2023 ANNUAL REPORT
| 2023 ALERUS FINANCIAL CORPORATION ANNUAL REPORT
OUR VISION FOR SUCCESS
We are driven by our purpose and mission to help our clients achieve their financial goals.
By delivering holistic advice and exceptional service to our clients, we will continue to
create value for our clients, our company, and our shareholders.
CORE FOCUS
Our Niche
We are a commercial wealth bank
and a national retirement provider.
Our Purpose
Our purpose is to help
our clients achieve theirs.
CORE VALUES
Passion for Excellence
Act with accountability
and urgency to best
serve clients and achieve
exceptional results.
Success is Never Final
Embrace opportunities to
adapt and grow with our
industry and our clients.
Do the Right Thing
Lead with integrity and
provide valued advice
and guidance.
One Alerus
Work together to grow
and provide purpose-
driven services for our
clients.
KATIE LORENSON
President and Chief Executive Officer
Alerus Financial Corporation
KATIE LORENSON
President and Chief Executive Officer
Alerus Financial Corporation
FUTURE FOCUS
Dear fellow shareholders,
Alerus has been providing banking, wealth management, and retirement services since the early 1900s.
Our business is built on relationships and trust, and that has allowed us to continue building one of the
most uniquely diversified financial institutions
in the country. Our company has endured and
persevered through many economic cycles
and challenges because of our relationships
with our clients and our communities and the
trust they place in us. 2023 was a volatile year
for the banking industry that included three
of the largest bank failures in U.S. history,
unprecedented interest rate hikes, fierce
deposit competition, inflation, and economic
uncertainty. Alerus stood steadfast and emerged
Through all we do, our focus is to build on the
trust placed in us while successfully executing our
company strategy for future success.
We will continue to offer a great place to work
for our team members, deliver excellence in all
interactions with clients, and further develop
strong partnerships with our communities, all
while creating value for our shareholders.
from the year even better positioned despite the challenging environment, because of our unwavering
focus on our clients, our communities, and our team members.
FOCUS ON VALUE CREATION: TALENT
Talent highlights in 2023 included:
Despite difficult operating conditions in 2023, we
remained focused on transforming our commercial
wealth bank, which we believe will provide significant
long-term positive impacts for our clients and
communities while positioning our company to return
to top tier performance.
Our people are our greatest asset, and our diversified
business model and strong reputation drove the
successful recruitment of over 120 new team members
in 2023. Our investments in talent remained disciplined
with overall headcount decreasing by 8% on a
year-over-year basis. Our transformation includes
a continued focus of putting the right people in the
Our people are our
greatest asset.
right seats. Throughout
2023, we implemented
several restructurings
which aligned team
members to their areas
of expertise across the
client experience, from support teams to client-facing
roles. We believe these changes will continue to
power a faster, frictionless client experience and will
become a critical differentiator in retaining, expanding,
and attracting new clients and team members to our
company.
■
■
■
■
■
Significantly strengthening our treasury
management team through the addition of best
in the business team members with decades of
expertise and proven success in their field.
Deepening our bench strength and expertise in
credit and enterprise risk management.
Continuing to recruit top talent mid-market
commercial and industrial (C&I) bankers.
Beginning to build additional niche segments with
the recruitment of a respected, highly skilled expert
in the government and nonprofit sector.
Adding an exceptional private banking team
to serve as the critical connector between our
commercial banking and wealth management
segments.
■ Welcoming the first treasurer in our company’s
history, who brings expertise in asset liability
management and provides key leadership in
balance sheet management.
The results of this difficult work and substantial change
were evident as we showed record new client sales in
nearly all areas of the company, highlighted by year-
over-year deposit growth, and continued successful
execution of our One Alerus holistic business model.
OUR TEAM
2023 COMMUNITY IMPACT
■
■
■
754 employees
64% of employees are female
40% of executive leadership and
corporate board members are female
■ Nearly $1 million contributed to local
charitable causes, organizations, and events
■
■
Empowered more than 450,000 plan
participants for retirement readiness
Employees volunteered 2,759 hours at 120
organizations across our footprint
FOCUS ON VALUE CREATION: BUSINESS MODEL
Creating shareholder value requires continued focus
on what we do best and aligning our resources and
investments in those areas. Through the company’s
employee stock ownership plan (ESOP), our team
members are one of our largest collective shareholders,
and they are united in our mission to create value by
delivering an exceptional client experience during every
client interaction. Our diversified business model is a
source of strength for our company and differentiates
us in the industry and with our clients. Over 50% of
our revenues are derived from wealth management
and retirement fee income businesses, which provide
valuable recurring and annuitized revenue without
significant levels of balance sheet and capital support.
As a diversified financial institution, we must constantly
evaluate opportunities to optimize our business.
In the fourth quarter of 2023, we opportunistically
repositioned our balance sheet, moving pandemic-
era investments out and replacing them with loans to
high-quality clients across the communities we serve.
In addition, we paid down borrowings on the balance
sheet at the end of the year, resulting in continuous
improved financial performance as evidenced by our
improving net interest margin. In the third quarter,
we successfully divested the trustee business relating
to ESOPs, allowing us to focus on building our core
competencies in retirement and benefits. Lastly,
given the continued challenging mortgage origination
environment, we integrated our mortgage division to
foster operational synergies with the private banking
and wealth management team members as they work
together in our One Alerus business model.
FOCUS ON VALUE CREATION: FORWARD
MOMENTUM
Alerus is as focused as ever on long-term value creation
for our shareholders. We continued our long history
of dividend increases and returned $21.2 million to
our shareholders in 2023, including $6.3 million of
stock buy backs. Our credit quality and capital levels
remain strong, and our durable and diversified business
model remains a differentiator in the industry. One
of the qualities that sets us apart from competitors is
our ability to offer a big bank business model with a
community bank touch. This will be key as we focus
on deepening existing client relationships, adding
new clients, and building niche segments in existing
markets, as well as entering new markets in the coming
years. Our foundational strength and well-executed
strategic improvements in 2023 have positioned us
to return financial performance to long-term, top tier
profitability and be a key partner to our clients and our
communities as we continue to grow together.
Through careful expense management, balancing
what we can control with factors outside of our control,
and strategically executing our long-term growth plan
centered on One Alerus, our team built incredible
momentum leading into 2024. We expect headwinds
to continue, and experience tells us to prepare for
unanticipated challenges in addition to the known
issues. But I have never been more confident in our
company’s path forward and our unique ability to bring
value and excellence to every client interaction, and, in
turn, deliver top tier returns for our shareholders. Thank
you for your investment and placing your trust in us.
With sincere gratitude,
President and CEO
Alerus Financial Corporation
COMMERCIAL BANKING LEADERS
Leroy Benson
Commercial Banking Executive
Leroy Benson joined Alerus in
2023, bringing more than 30 years
of financial industry experience
in the Twin Cities of Minnesota.
He has spent 20 years focusing
Steve Haggard
Commercial Banking Executive
Steve Haggard joined Alerus
through its merger with Metro
Phoenix Bank in 2022. He has
over 30 years of experience in
commercial banking and has
exclusively on commercial and business banking
and has extensive expertise serving the Twin Cities
market. He leads commercial banking and business
development in the Twin Cities and Fargo, North Dakota,
and oversees the commercial real estate segment.
spent his entire career in the Phoenix area, providing him
with extensive market knowledge. He leads commercial
banking activities in Arizona, and oversees the U.S. Small
Business Administration, homeowner’s associations, and
billboard media lending segments.
Kelly Elkin
Commercial Banking Executive
Kelly Elkin joined Alerus in
2023. She has over 35 years of
industry experience, specializing
in government and nonprofit
lending, capital markets,
Chris Wolf
Commercial Banking Executive
Chris Wolf joined Alerus in 2010,
and has more than 30 years of
financial industry experience. His
career includes positions as an
auditor, manager, commercial
Community Reinvestment Act (CRA), and grantmaking.
She leads government and nonprofit banking across
Alerus’ footprint, working collaboratively with nonprofits,
government agencies, community development
financial institutions, and the private sector to finance
projects that support diverse communities.
underwriter, controller, chief financial officer, and market
president. He has spent nearly his entire career in Grand
Forks and has a deep understanding of the region’s
business climate. He leads commercial banking and
business development efforts in the Grand Forks area
and oversees the ag/agribusiness segment.
WELCOME TO OUR NEWEST EXECUTIVE
We are pleased to welcome Forrest Wilson to our executive team as executive vice
president and chief retirement services officer. Mr. Wilson joined the company in February
2024 and brings over 25 years of experience on both the platform/recordkeeping and
investment sides of the retirement business. He has extensive knowledge in sales and
distribution growth, product oversight and strategy, acquisitions, digital engagement,
implementation, and service delivery, and has a proven track record in leading teams of
all sizes to reach and exceed significant goals. Before joining Alerus, he spent six years at
Ameritas Mutual Holding Company and served most recently as senior vice president of
retirement plans sales and distribution, where he was accountable for all aspects of the
business strategy, including several successful acquisitions, while consistently delivering
strong results. His proven execution in integrating strategic acquisitions, accelerating
organic growth, improving margins, and optimizing workflows and technology while
improving the client experience aligns with our key strategic objectives.
WELCOME NEW BOARD MEMBERS
We welcomed two new members to the board of directors in December 2023. Their unique perspectives and
incredible depths of knowledge in the financial sector will be valuable as we continue building on our company’s
strong foundation.
Nikki Sorum brings 40 years of experience as a leader in the financial services industry. She
served for more than 20 years in various leadership roles at Thrivent Financial, most recently
as head of sales and distribution at Thrivent Advisors, a position she held from 2020 until 2023.
Prior to her time at Thrivent, Ms. Sorum served in senior vice president roles at RBC Wealth
Management and was a partner at McKinsey & Co. She holds a bachelor’s degree in economics
from the University of Minnesota Twin Cities and an MBA from Harvard Business School.
John Uribe brings more than 30 years of financial and strategic leadership experience
with expertise in mergers and acquisitions, financial planning and analysis, and general
management. He currently serves as chief financial officer at Blue Cross and Blue Shield of
Minnesota, a position he has held since 2022. Prior to his appointment as chief financial officer,
Mr. Uribe served as vice president of corporate development and interim treasurer since 2012.
Before joining Blue Cross, Mr. Uribe served in various finance leadership roles at RedBrick
Health, GE Commercial Finance-Fleet Services, General Mills, and NCR Corporation. He is a
board member for organizations including Learn to Live, the Bakken Museum, and the Latino
Economic Development Center. He holds a bachelor’s degree in accounting and an MBA in
finance and international business from Indiana University Bloomington.
FAREWELL TO DIRECTOR KEVIN LEMKE
We extend our gratitude to corporate director Kevin Lemke, who will retire in May 2024.
Mr. Lemke joined the board of directors in 1994 and provided guidance and leadership
through 30 years of company growth. Milestones achieved during his tenure included the
company’s historic rebuilding and rebranding after the 1997 Grand Forks flood and fire;
Alerus’ expansion into Minnesota and build-out of the retirement and benefits segment,
beginning with the 2003 acquisition of Pension Solutions Inc. in St. Paul, Minnesota;
opportunistic acquisitions following the 2008 financial crisis; the company’s initial public
offering in 2019; and successful CEO transition in 2021-2022.
Thank you, Kevin, for your contributions and leadership.
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, 2023
☐ 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 its management's assessment of the effectiveness of its internal control over financial
reporting under section 404(b) of the Sarbanes-Oxley Act (15 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, 2023, was approximately $341,868,115 (based on the closing price on The
Nasdaq Capital Market on that date of $17.98). The number of shares of the registrant’s common stock outstanding at February 29, 2024 was 19,737,829.
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, 2023, pursuant
to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 7, 2024.
Table of Contents
PART I
Page
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
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
2
5
21
58
58
60
60
60
60
63
63
94
97
163
163
164
164
164
164
164
165
165
166
170
171
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, or the Company. These statements are often, but not always,
identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”,
“will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”,
or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of
forward-looking statements include, among others, statements the Company makes regarding projected growth,
anticipated future financial performance, financial condition, credit quality and management’s long-term performance
goals and the future plans and prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are
based only on the Company’s current beliefs, expectations and assumptions regarding the future of the Company’s
business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in
circumstances that are difficult to predict and many of which are outside of the Company’s control. The Company’s
actual results and financial condition may differ materially from those indicated in the forward-looking statements.
Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause the
Company’s actual results and financial condition to differ materially from those indicated in the forward-looking
statements include, among others, the following:
interest rate risk, including the effects of recent rate increases by the Federal Reserve;
the Company’s ability to successfully manage credit risk, including in the commercial real estate portfolio,
and maintain an adequate level of allowance for credit losses;
new or revised accounting standards;
business and economic conditions generally and in the financial services industry, nationally and within the
Company’s market areas, including inflation rates and possible recession;
the effects of recent developments and events in the financial services industry, including the large-scale
deposit withdrawals over a short-period of time at Silicon Valley Bank, Signature Bank and First Republic
Bank that resulted in the failure of those institutions;
the overall health of the local and national real estate market;
concentrations within the Company’s loan portfolio;
the level of nonperforming assets on the Company’s balance sheet;
the Company’s ability to implement organic and acquisition growth strategies;
the impact of economic or market conditions on the Company’s fee-based services;
the Company’s ability to continue to grow the retirement and benefit services business;
the Company’s ability to continue to originate a sufficient volume of residential mortgages for the
mortgage division to be profitable;
3
the occurrence of fraudulent activity, breaches or failures of the Company’s or the Company’s third party
vendors’ information security controls or cybersecurity-related incidents, including as a result of
sophisticated attacks using artificial intelligence and similar tools;
interruptions involving the Company’s information technology and telecommunications systems or third-
party servicers;
potential losses incurred in connection with mortgage loan repurchases;
the composition of the Company’s executive management team and the Company’s ability to attract and
retain key personnel;
rapid and expensive 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 non-bank lending companies;
the Company’s ability to successfully manage liquidity risk, including the Company’s need to access
higher cost sources of funds such as fed funds purchased and short-term borrowings;
the concentration of large deposits from certain clients, who have balances above current Federal Deposit
Insurance Corporation (“FDIC”) insurance limits;
the effectiveness of the Company’s risk management framework;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against the
Company or to which the Company may become subject;
potential impairment to the goodwill the Company recorded in connection with the Company’s past
acquisitions;
the extensive regulatory framework that applies to the Company;
the impact of recent and future legislative and regulatory changes, including in response to the recent bank
failures;
fluctuations in the values of the securities held in the Company’s securities portfolio, including as a result
of changes in interest rates;
governmental monetary, trade and fiscal policies;
risks related to climate change and the negative impact it may have on the Company’s customers and their
businesses;
severe weather, natural disasters, widespread disease or pandemics;
acts of war or terrorism, including the ongoing Israeli-Palestinian conflict and the Russian invasion of
Ukraine, or other adverse external events;
any material weaknesses in the Company’s internal control over financial reporting;
4
changes to U.S. or state tax laws, regulations and guidance, including the 1.0% excise tax on stock
buybacks by publicly traded companies;
potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential
election;
talent and labor shortages and employee turnover;
the Company’s 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 the Company in this report is based only on information currently
available to the Company and speaks only as of the date on which it is made. The Company undertakes no obligation to
publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as
a result of new information, future developments or otherwise.
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 the Company’s subsidiary, Alerus Financial, National Association, or the Bank,
the Company provides 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, 2023, the Company had $3.9 billion of total assets, $2.8 billion of total loans, $3.1 billion
of total deposits, $369.1 million of stockholders’ equity, $36.7 billion of assets under administration/management in the
Company’s retirement and benefit services segment, and $4.0 billion of assets under administration/management in the
Company’s wealth management segment. For the year ended December 31, 2023, the Company had $364.1 million of
mortgage originations.
The Company’s business model produces strong financial performance and a diversified revenue stream, which
has helped the Company establish a brand and culture yielding both a loyal client base and passionate and dedicated
employees. The Company believes its client first and advice-based philosophy, diversified business model and history of
high performance and growth distinguishes the Company from other financial service providers. The Company generates
its revenues from both net interest income and noninterest income. Net interest income is derived from offering the
Company’s traditional banking products and services. Noninterest income is driven primarily by the Company’s
retirement and benefit services, wealth management, and mortgage business segments. The remainder of revenue
consists of net interest income, which derives from offering the Company’s traditional banking products and services.
The Company’s operations date back to 1879, when it was originally founded as the Bank of Grand Forks, one
of the first banks chartered in the Dakota Territory. In 2000, the Company changed its name to Alerus Financial
Corporation, reflecting the Company’s 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, the Company has experienced significant
growth, both organically and through a series of strategic acquisitions. This growth has allowed the Company to build a
diversified franchise and expand its geographic footprint into growing metropolitan areas. The Company believes these
initiatives have transformed itself into a high tech, high touch client service provider, increased earnings and allowed the
Company to return more value to stockholders.
5
The Company’s Business Model and Products and Services
General
The Company’s business model is client centric, with a focus on offering a diversified range of solutions to
clients who desire an advice-based relationship, enabling the Company to become the preferred financial services
provider for clients. Through this approach, instead of focusing on the broader population, the Company targets specific
business and consumer segments that the Company believes it can serve better than its competitors and that have
meaningful growth potential. By offering sound financial advice and a long-term partnership, the Company believes it
aligns best with clients who are achievement oriented in their purpose and will allow the Company to play an active role
in their success at all stages of their businesses and lives. The Company classifies its consumer clients based on their
financial needs and goals, aligning best with those clients with complex situations. The Company’s business clients are
classified by industry, with a focus on specific high priority industries and client types, including professional services,
finance and insurance, wholesale, small business, construction, retail, and manufacturers. The Company targets
businesses with sales between $2.0 million and $100.0 million.
The Company’s commitment to delivering diversified solutions is driven by the Company’s “One Alerus”
initiative, launched in 2017, which enables the Company to bring all of its product and service offerings to clients in a
cohesive and seamless manner. Underlying the One Alerus initiative is the Company’s strategy of serving clients
through a combination of technology and skilled advisors—a “high tech, high touch” approach that the Company
believes 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 the
Company’s product and service offerings in a unified way, which the Company believes differentiates itself from
competitors and allows the Company to impact clients more meaningfully and generate long term value for the
Company. The primary components of One Alerus are:
the Company puts the client first in every decision it makes;
the Company provides comprehensive products and services, including banking, mortgage, wealth
management, and retirement and benefits;
the Company’s diverse business model providing revenue funding and growth opportunities;
each client is paired with a primary point of contact to help with individual needs and integrate specialists
when needed;
proactively invest in technology to integrate all business lines and enhance client engagement; and
the Company consistently seeks new ways to improve the client experience and enhance efficiencies to
build scalability.
Through One Alerus, the Company strives 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. The Company’s
advisors work holistically with clients in a guidance-based manner to proactively help them with their financial
decisions. The Company’s 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 the Company’s organization to bring the client in contact with product specialists as needed.
One Alerus bridges the gaps between the Company’s business units with a focus on client advocacy. The Company
6
believes the One Alerus initiative will enable the Company to achieve future organic growth by leveraging its existing
client base and help continue to provide strong returns to the Company’s stockholders.
The trusted advisor relationship is supported and enhanced through an integrated client access portal called “My
Alerus.” By collaborating with a key technology partner, the Company has integrated the diverse client applications of
the Company’s 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 the 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, the Company has 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). The Company’s clients can
further personalize their dashboard by integrating or linking financial accounts held at other institutions into My Alerus.
Once the Company’s 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, the Company completed the 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 merger, the Company issued $64.0 million of its common stock (valued at $23.81 per share as of July 1, 2022) in
a stock-for-stock transaction. As a result of the acquisition, the Company acquired $270.4 million in loans and $353.7
million in deposits from Metro Phoenix Bank.
