226)
(171)
(24)
(421)
266
8,610 $
(29)
(133)
(308)
(470)
—
(4,253) $
—
207
213
420
—
1,156
805
380
2,341
1,177
1,253 $ 22,174
119
The following tables present the recorded investment in loans and related allowance for the loan losses, by
portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of December 31, 2020 and
2019:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Residential real estate first
mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Recorded Investment
Allowance for Loan Losses
Individually Collectively
Evaluated Evaluated
Total
Individually Collectively
Evaluated Evaluated Unallocated Total
December 31, 2020
$
2,616 $ 689,242 $ 691,858 $
—
5,224
7,840
44,451
557,783
1,291,476
44,451
563,007
1,299,316
336 $
—
837
1,173
9,869 $
658
13,268
23,795
— $ 10,205
658
—
—
14,105
24,968
—
439
224
27
690
462,931
143,192
73,246
679,369
463,370
143,416
73,273
680,059
—
19
13
32
5,774
1,354
740
7,868
$
8,530 $ 1,970,845 $ 1,979,375 $
1,205 $ 31,663 $
—
—
—
—
5,774
1,373
753
7,900
1,378 $ 34,246
Recorded Investment
Allowance for Loan Losses
Individually Collectively
Evaluated Evaluated
Total
Individually Collectively
Evaluated Evaluated Unallocated Total
December 31, 2019
$
976 $ 478,168 $ 479,144 $
189 $ 12,081 $
—
5,925
6,901
26,378
488,778
993,324
26,378
494,703
1,000,225
—
2,946
3,135
303
3,742
16,126
— $ 12,270
303
—
—
6,688
19,261
—
Residential real estate first
mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
$
782
266
5
1,053
7,954 $ 1,713,325 $ 1,721,279 $
457,155
177,373
86,526
721,054
456,373
177,107
86,521
720,001
—
—
3
3
1,448
671
349
2,468
3,138 $ 18,594 $
—
—
—
—
1,448
671
352
2,471
2,192 $ 23,924
120
The tables below summarize key information on impaired loans. These impaired loans may have estimated
losses which are included in the allowance for loan losses.
(dollars in thousands)
Impaired loans with a valuation allowance
Commercial and industrial
Commercial real estate
Residential real estate junior lien
Other revolving and installment
Total impaired loans with a valuation allowance
Impaired loans without a valuation allowance
Commercial and industrial
Commercial real estate
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total impaired loans without a valuation allowance
Total impaired loans
Commercial and industrial
Commercial real estate
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total impaired loans
December 31, 2020
December 31, 2019
Recorded Unpaid Related
Investment Principal Allowance Investment Principal Allowance
Recorded Unpaid Related
$
723 $
725 $
3,948
19
27
4,717
3,974
20
27
4,746
1,893
1,276
439
205
—
3,813
2,173
1,415
464
306
—
4,358
336
837
19
13
1,205
—
—
—
—
—
—
$
639 $
727 $
5,718
—
5
6,362
5,823
—
6
6,556
337
207
782
266
—
1,592
1,110
236
797
372
—
2,515
189
2,946
—
3
3,138
—
—
—
—
—
—
2,616
5,224
439
224
27
2,898
5,389
464
326
27
8,530 $ 9,104 $ 1,205 $
336
837
—
19
13
976
5,925
782
266
5
189
2,946
—
—
3
7,954 $ 9,071 $ 3,138
1,837
6,059
797
372
6
$
The table below presents the average recorded investment in impaired loans and interest income for the
three years ending December 31, 2020, 2019, and 2018:
2020
Year Ended December 31,
2019
2018
Average
Recorded
Interest
Investment Income Investment Income Investment Income
Interest Recorded
Interest Recorded
Average
Average
$
765 $
14 $
839 $
(dollars in thousands)
Impaired loans with a valuation allowance
Commercial and industrial
Commercial real estate
Residential real estate junior lien
Other revolving and installment
Total impaired loans with a valuation allowance
Impaired loans without a valuation allowance
Commercial and industrial
Real estate construction
Commercial real estate
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total impaired loans without a valuation allowance
Total impaired loans
Commercial and industrial
Real estate construction
Commercial real estate
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total impaired loans
138
—
—
152
25
—
—
—
3
—
28
5,891
—
20
6,750
2,434
—
212
230
338
3
3,217
16 $
—
—
—
16
3,163 $
1,558
4
28
4,753
30
—
8
—
4
—
42
1,595
—
223
533
718
3
3,072
39
—
138
—
3
—
180 $
3,273
—
6,103
230
338
23
9,967 $
46
—
8
—
4
—
58 $
4,758
—
1,781
533
722
31
7,825 $
—
—
—
—
—
35
—
9
—
6
—
50
35
—
9
—
6
—
50
3,972
19
28
4,784
4,151
—
1,614
461
234
—
6,460
4,916
—
5,586
461
253
28
$ 11,244 $
121
Loans with a carrying value of $1.2 billion and $1.2 billion were pledged at December 31, 2020 and 2019,
respectively, to secure FHLB borrowings, public deposits, and for other purposes required or permitted by law.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A
restructuring of debt constitutes a troubled debt restructuring, or TDR, if the Company, for economic or legal reasons
related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest
due, or acceptance of other assets in full or partial satisfaction of the debt.
During the fourth quarter of 2020, there was one loan modified as a TDR as a result of changing the terms
allowing for interest only payments and smaller extensions. As of December 31, 2020, the carrying value of the
restructured loan was $2.6 million. This loan is currently performing in compliance with the modified terms and there
was no specific reserve for loan losses allocated to the loan modified as a TDR.
As of December 31, 2020, the Company had entered into modifications on 577 loans representing $153.6
million in total principal balances, since the beginning of the COVID-19 pandemic. Of those loans, 18 loans with a total
outstanding principal balance of $8.4 million, have been granted second deferrals, 21 loans with a total outstanding
principal balance of $3.7 million remain on the first deferral and the remaining loans have been returned to a normal
payment status. These deferrals were generally no more than 90 days in duration and were not considered TDRs in
accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on
April 7, 2020.
During the first quarter of 2019, there was one loan modified as a TDR as a result of extending the amortization
period. As of December 31, 2019, the carrying value of the restructured loan was $0.2 million. The loan is currently
performing according to the modified terms and there was a $24 thousand specific reserve for loan losses allocated to the
loan modified as a TDR.
The Company does not have material commitments to lend additional funds to borrowers with loans whose
terms have been modified in TDRs or whose loans are on nonaccrual.
NOTE 7 Land, Premises and Equipment, Net
Components of land, premises and equipment at December 31, 2020 and 2019 are as follows:
(dollars in thousands)
Land
Buildings and improvements
Finance lease
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
December 31,
2020
December 31,
2019
4,542
25,391
2,657
33,598
66,188
(45,899)
20,289
$
$
4,542
25,078
2,657
31,859
64,136
(43,507)
20,629
$
$
Depreciation expense for years ended December 31, 2020, 2019, and 2018 amounted to $3.9 million,
$3.6 million, and $3.2 million, respectively.
NOTE 8 Goodwill and Other Intangible Assets
As of December 31, 2020 and 2019, goodwill totaled $30.2 million and $27.3 million, respectively.
122
The following table summarizes the carrying amounts of goodwill, by segment, as of December 31, 2020 and
2019:
(dollars in thousands)
Banking
Retirement and benefit services
Total goodwill
December 31,
2020
December 31,
2019
$
$
20,131
10,070
30,201
$
$
20,131
7,198
27,329
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as
follows:
December 31, 2020
December 31, 2019
(dollars in thousands)
Identifiable customer intangibles
Core deposit intangible assets
Total intangible assets
Gross
Carrying
Amount
Accumulated
Amortization
$
43,346 $
(17,490) $
3,793
(3,730)
$
47,139 $
(21,220) $
Gross
Carrying
Amount
Accumulated
Amortization
31,857 $
(14,287) $
4,993
(4,172)
36,850 $
(18,459) $
Total
25,856 $
63
25,919 $
Total
17,570
821
18,391
Aggregate amortization expense for the years ended December 31, 2020, 2019, and 2018 was $4.0 million,
$4.1 million, and $4.6 million, respectively.
Estimated aggregate amortization expense for future years is as follows:
(dollars in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
NOTE 9 Loan Servicing
$
$
Amount
4,415
4,351
4,351
4,098
2,959
5,745
25,919
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of loans serviced for others totaled $445.5 million and $541.9 million at December 31, 2020 and
2019, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded
on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late
payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.
The following table summarizes the Company’s activity related to servicing rights for the years ended
December 31, 2020, 2019, and 2018:
(dollars in thousands)
Balance, beginning of period
Additions
Amortization
(Impairment)/Recovery
Balance, end of period
Year ended
December 31,
2019
2020
$
$
3,845
178
(922)
(1,114)
1,987
$
$
4,623
342
(987)
(133)
3,845
$
$
2018
4,686
534
(669)
72
4,623
123
The amount of loan servicing obligations included in other liabilities was $0 as of December 31, 2020 and
2019.
