P R O P E L L E D B Y P U R P O S E : 2022 Alerus Financial Corporation Annual Report
REINVENTION
OF PROCESSES
We consistently seek new
ways to improve the client
experience and enhance
efficiencies to build
scalability.
TECHNOLOGY
INVESTMENT
Proactively invested in
technology to integrate all
business lines and enhance
client engagement.
CLIENT
ORIENTED
We put the client first
in every decision we
make.
O N E
A L E R U S
TAILORED
ADVICE
Each client is paired with a
primary point of contact to
help with individual needs
and integrate specialists
when needed.
DIVERSIFIED
SERVICES
We provide comprehensive
products and services, including
banking, mortgage, wealth
management, and retirement
and benefits.
SYNERGISTIC
GROWTH
Our diverse business
model provides revenue
funding and growth
opportunities.
Our collaborative culture brings our diverse product and service offerings to clients
in a cohesive and seamless manner. The combination of our culture and business
model is One Alerus — a holistic approach to providing service and meeting clients’
needs throughout their financial journeys. We believe this strategic and inclusive
approach enables us to achieve future organic growth through client acquisition,
retention, and expansion to provide sustained strong returns to our shareholders
and employees through our employee stock ownership plan.
P R O P E L L E D B Y P U R P O S E
D E A R FE LLOW S H A R E H O LD E R S ,
When I look back on 2022, I am proud
of our professional and dedicated team
members at Alerus. Despite a year filled
with unprecedented and unpredictable
headwinds across the entire financial
industry, our collaborative culture,
commitment to our clients and
communities, and powerful diversified
business model enabled us to continue
executing our growth strategy with a
focus on areas we could control to propel
our company forward.
The strength of our foundation positioned Alerus team members to rise
to the challenge and continue to grow our company, marking substantial
milestones including:
• Completing the largest bank acquisition and first all-stock transaction in
Alerus history with the addition of Metro Phoenix Bank — the largest full-
service community bank headquartered in Phoenix.
• Attracting and integrating seasoned talent and specialists, including the
successful lift-out of a commercial real estate team and executive leaders.
• Earning record levels of new business growth in wealth management and
retirement verticals while continuing to build synergies between lines
of business.
Implementing continued control measures and thoughtful process and
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policy improvements to enhance the client experience and retain exceptional
asset quality.
Katie Lorenson
President and Chief Executive Officer
Alerus Financial Corporation
P R O P E L L E D B Y P U R P O S E
W E L C O M E N E W E X E C U T I V E
T E A M M E M B E R S
O U R PU R P O S E – O U R P EO P LE
The core of our business model continues to be our commitment to provide
unmatched client service and holistic advice. Our focus is to provide value to our
clients by developing an understanding of their goals and working with them
to achieve those goals. Bringing added value to clients supports our mission to
positively impact their financial potential and long-term financial outlook and,
in turn, creates long-term shareholder value. We continued to enhance our team
with new talent in 2022 to further realize our mission. In addition to successfully
transitioning several executive roles and establishing a new leadership team, we
enhanced our lending expertise with the addition of a five-member commercial
real estate specialist team which exceeded expectations and closed over $200
million in loans in their first nine months. We also proudly welcomed new team
members and clients from Metro Phoenix Bank and completed a successful
transition in September 2022. With extensive market knowledge, commercial
banking and small business lending expertise, and specialists in the niche areas
of homeowner’s accociation and outdoor advertising lending, our expanded
Arizona team is poised to provide transformational growth for our company in
the rapidly growing Phoenix market, as well as support new deposit and lending
opportunities throughout our footprint.
W E L C O M E N E W E X E C U T I V E
T E A M M E M B E R S
We completed our executive leadership transition plan in 2022, following the appointment of Katie
Lorenson as president and CEO on Jan. 1, 2022, and ahead of chief shared services officer Ann
McConn’s retirement on Jan. 6, 2023. Ann contributed her expertise and leadership to the company for
nearly 27 years and provided ample guidance to ensure a smooth leadership transition and support
continued success. Our long-term succession plan allowed us to appropriately focus on identifying
candidates with the right mix of industry experience, shared culture and business philosophies, and
passion for our company and clients. This enabled a seamless leadership transition and established a
dynamic executive team to lead our company into 2023 and beyond. We are pleased to welcome our
new executive team members, who join Ms. Lorenson and chief risk officer Karin Taylor.
AL VILL ALON
was named chief
financial officer in
January 2022. With
over 25 years of
experience, he brings
strategic expertise
and an extensive
background in analysis,
corporate strategy,
and investor relations.
His deep experience in
analysis and navigating
uncertainties inform and
guide the company’s
long-term growth
strategy to benefit
clients, employees, and
shareholders.
JIM COLLINS
was named chief banking
and revenue officer
in May 2022. He is an
accomplished financial
executive with nearly
30 years of experience
and extensive expertise
in commercial and
wealth banking. Mr.
Collins’ proven success
in talent recruitment,
retention, and leading
teams in revenue-related
activities, including
balance sheet growth,
client segmentation
strategies, products, and
client service, will benefit
our business lines across
all markets.
MISSY KENE Y
was named chief
engagement officer in
July 2022. A nearly 20-
year Alerus employee,
Ms. Keney previously
served as director of
marketing and client
experience and was a
multi-year member of the
company’s leadership
team prior to accepting
her new role. In addition
to leading employee
and client engagement
strategies, she leads
the company’s talent
management and overall
marketing and branding
strategies to drive growth
and create long-term
shareholder value.
JON HENDRY
was named chief
technology officer in July
2022. Mr. Hendry has 39
years of experience at
Alerus and has served as
a member of the Alerus
Financial, N.A. board of
directors since 2008. He
oversees the company’s
technology infrastructure
and initiatives, providing
extensive experience and
continued leadership
over the company’s
digital transformation
while aligning technology
investments with growth
initiatives. i
nitiatives.
We are pleased to welcome our new executive team
members, who join Ms. Lorenson and chief risk officer
Karin Taylor. We also bid a fond farewell to Ms. McConn,
who contributed her expertise and leadership to the
company for nearly 27 years and provided ample
guidance to ensure a smooth leadership transition and
support continued success.
CO N T R O LLE D A P P R OAC H
Despite the difficult operating environment in 2022,
our team executed at a high level, achieving total
revenue of $211 million and net income of $40 million
for the year. Loans held for investment grew 39%
from December 31, 2021; 25.5% when excluding
loans acquired through Metro Phoenix Bank and the
Paycheck Protection Program.
Our wealth management and retirement business
lines saw another record year of new business
growth while building on the synergies across our
business lines, creating additional value for clients
and shareholders. And while the mortgage industry
struggled against unpredictably severe headwinds,
our team members’ passion for serving clients
and communities remained strong. Several team
members were recognized among the top loan
producers in Minnesota. The Build Your Community
giving program, funded in part through contributions
made by mortgage bankers for each loan closed,
contributed over $350,000 to charitable causes.
We also continued to make thoughtful
improvements to our processes and loan policies
while taking measures to control and reduce
expenses where possible. We strategically exited the
payroll business and replaced the low- to no-margin
product offering with formal referral partnerships.
This allows us to continue providing exceptional
client service while enabling greater focus on our core
retirement and benefits business line.
We maintained very strong core deposits and had $706
million in interest-bearing demand deposits at year
end. By adjusting where we could while maintaining
focus on long-term, organic growth, our impressive
team achieved a 35% income increase compared to
2019 (the most recent non-pandemic year). We ended
2022 with total assets of $3.8 billion, 11.4% higher
than 2021 and an impressive accomplishment when
considering the macroeconomic challenges faced
throughout the year.
FO U N DATI O N A L STR E N GTH ,
TR A N S FO R M ATIV E G R OW TH
As we look to 2023, elevated interest rates
will likely remain a significant headwind.
Our continued focus on strategic talent
acquisitions, the highest levels of client
service, client growth and relationship
expansion, combined with strong risk
management and ongoing control measures,
positions us to rapidly outpace competitors as
macroeconomic conditions improve.
Alerus has an exceptional history of not just
weathering challenges but emerging from
them stronger than before. Our foundation has
been built upon strong capital, reserves, credit
quality, and high levels of fee income. This
strong foundation and our diversified business
model continue to provide a competitive
advantage for recruiting and retaining talent,
which our team members will build upon
exponentially. Together we are committed to
the ongoing, long-term success of Alerus and
creating value every day for our clients and our
shareholders in the coming year and beyond.
I am grateful to our team for their hard work,
dedication, and commitment to our clients,
communities, and each other. Thank you for
your investment and placing your trust in us.
With sincere gratitude,
Katie Lorenson
President and CEO
2 0 2 2 C O M PA N Y
A C C O L A D E S
D I R E C T O R T R A N S I T I O N S
Best Bank in Eden Prairie, MN
Sun Current
Top 10 Banks
Ranking Arizona
Top Workplace
Star Tribune, Minneapolis, MN
Business Bank, Small Business Bank,
Commercial Mortgage Lender, Wealth
Management
Finance & Commerce Reader Rankings
Business Bank, Community Bank,
Consumer Bank, Mortgage Lender
Twin Cities Business Best of Business
50 Best Places to Work
Prairie Business magazine
Banks of the Year
AZ Business magazine
Congratulations to Dan Coughlin, who was appointed
to serve as chairman of the board effective May 10,
2022. He replaced former Alerus chairman, president,
and CEO Randy Newman, who served as executive
chairman of the board beginning Jan. 1, 2022, to
support the company’s leadership transition, and
continues to serve as a director.
Mr. Coughlin joined the board of directors in 2016.
An industry veteran with over 40 years of experience,
he provides knowledge and experience in strategic
planning, risk management, mergers and acquisitions,
and capital formation. He served as chairman and
CEO of Howe Barnes Hoefer & Arnett from 2001 until
its merger with Raymond James & Associates in 2011.
He then served as managing director and co-head
of the financial services practice at Raymond James
until his retirement in 2014. He also served seven
years with the Federal Reserve Bank of Chicago,
where he assessed the competitive implications of
bank mergers and acquisitions.
We extend our deepest appreciation to directors
Karen Bohn and Sally Smith, who retired in
May 2022. Ms. Bohn joined the board of directors
in 1999 and contributed many valuable years of
guidance in the areas of governance and strategic
planning while Alerus grew exponentially. Ms. Smith
accepted a director role in 2007 and applied her
financial expertise to help guide the company
through the 2008 financial crisis, multiple acquisitions,
and its initial public offering. Thank you, Karen and
Sally, for sharing your talents and dedication with
our company.
E X E C U T I V E M A N AGE ME N T
Katie Lorenson
President and Chief Executive
Officer
Al Villalon
Executive Vice President and
Chief Financial Officer
Jim Collins
Executive Vice President and Chief
Banking and Revenue Officer
6 years with Alerus
Joined Alerus in 2022
Joined Alerus in 2022
Karin Taylor
Executive Vice President and
Chief Risk Officer
5 years with Alerus
Missy Keney
Executive Vice President and
Chief Engagement Officer
Jon Hendry
Executive Vice President and
Chief Technology Officer
18 years with Alerus
39 years with Alerus
B OA RD OF DIRE C T OR S
Kevin D. Lemke
President, Virtual Systems, Inc.
Michael S. Mathews
Former 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
Randy L. Newman
Former Chairman, President, and
CEO, Alerus
Galen G. Vetter
Former Global Chief Financial
Officer, Franklin Templeton
Investments
Former Partner-in-Charge, Upper
Midwest Region, RSM
Mary E. Zimmer
Former Director of Diverse Client
Segments, Wells Fargo Advisors
Former Regional President,
Northern Region, Wells Fargo
Advisors
Former Head of International
Wealth USA, Royal Bank of Canada
U.S. Wealth Management
Daniel E. Coughlin
Chairman, Alerus
Former Managing Director and
Co-Head of Financial Services,
Raymond James & Associates
Former Chairman and CEO, Howe
Barnes Hoefer & Arnett
Katie A. Lorenson
President and Chief Executive
Officer, Alerus
Janet O. Estep
Former President and CEO, Nacha
Former Executive Vice President,
U.S. Bank Transaction Services
Division
Former Vice President, Pace
Analytical Services
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, 2022
☐ 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2022, was approximately $389,265,666 (based on the closing price on The
Nasdaq Capital Market on that date of $23.81). The number of shares of the registrant’s common stock outstanding at February 28, 2023 was 20,058,582.
DOCUMENTS INCORPORATED BY REFERENCE:
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, 2022, pursuant
to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 8, 2023.
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
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6. [Reserved]
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 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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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:
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interest rate risks associated with our business, including the effects of recent and anticipated rate increases
by the Federal Reserve;
our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses;
fluctuations in the values of the securities held in our securities portfolio, including as a result of rising
interest rates, which has resulted in unrealized losses in our portfolio;
the impact of economic or market conditions on our fee-based services
new or revised accounting standards, including as a result of the implementation of the new Current
Expected Credit Loss standard;
business and economic conditions generally and in the financial services industry, nationally and within our
market areas, including continued rising rates of inflation;
the overall health of the local and national real estate market;
our ability to implement our organic and acquisition growth strategies, including the integration of Metro
Phoenix Bank, which we acquired in 2022;
potential impairment to the goodwill we recorded in connections with our past acquisitions, including the
acquisition of Metro Phoenix Bank;
our ability to continue to grow our retirement and benefit services business;
our ability to continue to originate a sufficient volume of residential mortgages;
our ability to successfully manage liquidity risk, including our need to access higher cost sources of funds
such as fed funds purchased and short-term borrowings;
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concentrations within our loan portfolio
the level of nonperforming assets on our balance sheet;
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
servicers;
developments and uncertainty related to the future use and availability of some reference rates, such as the
expected discontinuation of the London Interbank Offered Rate, as well as the development and
implementation of 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;
risks related to climate change and the negative impact it may have on our customers and their businesses;
severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts
of war or terrorism, including the Russian invasion of Ukraine, or other adverse external events;
any material weaknesses in our internal control over financial reporting;
concentrations of large depositors;
our dependence on dividends from the Bank;
the effectiveness of our risk management framework;
the extensive regulatory framework that applies to us;
the impact of recent and future legislative and regulatory changes;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against us
or to which we may become subject;
governmental monetary, trade and fiscal policies;
rapid technological change in the financial services industry;
increased competition in the financial services industry from non-banks such as credit unions and Fintech
companies, including digital asset service providers;
our ability to manage mortgage pipeline risk;
changes to U.S. or state tax laws, regulations and guidance including the new 1.0% excise tax on stock
buybacks by publicly traded companies;
talent and labor shortages and employee turnover;
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our success at managing the risks involved with the foregoing items; 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.
As of December 31, 2022, we had $3.8 billion of total assets, $2.4 billion of total loans, $2.9 billion of total
deposits, $356.9 million of stockholders’ equity, $32.1 billion of assets under administration/management in our
retirement and benefit services segment, and $3.6 billion of assets under administration/management in our wealth
management segment. For the year ended December 31, 2022, we had $812.3 million 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
5
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:
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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
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, health savings account, or HSA, flex spending account, or
FSA, administration and 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.
On July 1, 2022, we completed our acquisition of MPB BHC, Inc., the holding company of Metro Phoenix
Bank. The primary reasons for the acquisition were to expand the Company’s business in the Phoenix-Mesa-Scottsdale
metropolitan statistical area, or Phoenix MSA, and grow the size of the Company’s business. As consideration for the
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merger, we issued $64.0 million in a stock-for-stock transaction. As a result of the acquisition, we acquired $270.4
million in loans and $353.7 million in deposits from Metro Phoenix Bank.
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.
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, 2022, core deposits totaled $2.9 billion or 98.3% of our total deposits. Our
deposit portfolio includes synergistic deposits from our retirement and benefits services and wealth management
segments. As of December 31, 2022, these synergistic deposits totaled $691.6 million. We also offer an HSA deposit
program to attract low cost deposits. As of December 31, 2022, we had $166.2 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, 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.
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• 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.
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.
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 2022,
approximately 88.3% of the loans made by our mortgage division were for the purchase of a residential property,
compared to 11.7% 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, 2022, approximately 91.4% of the total mortgage loans were attributable to that market, compared to
5.4% attributable to the North Dakota market and 3.2% attributable to 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, 2022, we had
mortgage loans held for sale of $9.5 million from the residential mortgage loans we originated. For the year ended
December 31, 2022, our mortgage segment originated $812.3 million 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. 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 Colorado, Michigan,
and Minnesota.
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 two other full-service banking offices
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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. We believe this market is rich in low-cost, core
deposits and is strengthened by the Bakken Oil region. We can use these low-cost, core deposits 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 $232.4 billion as of June 30, 2022 and ranks as the 16th largest metropolitan
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 Phoenix, Scottsdale and Mesa,
Arizona. The Phoenix MSA had total deposits of $181.8 billion as of June 30, 2022 and ranks as the 20th 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. In addition, our National Market
President oversees the development of the national 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, $435.1 million, $58.8 million and $692.8 million, respectively, as
of December 31, 2022, representing approximately 77.8%, 12.8%, 2.4% and 23.8%, respectively of our total retirement
and benefit services assets under administration/management, wealth management assets under
administration/management, loans 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, business leasing and finance companies, credit unions, Fintech companies and digital asset service providers,
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
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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 employed a total of 837 employees as of December 31, 2022, of which
approximately:
•
•
773 are full-time employees; and
64 are part-time employees.
Our workforce further breaks down into the following categories:
•
•
gender: male 281, female 556; and
ethnicity: 715 white, 122 identify as either Native American Indian, Asian, African American,
Hispanic, Latino, or not specified.
The Company has four operating segments with the following employees:
• Banking: 109 employees;
• Mortgage: 97 employees;
• Retirement and Benefits: 213 employees; and
• Wealth Management: 23 employees.
The client service divisions include:
• Sales and Service: 222 employees;
• Client Service Center: 35 employees; and
• Human Resources, Information Technology, Audit, Legal, Compliance, and the Executives staff areas:
138 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.
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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-
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 McLagan a division of Aon, to provide benchmarking and
analysis for base salary structures and sales incentive programs.
Our benefits package provides 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 Form 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
11
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
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. The Economic Growth,
Regulatory Relief and Consumer Protection Act of 2018, or Regulatory Relief Act, 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 have been 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. 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.
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 generally are required to hold more capital than other
businesses, which directly affects our earnings capabilities. Although 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.
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.” The 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
12
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. The United States bank regulatory agencies adopted the Basel III regulatory capital
reforms, and, at the same time, effected changes required by the Dodd-Frank Act, in regulations that were effective (with
certain phase-ins) in 2015. Basel III established capital standards for banks and bank holding companies that are
meaningfully more stringent than those in place previously: it increased the required quantity and quality of capital; and
it required 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 most bank and savings and loan holding companies. The
Company and the Bank are each subject to the Basel III Rule.
Not only did Basel III 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 Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
• A ratio of 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 leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.
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.
Well-Capitalized Requirements. The ratios described above are minimum standards 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
13
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, 2022: (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, 2022, 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 % as of December 31, 2022.