Banking
Lending. Through the Company’s relationship-oriented lending approach, the Company’s strategy is to offer a
broad range of customized commercial and consumer lending products for the personal investment and business needs of
the Company’s clients. The Company’s commercial lending products include commercial loans, business term loans and
lines of credit for a diversified mix of small and midsized businesses. The Company offers both owner occupied and
non-owner occupied commercial real estate loans, as well as construction and land development loans. The Company’s
consumer lending products include residential first mortgage loans. In addition to originating these loans for the
Company’s own portfolio, it originates and sells, primarily servicing released, whole loans in the secondary market. The
Company’s 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, the Company offers installment loans and lines of credit,
typically to facilitate investment opportunities for consumer clients whose financial characteristics support the request.
The Company also provides clients loans collateralized by cash and marketable securities.
The Company’s 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 the Company makes 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. The Company underwrites 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. The Company provides 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 the Company’s major source of funds from individuals,
businesses and local governments. As of December 31, 2023, core deposits totaled $3.0 billion or 96.1% of the
Company’s total deposits. The Company’s deposit portfolio includes synergistic deposits from the retirement and
7
benefits services and wealth management segments. As of December 31, 2023, these synergistic deposits totaled $851.5
million. The Company also offers an HSA deposit program to attract low cost deposits. As of December 31, 2023, the
Company had $176.7 million of HSA deposits which are included in the synergistic deposit total.
The Company offers 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. The Company’s deposits are primarily obtained from depositors located in the Company’s
geographic footprint, and the Company believes that it has attractive opportunities to capture additional deposits in the
Company’s markets. In addition, the Company has created a National Market to focus on growing the synergistic
deposits from the retirement and benefits services and wealth management segments. In order to attract and retain
deposits, the Company relies on providing quality service, offering a suite of consumer and commercial products and
services and introducing new products and services that meet the Company’s clients’ needs as they evolve.
Retirement and Benefit Services
The Company’s retirement and benefit services business offers retirement plan administration and investment
advisory services, employee stock ownership plan, or ESOP, administration, fiduciary services, HSA and other benefit
services to clients on a nationwide basis. A breakdown of these services is as follows:
Advisory. The Company provides investment fiduciary services to retirement plans.
Retirement. The Company provides recordkeeping and administration services to qualified retirement
plans.
ESOP Administration. The Company provides recordkeeping and administration services to employee
stock ownership plans.
Health and Welfare. The Company provides HSA, FSA, and government health insurance program
recordkeeping and administration services to employers.
Wealth Management
The Company’s 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, the wealth management division offers brokerage services to
compliment the unique needs of its clients. The Company’s 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
The Company’s mortgage business offers first and second mortgage loans through a centralized mortgage unit
located in Minneapolis, Minnesota, as well as through the Company’s 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
2023, approximately 97.0% of the loans made by the mortgage division were for the purchase of a residential property,
compared to 3.0% for the refinance of an existing mortgage. The Company sources most residential mortgage loans from
the Minneapolis-St. Paul-Bloomington metropolitan statistical area, or the Twin Cities MSA, and for the year ended
8
December 31, 2023, approximately 85.6% of the total mortgage loans were attributable to that market, compared to
9.4% attributable to the North Dakota market and 5.0% attributable to the Phoenix MSA. The Company believes there is
an opportunity to expand the mortgage loan pipeline in these other markets, especially in the Phoenix MSA. Although
the Company originates loans for its own portfolio, the Company also conducts mortgage banking activities in which it
originates and sells, 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. The Company’s 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 the Company’s pricing and asset liability management strategies. As of
December 31, 2023, the Company had mortgage loans held for sale of $11.5 million from the residential mortgage loans
originated. For the year ended December 31, 2023, the Company’s mortgage segment originated $364.1 million of
mortgage loans.
The Company’s Banking Market Areas
The Company’s 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 offices located in the Company’s banking
markets, the retirement and benefit services business administers plans in all 50 states through offices located in
Colorado, Michigan, and Minnesota.
North Dakota
The Company’s 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 located in Grand Forks, North Dakota, three full-service banking offices located in Fargo and West
Fargo, North Dakota, and one full-service banking office located in Northwood, North Dakota. The Company believes
this market is rich in low-cost, core deposits and is strengthened by the Bakken Oil region. The Company can use these
low-cost, core deposits to fund loans in 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
the Company that are headquartered in the state. The Bank of North Dakota expands the Company’s lending capacity by
purchasing participations from the Bank. In addition, the Bank of North Dakota offers the Company 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
The Company serves the Minnesota market through six full-service banking offices all located in the Twin
Cities MSA. The Twin Cities MSA had total deposits of $237.6 billion as of June 30, 2023, and ranks as the 14th 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
The Company serves the Arizona market through full-service banking offices located in Phoenix and
Scottsdale, Arizona. The Phoenix MSA had total deposits of $167.2 billion as of June 30, 2023, and ranks as the
20th largest metropolitan statistical area in the United States in total deposits, based on FDIC data. The Phoenix MSA is
9
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.
The Company’s National Market
The Company’s retirement and benefit services business serves clients in all 50 states. It offers retirement and
benefit services at all of the Company’s banking offices located in the three primary market areas. In addition, the
Company operates one retirement and benefits services office in Minnesota, one in Colorado and one in Michigan. In
addition, the Company’s 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, and loans attributable to the National Market were $28.3 billion, $480.2 million, and $8.4
million, respectively, as of December 31, 2023, representing approximately 77.1%, 15.2%, and 0.3%, respectively of
total retirement and benefit services assets under administration/management, wealth management assets under
administration/management, and loans as of that date.
Competition
The financial services industry is highly competitive, and the Company competes in a number of areas,
including commercial and consumer banking, residential mortgages, wealth advisory, investment management, trust, and
record-keeping among others. The Company competes with other bank and nonbank institutions located within the
Company’s 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. The
Company also faces growing competition from online businesses with few or no physical locations, including online
banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment services
providers. Competition involves efforts to retain current clients, obtain new loans, deposits, and advisory services,
increase the scope and type of services offered, and offer competitive interest rates paid on deposits, charged on loans, or
charged for advisory services. The Company believes its integrated and high-touch service offering, along with its
sophisticated relationship-oriented approach sets the Company apart from competitors.
Human Capital Resources
The Company and its subsidiaries employed a total of 754 employees as of December 31, 2023, of which
approximately:
709 are full-time employees; and
45 are part-time employees.
The Company’s workforce further breaks down into the following categories:
gender: male 269, female 485; and
ethnicity: 624 white, 130 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: 246 employees;
Mortgage: 47 employees;
10
Retirement and Benefits: 243 employees; and
Wealth Management: 56 employees.
The staff and support divisions include:
Client Service Center: 39 employees; and
Human Resources, Information Technology, Marketing, Audit, Legal, Compliance, and the Executives
staff areas: 123 employees.
Banking is a people- and relationship-driven business and the Company’s employees are vital to the Company’s
success in the financial services industry. In short, the Company’s long-term success depends on the Company’s ability
to attract and retain top performers in every aspect of the Company’s business. The Company believes a diverse
workforce better enables the Company to understand its client base, and to help its clients meet their own goals and
expectations.
The Company’s culture is underpinned by its core values: Do the Right Thing (lead with integrity and provide
valued advice and guidance), Passion for Excellence (act with accountability and a sense of urgency to best serve clients
and achieve exceptional results), Success is Never Final (embrace opportunities to adapt and grow with our industry and
our clients), and One Alerus (working together to provide purpose-driven products and services for our clients).
The Company’s Talent Management Program is built on the foundation of 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 the Company builds on strengths with continuous, real-time coaching
and evaluation in areas of development, all aligned with the Company’s goals and strategies.
The development, attraction and retention of employees is a critical success factor for the Company for
succession planning and sustaining its core values. To support the advancement of the Company’s employees, it offers
training and development programs encouraging advancement from within and continues to fill its team with strong and
experienced management talent. The Company leverages 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 the 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. Alerus Essentials is a learning program for all
employees to learn more about the Company’s goals, strategies, core values, and service offerings. 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 its 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 the Company’s compensation programs balances incentive earnings for both short-term
and long-term performance. Specifically, the Company compensates most of its employees through a combination of
base salary, sales incentive programs, an annual performance bonus program tied to 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 the Company’s markets and within the Company’s 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.
The Company’s benefits package provides employees medical, dental, vision, life, disability and accidental
death insurance and paid time off benefits. The Company also provides its employees with retirement benefits designed
to assist employees with planning for and securing appropriate levels of income during retirement. The Company
believes these plans help attract and retain quality employees by offering benefits comparative with those offered by
competitors.
11
The Company provides policies and training on ethical conduct. The Company maintains 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
The Company’s principal executive office is located at 401 Demers Avenue, Grand Forks, North Dakota 58201,
and the Company’s telephone number at that address is (701) 795-3200. The Company’s website address is
www.alerus.com. The information contained on the Company’s 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 reasonably 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, the Company’s growth and
earnings performance may be affected not only by management decisions and general economic conditions, but also by
the requirements of applicable statutes and by the regulations and policies of various bank regulatory agencies, including
the Company’s 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
the Company’s 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 the Company’s
business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the
Company’s 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 the
Company’s business; the kinds and amounts of investments the Company may make; required capital levels relative to
the Company’s assets; the nature and amount of collateral for loans; the establishment of branches; the Company’s
ability to merge, consolidate and acquire; dealings with insiders and affiliates; and the Company’s 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, the Company 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 the Company’s 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 the Company 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. The Company believes these reforms have been favorable to operations.
12
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 the Company’s 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
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 if such assets exceeded a percentage of a banking institution’s
Common Equity Tier 1 Capital.
13
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 want 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
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, the Company 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, 2023: (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, 2023, the Company had
regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-
capitalized. The Company also remains in compliance with the capital conservation buffer of 2.5 % as of December 31,
2023.
14
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%. The Company has not elected to use the CBLR framework at
this time.
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, the Company is 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. The Company is legally obligated to act as a source of financial and managerial strength to the
Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so.
Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and are required to file with
the Federal Reserve periodic reports of the Company’s 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 the Company to
15
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. The Company has elected to operate as a
financial holding company. In order to maintain the Company’s 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 the Company 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 the Company that it deems appropriate. Furthermore,
if non-compliance is based on the failure of the Bank to achieve a satisfactory CRA rating, the Company 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. The Company is subject to the complex consolidated capital requirements of the Basel
III Rule, see “—the Role of Capital” above.
Dividend Payments. The Company’s 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, the Company is subject to the limitations of the Delaware General Corporation Law, or the DGCL. The
DGCL allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the
provisions of the DGCL) or if the Company has 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, which was exacerbated by the COVID-19 pandemic. Among
the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government
securities and changes in the discount rate on bank borrowings. These means are used in varying combinations to
influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid on deposits.
16
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Consequently, the Company is 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. The Company’s defined business lines of Banking,
Mortgage, Retirement and Benefits and Wealth Management are each subject to that authority. The FDIC, as
administrator of the DIF, also has regulatory authority over the Bank.
Supervision of Business Segments. As a national bank, the Bank is subject to examination and enforcement by
the OCC. The OCC examines the Bank’s Banking and Mortgage business segments as part of its safety and soundness
examinations, which consider not only compliance with applicable laws and regulations, but also capital levels, asset
quality (with rigorous loan portfolio reviews) and risk, management ability and performance, earnings, liquidity, and
various other factors. Many of these subjects are discussed further below.
The Bank’s Retirement and Benefits and Wealth Management business segments are subject to separate
examination as trust activities (generally on the same cycle as safety and soundness examinations). The OCC’s trust
examinations evaluate compliance with applicable law, management ability, operations, internal controls, and auditing,
earnings, compliance, and asset management. These business segments are subject to a multitude of state laws (trust law
is a state concept) and federal laws to which the Bank and each individual account are subject. These include trust
investment law, securities law, banking law, tax law, contract law, anti-money laundering requirements, environmental
law, consumer protection law, criminal law, and the U.S. Department of the Treasury’s Office of Foreign Assets Control
laws and regulations. The Employee Retirement Income Security Act of 1974, or ERISA, and the Internal Revenue Code
are the primary sources of law governing the structure, administration, and operation of employee benefit plans. The
U.S. Department of Labor is 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 2.5 basis points to 32 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.
For this purpose, 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. In its semiannual update in June 2022, the FDIC projected that the reserve ratio was at
17
risk of not reaching the statutory minimum of 1.35 % by September 30, 2028, the statutory deadline. Based on this
update, the FDIC approved an increase in the initial base deposit insurance assessment rate schedules by two basis
points, applicable to all insured depository institutions. The increase was effective on January 1, 2023, applicable to the
first quarterly assessment period of the 2023 assessment (January 1 through March 31, 2023).
In addition, because the total cost of the failures of Silicon Valley Bank, Signature Bank and First Republic
Bank was approximately $16.3 billion, the FDIC adopted a special assessment for banks having deposits above $5
billion, at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 (January 1
through March 31, 2024) with an invoice payment date of June 28, 2024, and will continue to collect special assessments
for an anticipated total of eight quarterly assessment periods. The base for the special assessment is equal to an insured
depository institution’s estimated uninsured deposits for the December 31, 2022 reporting period, adjusted to exclude the
first $5 billion in estimated uninsured deposits.
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, 2023, the Bank paid supervisory assessments to the OCC
totaling $431 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 meet financial obligations such as deposits or other funding sources. Banks are required to implement
liquidity risk management frameworks that ensure they maintain sufficient liquidity, including a cushion of
unencumbered, high quality liquid assets, to withstand a range of stress events. The level and speed of deposit outflows
contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023 was
unprecedented and contributed to acute liquidity and funding strain. These events have further underscored the
importance of liquidity risk management and contingency funding planning by insured depository institutions like the
Bank.
The primary roles of liquidity risk management are to: (i) prospectively assess the need for funds to meet
financial obligations and (ii) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by
coordinating the various sources of funds available to the institution under normal and stressed conditions. Basel III
includes a liquidity framework that requires the largest 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).
Although these tests do not, and will not, apply to the Bank, the Company continues to review its liquidity risk
management policies in light of regulatory requirements and industry 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, 2023. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the
18
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
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
19
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.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and
moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its
communities. Applications for acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting
its CRA requirements.
On October 24, 2023, the bank regulatory agencies issued a final rule to strengthen and modernize the CRA
regulations (the “CRA Rule”). The CRA Rule 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 Rule 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
underserved 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. Management of the Bank is assessing the impact of the CRA Rule on
its CRA lending and investment activities in its markets.
Anti-Money Laundering. The Bank Secrecy Act (“BSA”) is the common name for a series of laws and
regulations enacted in the United States to combat money laundering and the financing of terrorism. They 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. The so-called Anti-Money
Laundering/Countering the Financing of Terrorism (“AML/CFT”) regime under the BSA provides a foundation to
promote financial transparency and deter and detect those who seek to misuse the U.S. financial system to launder
criminal proceeds, finance terrorist acts or move funds for other illicit purposes.
20
The laws mandate financial services companies to have policies and procedures with respect to measures
designed to address: (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, 2023, the Company 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
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 the Company’s common stock involves a high degree of risk. The material risks and uncertainties
that management believes affect the Company 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 the Company files with the SEC. Any of the following risks, as well as risks that the Company does not know
or currently deem immaterial, could have a material adverse effect on the Company’s business, financial condition,
results of operations and growth prospects.
21
Summary
This is a summary of some of the material risks and uncertainties that management believes affects the
Company. 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. The Company encourages you to read Item 1A in its entirety.
Market and Interest Rate Risks
Interest rate risks associated with the Company’s business;
fluctuations in the values of the securities held in the Company’s securities portfolio; and
governmental monetary, trade and fiscal policies.
Credit Risks
The Company’s ability to successfully manage credit risk, including in the commercial real estate portfolio,
and maintain an adequate level of allowance for credit losses;
new or revised accounting standards;
business and economic conditions in the Company’s market areas;
the overall health of the local and national real estate market;
concentrations within the Company’s loan portfolio; and
the level of nonperforming assets on the Company’s balance sheet.
Operational, Strategic and Reputational Risks
The impact of economic or market conditions on the Company’s fee-based services;
the Company’s ability to implement organic and strategic acquisition growth strategies;
potential impairment to the goodwill the Company recorded in connection with the Company’s past
acquisitions;
the Company’s ability to continue to grow retirement and benefit services business;
the Company’s ability to continue to originate a sufficient volume of residential mortgages to make the
mortgage division profitable;
the occurrence of fraudulent activity, breaches or failures of the Company’s information security controls
or cybersecurity-related incidents, including those employing artificial intelligence;
interruptions involving the Company’s information technology and telecommunications systems or third-
party services;
potential losses incurred in connection with mortgage loan repurchases;
22
the composition of the Company’s executive management team and the Company’s ability to attract and
retain key personnel;
labor shortages;
any material weaknesses in the Company’s internal control over financial reporting; and
severe weather, natural disasters, effects of climate change, widespread disease or pandemics, acts of war
or terrorism, civil unrest or other adverse external events.
Liquidity and Funding Risks
The Company’s ability to successfully manage liquidity risk, including the Company’s need to access
higher cost sources of funds such as fed funds purchased and short-term borrowings;
concentrations of large depositors who may have deposits above the FDIC insurance limit; and
the Company’s dependence on dividends from the Bank.
Legal, Accounting and Compliance Risks
The effectiveness of the Company’s risk management framework;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against the
Company or to which the Company may become subject;
the extensive regulatory framework that applies to us; and
the impact of recent and future legislative and regulatory changes.
Market and Interest Rate Risks
The Company’s business is subject to interest rate risk, and fluctuations in interest rates may adversely affect the
Company’s earnings.
Fluctuations in interest rates may negatively affect the Company’s business and may weaken demand for some
of the Company’s products. The Company’s earnings and cash flows are dependent, in part, on net interest income,
which is the difference between the interest income that the Company earns on interest earning assets, such as loans and
investment securities, and the interest expense that the Company pays on interest-bearing liabilities, such as deposits and
borrowings. Changes in interest rates might also impact the values of equity and debt securities under management and
administration by the retirement and benefit services and wealth management businesses which may have a negative
impact on the Company’s fee income. Additionally, changes in interest rates also affect the Company’s ability to fund
operations with client deposits and the fair value of securities in the Company’s 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 the Company’s business, financial condition, results of operations and growth prospects.
It is currently expected that during 2024, and perhaps beyond, the Federal Open Market Committee of the
Federal Reserve, or FOMC, will continue to monitor interest rates, in part to reduce the rate of inflation to its preferred
level. In 2023, the FOMC increased at various dates throughout the year the target range for the federal funds rate from
4.25% to 4.50% to a range of 5.25% to 5.50%. All of these increases were expressly made in response to inflationary
pressures. 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, the Company’s net interest income could be adversely
affected if the rates the Company pays on deposits and borrowings increase more rapidly than the rates the Company
23
earns 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 the Company’s business, financial condition, liquidity, and
results of operations.
The Company’s 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. The Company cannot control
or accurately predict changes in market rates of interest. As a result of the recent interest rate increases, the Company has
experienced net interest margin compression as the Company’s interest-earning assets have repriced slower than the
Company’s interest-bearing liabilities, which has had a material adverse effect on the Company’s net interest income and
results of operations.
In addition, the Company could be prevented from increasing the interest rates charged on loans or from
maintaining the interest rates offered on deposits and money market savings accounts due to “price” competition from
other banks and financial institutions with which the Company competes. As of December 31, 2023, the Company had
$728.1 million of non-maturity, noninterest bearing deposit accounts and $2.0 billion of non-maturity interest bearing
deposit accounts. Interest rates for interest-bearing accounts have, throughout 2023, increased in response to a series of
increases made by the Federal Reserve in the targeted fed funds rate and market competition. The Company does not
know what market rates will be throughout 2024. In 2023, the Company has offered higher interest rates to maintain
current clients or attract new clients, and as a result, interest expense has increased in recent periods and may increase
further, perhaps materially. If the Company fails to offer interest at a sufficient level to keep these non-maturity deposits,
core deposits may be reduced, which would require the Company to obtain funding in other ways or risk slowing future
asset growth.
The Company could recognize losses on securities held in the Company’s securities portfolio, particularly if interest
rates increase or economic and market conditions deteriorate.