The following is a summary of key data and assumptions used in the valuation of servicing rights as of
December 31, 2020 and 2019. Increases or decreases in any one of these assumptions would result in lower or higher fair
value measurements.
(dollars in thousands)
Fair value of servicing rights
Weighted-average remaining term, years
Prepayment speeds
Discount rate
NOTE 10 Leases
December 31, December 31,
2020
2019
$
$
1,987
20.1
17.7 %
9.0 %
3,845
20.1
11.8 %
9.4 %
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for
branches, and office equipment rentals with terms extending through 2031. Portions of certain properties are subleased
for terms extending through 2023. Substantially all of the Company’s leases are classified as operating leases, and
therefore, were previously not recognized on the Company’s consolidated financial statements. With the adoption of
Topic 842, operating lease agreements are required to be recognized on the consolidated financial statements as a right-
of-use, or ROU, asset and a corresponding lease liability. The Company has one existing finance lease (previously
referred to as a capital lease) for a portion of the Company’s headquarters building with a lease term through 2022. As
this lease was previously required to be recorded on the Company’s consolidated financial statements, Topic 842 did not
materially impact the accounting for this lease.
The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less),
or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the
classification of the Company’s ROU assets and lease liabilities on the consolidated financial statements.
(dollars in thousands)
Lease Right-of-Use Assets
Operating lease right-of-use assets
Finance lease right-of-use assets
Total lease right-of-use assets
Lease Liabilities
Operating lease liabilities
Finance lease liabilities
Total lease liabilities
December 31, December 31,
2020
2019
Classification
Operating lease right-of-use assets
Land, premises and equipment, net
Operating lease liabilities
Long-term debt
$
$
$
$
6,918
202
7,120
7,861
430
8,291
$
$
$
$
8,343
318
8,661
8,864
640
9,504
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of
the lease term and the discount rates used to calculate the present value of the minimum lease payments. The Company’s
lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the
Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended
term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of
the rate implicit in the lease whenever the rate is readily determinable. As this rate is rarely determinable, the Company
utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating
124
leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the
Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.
Weighted-average remaining lease term, years
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
Finance leases
December 31,
2020
December 31,
2019
5.8
1.8
2.9 %
7.8 %
6.2
2.8
3.1 %
7.8 %
As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components
and instead to account for them as a single lease component, the variable lease cost primarily represents variable
payments such as common area maintenance utilities. Variable lease cost also includes payments for usage or
maintenance of those capitalized equipment operating leases.
The following table presents lease costs and other lease information for the year ending December 31, 2020 and
2019:
(dollars in thousands)
Lease costs
Operating lease cost
Variable lease cost
Short-term lease cost
Finance lease cost
Interest on lease liabilities
Amortization of right-of-use assets
Sublease income
Net lease cost
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows
from operating leases
Right-of-use assets obtained in exchange for new operating lease liabilities
Right-of-use assets obtained in exchange for new finance lease liabilities
Year ended
December 31,
2020
2019
$
$
$
2,457
1,170
395
42
116
(228)
3,952
2,432
1,555
—
2,378
819
535
58
116
(270)
3,636
2,376
—
—
$
$
$
Future minimum payments for finance and operating leases with initial or remaining terms of one year or more
as of December 31, 2020 are as follows:
(dollars in thousands)
Twelve months ended
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Amounts representing interest
Total operating lease liabilities
Finance
Leases
Operating
Leases
$
$
$
251 $
209
—
—
—
—
460 $
(30)
430 $
1,788
1,826
1,584
852
640
1,597
8,287
(426)
7,861
125
NOTE 11 Other Assets
Other assets on the balance sheet consist of the following balances at December 31, 2020 and 2019:
(dollars in thousands)
Federal Reserve Bank stock
Foreclosed assets
Prepaid expenses
Investments in partnerships
Trust fees accrued/receivable
Income tax refund receivable
Federal Home Loan Bank stock
Derivative instruments
Other assets
Total
NOTE 12 Deposits
December 31, December 31,
2020
2019
$
$
2,675
63
4,754
14
12,508
1,631
3,090
13,773
5,642
44,150
$
$
2,675
8
5,214
14
12,852
374
3,080
1,621
4,130
29,968
The components of deposits in the consolidated balance sheets at December 31, 2020 and 2019 were as follows:
(dollars in thousands)
Noninterest-bearing
Interest-bearing
Interest-bearing demand
Savings accounts
Money market savings
Time deposits
Total interest-bearing
Total deposits
December 31, December 31,
2020
754,716
$
2019
577,704
$
618,900
79,902
909,137
209,338
1,817,277
$ 2,571,993
458,689
55,777
683,064
196,082
1,393,612
$ 1,971,316
The aggregate amount of deposit overdrafts included as loans were $96 thousand and $315 thousand at
December 31, 2020 and 2019, respectively.
Certificates of deposit in excess of $250,000 totaled $62.1 million and $42.2 million at December 31, 2020 and
2019, respectively.
At December 31, 2020, the scheduled maturities of certificates of deposit were as follows:
(dollars in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
Amount
183,811
9,254
5,764
2,948
2,949
4,612
209,338
$
$
126
NOTE 13 Short - Term Borrowings
Short - term borrowings at December 31, 2020, 2019, and 2018 consisted of the following:
(dollars in thousands)
Fed funds purchased
Balance as of end of period
Average daily balance
Maximum month-end balance
Weighted-average rate
During period
End of period
FHLB Short-term advances
Balance as of end of period
Average daily balance
Maximum month-end balance
Weighted-average rate
During period
End of period
Year ended
December 31,
2019
2018
2020
$
— $
80
—
— $
61,709
139,605
93,460
86,768
112,260
— %
— %
2.54 %
— %
2.18 %
2.63 %
$
— $
—
—
— $
9,712
135,000
—
82
—
— %
— %
2.44 %
— %
2.44 %
— %
The Company had outstanding credit capacity with the FHLB of $631.7 million and $552.2 million at
December 31, 2020 and 2019 respectively, secured by pledged loans and investment securities. The Company also had
$87.0 million of unsecured federal funds agreements with correspondent banks with no outstanding balance at December
31, 2020 and 2019. In 2019, the Company established a $15.0 million unsecured line of credit with Bank of North
Dakota.
NOTE 14 Long - Term Debt
Long - term debt at December 31, 2020 and 2019 consisted of the following:
(dollars in thousands)
Subordinated notes payable
Face
Value
Carrying
Value
December 31, 2020
Period End
Interest
Maturity
Interest Rate
Rate
Date
Call Date
$ 50,000 $ 49,688
LIBOR + 4.12%
4.36 % 12/30/2025 12/30/2020
Three-month
Junior subordinated debenture (Trust I)
Three-month
4,124
3,447
LIBOR + 3.10%
3.35 % 6/26/2033 6/26/2008
Junior subordinated debenture (Trust II)
Finance lease liability
Total long-term debt
6,186
2,700
Three-month
5,170
LIBOR + 1.80%
430 Fixed
$ 63,010 $ 58,735
2.02 % 9/15/2036 9/15/2011
7.81 % 10/31/2022
N/A
December 31, 2019
(dollars in thousands)
Subordinated notes payable
Junior subordinated debenture (Trust I)
Carrying
Face
Value
Value
$ 50,000 $ 49,625 Fixed
Interest Rate
Three-month
Period End
Interest
Maturity
Rate
Date
Call Date
5.75 % 12/30/2025 12/30/2020
Junior subordinated debenture (Trust II)
Three-month
Finance lease liability
Total long-term debt
6,186
2,700
5,102
LIBOR + 1.80%
640 Fixed
3.69 % 9/15/2036 9/15/2011
7.81 % 10/31/2022
N/A
$ 63,010 $ 58,769
4,124
3,402
LIBOR + 3.10%
5.05 % 6/26/2033 6/26/2008
127
NOTE 15 True - Up Liability
In connection with the Prosperan Bank acquisition in 2009, the Bank agreed to pay the FDIC should the
estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet
thresholds as stated in the loss sharing agreements, or the true - up liability. This contingent consideration was classified
as a liability within other liabilities on the Consolidated Balance Sheet and was re - measured at each reporting date until
the contingency was resolved. At December 31, 2017, the value of the true - up liability was $3.2 million. Changes in the
value of the liability were reported in other noninterest expense.
On October 24, 2018, the Company entered into a termination agreement with the FDIC that terminated both
the Single Family Shared - Loss Agreement as well as the Commercial and Other Assets Shared - Loss Agreement. The
Company agreed to pay the FDIC $3.0 million. All rights and obligations of the parties under these loss share
agreements, including the claw - back provisions, terminated effective October 24, 2018. As a result, all recoveries, gains,
charge - offs, losses and expenses related to assets previously covered under loss share agreements are recognized entirely
by the Company from the date of termination.
NOTE 16 Financial Instruments with Off - Balance Sheet Risk
In the normal course of business, the Bank has outstanding commitment and contingent liabilities, such as
commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated
financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for
instruments that are included in the statements of financial condition.