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 depository
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 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%. 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,
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
14
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 more
than 5% of a class 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 permits 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, as long as the activity does not pose a substantial risk to the safety or
soundness of FDIC-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
limitations on us that it 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 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
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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. 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 increases in the targeted federal
funds rate throughout 2022. 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
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 deposit insurance fund, or 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,
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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 primarily responsible for administering and enforcing 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 DIF balance divided by estimated insured deposits. In response to the global financial
crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total
insured deposits. Prior to the Covid-19 pandemic, the reserve ratio briefly exceeded the statutory threshold, but, because
of extraordinary insured deposit growth caused by an unprecedented inflow of deposits during the pandemic, the reserve
ratio fell below 1.35% and continues to be below the threshold. The FDIC staff closely monitors the factors that affect
the reserve ratio, and, in order to raise the reserve ratio to 1.35 % by September 30, 2028, the FDIC increased the initial
deposit insurance rates by two basis points, beginning with the first quarterly assessment period of the 2023 assessment.
As a result of this change, the Bank’s FDIC insurance assessment will increase beginning in 2023.
The DIF balance was approximately $125.5 billion on September 30, 2022, up $1.0 billion from the end of the
second quarter. The reserve ratio remained at 1.26%, as growth in the fund balance kept pace with growth in insured
deposits. The FDIC staff continues to closely monitor the factors that affect the reserve ratio, and any change could
impact FDIC assessments.
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, 2022, the Bank paid supervisory assessments to the OCC
totaling $497 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 the 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).
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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 OCC approval, however, a national bank may not pay dividends in
any calendar year that, in the aggregate, exceed that bank’s year-to-date 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, 2022. 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 on 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.
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 that the institution pays on deposits or require the
institution to take any action that 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
that 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
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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 key risk themes identified for 2023 are discussed under Item 1A - Risk Factors. 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.
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. The amount of reserves
is established by the Federal Reserve based on tranches of zero, three and ten percent of a bank’s transaction account
deposits. However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system
had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve
tranches to zero percent, thereby freeing banks from the legally mandated 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
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communities. Applications for acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting
its CRA requirements.
In May 2022, the bank regulatory agencies issued a notice of proposed rulemaking called the Joint Proposal to
Strengthen and Modernize Community Reinvestment Act Regulations (the “CRA Proposal”). The CRA Proposal is
designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA
activities are evaluated. More specifically, the bank regulatory agencies described the goals of the CRA Proposal as
follows: (i) to expand access to credit, investment, and basic banking services in low and moderate income communities;
(ii) to adapt to changes in the banking industry, including mobile and internet banking by modernizing assessment areas
while maintaining a focus on branch based areas; (iii) to provide greater clarity, consistency, and transparency in the
application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible
CRA activities focused on low and moderate income communities and under served rural communities; (iv) to tailor
CRA rules and data collection to bank size and business model; and (v) to maintain a unified approach among the
regulators. A final rule has not yet been issued.
Anti-Money Laundering. The USA PATRIOT Act, the Bank Secrecy Act and other similar laws are designed
to deny terrorists and criminals the ability to obtain access to the U.S. financial system and have significant implications
for FDIC-insured institutions and other businesses involved in the transfer of money. These laws mandate financial
services companies to have policies and procedures with respect to measures designed to address 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, or CRE, is one example of
regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices guidance, or CRE Guidance, 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) 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, 2022, 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 global
financial crisis, many rules issued by the CFPB, as 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
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combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank Act and the
CFPB’s enabling rules 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’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.
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 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 CECL
standard;
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, including the
acquisition of Metro Phoenix Bank;
our ability to continue to grow our retirement and benefit services business;
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•
•
•
•
•
•
•
•
•
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
expected discontinuation of LIBOR as well as the development and implementation of 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;
labor shortages;
any material weaknesses in our internal control over financial reporting; and
severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts
of war or terrorism, or other adverse external events.
Liquidity and Funding Risks
• Our ability to successfully manage liquidity risk, including our need to access higher cost sources of funds
such as fed funds purchased and short-term borrowings;
•
•
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;
the extensive regulatory framework that applies to us; and
the impact of recent and future legislative and regulatory changes.
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, which are expected to continue to increase in 2023, 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
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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.
It is currently expected that during 2023, and perhaps beyond, the Federal Open Market Committee of the
Federal Reserve, or FOMC, will continue to increase interest rates to reduce the rate of inflation. In 2022, the FOMC
increased at various dates throughout the year the target range for the federal funds rate from 0.00% to 0.25% to a range
of 4.25% to 4.50%. All of these increases were expressly made in response to inflationary pressures, which are currently
expected to continue in 2023. In February of 2023 the FOMC increased rates again by 0.25%. If the FOMC further
increases the targeted federal funds rates, overall interest rates likely will rise, which may negatively impact the entire
national economy. In addition, our net interest income could be adversely affected if the rates we pay on deposits and
borrowings increase more rapidly than the rates we earn on loans and other assets. Rising interest rates also may reduce
the demand for loans and the value of fixed-rate investment securities. These effects from interest rate changes or from
other sustained economic stress or a recession, among other matters, could have a material adverse effect on our
business, financial condition, liquidity, and results of operations.
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.
In addition, we could be prevented from increasing the interest rates we charge on loans or from maintaining
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, 2022, we had $861.0 million of non-maturity,
noninterest bearing deposit accounts and $1.8 billion of non-maturity interest-bearing deposit accounts. Interest rates for
interest-bearing accounts have, in recent periods, started to increase in response to a series of increases made by the
Federal Reserve in the targeted fed funds rate in 2022 and market competition. We do not know what market rates will
eventually be in 2023. 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 at a sufficient level 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, 2022, the fair value of our securities portfolio was approximately $1.0 billion, or 26.1% of
our total assets. Factors beyond our control can significantly influence and cause potential adverse changes to the fair
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.
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A large percentage of our investment securities classified as available-for-sale has fixed interest rates. As is the
case with many financial institutions, our emphasis on increasing the development of core deposits, those with no stated
maturity date, has resulted in our interest-bearing liabilities having a shorter duration than our interest-earning assets.
This imbalance can create significant earnings volatility because interest rates change over time. As interest rates have
increased, our cost of funds has increased more rapidly than the yields on a substantial portion of our interest-earning
assets. In addition, the market value of our fixed-rate assets, for example, our investment securities, has declined in
recent periods. In line with the foregoing, we have experienced and may continue to experience an increase in the cost of
interest-bearing liabilities primarily due to raising the rates we pay on some of our deposit products to stay competitive
within our market and an increase in borrowing costs from increases in the federal funds rate.
At December 31, 2022, we had $183.3 million of unrealized losses in our securities portfolio. If we are forced
to liquidate any of those investments prior to maturity, including because of a lack of liquidity, we would recognize as a
charge to earnings the losses attributable to those securities. Our securities portfolio has an average duration of 20 years,
so we expect an increase in realized losses if interest rates continue to increase in 2023.
Monetary policies of the Federal Reserve could adversely affect our financial condition and results of operations.
In the current environment, economic and business conditions are significantly affected by U.S. monetary
policy, particularly the actions of the Federal Reserve in its effort to fight elevated levels of inflation. The Federal
Reserve is mandated to pursue the goals of maximum employment and price stability and, beginning in March 2022, it
made a series of significant increases to the target Federal Funds rate as part of an effort to combat elevated levels of
inflation affecting the U.S. economy, which is expected to continue in 2023. This has helped drive a significant increase
in prevailing interest rates and, while this will have a positive effect on our net interest income, it also harmed the value
of our securities portfolio, which had $132.3 million in unrealized losses in our available-for-sale investment securities
portfolio at December 31, 2022. This decline in value has negatively affected our tangible book value. Higher interest
rates can also negatively affect our customers’ businesses and financial condition, and the value of collateral securing
loans in our portfolio.
Given the complex factors affecting the strength of the U.S. economy, including uncertainties regarding the
persistence of inflation, geopolitical developments such as the war in Ukraine and resulting disruptions in the global
energy market, the effects of the pandemic in China, and tight labor market conditions and supply chain issues, there is a
meaningful risk that the Federal Reserve and other central banks may raise interest rates too much, thereby limiting
economic growth and potentially causing an economic recession. As noted above, this could decrease loan demand,
harm the credit characteristics of our existing loan portfolio and decrease the value of collateral securing loans in the
portfolio.
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
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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. In addition, as a result of the
implementation of CECL, the allowance for loan losses will reflect new or updated assumptions, model, and methods for
estimating the allowance for loan losses to determine expected credit losses.
As of December 31, 2022, our allowance for loan losses as a percentage of total loans was 1.27% and as a
percentage of total nonperforming loans was 820.9%. Although management believes that the allowance for loan losses
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 CECL 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.
The new accounting standard for establishing the allowance for credit losses, referred to as CECL, requires
financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the
expected credit losses as allowances for credit losses. This standard became applicable to us on January 1, 2023. Under
the revised methodology, credit losses are 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 requires 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 increase the types of data we need to collect and analyze to
determine the appropriate level of the allowance for credit losses. Any increase in our allowance for credit losses, or
expenses incurred to determine the appropriate level of the allowance for credit 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 credit losses and could result in the
need for additional capital.
Utilizing objective and subjective factors, the Company now maintains, as of January 1, 2023, an allowance for
credit losses, established through a provision for credit losses charged to expense, to cover its estimate of the current
expected credit losses in its loan and securities portfolios. In determining the size of this allowance, the Company
utilizes estimates based on analyses of volume and types of loans, internal loan classifications, trends in classifications,
volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national
and local economic conditions, including unemployment statistics, industry and peer bank loan quality indications, and
other pertinent factors and information. Actual losses are difficult to forecast, especially if those losses stem from factors
beyond the Company’s historical experience or are otherwise inconsistent with its credit quality assessments. If our
assumptions are inaccurate, our current allowance may not be sufficient to cover potential credit losses, and additional
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provisions may be necessary, which would negatively impact our results of operations and financial condition. Any
subsequent increase in our allowance for credit losses or expenses incurred to determine the appropriate level of the
allowance for credit losses will result in a decrease in net income and capital and may have a material adverse impact on
our financial condition and results of operations. Moreover, the CECL standard may create more volatility in our level of
allowance for credit losses and could result in the need for additional capital.
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, 2022, 97.6% 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 assets under administration, or
AUA, and assets under management, or 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 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.
Continued elevated levels of inflation could adversely impact our business, financial condition, results of operations
and growth prospects.
The United States has recently experienced elevated levels of inflation, with the consumer price index climbing
approximately 6.5% in 2022. Inflationary pressures are currently expected to continue into 2023. Continued levels of
inflation could have complex effects on our business, results of operations and financial condition, some of which could
be materially adverse. For example, while we generally expect any inflation-related increases in our interest expense to
be offset by increases in our interest income, inflation-driven increases in our levels of noninterest expense could
negatively impact our results of operations. Continued elevated levels of inflation could also cause increased volatility
and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay
indebtedness. It is possible that governmental responses to the current inflation environment could adversely affect our
business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of
price controls. The duration and severity of the current inflationary period cannot be estimated with precision.
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, 2022, approximately 74.0% 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
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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 interest rates and market conditions in the area in which the real estate is located and some of these
values have been negatively affected by the recent rise in prevailing interest rates. 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 23.9% of our total loan portfolio at December 31, 2022. 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. In the current economic environment, the cumulative
effects of rising inflation, labor shortages and supply chain constraints and the threat of a recession may adversely affect
commercial and industrial loans, especially if general economic conditions worsen. 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 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, 2022, we had $979.5 million of commercial real estate loans, consisting of $756.1 million
of loans secured by nonfarm nonresidential properties, $87.8 million of loans secured by multifamily residential
properties, $97.8 million of construction and land development loans and $37.8 million of loans secured by farmland.
Commercial real estate loans represented 40.0% of our total loan portfolio and 289.5% of the Bank’s total capital at
December 31, 2022. The market value of real estate can fluctuate significantly in a short period of time as a result of
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interest rates and market conditions in the area in which the real estate is located and some of these values have been
negatively affected by the recent rise in prevailing interest rates. 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 4.0% of our total loan portfolio as of
December 31, 2022. 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.
Our concentration of one-to-four family residential mortgage loans may result in lower yields and profitability.
One-to-four family residential mortgage loans comprised $679.6 million and $510.7 million, or 27.8% and
29.1%, of our loan portfolio at December 31, 2022 and 2021, respectively. These loans are secured primarily by
properties located in the states of Minnesota, North Dakota and Arizona. These loans generally have lower yields
relative to other loan categories within our loan portfolio. While these loans may possess higher yields than investment
securities, their repayment characteristics are not as well defined, and they generally possess a higher degree of interest
rate risk versus other loans and investment securities within our portfolio. This increased interest rate risk is due to the
repayment and prepayment options inherent in residential mortgage loans which are exercised by borrowers based upon
the overall level of interest rates. These residential mortgage loans are generally made on the basis of the borrower’s
ability to make repayments from his or her employment and the value of the property securing the loan. Thus, as a result,
repayment of these loans is also subject to general economic and employment conditions within the communities and
surrounding areas where the property is located.
A decline in residential real estate market prices or home sales has the potential to adversely affect our one-to-
four family residential mortgage portfolio in several ways, such as a decrease in collateral values and an increase in non-
performing loans, each of which could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Nonperforming assets take significant time to resolve and adversely affect our net interest income.
As of December 31, 2022, our nonperforming loans (which consist of nonaccrual loans and loans past due
90 days or more) totaled $3.8 million, or 0.16% of our total loan portfolio, and our nonperforming assets (which consist
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of nonperforming loans, foreclosed assets and other real estate owned) totaled $3.8 million, or 0.10% of total assets. In
addition, we had $5.0 million of accruing loans that were 31-89 days delinquent as of December 31, 2022.
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
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, 2022, our 10 largest borrowing relationships accounted
for approximately 5.5% 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, 2022, we had $30 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
29
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,
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, 2022, noninterest income
represented approximately 52.7% 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 2022, we experienced outflows of $7.5 billion in our retirement and benefit services division
partially offset by inflows of $5.7 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
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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.
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. For example, in the second quarter of 2022, we completed the acquisition of MPB BHC, Inc., holding
company for Metro Phoenix Bank in Phoenix, Arizona. 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.
We may be adversely affected by risks associated with completed acquisitions, including execution risks, failure to
realize anticipated transaction benefits, and failure to overcome integration risks, which could adversely affect our
growth and profitability.
In the third quarter of 2022, we completed the acquisition of MPB BHC, Inc., the holding company for Metro
Phoenix Bank in Phoenix, Arizona. As with any acquisition, we may fail to realize some or all of the anticipated
transaction benefits associated with the acquisition of Metro Phoenix Bank, including anticipated cost savings.
Additionally, the integration of Metro Phoenix Bank requires integration of systems, procedures and personnel of the
acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers
and employees of the acquired business and our business. If the ongoing integration process for our acquisition of Metro
Phoenix Bank is not completed successfully, we may not realize the anticipated economic benefits of the acquisition
within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also
experience greater than anticipated customer losses even if the integration process is successful.
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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:
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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;
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 2022, our retirement and benefit services business experienced outflows of AUA and AUM of $7.5 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.
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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 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. As a result of the
current rising interest rate environment, we began to see in the second half of 2022 lower demand for mortgage loans
and refinancing activity. In 2022, we originated $812.3 million of mortgage loans, compared to $1.8 billion in 2021. We
expect this trend to continue in 2023 with additional rate increases expected to be made by the Federal Reserve.
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, coupled with 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. Any reduction of loan production volumes 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
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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
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.
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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 are scheduled to stop reporting such information by June 30,
2023. It is not certain at this time 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
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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 Katie Lorenson, our President and Chief Executive Officer, Alan Villalon, our Chief Financial
Officer, Jim Collins, our Chief Banking and Revenue Officer, Missy Keney, our Chief Engagement Officer, Jon Hendry
our Chief Technology 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.
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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,
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.
Labor shortages and a failure to attract and retain qualified employees could negatively impact our business,
financial condition, results of operations and growth prospects.
A number of factors may adversely affect the labor force available to us or increase labor costs, including the
high employment levels and decreased labor force size and participation rates in recent periods. Although we have not
experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly
competitive local labor markets. A sustained labor shortage or increased turnover rates within our employee base could
lead to increased costs, such as increased compensation expense to attract and retain employees. In addition, if we are
unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we take to respond
to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall
labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by general macroeconomic factors,
could have a material adverse impact 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
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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. The widespread adoption of new technologies,
including mobile banking services, cryptocurrencies and payment systems, could require us in the future to make
substantial expenditures to modify or adapt our existing products and services as we grow and develop new products to
satisfy our customers’ expectations and comply with regulatory guidance. 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
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
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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.
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,
2022, we had $50.0 million of subordinated notes payable and $8.8 million of junior subordinated debentures
outstanding. In the first quarter of 2021, we redeemed our previously issued subordinated debt with a rate of 5.75% and
issued new subordinated debt to the Bank of North Dakota with an initial fixed rate of 3.50%. 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.
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The COVID-19 pandemic could continue to have adverse effects on our business.
The COVID-19 pandemic has had a significant economic impact on the communities in which we operate, our
borrowers and depositors, and the national economy generally. These effects have diminished in the past year, but future
developments and uncertainties will be difficult to predict, such as the potential emergence of a new variant, the course
of the pandemic in China and other major economies, the persistence of pandemic-related work and lifestyle changes,
changes in consumer preferences associated with the emergence of the pandemic, and other market disruptions. Any
such developments could have a complex and negative effect on our business, including with respect to the prevailing
economic environment, our lending and investment activities, and our business operations.
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
remaining concerns about the potential ongoing effects of the COVID-19 pandemic 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. 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.
The financial markets and the global economy may also be adversely affected by the current or anticipated
impact of military conflict, including the current conflict between Russia and Ukraine, which is increasing volatility in
commodity and energy prices, creating supply chain issues and causing instability in financial markets. Sanctions
imposed by the United States and other countries in response to such conflict could further adversely impact the
financial markets and the global economy, and any economic countermeasures by the affected countries or others could
exacerbate market and economic instability. The specific consequences of the conflict in Ukraine on our business is
difficult to predict at this time, but in addition to inflationary pressures affecting our operations and those of our
customers and borrowers, we may also experience an increase in cyberattacks against us, our customers and borrowers,
service providers and other third parties.
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.
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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.
While we do not offer products relating to digital assets, including cryptocurrencies, stablecoins and other
similar assets, there has been a significant increase in digital asset adoption globally over the past several years. Certain
characteristics of digital asset transactions, such as the speed with which such transactions can be conducted, the ability
to transact without the involvement of regulated intermediaries, the ability to engage in transactions across multiple
jurisdictions, and the anonymous nature of the transactions, are appealing to certain consumers notwithstanding the
various risks posed by such transactions. Accordingly, digital asset service providers—which, at present are not subject
to the same degree of scrutiny and oversight as banking organizations and other financial institutions—are becoming
active competitors to more traditional financial institutions.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee
income, as well as the loss of customer deposits and the related income generated from deposits. The loss of these
revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our business,
financial condition and results of operations. Potential partnerships with digital asset companies, moreover, could also
entail significant investment.