As of December 31, 2023, the fair value of the Company’s securities portfolio was approximately $745.4
million, or 19.1% of total assets. Factors beyond the Company’s control can significantly influence and cause potential
adverse changes to the fair value of securities in the Company’s portfolio. For example, fixed-rate securities acquired by
the Company 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 the Company’s 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 or other factors, could
cause write-downs and realized or unrealized losses in future periods and declines in other comprehensive income,
which could have a material adverse effect on the Company’s business, financial condition, results of operations and
growth prospects. The process for determining whether a write-down is required 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.
A large percentage of the Company’s investment securities classified as available-for-sale has fixed interest
rates. As is the case with many financial institutions, the Company’s emphasis on increasing the development of core
deposits, those with no stated maturity date, has resulted in the Company’s interest-bearing liabilities having a shorter
duration than interest-earning assets. This imbalance can create significant earnings volatility because interest rates
change over time. As interest rates have increased, the Company’s cost of funds has increased more rapidly than the
yields on a substantial portion of the Company’s interest-earning assets. In addition, the market value of the Company’s
fixed-rate assets, for example, investment securities, has declined in recent periods. In line with the foregoing, the
Company has experienced and may continue to experience an increase in the cost of interest-bearing liabilities primarily
due to raising the rates the Company pays on some of its deposit products to stay competitive within the Company’s
market and an increase in borrowing costs from increases in the federal funds rate.
24
At December 31, 2023, the Company had $139.1 million of unrealized losses in its securities portfolio. If the
Company is forced to liquidate any of those investments prior to maturity, including because of a lack of liquidity, it
would recognize as a charge to earnings the losses attributable to those securities. The Company’s securities portfolio
has a weighted average effective duration of 5.0 years, so the Company expects an increase in realized losses if interest
rates remain elevated or continue to increase in 2024.
Monetary policies of the Federal Reserve could adversely affect the Company’s 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, throughout 2022 and 2023,
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. This has helped drive a significant increase in prevailing interest rates, however it
has had a negative effect on the Company’s net interest income and has harmed the value of the Company’s securities
portfolio, which had $98.0 million in unrealized losses in available-for-sale investment securities at December 31, 2023.
This decline in value has negatively affected the Company’s tangible book value. Higher interest rates can also
negatively affect the Company’s customers’ businesses and financial condition, and the value of collateral securing loans
in the Company’s 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 ongoing conflicts between Israel and Palestine and
between Russia and Ukraine and resulting disruptions in the global energy market, 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 or other political
instability. As noted above, this could decrease loan demand, harm the credit characteristics of the Company’s existing
loan portfolio and decrease the value of collateral securing loans in the portfolio.
The Company cannot guarantee that its stock repurchase program will be fully implemented or that it will enhance
long-term stockholder value.
On December 12, 2023, the Company’s board of directors approved a new stock repurchase program, which
became effective on February 18, 2024, and which authorizes the Company to repurchase up to 1,000,000 shares of its
common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded
the previous 770,000 share stock repurchase program, under which approximately 413,526 shares remained. The new
stock repurchase program will expire on February 18, 2027. The repurchase program does not obligate the Company to
repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no
assurance that the Company will do so or that the Company will repurchase shares at favorable prices. The repurchase
program may be suspended or terminated at any time and, even if fully implemented, the repurchase program may not
enhance long-term stockholder value.
Credit Risks
The Company’s business depends on its ability to manage credit risk.
As a bank, the Company’s business requires it to manage credit risk; however, default risk may arise from
events or circumstances that are difficult to detect, such as fraud, or difficult to predict, such as catastrophic events
affecting certain industries. As a lender, the Company is exposed to the risk that its 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, proper loan underwriting, changes in economic and industry conditions, and
inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to the
Company about its business in a timely manner, or may present inaccurate or incomplete information to the Company, as
well as risks relating to the value of collateral. To manage credit risk, the Company must, among other actions, maintain
25
disciplined and prudent underwriting standards and ensure that the Company’s 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 the Company’s employees in underwriting and monitoring loans, or the Company’s inability to adequately
adapt policies and procedures to changes in economic, or any other conditions affecting borrowers and the quality of the
Company’s loan portfolio, may result in loan defaults, foreclosures, and charge-offs and may necessitate that the
Company significantly increases the allowance for credit losses, each of which could adversely affect net income. As a
result, the Company’s inability to successfully manage credit risk could have a material adverse effect on the Company’s
business, financial condition, results of operations, and growth prospects.
The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio.
The Company establishes and maintains its allowance for credit losses at a level that management considers
adequate to absorb current expected credit losses based on an analysis of the Company’s loan portfolio and current
market environment. The allowance for credit losses represents the Company’s estimate of expected losses in the
portfolio at each balance sheet date and is based upon relevant information available at such time. The allowance
contains provisions for expected losses that have been identified relating to specific borrowing relationships, as well as
expected losses inherent in the loan portfolio that are not specifically identified. Additions to the allowance for credit
losses, which are charged to earnings through the provision for credit 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 the Company’s market area. The actual amount of credit losses is affected by, among other things, changes
in economic, operating, and other conditions within the Company’s markets, which may be beyond the Company’s
control, and such losses may exceed current estimates.
As of December 31, 2023, the Company’s allowance for credit losses as a percentage of total loans was 1.30%,
and as a percentage of total nonperforming loans was 410.3%. Although management believes that the allowance for
credit 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 net income and could have a material adverse effect on the Company’s
business, financial condition, results of operations and growth prospects. The Company may also be required to take
additional provisions for loan losses in the future to further supplement the allowance for credit losses, either due to
management’s assessment that the allowance is inadequate or as required by the Company’s banking regulators. The
Company’s banking regulators periodically review the Company’s allowance for credit losses and the value attributed to
nonaccrual loans or to real estate acquired through foreclosure and may require the Company to adjust its determination
of the value for these items. These adjustments may have a material adverse effect on the Company’s business, financial
condition, results of operations and growth prospects.
A decline in the business and economic conditions in the Company’s market areas could have a material adverse
effect on the Company’s business, financial condition, results of operations and growth prospects.
The Company’s business activities and credit exposure, including real estate collateral for many of its loans, are
concentrated in North Dakota, Minnesota and Arizona, although the Company also pursues business opportunities
nationally. As of December 31, 2023, 89.4% of the loans in the Company’s 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 or Arizona may affect the Company’s 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 the Company’s 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 the Company and the Company’s profitability more significantly
and more adversely than the Company’s 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 the Company’s retirement and benefit services and wealth management businesses resulting in
26
lower fee income, and clients could potentially seek alternative investment opportunities with other providers, which
could also result in lower fee income to us. The Company’s 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 the Company’s control,
are difficult to predict and could have a material adverse effect on the Company’s business, financial position, results of
operations and growth prospects.
Continued elevated levels of inflation could adversely impact the Company’s 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 3.4% in 2023. Continued elevated levels of inflation could have complex effects on the Company’s
business, results of operations and financial condition, some of which could be materially adverse. For example, while
the Company generally expects any inflation-related increases in the Company’s interest expense to be offset by
increases in interest income, inflation-driven increases in the Company’s levels of noninterest expense could negatively
impact 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 the Company’s clients’ ability to repay
indebtedness. It is possible that governmental responses to the current inflation environment, such as changes to
monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls, could
adversely affect the Company’s business. The duration and severity of the current inflationary period cannot be
estimated with precision.
Because a significant portion of the Company’s 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 the Company’s real estate loans and result in loan and other losses.
At December 31, 2023, approximately 77.5% of the Company’s total loan portfolio was comprised of loans
with real estate as a primary 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 or decreases in occupancy and, therefore, in the cash flows generated by those
real properties on which the borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real
properties, which make it more difficult for the borrowers to sell those real properties for amounts sufficient to repay
their loans in full, and (iii) job losses of residential home buyers, which makes it more difficult for these borrowers to
fund their loan payments. As a result, adverse developments affecting real estate values in the Company’s market areas
could increase the credit risk associated with the Company’s 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, including decreases in office occupancy due to the shift to remote
working environments following the COVID-19 pandemic, and the liquidity of real estate in one or more of the
Company’s markets could increase the credit risk associated with the Company’s loan portfolio, significantly impair the
value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure
without a loss or additional losses or the Company’s ability to sell those loans on the secondary market. Such declines
and losses would have a material adverse effect on the Company’s business, financial condition, results of operations
and growth prospects. If real estate values decline, it is also more likely that the Company would be required to increase
the Company’s allowance for credit losses, which would have a material adverse effect on the Company’s 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 the Company forecloses on and takes title to such properties, the Company may be liable for
remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to
incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit
the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or
27
enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. The
remediation costs and any other financial liabilities associated with an environmental hazard could have a material
adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Many of the Company’s loans are to commercial borrowers, which have a higher degree of risk than other types of
loans.
Commercial and industrial loans represented 21.7% of the Company’s total loan portfolio at December 31,
2023. 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 generally, or in certain industries, may increase the Company’s 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. The Company’s 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 the Company’s business, financial condition, results of operations and growth prospects.
The Company’s 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, 2023, the Company had $1.3 billion of commercial real estate loans, consisting of
$569.4 million of non-owner occupied loans, $271.6 million of owner occupied loans, $245.1 million of loans secured
by multifamily residential properties, $124.0 million of construction and land development loans and $40.1 million of
loans secured by farmland. Commercial real estate loans represented 45.3% of the Company’s total loan portfolio and
353.4% of the Bank’s total capital at December 31, 2023. 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 developments
affecting real estate values in the Company’s market areas could increase the credit risk associated with the Company’s
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,
including decreases in office occupancy due to the shift to remote working environments following the COVID-19
pandemic, 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 the Company may not be able to
realize the full value of the collateral that the Company anticipated at the time of originating the loan, which could force
the Company to take charge-offs or require the Company to increase the Company’s provision for loan losses, which
could have a material adverse effect on the Company’s 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 the Company may be exposed to significant losses on loans for these
projects.
Construction and land development loans comprised approximately 4.5% of the Company’s total loan portfolio
as of December 31, 2023. Such lending involves additional risks because funds are advanced upon the security of the
28
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 accurately
evaluate 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 the Company’s appraisal of the value of the completed project
proves to be overstated or market values or rental rates decline, the Company may have inadequate security for the
repayment of the loan upon completion of construction of the project. If the Company is forced to foreclose on a project
prior to or at completion due to a default, the Company 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, the Company 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 the Company attempts to dispose of it.
The Company’s concentration of one-to-four family residential mortgage loans may result in lower yields and
profitability.
One-to-four family residential mortgage loans comprised $726.9 million and $679.6 million, or 26.3% and
27.8%, of the Company’s loan portfolio at December 31, 2023 and 2022, 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 the Company’s 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 the Company’s 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 the
Company’s 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 the Company’s business,
financial condition, results of operations and growth prospects.
Nonperforming assets take significant time and resources to resolve and adversely affect the Company’s net interest
income.
As of December 31, 2023, the Company’s nonperforming loans (which consist of nonaccrual loans and loans
past due 90 days or more) totaled $8.7 million, or 0.32% of the Company’s total loan portfolio, and the Company’s
nonperforming assets (which consist of nonperforming loans, foreclosed assets and other real estate owned) totaled
$8.8 million, or 0.32% of total assets. In addition, the Company had $3.4 million of accruing loans that were 31-89 days
delinquent as of December 31, 2023.
The Company’s nonperforming assets adversely affect net interest income in various ways. The Company does
not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting net income and returns
on assets and equity. When the Company takes collateral in foreclosure and similar proceedings, the Company is
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 the Company’s risk profile and the level of capital the Company’s regulators believe is
appropriate for the Company to maintain in light of such risks. The resolution of nonperforming assets requires
significant time commitments from management, which increases the Company’s loan administration costs and
adversely affects its efficiency ratio and can be detrimental to the performance of their other responsibilities, and may
also involve additional financial resources. If the Company experiences increases in nonperforming loans and
nonperforming assets, net interest income may be negatively impacted and the Company’s loan administration costs
29
could increase, each of which could have a material adverse effect on the Company’s business, financial condition,
results of operations and growth prospects.
The Company’s high concentration of large loans to certain borrowers may increase the Company’s credit risk.
The Company has 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, 2023, the Company’s 10 largest
borrowing relationships accounted for approximately 6.1% of the total loan portfolio. The Company has established an
informal, internal limit on loans to one borrower, principal or guarantor, but the Company 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 the Company’s 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, the Company’s nonaccruing loans and the Company’s provision for
loan losses could increase significantly, which could have a material adverse effect on the Company’s business, financial
condition, results of operations and growth prospects.
The small to midsized businesses that the Company lends to may have fewer resources to weather adverse business
developments, which may impair their ability to repay their loans.
The Company lends 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 a small
number 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 the Company operates and small to midsized businesses are adversely affected or the Company’s borrowers are
otherwise affected by adverse business developments, the Company’s business, financial condition, results of operations
and growth prospects may be materially adversely affected.
Real estate market volatility and future changes in the Company’s disposition strategies could result in net proceeds
that differ significantly from the Company’s foreclosed asset fair value appraisals.
As of December 31, 2023, the Company had no foreclosed assets, which typically consist of properties that the
Company obtains 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, the Company may utilize alternative sale
strategies other than orderly disposition as part of the Company’s foreclosed asset disposition strategy, such as
immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and
the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could
differ significantly from appraisals, comparable sales and other estimates used to determine the fair value of the
Company’s foreclosed assets.
The Company’s exposure to home equity lines of credit may increase the potential for loss.
The Company’s 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 the Company typically does not service if the loan is sold. By not servicing the first
mortgage loans, the Company is unable to track the delinquency status which may indicate whether such loans are at risk
30
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 the Company 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. As of December 31, 2023, the unfunded
commitment related to home equity lines of credit was $216.1 million.
Operational, Strategic and Reputational Risks
Noninterest income represents a significant portion of the Company’s total revenue and may be negatively impacted
by changes in economic or market conditions and competition.
A significant portion of the Company’s revenue results from fee-based services provided by the 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, 2023,
noninterest income represented approximately 47.7% of the Company’s total revenue, which includes net interest
income and noninterest income, a significant portion of which is derived from the Company’s 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 the
Company provides 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 the Company is unable to maintain
the Company’s number of plans, participants and AUA and AUM at historical or greater levels, the Company’s fee
income derived from this business may decline. For example, in a typical year the Company expects to experience
outflows in AUA and AUM due to withdrawals, client turnover, plan terminations, mergers and acquisition activity. In
2023, the Company experienced outflows of $4.8 billion in the Company’s retirement and benefit services division
partially offset by inflows of $4.5 billion.
In addition, economic, market or other factors that reduce the level or rates of savings in or with the Company’s
clients, either through reductions in financial asset valuations or through changes in investor preferences, could
materially reduce the Company’s 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 the Company’s control. the Company 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 the Company’s performance and may adversely affect the value of the assets that the Company manages. A
general economic slowdown could decrease the value of the AUA and AUM in the Company’s 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 the Company.
Even when economic and market conditions are generally favorable, the Company’s investment performance
may be adversely affected by the investment style of the Company’s asset managers and the particular investments that
they make. To the extent the Company’s future investment performance is perceived to be poor in either relative or
absolute terms, the revenues and profitability of the Company’s wealth management business will likely be reduced and
the Company’s ability to attract new clients will likely be impaired. In addition, the Company’s management contracts
generally provide for fee payments for wealth management and trust services based on the market value of AUM.
Because most contracts provide for a fee based on market values of securities, fluctuations in the underlying securities
values may have a material adverse effect on the Company’s revenue. Fee compression due to competitive pressures has
resulted in and continues to result in significant pressure to reduce the fees the Company charges for the Company’s
services in both the retirement and benefit services and wealth management businesses.
31
The Company may not be successful in implementing the Company’s organic growth strategy, which could have a
material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Part of the Company’s business strategy is to focus on organic growth, which includes leveraging the
Company’s business lines across the Company’s entire client base, enhancing brand awareness and building the
Company’s infrastructure. The success of the Company’s organic growth strategy depends on the Company’s ability to
increase loans, deposits, AUM and AUA at acceptable risk levels without incurring offsetting increases in noninterest
expense. The Company may not be successful in generating organic growth if the Company fails to effectively execute
the Company’s 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 the Company’s office locations. In addition, the success of the Company’s organic growth strategy will
depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in the Company’s
primary market areas. Failure to adequately manage the risks associated with the Company’s anticipated organic growth
could have a material adverse effect on the Company’s business, financial condition, results of operations and growth
prospects.
In addition to the Company’s organic growth strategy, it intends to expand business by acquiring other banks and
financial services companies, but 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 the Company’s business strategy is to grow the Company’s banking franchise and
increase the Company’s market share through organic growth, the Company intends 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 third quarter of 2022, the Company completed
the acquisition of MPB BHC, Inc., holding company for Metro Phoenix Bank in Phoenix, Arizona. Although the
Company intends to continue to grow its business through organic growth and strategic acquisitions, because certain of
the Company’s market areas are comprised of mature, rural communities with limited population growth, the Company
anticipates that much of its future growth will be dependent on the Company’s ability to successfully implement the
Company’s acquisition growth strategy. However, the Company may not be able to identify suitable acquisition targets,
or may not succeed in seizing such opportunities when they arise or in integrating any such banks or financial service
companies within the Company’s existing business framework following acquisition. In addition, even if suitable targets
are identified, the Company expects to compete for such businesses with other potential bidders, many of which may
have greater financial resources than the Company, which may adversely affect the Company’s ability to make
acquisitions at attractive prices. The Company’s ability to execute on acquisition opportunities may require the Company
to raise additional capital and to increase the Company’s capital position to support the growth of the Company’s
franchise. It will also depend on market conditions over which the Company has no control. Moreover, certain
acquisitions may require the approval of the Company’s bank regulators, and the Company may not be able to obtain
such approvals on acceptable terms, if at all.
If the Company pursues additional strategic acquisitions, it may expose the Company to financial, execution and
operational risks that could have a material adverse effect on the Company’s business, financial position, results of
operations and growth prospects.
Since 2000, the Company has experienced significant growth, both organically and through acquisitions of
banks and other financial service providers, including wealth management and retirement administration businesses. The
Company plans to continue to grow its 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 the Company’s overall strategy
and that the Company believes make financial and strategic sense. These acquisitions may result in the Company
entering new markets.
If the Company grows through acquisitions, it may expose the Company to financial, execution and operational
risks that could have a material adverse effect on the Company’s business, financial position, results of operations and
32
growth prospects. Acquiring other banks and financial service providers involve risks commonly associated with
acquisitions, including:
Potential exposure to unknown or contingent liabilities of the banks and businesses the Company acquires;
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 the
Company acquires, including higher than expected deposit attrition;
potential disruption to the Company’s business;
potential restrictions on the Company’s 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 the Company’s management’s time and attention; and
the possible loss of key employees and clients of the banks and businesses the Company acquires.
In addition to the foregoing, the Company may face additional risks in acquisitions to the extent the Company
acquires new lines of business or new products, or enter new geographic areas, in which the Company has little or no
current experience, especially if the Company loses key employees of the acquired operations. If the Company hires a
new team of employees, the Company 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 the Company later determines
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 the Company cannot assure you that it will be successful in
overcoming these risks or any other problems encountered in connection with acquisitions. The Company’s inability to
overcome risks associated with acquisitions could have a material adverse effect on the Company’s business, financial
condition, results of operations and growth prospects.
The Company’s retirement and benefit services business relies on acquisitions to maintain and grow the Company’s
AUA and AUM.
In 2023, the Company’s retirement and benefit services business experienced outflows of AUA and AUM of
$4.8 billion, due to withdrawals, client turnover, plan terminations, and mergers and acquisition activity. the Company
believes this level of runoff is typical in the industry. To maintain and grow this business, the Company believes it needs
to be an active acquirer and seek to complete acquisitions of retirement administration providers if the Company is able
to find quality acquisition opportunities. If the Company is unable to source a pipeline of potential acquisitions of
companies that it determines are a good strategic fit for the Company, the Company’s retirement and benefit services
business may fail to grow or even shrink, which could have a material adverse effect on the Company’s business,
financial condition, results of operations and growth prospects.