At December 31, 2020 and 2019, the following financial instruments whose contract amount represents credit
risk were approximately as follows:
(dollars in thousands)
Commitments to extend credit
Standby letters of credit
Total
December 31, December 31,
2020
611,140
6,510
617,650
$
$
2019
586,365
8,516
594,881
$
$
At December 31, 2020 and 2019, respectively, the Company had a $150 thousand letter of credit with the
FHLB. Bank of North Dakota letters of credit are collateralized by loans pledged to the Bank of North Dakota in the
amount of $245.7 million and $242.0 million at December 31, 2020, and 2019, respectively. Outstanding letters of credit
at December 31, 2020 and 2019 were $0 and $20.0 million, respectively.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s
creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income producing commercial properties.
The Company was not required to perform on any financial guarantees and did not incur any losses on its
commitments during the past two years.
128
NOTE 17 Legal Contingencies
The Company may be subject to claims and lawsuits which may arise primarily in the ordinary course of
business. It is the opinion of management that the disposition or ultimate resolution of these claims and lawsuits is
currently not expected to have a material adverse effect on the financial position of the Company.
NOTE 18 Share-Based Compensation Plan
On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity
Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards,
including stock options, stock appreciation rights, restricted stock, restricted stock units, and cash incentive awards in
such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that
is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for
issuance under the plan, except if such shares are (a) tendered in payment of the exercise price of a stock option,
(b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled
stock appreciation right or other awards that were not issued upon the settlement of the award. Shares vest, become
exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in
individual agreements with the participant receiving the award. The maximum number of shares that may be delivered
under the plan shall be 1,100,000 shares. As of December 31, 2020, 30,499 stock awards and 49,604 restricted stock
units had been issued under the plan.
Effective May 2009, the Company adopted the Alerus Financial Corporation 2009 Stock Award Plan, or the
2009 Plan, providing for the grant of up to 1,350,000 shares of its common stock to employees, officers, consultants,
independent contractors, and directors pursuant to awards of non - qualified stock options, stock appreciation rights,
restricted stock and restricted stock units, performance awards, or other stock - based awards in such forms and amounts
as deemed appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or
expires prior to exercise or realization, either in full or in part, and shares used to satisfy the purchase of an award or tax
obligations associated therewith shall again become available for issuance under the plan. Shares vest, become
exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in
individual agreements with the participant receiving the award. In determining compensation expense, the fair value of
the award will be determined on the date of grant expensed over the applicable vesting period. For performance awards,
the Company estimates that the most likely outcome is the achievement of the target level and if during the performance
period, additional information becomes available to lead the Company to believe a different level will be achieved for
the performance period, the Company will reassess the number of units that will vest for the grant and adjust its
compensation expense accordingly on a prospective basis. Following the adoption of the 2019 Equity Incentive Plan, no
new awards may be granted from this plan.
Amounts granted under the plans have been retroactively adjusted for all stock splits effected in the form of
dividends. Activity in the stock plan for the years ended December 31, 2020, and 2019 is as follows:
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period
Granted
Vested
Forfeited or cancelled
Outstanding at end of period
Year ended December 31, 2020 Year ended December 31, 2019
Weighted-
Average Grant
Date Fair Value Awards
Weighted-
Average Grant
Date Fair Value
Awards
347,211 $
82,494
(91,346)
(13,329)
325,030 $
18.64
19.62
16.39
19.62
19.48
337,014 $
70,617
(53,994)
(6,426)
347,211 $
18.36
19.87
18.76
17.63
18.64
Unrecognized compensation expense related to share-based awards was $2.8 million and $3.3 million as of
December 31, 2020 and 2019, respectively. The expense is expected to be recognized over a weighted-average period of
3.43 years and 3.86 years, as of December 31, 2020 and 2019, respectively.
129
Compensation expense relating to stock awards under these plans was $1.9 million in 2020, $1.5 million in
2019, and $1.2 million in 2018. The number of unvested shares outstanding was 203,253 and 262,734 respectively, at
December 31, 2020 and 2019. The number of unvested units outstanding was 73,236 and 84,477 at December 31, 2020
and 2019, respectively.
Effective May 2009, the Company also adopted the Alerus Financial Corporation Stock Grant Plan for
Non - Employee Directors, or the Retainer Plan, providing for the issuance of up to 180,000 shares of its common stock
to non - employee directors. The purpose of the Retainer Plan is to provide for payment for the annual retainer to directors
in shares of Company common stock. The number of shares to be issued is based on the retainer divided by the fair
market value per share as of the grant date, as defined in Note 1 (Significant Accounting Policies). Upon the issuance of
shares under this plan, the then current value of the shares is charged to expense. Effective November 11, 2019, the
Company terminated the Retainer Plan.
Activity in the Retainer Plan for the years ended December 31, 2020, and 2019 is as follows:
Balance as of December 31, 2018
Retainer shares awarded
Plan expiration
Balance as of December 31, 2019
Retainer shares awarded
Balance as of December 31, 2020
Number of Shares
Available for Restricted
future
grant
25,825
(13,144)
(12,681)
—
—
—
stock
awards
154,175
13,144
—
167,319
—
167,319
Compensation expense relating to stock awards under this plan was $0 in 2020, $0.3 million in 2019, and
$0.3 million in 2018.
NOTE 19 Employee Benefits
The Company maintains two employee retirement plans including the Alerus Financial Corporation Employee
Stock Ownership Plan, or ESOP, and a defined contribution salary reduction plan, or 401k. The plans cover substantially
all full - time employees upon satisfying prescribed eligibility requirements for age and length of service. Contributions to
the ESOP are determined annually by the Board of Directors, at its discretion, and allocated to participants based on
a percentage of annual compensation. Shares of the Company stock within the ESOP are considered outstanding and
dividends on these shares are charged to retained earnings. Under the 401k, the Company contributes 100% of amounts
deferred by employees up to 3% of eligible compensation and 50% of amounts deferred by employees between 3% and
6% of eligible compensation. Retirement plan contributions are reflected under employee benefits in the income
statement and for years ending December 31, 2020, 2019, and 2018 were as follows:
(dollars in thousands)
Salary reduction plan
ESOP
Total
Total ESOP shares outstanding
December 31, December 31, December 31,
2020
2019
2018
$
$
2,960 $
2,166
5,126 $
2,599 $
1,836
4,435 $
2,402
1,665
4,067
1,334,372
1,170,611
1,307,439
Prior to the Company’s initial public offering, in accordance with provisions of the Internal Revenue Code of
1986, as amended, or the Code, that are applicable to private companies, the terms of the ESOP provided that ESOP
participants had the right, for a specified period of time, to require us to repurchase shares of our common stock that
were distributed to them by the ESOP. As a result, the ESOP - owned shares were deducted from total stockholders’
equity in our consolidated balance sheets. The shares of common stock held by the ESOP are reflected in our
consolidated balance sheets as a line item called “ESOP - owned shares” appearing between total liabilities and
stockholders’ equity. Upon the completion of our initial public offering and the listing of our common stock on the
130
Nasdaq Capital Market, in September 2019, our repurchase liability was extinguished and the ESOP - owned shares are
now included in total stockholders’ equity.
NOTE 20 Noninterest Income
The following table presents the Company’s noninterest income for the years ended December 31, 2020, 2019,
and 2018.
(dollars in thousands)
Retirement and benefits
Wealth management
Mortgage banking (1)
Service charges on deposit accounts
Net gains (losses) on investment securities (1)
Other
Interchange fees
Bank-owned life insurance income (1)
Misc. transactional fees
Other noninterest income
Total noninterest income
(1)
Not within the scope of ASC 606.
2020
60,956
17,451
61,641
1,409
2,737
2,140
797
1,246
994
149,371
$
$
$
$
Year ended
December 31,
2019
63,811
15,502
25,805
1,772
357
1,972
803
1,236
2,936
114,194
$
$
2018
63,316
14,900
17,630
1,808
85
2,005
803
1,106
1,096
102,749
Contract balances: A contract asset balance occurs when an entity performs a service for a customer before the
customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset).
A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already
received payment (or payment is due) from the customer. The Company’s noninterest income streams are largely based
on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end
market value. Consideration is often received immediately or shortly after the Company satisfies its performance
obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with
customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and 2019, the
Company did not have any significant contract balances.
Contract acquisition costs: In connection with the adoption of Topic 606, an entity is required to capitalize, and
subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are
expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a
contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales
commission). The Company utilizes the practical expedient which allows entities to immediately expense contract
acquisition costs when the asset would have resulted from capitalizing these costs would have been amortized in one
year or less. Upon adoption of Topic 606, the company did not capitalize any contract acquisition costs.