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,
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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
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.
42
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, such as the COVID-19 pandemic, 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 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 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.
Our 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 bonds, treasuries or stocks, as providing a better
risk/return tradeoff. As a result of the current rising interest rate environment, total deposits declined in 2022, as
customers deployed liquidity and sought higher yielding alternative investments, including higher rate deposit accounts
offered by larger competitors. We expect this trend to continue in 2023 with additional rate increases expected to be
made by the Federal Reserve. 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
43
are also depositors. 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, 2022, we had
pledged $260.7 million of investment securities for this purpose, which represented approximately 25.1% 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 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. At December 31, 2022,
our borrowed funds increased to $378.1 million, compared to zero at December 31, 2021. The increase included $225.0
million in FHLB advances and $153.1 million in federal funds purchased. As a result, our cost of funds increased and in
2022, as compared to 2021.
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, 2022, we had $225.0 million FHLB advances and $153.1 million of 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, 2022, our advances from the FHLB were collateralized by
$855.9 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.
44
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, 2022, our 10 largest depositor relationships accounted
for approximately 10.1% of our total deposits. This high concentration of depositors presents a risk to our liquidity if one
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, 2022, the Bank had the capacity to pay the Company a dividend of up to $99.4 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. In particular, if we need to raise additional capital in the current interest rate environment,
we believe the pricing and other terms investors may require in such an offering may not be attractive to us. 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.
45
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
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 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
46
regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. In
addition, trends in financial and business reporting, including environmental social and governance (ESG) related
disclosures, could require us to incur additional reporting expense. 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.
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 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, 2022. 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. 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
47
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.
The recent change in our independent registered public accounting firm could materially impact our financial
statements.
On December 1, 2022, the Audit Committee of the Board of Directors of the Company approved the dismissal
of CliftonLarsonAllen LLP (“CLA”), as the Company’s independent registered public accounting firm because CLA
indicated that it would not stand for reappointment following completion of the audit of the Company’s consolidated
financial statements for the year-ending December 31, 2022. On December 1, 2022, the Audit Committee approved the
appointment of RSM, LLP (“RSM”) to serve as the Company’s independent registered public accounting firm for the
year ending December 31, 2023. RSM’s future audits of the Company’s financial statements may identify errors or
omissions in our historical financial statements that were not previously identified and that could require us to restate
previously issued financial statements or materially impact how we report our financial condition and results of
operations going forward. If we have to restate any historical financial statements it could have a material adverse effect
on our financial condition and results of operations.
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.
48
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, 2022, we had goodwill of $47.1 million, or 13.2% 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.
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 U.S. 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. Many of the
provisions of the SECURE Act 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. In addition,
in December 2022, the U.S. Congress enacted the SECURE 2.0 Act of 2022, or SECURE 2.0, which built some of the
provisions of the SECURE Act and made additional significant changes to provisions of existing law governing
49
retirement plans and IRAs. Many of the provisions of SECURE 2.0 were effective immediately upon passage of
SECURE 2.0 while other provisions are effective on later dates. Some of the changes in law made by the SECURE Act
and SECURE 2.0 are complex and unclear in application. We cannot predict what impact the SECURE Act or SECURE
2.0 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 and 2022 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
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 or government agencies 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, 2022, our net deferred tax asset was $42.4 million.
There is uncertainty surrounding potential legal, regulatory and policy changes by the Biden Administration 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.
50
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
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
51
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
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
52
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
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, 2022, 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 $1.235 billion or more, (ii) the end of the fiscal year
53
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
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
54
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 became 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
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
55
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.
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 two 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, two 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,
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. We have remodeled several locations to utilize our spaces in a more efficient manner. As
of December 31, 2022, 7 of our office properties were owned and 11 of our office 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.
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, 2023, the Company had 246 holders of record of the Company’s common stock and an
estimated 1,373 additional beneficial holders of the Company’s common stock whose stock was held in street name by
brokerages or fiduciaries.
56
Stock Repurchase Plans
The following table presents information related to repurchases of our common stock for each calendar month
in the fourth quarter of 2022.
(dollars in thousands, except per share data)
October 1-31, 2022
November 1-30, 2022
December 1-31, 2022
Total
Total Number
of Shares
Purchased (1)
Average
Price Paid
per Share
— $
—
—
— $
—
—
—
—
Maximum Number of
Total Number of
Shares Purchased as
Part of Publicly
Shares that May
Yet be Purchased
Announced Plans Under the Plan (2)
770,000
770,000
770,000
770,000
—
—
—
—
(1)
(2)
Shares repurchased by the Company represent shares surrendered by employees to the Company to pay withholding taxes on the vesting of
restricted stock awards.
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the
Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Program was effective
immediately and will continue for a period of 36 months, until February 18, 2024. The Program does not obligate the Company to
repurchase any shares of its common stock and there is no assurance that the Company will do so.
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,
2022, 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, the date of our initial public
offering, and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and
retention of all stock dividends.
57
Total Return Performance
e
u
l
a
V
x
e
d
n
I
$200.00
$190.00
$180.00
$170.00
$160.00
$150.00
$140.00
$130.00
$120.00
$110.00
$100.00
$90.00
09/13/2019
12/31/2019
12/31/2020
Period Ending
12/31/2021
12/31/2022
Alerus Financial Corporation
Nasdaq Composite Index
S&P U.S. Banks - Midwest Region Index
Alerus Financial Corporation
Nasdaq Composite Index
S&P U.S. Banks - Midwest Region Index
$
$
100.00
100.00
100.00
$
105.21
109.73
107.90
129.70 $
157.62
91.77
September 13, December 31, December 31,
2019
2019
2020
December 31, December 31,
2021
141.67 $
191.34
122.56
2022
116.32
131.19
105.77
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 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
58
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.
In the first quarter of 2021, we issued subordinated debt to the Bank of North Dakota pursuant to a
Subordinated Note Purchase Agreement, dated March 30, 2021 (the “Note Purchase Agreement”). Under the terms of
the Subordinated Note Purchase Agreement, if an event of default has occurred (as defined in the Subordinated Note
Purchase Agreement), we cannot, subject to certain exceptions outlined in the Note Purchase Agreement, pay any
dividends to our stockholders until such event of default or failure to comply with said covenants is cured, without the
prior written consent of the Bank of North Dakota.
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
None.
ITEM 6. [RESERVED]
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.
59
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, 2022, we had $3.8 billion of total assets, $2.4 billion of total loans, $2.9 billion of total
deposits, $356.9 million of stockholders’ equity, $32.1 billion of AUA/AUM in our retirement and benefit services
segment, and $3.6 billion of AUA/AUM in our wealth management segment. For the year ended December 31, 2022, we
had $812.3 billion of mortgage originations.
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, 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.
• 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.
60
• 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 to 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.
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.
61
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, held-to-maturity
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, adjusted for consideration of economic trends, collateral values, trends in
past due loans and other factors, 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
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
62
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.
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 available-for-
sale and derivative financial instruments. As of December 31, 2022, and 2021, $723.7 million or 19.1% and $857.0
million, or 25.3%, 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, 2022 and 2021,
$6.3 million and $1.4 million, respectively representing less than 1% of our total liabilities in those years were classified
as Level 2 of the fair value hierarchy. As of December 31, 2022, we had 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 28 (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, 2022.
63
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.
(dollars and shares in thousands, except per share data)
Selected Income Statement Data
2022
As of and for the year ended December 31,
2020
2019
2021
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per Common Share Data
Earnings - basic
Earnings - diluted
Dividends declared
Tangible book value per common share (1)
Average shares outstanding - basic
Average shares outstanding - diluted
Selected Performance Ratios
Return on average total assets
Return on average common equity
Return on average tangible common equity (1)
Noninterest income as a % of revenue
Net interest margin (taxable-equivalent basis)
Efficiency ratio (1)
Dividend payout ratio
Average equity to average assets
Selected Balance Sheet Data - Period Ending
Loans (2)
Allowance for loan losses
Investment securities
Assets
Deposits (3)
Long-term debt
Total stockholders’ equity (4)
Asset Quality Ratios
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
Other Data
Retirement and benefit services assets under
administration/management
Wealth management assets under
administration/management
Mortgage originations
$
$
$
$
$
$
$
$
$
$
$
$
99,729
—
111,223
158,770
52,182
12,177
40,005
2.12
2.10
0.70
14.37
18,640
18,884
1.14 %
11.55 %
15.09 %
52.72 %
3.04 %
72.86 %
33.33 %
9.89 %
$
$
$
$
$
$
87,099
(3,500)
147,387
168,909
69,077
16,396
52,681
3.02
2.97
0.63
17.87
17,189
17,486
1.66 %
15.22 %
18.89 %
62.86 %
2.90 %
70.02 %
21.21 %
10.89 %
$
$
$
$
$
$
83,846
10,900
149,371
163,799
58,518
13,843
44,675
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 %
74,551 $
7,312
114,194
142,537
38,896
9,356
29,540 $
1.96 $
1.91 $
0.57 $
14.08 $
14,736
15,093
1.34 %
12.78 %
17.46 %
60.50 %
3.65 %
73.22 %
29.84 %
10.45 %
2018
75,224
8,610
102,749
136,325
33,038
7,172
25,866
1.88
1.84
0.53
10.68
13,763
14,063
1.21 %
13.81 %
21.02 %
57.73 %
3.84 %
73.80 %
28.82 %
8.80 %
$ 2,443,994
(31,146)
1,039,226
3,779,637
2,915,484
58,843
356,872
$ 1,758,020
(31,572)
1,205,710
3,392,691
2,920,551
58,933
359,403
$ 1,979,375
(34,246)
592,342
3,013,771
2,571,993
58,735
330,163
$ 1,721,279 $ 1,701,850
(22,174)
254,878
2,179,070
1,775,096
58,824
196,954
(23,924)
313,158
2,356,878
1,971,316
58,769
285,728
0.02 %
0.16 %
0.10 %
1.27 %
(0.04)%
0.12 %
0.09 %
1.80 %
0.03 %
0.26 %
0.17 %
1.73 %
0.33 %
0.45 %
0.33 %
1.39 %
0.18 %
0.41 %
0.33 %
1.30 %
820.93 %
1,437.05 %
674.13 %
305.66 %
318.45 %
$ 32,122,520
$ 36,732,938
$ 34,199,954
$ 31,904,648 $ 27,812,149
$ 3,582,648
812,314
$
$ 4,039,931
$ 1,836,064
$ 3,338,594
$ 1,778,977
$ 3,103,056 $ 2,626,815
779,708
$
946,441 $
(1)
(2)
(3)
(4)
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.
64
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.
December 31,
2022
December 31,
2021
December 31,
2020
December 31,
2019
December 31,
2018
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)
Tangible book value per common share (c)/(d)
$
$
$
356,872
47,087
22,455
287,330
3,779,637
47,087
22,455
3,710,095
$
359,403
31,490
20,250
307,663
3,392,691
31,490
20,250
3,340,951
$
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
7.74 %
9.21 %
9.27 %
10.38 %
6.91 %
356,872
47,087
22,455
287,330
19,992
14.37
$
$
359,403
31,490
20,250
307,663
17,213
17.87
$
$
330,163
30,201
25,919
274,043
17,125
16.00
$
$
285,728 $
27,329
18,391
240,008
17,050
14.08 $
196,954
27,329
22,473
147,152
13,775
10.68
65
December 31, December 31, December 31, December 31, December 31,
2020
2018
2019
2022
2021
Return on average tangible common equity
Net income
Add: Intangible amortization expense (net of tax)
Net income, excluding intangible amortization
(e)
Average total equity
Less: Average goodwill
Less: Average other intangible assets (net of tax)
Average tangible common equity (f)
Return on average tangible common equity
(e)/(f)
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)
Results of Operations
$
40,005
3,756
$
52,681
3,460
$
44,675
3,129
$
29,540 $
3,224
25,866
3,664
43,761
346,355
39,415
17,018
289,922
56,141
346,059
30,385
18,548
297,126
47,804
310,208
27,439
13,309
269,460
32,764
231,084
27,329
16,101
187,654
29,530
187,341
27,329
19,522
140,490
15.09 %
18.89 %
17.74 %
17.46 %
21.02 %
$
158,770
4,754
154,016
99,729
111,223
429
211,381
$
$
168,909
4,380
164,529
87,099
147,387
492
234,978
$
$
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
72.86 %
70.02 %
68.40 %
73.22 %
73.80 %
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, 2022 are compared to the results for the year ended
December 31, 2021, and the consolidated financial condition of the Company as of December 31, 2022 is compared to
December 31, 2021. Results of operations for the year ended December 31, 2021 compared to results for the year ended
December 31, 2020, can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations of the Company’s 2021 annual report on Form 10-K filed with the SEC on March 11, 2022.
Summary
Net income for the year ended December 31, 2022, was $40.0 million, a decrease of $12.7 million, or 24.1%,
compared to $52.7 million for the year ended December 31, 2021. Diluted earnings per common share were $2.10 in
2022, compared to $2.97 in 2021. Return on average total assets was 1.14% in 2022, compared to 1.66% for 2021. The
decrease in net income was primarily driven by a $36.2 million decrease in noninterest income, partially offset by a
$12.6 million increase in net interest income and a $10.1 million decrease in noninterest expense. Noninterest income
decreased primarily due to a $31.6 million decrease in mortgage banking revenue, attributable to a decrease in mortgage
originations. The increase in net interest income was primarily due to a $22.9 million increase in interest income, driven
by a $11.8 million increase in interest income received from loans. The decrease in noninterest expense was primarily
due to a $12.7 million decrease in compensation expense, driven by a decrease in mortgage incentives associated with
the decrease in mortgage originations.
Net Interest Income—With Nontaxable Income Converted to Fully Taxable Equivalent, or FTE
Net interest income totaled $99.7 million in 2022, an increase of $12.6 million, or 14.5%, from 2021. Net
interest margin increased 14 basis points to 3.04%, in 2022, from the 2.90% reported in 2021. The increase in net interest
margin was primarily a result of a $22.9 million increase in interest income earned on interest earning assets, partially
offset by a $10.3 million increase in interest expense paid on interest-bearing liabilities. The increase in interest earning
assets was primarily driven by a $12.4 million increase in the interest income earned from loans due to a rising interest
rate environment resulting from the Federal Reserve Bank raising short-term rates. Additionally, the average balance of
total loans increased $200.7 million for the year ended December 31, 2022 compared to the year ended December 31,
2021, primarily driven by an increase in organic loan growth as well as loans acquired from Metro Phoenix Bank. The
interest expense paid on interest-bearing liabilities increased primarily due to a 26 basis point increase in the rate paid on
66
interest-bearing deposits and a 284 basis point increase in the rate paid on fed funds purchased and short-term
borrowings. The increase in interest expense paid on deposits was primarily due to deposit rate increases in a response to
a highly competitive deposit environment. Additionally we saw a $63.3 million increase in the average balance of fed
funds purchased and short-term borrowings as loan growth outpaced deposit growth in 2022.
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
interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to
the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.
(dollars in thousands)
Interest Earning Assets
Interest-bearing deposits with banks
Investment securities (1)
Fed funds sold
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 earning assets
Noninterest earning assets
Total assets
Interest-Bearing Liabilities
Interest-bearing demand deposits
Money market and savings deposits
Time deposits
Fed funds purchased
Short-term borrowings
Long-term debt
2022
Year ended December 31,
2021
2020
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
$
58,149
1,135,426
7,313
24,497
$
586
24,333
192
855
1.01 % $ 222,916
864,273
2.14 %
—
2.63 %
65,968
3.49 %
$
322
14,172
—
1,494
0.14 %
1.64 %
— %
2.26 %
162,616 $
664
425,219 8,999
—
79,201 1,948
—
0.41 %
2.12 %
— %
2.46 %
507,040
63,296
713,102
1,283,438
587,443
136,483
52,071
775,997
2,059,435
13,824
3,298,644
202,011
$ 3,500,655
$ 692,287
1,113,426
221,997
63,296
89,932
58,864
2,239,802
26,004
3,300
29,632
58,936
20,573
7,222
2,525
30,320
89,256
784
116,006
579,002
5.13 %
41,751
5.21 %
4.16 %
571,326
4.59 % 1,192,079
477,621
3.50 %
131,412
5.29 %
57,574
4.85 %
3.91 %
666,607
4.33 % 1,858,686
5.67 %
6,329
3.52 % 3,018,172
160,648
$ 3,178,820
28,445
1,712
21,523
51,680
16,575
6,093
2,537
25,205
76,885
276
93,149
687,266 31,600
4.91 %
32,804 1,488
4.10 %
3.77 %
523,219 21,884
4.34 % 1,243,289 54,972
463,174 18,391
3.47 %
159,844 7,696
4.64 %
79,238 3,621
4.41 %
3.78 %
702,256 29,708
4.14 % 1,945,545 84,680
4.36 %
266
3.09 % 2,618,427 96,557
5,846
156,713
$ 2,775,140
$
1,516
6,090
1,563
1,554
2,785
2,340
15,848
0.22 % $ 697,276
0.55 % 1,023,677
215,624
0.70 %
2.46 %
3
—
3.10 %
3.98 %
50,759
0.71 % 1,987,339
$
987
1,500
1,174
—
—
1,897
5,558
0.14 % $ 551,861 $ 1,624
920,072 4,863
0.15 %
203,413 2,356
0.54 %
—
80
— %
— %
—
—
3.74 %
58,742 3,413
0.28 % 1,734,168 12,256
4.60 %
4.54 %
4.18 %
4.42 %
3.97 %
4.81 %
4.57 %
4.23 %
4.35 %
4.55 %
3.69 %
0.29 %
0.53 %
1.16 %
— %
— %
5.81 %
0.71 %
Total interest-bearing liabilities
Noninterest-Bearing Liabilities and
Stockholders' Equity
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Stockholders’ equity
851,821
62,677
346,355
Total liabilities and stockholders’ equity $ 3,500,655
784,998
60,424
346,059
$ 3,178,820
673,676
57,088
310,208
$ 2,775,140
Net interest income
Net interest rate spread
Net interest margin on FTE basis (1)
$ 100,158
$ 87,591
$ 84,301
2.81 %
3.04 %
2.81 %
2.90 %
2.98 %
3.22 %
(1)
Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0% .