If the Company is unable to continue to originate residential real estate loans and sell them into the secondary
market for a profit, the Company’s noninterest income could decrease.
The Company derives a portion of its noninterest income from the origination of residential real estate loans
and the subsequent sale of such loans into the secondary market. If the Company is unable to continue to originate and
sell residential real estate loans at historical or greater levels, the Company’s residential real estate loan volume would
decrease, which could decrease the Company’s earnings. A rising interest rate environment, general economic
33
conditions, market volatility or other factors beyond the Company’s control could adversely affect the Company’s 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 the 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, the Company saw continued lower demand for mortgage loans and refinancing activity in 2023. In 2023,
the Company originated $364.1 million of mortgage loans, compared to $812.3 million in 2022. The Company expects
this trend to continue in 2024.
The financial services industry is experiencing an increase in regulatory and compliance requirements related to
mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase
and the Company is unable to make technology upgrades, the Company’s ability to originate mortgage loans will be
reduced or eliminated. Additionally, the Company sells a large portion of its residential real estate loans to third party
investors, and rising interest rates could negatively affect the Company’s ability to generate suitable profits on the sale of
such loans. If interest rates increase after the Company originates the loans, the Company’s ability to market those loans
is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue the
Company generates 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, the Company 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 the Company’s business, financial condition, results of operations and growth prospects.
The occurrence of fraudulent activity, breaches or failures of the Company’s information security controls or
cybersecurity related incidents could have a material adverse effect on the Company’s business, financial condition,
results of operations and growth prospects.
As a financial institution, the Company is susceptible to fraudulent activity, information security breaches and
cybersecurity-related incidents that may be committed against the Company, its clients or third parties with whom the
Company interacts, which may result in financial losses or increased costs to the Company or its clients, disclosure or
misuse of the Company’s information or its client information, misappropriation of assets, privacy breaches against the
Company’s clients, litigation or damage to the Company’s 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
the Company or its 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 and as a result of increasingly sophisticated methods of conducting cyber attacks,
including those employing artificial intelligence. Consistent with industry trends, the Company has 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 retail companies, financial institutions and
third party vendors specializing in providing services to financial institutions, including MOVEit and First American
Financial, 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. The Company is not aware of having experienced any misappropriation, loss or
other unauthorized disclosure of confidential or personally identifiable information having a material impact on the
Company as a result of a direct cyber security breach or other act on the Bank; however, some of the Company’s clients
and third party vendors may have been affected by such breaches, which could increase their risks of identity theft and
other fraudulent activity that could involve client accounts at the Bank.
34
Information pertaining to the Company and its clients is maintained, and transactions are executed, on networks
and systems maintained by the Company and certain third-party partners, such as the Company’s 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 the Company and the Company’s clients
against fraud and security breaches and to maintain the confidence of the Company’s clients. Breaches of information
security also may occur through intentional or unintentional acts by those having access to the Company’s systems or the
confidential information of the Company’s 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 the Company uses to prevent fraudulent transactions and to protect data about us,
the Company’s clients and underlying transactions, as well as the technology used by the Company’s clients to access
the Company’s systems. The Company’s 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 the Company or its clients, loss of
business or clients, damage to the Company’s reputation, the incurrence of additional expenses, disruption to the
Company’s business, additional regulatory scrutiny or penalties or the Company’s exposure to civil litigation and
possible financial liability, any of which could have a material adverse effect on the Company’s business, financial
condition, results of operations and growth prospects.
Issues with the use of artificial intelligence in our marketplace may result in reputational harm or liability, or could
otherwise adversely affect the Company’s business.
Artificial intelligence, including generative artificial intelligence, is or may be enabled by or integrated into the
Company’s products or those developed by its third party partners. As with many developing technologies, artificial
intelligence presents risks and challenges that could affect its further development, adoption, and use, and therefore our
business. Artificial intelligence algorithms may be flawed, for example datasets may contain biased information or
otherwise be insufficient, and inappropriate or controversial data practices could impair the acceptance of artificial
intelligence solutions and result in burdensome new regulations. If the analyses of those products incorporating artificial
intelligence assist in producing for the Company or its third party partners are deficient, biased or inaccurate, the
Company could be subject to competitive harm, potential legal liability and brand or reputational harm. The use of
artificial intelligence may also present ethical issues. If the Company or its third party partners offer artificial
intelligence enabled products that are controversial because of their purported or real impact on human rights, privacy, or
other issues, the Company may experience competitive harm, potential legal liability and brand or reputational harm. In
addition, the Company expects that governments will continue to assess and implement new laws and regulations
concerning the use of artificial intelligence, which may affect or impair the usability or efficiency of products and
services and those developed by the Company’s third party partners.
The Company depends on information technology and telecommunications systems, and any systems failures,
interruptions or data breaches involving these systems could adversely affect the Company’s operations and financial
condition.
The Company’s business is highly dependent on the successful and uninterrupted functioning of its 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. The Company is vulnerable to the impact of failures of its systems to operate as needed or
intended. Such failures could include those resulting from human error, unexpected transaction volumes, intentional
attacks or overall design or performance issues.
The Company outsources to third parties many of its major systems, such as data processing and mobile and
online banking. In addition, the Company partners with a leading financial technology company to create an online
account portal that integrates the Company’s diverse product applications into a user-friendly experience for the
Company’s 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 the Company’s operations. Because the Company’s
information technology and telecommunications systems interface with and depend on third party systems, the Company
35
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 the Company’s ability to
process loans or gather deposits and provide customer service, compromise the Company’s ability to operate effectively,
result in potential noncompliance with applicable laws or regulations, damage the Company’s reputation, result in a loss
of client business or subject the Company 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 the Company’s operations or adversely affect its reputation.
It may be difficult for the Company to replace some of its third-party vendors, particularly vendors providing
the Company’s core banking and information services, in a timely manner if they are unwilling or unable to provide the
Company with these services in the future for any reason and even if the Company is 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 the Company’s
business, financial condition, results of operations and growth prospects.
The Company’s 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. The Company also interacts with and relies on retailers, for whom the Company
processes 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 cybersecurity breaches described above, including those
employing artificial intelligence, and the cybersecurity measures that they maintain to mitigate the risk of such activity
may be different than the Company’s own and may be inadequate.
Because financial entities and technology systems are becoming more interdependent and complex, a cyber
incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial
entities could have a material impact on counterparties or other market participants, including ourselves. As a result of
the foregoing, the Company’s ability to conduct business may be adversely affected by any significant disruptions to the
Company or to third parties with whom the Company interacts.
A transition away from LIBOR as a reference rate for financial contracts could negatively affect the Company’s
income and expenses and the value of various financial contracts.
LIBOR represented the interest rate at which banks offer to lend funds to one another in the international
interbank market for short-term loans. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no
longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. U.S. Regulators issued
guidance to urge market participants to address their LIBOR exposures and transition to robust and sustainable
alternative rates and the Alternative Reference Rate Committee proposed that SOFR is the rate that represents best
practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently
indexed to LIBOR, but has also advised participants to conduct a comprehensive evaluation of any alternative reference
rates being considered for use. Contracts linked to LIBOR are vast in number and value, are intertwined with numerous
financial products and services, and have diverse parties.
The end date for LIBOR was June 30, 2023. The Company actively worked to plan for the transition away from
LIBOR, but the transition is both complex and challenging and the downstream effect of unwinding or transitioning such
contracts may yet cause instability and negatively impact on financial markets and individual institutions. If the
Company or other market participants have failed to implement alternative rates other than LIBOR, it could have an
adverse effect on the Company and the financial system as a whole.
36
Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages
that the Company has sold into the secondary market may require the Company to increase its financial statement
reserves in the future.
The Company engages in the origination and sale of residential real estate loans into the secondary market. In
connection with such sales, the Company makes certain representations and warranties, which, if breached, may require
the Company 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 the Company believes its mortgage lending practices and standards to
be adequate, the Company may receive repurchase or indemnification requests in the future, which could be material in
volume. If that were to happen, the Company could incur losses in connection with loan repurchases and indemnification
claims, and any such losses might exceed the Company’s financial statement reserves, requiring the Company to
increase such reserves. In that event, any losses the Company might have to recognize and any increases the Company
might have to make to the Company’s reserves could have a material adverse effect on the Company’s business,
financial position, results of operations and growth prospects.
The Company is highly dependent on its executive management team, and the loss of any of the Company’s senior
executive officers or other key employees, or the Company’s inability to attract and retain qualified personnel, could
harm the Company’s ability to implement its strategic plan and impair the Company’s relationships with clients.
The Company’s success is dependent, to a large degree, upon the continued service and skills of the Company’s
executive management team, which consists of Katie Lorenson, President and Chief Executive Officer; Alan Villalon,
Chief Financial Officer; Jim Collins, Chief Banking and Revenue Officer; Missy Keney, Chief Engagement Officer; Jon
Hendry, Chief Technology Officer; Karin Taylor, Chief Risk and Operations Officer; and Forrest Wilson, Chief
Retirement Services Officer. The Company’s business and growth strategies are built primarily upon its ability to retain
employees with experience and business relationships within the Company’s market areas. The loss of any of the
members of the Company’s executive management team or any of the Company’s other key personnel, including client
advisors, could have an adverse impact on the Company’s business and growth because of their skills, years of industry
experience, knowledge of the Company’s 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, the Company needs to continue to attract and retain key personnel and to recruit qualified individuals who fit the
Company’s culture to succeed existing key personnel and ensure the continued growth and successful operation of the
Company’s business. Leadership changes may occur from time to time, and the Company cannot predict whether
significant retirements or resignations will occur or whether the Company 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, the
Company’s ability to effectively compete for senior executives and other qualified personnel by offering competitive
compensation and benefit arrangements may be restricted by our financial condition, and 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 the Company’s business, financial condition, results of operations and growth prospects.
The Company’s ability to retain and recruit employees is critical to the success of its business strategy and any failure
to do so could impair the Company’s customer relationships and adversely affect its business, financial condition,
results of operations and growth prospects.
The Company’s ability to retain and grow its loans, deposits and fee income depends upon the business
generation capabilities, reputation and relationship management skills of the Company’s employees. If the Company
loses the services of any of its employees, including successful employees employed by banks or other businesses that
the Company may acquire, to a new or existing competitor or otherwise, the Company may not be able to retain valuable
37
relationships and some of its customers could choose to use the services of a competitor instead of the Company’s
services.
The Company’s success and growth strategy also depends on its continued ability to attract and retain
experienced employees for all of the Company’s business lines. The Company may face difficulties in recruiting and
retaining personnel of its desired caliber, including as a result of competition from other financial institutions.
Competition for high quality personnel is strong and the Company may not be successful in attracting or retaining the
personnel it requires. In particular, many of the Company’s competitors are significantly larger with greater financial
resources and may be able to offer more attractive compensation packages and broader career opportunities.
Additionally, the Company may incur significant expenses and expend significant time and resources on training,
integration, and business development before the Company is able to determine whether a new employee will be
profitable or effective in their role. If the Company is unable to attract and retain a successful customer development and
management team or if the Company’s customer development and management team fails to meet its expectations in
terms of customer relationships and profitability, the Company may be unable to execute its business strategy and its
business, financial condition, results of operations and growth prospects may be negatively affected.
The Company’s ability to maintain its reputation is critical to the success of the Company’s business, and the failure
to do so may materially adversely affect its business and the value of the Company’s stock.
The Company relies, in part, on its reputation to attract clients and retain client relationships. Damage to the
Company’s reputation could undermine the confidence of its current and potential clients in the Company’s ability to
provide high-quality financial services. Such damage could also impair the confidence of the Company’s counterparties
and vendors and ultimately affect its ability to effect transactions. In particular, the Company’s ability to attract and
retain clients and employees could be adversely affected to the extent its reputation is damaged. The Company’s actual
or perceived failure to address various issues could give rise to reputational risk that could cause harm to the Company
and its 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 the
Company’s 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 the Company to enforcement actions, fines, and penalties and cause the
Company to incur related costs and expenses. In addition, the Company’s businesses are dependent on the integrity of its
relationships, 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 the Company’s businesses could be negatively
affected, which may result in the loss of accounts and could have a material adverse effect on the Company’s business,
financial condition, results of operations and growth prospects.
Maintenance of the Company’s reputation depends not only on its success in maintaining the Company’s
service-focused culture and controlling and mitigating the various risks described in this report, but also on the
Company’s success in identifying and appropriately addressing issues that may arise in the areas described above.
Maintaining the Company’s reputation also depends on its ability to successfully prevent third parties from infringing on
the “Alerus” brand and associated trademarks and the Company’s other intellectual property. Defense of the Company’s
reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a
material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Labor shortages and a failure to attract and retain qualified employees could negatively impact the Company’s
business, financial condition, results of operations and growth prospects.
A number of factors may adversely affect the labor force available to the Company or increase labor costs,
including high employment levels and decreased labor force size and participation rates in recent periods. Although the
Company has not experienced any material labor shortage to date, the Company continues to observe an overall
tightening of and increase in competition in local labor markets. A sustained labor shortage or increased turnover rates
within the Company’s employee base could lead to increased costs, such as increased compensation expense to attract
38
and retain employees, as well as decreased efficiency. In addition, if the Company is unable to hire and retain employees
capable of performing at a high-level, or if mitigation measures the Company takes to respond to a decrease in labor
availability have unintended negative effects, the Company’s 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 the Company’s business, financial condition, results of operations and growth
prospects.
The Company’s use of third-party vendors and its other ongoing third-party business relationships is subject to
increasing regulatory requirements and attention.
The Company’s use of third party vendors, including the financial technology company it partners with to
create a customer portal, for certain information systems is subject to increasingly demanding regulatory requirements
and attention by the Company’s federal bank regulators. Recent regulations require the Company to enhance its due
diligence, ongoing monitoring and control over the Company’s third-party vendors and other ongoing third party
business relationships. In certain cases, the Company may be required to renegotiate the Company’s agreements with
these vendors to meet these enhanced requirements, which could increase costs. The Company expects that regulators
will hold the Company responsible for deficiencies in oversight and control of its third party relationships and in the
performance of the parties with which the Company has these relationships. As a result, if the Company’s regulators
conclude that it has not exercised adequate oversight and control over the Company’s third party vendors or other
ongoing third party business relationships or that such third parties have not performed appropriately, the Company
could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or
fines, as well as requirements for client remediation, any of which could have a material adverse effect on the
Company’s business, financial condition, results of operations and growth prospects.
The Company has a continuing need for technological change, and it may not have the resources to effectively
implement new technology or it 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. The Company’s future success will depend in part upon its,
and its third party partners’, ability to address the needs of the Company’s clients by using technology to provide
products and services that will satisfy client demands for convenience as well as to create additional efficiencies in
operations. The widespread adoption of new technologies, including mobile banking services, artificial intelligence,
cryptocurrencies and payment systems, could require the Company in the future to make substantial expenditures to
modify or adapt the Company’s existing products and services as it grows and develops new products to satisfy the
Company’s customers’ expectations, remain competitive and comply with regulatory guidance. The Company may
experience operational challenges as it implements these new technology enhancements, which could result in the
Company not fully realizing the anticipated benefits from such new technology or require the Company to incur
significant costs to remedy any such challenges in a timely manner.
Many of the Company’s 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 the Company will be
able to offer, which would put the Company at a competitive disadvantage. Accordingly, a risk exists that the Company
will not be able to effectively implement new technology-driven products and services or be successful in marketing
such products and services to the Company’s 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 the Company to fail to comply with applicable laws. The Company expects 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 the Company currently uses. Because the pace of technological change is
high and the Company’s industry is intensely competitive, it may not be able to sustain the Company’s 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
39
interruptions, errors and delays could have a material adverse effect on the Company’s business, financial condition,
results of operations and growth prospects.
The Company is 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 the Company to financial losses or
regulatory sanctions and seriously harm the Company’s reputation. Misconduct by the Company’s employees could
include hiding unauthorized activities from us, improper or unauthorized activities on behalf of the Company’s
customers or improper use of confidential information. It is not always possible to prevent employee errors or employee
and customer misconduct, and the precautions the Company takes to prevent and detect this activity may not be effective
in all cases. Employee errors could also subject the Company to financial claims for negligence.
The Company maintains 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 the Company’s 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 the Company’s business, financial condition results of operations and
growth prospects.
The Company’s dividend policy may change.
Although the Company has historically paid dividends to its stockholders and currently intends to maintain or
increase its dividend levels in future quarters, the Company has no obligation to continue doing so and may change the
Company’s dividend policy at any time without notice to the Company’s stockholders. Holders of the Company’s
common stock are only entitled to receive such cash dividends as the Company’s Board of Directors, in its discretion,
may declare out of funds legally available for such payments. Further, consistent with the Company’s strategic plans,
growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will
continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid
to the Company’s common stockholders.
In addition, the Company is a financial holding company, and the Company’s 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.
The Company is a separate and distinct legal entity from its subsidiaries, including the Bank. The Company
receives substantially all of its revenue from dividends from the Bank, which it uses as the principal source of funds to
pay expenses. Various federal and state laws and regulations limit the amount of dividends that the Bank and certain of
the Company’s non-bank subsidiaries may pay the Company. Such limits are also tied to the earnings of the Company’s
subsidiaries. If the Bank does not receive regulatory approval or if its earnings are not sufficient to make dividend
payments to the Company while maintaining adequate capital levels, the Company’s ability to pay its expenses and its
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 the Company’s common stock price to
decline.
The Company is generally not restricted from issuing additional shares of stock, up to totals of 30,000,000
shares of common stock and 2,000,000 shares of preferred stock authorized in the Company’s certificate of
incorporation, which in each case could be increased by a vote of the holders of a majority of the Company’s shares of
common stock. The Company may issue additional shares of 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 the Company chooses to raise capital by selling shares of common stock for any reason, the issuance
40
would have a dilutive effect on the holders of the Company’s common stock and could have a material negative effect
on the market price of the Company’s common stock.
The Company may issue shares of preferred stock in the future, which could make it difficult for another company to
acquire the Company or could otherwise adversely affect holders of the Company’s common stock, which could
depress the price of the Company’s common stock.
Although there are currently no shares of the Company’s preferred stock issued and outstanding, the
Company’s certificate of incorporation authorizes the Company to issue up to 2,000,000 shares of one or more series of
preferred stock. The Company’s 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 the
Company’s common stock with respect to dividends or in the event of a dissolution, liquidation or winding up, and other
terms. If the Company issues preferred stock in the future that has preference over the Company’s common stock with
respect to payment of dividends or upon the Company’s liquidation, dissolution or winding up, or if the Company issues
preferred stock with voting rights that dilute the voting power of the Company’s common stock, the rights of the holders
of the Company’s common stock or the market price of the Company’s common stock could be adversely affected. In
addition, the ability of the Company’s Board of Directors to issue shares of preferred stock without any action on the
part of the Company’s stockholders may impede a takeover of the Company and prevent a transaction perceived to be
favorable to the Company’s stockholders.
The holders of the Company’s debt obligations and preferred stock, if any, will have priority over the Company’s
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, the Company’s common stock would rank junior
in priority to all claims of debt holders against the Company and claims of all of the Company’s outstanding shares of
preferred stock. As of December 31, 2023, the Company had $50.0 million of subordinated notes payable and
$9.0 million of junior subordinated debentures outstanding. The Company does not currently have any shares of
preferred stock issued and outstanding. As a result, holders of the Company’s 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 its obligations to 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.
The Company’s business and operations may be adversely affected in numerous and complex ways by weak economic
conditions and global trade.
The Company’s 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, the Company’s
growth and profitability from the Company’s 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. 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 the Company’s 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 the Company’s 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 the Company’s business, financial condition, results of operations and growth
prospects.