131
NOTE 21 Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2020, 2019, and 2018 are as
follows:
(dollars in thousands)
Federal
Current
Deferred
Federal income tax
State
Current
Deferred
State income tax
Total income tax expense
Year ended
December 31,
2019
2020
2018
$
14,541 $
(3,615)
10,926
7,091 $
267
7,358
5,801
(49)
5,752
3,736
(819)
2,917
13,843 $
1,926
72
1,998
9,356 $
1,265
155
1,420
7,172
$
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2020 and 2019 are as follows:
(dollars in thousands)
Deferred Tax Assets
Allowance for loan losses
Employee compensation and benefit accruals
Expense accruals
Identifiable intangible amortization
Deferred loan fees
Net operating loss carry forwards
Nonaccrual loan interest
Other
Total deferred tax assets from temporary differences
Deferred Tax Liabilities
Accumulated depreciation
Goodwill and intangible amortization
Servicing assets
Prepaid expenses
Unrealized loss on available - for - sale investment securities
Other
Total deferred tax liabilities from temporary differences
Net Deferred Tax Assets
December 31, December 31,
2020
2019
$
$
8,556
2,608
352
3,388
1,204
173
62
505
16,848
314
2,258
511
785
3,566
5
7,439
9,409
$
$
5,893
2,542
935
3,369
266
236
—
341
13,582
1,431
1,835
965
804
649
7
5,691
7,891
The reconciliation between applicable income taxes and the amount computed at the applicable statutory
Federal tax rate for years ending December 31, 2020, 2019, and 2018 is as follows:
Year ended December 31,
2020
Percent of
2019
2018
Percent of
Percent of
(dollars in thousands)
Taxes at statutory federal income tax rate
Tax effect of:
Tax exempt income
State income taxes, net of federal benefits
Nondeductible items and other
Applicable income taxes
Amount Pretax Income Amount Pretax Income Amount Pretax Income
21.0 %
$ 12,289
21.0 % $ 8,168
21.0 % $ 6,938
(527)
2,522
(441)
$ 13,843
(0.9)% (442)
1,618
4.3
(0.8)
12
23.6 % $ 9,356
(1.1)% (365)
1,399
4.2
(800)
—
24.1 % $ 7,172
(1.1)%
4.2
(2.4)
21.7 %
132
It is the opinion of management that the Company has no significant uncertain tax positions that would be
subject to change upon examination.
NOTE 22 Segment Reporting
The Company determines reportable segments based on the services offered, the significance of the services
offered, the significance of those services to the Company’s financial statements, and management’s regular review of
the operating results of those services. The Company operates through four operating segments: Banking, Retirement
and Benefit Services, Wealth Management, and Mortgage.
The financial information presented on each segment sets forth net interest income, provision for loan losses,
direct noninterest income and direct noninterest expense before indirect allocations. Corporate Administration includes
the indirect overhead expense and is set forth in the table below. The segment net income before taxes represents direct
revenue and expense before indirect allocations and income taxes.
The following table presents key metrics related to the Company’s segments for the periods presented:
Year ended December 31, 2020
(dollars in thousands)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Total assets
(dollars in thousands)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Total assets
(dollars in thousands)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Total assets
Banking
Banking
$
85,167 $
10,900
10,017
46,883
$
37,401 $
$ 2,827,792 $
Corporate
Retirement and Wealth
Benefit Services Management Mortgage Administration Consolidated
83,846
(3,413) $
10,900
—
149,371
(694)
163,799
37,068
(41,175) $
58,518
10,134 $ 3,013,771
2,092 $
— $
—
—
61,641
17,451
36,323
8,289
9,162 $
27,410 $
3,009 $ 125,078 $
— $
—
60,956
35,236
25,720 $
47,758 $
Year ended December 31, 2019
Banking
$
76,916 $
7,312
6,970
43,171
$
33,403 $
$ 2,259,614 $
Wealth
Corporate
Retirement and
Benefit Services Management Mortgage Administration Consolidated
74,551
(3,610) $
7,312
—
114,194
2,106
142,537
34,894
(36,398) $
38,896
10,412 $ 2,356,878
— $
—
15,502
7,188
8,314 $
5,173 $
128 $ 47,703 $
— $
—
63,811
35,407
28,404 $
39,021 $
1,245 $
—
25,805
21,877
Year ended December 31, 2018
Banking
$
77,919 $
8,599
6,921
42,605
$
33,636 $
$ 2,120,249 $
Corporate
Retirement and Wealth
Benefit Services Management Mortgage Administration Consolidated
75,224
8,610
102,749
136,325
33,038
(506) $ 2,179,070
62 $
—
14,900
6,824
8,138 $ 1,254 $
3,235 $ 14,600 $
— $
—
63,316
36,414
26,902 $
41,492 $
(3,591) $
—
(18)
33,283
(36,892) $
834 $
11
17,630
17,199
The Banking division offers a complete line of loan, deposit, cash management, and treasury services through
fourteen offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and
mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segments’ balance
sheet.
133
Retirement and Benefit Services
Retirement and Benefit Services provides the following services nationally: recordkeeping and administration
services to qualified retirement plans; ESOP trustee, recordkeeping, and administration; investment fiduciary services to
retirement plans; health savings account, flex spending account, and Cobra recordkeeping and administration services to
employers; payroll and HIRS services for employers. In addition, the division operates within the banking markets as
well as in Lansing, Michigan, Littleton, Colorado.
Wealth Management
The Wealth Management division provides advisory and planning services, investment management, and trust
and fiduciary services to clients across the Company’s footprint.
Mortgage
The mortgage division offers first and second mortgage loans through the Banking office locations.
NOTE 23 Earnings Per Share
Beginning in the third quarter of 2019, the Company elected to prospectively use the two-class method in
calculating earnings per share due to the restricted stock awards and restricted stock units qualifying as participating
securities. Under the two-class method, earnings available to common shareholders for the period are allocated between
common shareholders and participating securities according to common dividends declared (or accumulated) and
participating rights in undistributed earnings. Average shares of common stock for diluted net income per common share
include shares to be issued upon the vesting of restricted stock awards and restricted stock units granted under the
Company’s share-based compensation plans.
The calculation of basic and diluted earnings per share using the two-class method for the years ending
December 31, 2020 and 2019 is presented below:
(dollars and shares in thousands, except per share data)
Net income
Dividends and undistributed earnings allocated to participating securities
Net income available to common shareholders
Weighted-average common shares outstanding for basic earnings per share
Dilutive effect of stock-based awards
Weighted-average common shares outstanding for diluted earnings per share
Earnings per common share:
Basic earnings per common share
Diluted earnings per common share
$
$
Year ended
December 31,
2020
44,675 $
770
43,905 $
17,106
332
17,438
2019
29,540
647
28,893
14,736
357
15,093
$
$
2.57 $
2.52 $
1.96
1.91
For the year ending December 31, 2018, the basic and diluted earnings per share numbers were calculated using
the treasury stock method, as presented in the table below. The Company determined that the impact to diluted earnings
per share would be immaterial if calculated under the two-class method for the year ending December 31, 2018.
134
The calculation of basic and diluted earnings per share using the treasury stock method for the year ending
December 31, 2018 is presented below:
(dollars and shares in thousands, except per share data)
Basic:
Net income attributable to common shareholders
Weighted-average common shares outstanding
Basic earnings per common share
Diluted:
Net income attributable to common shareholders
Weighted-average common shares outstanding
Add: Dilutive effect of stock-based awards
Weighted-average common shares outstanding for diluted EPS
Diluted earnings per common share
NOTE 24 Related Party Transactions
Year ended
December 31,
2018
$
$
$
$
25,866
13,763
1.88
25,866
13,763
300
14,063
1.84
In the ordinary course of business, the Bank has granted loans to executive officers, directors, and their
affiliates (related parties). These loans are made on substantially the same terms and conditions as those prevailing at the
time for comparable transactions with outsiders and are not considered to involve more than the normal risk of
collectability. The following table presents the activity associated with loans made between related parties at December
31, 2020 and 2019:
(dollars in thousands)
Beginning balance
New Loans and Advances
Repayments
Changes to Related Parties (1)
Ending Balance
Year ended December 31,
2020
2019
307
271
(322)
(2)
254
$
$
12,611
498
(588)
(12,214)
307
$
$
(1)
Represents changes related to directors that retired from our Board during the year.
Deposits from related parties held by the Bank at December 31, 2020 and 2019, amounted to $3.1 million and
$0.5 million, respectively.
NOTE 25 Derivative Instruments
The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative
instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The
Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain
balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by
movements in interest rates. As a result of the interest rate fluctuations, hedged assets and liabilities will appreciate or
depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income
or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy
as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by
changes in interest rate risks.
Derivative instruments that are used as part of the Company’s interest rate risk management strategy include
interest rate swaps, futures contracts, and options contracts with indices that relate to the pricing of specific balance sheet
assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments
between two parties, based on a common notional principal amount and maturity date.
135
Interest rate options represent contracts that allow the holder of the option to (1) receive cash or (2) purchase,
sell, or enter into a financial instrument at a specified price within a specified period of time. Certain of these contracts
also provide the Company with the right to enter into interest - rate swaps and cap and floor agreements with the writer of
the option.
By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to
perform, credit risk is equal to the extent of the estimated fair value gain in a derivative. When the estimated fair value of
a derivative contract is positive, this generally indicates that the counterparty owes the Company and therefore, creates a
repayment risk for the Company. When the estimated fair value of a derivative contract is negative, the Company owes
the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with high - quality counterparties that are reviewed periodically by
the Company’s credit committee.