67
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, 2022
Compared with
Year ended December 31, 2021
Change due to:
Interest
Variance
Year ended December 31, 2021
Compared with
Year ended December 31, 2020
Change due to:
Interest
Variance
Volume
Rate
Volume
Rate
$
$
(231)
4,447
(937)
495
5,714
298
$
264
10,161
(639)
$
247 $
9,308
(326)
(4,980)
406
2,011
(2,563)
574
(1,368)
(990)
(1,784)
(4,347)
22
4,904
(2,441)
1,588
8,109
7,256
3,998
1,129
(12)
5,115
12,371
508
22,665
529
4,590
389
1,554
443
7,505
$ 15,160
422
549
142
—
(464)
649
4,255 $
$
(589)
(4,135)
(128)
(342)
5,173
(454)
1,825
(182)
(2,372)
(729)
(2,390)
(235)
(94)
(2,719)
(3,448)
(12)
(8,312)
(1,059)
(3,912)
(1,324)
—
(1,052)
(7,347)
(965)
(3,155)
224
(361)
(3,292)
(1,816)
(1,603)
(1,084)
(4,503)
(7,795)
10
(3,408)
(637)
(3,363)
(1,182)
—
(1,516)
(6,698)
3,290
$
(3,533)
883
5,345
2,695
3,811
235
(243)
3,803
6,498
327
10,104
(7)
135
34
—
303
465
9,639
1,092
705
2,764
4,561
187
894
231
1,312
5,873
181
12,561
536
4,455
355
1,554
140
7,040
5,521
$
$
(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
Federal Reserve/FHLB Stock
Total interest income
Interest-bearing liabilities
Interest-bearing demand deposits
Money market and savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest expense
Change in net interest income
Provision for Loan Losses
There was no provision for loan losses for the year ended December 31, 2022, compared to a $3.5 million
reversal of provision for loan losses for the year ended December 31, 2021. Although management saw increases in loan
volume, based on the reduction of previous adjustments for pandemic related qualitative factors, management concluded
there was no need for additional provisions in 2022.
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.”
68
Noninterest Income
The following table presents noninterest income for the years ended December 31, 2022, 2021 and 2020
(dollars in thousands)
Retirement and benefit services
Wealth management
Mortgage banking
Service charges on deposit accounts
Net gains (losses) on investment
securities
Other
Total noninterest income
2022
$ 67,135
20,870
16,921
1,434
2021
$ 71,709
21,052
48,502
1,395
$ Change % Change
2021
Year ended December 31,
$ (4,574)
(182)
(31,581)
39
(6.4)% $ 71,709
21,052
(0.9)%
48,502
(65.1)%
1,395
2.8 %
2020
$ 60,956
17,451
61,641
1,409
$ 10,753
3,601
(13,139)
(14)
$ Change % Change
—
4,863
$ 111,223
125
4,604
$ 147,387
(125)
259
$ (36,164)
(100.0)%
5.6 %
125
4,604
(24.5)% $ 147,387
2,737
5,177
$ 149,371
(2,612)
(573)
$ (1,984)
17.6 %
20.6 %
(21.3)%
(1.0)%
(95.4)%
(11.1)%
(1.3)%
Noninterest income as a % of revenue
52.7 %
62.9 %
62.9 %
64.1 %
Total noninterest income decreased $36.2 million, or 24.5%, to $111.2 million in 2022, from $147.4 million for
2021. The decrease in noninterest income was primarily driven by decreases of $31.6 million in mortgage banking
revenue and $4.6 million in retirement and benefit services revenue. Mortgage banking revenue decreased primarily as a
result of a $1.0 billion, or 55.8%, decrease in mortgage originations, partially offset by a 47 basis point increase in the
gain on sale margin. Retirement and benefit services revenue decreased primarily due to a $4.1 million decrease in asset-
based fees, as assets under administration/management decreased $4.6 million from 2021.
Noninterest income as a percent of total operating revenue, which consists of net interest income plus
noninterest income, was 52.7% in 2022, down from 62.9% the prior year. The decrease in 2022 was due to a 24.5%
decrease in noninterest income, partially offset by a 14.5% increase in net interest income.
Noninterest Expense
The following table presents noninterest expense for the years ended December 31, 2022, 2021 and 2020.
(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
2022
2021
$ Change % Change
2021
2020
$ Change % Change
Year ended December 31,
$ 80,656 $ 93,386
22,033
8,148
21,915
7,605
$ (12,730)
(118)
(543)
(13.6)% $ 93,386
22,033
8,148
(0.5)%
(6.7)%
$ 89,206 $
20,050
10,058
4,180
1,983
(1,910)
19,487
4,754
8,367
3,254
2,440
1,182
2,183
6,927
20,486
4,380
6,292
3,182
2,361
442
(999)
374
2,075
72
79
740
(2,067)
2,978
$ (10,139)
20,486
4,380
6,292
3,182
2,361
(4.9)%
8.5 %
33.0 %
2.3 %
3.3 %
167.4 %
(48.6)%
4,250
3,949
75.4 %
(6.0)% $ 168,909
442
19,135
3,961
4,834
3,133
2,174
359
5,707
5,182
$ 163,799 $
1,351
419
1,458
49
187
83
(1,457)
(1,233)
5,110
4,250
3,949
$ 158,770 $ 168,909
4.7 %
9.9 %
(19.0)%
7.1 %
10.6 %
30.2 %
1.6 %
8.6 %
23.1 %
(25.5)%
(23.8)%
3.1 %
Total noninterest expense decreased $10.1 million, or 6.0%, to $158.8 million for the year ended
December 31, 2022, from $168.9 million for 2021. The decrease in noninterest expense was primarily driven by a $12.7
million decrease in compensation expense, $2.1 million in mortgage and lending expenses, and a $999 thousand
decrease in business services, software and technology expense, partially offset by increases of $3.0 million in other
noninterest expense and $2.1 million in professional fees and assessments expenses. The decreases in compensation
expense and mortgage and lending expenses were primarily driven by a decrease in mortgage incentives associated with
the $1.0 billion, or 55.8%, decrease in mortgage originations. Business services, software and technology expense
decreased primarily due to the timing of contract renewals. The increase in other noninterest expense was primarily due
to a $1.1 million increase in charge-offs, a result of our payroll services divestiture. Professional fees and assessments
expense increased due to merger related expenses associated with the acquisition of Metro Phoenix Bank.
69
Income Taxes
For the year ended December 31, 2022, we recognized income tax expense of $12.2 million on $52.2 million of
pre-tax income resulting in an effective tax rate of 23.3%, a modest change as compared to the same period in 2021, in
which we recognized an income tax expense of $16.4 million on $69.1 million of pre-tax income, resulting in an
effective tax rate of 23.7%.
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
16 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 $39.3 million for the year
ended December 31, 2022, a decrease of $12.3 million compared to 2021. The decrease was primarily driven by a $22.1
million increase in noninterest expense, partially offset by a $13.2 million increase in net interest income.
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. The division services approximately 8,100 retirement plans and more than 384,800
plan participants. In addition, the division employs approximately 213 professionals, and operates within our banking
markets as well as Lansing, Michigan, and Littleton, Colorado.
The retirement and benefit services segment reported net income before taxes and indirect allocations of $40.9
million for the year ended December 31, 2022, an increase of $9.4 million from $31.5 million for 2021. Revenue of
$67.1 million, comprised of $23.8 million in asset-based revenue and $43.4 million in participant and transaction
revenues, decreased $4.6 million or 6.4% primarily due to a $4.6 billion, or 12.6%, decrease in assets under
administration/management.
70
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)
2022
$ 36,732,938
—
5,735,604
(7,512,492)
(2,833,530)
$ 32,122,520
Year ended
December 31,
2021
$ 34,199,954
—
5,589,925
(6,010,136)
2,953,195
$ 36,732,938
2020
$ 31,904,648
1,258,382
4,829,449
(6,828,573)
3,036,048
$ 34,199,954
0.20 %
0.20 %
0.18 %
(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 was $32.1 billion at December 31, 2022, a
decrease of $4.6 billion, or 12.6%, compared to the total at December 31, 2021. The decrease was primarily driven by a
decrease of $2.8 billion in market impact, driven by lower bond and equity markets, as well as outflows outpacing
inflows by $1.8 billion.
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 $14.9 million for the year
ended December 31, 2022, an increase of $2.7 million, or 22.2%, from 2021. Noninterest expense decreased $2.9
million, or 32.6%, as compared to 2021, primarily due to a decrease of allocated expenses.
71
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)
2022
2,214,346
1,263,252
(1,326,374)
(253,464)
1,897,760
0.48 %
716,312
143,355
(115,458)
(108,542)
635,667
0.98 %
279,584
73,446
(84,668)
(16,203)
252,159
0.70 %
3,210,242
1,480,053
(1,526,500)
(378,209)
2,785,586
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Year ended
December 31,
2021
1,754,647
881,980
(623,324)
201,043
2,214,346
$
$
0.51 %
$
569,936
162,537
(89,829)
73,668
716,312
$
0.97 %
$
253,470
259,790
(244,642)
10,966
279,584
2,578,053
1,304,307
(957,795)
285,677
3,210,242
$
0.64 %
$
$
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
0.92 %
290,677
194,897
(251,542)
19,438
253,470
0.57 %
2,413,068
729,120
(874,169)
310,034
2,578,053
0.61 %
0.62 %
0.59 %
(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 $797.1 million, $829.7 million, and $760.5 million for the years ended
December 31, 2022 and 2021, and 2020, respectively.
Yield does not include brokerage revenue of $2.6 million, $3.1 million, and $2.7 million for the years ended December 31, 2022 and 2021,
and 2020, respectively.
AUA and AUM for the wealth management segment was $2.8 billion, excluding $797.1 million of brokerage
assets, at December 31, 2022, a decrease of $424.7 million, or 13.2%, compared to the total at December 31, 2021. The
decrease was driven by a $378.2 million decrease in market impact. Additionally, there was a $46.4 million decrease as
outflows outpaced inflows in 2022, driven by lower bond and equity markets.
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 $210 thousand for the year ended
December 31, 2022, a decrease of $13.1 million, or 98.4%, from the $13.3 million reported in 2021. Mortgage
noninterest income for 2022 of $48.5 million decreased $31.6 million, or 65.1%, from 2021. The decrease was primarily
driven by a decrease in mortgage originations, partially offset by a $6.5 million increase in the change in fair value of the
secondary market derivatives and a modest 41 basis point increase in the gain on sale margin.
72
Financial Condition
Overview
Total assets were $3.8 billion at December 31, 2022, an increase of $386.9 million, or 11.4%, compared to
$3.4 billion at December 31, 2021. The increase in total assets was primarily due to an increase of $686.0 million in
loans held for investment, partially offset by decreases of $184.1 million in cash and cash equivalents and $166.5 million
in investment securities.
Investment Securities
The following table presents the carrying amount of our investment securities portfolio at the dates indicated:
(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 investment securities
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity investment securities
Total investment securities
December 31, 2022
December 31, 2021
December 31, 2020
Percent
of
Portfolio
Balance
Percent
of
Percent
of
Balance
Portfolio Balance
Portfolio
3,520
—
587,679
63,558
34
62,533
717,324
0.3 % $
— %
5,103
—
0.4 % $
— %
5,907
153,773
56.6 %
6.1 %
— %
6.0 %
69.0 %
707,157
90,913
54
50,422
853,649
58.7 %
7.5 %
— %
4.2 %
306,719
94,978
115
30,850
70.8 % 592,342
1.0 %
26.0 %
51.8 %
16.0 %
— %
5.2 %
100.0 %
137,787
13.3 %
144,543
12.0 %
—
— %
184,115
321,902
$ 1,039,226
17.7 %
31.0 %
207,518
352,061
100.0 % $ 1,205,710
17.2 %
29.2 %
—
—
100.0 % $ 592,342
— %
— %
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. In the second quarter of 2021, we transferred our portfolio of obligations of state and political agencies from
available-for-sale to held-to-maturity to protect capital and reduce volatility in other comprehensive income due to
market value changes.
At December 31, 2022, total investment securities were $1.0 billion compared to $1.2 billion at
December 31, 2021. Investment securities as a percentage of total assets were 27.5% and 35.5%, as of
December 31, 2022 and December 31, 2021, respectively. The decrease in investment securities was primarily due to a
$120.3 million increase in unrealized losses on our available-for-sale investment securities, a result of the rising interest
rate environment. Securities with a carrying value of $260.7 million were pledged at December 31, 2022, to secure
public deposits and for other purposes required or permitted by law.
The net pre-tax unrealized market value loss on the available-for-sale investment portfolio as of
December 31, 2022 was $132.2 million, as compared to a $6.6 million loss as of December 31, 2021. The increase is a
result of the interest rate environment.
The investment portfolio is composed of U.S. Treasury debentures, U.S. Agency mortgage-backed
pass-throughs, U.S. Agency, Commercial Mortgage Obligations, or CMOs, Corporate bonds and Municipal bonds.
73
As of December 31, 2022 and December 31, 2021 the Company held 85 tax-exempt state and local municipal
securities totaling $40.9 million and held 94 tax-exempt state and local municipal securities totaling $49.4 million,
respectively. Other than the aforementioned investments, at December 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, all of the available-for-sale debt securities in an unrealized
loss position were investment grade. For the years ended December 31, 2022 and 2021, 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 investment securities presented in the following table are reported at fair value and by contractual maturity
as of December 31, 2022. 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, 2022
$
—
— % $
—
— % $
1,301
4.10 % $
2,219
3.67 %
4
—
—
—
3.34 %
3,420
— % 16,443
—
— %
—
— %
2.36 %
2.77 %
— %
— %
8,059
7,792
12
62,533
2.60 % 576,196
39,323
2.82 %
22
5.47 %
—
3.86 %
1.82 %
2.50 %
5.15 %
— %
4
3.34 % 19,863
2.70 %
79,697
3.64 % 617,760
1.87 %
6,522
1.26 % 37,146
1.13 %
59,138
1.90 %
17,245
2.21 %
—
— %
—
— %
—
— % 150,861
2.18 %
6,522
$ 6,526
1.26 % 37,146
1.26 % $ 57,009
1.13 %
59,138
1.68 % $ 138,835
1.90 % 168,106
2.89 % $ 785,866
2.19 %
1.94 %
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale
investment securities
Held-to-maturity
Obligations of state and
political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity
investment securities
Total investment securities
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.
74
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
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, 2022
December 31, 2021
December 31, 2020
December 31, 2019
December 31, 2018
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
Balance
(dollars in thousands)
Commercial
Commercial and industrial (1) $ 583,876
Real estate construction
97,810
Commercial real estate
881,670
Total commercial
1,563,356
Consumer
Residential real estate first
mortgage
Residential real estate junior
lien
Other revolving and
installment
Total consumer
Total loans
50,608
880,638
$ 2,443,994
150,479
679,551
23.9 % $ 436,761
40,619
4.0 %
36.0 %
598,893
63.9 % 1,076,273
24.8 % $ 691,858
44,451
2.3 %
34.1 %
563,007
61.2 % 1,299,316
35.0 % $ 479,144
26,378
2.2 %
28.5 %
494,703
65.7 % 1,000,225
27.8 % $
1.5 %
28.8 %
58.1 %
510,706
18,965
439,963
969,634
30.0 %
1.1 %
25.9 %
57.0 %
27.8 %
510,716
29.1 %
463,370
23.4 %
457,155
26.6 %
448,143
26.3 %
6.2 %
125,668
7.1 %
143,416
7.2 %
177,373
10.3 %
188,855
11.1 %
2.1 %
36.1 %
45,363
681,747
100.0 % $ 1,758,020
2.6 %
38.8 %
73,273
680,059
100.0 % $ 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 %
100.0 %
(1)
Includes PPP loans of $737 thousand as of December 31, 2022 and $33.6 million as of December 31, 2021.
Total loans outstanding were $2.4 billion as of December 31, 2022, an increase of $686.0 million, or 39.0%,
from December 31, 2021. The increase in total loans was primarily due to increases of $415.6 million in organic loan
growth and $270.4 million in loans acquired from Metro Phoenix Bank. Excluding loans acquired from Metro Phoenix
Bank, the increases in organic loan growth included increases of $154.5 million in commercial real estate, $149.2
million in residential real estate first mortgages and $50.5 million in commercial and industrial loans. Excluding PPP
loans and loans acquired from Metro Phoenix Bank, commercial and industrial loans increased $83.4 million.
Our loan portfolio is highly diversified. As of December 31, 2022, approximately 23.9% of loans outstanding
were commercial and industrial, while 36.0% of loans outstanding were commercial real estate, and 34.0% 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, 2022: real estate (39%), retail trade (8%), accommodation
and food services (6%), wholesale trade (5%), manufacturing (5%), healthcare (4%), finance &
insurance (4%),construction (3%), professional services (3%), agriculture, forestry, fishing and hunting (3%),
management of companies (2%), transportation (2%), and educational services (1%). A variety of other industries with
less than a 1% share of the total portfolio comprise the remaining 15%. The loan portfolio is also diversified by market
distribution with 49.1% of the portfolio in the Twin Cities MSA, 31.1% in the eastern North Dakota cities of Grand
Forks and Fargo, 17.4% in the Phoenix MSA and 2.4% in our national market, as of December 31, 2022.
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,
75
along with some of our adjustable rate mortgages are sold to other financial institutions with which we have established
a correspondent lending relationship.
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 increased 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, 2022, our consumer mortgage portfolio was $830.0 million which was a $193.6 million, or 30.4%,
increase from $636.4 million as of December 31, 2021. 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, 2022, the commercial loan portfolio was $1.6 billion, an increase of $487.1 million, or
45.3%, from $1.1 billion as of December 31, 2021. The increase was primarily due to a $57.2 million increase in real
estate construction loans, attributable to the acquisition of Metro Phoenix Bank as well as an increase in organic loan
growth due to our expanded commercial lending team. 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. As of December 31, 2022, only one loan with an
outstanding principal balance of $268 thousand remains on deferral. 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.
76
The following table shows the maturities and sensitivity to interest rates for the loan portfolio as of
December 31, 2022:
One year but within
After one
December 31, 2022
After five
but within
five years fifteen years fifteen years
After
(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
Loans with fixed interest rates:
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 with fixed interest rates
Loans with floating interest rates:
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 with floating interest rates
or less
$ 167,942
49,014
24,414
241,370
7,948
9,577
10,264
27,789
$ 269,159
$ 12,758
16,306
19,547
48,611
3,420
2,102
3,319
8,841
$ 57,452
$ 155,184
32,708
4,867
192,759
4,528
7,475
6,945
18,948
$ 211,707
$ 168,860 $
9,494
467,281
645,635
— $
1,826
62,146
63,972
Total
583,876
97,810
881,670
1,563,356
54,110
33,896
2,399
90,405
591,418
81,670
—
673,088
$ 736,040 $ 737,060
679,551
150,479
50,608
880,638
$ 2,443,994
$
77,922 $
5,839
284,629
368,390
— $
—
17,799
17,799
296,034
39,645
560,712
896,391
41,805
13,193
2,399
57,397
385,434
5,406
—
390,840
$ 425,787 $ 408,639
451,521
26,584
29,383
507,488
$ 1,403,879
$
90,938 $
3,655
182,652
277,245
— $
1,826
44,347
46,173
287,842
58,165
320,958
666,965
12,305
20,703
—
33,008
205,984
76,264
—
282,248
$ 310,253 $ 328,421
228,030
123,895
21,225
373,150
$ 1,040,115
$ 247,074
37,476
327,829
612,379
26,075
25,336
37,945
89,356
$ 701,735
$ 205,354
17,500
238,737
461,591
20,862
5,883
23,665
50,410
$ 512,001
$ 41,720
19,976
89,092
150,788
5,213
19,453
14,280
38,946
$ 189,734
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.