41
The financial markets and the global economy may also be adversely affected by the current or anticipated
impact of military conflict, including the ongoing conflicts between Israel and Palestine and 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 these
conflicts on the Company’s business are difficult to predict at this time, but in addition to inflationary pressures affecting
the Company’s operations and those of the Company’s customers and borrowers, the Company may also experience an
increase in cyberattacks against us, the Company’s customers and borrowers, service providers and other third parties.
The Company depends 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 the
Company’s loan portfolio on an ongoing basis, the Company may rely on information furnished by or on behalf of
clients and counterparties, including financial statements, credit reports and other financial information. The Company
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 the Company’s business, financial condition, results of operations and growth prospects.
New lines of business, products, product enhancements or services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products and product
enhancements as well as new services within the Company’s 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, the Company
may invest significant time and resources, although the Company 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 the Company’s 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 the Company’s business, financial
condition, results of operations and growth prospects.
The Company faces intense competition from other banks and financial services companies that could hurt its
business.
The Company operates in the highly competitive financial services industry and faces significant competition
for clients from financial institutions located both within and beyond the Company’s market areas. Overall, the
Company competes 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, or “Fintech,” companies and securities brokerage firms,
operating within or near the areas the Company serves. Many of the Company’s non-bank competitors are not subject to
the same extensive regulations that govern the Company’s 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.
42
While the Company does 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 the Company’s
business, financial condition and results of operations. Potential partnerships with digital asset companies, moreover,
could also entail significant investment.
In the Company’s banking business, it may not be able to compete successfully with other financial institutions
in the Company’s markets, particularly with larger financial institutions that have significantly greater resources than us,
and the Company 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 the
Company’s geographic market areas because there are numerous well-established, well-resourced, well-capitalized, and
successful investment management, wealth advisory and wealth management and trust firms in these areas. In addition,
the record-keeping and administration industry is dominated by a small number of larger institutions that may charge
fees that are lower than the Company charges for similar services. The Company’s ability to successfully attract and
retain retirement and benefit services and wealth management clients is dependent upon its ability to compete with
competitors’ investment, advisory, fiduciary and recordkeeping products and services, levels of investment performance
and marketing and distribution capabilities. If the Company is unable to compete effectively with other banking or other
financial services businesses, it could find it more difficult to attract new and retain existing clients and the Company’s
noninterest income could decline, which could have a material adverse effect on the Company’s business, financial
condition, results of operations and growth prospects.
The Company originates, sells and services residential mortgage loans. The Company’s mortgage business
faces vigorous competition from banks and other financial institutions, including larger financial institutions and
independent mortgage companies. The Company’s 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 the Company’s mortgage origination business. Changes in interest rates and pricing decisions by the Company’s loan
competitors affect demand for the Company’s residential mortgage loan products, the revenue realized on the sale of
loans and revenues received from servicing such loans for others, ultimately reducing the Company’s noninterest
income. In addition, if the Company is unable to attract and retain enough skilled employees, the Company’s mortgage
origination volume may decline.
The Company’s 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
43
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 the Company closely monitors business disruptors and seek
to adapt to changing technologies, matching the pace of innovation exhibited by new and differently situated competitors
may require the Company and policy-makers to adapt at a greater pace. Because the financial services industry is
experiencing rapid changes in technology, the Company’s future success will depend in part on its ability to address its
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 the Company has with its clients are terminable without cause and on
relatively short notice by the Company’s clients, which makes it vulnerable to short-term declines in the performance
of the securities under the Company’s management.
Like most investment advisory and wealth management businesses, the investment advisory contracts the
Company has with the Company’s 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 the Company manages, which can result
from factors outside the Company’s control, such as adverse changes in market or economic conditions or the poor
performance of some of the investments the Company has recommended to the Company’s clients, could lead some of
its clients to move assets under the Company’s 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, the Company’s operating results are heavily dependent on the financial performance of the Company’s
investment portfolios and the investment strategies the Company employs in the Company’s investment advisory
businesses and even short-term declines in the performance of the investment portfolios the Company manages for the
Company’s clients, whatever the cause, could result in a decline in AUM and a corresponding decline in investment
management fees, which would adversely affect the Company’s results of operations.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could
significantly impact the Company’s business.
Severe weather, natural disasters, effects of climate change, widespread disease or pandemics, acts of war or
terrorism, civil unrest or other adverse external events could have a significant impact on the Company’s ability to
conduct business. In addition, such events could affect the stability of the Company’s 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 the Company to incur additional expenses. The occurrence of any of these events in the
future could have a material adverse effect on the Company’s business, financial condition, results of operations and
growth prospects.
The Company’s 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 the Company’s wealth management business.
The Company relies on its asset managers to produce investment returns and financial advisors to advise clients
of the Company’s wealth management business. The Company believes that investment performance is an important
factor for the growth of its AUM. Poor investment performance could impair the Company’s revenues and growth
because existing clients might withdraw funds in favor of better performing products, which would result in lower
investment management fees, or the Company’s 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, the Company’s asset managers
and financial advisors often have regular direct contact with the Company’s 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 the Company’s relationships with the Company’s clients and lead to the loss of client accounts.
Losses of such accounts could have a material adverse effect on the Company’s business, financial condition, results of
operations and growth prospects.
44
The Company may be adversely affected by the soundness of certain securities brokerage firms.
The Company’s 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 the Company 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 the Company’s clients in the
services provided by those firms or otherwise adversely impact their custodial holdings. Such an occurrence could
negatively impact the Company’s ability to retain existing or attract new clients and, as a result, could have a material
adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Liquidity and Funding Risks
Liquidity risks could affect the Company’s operations and jeopardize its business, financial condition, results of
operations and growth prospects.
Liquidity is essential to the Company’s business. Liquidity risk is the risk that the Company will not be able to
meet its obligations, including financial commitments, as they come due and is inherent in the Company’s 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 the Company’s liquidity.
The Company’s most important source of funds consists of the Company’s 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. Total deposits increased in 2023, however, clients demanded higher interest rates
on deposit accounts to compete with higher yielding short-term investments available. The Company’s future growth
will largely depend on its ability to maintain and grow a strong deposit base and the Company’s ability to retain its
largest retirement and benefit services and wealth management clients, many of whom are also depositors. If clients,
including the Company’s retirement and benefit services and wealth management clients, move money out of bank
deposits and into other investments, the Company could lose a relatively low-cost source of funds, which would require
the Company to seek other funding alternatives, including increasing the Company’s dependence on wholesale funding
sources, in order to continue to grow, thereby increasing the Company’s funding costs and reducing net interest income
and net income.
Additionally, uninsured deposits have historically been viewed by the FDIC as less stable than insured deposits.
According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with
larger uninsured deposit account balances often are small- to mid-sized businesses that rely upon deposit funds for
payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and
performance of their depository institutions. As a result, in the event of financial distress, uninsured depositors
historically have been more likely to withdraw their deposits. If a significant portion of our deposits were to be
withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal
demands, the Company may be unable to obtain funding at favorable terms, which may have an adverse effect on our net
interest margin. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during
periods of higher prevailing interest rates, such as the present period. Our ability to attract depositors during a time of
actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for borrowings
generally exceed the interest rates paid on deposits. This spread may be exacerbated by higher prevailing interest rates.
In addition, because our available for sale securities lose value when interest rates rise, after-tax proceeds resulting from
the sale of such assets may be diminished during periods when interest rates are elevated. Under such circumstances, we
may be required to access funding from sources such as the Federal Reserve’s discount window in order to manage our
liquidity risk.
The Company also accesses 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, 2023,
the Company had pledged $250.0 million of investment securities for this purpose, which represented approximately
31.8% of the Company’s total securities portfolio. If the Company is unable to pledge sufficient qualifying collateral to
45
secure public funding, it may lose access to this source of liquidity that the Company has 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 the Company’s equity and debt securities to investors. Additional liquidity is
provided by the ability to borrow from the Federal Reserve and the FHLB. The Federal Reserve established the Bank
Term Funding Program, or BTFP, on March 12, 2023, offering qualifying banks loans of up to one year in length
collateralized by qualifying assets, including U.S. securities valued at par, to serve as a source of additional liquidity
against high-quality securities and reducing an institution’s need to quickly sell high-quality securities to meet liquidity
needs. The Federal Reserve has announced that it is ending the BTFP and will cease making new loans under this
program on March 11, 2024. The Company may also borrow from third-party lenders from time to time. The Company’s
access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on terms that are
acceptable to the Company could be impaired by factors that affect the Company 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 the Company’s 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 the Company’s repurchase agreements could reduce the Company’s
available liquidity. At December 31, 2023, the Company’s borrowed funds decreased to $314.2 million, compared to
$378.1 million at December 31, 2022. The balance of borrowed funds as of December 31, 2023 included $200.0 million
in FHLB advances and $114.2 million in federal funds purchased. Despite the decrease in borrowings, the Company’s
cost of funds increased and in 2023, as compared to 2022 as a result of the increased interest rate environment.
Any decline in available funding could adversely impact the Company’s ability to continue to implement its
strategic plan, including originating loans and investing in securities, or to fulfill obligations such as paying expenses,
repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on the
Company’s business, financial condition, results of operations and growth prospects.
The Company may not be able to maintain a strong core deposit base or other low-cost funding sources.
The Company depends primarily on core deposits from its clients, which consist of noninterest bearing
deposits, interest bearing checking accounts, certificates of deposit less than $250,000 and money market savings
accounts, as the Company’s primary source of funding for lending activities. The Company’s future growth will largely
depend on its ability to maintain and grow this strong, core deposit base and the Company’s ability to retain its
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 the Company’s 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), the Company could lose a relatively low-cost source of funds,
increasing funding costs and reducing net interest income and net income.
The Company supplements its core deposit funding with non-core, short-term funding sources, including FHLB
advances and fed funds purchased. As of December 31, 2023, the Company had $200.0 million FHLB advances and
$114.2 million of fed funds purchased from the FHLB. The Company’s maximum borrowing capacity from the FHLB is
based on the amount of mortgage and commercial loans the Company can pledge. As of December 31, 2023, the
Company’s advances from the FHLB were collateralized by $970.4 million of real estate loans. If the Company is
unable to pledge sufficient qualifying collateral to secure funding from the FHLB, it may lose access to this source of
liquidity. If the Company is unable to access any of these types of funding sources or if its costs related to them
increases, the Company’s liquidity and ability to support demand for loans could be materially adversely affected.
46
The Company’s high concentration of large depositors may increase its liquidity risk.
The Company has 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, 2023, the Company’s 10 largest
depositor relationships accounted for approximately 8.7% of total deposits. This high concentration of depositors
presents a risk to the Company’s liquidity if one or more of them decides to change its relationship with the Company
and to withdraw all or a significant portion of their accounts, for example as a result of deposits above the FDIC
insurance limit. If such an event occurs, the Company 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 the Company’s
business, financial condition, results of operations and growth prospects.
The Company’s liquidity is largely dependent on dividends from the Bank.
The Company is a legal entity separate and distinct from the Bank, and its other subsidiaries. A substantial
portion of the Company’s cash flow, including cash flow to pay principal and interest on the Company’s 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, 2023, the Bank had the capacity to pay the
Company a dividend of up to $61.3 million without the need to obtain prior regulatory approval. Also, the Company’s
right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to the Company, it may not be able
to service its debt, which could have a material adverse effect on the Company’s business, financial condition, results of
operations and growth prospects.
The Company may need to raise additional capital in the future, and if it fails to maintain sufficient capital, whether
due to losses, an inability to raise additional capital or otherwise, the Company’s business, financial condition, results
of operations and growth prospects, as well as its ability to maintain regulatory compliance, would be adversely
affected.
The Company faces significant capital and other regulatory requirements as a financial institution. The
Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to
meet the Company’s commitments and business needs, which could include the possibility of financing acquisitions. The
Company does not have any current plans, arrangements or understandings to make any additional acquisitions. In
addition, the 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 the Company to raise additional capital or contract the Company’s operations. The
Company’s 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, the Company’s credit ratings, its ability to maintain a listing on Nasdaq and its financial
condition and performance. In particular, if the Company needs to raise additional capital in the current interest rate
environment, the Company believes the pricing and other terms investors may require in such an offering may not be
attractive to the Company. If the Company fails to maintain an investment grade credit rating, it may adversely impact
its ability to raise capital or incur additional debt. Accordingly, the Company cannot assure you that it will be able to
raise additional capital if needed or on terms acceptable to the Company. If the Company fails to maintain capital to
meet regulatory requirements, or is unable to raise capital to meet its business needs, its business, financial condition,
results of operations and growth prospects would be materially and adversely affected.
The Company 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 , reputational 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
47
liquidity problems and losses or defaults by various institutions. For example, certain community banks experienced
deposit outflows following the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023. This
systemic risk may adversely affect financial intermediaries with which the Company interacts on a daily basis or key
funding providers such as the FHLB, any of which could have a material adverse effect on the Company’s access to
liquidity or otherwise have a material adverse effect on its business, financial condition, results of operations and growth
prospects.
The Company receives 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 the Company’s deposit clients and clients of the Company’s 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 the Company fails to adequately
serve these professional clients with its deposit services, lending, wealth management products and other services, this
source of referrals may diminish, which could have a negative impact on the Company’s financial results. Further, if the
economy in the geographic areas that the Company serves 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 the Company’s business, financial condition, results of operations and growth
prospects.
Legal, Accounting and Compliance Risks
The Company’s risk management framework may not be effective in mitigating risks or losses to the Company.
The Company’s risk management framework is comprised of various processes, systems and strategies, and is
designed to manage the types of risk to which the Company is subject, including, among others, credit, market, liquidity,
interest rate and compliance. The Company’s framework also includes financial or other modeling methodologies that
involve management assumptions and judgment. The Company’s risk management framework may not be effective
under all circumstances and it may not adequately mitigate any risk or loss to us. If the Company’s framework is not
effective, it could suffer unexpected losses and the Company’s business, financial condition, results of operations and
growth prospects could be materially and adversely affected. The Company may also be subject to potentially adverse
regulatory consequences.
The Company’s 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.
The Company’s accounting policies and methods are fundamental to the way it records and reports its financial
condition and results of operations. The Company’s management must exercise judgment in selecting and applying
many of these accounting policies and methods so they comply with United States generally accepted accounting
principles (“GAAP”) and reflect management’s judgment of the most appropriate manner to report the Company’s
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
the Company’s reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting the Company’s 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 the Company’s underlying assumptions or estimates prove to be incorrect, it could have a material adverse
effect on its business, financial condition, results of operations and growth prospects.
The Company’s 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 the Company’s controls, processes
48
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 the Company’s compliance costs, divert
management attention from its business or subject the Company to regulatory actions and increased regulatory scrutiny.
Any of these could have a material adverse effect on the Company’s business, financial condition, results of operations
and growth prospects.
Changes in accounting policies or standards could materially impact the Company’s financial statements.
From time to time, FASB, the Public Company Accounting Oversight Board (or PCAOB) or the SEC, may
change the financial accounting and reporting standards that govern the preparation of the Company’s financial
statements. Such changes may result in the Company being subject to new or changing accounting and reporting
standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors)
may change their interpretations or positions on how these standards should be applied. In addition, trends in financial
and business reporting, including environmental social and governance (ESG) related disclosures, could require the
Company to incur additional reporting expense. These changes may be beyond the Company’s control, can be hard to
predict and can materially impact how it records and reports its financial condition and results of operations. In some
cases, the Company could be required to apply a new or revised standard retroactively, or apply an existing standard
differently, in each case resulting in the Company’s 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 the Company’s business operations.
As a public company, the Company is 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 the Company file annual,
quarterly and current reports with respect to its business and financial condition with the SEC. The Sarbanes-Oxley Act
requires, among other things, that the Company establish and maintain effective internal controls and procedures for
financial reporting. Compliance with these reporting requirements and other rules and regulations, including period
revisions to and additional rules and regulations, of the SEC could increase the Company’s legal and financial
compliance costs and make some activities more time consuming and costly, which could negatively affect the
Company’s efficiency ratio. Further, the need to maintain the corporate infrastructure demanded of a public company
may divert management’s attention from implementing the Company’s strategic plan, which could prevent the Company
from successfully implementing the Company’s growth initiatives and improving its 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, the Company is taking advantage of certain temporary exemptions from various reporting requirements, including
reduced disclosure obligations regarding executive compensation in the Company’s periodic reports and proxy
statements and an exemption from the requirement to obtain an attestation from the Company’s auditors on
management’s assessment of its internal control over financial reporting. When these exemptions cease to apply, the
Company expects to incur additional expenses and devote increased management effort toward ensuring compliance
with them.
The financial reporting resources the Company has put in place may not be sufficient to ensure the accuracy of the
additional information the Company is required to disclose as a publicly listed company.
As a public company, the Company is 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 the Company’s 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 the Company is unable to meet the demands required of the Company as a public company, including the
requirements of the Sarbanes-Oxley Act, the Company may be unable to report its 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 the Company to sanctions or investigations by the SEC or
49
other regulatory authorities. If material weaknesses or other deficiencies occur, the Company’s ability to report its
financial results accurately and timely could be impaired, which could result in late filings of the Company’s annual and
quarterly reports under the Exchange Act, restatements of the Company’s consolidated financial statements, a decline in
the Company’s stock price, suspension or delisting of the Company’s common stock from the Nasdaq Capital Market,
and could have a material adverse effect on the Company’s business, financial condition, results of operations and
growth prospects. Even if the Company is able to report its financial statements accurately and in a timely manner, any
disclosure of material weaknesses in the Company’s future filings with the SEC could cause the Company’s reputation
to be harmed and the Company’s stock price to decline significantly.
The Company did not engage its independent registered public accounting firm to perform an audit of its
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 the Company’s financial statements as of December 31, 2023. Had the
Company’s independent registered public accounting firm performed an audit of its internal control over financial
reporting under the standards of PCAOB, material weaknesses may have been identified. The JOBS Act provides that,
so long as the Company qualifies as an emerging growth company, it will be exempt from the provisions of
Section 404(b) of Sarbanes-Oxley, which would require that the Company’s independent registered public accounting
firm provide an attestation report on the effectiveness of its internal control over financial reporting under the standards
of PCAOB. The Company may take advantage of this exemption so long as it qualifies as an emerging growth company.
The recent change in the Company’s independent registered public accounting firm could materially impact the
Company’s 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 the Company’s historical financial statements that were not previously identified and that could require the
Company to restate previously issued financial statements or materially impact how the Company reports its financial
condition and results of operations going forward. If the Company has to restate any historical financial statements it
could have a material adverse effect on its financial condition and results of operations.
Litigation and regulatory actions, including possible enforcement actions, could subject the Company to significant
fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on the Company’s
business activities.
The Company’s 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 OFAC.
In the normal course of business, from time to time, the Company has 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 the Company’s current or prior business activities. Legal actions could include claims for substantial
compensatory or punitive damages or claims for indeterminate amounts of damages. The Company 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 the Company’s current or prior business activities. Any such legal or
regulatory actions may subject the Company to substantial compensatory or punitive damages, significant fines,
penalties, obligations to change the Company’s business practices or other requirements resulting in increased expenses,
diminished income and damage to the Company’s reputation. The Company’s involvement in any such matters, whether
50
tangential or otherwise and even if the matters are ultimately determined in the Company’s favor, could also cause
significant harm to the Company’s reputation and divert management attention from the operation of the Company’s
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 the Company’s 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 the Company takes 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 the Company’s culture, such
focus could also lead to additional regulatory proceedings.
If the goodwill that the Company recorded in connection with the Company’s recent acquisitions becomes impaired, it
could have a negative impact on its financial condition and results of operations.
As of December 31, 2023, the Company had goodwill of $46.8 million, or 12.7% of the Company’s 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, the Company conducts a qualitative
assessment, and the Company also estimates the fair value of net assets based on analyses of its 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 the Company’s business, financial condition, results of operations and growth prospects.