The Company also maintains a policy of requiring that all derivative contracts be governed by an International
Swaps and Derivatives Association Master Agreement. Various derivatives, including interest rate, commodity, equity,
credit, and foreign exchange contracts, are offered to clients but usually offset the exposure from such contracts by
purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as
freestanding derivatives. Free - standing derivatives also include derivatives entered into for risk management that do not
otherwise qualify for hedge accounting, including domestic hedge derivatives.
The following table presents the total notional or contractual amounts and estimated fair values for derivatives
not designated as hedging instruments that are recorded on the balance sheet in other assets or other liabilities. Customer
accommodation, trading, and other free - standing derivatives are recorded on the balance sheet at fair value in trading
assets or other liabilities at December 31, 2020 and 2019:
(dollars in thousands)
Consolidated Balance Sheet Location
Asset Derivatives
Interest rate lock commitments
Other assets
Forward loan sales commitments Other assets
December 31, 2020
Fair
Value
Notional
Amount
December 31, 2019
Fair
Value
Notional
Amount
$
10,693 $ 359,296 $
2,664
86,990
1,228 $
393
1,621 $
45,715
12,784
58,499
Total asset derivatives
$
13,357 $ 446,286 $
Liability Derivatives
TBA mortgage backed securities Accrued expenses and other liabilities $
$
Total liability derivatives
2,911 $ 396,193 $
2,911 $ 396,193 $
109 $
109 $
68,500
68,500
The Company has third party agreements that require a minimum dollar transfer amount upon a margin call.
This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at
December 31, 2020 and 2019, respectively, was $2.7 million and $0.9 million. The amount of collateral posted with
third parties is deemed to be sufficient to collateralize both the fair market value change a well as any additional amounts
that may be required as a result of a change in the specified credit measures.
The gain (loss) recognized on derivatives instruments for years ended December 31, 2020, 2019, and 2018 was
as follows:
(dollars in thousands)
Interest rate lock commitments
Interest rate lock commitments
Forward loan sales commitments
TBA mortgage backed securities
Consolidated Statements of
of Income Location
Mortgage banking
Other noninterest income
Mortgage banking
Mortgage banking
Total gain/(loss) from derivative instruments
Year ended
December 31, December 31, December 31,
2020
2019
2018
$
$
8,798 $
(3)
2,271
(12,997)
(1,931) $
1,216 $
—
400
(109)
1,507 $
14
—
(16)
—
(2)
136
NOTE 26 Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s
consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank
to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total
capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average
assets (as defined). Management believes at December 31, 2020 and 2019, each of the Company and the Bank met all of
the capital adequacy requirements to which it is subject.
On August 28, 2018, the Federal Reserve Board, or the Board, issued an interim final rule expanding the
applicability of the Board’s Small Bank Holding Company Policy Statement, as required by the Economic Growth,
Regulatory Relief, and Consumer Protection Act of 2018. The interim final rule raised the Small Bank Holding
Company Policy Statement’s asset threshold from $1 billion to $3 billion in total consolidated assets, and as a result,
before the initial public offering, the holding company was exempted from all regulatory guidelines, to which it
previously had been subject, as long as it does not engage in significant nonbanking activities, conduct off-balance sheet
activities, or have a material amount of debt or equity registered with the SEC. Now that the Company is a public
reporting company with its common stock registered with the SEC, the Company does not meet the qualifications of the
Small Bank Holding Company Policy Statement. As of December 31, 2020, the most recent notification from the
Federal Deposit Insurance Corporation, categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since the notification that management believe have changed
in the Bank’s category.
Actual capital amounts and ratios for the Company (consolidated) and the Bank at December 31, 2020 and
2019 are presented in the following table:
(dollars in thousands)
Common equity tier 1 capital to risk weighted assets
Consolidated
Bank
Tier 1 capital to risk weighted assets
Consolidated
Bank
Total capital to risk weighted assets
Consolidated
Bank
Tier 1 capital to average assets
Consolidated
Bank
December 31, 2020
Requirements
for Capital
Adequacy Purposes
Minimum to be
Well Capitalized
Under Prompt
Corrective Action
Actual
Amount
Ratio Amount
Ratio Amount
Ratio
$ 265,490
251,806
12.75 % $ 93,723
93,632
12.10 %
273,797
251,806
13.15 % 124,964
12.10 % 124,843
N/A
4.50 % $
4.50 % 135,246
.
6.00 %
N/A
6.00 % 166,457
N/A
6.50 %
N/A
8.00 %
349,620
277,916
16.79 % 166,618
13.36 % 166,457
8.00 %
N/A
8.00 % 208,071
N/A
10.00 %
273,797
251,806
9.24 % 118,587
8.50 % 118,511
4.00 %
N/A
4.00 % 148,139
N/A
5.00 %
137
(dollars in thousands)
Common equity tier 1 capital to risk weighted assets
Consolidated
Bank
Tier 1 capital to risk weighted assets
Consolidated
Bank
Total capital to risk weighted assets
Consolidated
Bank
Tier 1 capital to average assets
Consolidated
Bank
December 31, 2019
Requirements
for Capital
Adequacy Purposes
Minimum to be
Well Capitalized
Under Prompt
Corrective Action
Actual
Amount
Ratio Amount
Ratio Amount
Ratio
$ 239,672
228,512
12.48 % $ 86,452
86,362
11.91 %
247,866
228,512
12.90 % 115,270
11.91 % 115,149
4.50 % $
N/A
4.50 % 124,745
.
N/A
6.00 %
6.00 % 153,532
N/A
6.50 %
N/A
8.00 %
321,415
252,436
16.73 % 153,693
13.15 % 153,532
8.00 %
N/A
8.00 % 191,915
N/A
10.00 %
247,866
228,512
11.05 %
10.20 %
91,504
89,615
4.00 %
N/A
4.00 % 112,018
N/A
5.00 %
The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory
approval. The Bank normally restricts dividends to a lesser amount. In addition, the Company must adhere to various
U.S. Department of Housing and Urban Development, or HUD, regulatory guidelines including required minimum
capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD
guidelines could result in withdrawal of this certification. As of December 31, 2020 and 2019 the Company was in
compliance with HUD guidelines.
NOTE 27 Fair Value of Assets and Liabilities
The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy
based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair
value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value
measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is
significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized
based on the following inputs to the valuation techniques as follows:
Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that an entity has the ability to access.
Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted
prices of investment securities with similar characteristics, or discounted cash flows.
Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an
entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the
Company may re - measure the carrying value of assets and liabilities measured on a nonrecurring basis to
estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such
assets are written down from their carrying amounts to their estimated fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and
other items at estimated fair value for the initial and subsequent measurement on an instrument - by - instrument basis. The
Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected
to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired
financial instruments at estimated fair value in the future.
138
Recurring Basis
The Company uses estimated fair value measurements to record estimated fair value adjustments to certain
assets and liabilities and to determine estimated fair value disclosures. For additional information on how the Company
measures estimated fair value refer to Note 1 (Significant Accounting Policies).
The following tables present the balances of the assets and liabilities measured at estimated fair value on a
recurring basis at December 31, 2020 and 2019:
(dollars in thousands)
Available-for-sale and securities
U.S. treasury and government agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale securities
Other assets
Derivatives
Other liabilities
Derivatives
(dollars in thousands)
Available-for-sale and equity securities
U.S. treasury and government agencies
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Equity securities
Total available-for-sale and equity securities
Other assets
Derivatives
Other liabilities
Derivatives
Level 1
Level 2
Level 3
Total
December 31, 2020
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
$
5,907
153,773
$
262,004
139,693
115
30,850
592,342
13,357
2,911
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
Level 1
Level 2
Level 3
December 31, 2019
$
—
—
21,240
68,648
$
—
—
—
—
2,808
2,808
—
—
182,538
30,685
144
7,095
—
310,350
1,621
109
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
5,907
153,773
262,004
139,693
115
30,850
592,342
13,357
2,911
Total
21,240
68,648
182,538
30,685
144
7,095
2,808
313,158
1,621
109
$
$
$
$
$
$
$
The following is a description of the valuation methodologies used for instruments measured at estimated fair
value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities
When available, the Company uses quoted market prices to determine the estimated fair value of investment
securities; such items are classified in Level 1 of the estimated fair value hierarchy. For the Company’s investment
securities for which quoted prices are not available for identical investment securities in an active market, the Company
determines estimated fair value utilizing vendors who apply matrix pricing for similar bonds for which no prices are
observable or may compile prices from various sources. These models are primarily industry - standard models that
consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss
severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant
economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from
observable data, or are supported by observable levels at which transactions are executed in the marketplace. Estimated
fair values from these models are verified, where possible, against quoted prices for recent trading activity of assets with
139
similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when
prices from independent sources vary, cannot be obtained, or cannot be corroborated, a security is generally classified as
Level 3.
Derivatives
All of the Company’s derivatives are traded in over - the - counter markets where quoted market prices are not
readily available. For these derivatives, estimated fair value is measured using internally developed models that use
primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2.
Examples of Level 2 derivatives are basic interest rate swaps and forward contracts. Any remaining derivative estimated
fair value measurements using significant assumptions that are unobservable are classified as Level 3. Level 3
derivatives include interest rate lock commitments written for residential mortgage loans that are held for sale.