77
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
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.
78
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, 2022, 2021, and 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
Criticized loans as a percent of total loans
December 31,
December 31, December 31,
2022
2021
2020
$
$
$
25,182
262
8,400
33,844
808
632
1
1,441
35,285
$
1.44 %
6,526 $
—
13,602
20,128
341
770
—
1,111
21,239 $
1.21 %
22,256
—
29,274
51,530
2,149
2,955
37
5,141
56,671
2.86 %
The following table presents information regarding nonperforming assets as of the dates presented:
December 31, December 31, December 31,
2021
2022
2020
December 31,
2019
December 31,
2018
(dollars in thousands)
Nonaccrual loans (1)
Accruing loans 90+ days past due
Total nonperforming loans
OREO and repossessed assets
Total nonperforming assets
Total restructured accruing loans
$
$
3,794
—
3,794
30
3,824
151
$
2,076
121
2,197
885
3,082
676
$
5,050
30
5,080
63
5,143
3,427
Total nonperforming assets and restructured
accruing loans
$
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to nonperforming loans
3,975
$
0.16 %
0.10 %
821 %
$
3,758
0.12 %
0.09 %
1,437 %
8,570
$
0.26 %
0.17 %
674 %
7,379 $
448
7,827
8
7,835
957
8,792
$
0.45 %
0.33 %
306 %
6,963
—
6,963
204
7,167
823
7,990
0.41 %
0.34 %
318 %
(1)
Nonaccrual loans included nonperforming TDRs of $0.8 million, $0.7 million, $0.0 million, $0.0 million, and $0.2 million at the respective
dates indicated above.
The allowance for loan losses to nonperforming loans ratio decreased 616 basis points from
December 31, 2022. The decrease was primarily the result of a decrease in the allowance for loan losses, due to no
provision expense for the year ended December 31, 2022 and $3.5 million of provision reversal in 2021.
Interest income lost on nonaccrual loans approximated $155 thousand, $183 thousand, and $545 thousand for
the years ended December 31, 2022, 2021 and 2020. There was no interest income included in net income related to
nonaccrual loans for the years ended December 31, 2022, 2021 and 2020.
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.
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.
79
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 expense for provision for unfunded commitments was $1.1 million for the year ended December 31, 2022 compared
to $159 thousand for the year ended December 31, 2021.
80
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)
2022
31,572
$
2021
34,246
$
Year ended
December 31,
2020
23,924
$
2019
22,174 $
2018
16,564
$
(1,396)
—
—
(1,396)
—
—
(153)
(153)
(1,549)
461
76
134
671
—
282
170
452
1,123
426
1,168
587
178
1,933
(1,230)
—
(536)
(1,766)
—
—
(156)
(156)
(1,922)
1,660
—
822
2,482
—
123
143
266
2,748
(826)
(1,710)
125
(2,015)
(3,600)
(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
(763)
(288)
30
(1,021)
(912)
—
$
31,146
$ 2,443,994
2,059,435
758
(201)
(259)
298
(198)
(3,500)
$
31,572
$ 1,758,020
1,858,686
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 $
(226)
(171)
(24)
(421)
266
8,610
$
22,174
$ 1,721,279 $ 1,701,850
1,677,884
1,706,979
1.27 %
1.80 %
1.73 %
1.39 %
1.30 %
0.02 %
(0.04)%
0.03 %
0.33 %
0.18 %
The allowance for loan losses was $31.1 million at December 31, 2022, compared to $31.6 million at
December 31, 2021. The $426 thousand decrease in the allowance for loan losses was due to $426 thousand in net
charge-offs and no provisions for loan losses in 2022. The ratio of nonperforming loans to total loans at
December 31, 2022 was 0.16%, compared to 0.12% at December 31, 2021.
81
The following table presents the allocation of the allowance for loan losses as of the dates presented.
December 31, 2022
December 31, 2021
December 31, 2020
December 31, 2019
December 31, 2018
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
(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
installment
Unallocated
Total loans
$
$
9,158
1,446
12,688
23.9 % $
4.0 %
36.0 %
8,925
783
12,376
24.8 % $
2.3 %
34.1 %
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 %
5,769
27.8 %
6,532
29.1 %
5,774
23.4 %
1,448
26.6 %
1,156
26.3 %
1,289
6.2 %
1,295
7.1 %
1,373
7.2 %
671
10.3 %
805
11.1 %
528
268
31,146
2.1 %
— %
100.0 % $
481
1,180
31,572
2.6 %
— %
100.0 % $
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 %
The decrease in the allocation of allowance for loan losses was primarily driven by a $584 thousand, or 49.5%
decrease in the unallocated allowance balance, a result of a reduction of previous adjustments for COVID-19 pandemic
related qualitative factors.
Deposits
Total deposits were $2.9 billion as of December 31, 2022, a decrease of $5.1 million, or 0.2%, from
December 31, 2021. Interest-bearing deposits increased $72.8 million while noninterest-bearing deposits decreased
$77.9 million. In the third quarter of 2022, we acquired $353.7 million in deposits from our acquisition of Metro Phoenix
Bank. Excluding deposits acquired from Metro Phoenix Bank, deposits decreased $358.8 million, or 12.3%, from
December 31, 2021. The decrease consisted primarily of declines of $184.7 million in interest-bearing deposits and
$174.0 million in noninterest-bearing deposits. Interest-bearing deposits decreased primarily due to a $84.9 million
decrease in money market savings accounts, and a $69.0 million decrease in time deposits. Noninterest-bearing deposits
decreased primarily due to a $68.3 million decrease in synergistic deposits. Synergistic deposits, which include deposits
from our retirement and benefit services and wealth management segments as well as HSA deposits, increased $22.6
million from December 31, 2021, primarily due to increases in synergistic deposits from our wealth management
division.
Interest-bearing deposit costs were 0.45% and 0.19% for the years ended December 31, 2022 and 2021,
respectively. The increase in interest-bearing deposit costs were the result of a rising interest rate environment in
response to a highly competitive deposit environment.
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.
82
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
Year ended
December 31, 2022
Year ended
December 31, 2021
Year ended
December 31, 2020
Average
Balance
$ 851,821
692,287
1,113,426
221,997
$ 2,879,531
Average
Rate
— % $
Average
Balance
784,998
0.22 %
697,276
0.55 % 1,023,677
215,624
0.70 %
0.32 % $ 2,721,575
Average
Rate
Average
Balance
673,676
— % $
551,861
0.14 %
920,072
0.15 %
203,413
0.54 %
0.13 % $ 2,349,022
Average
Rate
— %
0.29 %
0.53 %
1.16 %
0.38 %
The following table shows the contractual maturity of uninsured time deposits, including certificate of deposits
and IRA deposits of $250 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
December 31,
2022
$
$
17,701
21,292
4,611
7,479
51,083
The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC
insurance limit, currently $250,000, were approximately $1.8 billion and $1.9 billion at December 31, 2022 and 2021,
respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory
reporting purposes.
Borrowings and Subordinated Debt
We utilize both short-term and long-term borrowings as part of our asset/liability management and funding
strategies. Short-term borrowings consist of FHLB advances and federal funds purchased. We had $378.1 million in
short-term borrowings outstanding at December 31, 2022. We had no short-term borrowings outstanding at
December 31, 2021.
FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of
approximately $909.8 million and $677.7 million at December 31, 2022 and 2021, respectively.
Long-term debt is utilized to fund longer term assets and as a source of regulatory capital. In the first quarter of
2021, we redeemed our previously issued subordinated debt with a rate of 5.75% and issued new subordinated debt to
the Bank of North Dakota. At December 31, 2022, we had $50.0 million of one outstanding 3.50% Fixed Rate
Subordinated Note due 2031, or the Subordinated Note. The Subordinated Note currently bears interest at a fixed rate of
3.50% per year, payable annually through March 31, 2026. At the fifth anniversary of the issuance date of the
Subordinated Note the interest rate will reset to a fixed interest rate equal to FHLB rate, plus 2.0%, with a minimum
annual fixed rate of not less than 3.5%. The Subordinated Note matures on March 30, 2031, and we have the option to
redeem or prepay any or all of the Subordinated Note without premium or penalty any time after March 31, 2026, 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.
Junior subordinated debentures issued to capital trusts that issued trust preferred securities were $8.8 million as
of December 31, 2022, compared to $8.7 million as of December 31, 2021. The increase was due to purchase accounting
83
amortization on the junior subordinated notes assumed in the Beacon Bank acquisition in 2016. 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
FHLB Short-term advances
Subordinated notes
Junior subordinated debentures
Finance lease liability
Total borrowed funds
Capital Resources
December 31, 2022
December 31, 2021
December 31, 2020
Percent of
Percent of
Balance
$ 153,080
225,000
50,000
8,843
—
$ 436,923
Portfolio Balance
—
35.0 % $
—
51.6 %
50,000
11.4 %
8,730
2.0 %
203
— %
100.0 % $ 58,933
Portfolio Balance
—
— % $
—
— %
49,688
84.9 %
8,617
14.8 %
430
0.3 %
100.0 % $ 58,735
Percent of
Portfolio
— %
— %
84.6 %
14.7 %
0.7 %
100.0 %
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 issued
Common stock dividends
Stock‑based compensation expense
Ending balance
For the years ended December 31,
2020
2021
2022
$ 285,728
44,675
8,702
(482)
—
(10,387)
1,927
$ 330,163
$ 359,403 $ 330,163
52,681
(14,893)
(712)
—
(10,931)
3,095
$ 356,872 $ 359,403
40,005
(94,386)
(738)
63,830
(13,146)
1,904
Total stockholders’ equity was $356.9 million at December 31, 2022, a decrease of $2.5 million, or 0.7%,
compared to $359.4 million at December 31, 2021. The decrease was primarily due to $94.4 million in other
comprehensive loss and $13.1 million in common stock dividends. The decrease in other comprehensive loss was due to
rising interest rates, which resulted in a lower fair value of our available-for-sale investment securities. This decrease
was partially offset by $40.0 million of net income and a $63.8 million common stock issuance in connection with the
acquisition of Metro Phoenix Bank.
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.
At December 31, 2022, 2021, and 2020, we met all capital adequacy requirements to which we were subject.
84
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 Consolidated
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,
2022
December 31,
2021
13.39 %
13.69 %
16.48 %
11.25 %
7.74 %
12.76 %
12.76 %
13.83 %
10.48 %
14.65 %
15.06 %
18.64 %
9.79 %
9.21 %
13.87 %
13.87 %
15.12 %
9.01 %
(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 15 (Financial Instruments with Off-
Balance Sheet Risk) in the notes to the consolidated financial statements found elsewhere in this report.
Liquidity
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.
85
At December 31, 2022, we had on balance sheet liquidity of $778.9 billion, compared to $1.1 billion at
December 31, 2021 and $511.1 million at December 31, 2020. On balance sheet liquidity includes cash and cash
equivalents, federal funds sold, unencumbered securities available-for-sale and over collateralized securities pledging
positions available-for-sale.
The Bank is a member of the FHLB, which provides short- and long-term funding to its members through
advances collateralized by real estate-related assets and other select collateral, most typically in the form of debt
securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB.
As of December 31, 2022, we had $909.8 million of collateral pledged to the FHLB. Based on this collateral we are
eligible to borrow up to $909.8 million and had $531.6 million available capacity as of December 31, 2022. 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, 2022 and December 31, 2021.
Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to
collateralize additional funding. At December 31, 2022, we had $58.2 million of cash and cash equivalents of which
$24.9 million were interest-bearing deposits held at the Federal Reserve, FHLB and other correspondent banks.
Though remote, the possibility of a funding crisis exists at all financial institutions. 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.
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.
Recent Developments
Shareholder Dividend
On February 21, 2023, the Board of Directors of the Company declared a quarterly cash dividend of $0.18 per
common share. This dividend is payable on April 14, 2023, to stockholders of record on March 15, 2023.
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.
86
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.
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, 2022 and December 31, 2021, are presented in
the table below.
December 31, 2022
December 31, 2021
+400 basis points
+300 basis points
+200 basis points
+100 basis points
−100 basis points
−200 basis points
12 months
24 months
12 months
Following Following Following Following
24 months
−2.9 %
−2.3 %
−1.8 %
−1.3 %
−15.7 %
N/A %
−25.1 %
−18.9 %
−12.7 %
−6.2 %
5.2 %
7.9 %
−8.2 %
−6.1 %
−4.1 %
−2.0 %
−10.6 %
N/A %
−8.2 %
−6.4 %
−4.4 %
−1.8 %
0.5 %
−1.7 %
The above interest rate simulation suggests that the Company’s balance sheet is liability sensitive, in the short-
term, as of December 31, 2022, demonstrating that an increase in interest rates would have a negative impact on net
87
interest income over the next 12 and 24 months. The balance sheet was more liability sensitive in a rising-rate
environment as of December 31, 2022 than it was as of December 31, 2021. The increase is primarily related to repricing
characteristics of our non-maturity deposits portfolio and changes to the interest rate environment.
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, 2022 and
December 31, 2021, 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,
2022
December 31,
2021
−19.5 %
−15.3 %
−10.4 %
−4.9 %
4.0 %
5.0 %
−26.0 %
−16.8 %
−8.2 %
−1.4 %
−31.2 %
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.
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.
88
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors
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, 2022 and 2021, 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, 2022, and
the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022
and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CliftonLarsonAllen LLP
CliftonLarsonAllen LLP
Minneapolis, Minnesota
March 10, 2023
We have served as the Company’s auditor since 2014.
CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.
89
Alerus Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
Assets
Cash and cash equivalents
Investment securities
Available-for-sale, at fair value
Held-to-maturity, at carrying value
Fed funds sold
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
Short-term borrowings
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: 19,991,681 and 17,212,588 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,
2022
(Audited)
2021
(Audited)
$
58,242
$
242,311
717,324
321,902
—
9,488
2,443,994
(31,146)
2,412,848
17,288
5,419
12,869
33,991
47,087
22,455
2,643
42,369
75,712
$ 3,779,637
853,649
352,061
—
46,490
1,758,020
(31,572)
1,726,448
18,370
3,727
8,537
33,156
31,490
20,250
1,880
11,614
42,708
$ 3,392,691
$
860,987
2,054,497
2,915,484
378,080
58,843
5,902
64,456
3,422,765
$
938,840
1,981,711
2,920,551
—
58,933
4,275
49,529
3,033,288
—
—
19,992
155,095
280,426
(98,641)
356,872
$ 3,779,637
17,213
92,878
253,567
(4,255)
359,403
$ 3,392,691
See Accompanying Notes to Consolidated Financial Statements
90
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,
2021
2020
2022
$
89,907
$
78,133
$
86,425
23,260
848
1,562
115,577
9,169
4,339
2,340
15,848
99,729
—
99,729
67,135
20,870
16,921
1,434
—
4,863
111,223
80,656
21,915
7,605
19,487
4,754
8,367
3,254
2,440
1,182
2,183
6,927
158,770
52,182
12,177
40,005
2.12
2.10
0.70
18,640
18,884
$
$
$
$
$
$
$
$
13,001
925
598
92,657
3,661
—
1,897
5,558
87,099
(3,500)
90,599
71,709
21,052
48,502
1,395
125
4,604
147,387
93,386
22,033
8,148
20,486
4,380
6,292
3,182
2,361
442
4,250
3,949
168,909
69,077
16,396
52,681
3.02
2.97
0.63
17,189
17,486
$
$
$
$
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
10,058
19,135
3,961
4,834
3,133
2,174
359
5,707
5,182
163,799
58,518
13,843
44,675
2.57
2.52
0.60
17,106
17,438
See Accompanying Notes to Consolidated Financial Statements
91
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
2022
$
40,005
Year ended
December 31,
2021
52,681
$
2020
$
44,675
Unrealized gains (losses) on available-for-sale securities
Accretion of (gains) losses on debt securities reclassified to held-to-maturity
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 (loss)
(125,634)
(382)
—
(126,016)
(31,630)
(94,386)
(54,381)
$
$
(19,433)
(326)
(125)
(19,884)
(4,991)
(14,893)
37,788
$
14,355
—
(2,737)
11,618
2,916
8,702
53,377
See Accompanying Notes to Consolidated Financial Statements
92
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands)
Balance as of December 31, 2021
Net income
Other comprehensive income (loss)
Common stock repurchased
Common stock dividends
Stock issuance from the acquisition of Metro Phoenix
Bank
Share‑based compensation expense
Vesting of restricted stock
Balance as of December 31, 2022
(dollars in thousands)
Balance as of December 31, 2020
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, 2021
(dollars in thousands)
Balance 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
Year ended December 31, 2022
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
17,213
—
—
(26)
—
$
92,878
—
—
(712)
—
$ 253,567 $
40,005
—
—
(13,146)
2,681
10
114
19,992
61,149
1,894
(114)
$ 155,095
—
—
—
$ 280,426 $
(4,255)
—
(94,386)
—
—
—
—
—
(98,641)
Total
$ 359,403
40,005
(94,386)
(738)
(13,146)
63,830
1,904
—
$ 356,872
Year ended December 31, 2021
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
$
$
90,237
—
—
(348)
—
3,086
(97)
92,878
$ 212,163 $
52,681
—
(346)
(10,931)
—
—
$ 253,567 $
10,638
—
(14,893)
—
—
—
—
(4,255)
Total
$ 330,163
52,681
(14,893)
(712)
(10,931)
3,095
—
$ 359,403
Common
Stock
17,125
—
—
(18)
—
9
97
17,213
$
$
$
$
Year ended December 31, 2020
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
$
$
88,650
—
—
(249)
—
1,913
(77)
90,237
$ 178,092 $
44,675
—
(217)
(10,387)
—
—
$ 212,163 $
1,936
—
8,702
—
—
—
—
10,638
Total
$ 285,728
44,675
8,702
(482)
(10,387)
1,927
—
$ 330,163
Common
Stock
17,050
—
—
(16)
—
14
77
17,125
$
$
See Accompanying Notes to Consolidated Financial Statements
93
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
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 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:
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
Proceeds from sales or calls of investment securities held-to-maturity
Proceeds from maturities of investment securities held-to-maturity
Purchases of investment securities held-to-maturity
Net (increase) decrease in equity securities
Net (increase) decrease in loans
Net (increase) decrease in FHLB stock
Net cash received (paid) for business combinations
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
Proceeds from the issuance of subordinated debt
Cash dividends paid on common stock
Repurchase of common stock
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,
2021
2020
2022
$
40,005 $
52,681 $
44,675
913
—
8,467
3,387
(229)
1,904
(835)
(33)
2,006
(11,616)
71
—
(702)
48,539
(3,241)
5,357
8,973
102,966
—
105,633
(95,600)
963
27,429
—
—
(416,150)
(15,556)
101,511
(1,789)
937
(292,622)
2,786
(3,500)
8,868
3,744
(58)
3,095
(793)
(62)
8,459
(48,038)
(275)
(125)
(638)
123,945
1,125
(7,247)
5,865
149,832
13,189
125,581
(571,595)
1,772
12,545
(218,363)
—
221,006
(716)
—
(1,706)
629
(417,658)
(358,752)
378,080
(203)
—
(12,800)
(738)
5,587
(184,069)
242,311
58,242 $
348,558
—
(49,920)
50,000
(10,751)
(712)
337,175
69,349
172,962
242,311 $
$
(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)
(2,684)
(5,527)
(22,252)
75,647
69,680
(414,724)
—
—
—
2,808
(259,130)
(10)
(9,279)
(3,811)
429
(538,390)
600,677
—
(210)
—
(10,387)
(482)
589,598
28,956
144,006
172,962
See Accompanying Notes to Consolidated Financial Statements
94
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
Accretion of unrealized (gain) loss on investment securities held-to-maturity
Investment securities transferred to held-to-maturity
Right-of-use assets obtained in exchange for new operating leases
Acquisitions
Noncash assets acquired
Liabilities assumed
Issuance of common stock for the acquisition of Metro Phoenix Bank
Net noncash acquired
Year ended
December 31,
2021
2020
2022
$
15,095 $
12,531
101,696
4,538 $
13,124
—
12,641
13,582
513
153
(94,004)
(382)
—
4,266
297,745
(354,358)
(64,019)
(120,632)
1,176
(14,567)
(326)
149,191
267
—
—
—
—
456
8,702
—
—
1,555
14,627
(5,348)
—
9,279
See Accompanying Notes to Consolidated Financial Statements
95
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.