The Company is subject to extensive regulation, and the regulatory framework that applies to the Company, together
with any future legislative or regulatory changes, may significantly affect its 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 the Company’s business or stockholders. The 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 the Company govern a variety of matters, including permissible types,
amounts and terms of loans and investments the Company may make, the maximum interest rate that may be charged,
the amount of reserves the Company must hold against deposits the Company takes, the types of deposits the Company
may accept, maintenance of adequate capital and liquidity, changes in the control of the Company and its Bank,
restrictions on dividends and establishment of new offices. The Company must obtain approval from its 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. The Company’s regulators also have the ability to compel it to take certain actions, or restrict it from
taking certain actions entirely, such as actions that the Company’s regulators deem to constitute an unsafe or unsound
banking practice. The Company’s 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 the Company’s reputation, all of which could have a material adverse effect on its business, financial
condition, results of operations and growth prospects.
51
While the Company endeavors to maintain safe banking practices and controls beyond the regulatory
requirements applicable to the Company, its 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,
including in the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023. 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 the Company’s ability to compete effectively, to attract and
retain clients, or make it less attractive for the Company to continue providing certain products and services. Any future
changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and
regulations, could affect the Company in substantial and unpredictable ways, including those listed above or other ways
that could have a material adverse effect on the Company’s 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 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. The Company
cannot predict what impact the SECURE Act or SECURE 2.0 will ultimately have on the Company’s business.
There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations
in the United States that may directly affect financial institutions and the global economy.
2024 is a presidential election year. 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.
The Company’s retirement and benefit services and wealth management businesses are highly regulated, and the
regulators have the ability to limit or restrict the Company’s activities and impose fines or suspensions on the conduct
of the Company’s business.
The Company’s retirement and benefit services and wealth management businesses are highly regulated,
primarily at the federal level. The failure of any of the Company’s 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. The Company is also subject to the provisions and regulations of the Employee
Retirement Income Security Act of 1974, or ERISA, to the extent that the Company acts as a “fiduciary” under ERISA
with respect to certain of the Company’s 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 the Company’s business,
financial condition, results of operations and growth prospects.
The Company is currently subject to and may continue to be subject to claims and litigation relating to the
Company’s fiduciary responsibilities.
Some of the services the Company provides, such as trust and investment services, require the Company to act
as fiduciary for its clients and others. From time to time, third parties or government agencies make claims and take legal
52
action against the Company pertaining to the performance of its fiduciary responsibilities. For example, the Company
recently sold its ESOP fiduciary services business, but remains subject to a number of lawsuits that are typical in that
industry, one of which was brought by the United States Department of Labor, related to the Company ESOP’s fiduciary
services. If these claims and legal actions are not resolved in a manner favorable to the Company, it may be exposed to
significant financial liability or the Company’s reputation could be damaged. Either of these results may adversely
impact demand for the Company’s products and services or otherwise have a material adverse effect on its 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 the Company’s business, financial condition, results of operations and growth prospects.
The Company operates in an environment that imposes income taxes on its operations at both the federal and
state levels to varying degrees. The Company engages 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 the Company’s 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, 2023, the Company’s net deferred tax asset was $34.6 million.
The Company is 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, the Company’s capital requirements increased, both in the amount of capital it must hold
and in the quality of the capital to absorb losses. In addition, following the bank failures in 2023, federal bank regulatory
agencies have begun to propose changes and potential increases in existing capital requirements. Holding high amounts
of capital compresses the Company’s earnings and constrains growth. In addition, the failure to meet applicable
regulatory capital requirements could result in one or more of the Company’s regulators placing limitations or conditions
on the Company’s activities, including its growth initiatives, or restricting the commencement of new activities, and
could affect client and investor confidence, its costs of funds and FDIC insurance costs and its ability to make
acquisitions and result in a material adverse effect on the Company’s business, financial condition, results of operations
and growth prospects.
Federal regulators periodically examine the Company’s business, and it may be required to remediate adverse
examination findings.
The Federal Reserve and the OCC periodically examine the Company, including its operations and its
compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the
Company’s financial condition, capital resources, asset quality, asset concentrations, earnings prospects, management,
liquidity, sensitivity to market risk or other aspects of any of the Company’s operations had become unsatisfactory, or
that the Company was 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 the Company’s capital, to restrict the Company’s 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 the Company’s deposit insurance and place the Company into
receivership or conservatorship. Any regulatory action against the Company could have a material adverse effect on its
business, financial condition, results of operations and growth prospects.
53
The Company is 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. The Company’s 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 the Company utilizes 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 the Company’s
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 the Company.
The Bank Secrecy 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. The Company is required to comply with these and other anti-money laundering
requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. The Company is also subject to increased scrutiny of
compliance with the rules enforced by the OFAC. If the Company’s policies, procedures and systems are deemed
deficient or the policies, procedures and systems of any financial institution the Company acquires in the future are
deemed deficient, the Company would be subject to liability, including fines and regulatory actions, which may include
restrictions on the Company’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with
certain aspects of the Company’s 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 the
Company’s business, financial condition, results of operations and growth prospects.
Regulations relating to privacy, information security and data protection could increase the Company’s costs, affect
or limit how the Company collects and use personal information and adversely affect its business opportunities.
The Company is subject to various privacy, information security and data protection laws, including
requirements concerning security breach notification, and the Company could be negatively affected by these laws. For
example, the Company’s business is subject to the Gramm-Leach-Bliley Act which, among other things (i) imposes
certain limitations on its ability to share nonpublic personal information about its clients with nonaffiliated third parties,
(ii) requires that the Company provide certain disclosures to clients about the Company’s information collection, sharing
and security practices and afford clients the right to “opt out” of any information sharing by the Company with
nonaffiliated third parties (with certain exceptions) and (iii) requires that the Company develop, implement and maintain
a written comprehensive information security program containing appropriate safeguards based on the Company’s size
and complexity, the nature and scope of the Company’s activities and the sensitivity of client information it processes, 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
54
in the United States are increasingly adopting or revising privacy, information security and data protection laws,
including with respect to the use of artificial intelligence by financial institutions and their service providers, that
potentially could have a significant impact on the Company’s current and planned privacy, data protection and
information security-related practices, the Company’s collection, use, sharing, retention and safeguarding of consumer or
employee information and some of the Company’s current or planned business activities. This could also increase the
Company’s 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 the Company is subject could result in
higher compliance and technology costs and could restrict the Company’s ability to provide certain products and
services, which could have a material adverse effect on the Company’s business, financial condition, results of
operations and growth prospects. The Company’s 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 the Company’s reputation, which could have a material adverse effect on the Company’s
business, financial condition, results of operations and growth prospects.
The Federal Reserve may require the Company to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a financial holding company to act as a source of financial
and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank
Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength”
doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary
bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit
resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the
resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding
company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank.
Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment
over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any
borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive
and could have a material adverse effect on the Company’s 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 the Company’s 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 the Company’s 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 the
Company’s 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 the Company also remains 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. The Company is expected to monitor and respond to these complaints, including those that the
Company deems frivolous, and doing so may require management to reallocate resources away from more profitable
endeavors.
55
The level of the Company’s commercial real estate portfolio may subject the Company 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, 2023, the Bank did not exceed these guidelines.
The Company is an emerging growth company within the meaning of the Securities Act and because the Company
has decided to take advantage of certain exemptions from various reporting and other requirements applicable to
emerging growth companies, the Company’s common stock could be less attractive to investors.
For as long as the Company remains an emerging growth company, as defined in the JOBS Act, it 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. The Company has elected to, and expect to continue to, take advantage of certain of these and other
exemptions until it is no longer an emerging growth company. The Company will remain an emerging growth company
until the earliest of (i) the end of the fiscal year during which the Company has total annual gross revenues of
$1.235 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the date of the first sale of
common equity securities under the Company’s registration statement on Form S-1, which was declared effective by the
SEC on September 12, 2019, (iii) the date on which the Company has, 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
the Company’s equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) the
Company has been a public reporting company under the Exchange Act for at least twelve calendar months and (C) the
Company has filed at least one annual report on Form 10-K. The Company expects to no longer qualify as an emerging
growth company as of December 31, 2024.
Because the Company has elected to use the extended transition period for complying with new or revised accounting
standards for an emerging growth company, the Company’s financial statements may not be comparable to
companies that comply with these accounting standards as of the public company effective dates.
The Company has 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 the Company 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, the Company’s financial statements may not be comparable to
companies that comply with these accounting standards as of the public company effective dates. Because the
Company’s financial statements may not be comparable to companies that comply with public company effective dates,
investors may have difficulty evaluating or comparing the Company’s business, financial results or prospects in
56
comparison to other public companies, which may have a negative impact on the value and liquidity of the Company’s
common stock. The Company cannot predict if investors will find its common stock less attractive because the Company
plans to rely on this exemption. If some investors find the Company’s common stock less attractive as a result, there may
be a less active trading market for the Company’s common stock and the Company’s stock price may be more volatile.
Certain banking laws and certain provisions of the Company’s 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 the Company, even if doing so would be perceived to be beneficial to the Company’s 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 the Company’s certificate of incorporation and bylaws that could have the effect of
delaying, deferring or discouraging another party from acquiring control of the Company, even if such acquisition would
be viewed by the Company’s stockholders to be in their best interests. These include supermajority stockholder voting
thresholds and requirements relating to stockholder meetings and nominations or proposals. The Company is also subject
to a statutory antitakeover provision included in the DGCL. In addition, the Company’s Board of Directors is authorized
under its 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 the Company’s common stock.
The Company’s certificate of incorporation has an exclusive forum provision, which could limit a stockholder’s
ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers or other employees.
The Company’s 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 the Company’s behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of the Company’s
directors, officers, employees or agents; (iii) any action asserting a claim arising pursuant to the DGCL, the Company’s
certificate of incorporation or the Company’s bylaws; or (iv) any action asserting a claim that is governed by the internal
affairs doctrine. However, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to
enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the
exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or
any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act
creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created
by the Securities Act or the rules and regulations thereunder. As a result, there is uncertainty as to whether a court would
enforce such a provision, and the Company’s stockholders will not be deemed to have waived its compliance with the
federal securities laws and the rules and regulations thereunder.
The Company’s stockholders approved this provision. Any person purchasing or otherwise acquiring any
interest in any shares of the Company’s capital stock shall be deemed to have notice of and to have consented to this
provision of the Company’s 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 the Company or the
Company’s 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, the Company may incur additional
costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on the
Company’s business, financial condition, results of operations and growth prospects.
57
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. The Company continues to assess the potential impact of the CCPA on the
Company’s 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 the Company has customers could enact
similar laws.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures
that could significantly impact the Company’s 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 the
Company 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 the Company’s
customers will likely vary depending on their specific attributes, including reliance on, or role in, carbon intensive
activities. The Company’s efforts to take these risks into account in making lending and other decisions, including by
increasing the Company’s business with climate-friendly companies, may not be effective in protecting the Company
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 the Company’s 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 the Company’s loans, which could diminish the value of the Company’s loan portfolio. Such events may also
cause reductions in regional and local economic activity that may have an adverse effect on the Company’s customers,
which could limit the Company’s ability to raise and invest capital in these areas and communities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk Management and Strategy. The Company relies extensively on various information systems and other
electronic resources to operate its business. In addition, nearly all of the Company’s customers, service providers and other
business partners on whom the Company depends, including the providers of the Company’s online banking, mobile
58
banking and accounting systems, use these systems and their own electronic information systems. Any of these systems
can be compromised, including by employees, customers and other individuals who are authorized to use them, and bad
actors using sophisticated and constantly evolving set of software, tools and strategies to do so. The nature of the
Company’s business, as a financial services provider, and the Company’s relative size, make the Company and its business
partners high-value targets for these bad actors to pursue. See “Item 1A. RISK FACTORS—Operational, Strategic and
Reputational Risks”.
Accordingly, the Company has devoted significant resources to assessing, identifying and managing risks
associated with cybersecurity threats, as noted below:
Identifying and assessing cybersecurity threats: The Company regularly evaluates its systems and data for
potential vulnerabilities and analyzes the evolving cyber threat landscape, to ensure it proactively addresses
risks before they materialize. The Company employs monitoring tools that can detect and help respond to
cybersecurity threats in real-time.
Integration with Overall Risk Management: Cybersecurity risks are seamlessly integrated into the
Company’s broader risk management framework, ensuring a holistic view and prioritized mitigation
strategies.
Management of Third-Party Risk: The Company’s comprehensive third-party management process
includes rigorous due diligence, oversight and identification of cybersecurity risks associated with vendors
and service providers.
Team: The Company has an internal cybersecurity team that is responsible for conducting regular
assessments of its information systems, existing controls, vulnerabilities and potential improvements.
Engagement of Expert Assistance: The Company leverages the expertise of independent consultants, legal
advisors, and audit firms to evaluate the effectiveness of our risk management systems and address potential
cybersecurity incidents efficiently.
Training: The Company conducts periodic cybersecurity training for its workforce.
This information security program is a key part of the Company’s overall risk management system, which is
administered by the Director of Information Security. The program includes administrative, technical and physical
safeguards to help protect the security and confidentiality of customer records and information. These security and privacy
policies and procedures are in effect across all of the Company’s businesses and geographic locations.
From time-to-time, the Company has identified cybersecurity threats and cybersecurity incidents that require the
Company to make changes to its processes and to implement additional safeguards. While none of these identified threats
or incidents have materially affected the Company, it is possible that threats and incidents the Company identifies in the
future could have a material adverse effect on its business strategy, results of operations and financial condition.
Governance. The Company’s management team is responsible for the day-to-day management of cybersecurity
risks it faces, including the Company’s Executive Vice President and Chief Technology Officer and Director of Information
Security. The Company’s current Director of Information Security has over 28 years of experience. For the past 7 years,
the Company’s Director of Information Security has successfully managed teams, implementing and maintaining robust
cybersecurity and data protection controls to safeguard the Company’s information assets. The Company’s Director of
Information Security reports directly to our Executive Vice President and Chief Technology Officer, who possesses
extensive expertise gained through over 39 years in various IT and leadership roles. This combined experience ensures
exceptional guidance and oversight of our cybersecurity program.
In addition, the Company’s Board of Directors, both as a whole and through its Risk Committee (the “Risk
Committee”), is responsible for the oversight of risk management, including cybersecurity risks. In that role, the
59
Company’s Board of Directors and the Risk Committee, with support from the Company’s cybersecurity advisors, are
responsible for ensuring that the risk management processes designed and implemented by management are adequate
and functioning as designed. To carry out those duties, both the Company’s Board of Directors and the Risk Committee
receive quarterly reports from the Company’s management team regarding cybersecurity risks and the Company’s
efforts to prevent, detect, mitigate and remediate any cybersecurity incidents.
ITEM 2. PROPERTIES
The Company’s corporate headquarters are located at 401 Demers Avenue, Grand Forks, North Dakota 58201.
In addition to the Company’s corporate headquarters, which includes a full service banking office, the Company
operates 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, and two full-service banking office located in the Phoenix
MSA. The Company offers retirement and benefits, wealth management and mortgage products and services at all of its
full-service banking offices. In addition, the Company operates one retirement and benefits services office in each of
Minnesota, Colorado and Michigan. The Company has remodeled several locations to utilize the Company’s spaces in a
more efficient manner. As of December 31, 2023, seven of the Company’s office properties were owned and eleven of
the Company’s 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.
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
The Company’s common stock trades on the Nasdaq Stock Market, or Nasdaq, under the symbol “ALRS”.
Stockholders
As of February 28, 2024, the Company had 227 holders of record of the Company’s common stock and an
estimated 2,966 additional beneficial holders of the Company’s common stock whose stock was held in street name by
brokerages or fiduciaries.
60
Stock Repurchase Plans
The following table presents information related to repurchases of the Company’s common stock for each
calendar month in the fourth quarter of 2023.
(dollars in thousands, except per share data)
October 1-31, 2023
November 1-30, 2023
December 1-31, 2023
Total
Total Number
of Shares
Purchased (1)
71,700 $
46,300
—
118,000 $
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)
459,826
413,526
413,526
413,526
71,700
46,300
—
118,000
17.68
17.59
—
17.65
(1)
(2)
Shares repurchased by the Company included shares surrendered by employees to the Company to pay withholding taxes on the vesting of
restricted stock awards. There were no shares surrendered by employees to the Company to pay withholding taxes on vesting of restricted
stock awards in the fourth quarter of 2023.
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Existing Program, which
authorized the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Existing
Program was effective immediately and continued until February 18, 2024. On December 12, 2023, the Board approved a new stock
repurchase program, or the New Program, which authorizes the Company to repurchase up to 1,000,000 shares of its common stock, subject
to certain limitations and conditions. The New Program became effective on February 18, 2024, and replaced the Existing Program. The
New Program will expire on February 18, 2027. Neither the Existing Program nor the New Program obligates the Company to repurchase
any shares of its common stock and there is no assurance that the Company will do so. For the three months ended December 31, 2023, the
Company repurchased 118,000 shares of common stock under the Existing Program.
61
Performance Graph
The following graph compares the percentage change in the cumulative stockholder return of the Company’s
common stock for the period December 31, 2019, through December 31, 2023. For the purposes of comparison, the
graph illustrates comparable stockholder returns of the Nasdaq Composite Index and the total return of the S&P U.S.
BMI Banks - Midwest Region Index. The graph assumes a $100.00 investment on December 31, 2019 in each case, and
measures the amount by which the market value, assuming reinvestment of dividends, has changed as of December 31,
2023.
Alerus Financial Corporation
Nasdaq Composite Index
S&P U.S. Banks - Midwest Region Index
Dividend Policy
$
December 31, December 31, December 31, December 31, December 31,
2021
134.66 $
177.27
113.59
2020
123.28 $
145.05
85.98
2019
100.00 $
100.00
100.00
2022
110.56 $
119.63
98.03
2023
110.32
173.11
100.08
It has been the Company’s policy to pay quarterly dividends to holders of its common stock and the Company
currently intends to maintain or increase its dividend levels in future quarters. The Company’s dividend policy and
practice may change in the future, however, and the Company’s Board of Directors may change or eliminate the
payment of future dividends at its discretion, without notice to the Company’s stockholders. Any future determination to
pay dividends to holders of the Company’s common stock will depend on its results of operations, financial condition,
economic conditions, capital requirements, banking regulations, contractual restrictions and any other factors that the
Company’s Board of Directors may deem relevant.
62
Dividend Restrictions
As a Delaware corporation, the Company is subject to certain restrictions on dividends under the DGCL. In
general, a Delaware corporation may only pay dividends either out of surplus (as defined and computed in accordance
with the provisions of the DGCL) or out of the current or the immediately preceding year’s net profits. Surplus is defined
as the excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital.
The value of a corporation’s assets can be measured in a number of ways and may not necessarily equal their book
value.
In the first quarter of 2021, the Company 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), the Company cannot, subject to certain exceptions outlined in the Note Purchase Agreement, pay
any dividends to its 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 the Company’s junior subordinated debentures issued to its two statutory trusts, the
Company is not permitted to pay dividends on its capital stock if an event of default occurs under the terms of the
debentures, the Company is otherwise in default with respect to the Company’s payment obligations or the Company has
elected to defer interest payments on the debentures.
In addition, the Company is 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 the Company is a holding company and does not engage directly in business
activities of a material nature, the Company’s ability to pay dividends to its stockholders depends, in large part, upon its
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]
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be
read in conjunction with the “Selected Financial Data” and the Company’s 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. The Company assumes no obligation to update any of these
forward-looking statements.
Overview
The Company is a diversified financial services company headquartered in Grand Forks, North Dakota.
Through the Company’s subsidiary, Alerus Financial, National Association, the Company provides innovative and
comprehensive financial solutions to businesses and consumers through four distinct business lines—banking, retirement
63
and benefit services, wealth management and mortgage. These solutions are delivered through a relationship oriented
primary point of contact along with responsive and client friendly technology.
The Company’s 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 the Company’s offices located in the
Company’s banking markets, its retirement and benefit services business administers plans in all 50 states through
offices located in Michigan, Minnesota and Colorado.