Nonrecurring Basis
Certain assets are measured at estimated fair value on a nonrecurring basis. These assets are not measured at
estimated fair value on an ongoing basis; however, they are subject to estimated fair value adjustments in certain
circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized
impairment.
Net impairment losses related to nonrecurring estimated fair value measurements of certain assets for the years
ended December 31, 2020 and 2019 consisted of the following:
(dollars in thousands)
Loans held for sale
Impaired loans
Foreclosed assets
Servicing rights
(dollars in thousands)
Loans held for sale
Impaired loans
Foreclosed assets
Servicing rights
Loans Held for Sale
$
$
December 31, 2020
$
Level 2
122,440
—
—
—
Level 3
$
—
7,325
63
1,987
Total
122,440
7,325
63
1,987
$
Impairment
—
1,205
—
—
December 31, 2019
Level 2
Level 3
Total
$
46,846
—
—
—
$
—
4,816
8
3,845
46,846
4,816
8
3,845
$
Impairment
—
3,138
—
—
Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains
quotes or bids on these loans directly from purchasing financial institutions. Typically these quotes include a premium
on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.
Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value represent
additional net write - downs during the period to record these loans at the lower of cost or estimated fair value subsequent
to their initial classification as loans held for sale.
Impaired Loans
In accordance with the provisions of the loan impairment guidance, loans for which it is probable that payment
of interest and principal will not be made in accordance with the contractual terms are measured for impairment.
Allowable methods for estimating fair value include using the estimated fair value of the collateral for collateral
dependent loans or, where a loan is determined not to be collateral dependent, using a discounted cash flow method. The
estimated fair value method requires obtaining a current independent appraisal of the collateral and applying a discount
140
factor, if necessary, to the appraised value and including costs to the sell. Because many of these inputs are not
observable, the measurements are classified as Level 3.
Foreclosed Assets
Foreclosed assets are recorded at estimated fair value based on property appraisals, less estimated selling costs,
at the date of the transfer with any impairment amount charged to the allowance for loan losses. Subsequent to the
transfer, foreclosed assets are carried at the lower of cost or estimated fair value, less estimated selling costs with
changes in the estimated fair value or any impairment amount recorded in other noninterest expense. Fair value
measurements may be based upon appraisals, third - party price opinions, or internally developed pricing methods. These
measurements are classified as Level 3.
Servicing Rights
Servicing rights do not trade in an active market with readily observable prices. Accordingly, the estimated fair
value of servicing rights is determined using a valuation model that calculates the present value of estimated future net
servicing income. The model incorporates assumptions that market participants use in estimating future net servicing
income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual
servicing fee income, ancillary income, and late fees. Servicing rights are carried at lower of cost or market value, and
therefore can be subject to estimated fair value measurements on a nonrecurring basis. Estimated fair value
measurements of servicing rights use significant unobservable inputs and accordingly, are classified as Level 3. The
Company obtains the estimated fair value of servicing rights from an independent third party pricing service and records
the unadjusted estimated fair values in the financial statements.
The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values at
December 31, 2020 and 2019, are as follows:
(dollars in thousands)
Asset Type
Impaired loans
Valuation Technique
Appraisal value
Foreclosed assets
Appraisal value
Servicing rights
Discounted cash flows
(dollars in thousands)
Asset Type
Impaired loans
Valuation Technique
Appraisal value
Foreclosed assets
Appraisal value
Servicing rights
Discounted cash flows
Unobservable Input
Property specific
adjustment
Property specific
adjustment
Prepayment speed
assumptions
Discount rate
Unobservable Input
Property specific
adjustment
Property specific
adjustment
Prepayment speed
assumptions
Discount rate
December 31, 2020
Fair Value
Range
Weighted
Average
$
7,325
N/A
63
N/A
1,987
191-403
9.0 %
N/A
N/A
285
9.0 %
December 31, 2019
Weighted
Fair Value
Range
Average
$
4,816
8
N/A
N/A
3,845
123-267
9.4 %
N/A
N/A
194
9.4 %
Disclosure of estimated fair value information about financial instruments, for which it is practicable to
estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted
market prices are not available, estimated fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate
of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain
financial instruments with an estimated fair value that is not practicable to estimate and all non - financial instruments are
141
excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not
necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances at December 31, 2020
and 2019 are not carried at estimated fair value in their entirety on the consolidated balance sheets.
Cash and Due from Banks and Accrued Interest
The carrying amounts reported in the Consolidated Balance Sheets approximate those assets and liabilities
estimated fair values.
Loans
For variable - rate loans that reprice frequently and with no significant change in credit risk, estimated fair values
are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Bank - Owned Life Insurance
Bank - owned life insurance is carried at the amount due upon surrender of the policy, which is also the
estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying
insurance contract.
Deposits
The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the
consolidated balance sheet date. The estimated fair values of fixed - rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to
a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.
Short - Term Borrowings and Long - Term Debt
For variable - rate borrowings that reprice frequently, estimated fair values are based on carrying values. The
estimated fair value of fixed - rate borrowings are estimated using discounted cash flow analysis, based on the Company’s
current incremental borrowing rates for similar types of borrowing arrangements.
Off - Balance Sheet Credit - Related Commitments
Off - balance sheet credit related commitments are generally of short - term nature. The contract amount of such
commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan
commitments which are generally priced at market at the time of funding.
142
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are
as follows:
(dollars in thousands)
Financial Assets
Cash and cash equivalents
Loans
Accrued interest receivable
Bank-owned life insurance
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Time deposits
Long-term debt
Accrued interest payable
(dollars in thousands)
Financial Assets
Cash and cash equivalents
Loans
Accrued interest receivable
Bank-owned life insurance
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Time deposits
Long-term debt
Accrued interest payable
Carrying
Amount
Level 1
December 31, 2020
Estimated Fair Value
Level 3
Level 2
Total
$
172,962 $ 172,962 $
1,945,129
9,662
32,363
—
9,662
—
— $
— $
—
—
32,363
1,992,394
—
—
172,962
1,992,394
9,662
32,363
$
754,716 $
1,607,939
209,338
58,735
654
754,716 $
— $
—
—
—
654
1,607,939
—
56,131
—
— $
—
210,637
—
—
754,716
1,607,939
210,637
56,131
654
Carrying
Amount
Level 1
December 31, 2019
Estimated Fair Value
Level 3
Level 2
Total
$
144,006 $ 144,006 $
1,697,355
7,551
31,566
—
7,551
—
— $
— $
—
—
31,566
1,693,824
—
—
144,006
1,693,824
7,551
31,566
577,704 $
— $
—
—
—
1,038
1,197,530
—
58,239
—
— $
—
196,182
—
—
577,704
1,197,530
196,182
58,239
1,038
$
577,704 $
1,197,530
196,082
58,769
1,038
143
NOTE 28 Parent Company Only Financial Statements
The condensed financial statements of Alerus Financial Corporation (parent company only) are presented
below. These statements should be read in conjunction with the Notes to the Consolidated Financial Statements
Alerus Financial Corporation
Parent Company Condensed Balance Sheets
(dollars in thousands)
Assets
Cash and cash equivalents
Land, premises and equipment, net
Investment in subsidiaries
Deferred income taxes, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Long - term debt
Accrued expenses and other liabilities
Total liabilities
Stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
Alerus Financial Corporation
Parent Company Condensed Statements of Income
(dollars in thousands)
Income
Dividends from subsidiaries
Other income
Total operating income
Expenses
Income before equity in undistributed income
Equity in undistributed income of subsidiaries
Income before income taxes
Income tax benefit
Net income
December 31, December 31,
2020
2019
$
$
76,701 $
202
316,789
1,007
589
395,288 $
$
58,735 $
6,390
65,125
330,163
330,163
395,288 $
$
73,647
318
274,878
998
1,034
350,875
58,769
6,378
65,147
285,728
285,728
350,875
Year ended December 31,
2019
2018
2020
$
$
16,000 $
10
16,010
6,057
9,953
33,208
43,161
1,514
44,675 $
15,000 $
15
15,015
5,999
9,016
19,089
28,105
1,435
29,540 $
11,470
14
11,484
5,964
5,520
18,852
24,372
1,494
25,866
144
Alerus Financial Corporation
Parent Company Condensed Statements of Cash Flows
(dollars in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries
Depreciation and amortization
Stock - based compensation cost
Other, net
Net cash provided by operating activities
Investing activities
Investment in bank subsidiary
Acquisitions, net cash acquired
Net cash provided by investing activities
Financing activities
Cash dividends paid on common stock
Repurchase of common stock
Proceeds from the issuance of common stock in initial public offering net of issuance
costs
Net cash provided by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Note 29 Quarterly Condensed Financial Information (Unaudited)
Year ended December 31,
2019
2018
2020
$
44,675 $
29,540 $
25,866
(33,208)
116
1,927
414
13,924
(19,089)
115
251
2,676
13,493
(18,852)
116
370
1,314
8,814
—
—
—
—
—
—
(10,387)
(483)
(8,909)
(1,948)
—
(10,870)
3,054
73,647
76,701 $
62,804
51,947
65,440
8,207
73,647 $
$
—
—
—
(7,456)
(356)
—
(7,812)
1,002
7,205
8,207
The following tables present the unaudited quarterly condensed financial information for the years ended
December 31, 2020 and 2019:
2020 Quarter Ended
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share data
Basic earnings per common share
Diluted earnings per common share
March 31, June 30, September 30, December 31,
25,201
$ 23,106 $ 23,506 $
2,048
23,153
1,400
21,753
38,696
47,126
13,323
3,144
10,179
4,269
18,837
2,500
16,337
27,189
36,726
6,800
1,437
5,363 $ 11,474 $
24,289 $
2,524
21,765
3,500
18,265
45,256
40,214
23,307
5,648
17,659 $
3,415
20,091
3,500
16,591
38,230
39,734
15,087
3,613
$
$
$
0.31 $
0.30 $
0.66 $
0.65 $
1.01 $
0.99 $
0.64
0.63
145
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share data
Basic earnings per common share
Diluted earnings per common share
NOTE 30 Branch Sale
2019 Quarter Ended
March 31,
$ 23,310 $ 23,478 $
June 30, September 30, December 31,
22,887
4,428
18,459
1,797
16,662
29,556
36,435
9,783
2,131
7,652
23,625 $
4,944
18,681
1,498
17,183
29,580
37,327
9,436
2,332
7,104 $
4,190
19,120
2,220
16,900
25,074
33,514
8,460
2,024
6,436 $ 8,348 $
5,187
18,291
1,797
16,494
29,984
35,261
11,217
2,869
$
$
$
0.47 $
0.46 $
0.60 $
0.59 $
0.49 $
0.48 $
0.44
0.43
On January 15, 2019, the Bank announced an agreement to sell the Bank’s branch offices located in Duluth,
Minnesota, including loans and deposits attributable to those offices, to another financial institution. The Bank decided
to exit the Duluth market to reallocate resources to the Minneapolis-St. Paul-Bloomington metropolitan statistical area,
which is a higher growth market in the state, and its other core markets in the Phoenix-Mesa-Scottsdale metropolitan
statistical area, and in Fargo and Grand Forks, North Dakota. The loans and deposits were classified as held for sale in
the consolidated financial statements as of December 31, 2018. The transaction closed on April 26, 2019. The loans and
deposits associated with this transaction totaled approximately $28.3 million and $19.4 million, respectively, as of the
closing date. A pre-tax gain on the sale was recognized in the amount of $1.5 million.