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, the fair value of assets acquired and liabilities assumed from an acquisition
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
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
96
which the Company has $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a
“large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on
which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in
non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less
attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the
Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and
the Company’s stock price may be more volatile.
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, 2022 and 2021 respectively, 23.9% and 24.8% 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 (Loans and Allowance for Loan Losses) 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 (Investment Securities) 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 are classified as available-for-sale and are carried at estimated fair value with unrealized gains
and losses reported in other comprehensive income (loss). 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.
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
97
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.
Certain debt securities that the Company has an intent to hold to maturity are classified as held-to-maturity and
recorded at amortized cost. Interest earned on held-to-maturity debt securities is included in interest income.
Amortization or accretion of premiums and discounts is also recognized in interest income using the effective interest
method over the contractual life of the security and is adjusted to reflect actual prepayments. Transfers of debt securities
from available-for-sale to held-to-maturity are made at fair value at the date of transfer. Unrealized holding gains and
losses at the date of transfer are included in other comprehensive income and in the carrying value of held-to-maturity
security are amortized over the remaining life of the security.
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 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.
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
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
98
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; uncertainty related to
the effects of the COVID-19 pandemic; industry conditions; COVID-19 pandemic related modifications; 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.
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.
99
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, 2022, 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.
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
100
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.
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.
101
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 the
Company 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, 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.
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.
Tax Credit Investments
The Company invests in qualified affordable housing projects for the purpose of community reinvestment and
obtaining tax credits. These investments are included in other assets on the balance sheet, and any unfunded
commitments in accrued expenses and other liabilities on the balance sheet. The qualified affordable housing projects are
102
accounted for under the proportional amortization method. Under the proportional amortization method, the initial cost
of the investment is recognized over the period that the Company expects to receive the tax credits, with the expense
included within income tax expense on the consolidated statements of income. Management analyzes these investments
for potential impairment when events or changes in circumstances indicate that it is more likely than not that the carrying
amount of the investment will not be realized. An impairment loss is measured as the amount by which the carrying
amount of an investment exceeds its fair value.
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 20 (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 incur any interest or penalties
in 2022, 2021, or 2020.
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 2019.
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 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.
103
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 shares 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, 2022, and those which are not
yet effective and have been evaluated or are currently being evaluated by management, as of December 31, 2022.
Adopted Pronouncements
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. The Company adopted this standard during the first quarter of 2022 and the adoption of this
standard did not have a material 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 by clarifying and
amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years
beginning after and interim periods within those fiscal years beginning after December 15, 2020, for public business
entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim
periods within those fiscal years beginning after December 15, 2021. The Company adopted this standard during the first
quarter of 2022 and the adoption of this standard did not have a material 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 implements a change from the current impaired loss
model to an expected credit loss model over the life of an instrument, including loans and securities held-to-maturity.
The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal
years beginning after December 15, 2022, including interim periods with those years. The Company has executed a
project plan to implement this guidance. The project plan included an assessment of data, development of
methodologies, model valuation, parallel runs, refining qualitative factors and forecast periods, and evaluation of related
disclosures. Management is finalizing macroeconomic conditions and forecast assumptions to be used in our CECL
model, however, we expect an initial increase to the allowance for credit losses, including the increase in reserve for
unfunded commitments, of approximately $5.0 million - $7.0 million above the existing allowance for loan loss levels.
The anticipated initial increase to the allowance for credit losses is expected to be substantially attributable to the fair
value marks on prior acquisitions and the reserve required on unfunded commitments. When finalized, this one-time
increase will be recorded, net of tax, as an adjustment to beginning retained earnings.
Internal controls over financial reporting specifically related to CECL are being designed and evaluated,
however, all internal controls related to CECL implementation are not operational. The Company is in the final stages of
completing the formal governance and approval process. Ongoing impacts of the CECL methodology will be dependent
upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio
duration and other factors.
104
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, Financial Instruments – Credit Losses (Topic 326); Targeted
Transition Relief. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on
financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if
the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to
held to maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU
2019-05 has the same effective date as ASU 2016-13 (i.e., the first quarter of 2023 for the Company). The Company
does not expect to elect the fair value option, and therefore, ASU 2019-05 is not expected to impact the Company’s
consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses Troubled Debt
Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for Troubled
Debt Restructurings, or TDRs, by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by
Creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when
a borrower is experiencing financial difficulty. For public business entities, this amendment also has vintage disclosures
that require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net
investments in leases within the scope of Subtopic 326-20 Financial Instruments – Credit Losses – Measured at
Amortized Cost. For entities that have not yet adopted the amendments in ASU 2016-13, the effective dates for the
amendments in this update are same as the effective date for ASU 2016-13. As the Company has immaterial TDR loans,
ASU 2022-02 is not expected to have a material impact on the Company’s 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 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. LIBOR is used as an index rate for a portion of the Company’s available-for-sale securities,
derivative contracts, subordinated notes payable, junior subordinated debentures, and approximately 6.9% of the
Company’s loans, as of December 31, 2022.
If reference rates are discontinued, the existing contracts will be modified to replace the discounted rate with a
replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether
the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the
previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of
contracts within the scope of Topic 310, receivables, and 470, Debt, will be accounted for by prospectively adjusting the
effective interest rates and no such evaluation is required. When elected, the optional expedient for contract
105
modifications must be applied consistently for all eligible contracts or eligible transactions. The Company is in the
process of evaluating the impact of this pronouncement of those financial assets and liabilities where LIBOR is used as
an index rate.
In December 2022, the FASB issued ASU 2022-06 Reference Rate Reform (Topic 848) Deferral of the Sunset
Date of Topic 848. This amendment provides an update to defer the sunset date of Topic 848 from December 31, 2022,
to December 31, 2024, after which all entities will no longer be permitted to apply the relief in Topic 848.
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
On July 1, 2022, the Company acquired MPB BHC, Inc., the bank holding company for Metro Phoenix Bank
located in Phoenix, Arizona, for a total purchase price of $64.0 million in a stock-for-stock transaction. The primary
reasons for the acquisition were to expand the Company’s operations in the Phoenix MSA and grow the size of the
Company’s business. As part of the transaction, $7.6 million was allocated to a customer deposit intangible and $15.1
million to goodwill. The purchase consisted of $270.4 million in loans and $353.7 million in deposits. The purchased
106
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
Fed funds sold
Core deposit intangible
Loans
Accrued interest receivable
Other assets
Total assets
Liabilities
Deposits
Other liabilities
Total liabilities
Excess assets over liabilities
Stock issued for MPB
Total goodwill recorded
As recorded by
Metro Phoenix Bank
Preliminary Fair Value As recorded by
the Company
Adjustments
$
$
101,819
18,936
—
273,843
1,091
3,342
399,031
354,529
673
355,202
43,829
$
$
(123) $
—
7,592
(3,440)
—
188
4,217
(844)
—
(844)
5,061
$
101,696
18,936
7,592
270,403
1,091
3,530
403,248
353,685
673
354,358
48,890
64,019
15,129
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. There was no amount of required
reserve balances at December 31, 2022 and 2021. In addition to vault cash, the Company held balances at the Federal
Reserve Bank and other financial institutions of $28.0 million and $224.4 million at December 31, 2022 and 2021,
respectively, to meet these requirements. The balances are included in cash and cash equivalents on the Consolidated
Balance Sheets.
NOTE 5 Investment Securities
The following tables present amortized cost, gross unrealized gains and losses, and fair value of the available-
for-sale investment securities and held-to-maturity investment securities as of December 31, 2022 and 2021:
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity investment securities
Total investment securities
December 31, 2022
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
3,518
$
19
$
(17)
$
3,520
705,845
70,669
34
69,501
849,567
137,787
2
—
—
—
21
(118,168)
(7,111)
—
(6,968)
(132,264)
587,679
63,558
34
62,533
717,324
—
(17,736)
120,051
184,115
321,902
$ 1,171,469
$
—
—
$
21
(33,254)
(50,990)
(183,254)
$
150,861
270,912
988,236
107
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity investment securities
Total investment securities
December 31, 2021
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
5,028
$
75
$
—
$
5,103
717,781
88,362
52
49,035
860,258
144,543
1,213
2,674
2
1,398
5,362
1,110
(11,837)
(123)
—
(11)
(11,971)
707,157
90,913
54
50,422
853,649
(349)
145,304
207,518
352,061
$ 1,212,319
$
—
1,110
6,472
$
(3,145)
(3,494)
(15,465)
204,373
349,677
$ 1,203,326
On April 1, 2021, the Company transferred its state and political agencies debt securities portfolio, with a fair
value of $149.2 million and a net unrealized gain of $1.3 million, from available-for-sale to held-to-maturity.
The amortized cost and estimated fair value of investment securities at December 31, 2022, 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 investment securities
Held-to-maturity
Available-for-sale
Carrying
Value
6,554
40,317
69,992
205,039
321,902
$
$
Fair
Value
6,522
37,146
59,138
168,106
270,912
$
$
Amortized
Cost
$
$
4 $
21,256
87,961
740,346
849,567 $
Fair
Value
4
19,863
79,697
617,760
717,324
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Investment securities with a total carrying value of $260.7 million and $192.8 million, were pledged at
December 31, 2022 and 2021, 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, 2022, 2021, and 2020
are displayed in the table below:
(dollars in thousands)
Proceeds
Realized gains
Realized losses
2022
$
Year ended
December 31,
2021
— $
—
—
13,189 $
114
—
2020
75,647
2,737
—
108
Proceeds from the sale or call of held-to-maturity securities for the years ended December 31, 2022, 2021 and
2020 are displayed in the table below:
(dollars in thousands)
Proceeds
Realized gains
Realized losses
2022
$
Year ended
December 31,
2021
963
$
—
—
1,772 $
11
—
2020
—
—
—
During the year ended December 31, 2022, there were no sales of held-to-maturity securities. During the year
ended December 31, 2021 the company sold one held-to-maturity security with an amortized cost of $330 thousand.
Proceeds from the sale totaled $348 thousand, resulting in realized gains of $11 thousand. For this sale of a held-to-
maturity security, the Company received evidence of a significant deterioration of the issuer’s creditworthiness. There
were no sales of held-to-maturity securities during the year ended December 31, 2020.
Information pertaining to investment securities with gross unrealized losses that are not deemed to be
other-than-temporarily impaired at December 31, 2022 and 2021 aggregated by investment category and length of time
that individual investment securities have been in a continuous loss position, follows:
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity investment securities
Total investment securities
Unrealized
Less than 12 Months
Fair
Value
Losses
December 31, 2022
Over 12 Months
Total
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
$
(17) $
509
$
— $
— $
(17) $
509
(10,457)
(4,835)
—
(4,452)
(19,761)
79,693
50,437
32
48,048
178,719
(107,711)
(2,276)
—
(2,516)
(112,503)
507,418
13,120
2
14,484
535,024
(118,168)
(7,111)
—
(6,968)
(132,264)
587,111
63,557
34
62,532
713,743
(3,336)
18,788
(14,400)
98,762
(17,736)
117,550
(33,254)
(47,654)
150,861
268,411
$ (160,157) $ 784,647 $ (183,254) $ 982,154
(33,254)
(50,990)
150,861
249,623
—
(3,336)
—
18,788
$ (23,097) $ 197,507
109
(dollars in thousands)
Available-for-sale
U.S. Treasury and agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total held-to-maturity investment securities
Total investment securities
Unrealized
Less than 12 Months
Fair
Value
Losses
December 31, 2021
Over 12 Months
Total
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
$
— $
— $
— $
— $
— $
—
(10,156)
(123)
—
(11)
(10,290)
554,811
17,470
—
5,989
578,270
(1,681)
—
—
—
(1,681)
55,082
—
2
—
55,084
(11,837)
(123)
—
(11)
(11,971)
609,893
17,470
2
5,989
633,354
(349)
53,210
—
—
(349)
53,210
(3,145)
(3,494)
$ (13,784)
204,373
257,583
$ 835,853
$
—
—
(3,145)
(3,494)
(1,681) $ 55,084 $ (15,465)
—
—
204,373
257,583
$ 890,937
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 years ended December 31, 2022 and 2021, the Company did not believe any OTTI existed and therefore
did not recognize any OTTI losses on its investment securities.
As of December 31, 2022 and 2021, 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,
2022
December 31,
2021
$
4,595
19,362
$
2,675
3,806
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.
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, 2022, the conversion ratio was 1.5991. Based on the existing transfer restriction and
the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,702 Class A
equivalents) that the Company owned as of December 31, 2022 and 2021, were carried at a zero cost basis.
110
NOTE 6 Loans and Allowance for Loan Losses
The following table presents total loans outstanding, by portfolio segment, as of December 31, 2022 and 2021:
(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,
2022
2021
$
583,876 $
97,810
881,670
1,563,356
436,761
40,619
598,893
1,076,273
679,551
150,479
50,608
880,638
510,716
125,668
45,363
681,747
$ 2,443,994 $ 1,758,020
(1)
Includes PPP loans of $737 thousand at December 31, 2022 and $33.6 million at December 31, 2021.
Total loans include net deferred loan fees and costs of $919 thousand and $231 thousand at December 31, 2022
and 2021, respectively. Deferred loan fees on PPP loans were zero at December 31, 2022 and $881 thousand at
December 31, 2021. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $7.1 million as
of December 31, 2022.
As part of the acquisition of Metro Phoenix Bank, the Company acquired loans that displayed evidence of
deterioration of credit quality since origination and which was probable that all contractually required payments would
not be collected. The carrying amounts and contractually required payments of these loans which are included in the loan
balances above are summarized in the following table:
(dollars in thousands)
Real estate construction
Outstanding balance
Carrying amount
Allowance for loan losses
Carrying amount, net of allowance for loan losses
Accretable yield, or income expected to be collected, is shown in the table below:
(dollars in thousands)
Beginning balance
New loans purchased
Accretion of income
Ending balance
December 31,
2022
For the year ended
December 31,
2022
440
440
262
97
165
—
225
(48)
177
$
$
$
$
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.
111
The following tables present past due aging analysis of total loans outstanding, by portfolio segment, as of
December 31, 2022 and 2021, 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, 2022
90 Days
or More
Past Due
Nonaccrual
Total
Loans
$
580,288
97,370
879,830
1,557,488
677,471
149,918
50,360
877,749
$ 2,435,237
$
$
2,426
—
368
2,794
1,545
377
247
2,169
4,963
$
$
—
—
—
—
—
—
—
—
—
$
$
1,162
440
1,472
3,074
535
184
1
720
3,794
$
583,876
97,810
881,670
1,563,356
679,551
150,479
50,608
880,638
$ 2,443,994
Accruing
Current
30 - 89 Days
Past Due
December 31, 2021
90 Days
or More
Past Due
Nonaccrual
Total
Loans
$
435,135
40,619
598,264
1,074,018
508,925
125,412
45,242
679,579
$ 1,753,597
$
$
168
—
—
168
1,770
167
121
2,058
2,226
$
$
121
—
—
121
—
—
—
—
121
$
$
1,337
—
629
1,966
21
89
—
110
2,076
$
436,761
40,619
598,893
1,076,273
510,716
125,668
45,363
681,747
$ 1,758,020
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.