The Company’s business model produces strong financial performance and a diversified revenue stream, which
has helped the Company establish a brand and culture yielding both a loyal client base and passionate and dedicated
employees. The Company believes its client first and advice based philosophy, diversified business model and history of
high performance and growth distinguishes the Company from other financial service providers. The Company generates
a majority of its overall revenue from noninterest income, which is driven primarily by the Company’s retirement and
benefit services, wealth management and mortgage business lines.
As of December 31, 2023, the Company had $3.9 billion of total assets, $2.8 billion of total loans, $3.1 billion
of total deposits, $369.1 million of stockholders’ equity, $36.7 billion of AUA/AUM in the Company’s retirement and
benefit services segment, and $4.0 billion of AUA/AUM in the Company’s wealth management segment. For the year
ended December 31, 2023, the Company had $364.1 million of mortgage originations.
Net Interest Income
Net interest income represents interest income less interest expense. The Company generates interest income on
interest-earning assets, primarily loans and available-for-sale securities. The Company incurs interest expense on
interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, the
Company measures and monitors: (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 the Company earns on
interest-earning assets or pay on interest-bearing liabilities.
Noninterest Income
Noninterest income primarily consists of the following:
The Company’s retirement and benefit services business, which includes retirement plan administration,
retirement plan investment advisory, HSA, ESOP administration and recordkeeping, and other benefit
services, is the Company’s largest source of noninterest income. Over half of the Company’s 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. The 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.
64
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 the Company’s clients.
Net gains (losses) on investment securities consists of the realized gains or losses related to the sale of
available-for-sale investment securities.
Other noninterest income consists of debit card interchange income, income earned on the growth of the
cash surrender value of life insurance policies the Company holds 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 the Company’s 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 the Company occupies.
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. The Company believes its technology spending enhances the efficiency of the
Company’s employees and enables the Company to provide outstanding service to its clients. Technology
and information system costs are primarily impacted by the number of locations the Company occupies, the
number of employees, clients and volume of transactions the Company has and the level of service the
Company requires from its 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 the Company pays 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,
65
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 the Company’s business activities and needs.
Operating Segments
The Company measures the overall profitability of business operations based on income before income tax. The
Company allocates costs to its 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. The Company measures the profitability of each segment based on the direct and indirect allocations of
expense as it believes it better approximates the contribution generated by the Company’s reportable operating segments.
All indirect overhead allocations to each segment are determined by management based on an annual review of
department expenses. 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 in Item 8
of this Form 10-K.
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s 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 the Company’s 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 is discussed below.
Allowance for credit losses (“ACL”)— In 2023, the Company adopted the new accounting standard for credit
losses, ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, as amended (“ASU 2016-13”). This new accounting standard, commonly referred to as “CECL,”
significantly changed the Company’s methodology for accounting for reserves on loans, unfunded off balance sheet
credit exposures, including certain unfunded loan commitments and standby guarantees, as well as introduced the
consideration for an allowance on HTM investment securities. ASU 2016-13 replaced the “incurred loss” methodology
used prior to 2023 to establish an allowance on loans and off-balance sheet credit exposures, with an “expected loss”
approach. Under CECL, the ACL at each reporting period serves as our best estimate of projected credit losses over the
contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and
forecasts as of the valuation date.
The recorded ACL on loans and HTM investment securities is determined based on the amortized cost basis of
the assets and may be determined at various levels, including homogeneous loan pools, individual credits with unique
risk factors, and homogenous HTM investment securities pools, by credit rating. Since adoption of CECL in 2023, the
Company has used a discounted cash flow approach to calculate the ACL for each loan segment. Within the discounted
cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the
expected loss for each loan segment. PD is the probability the asset will default within a given timeframe and LGD is the
percentage of the assets not expected to be collected due to default. PD and LGD data is derived using a combination of
external data and internal historical default and loss experience.
CECL may create more volatility in our ACL, particularly our ACL on loans and ACL on off balance sheet
credit exposures. Under CECL, our ACL may increase or decrease period to period based on many factors, including,
but not limited to: macroeconomic forecasts and conditions; a change in the prepayment speed assumption; an increase
or decrease in loan balances, including changes to the Company’s loan portfolio mix; credit quality of the loan portfolio;
and various qualitative factors outlined in ASU 2016-13.
66
ASU 2016-13 also changed the Company’s methodology and accounting for credit losses within the investment
portfolio designated as AFS. To the extent the fair value of a security designated as AFS is less than its amortized cost
and the Company either intends to sell the security or it is more-likely-than-not the Company will be required to sell the
security before recovery of its amortized cost basis, then the investment is permanently impaired and the amortized cost
basis is written down to fair value and a corresponding impairment charge is recorded within the consolidated statements
of income. If neither of the above is true, but the fair value of the investment is below its amortized cost basis at the
reporting date, then an allowance is established on the AFS investment for the portion of the impairment that is due to
credit reasons (e.g. credit rating downgrades, past due receivables, and/or other macro- or micro-adverse trends). The
allowance established on an AFS investment due to credit losses is limited to the amount the fair value of the investment
is below its amortized cost basis as of the reporting date. If the fair value of the investment is below its amortized cost
basis for non-credit-related reasons (e.g. interest rate environment), then the impairment continues to be recognized
within stockholders' equity through AOCI.
ACL on Loans. The Company considers the ACL on loans to be a critical accounting policy given the
uncertainty in evaluating the allowance required to cover management’s estimate of all expected credit losses over the
expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key
management function that requires significant judgment and estimate by management about the effect of matters that are
inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may
result in significant changes in the allowance in future periods. While the Company’s current evaluation indicates that
the ACL on loans at December 31, 2023 and 2022 was appropriate, the allowance may need to be increased under
adversely different conditions or assumptions.
The significant key assumptions used with the ACL on loans calculation at December 31, 2023 using the CECL
methodology, included:
Macroeconomic factors (loss drivers): Macroeconomic factors are used within our discounted cash flow model
to forecast the PD over the forecast period. As macroeconomic factors condition worsen, the PD increases, and
the corresponding LGD increases, resulting in an increase in the ACL on loans. The Company utilizes National
unemployment, changes in National GDP, and changes in National Housing Price Index in estimation of the
ACL on loans. Macroeconomic factors used in the calculation of the ACL on loans may change from time to
time and in times of greater uncertainty. The Company may consider a range of possible forecasts and evaluate
the probability of each scenario.
Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable
forecast period in developing the ACL, which represents the time period that management believes it can
reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be
reasonable and supportable is set annually and validated through an assessment of economic leading indicators.
In periods of greater volatility and uncertainty, such as that seen across the global markets and economies,
including the U.S., the Company may elect to use a shorter forecast period, whereas when markets, economies
and various other factors are considered more stable and certain, the Company may elect to use a longer
forecast period. Generally, the Company expects its forecast period to range from one to two years. Once the
reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss
expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for
prepayments. In determining the length of time over which the reversion will take place (i.e. “reversion speed”),
the Company considers such factors such as, but not limited to, historical loan loss experience over previous
economic cycles, as well as where the Company believes it is within the current economic cycle. At December
31, 2023, the Company used a one-year forecast period and one-year reversion period for each loan segment to
measure the ACL on loans.
Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing the Company’s own
historical loan data, as well as consideration of current environmental factors. The prepayment speed
assumption is utilized with the discounted cash flow model (i.e. the CECL model) to forecast expected cash
flows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed
assumption will drive a lower ACL, and vice versa.
67
Qualitative factors: ASU 2016-13 requires companies to consider various qualitative factors that may impact
expected credit losses. The Company continues to consider qualitative factors in determining and arriving at our
ACL on loans each reporting period.
As of December 31, 2023, the recorded ACL on loans was $35.8 million and represented the Company’s best
estimate of expected credit losses within the loan portfolio. However, the Company may adjust its assumptions to
account for differences between expected and actual losses each period. A future change of the Company’s assumptions
will likely alter the level of allowance required and may have a material impact on future results of operations and
financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in the aforementioned
key assumptions, as well as asset quality within the loan portfolio, and the Company considers the impact of these trends
on the ACL and the Company's financial condition, if any. The ACL on loans is reviewed and approved on a quarterly
basis by the ACL Governance Committee, and later reviewed and ratified by the Bank's Board of Directors.
Refer to “—Results of Operations—Provision for Credit Losses,” “—Financial Condition—Asset Quality,” and
Note 6 of the consolidated financial statements for further discussion.
ACL on Off Balance Sheet Credit Exposures. The Company considers the ACL on off balance sheet credit
exposures to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to
cover management’s estimate of all expected credit losses on expected future loan fundings of, primarily, unfunded loan
commitments for those that are not unconditionally cancellable by the Company. The expected credit loss factor
calculated for each loan segment using the ACL on loans methodology described above, as well as within Note 1 of the
consolidated financial statements, is used to calculate the ACL on off balance sheet credit exposures for each applicable
loan segment, and, thus, are subject to the same level of estimation risk and volatility previously described. In addition,
one other key assumption is used to derive the allowance on off balance sheet credit exposures and that is the expected
funding rate. The expected funding rate is derived using historical loan level data for credit line usage, and is applied to
total off balance sheet credit exposures at each reporting date, excluding any that are unconditionally cancellable by the
Company, to determine the expected funding amount. As unfunded loan commitments are funded, the allowance
migrates from that provided for off balance sheet credit exposures to the ACL on loans. If the expected funding rate or
any other key assumption used is not reasonable, then this could have an adverse impact on the total ACL upon funding.
As of December 31, 2023, the recorded ACL on off balance sheet credit exposures was $7.4 million and
presented within accrued interest and other liabilities on the consolidated balance sheet. Increases (decreases) to the
allowance are presented within provision (credit) for credit losses on the consolidated statements of income. The
allowance at December 31, 2023, represented the Company’s best estimate, however, it may adjust assumptions to
account for differences between expected and actual losses from period to period. A future change to the Company’s
assumptions will likely alter the level of allowance required and may have a material impact on future results of
operations and financial condition.
Refer to “—Results of Operations—Provision for Credit Losses,” “—Financial Condition—Asset Quality,” and
Note 6 of the consolidated financial statements for further discussion.
ACL for HTM Debt Securities. The estimate of expected credit losses on the Company’s HTM investment
portfolio utilizes external PD and LGD data by credit rating to determine a loss rate. Management may exercise
discretion to make adjustments based on various environmental factors.
At December 31, 2023, the Company held securities in its HTM portfolio with an amortized cost basis of
$299.7 million that primarily consisted of MBS and CMO debt securities issued, municipal bonds or guaranteed by U.S.
government-sponsored agencies. Under ASU 2016-13 the Company has the ability to exclude certain securities when the
historical credit loss information, adjusted for current conditions and forecasts, resulting in zero risk of nonpayment of
the amortized cost basis of the security. Management has evaluated and determined zero risk of nonpayment on all
securities guaranteed by the U.S government agencies. At December 31, 2023, the Company recorded an ACL on HTM
debt securities of $213 thousand.
68
Refer to “—Financial Condition—Investments” and Note 5 of the consolidated financial statements for further
discussion.
ACL on AFS Debt Securities. The Company considers the ACL on AFS debt securities to be a critical accounting
policy given the size of the investment portfolio and level of estimation used to determine the allowance, as appropriate. As of
December 31, 2023, the Company's AFS portfolio was entirely made up of assets that are fair valued using level 2 valuation
techniques in accordance with ASC 820, Fair Value Measurement. The Company engages a third party pricing agency to assist
with the valuation of such debt securities and the assets are carried at fair value at each reporting period. An allowance is
recorded on an AFS debt security to the extent an event has occurred that suggests receipt of full contractual payments are at
risk. When such an event has been identified, a discounted cash flow model is used to determine the expected losses due to
credit risk, and an allowance is recorded to reduce the carrying value of the debt security by the calculated expected loss
amount, limited to the amount by which the fair value of the debt security is below its amortized cost basis.
As further described within “—Financial Condition—Investments,” the Company's AFS portfolio, as of December
31, 2023, primarily consisted of MBS and CMO debt securities issued or guaranteed by U.S. government-sponsored agencies,
and, thus, presenting little to no credit risk. As of December 31, 2023, the Company had not identified indications of credit risk
and did not carry any allowance for credit losses on its AFS portfolio, nor did it record any permanent impairments during
2023, 2022 or 2021.
Refer to “—Financial Condition—Investments” and Note 5 of the consolidated financial statements for further
discussion.
Intangible assets—As a result of acquisitions, the Company carries 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.
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, 2023 and 2022, $495.2 million, or 12.7%, and $723.7 million, or
19.1%, respectively, of the Company’s 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, 2023 and 2022, $9.2 million
and $6.3 million of derivative financial instruments, respectively, were classified as Level 2 of the fair value hierarchy,
representing less than 1% of the Company’s total liabilities in those years. As of December 31, 2023, the Company had no fair
value assets or liabilities classified in Level 3 of the fair value hierarchy.
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 in Item 8 of this Form 10-K.
69
Selected Financial Data
The following consolidated selected financial data is derived from the Company’s audited consolidated
financial statements as of and for the three years ended December 31, 2023.
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
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)
Adjusted efficiency ratio (1)
Dividend payout ratio
Average equity to average assets
Selected Balance Sheet Data - Period Ending
Loans
Allowance for credit losses
Investment securities
Assets
Deposits
Long-term debt
Total stockholders' equity (2)
Asset Quality Ratios
Net charge-offs/(recoveries) to average loans
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for credit losses to total loans
Allowance for credit losses to nonperforming loans
Other Data
As of and for the year ended December 31,
2021
2022
2023
$
$
$
$
$
$
$
$
$
$
$
$
87,839
2,057
80,229
150,157
15,854
4,158
11,696
0.59
0.58
0.75
15.46
19,922
20,143
$
$
$
$
$
$
99,729
—
111,223
158,770
52,182
12,177
40,005
2.12
2.10
0.70
14.37
18,640
18,884
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
0.31 %
3.26 %
5.37 %
47.74 %
2.46 %
85.85 %
74.91 %
129.31 %
9.39 %
1.14 %
11.55 %
15.09 %
52.72 %
3.04 %
72.86 %
72.86 %
33.33 %
9.89 %
1.66 %
15.22 %
18.89 %
62.86 %
2.90 %
70.02 %
70.06 %
21.21 %
10.89 %
$ 2,759,583
(35,843)
786,251
3,907,713
3,095,611
58,956
369,127
$ 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
(0.04) %
0.32 %
0.22 %
1.30 %
410.34 %
0.02 %
0.16 %
0.10 %
1.27 %
820.93 %
(0.04)%
0.12 %
0.09 %
1.80 %
1,437.05 %
Retirement and benefit services assets under administration/management
Wealth management assets under administration/management
Mortgage originations
$ 36,682,425
$ 4,018,846
364,114
$
$ 32,122,520
$ 3,582,648
812,314
$
$ 36,732,938
$ 4,039,931
$ 1,836,064
(1)
(2)
Represents a Non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial
Measures.”
Includes ESOP-owned shares.
70
Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, the Company routinely supplements its
evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the
ratio of tangible common equity to tangible assets, tangible common equity per share, return on average tangible
common equity, net interest margin (tax-equivalent), the efficiency ratio, and the adjusted 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;
(vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus
noninterest income plus a tax-equivalent adjustment; and (vii) adjusted efficiency ratio as noninterest expense less
intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment
less net gains (losses) on investment securities.
The following tables present these non-GAAP financial measures along with the most directly comparable
financial measures calculated in accordance with GAAP for the periods indicated.
Tangible common equity to tangible assets
Total common stockholders’ equity
Less: Goodwill
Less: Other intangible assets
Tangible common equity (a)
Total assets
Less: Goodwill
Less: Other intangible assets
Tangible assets (b)
December 31,
2023
December 31,
2022
December 31,
2021
$
369,127
46,783
17,158
305,186
3,907,713
46,783
17,158
3,843,772
$
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
Tangible common equity to tangible assets (a)/(b)
7.94 %
7.74 %
9.21 %
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)
$
$
369,127
46,783
17,158
305,186
19,734
15.46
$
$
356,872
47,087
22,455
287,330
19,992
14.37
$
$
359,403
31,490
20,250
307,663
17,213
17.87
71
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 (g)
Net interest income
Noninterest income
Tax-equivalent adjustment
Total tax-equivalent revenue (h)
Efficiency ratio (g)/(h)
Adjusted efficiency ratio
Noninterest expense
Less: Intangible amortization expense
Adjusted noninterest expense (i)
Net interest income
Noninterest income
Tax-equivalent adjustment
Less: Net gains (losses) on investment securities
Total tax-equivalent revenue (j)
Adjusted efficiency ratio (i)/(j)
Results of Operations
December 31,
2023
December 31,
2022
December 31,
2021
$
11,696
4,184
15,880
358,268
46,959
15,624
295,685
$
40,005
3,756
43,761
346,355
39,415
17,018
289,922
$
52,681
3,460
56,141
346,059
30,385
18,548
297,126
5.37 %
15.09 %
18.89 %
$
150,157
5,296
144,861
87,839
80,229
671
168,739
$
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
85.85 %
72.86 %
70.02 %
$
150,157
5,296
144,861
87,839
80,229
671
(24,643)
193,382
$
158,770
4,754
154,016
99,729
111,223
429
—
211,381
$
168,909
4,380
164,529
87,099
147,387
492
125
234,853
74.91 %
72.86 %
70.06 %
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, 2023 are compared to the results for the year ended
December 31, 2022, and the consolidated financial condition of the Company as of December 31, 2023 is compared to
December 31, 2022. Results of operations for the year ended December 31, 2022 compared to results for the year ended
December 31, 2021, can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations of the Company’s 2022 annual report on Form 10-K filed with the SEC on March 10, 2023.
Summary
Net income for the year ended December 31, 2023 was $11.7 million, a decrease of $28.3 million, or 70.8%,
compared to $40.0 million for the year ended December 31, 2022. Diluted earnings per common share were $0.58 in
2023, compared to $2.10 in 2022. Return on average total assets was 0.31% in 2023, compared to 1.14% for 2022. The
decrease in net income was primarily driven by a $31.0 million decrease in noninterest income and a $11.9 million
decrease in net interest income, partially offset by an $8.6 million decrease in noninterest expense. Noninterest income
decreased primarily due to a $24.6 million loss on investment securities as a result of a strategic balance sheet
repositioning in the fourth quarter, as well as an $8.5 million decrease in mortgage banking revenue, attributable to a
decrease in mortgage originations due to the impact of higher interest rates. The decrease in net interest income was due
to heightened deposit competition, the impact of rising short-term interest rates on indexed money market deposits, and
clients moving deposits out of noninterest bearing products into interest-bearing products. The decrease in noninterest
expense was primarily due to a $4.4 million decrease in compensation expense, driven by a decrease in mortgage
incentives associated with the decrease in mortgage originations.
72
Net Interest Income—With Nontaxable Income Converted to Fully Taxable Equivalent, or FTE
Net interest income totaled $87.8 million in 2023, a decrease of $11.9 million, or 11.90%, from 2022. Net
interest margin decreased 58 basis points to 2.46% in 2023, from the 3.04% reported in 2022. The decrease in net
interest margin was primarily a result of a $61.2 million increase in interest expense on interest-bearing liabilities,
partially offset by a $49.3 million increase in interest income on interest earning assets. The increase in interest expense
was primarily driven by a 220 basis point increase in the average rate paid on interest-bearing liabilities due to increases
in short-term interest rates and a highly competitive deposit environment. Additionally, the average balance of interest-
bearing liabilities increased $411.6 million, driven by increased short-term borrowings to support loan growth, core
deposit growth, and deposit migration from noninterest bearing deposit accounts into interest bearing deposit accounts.
The increase in the interest income earned on interest bearing assets was driven by a 105 basis point increase in the
average rate earned on loans as well as a $475.6 million increase in the average balance of total loans from organic
growth.
The following table sets forth information related to the Company’s average balance sheet, average yields on
assets, and average rates of liabilities for the periods indicated. The Company derived these yields by dividing income or
expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from
the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on
nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables,
adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income
on a comparable basis.