NOTE 31 COVID-19 Pandemic Response
On March 27, 2020, President Trump signed into Law the Coronavirus Aid Relief and Economic Security Act,
or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals,
supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small
Business Administration, or SBA, referred to as the PPP. Under the PPP, small business, sole proprietorships,
independent contractors, and self-employed individuals were able to apply for loans from existing SBA lenders and other
approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. The
Bank participated as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to
temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the
effects of COVID-19. See “Note 6 Loans and Allowance for Loan Losses” for additional discussion regarding TDRs.
On April 2, 2020, the SBA issued an interim final rule, announcing the implementation of sections 1102 and
1106 of the CARES Act. Section 1102 of the CARES Act temporarily added a new program, the PPP, to the SBA’s 7(a)
Loan Program. Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying
loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small
businesses nationwide adversely impacted by COVID-19.
On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion
COVID-19 relief package that included an additional $284.0 billion in PPP funding.
As an SBA-Certified Preferred lender, we were delegated the authority as part of the CARES Act to make PPP
SBA-guaranteed financing available to eligible borrowers. As of December 31, 2020, we had assisted 1,632 new and
existing clients secure approximately $363.6 million of PPP financing. The SBA pays a processing fee based on the
balance of the financing outstanding at the time of final disbursement. The processing fees were as follows: five percent
for loans of not more than $350 thousand, three percent for loans of more than $350 thousand and less than $2 million,
and one percent for loans of at least $2 million. Net processing fees in the amount of $11.1 million were being deferred
and recognized as interest income on a level yield method of the life of the represented loans.
146
On April 7, 2020, the FRB, authorized each of the Federal Reserve Banks to establish the Payment Protection
Program Lending Facility, or PPPL Facility, pursuant to section 13(3) of the Federal Reserve Act. Under the PPPL
Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans
guaranteed by the SBA under the PPP established by the CARES Act.
On April 15, 2020, we executed a PPPL Facility Agreement with the Federal Reserve Bank of Minneapolis.
The PPP loans guaranteed by the SBA are eligible to serve as collateral for the PPPL Facility. The PPPL Facility
provided us with additional liquidity, if necessary, to facilitate lending to small businesses under the PPP. As of
December 31, 2020, we have not had a need to utilize the PPPL Facility.
NOTE 32 Subsequent Events
Subsequent to year end, the Company gave notice pursuant to Section 4(b) of the 5.75% Fixed to Floating Rate
Subordinated Notes due 2025, or the Subordinated Notes, of the Company, that the entire aggregate $50.0 million
outstanding principal amount of the Subordinated Notes were being called for redemption, and would be redeemed
effective Friday, January 29, 2021, or the Redemption Date. On the Redemption Date, holders of record of the
Subordinated Notes were paid 100% of the outstanding principal amount of each Subordinated Note, plus accrued and
unpaid interest thereon to, but excluding the Redemption Date.
Subsequent to year end, the Company received a commitment from the Bank of North Dakota for subordinated
debenture financing. The Company was approved to borrow up to $50.0 million at a fixed interest rate of 3.50% for the
first five years, the rate will then reset at the 5 year FHLB advance rate plus 2.00%, with a floor of 3.50%. The
subordinated note will have a 10 year maturity and will qualify for Tier 2 capital. The commitment expires May 23,
2021, and the Company is currently planning to advance on the commitment on March 30, 2021.
Subsequent events have been evaluated through March 12, 2021, which is the date these financial statements
were issued.
147
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in
Rule 13a - 15(e) under the Exchange Act of 1934, or the Exchange Act) as of December 31, 2020, the end of the
fiscal year covered by this Annual Report on Form 10 - K. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of December 31, 2020, the Company’s disclosure controls and
procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Evaluation of Internal Control over Financial Reporting
This annual report does not include an attestation report of the Company’s independent registered public
accounting firm. As an emerging growth company, management’s report on internal control over financial reporting was
not subject to attestation by the Company’s independent registered public accounting firm in accordance with the JOBS
Act.
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control
system is a process designed to provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published financial statements.
Internal control over financial reporting of the Company includes those policies and procedures that pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the Company’s consolidated financial statements.
Because of inherent limitations in any system of internal control, no matter how well designed, misstatements
due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of
controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance
with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness
may vary over time.
Management assessed the Company’s internal control over financial reporting as of December 31, 2020. This
assessment was based on criteria for effective internal control over financial reporting set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in 2013. Based on
this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective
internal control over financial reporting as of December 31, 2020 based on the specified criteria.
148
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the
period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is set forth under the headings ‘Proposal 1 – Election of Directors” and
“Corporate Governance and the Board of Directors” appear in the Company’s Proxy Statement for the 2021 annual
meeting of shareholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of
the Company’s fiscal year end, December 31, 2020, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth under the headings “Corporate Governance and the Board of
Directors – Compensation Committee Interlocks and Insider Participation,” “Corporate Governance and the Board of
Directors – Director Compensation,” and “Executive Compensation” appearing in the Company’s Proxy Statement for
the 2020 annual meeting of shareholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act
within 120 days of the Company’s fiscal year end, December 31, 2020, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plans
The following table discloses the number of outstanding options, warrants and rights granted to participants by
the Company under our equity compensation plans, as well as the number of securities remaining available for future
issuance under these plans as of December 31, 2020. The table provides this information separately for equity
compensation plans that have and have not been approved by security holders. Additional information regarding stock
incentive plans is presented in Note 18 to the Consolidated Financial Statements for the year ending December 31, 2020.
Plan Category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(a)
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(b)
Weighted-average exercise
price of outstanding
options, warrants and
rights
(c)
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
325,030 $
—
325,030 $
19.48
—
19.48
1,100,000
—
1,100,000
Other information required pursuant to Item 403 of Regulation S-K can be found under the caption “Security
Ownership of Certain Beneficial Owners” in the Company’s definitive Proxy Statement for the 2020 annual meeting of
shareholders to be filed with the SEC within 120 days of the Company’s fiscal year end, December 31, 2020, which is
incorporated herein by reference.
149
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this item is set forth under the headings “Certain Relationships and Related Party
Transactions” and “Corporate Governance and the Board of Directors” appearing in the Company’s Proxy Statement for
the 2020 annual meeting of shareholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act
within 120 days of the Company’s fiscal year end, December 31, 2020, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is set forth under the heading “Proposal 2 – Ratification of the Appointment
of CliftonLarsonAllen LLP as our Independent Registered Public Accounting Firm” appearing in the Company’s Proxy
Statement for the 2020 annual meeting of shareholders to be filed with the SEC pursuant to Regulation 14A under the
Exchange Act within 120 days of the Company’s fiscal year end, December 31, 2020, which is incorporated herein by
reference.