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
112
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, 2022 and 2021:
(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, 2022
Criticized
Pass
Special
Mention
Substandard Doubtful
Total
$
558,694
97,548
873,270
1,529,512
678,743
149,847
50,607
879,197
$ 2,408,709
$ 21,969
—
—
21,969
63
—
—
63
$ 22,032
$
$
3,213 $
262
8,400
11,875
745
632
1
1,378
13,253 $
—
—
—
—
—
—
—
—
—
$
583,876
97,810
881,670
1,563,356
679,551
150,479
50,608
880,638
$ 2,443,994
December 31, 2021
Criticized
Pass
Special
Mention
Substandard Doubtful
Total
$
430,235
40,619
585,291
1,056,145
510,375
124,898
45,363
680,636
$ 1,736,781
$
$
480
—
—
480
—
—
—
—
480
$
$
6,046 $
—
13,602
19,648
341
770
—
1,111
20,759 $
—
—
—
—
—
—
—
—
—
$
436,761
40,619
598,893
1,076,273
510,716
125,668
45,363
681,747
$ 1,758,020
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
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,
113
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, 2022, 2021, and 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
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
$
8,925
783
12,376
22,084
6,532
1,295
481
8,308
1,180
$ 31,572
Beginning
Balance
Year ended December 31, 2022
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$
1,168
587
178
1,933
$
(1,396) $
—
—
(1,396)
461
76
134
671
(763)
(288)
30
(1,021)
(912)
$
— $
—
—
(153)
(153)
—
(1,549) $
—
282
170
452
—
1,123
$
9,158
1,446
12,688
23,292
5,769
1,289
528
7,586
268
$ 31,146
Year ended December 31, 2021
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$ 10,205
658
14,105
24,968
5,774
1,373
753
7,900
1,378
$ 34,246
$
$
(1,710)
125
(2,015)
(3,600)
758
(201)
(259)
298
(198)
(3,500)
$
$
(1,230) $
—
(536)
(1,766)
—
—
(156)
(156)
—
(1,922) $
1,660
—
822
2,482
—
123
143
266
—
2,748
$
8,925
783
12,376
22,084
6,532
1,295
481
8,308
1,180
$ 31,572
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
4,321
507
514
5,342
(814)
10,900
$
$
(4,249) $
—
(865)
(5,114)
—
(12)
(242)
(254)
—
(5,368) $
4,352
—
97
4,449
5
207
129
341
—
4,790
$ 10,205
658
14,105
24,968
5,774
1,373
753
7,900
1,378
$ 34,246
114
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, 2022 and
2021:
(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 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
Unallocated
Total loans
Recorded Investment
Collectively
Evaluated Evaluated
Individually
Allowance for Loan Losses
Individually Collectively
Total
Evaluated Evaluated Total
December 31, 2022
$
$
1,313
262
1,472
3,047
535
184
1
720
—
3,767
$
582,563
97,548
880,198
1,560,309
$
583,876
97,810
881,670
1,563,356
$
275 $
97
582
954
8,883
1,349
12,106
22,338
679,016
150,295
50,607
879,918
—
$ 2,440,227
679,551
150,479
50,608
880,638
—
$ 2,443,994
$
—
—
—
—
—
5,769
1,289
528
7,586
—
954 $ 29,924
$
9,158
1,446
12,688
23,292
5,769
1,289
528
7,586
268
$ 31,146
Recorded Investment
Collectively
Evaluated Evaluated
Individually
Allowance for Loan Losses
Individually Collectively
Total
Evaluated Evaluated Total
December 31, 2021
$
$
1,831
—
809
2,640
21
91
—
112
—
2,752
$
434,930
40,619
598,084
1,073,633
$
436,761
40,619
598,893
1,076,273
$
278 $
—
5
283
8,647
783
12,371
21,801
510,695
125,577
45,363
681,635
—
$ 1,755,268
510,716
125,668
45,363
681,747
—
$ 1,758,020
$
—
—
—
—
—
6,532
1,295
481
8,308
—
283 $ 30,109
$
8,925
783
12,376
22,084
6,532
1,295
481
8,308
1,180
$ 31,572
115
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
Real estate construction
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
December 31, 2022
Unpaid
Recorded
Related
Investment Principal Allowance Investment Principal Allowance
Recorded Unpaid
Related
December 31, 2021
$
$
675
262
896
—
—
1,833
638
—
576
535
184
1
1,934
1,313
262
1,472
535
184
1
3,767
$
711
440
900
—
—
2,051
767
—
660
573
218
1
2,219
1,478
440
1,560
573
218
1
$ 4,270
$
$
275
97
582
—
—
954
—
—
—
—
—
—
—
275
97
582
—
—
—
954
$
$
445 $
—
180
—
—
625
464
—
203
—
—
667
1,386
—
629
21
91
—
2,127
1,575
—
684
24
120
—
2,403
1,831
—
809
21
91
—
2,039
—
887
24
120
—
$ 2,752 $ 3,070
$
278
—
5
—
—
283
—
—
—
—
—
—
—
278
—
5
—
—
—
283
116
The table below presents the average recorded investment in impaired loans and interest income for the
three years ending December 31, 2022, 2021, and 2020:
2022
Year Ended December 31,
2021
2020
(dollars in thousands)
Impaired loans with a valuation allowance
Commercial and industrial
Real estate construction
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
Average
Recorded
Interest
Investment Income Investment Income Investment Income
Interest Recorded
Interest Recorded
Average
Average
$
$
722
442
935
—
—
2,099
707
—
618
575
191
1
2,092
1,429
442
1,553
575
191
1
4,191
$
$
13
—
—
—
—
13
—
—
—
—
—
—
—
13
—
—
—
—
—
13
$
$
1,988
—
672
23
98
1
2,782
2,505
—
859
23
98
1
3,486
$
517
—
187
—
—
704
13 $
—
7
—
—
20
765
—
3,972
19
28
4,784
4,151
—
1,614
461
234
—
6,460
20
—
—
—
—
—
20
4,916
33
—
—
5,586
7
461
—
253
—
28
—
40 $ 11,244
$
$
$
14
—
138
—
—
152
25
—
—
—
3
—
28
39
—
138
—
3
—
180
Loans with a carrying value of $1.5 billion and $1.2 billion were pledged at December 31, 2022 and 2021,
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 year December 31, 2022, there were no loans modified as a TDR.
During the second quarter of 2021, there were three loans modified as TDRs as a result of changing the terms
allowing for interest rate reductions and an extension of the maturity dates. As of December 31, 2021, the carrying value
of the restructured loans was $701 thousand. The loans are not currently performing in compliance with the modified
terms and were placed on nonaccrual. There was no specific reserve for loan losses allocated to the loan modified as a
TDR.
Consistent with regulatory guidance urging banks to work with borrowers during the COVID-19 pandemic, the
Company offered a payment deferral program for its lending clients that were adversely affected by the COVID-19
pandemic. 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.
For the year ended December 31, 2022, the Company entered into no new modifications and as of
December 31, 2022, only one loan with a total outstanding principal balance of $268 thousand remained on deferral.
117
As of December 31, 2021, 6 loans with a total outstanding principal balance of $3.3 million had been granted
second deferrals, 2 loans with a total outstanding principal balance of $72 thousand remained on the first deferral and the
remaining loans have been returned to a normal payment status.
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, 2021, we had assisted 2,454 new and
existing clients secure approximately $474.2 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 $15.7 million were being deferred
and recognized as interest income on a level yield method of the life of the represented loans. At December 31, 2022, the
Company recognized all of the net processing fees.
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, 2022 and 2021 were as follows:
(dollars in thousands)
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
December 31, December 31,
2022
4,542 $
26,625
2,657
36,013
69,837
(52,549)
17,288 $
$
$
2021
4,542
25,633
2,657
35,063
67,895
(49,525)
18,370
Depreciation expense for the years ended December 31, 2022, 2021, and 2020 amounted to $3.0 million,
$3.6 million, and $3.9 million, respectively.
NOTE 8 Goodwill and Other Intangible Assets
As of December 31, 2022 and 2021, goodwill totaled $47.1 million and $31.5 million, respectively.
The following table summarizes the carrying amounts of goodwill, by segment, as of December 31, 2022 and
2021:
(dollars in thousands)
Banking (1)
Retirement and benefit services
Total goodwill
December 31, December 31,
2022
35,260 $
11,827
47,087 $
2021
20,131
11,359
31,490
$
$
(1)
Goodwill increases consisted of the Metro Phoenix Bank acquisition purchase accounting adjustments, where were finalized in the fourth
quarter of 2022.
118
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as
follows:
December 31, 2022
December 31, 2021
(dollars in thousands)
Identifiable customer intangibles
Core deposit intangible assets
Total intangible assets
Gross
Carrying
Amount
$ 41,423
7,592
$ 49,015
Accumulated
Amortization Total
$
(25,927) $ 15,496
6,959
(26,560) $ 22,455
(633)
$
Gross
Carrying
Amount
$ 42,057 $
—
$ 42,057 $
Accumulated
Amortization Total
(21,807) $ 20,250
—
(21,807) $ 20,250
—
Aggregate amortization expense for the years ended December 31, 2022, 2021, and 2020 was $4.8 million,
$4.4 million, and $4.0 million, respectively.
Estimated aggregate amortization expense for future years is as follows:
(dollars in thousands)
2023
2024
2025
2026
2027
Thereafter
Total
NOTE 9 Loan Servicing
Amount
5,297
5,043
3,904
2,275
2,275
3,661
22,455
$
$
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of loans serviced for others totaled $357.2 million and $345.8 million at December 31, 2022 and
2021, 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, 2022, 2021, and 2020:
(dollars in thousands)
Balance, beginning of period
Additions
Amortization
(Impairment)/Recovery
Balance, end of period
Year ended
December 31,
2021
2022
$
$
1,880 $
622
(524)
665
2,643 $
1,987
225
(745)
413
1,880
$
$
2020
3,845
178
(922)
(1,114)
1,987
The following is a summary of key data and assumptions used in the valuation of servicing rights as of
December 31, 2022 and 2021. 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
December 31, December 31,
2022
2021
$
$
2,643
20.5
6.9 %
10.5 %
1,880
20.3
14.2 %
9.5 %
119
NOTE 10 Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified
property, plant or equipment for a period of time in exchange for consideration. Substantially all 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 2032. We do not have any material subleased properties. Substantially all of the Company’s leases are
classified as operating leases. The Company made a policy election to exclude the recognition requirements of Topic
842 to all leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in
income or expense on a straight-line basis over the lease term.
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
Classification
Operating lease right-of-use assets
Land, premises and equipment, net
Operating lease liabilities
Long-term debt
December 31, December 31,
2022
2021
$
$
$
$
5,419
—
5,419
5,902
—
5,902
$
$
$
$
3,727
87
3,814
4,275
203
4,478
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 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,
2022
December 31,
2021
5.0
—
3.1 %
— %
3.4
0.8
2.5 %
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.
120
The following table presents lease costs and other lease information for the years ending December 31, 2022,
2021 and 2020:
(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
Year ended
December 31,
2021
2020
2022
$
$
$
1,799 $
899
217
1,827
823
181
7
87
(238)
2,771 $
25
116
(228)
2,744
1,706 $
4,266
1,763
267
$
$
$
$
2,457
1,170
395
42
116
(228)
3,952
2,432
1,555
Future minimum payments for leases with initial or remaining terms of one year or more as of
December 31, 2022 are as follows:
(dollars in thousands)
Twelve months ended
2023
2024
2025
2026
2027
Thereafter
Total future minimum lease payments
Amounts representing interest
Total operating lease liabilities
NOTE 11 Other Assets
Operating
Leases
$
$
$
1,987
1,236
1,118
936
385
854
6,516
(614)
5,902
Other assets on the balance sheet consisted of the following balances at December 31, 2022 and 2021:
(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
Tax credit investments
Other assets
Total
December 31, December 31,
2022
2021
$
$
4,595 $
30
6,770
14
14,684
2,856
19,362
6,333
17,642
3,426
75,712 $
2,675
885
5,325
14
14,680
1,146
3,806
3,382
7,906
2,889
42,708
121
NOTE 12 Deposits
The components of deposits in the consolidated balance sheets at December 31, 2022 and 2021 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,
2022
860,987 $
2021
938,840
$
706,275
99,882
1,035,981
212,359
2,054,497
714,669
96,825
937,305
232,912
1,981,711
$ 2,915,484 $ 2,920,551
The aggregate amount of deposit overdrafts included as loans were $202 thousand and $2.9 million at
December 31, 2022 and 2021, respectively.
Certificates of deposit in excess of $250,000 totaled $51.1 million and $91.5 million at December 31, 2022 and
2021, respectively.
At December 31, 2022, the scheduled maturities of certificates of deposit were as follows:
(dollars in thousands)
2023
2024
2025
2026
2027
Thereafter
Total
Amount
$ 169,062
22,854
4,802
10,663
1,833
3,145
$ 212,359
NOTE 13 Short-Term Borrowings
Short-term borrowings at December 31, 2022, 2021, and 2020 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,
2021
2020
2022
$
$ 153,080
63,296
251,880
2.46 %
4.26 %
$
$ 225,000
89,932
225,000
$
—
3
—
— %
— %
$
—
—
—
3.10 %
4.31 %
— %
— %
—
80
—
— %
— %
—
—
—
— %
— %
The Company had outstanding credit capacity with the FHLB of $531.6 million and $677.4 million at
December 31, 2022 and 2021 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 balances at
122
December 31, 2022 and 2021. The Company has an unused $15.0 million unsecured line of credit with Bank of North
Dakota.
NOTE 14 Long-Term Debt
Long-term debt at December 31, 2022 and 2021 consisted of the following:
December 31, 2022
(dollars in thousands)
Subordinated notes payable
Junior subordinated debenture (Trust I)
Junior subordinated debenture (Trust II)
Total long-term debt
Face
Value
$ 50,000
Carrying
Value
Interest Rate
$ 50,000 Fixed
4,124
3,537
6,186
$ 60,310
5,306
$ 58,843
Three-month
LIBOR + 3.10%
Three-month
LIBOR + 1.80%
Period End
Interest
Rate
Maturity
Call Date
3.50 % 3/30/2031 3/31/2026
Date
7.82 % 6/26/2033 6/26/2008
6.57 % 9/15/2036 9/15/2011
(dollars in thousands)
Subordinated notes payable
Junior subordinated debenture (Trust I)
Junior subordinated debenture (Trust II)
Finance lease liability
Total long-term debt
Face
Value
$ 50,000
Carrying
Value
$ 50,000
4,124
3,492
6,186
2,700
$ 63,010
5,238
203
$ 58,933
Fixed
Three-month
LIBOR + 3.10%
Three-month
LIBOR + 1.80%
Fixed
December 31, 2021
Period End
Interest
Maturity
Interest Rate
Rate
Date
3.50 % 3/30/2031
Call Date
3/31/2026
3.32 % 6/26/2033
6/26/2008
2.00 % 9/15/2036
7.81 % 10/31/2022
9/15/2011
N/A
NOTE 15 Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company 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 Company’s exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Company uses the same credit policies in making such commitments as it
does for instruments that are included in the statements of financial condition.
At December 31, 2022 and 2021, 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,
2022
806,431
13,089
819,520
$
$
$
$
2021
668,115
10,529
678,644
At December 31, 2022 the Company had no outstanding letters of credit with the FHLB. At
December 31, 2021, 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 $215.5 million and
$229.7 million at December 31, 2022, and 2021, respectively. The Company had no outstanding letters of credit with the
Bank of North Dakota at December 31, 2022 and 2021, respectively.
123
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.
NOTE 16 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 17 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. However, shares subject to an award shall not again be made available for issuance or delivery
under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or
withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation
right or other awards that were not issued upon the settlement of the award. 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 plan authorizes the issuance of up to 1,100,000 shares of common stock.
As of December 31, 2022, 922,010 shares of common stock are still available for issue under the 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, 2022, and 2021 was 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,
2022
Weighted-
Average Grant
Date Fair Value Awards
2021
Weighted-
Average Grant
Date Fair Value
Awards
260,850
102,265
(113,562)
(11,067)
238,486
$
$
21.04
25.44
19.25
23.90
23.65
325,030 $
66,664
(104,119)
(26,725)
260,850 $
19.48
26.63
20.51
18.03
21.04
Unrecognized compensation expense related to share-based awards was $2.5 million and $2.2 million as of
December 31, 2022 and 2021, respectively. The expense is expected to be recognized over a weighted-average period of
2.7 and 2.9 years, as of December 31, 2022 and 2021, respectively.
Compensation expense relating to stock awards under these plans was $1.9 million in 2022, $3.1 million in
2021, and $1.9 million in 2020. The number of unvested shares outstanding was 128,267 and 140,228 respectively, at
December 31, 2022 and 2021. The number of unvested units outstanding was 110,219 and 120,622 at
December 31, 2022 and 2021, respectively.
124
NOTE 18 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 401(k) plan. 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 401(k) plan, 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, 2022, 2021, and 2020 were as follows:
(dollars in thousands)
Salary reduction plan
ESOP
Total
Total ESOP shares outstanding
NOTE 19 Noninterest Income
December 31, December 31, December 31,
2021
2020
2022
$
$
3,148 $
1,932
5,080 $
3,123 $
2,014
5,137 $
1,111,424
1,207,952
2,960
2,166
5,126
1,170,611
The following table presents the Company’s noninterest income for the years ended December 31, 2022, 2021,
and 2020.
(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.
Year ended
December 31,
2021
71,709
21,052
48,502
1,395
125
2022
67,135 $
20,870
16,921
1,434
—
2,246
835
1,429
353
111,223 $
2,180
793
1,218
413
147,387
$
$
2020
60,956
17,451
61,641
1,409
2,737
2,140
797
1,246
994
149,371
$
$
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, 2022 and 2021, 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
125
acquisition costs when the asset would have resulted from capitalizing these costs would have been amortized in one
year or less.
NOTE 20 Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2022, 2021, and 2020 were
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,
2022
2021
2020
$
9,005 $
727
9,732
10,731 $
2,212
12,943
2,298
147
2,445
$ 12,177 $
2,879
574
3,453
16,396 $
14,541
(3,615)
10,926
3,736
(819)
2,917
13,843
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2022 and 2021 were 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
Unrealized loss on available‑for‑sale investment securities
Other
Total deferred tax assets from temporary differences
Deferred Tax Liabilities
Accumulated depreciation
Goodwill and intangible amortization
Servicing assets
Prepaid expenses
Other
Total deferred tax liabilities from temporary differences
Net Deferred Tax Assets
December 31, December 31,
2022
2021
$
$
7,818 $
2,455
417
3,363
1,665
3
74
33,056
884
49,735
835
5,115
663
552
201
7,366
42,369 $
7,925
2,762
634
3,341
58
42
86
1,426
518
16,792
918
2,752
451
1,014
43
5,178
11,614
126
The reconciliation between applicable income taxes and the amount computed at the applicable statutory
Federal tax rate for years ending December 31, 2022, 2021, and 2020 was as follows:
2022
Percent of
Year ended December 31,
2021
Percent of
2020
Percent of
(dollars in thousands)
Taxes at statutory federal income tax rate
Tax effect of:
Amount Pretax Income Amount Pretax Income Amount Pretax Income
21.0 %
$ 10,958
21.0 % $ 12,289
21.0 % $ 14,506
Tax exempt income
State income taxes, net of federal benefits
Nondeductible items and other
Applicable income taxes
(514)
2,297
(564)
$ 12,177
(556)
(1.0)%
2,973
4.4 %
(1.1)%
(527)
23.3 % $ 16,396
(527)
(0.8)%
2,522
4.3
(0.8)
(441)
23.7 % $ 13,843
(0.9)%
4.3 %
(0.8)%
23.6 %
It is the opinion of management that the Company has no significant uncertain tax positions that would be
subject to change upon examination.
NOTE 21 Tax Credit Investments
The Company invests in qualified affordable housing projects for the purpose of community reinvestment and
obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-
known developers and projects within the Company’s market area.
The following table presents a summary of the Company’s investments in qualified affordable housing projects
tax credit investments at December 31, 2022:
(dollars in thousands)
Investment
Low income housing tax credit
Total
December 31, 2022
Investment Unfunded Commitment
December 31, 2021
Investment Unfunded Commitment
Accounting Method
Proportional amortization $ 17,906 $
$
$ 17,906
15,559 $ 7,906 $
$ 7,906 $
15,559
6,999
6,999
For the year ended December 31, 2022, we had $264 thousand of amortization expense and $373 thousand of
tax benefit recognized for the Company’s qualified affordable housing projects tax credit investments. For the year
ended December 31, 2021, we had no amortization expense and $8 thousand of tax benefit recognized for the
Company’s qualified affordable housing projects tax credit investments.
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.
127
The following table presents key metrics related to the Company’s segments as of and for the periods presented:
Year ended December 31, 2022
Retirement and
Wealth
Corporate
(dollars in thousands)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Total assets
Banking
$
100,190
—
6,199
67,068
$
39,321
$ 3,696,676
$
Benefit Services Management Mortgage Administration Consolidated
99,729
(2,340) $
—
—
111,223
98
158,770
40,929
(43,171) $
52,182
27,488 $ 3,779,637
— $
—
67,135
26,204
40,931
40,821
— $
—
20,870
5,979
14,891
4,032
1,879 $
—
16,921
18,590
$
210 $
$ 10,620 $
$
$
$
$
Year ended December 31, 2021
Retirement and
Wealth
Corporate
(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
$
87,014
(3,500)
6,091
44,989
51,616
$
$ 3,254,979
$
Benefit Services Management Mortgage Administration Consolidated
87,099
(1,896) $
(3,500)
—
147,387
33
168,909
37,725
69,077
(39,588) $
13,402 $ 3,392,691
1,981 $
—
48,502
37,162
$ 13,321 $
$ 75,713 $
— $
—
71,709
40,164
31,545
44,953
— $
—
21,052
8,869
12,183
3,644
$
$
$
$
Year ended December 31, 2020
Retirement and
Wealth
Corporate
Banking
85,167
$
10,900
10,017
46,883
$
37,401
$ 2,827,792
$
Benefit Services Management Mortgage Administration Consolidated
83,846
10,900
149,371
163,799
58,518
$ 3,013,771
2,092 $
—
61,641
36,323
$ 27,410 $
$ 125,078 $
(3,413) $
—
(694)
37,068
(41,175) $
10,134
— $
—
60,956
35,236
25,720
47,758
— $
—
17,451
8,289
9,162
3,009
$
$
$
$
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.
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; and health savings account, flex spending account, and COBRA recordkeeping and administration
services to employers. The division operates within the banking markets as well as in Lansing, Michigan, and Littleton,
Colorado.
Wealth Management
The Wealth Management division provides advisory and planning services, investment management, and trust
and fiduciary services to clients across the Company’s footprint.
Mortgage
The mortgage division offers first and second mortgage loans through the Banking office locations.
128
NOTE 23 Earnings Per Share
The calculation of basic and diluted earnings per share using the two-class method for the years ending
December 31, 2022, 2021, and 2020 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
NOTE 24 Related Party Transactions
Year ended
December 31,
2022
40,005 $
416
39,589 $
18,640
244
18,884
2021
52,681
802
51,879
17,189
297
17,486
$
$
2020
44,675
770
43,905
17,106
332
17,438
2.12 $
2.10 $
3.02
2.97
$
$
2.57
2.52
$
$
$
$
In the ordinary course of business, the Bank has extended 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, 2022 and 2021:
(dollars in thousands)
Beginning balance
New loans and advances
Repayments
Changes to related parties (1)
Ending balance
Year ended December 31,
2022
2021
$
$
34
145
(95)
46
130
$
$
254
132
(352)
—
34
(1)
Represents changes related to directors that were added to the Board during the year.
Deposits from related parties held by the Bank at December 31, 2022 and 2021, amounted to $587 thousand
and $3.6 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.
129
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, 2022 and 2021:
(dollars in thousands)
Asset Derivatives
Interest rate swaps
Interest rate lock commitments
Forward loan sales commitments
TBA mortgage backed securities
Total asset derivatives
Liability Derivatives
Interest rate swaps
TBA mortgage backed securities
Total liability derivatives
December 31, 2022
Fair
Value
December 31, 2021
Notional
Fair
Amount
Amount Value
Notional
Consolidated Balance Sheet Location
Other assets
Other assets
Other assets
Other assets
$ 6,277
121
7
—
$ 6,405
$ 43,430 $ 1,366
1,507
490
34
$ 54,243 $ 3,397
10,462
351
—
$ 44,826
52,316
13,418
97,000
$ 207,560
Accrued expenses and other liabilities
Accrued expenses and other liabilities
$ 6,277
26
$ 6,303
$ 43,430 $ 1,368
—
$ 69,180 $ 1,368
25,750
$ 44,826
—
$ 44,826
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, 2022 and 2021, respectively, was zero and $19 thousand. 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, 2022, 2021, and 2020 was
as follows:
(dollars in thousands)
Interest rate swaps
Interest rate lock commitments
Forward loan sales commitments
TBA mortgage backed securities
Total gain/(loss) from derivative instruments
Consolidated Statements
of Income Location
Other noninterest income
Mortgage banking
Mortgage banking
Mortgage banking
Year ended
December 31, December 31, December 31,
2022
2021
2020
$
$
2 $
(1,464)
(483)
4,916
2,971 $
$
1
(8,660)
(2,174)
5,220
(5,613) $
(3)
8,798
2,271
(12,997)
(1,931)
130
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, 2022 and 2021, each of the Company and the Bank met all of
the capital adequacy requirements to which it is subject.
As of December 31, 2022, 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, 2022 and
2021 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
(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, 2022
Requirements
for Capital
Adequacy Purposes
Minimum to be
Well Capitalized
Under Prompt
Corrective Action
Actual
Amount
Ratio Amount
Ratio Amount
Ratio
$ 389,335
370,749
13.39 % $ 130,862
12.76 % 130,791
13.69 % 174,482
12.76 % 174,388
N/A
4.50 % $
4.50 % 188,920
.
6.00 %
N/A
6.00 % 232,517
N/A
6.50 %
N/A
8.00 %
16.48 % 232,643
13.83 % 232,517
8.00 %
N/A
8.00 % 290,646
N/A
10.00 %
11.25 % 141,514
10.48 % 141,440
4.00 %
N/A
4.00 % 176,800
N/A
5.00 %
December 31, 2021
Requirements
for Capital
Adequacy Purposes
Minimum to be
Well Capitalized
Under Prompt
Corrective Action
Actual
Amount
Ratio Amount
Ratio Amount
Ratio
$ 314,628
297,453
14.65 % $ 96,647
96,538
13.87 %
15.06 % 128,862
13.87 % 128,718
4.50 % $
N/A
4.50 % 139,444
.
6.00 %
N/A
6.00 % 171,624
N/A
6.50 %
N/A
8.00 %
18.64 % 171,816
15.12 % 171,624
N/A
8.00 %
8.00 % 214,530
N/A
10.00 %
9.79 % 132,112
9.01 % 132,039
4.00 %
N/A
4.00 % 165,049
N/A
5.00 %
398,179
370,749
479,325
401,895
398,179
370,749
323,358
297,453
400,263
324,328
323,358
297,453
131
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, 2022 and 2021 the Company was in
compliance with HUD guidelines.
NOTE 27 Stock Repurchase Program
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the
Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain
limitations and conditions. The Program was effective immediately and will continue for a period of 36 months, until
February 18, 2024. The Program does not obligate the Company to repurchase any shares of its common stock and there
is no assurance that the Company will do so. For the years ended December 31, 2022 and 2021, there were no shares
repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of
restricted stock awards and units.
NOTE 28 Fair Value of Assets and Liabilities
The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy
based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair
value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value
measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is
significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized
based on the following inputs to the valuation techniques as follows:
Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that an entity has the ability to access.
Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted
prices of investment securities with similar characteristics, or discounted cash flows.
Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an
entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the
Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to
estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such
assets are written down from their carrying amounts to their estimated fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and
other items at estimated fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The
Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected
to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired
financial instruments at estimated fair value in the future.
Recurring Basis
The Company uses estimated fair value measurements to record estimated fair value adjustments to certain
assets and liabilities and to determine estimated fair value disclosures. For additional information on how the Company
measures estimated fair value refer to Note 1 (Significant Accounting Policies).
132
The following tables present the balances of the assets and liabilities measured at estimated fair value on a
recurring basis at December 31, 2022 and 2021:
(dollars in thousands)
Available-for-sale
U.S. treasury and government agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Other assets
Derivatives
Other liabilities
Derivatives
(dollars in thousands)
Available-for-sale
U.S. treasury and government agencies
Mortgage backed securities
Residential agency
Commercial
Asset backed securities
Corporate bonds
Total available-for-sale investment securities
Other assets
Derivatives
Other liabilities
Derivatives
Level 1
Level 2
Level 3
Total
December 31, 2022
— $
3,520 $
—
$
3,520
—
—
—
—
— $
587,679
63,558
34
62,533
717,324 $
— $
6,405 $
— $
6,303 $
—
—
—
—
—
—
—
587,679
63,558
34
62,533
717,324
6,405
6,303
$
$
$
Level 1
Level 2
Level 3
Total
December 31, 2021
— $
5,103 $
—
$
5,103
—
—
—
—
— $
707,157
90,913
54
50,422
853,649 $
— $
3,397 $
— $
1,368 $
—
—
—
—
—
—
—
707,157
90,913
54
50,422
853,649
3,397
1,368
$
$
$
$
$
$
$
$
$
$
$
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
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
133
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, 2022 and 2021 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
$
$
Level 2
Level 3
Total
December 31, 2022
$
9,488
—
—
—
$
—
2,813
30
2,643
9,488 $
2,813
30
2,643
Impairment
—
954
—
—
December 31, 2021
Level 2
Level 3
$
46,490
—
—
—
$
—
2,469
885
1,880
Total
46,490 $
2,469
885
1,880
Impairment
—
283
—
—
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
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
134
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, 2022 and 2021, are as follows:
(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
(dollars in thousands)
Asset Type
Impaired loans
Foreclosed assets
Servicing rights
Valuation Technique
Appraisal value
Appraisal value
Discounted cash flows
Unobservable Input
Property specific
adjustment
Property specific
adjustment
Prepayment speed
assumptions
Discount rate
December 31, 2022
Fair Value Range
Weighted
Average
$
2,813
N/A
30
N/A
2,643
103-137
10.5 %
N/A
N/A
115
10.5 %
December 31, 2021
Fair Value Range
Weighted
Average
$
2,469
885
N/A
N/A
1,880
161-327
9.5 %
N/A
N/A
237
9.5 %
Disclosure of estimated fair value information about financial instruments, for which it is practicable to
estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted
market prices are not available, estimated fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate
of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain
financial instruments with an estimated fair value that is not practicable to estimate and all non-financial instruments are
excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not
necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances at December 31, 2022
and 2021 are not carried at estimated fair value in their entirety on the consolidated balance sheets.
135
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 is 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.
136
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
Investment securities held-to-maturity
Loans, net
Accrued interest receivable
Bank-owned life insurance
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Time deposits
Short-term borrowings
Long-term debt
Accrued interest payable
(dollars in thousands)
Financial Assets
Cash and cash equivalents
Investment securities held-to-maturity
Loans, net
Accrued interest receivable
Bank-owned life insurance
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Time deposits
Long-term debt
Accrued interest payable
$
$
$
$
Total
58,242
270,912
2,311,956
12,869
33,991
860,987
1,842,138
208,550
378,080
56,116
2,426
Total
242,311
349,677
1,760,784
8,537
33,156
938,840
1,748,799
232,970
57,772
1,674
Carrying
Amount
Level 1
Estimated Fair Value
Level 3
Level 2
December 31, 2022
$
$
58,242
321,902
2,412,848
12,869
33,991
860,987
1,842,138
212,359
378,080
58,843
2,426
$
$
$
58,242
—
—
12,869
—
— $
—
—
378,080
—
2,426
— $
270,912
—
—
33,991
—
—
2,311,956
—
—
860,987 $
1,842,138
—
—
56,116
—
—
—
208,550
—
—
—
Carrying
Amount
Level 1
Estimated Fair Value
Level 3
Level 2
December 31, 2021
$
$ 242,311
—
—
8,537
—
— $
349,677
—
—
33,156
—
—
1,760,784
—
—
$
— $
—
—
—
1,674
938,840 $
1,748,799
—
57,772
—
—
—
232,970
—
—
$
$
242,311
352,061
1,726,448
8,537
33,156
938,840
1,748,799
232,912
58,933
1,674
137
NOTE 29 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,
2022
2021
$
$
$
$
84,017 $
—
338,595
904
487
424,003 $
58,843 $
8,288
67,131
356,872
356,872
424,003 $
81,753
87
342,538
1,000
655
426,033
58,933
7,697
66,630
359,403
359,403
426,033
Year ended December 31,
2021
2020
2022
$
$
18,500 $
16
18,516
6,583
11,933
26,424
38,357
1,648
40,005 $
16,000
4
16,004
5,293
10,711
40,642
51,353
1,328
52,681
$
$
16,000
10
16,010
6,057
9,953
33,208
43,161
1,514
44,675
138
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
Net cash (paid) for business combinations
Net cash provided by investing activities
Financing activities
Cash dividends paid on common stock
Repurchase of common stock
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 30 Subsequent Events
Year ended December 31,
2021
2020
2022
$
40,005 $
52,681
$
44,675
(26,424)
87
1,904
419
15,991
—
(189)
(189)
(40,642)
115
3,095
1,266
16,515
—
—
—
(33,208)
116
1,927
413
13,923
—
—
—
(12,800)
(738)
(13,538)
2,264
81,753
84,017 $
(10,751)
(712)
(11,463)
5,052
76,701
81,753
$
(10,387)
(482)
(10,869)
3,054
73,647
76,701
$
In February 2023, the Company entered into a 3-year pay-fixed receive-variable interest rate swap with a
notional amount of $200.0 million to manage its exposure to changes in the fair value of certain fixed-rate assets. The
interest rate swap will mature on February 10, 2026.
Subsequent events have been evaluated through March 10, 2023, which is the date these financial statements
were issued.
139
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, 2022, 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, 2022, 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, 2022. 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, 2022 based on the specified criteria.
140
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.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
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” appearing in the Company’s Proxy Statement for the 2022 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, 2022, 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 2022 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, 2022, 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, 2022. 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 17 (Share-Based Compensation Plan) to the Consolidated Financial Statements for
the year ending December 31, 2022.
Plan Category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(a)
(b)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
238,486
—
238,486
Weighted-average exercise
price of outstanding
options, warrants and
rights
$
$
23.65
—
23.65
(c)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
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 2022 annual meeting of
141
shareholders to be filed with the SEC within 120 days of the Company’s fiscal year end, December 31, 2022, which is
incorporated herein by reference.
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 2022 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, 2022, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT 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 2022 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, 2022, which is incorporated herein by
reference.
142
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.
Report of Independent Registered Accounting Firm (PCAOB ID 655)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
89
90
91
92
93
94
96
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
2.1
3.1
3.2
Agreement and Plan of Merger by and between Alerus Financial Corporation and MBP BHC, Inc.,
dated December 8, 2021 (incorporated herein by reference to Exhibit 2.1 on Form 8-K filed on
December 8, 2021)
Description
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)
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)
4.1
Description of Capital Stock (incorporated herein by reference to Exhibit 4.1 on Form 10-K Filed on
March 26, 2020)
4.2
Subordinated Note Due March 30, 2021 (incorporated herein by reference to Exhibit 4.1 on Form 8-K
filed on March 30, 2021)
10.1†
10.2†
Executive Severance Agreement by and between Alerus Financial Corporation and Katie Lorenson,
dated October 13, 2018 (incorporated herein by reference to Exhibit 10.4 on Form S-1 filed on
August 16, 2019)
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)
143
Exhibit
Number
10.3†
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)
Description
10.4†
Alerus Financial Corporation 2009 Stock Plan (incorporated herein by reference to Exhibit 10.7 on
Form S-1 filed on August 16, 2019)
10.5†
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)
10.6†
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)
10.7†
Alerus Financial Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.10 on
Form S-1 filed on August 16, 2019)
10.8†
Alerus Financial Short Term Incentive Plan (incorporated herein by reference to Exhibit 10.11 on
Form S-1 filed on August 16, 2019)
10.9†
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)
10.10†
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)
10.11†
Alerus Financial Corporation Employee Stock Ownership Plan (incorporated herein by reference to
Exhibit 10.14 on Form S-1 filed on August 16, 2019)
10.12†
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)
10.13†
Alerus Financial Corporation 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit
10.15 on Form S-1 filed on August 16, 2019)
10.14†
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)
10.15†
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)
10.16†
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)
144
Exhibit
Number
10.17†
Subordinated Note Purchase Agreement by and between Alerus Financial Corporation and the Bank
of North Dakota, dated March 30, 2021 (incorporated herein by reference to Exhibit 10.1 on
Form 8-K filed on March 30, 2021)
Description
10.18†
Alerus Financial Corporation Long-Term Incentive Plan (incorporated herein by reference to Exhibit
10.1 on From 8-K filed on February 22, 2021)
10.19†
Form of Performance-Based Restricted Stock Unit Award Agreement for Senior Executive Officers
(incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on February 22, 2021)
10.20†
Form of Performance-Based Restricted Stock Unit Award Agreement for Non-Executive Senior
Officers (incorporated herein by reference to Exhibit 10.3 on Form 8-K filed on February 22, 2021)
10.21†
Form of Time-Based Restricted Stock Unit Award Agreement for Senior Executive Officers
(incorporated herein by reference to Exhibit 10.4 on Form 8-K filed on February 22, 2021)
10.22†
Form of Time-Based Restricted Stock Unit Award Agreement for Non-Executive Senior Officers
(incorporated herein by reference to Exhibit 10.5 on Form 8-K filed on February 22, 2021)
10.23†
10.24†
10.25†
10.26†
10.27†
Employment Offer Letter between Alerus Financial Corporation and Alan Villalon, dated January 11,
2022 (incorporated herein by reference to Exhibit 10.24 on Form 10-K filed on March 11, 2022)
Executive Severance Agreement by and between Alerus Financial Corporation and Alan Villalon,
dated January 11, 2022 (incorporated herein by reference on Exhibit 10.25 on Form 10-K filed on
March 11, 2022)
Executive Severance Agreement by and between Alerus Financial Corporation and Jim Collins, dated
June 1, 2022 (incorporated herein by reference to Exhibit 10.1 on Form 10-Q filed on August 4, 2022)
Executive Severance Agreement by and between Alerus Financial Corporation and Missy Keney,
dated July 25, 2022 (incorporated herein by reference to Exhibit 10.1 on Form 10-Q filed on
November 3, 2022)
Executive Severance Agreement by and between Alerus Financial Corporation and Jon Hendry, dated
July 25, 2022 (incorporated herein by reference to Exhibit 10.2 on Form 10-Q filed on November 3,
2022)
16.1†
Letter of CliftonLarsonAllen LLP, dated December 6, 2022 (incorporated herein by reference to
Exhibit 16.1 on Form 8-K filed on December 6, 2022)
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
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
145
Exhibit
Number
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
Description
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.
146
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
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101).
ITEM 16. – FORM 10-K SUMMARY
None.
147
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 10, 2023
ALERUS FINANCIAL CORPORATION
By:
Name:
Title:
/s/ Katie A. Lorenson
Katie A. Lorenson
President and Chief Executive Officer
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/ Katie A. Lorenson
Katie A. Lorenson
/s/ Alan A. Villalon
Alan A. Villalon
/s/ Jerrod K. Hanson
Jerrod K. Hanson
/s/ Daniel E. Coughlin
Daniel E. Coughlin
/s/ Kevin D. Lemke
Kevin D. Lemke
/s/ Michael S. Mathews
Michael S. Mathews
/s/ Randy L. Newman
Randy L. Newman
/s/ Galen G. Vetter
Galen G. Vetter
/s/ Mary E. Zimmer
Mary E. Zimmer
/s/ Janet O. Estep
Janet O. Estep
Director, President and Chief Executive
Officer
(Principal Executive Officer)
March 10, 2023
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
March 10, 2023
Chief Accounting Officer and Senior Vice
President
(Principal Accounting Officer)
March 10, 2023
Director
March 10, 2023
Director
March 10, 2023
Director
March 10, 2023
Director
March 10, 2023
Director
March 10, 2023
Director
Director
March 10, 2023
March 10, 2023
148
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