150
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
1. Financial Statements: The consolidated financial statements that appear in Item 8 of this Form 10 - K are
incorporated herein by reference.
2. Financial Statement Schedules: All schedules are omitted because they are not applicable, not required, or
because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number
3.1
3.2
4.1
10.1†
Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation
(incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019)
Description
Second Amended and Restated Bylaws of Alerus Financial Corporation (incorporated herein by
reference to Exhibit 3.2 on Form S-1 filed on August 16, 2019)
Description of Capital Stock (incorporated herein by reference to Exhibit 4.1 on Form 10-K Filed on
March 26, 2020)
Executive Severance Agreement by and between Alerus Financial Corporation and Randy Newman,
dated August 1, 2017 (incorporated herein by reference to Exhibit 10.1 on Form S-1 filed on August
16, 2019)
10.2†
Executive Severance Agreement by and between Alerus Financial Corporation and Kris Compton,
dated October 8, 2017 (incorporated herein by reference to Exhibit 10.3 on Form S-1 filed on August
16, 2019)
10.3†
Executive Severance Agreement by and between Alerus Financial Corporation and Katie Lorenson,
dated October 31, 2018 (incorporated herein by reference to Exhibit 10.4 on Form S-1 filed on August
16, 2019)
10.4†
Executive Severance Agreement by and between Alerus Financial Corporation and Ann McConn,
dated October 8, 2017 (incorporated herein by reference to Exhibit 10.5 on Form S-1 filed on August
16, 2019)
10.5†
Executive Severance Agreement by and between Alerus Financial Corporation and Karin Taylor,
dated December 10, 2018 (incorporated herein by reference to Exhibit 10.6 on Form S-1 filed on
August 16, 2019)
10.6†
Alerus Financial Corporation 2009 Stock Plan (incorporated herein by reference to Exhibit 10.7 on
Form S-1 filed on August 16, 2019)
10.7†
Form of Restricted Stock Award Agreement under the Alerus Financial Corporation 2009 Stock Plan
(incorporated herein by reference to Exhibit 10.8 on Form S-1 filed on August 16, 2019)
151
Exhibit
Number
10.8†
Form of Performance-Based Restricted Stock Unit Agreement under the Alerus Financial Corporation
2009 Stock Plan (incorporated herein by reference to Exhibit 10.9 on Form S-1 filed on August 16,
2019)
Description
10.9†
Alerus Financial Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.10 on
Form S-1 filed on August 16, 2019)
10.10†
Alerus Financial Short Term Incentive Plan (incorporated herein by reference to Exhibit 10.11 on
Form S-1 filed on August 16, 2019)
10.11†
Alerus Financial Corporation Deferred Compensation Plan for Directors (As Restated Effective
January 1, 2005) (incorporated herein by reference to Exhibit 10.12 on Form S-1 filed on August 16,
2019)
10.12†
Alerus Financial Corporation Deferred Compensation Plan for Executives (As Restated Effective
January 1, 2006) as subsequently amended (incorporated herein by reference to Exhibit 10.13 on
Form S-1 filed on August 16, 2019)
10.13†
Alerus Financial Corporation Employee Stock Ownership Plan (incorporated herein by reference to
Exhibit 10.14 on Form S-1 filed on August 16, 2019)
10.14†
Third Amendment of Alerus Financial Corporation Employee Stock Ownership Plan (incorporated
herein by reference to Exhibit 10.14 on Form 10-K filed on March 26, 2020)
10.15†
Alerus Financial Corporation 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit
10.15 on Form S-1 filed on August 16, 2019)
10.16†
Form of Performance-Based Restricted Stock Unit Award Agreement under the Alerus Financial
Corporation 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 on Form 8-K filed
on February 25, 2020)
10.17†
Form of Restricted Stock Award Agreement under the Alerus Financial Corporation 2019 Equity
Incentive Plan (incorporated herein by reference to Exhibit 10.17 on Form 10-K filed on March 26,
2020)
10.18†
Form of Performance-Based Restricted Stock Unit Award Agreement under the Alerus Financial
Corporation 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 on Form 8-
K filed on February 25, 2020)
10.19†
Executive Severance Agreement by and between Alerus Financial Corporation and Ryan Goldberg,
dated March 4, 2020 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on March
10, 2020)
21.1
Subsidiaries of Alerus Financial Corporation (incorporated herein by reference to Exhibit 21.1 on
23.1
31.1
Form S-1 filed on August 16, 2019)
Consent of CliftonLarsonAllen LLP
Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
152
Exhibit
Number
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act
of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
Description
32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
†
Indicates a management contract or compensatory plan or arrangement.
153
Exhibit
Number
101.1 INS
101.1 SCH
101.1 CAL
101.1 DEF
101.1 LAB
101.1 PRE
104
Description
iXBRL Instance Document
iXBRL Taxonomy Extension Schema
iXBRL Taxonomy Extension Calculation Linkbase
iXBRL Taxonomy Extension Definition Linkbase
iXBRL Taxonomy Extension Label Linkbase
iXBRL Taxonomy Extension Presentation Linkbase
The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document.
ITEM 16. – FORM 10 - K SUMMARY
None.
154
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.
SIGNATURES
Date: March 12, 2021
ALERUS FINANCIAL CORPORATION
By:
Name:
Title:
/s/ Randy L. Newman
Randy L. Newman
Chairman, Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Randy L. Newman
Randy L. Newman
/s/ Katie A. Lorenson
Katie A. Lorenson
/s/ Karen M. Bohn
Karen M. Bohn
/s/ Lloyd G. Case
Lloyd G. Case
/s/ Daniel E. Coughlin
Daniel E. Coughlin
/s/ Kevin D. Lemke
Kevin D. Lemke
/s/ Michael S. Mathews
Michael S. Mathews
/s/ Sally J. Smith
Sally J. Smith
/s/ Galen G. Vetter
Galen G. Vetter
Chairman, Chief Executive Officer and
President (Principal Executive Officer)
March 12, 2021
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
Director
March 12, 2021
155
(This page has been left blank intentionally.)
S E N I O R E XECU TIV E T E A M
RANDY L . NEWMAN
KATIE LORENSON
ANN MCCONN
RYAN GOLDBERG
KARIN TAYLOR
Chairman, President,
and Chief Executive
Officer
Executive Vice
President and Chief
Financial Officer
Executive Vice President
and Chief Shared
Services Officer
Executive Vice
President and Chief
Revenue Officer
Executive Vice
President and Chief
Risk Officer
40 years with Alerus
4 years with Alerus
19 years with Alerus
Joined Alerus in 2020
3 years with Alerus
A LE R U S LE A D E R S H I P CO U N C I L
Mark Alley
Market President, National
Market
18 years with Alerus
Sara Ausman
Market President, Twin Cities
9 years with Alerus
Maria Biessener
Director of Operations and
Process Excellence
3 years with Alerus
Lori Day
Director of Mortgage
4 years with Alerus
B OA R D O F D I R EC TO R S
Randy L. Newman
Grand Forks, ND
Chairman, President,
and Chief Executive
Officer, Alerus Financial,
N.A., Alerus Financial
Corporation
Karen M. Bohn
Edina, MN
President, Galeo Group, LLC
Former Chief
Administrative Officer,
Piper Jaffray Companies
Former Chief Executive
Officer, Piper Trust
Company
Dan Doeden
Market President, Fargo
17 years with Alerus
Debbie Lange
Chief Credit Officer
2 years with Alerus
Rob Schwister
Market President, Phoenix
11 years with Alerus
Jon Hendry
Chief Information Officer
37 years with Alerus
Karna Loyland
Director of Banking
22 years with Alerus
Teresa Wasvick
Director of Human Resources
30 years with Alerus
Travis Ingebrigtson
Director of Finance
6 years with Alerus
Missy Keney
Director of Marketing and
Client Experience
16 years with Alerus
Brian Overby
President of Retirement
and Benefits
26 years with Alerus
Brian Schumacher
Director of Wealth
Management
10 years with Alerus
Chris Wolf
Market President, Grand Forks
11 years with Alerus
Lloyd G. Case
Fargo, ND
Past President and CEO of
Forum Communications
Company
Board of Directors,
Forum Communications
Daniel E. Coughlin
Chicago, IL
Former Managing
Director and Co-Head
of Financial Services,
Raymond James &
Associates
Former Chairman and
CEO, Howe Barnes Hoefer
& Arnett
Kevin D. Lemke
Grand Forks, ND
President, Virtual
Systems, Inc.
Michael S. Mathews
Minneapolis, MN
Chief Information Officer,
Deluxe Corporation
Former SVP, Technology
and Enterprise Programs,
UnitedHealth Group
Former Global Head/
Director, Global
Technology, Operations
and Six Sigma,
Merrill Lynch
Sally Smith
Minneapolis, MN
Former President and CEO,
Buffalo Wild Wings, Inc.
Former CFO, Buffalo Wild
Wings, Inc.
Former CFO, Dahlberg, Inc.
Galen G. Vetter
Minneapolis, MN
Former Global Chief
Financial Officer, Franklin
Templeton Investments
Former Partner-in-Charge,
Upper Midwest Region,
McGladrey RSM
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