73
(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
Cash and due from banks
Allowance for loan losses
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
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
Total interest-bearing liabilities
2023
Year ended December 31,
2022
Average
Balance
Interest Average
Income/ Yield/
Expense Rate
Interest Average
Average
Balance
Income/ Yield/ Average
Balance
Expense Rate
2021
Interest Average
Income/ Yield/
Rate
Expense
$
35,395 $
983,545
—
13,217
1,202
25,199
—
721
3.40 % $
58,149 $
2.56 % 1,135,426
7,313
24,497
— %
5.46 %
586
24,333
192
855
1.01 %
2.14 %
2.63 %
3.49 %
222,916 $
864,273
—
65,968
322
14,172
—
1,494
0.14 %
1.64 %
— %
2.26 %
4.91 %
4.10 %
3.77 %
4.34 %
3.47 %
4.64 %
4.41 %
3.78 %
4.14 %
4.36 %
3.09 %
558,458
99,315
980,667
1,638,440
36,986
7,607
51,020
95,613
507,040
6.62 %
63,296
7.66 %
713,102
5.20 %
5.84 % 1,283,438
26,004
3,300
29,632
58,936
579,002
5.13 %
41,751
5.21 %
571,326
4.16 %
4.59 % 1,192,079
28,445
1,712
21,523
51,680
706,626
154,036
35,971
896,633
2,535,073
25,246
3,592,476
30,422
(35,883)
17,510
5,624
13,034
33,059
46,959
19,777
2,349
43,443
48,247
224,541
$ 3,817,017
27,240
11,639
2,179
41,058
136,671
1,761
165,554
20,573
587,443
3.85 %
7,222
136,483
7.56 %
2,525
52,071
6.06 %
30,320
775,997
4.58 %
89,256
5.39 % 2,059,435
6.98 %
784
13,824
4.61 % 3,298,644 116,006
31,957
(32,011)
17,429
3,626
9,377
33,573
39,415
21,542
2,246
31,593
43,264
202,011
$ 3,500,655
16,575
6,093
2,537
25,205
76,885
276
93,149
477,621
3.50 %
131,412
5.29 %
57,574
4.85 %
666,607
3.91 %
4.33 % 1,858,686
5.67 %
6,329
3.52 % 3,018,172
27,399
(34,054)
19,081
4,997
8,461
32,760
30,385
23,479
1,984
11,685
34,471
160,648
$ 3,178,820
$ 768,238 $
1,118,815
303,746
287,768
113,973
58,900
2,651,440
9,872
32,639
10,876
15,283
5,693
2,681
77,044
1.29 % $ 692,287 $
2.92 % 1,113,426
221,997
3.58 %
63,296
5.31 %
89,932
5.00 %
4.55 %
58,864
2.91 % 2,239,802
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 %
3
2.46 %
—
3.10 %
3.98 %
50,759
0.71 % 1,987,339
987
1,500
1,174
—
—
1,897
5,558
0.14 %
0.15 %
0.54 %
— %
— %
3.74 %
0.28 %
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Stockholders’ equity
737,365
69,944
358,268
$ 3,817,017
Total liabilities and stockholders’ equity
Net interest income
Net interest rate spread
Net interest margin on FTE basis (1)
851,821
62,677
346,355
$ 3,500,655
784,998
60,424
346,059
$ 3,178,820
$ 88,510
$ 100,158
$ 87,591
1.70 %
2.46 %
2.81 %
3.04 %
2.81 %
2.90 %
(1)
Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.
74
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances
(volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The
following table shows the effect that these factors had on the interest earned on interest earning assets and the interest
incurred on interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in
volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the
change in average rate by the previous period’s volume.
Year ended December 31, 2023
Compared with
Year ended December 31, 2022
Change due to:
Interest
Year ended December 31, 2022
Compared with
Year ended December 31, 2021
Change due to:
Interest
Variance
Volume
Rate
Variance Volume
Rate
$
(230) $
846 $
(3,250)
(192)
(394)
4,116
—
260
616 $
866
(192)
(134)
(231) $
4,447
—
(937)
495 $
5,714
192
298
264
10,161
192
(639)
2,638
1,877
11,131
15,646
4,171
929
(781)
4,319
19,965
648
16,547
8,344
2,430
10,257
21,031
2,496
3,488
435
6,419
27,450
329
33,001
10,982
4,307
21,388
36,677
6,667
4,417
(346)
10,738
47,415
977
49,548
(3,533)
883
5,345
2,695
3,811
235
(243)
3,803
6,498
327
10,104
1,092
705
2,764
4,561
187
894
231
1,312
5,873
181
12,561
(2,441)
1,588
8,109
7,256
3,998
1,129
(12)
5,115
12,371
508
22,665
8,356
8,189
167
26,549
26,519
30
9,313
8,741
572
13,729
8,207
5,522
2,908
2,163
745
341
340
1
7,037
61,196
54,159
9,510 $ (21,158) $ (11,648)
(7)
135
34
—
—
303
465
9,639 $
529
536
4,590
4,455
389
355
1,554
1,554
2,785
2,785
443
140
9,825
10,290
2,736 $ 12,375
$
(tax-equivalent basis, dollars in thousands)
Interest earning assets
Interest-bearing deposits with banks
Investment securities
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
Federal Reserve/FHLB Stock
Total interest income
Interest-bearing liabilities
Interest-bearing demand deposits
Money market and savings deposits
Time deposits
Fed funds purchased
Short-term borrowings
Long-term debt
Total interest expense
Change in net interest income
Provision for Credit Losses
The Company recorded a provision for credit losses expense of $2.1 million for the year ended
December 31, 2023, compared to no provision for credit losses expense for the year ended December 31, 2022. The
provision for credit losses expense for the year ended December 31, 2023, included $(225) thousand recovery for credit
losses on loans, $2.2 million in provision for credit losses on unfunded commitments and $40 thousand in provision for
credit losses on investment securities held-to-maturity. The Current Expected Credit Loss, or CECL, accounting standard
requires the Company to recognize losses over the expected life of the loan as opposed to the losses expected to already
have been incurred. The increase in provision for credit losses is primarily a result of a change in forecasting
assumptions brought about by the new methodology as well as strong loan growth and unfunded commitments.
75
Noninterest Income
The following table presents noninterest income for the years ended December 31, 2023, 2022 and 2021
Year ended December 31,
(dollars in thousands)
Retirement and benefit services
Wealth management
Mortgage banking
Service charges on deposit accounts
Net gains (losses) on investment securities
Other
Total noninterest income
Noninterest income as a % of revenue
2023
$ 65,294
21,855
8,411
1,280
(24,643)
8,032
$ 80,229
2022
$ 67,135
20,870
16,921
1,434
—
4,863
$ 111,223
$ Change % Change
2022
$ (1,841)
985
(8,510)
(154)
(24,643)
3,169
$ (30,994)
(2.7)% $ 67,135
20,870
4.7 %
16,921
(50.3)%
1,434
(10.7)%
100.0 %
—
4,863
65.2 %
(27.9)% $ 111,223
2021
$ 71,709
21,052
48,502
1,395
125
4,604
$ 147,387
$ Change
$ (4,574)
(182)
(31,581)
39
(125)
259
$ (36,164)
%
Change
(6.4)%
(0.9)%
(65.1)%
2.8 %
(100.0)%
5.6 %
(24.5)%
47.7 %
52.7 %
52.7 %
62.9 %
Total noninterest income decreased $31.0 million, or 27.9%, to $80.2 million in 2023, from $111.2 million for
2022. The decrease in noninterest income was primarily driven by the previously announced balance sheet repositioning,
as a result of which a $24.6 million loss on the sale of investment securities was recognized in the fourth quarter of 2023.
Mortgage banking revenue decreased $8.5 million in 2023 primarily as a result of a $448.2 million, or 55.2%, decrease
in mortgage originations due to the impact of higher interest rates.
Noninterest income as a percent of total operating revenue, which consists of net interest income plus
noninterest income, was 47.7% in 2023, down from 52.7% the prior year. The decrease in 2023 was due to a 27.9%
decrease in noninterest income and an 11.9% decrease in net interest income.
Noninterest Expense
The following table presents noninterest expense for the years ended December 31, 2023, 2022 and 2021.
(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
2023
2022
$ Change % Change
2022
2021
Year ended December 31,
$ 76,290 $ 80,656 $ (4,366)
(1,864)
(128)
21,915
7,605
20,051
7,477
(5.4)% $ 80,656 $ 93,386 $ (12,730)
(118)
(8.5)%
(543)
(1.7)%
21,915
7,605
22,033
8,148
$ Change % Change
(13.6)%
(0.5)%
(6.7)%
21,053
5,296
6,743
3,027
1,796
1,189
1,902
5,333
1,566
542
(1,624)
(227)
(644)
7
(281)
(1,594)
$ 150,157 $ 158,770 $ (8,613)
19,487
4,754
8,367
3,254
2,440
1,182
2,183
6,927
8.0 %
11.4 %
(19.4)%
(7.0)%
(26.4)%
0.6 %
(12.9)%
(23.0)%
(999)
374
2,075
72
79
740
(2,067)
2,978
(5.4)% $ 158,770 $ 168,909 $ (10,139)
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
4,250
3,949
(4.9)%
8.5 %
33.0 %
2.3 %
3.3 %
167.4 %
(48.6)%
75.4 %
(6.0)%
Total noninterest expense decreased $8.6 million, or 5.4%, to $150.2 million for the year ended
December 31, 2023, from $158.8 million for the year ended December 31, 2022. The decrease in noninterest expense
was primarily driven by a $4.4 million decrease in compensation expense, a $1.9 million decrease in employee taxes and
benefits expense, and a $1.6 million decrease in professional fees and assessments expense, partially offset by an
increase of $1.6 million in business services, software and technology expense. The decreases in compensation expense
and employee taxes and benefits expenses were primarily driven by a decrease in mortgage incentives associated with
the decrease in mortgage originations, and decreased expenses related to group insurance. Professional fees and
assessments expenses decreased due to merger related expenses associated with the acquisition of Metro Phoenix Bank
in 2022, partially offset by an increase in FDIC assessments. Business services, software and technology expense
increased primarily due to higher contract renewals due to inflationary pressures and equipment purchases.
76
Income Taxes
For the year ended December 31, 2023, the Company recognized income tax expense of $4.2 million on
$15.9 million of pre-tax income, resulting in an effective tax rate of 26.2%. For the year ended December 31, 2022, the
Company recognized an income tax expense of $12.2 million on $52.2 million of pre-tax income, resulting in an
effective tax rate of 23.3%. The increase in the effective tax rate was primarily driven by items related to the acquisition
of Metro Phoenix Bank in 2022 and an increase in state taxes driven by increased income earned in Minnesota and
Arizona.
Segment Reporting
The Company determined reportable segments based on the significance of the services offered, the
significance of those services to the Company’s financial condition and operating results, and the Company’s regular
review of the operating results of those services. The Company has 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 and indirect noninterest expense overhead allocations. Corporate administration
includes all remaining income and expenses not allocated to the four operating segments. Certain reclassification
adjustments have been made between corporate administration and the various lines of business for consistency in
presentation.
For additional financial information on the Company’s segments see Note 22 (Segment Reporting) of the
Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.
Banking
The banking segment offers a complete line of loan, deposit, cash management, and treasury services through
15 offices in North Dakota, Minnesota, and Arizona. These products and services are supported through various digital
applications. The majority of the Company’s assets and liabilities are on the banking segment balance sheet.
The banking segment reported net income before taxes of $7.1 million for the year ended December 31, 2023, a
decrease of $25.4 million compared to the year ended December 31, 2022. The decrease was primarily driven by a $21.6
million decrease in noninterest income and a $10.5 million decrease in net interest income, partially offset by a $8.8
million decrease in noninterest expense. During the fourth quarter of 2023, the Company sold $171.8 million of
available-for-sale (AFS) securities in a balance sheet repositioning. The sale resulted in a one-time pre-tax net loss of
$24.6 million. Proceeds from the sale were reinvested into loans to new and existing clients throughout the communities
the Company serves, in addition to paying down borrowings.
Retirement and Benefit Services
Retirement and benefit services provide the following services nationally: recordkeeping and administration
services to qualified retirement plans; ESOP 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 8,300 retirement plans and more than 474,000
plan participants. In addition, the division employs approximately 243 professionals, and operates within the Company’s
banking markets, as well as East Lansing, Michigan, and Lakewood, Colorado.
The retirement and benefit services segment reported net income before taxes of $14.7 million for the year
ended December 31, 2023, a decrease of $4.5 million compared to the year ended December 31, 2022. Revenue of $65.3
million, comprised of $23.1 million in asset-based revenue and $42.2 million in participant and transaction revenues,
decreased $1.8 million, or 2.7%, primarily due to the divestiture of the payroll services line of business.
77
The following table presents changes in the combined AUA and AUM for the Company’s 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)
2023
$ 32,122,520
—
4,548,845
(4,836,524)
4,847,584
$ 36,682,425
Year ended
December 31,
2022
$ 36,732,938
—
5,735,604
(7,512,492)
(2,833,530)
$ 32,122,520
2021
$ 34,199,954
—
5,589,925
(6,010,136)
2,953,195
$ 36,732,938
0.19 %
0.20 %
0.20 %
(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 $36.7 billion at December 31, 2023, an
increase of $4.6 billion, or 14.2%, compared to the total at December 31, 2022. The increase was primarily driven by an
increase of $4.8 billion in market impact, driven by improved bond and equity markets.
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.
Wealth management reported net income before taxes of $9.8 million for the year ended December 31, 2023, a
decrease of $3.1 million, or 23.9%, compared to the year ended December 31, 2022. Noninterest expense in 2023
increased $4.1 million, or 51.3%, as compared to 2022, primarily due to an increase of allocated expenses.
78
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)
Year ended
December 31,
2022
2,214,346
1,263,252
(1,326,374)
(253,464)
1,897,760
$
$
2023
1,897,760
551,102
(542,463)
200,439
2,106,838
2021
1,754,647
881,980
(623,324)
201,043
2,214,346
$
$
0.52 %
0.48 %
0.51 %
635,667
129,170
(108,673)
97,599
753,763
$
$
716,312
143,355
(115,458)
(108,542)
635,667
$
$
569,936
162,537
(89,829)
73,668
716,312
1.01 %
0.98 %
0.97 %
252,159
88,702
(85,831)
43,420
298,450
$
$
279,584
73,446
(84,668)
(16,203)
252,159
$
$
253,470
259,790
(244,642)
10,966
279,584
0.53 %
0.70 %
0.64 %
2,785,586
768,974
(736,967)
341,458
3,159,051
$
$
3,210,242
1,480,053
(1,526,500)
(378,209)
2,785,586
$
$
2,578,053
1,304,307
(957,795)
285,677
3,210,242
0.64 %
0.61 %
0.62 %
$
$
$
$
$
$
$
$
(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 $859.8 million, $797.1 million, and $829.7 million for the years ended
December 31, 2023 and 2022, and 2021, respectively.
Yield does not include brokerage revenue of $2.9 million, $2.6 million, and $3.1 million for the years ended December 31, 2023 and 2022,
and 2021, respectively.
AUA and AUM for the wealth management segment was $3.2 billion, excluding $859.8 million of brokerage
assets, at December 31, 2023, an increase of $0.4 million, or 13.4%, compared to the total at December 31, 2022. The
increase was driven by a $0.3 million increase in market impact. Additionally, there was a $32 thousand increase as
inflows outpaced outflows in 2023, driven by improved bond and equity markets.
Mortgage
The mortgage division offers first and second mortgage loans through the banking office locations.
Mortgage reported a net loss before taxes of $5.4 million for the year ended December 31, 2023, an increase of
$2.9 million, or 117.2%, from the $2.5 million net loss reported for the year ended December 31, 2022. Mortgage
noninterest income for 2023 of $8.4 million decreased $8.5 million, or 50.3%, from 2022. The decrease was primarily
driven by a decrease in mortgage originations and a 32 basis point decrease in the gain on sale margin, partially offset by
a $2.0 million increase in the change in fair value of the secondary market derivatives.
79
Financial Condition
Overview
Total assets were $3.9 billion at December 31, 2023, an increase of $128.1 million, or 3.4%, compared to
$3.8 billion at December 31, 2022. The increase in total assets was primarily due to increases of $312.1 million in loans
held for investment and $64.2 million in cash and cash equivalents, partially offset by a decrease of $253.0 million in
investment securities.
Investment Securities
The following table presents the carrying amount of the Company’s investment securities portfolio at the dates
indicated:
(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, 2023
December 31, 2022
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
$
1,120
0.1 %
$
3,520
0.3 %
435,594
1,353
25
48,644
486,736
55.4 %
0.2 %
— %
6.2 %
61.9 %
587,679
63,558
34
62,533
717,324
56.6 %
6.1 %
— %
6.0 %
69.0 %
129,603
16.5 %
137,787
13.3 %
170,125
299,728
786,464
$
21.6 %
38.1 %
100.0 %
184,115
321,902
1,039,226
$
17.7 %
31.0 %
100.0 %
The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy
of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue.
The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance
sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to
pledge as collateral. In 2021, the Company transferred its 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, 2023, total investment securities were $0.8 billion compared to $1.0 billion at
December 31, 2022. Investment securities as a percentage of total assets were 20.1% and 27.5%, as of
December 31, 2023 and December 31, 2022, respectively. The decrease in investment securities was primarily due to a
strategic balance sheet repositioning in the fourth quarter, in which the Company sold $171.8 million of available-for-
sale securities. Proceeds from the sale were reinvested into loans to new and existing clients in addition to paying down
borrowings. Securities with a carrying value of $250.0 million were pledged at December 31, 2023, 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, 2023 was $98.0 million, as compared to a $132.2 million loss as of December 31, 2022. The decrease is a
result of improved markets and an overall reduction of the size of the investment portfolio.
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.
80
As of December 31, 2023 and December 31, 2022 the Company held 75 tax-exempt state and local municipal
securities totaling $35.0 million and held 85 tax-exempt state and local municipal securities totaling $40.9 million,
respectively. Other than the aforementioned investments, at December 31, 2023 and December 31, 2022, 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.
The Company’s available-for-sale (“AFS”) debt securities that are in an unrealized loss position are assessed to
determine if an allowance should be recorded or if a write-down is required in accordance with Accounting Standards
Update (“ASU”) 2016-13. As of and for the years ended years ended December 31, 2023 and 2022, the Company did not
record any allowances or write-down any of the AFS debt securities in an unrealized loss position. Refer to Note 1
(Significant Accounting Policies) of the consolidated financial statements included in Item 8 of this Form 10-K for
additional details of the Company’s assessment of the allowance for AFS investments as of and for the year ended
December 31, 2023.
In accordance with ASU 2016-13, each reporting period the Company’s held-to-maturity (“HTM”) debt
securities are assessed to determine if any allowance should be recorded or if a write-down is required. As of and for the
years ended December 31, 2023, the Company recorded an allowance of $213 thousand and did not write-down any
HTM debt securities. As of and for the year ended December 31, 2022, the Company did not record any allowances or
write-down any HTM debt securities. Refer to Note 1 (Significant Accounting Policies) of the consolidated financial
statements included in Item 8 of this Form 10-K for additional details of the Company’s assessment of the allowance for
HTM investments as of and for the year ended December 31, 2023.
The investment securities presented in the following table are reported at fair value and by contractual maturity
as of December 31, 2023. Actual timing may differ from contractual maturities if borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Additionally, the mortgage backed securities
receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent
basis, assuming a 21.00% income tax rate.
Maturity as of December 31, 2023
(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
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
$
—
— % $
521
5.90 % $
—
— % $
599
5.95 %
23
—
—
—
2.61 %
— %
— %
— %
2,572
—
—
—
2.45 %
— %
— %
— %
4,810
1,353
7
48,644
2.89 %
2.40 %
4.70 %
3.69 %
428,189
—
18
—
1.70 %
— %
5.09 %
— %
23
2.61 %
3,093
3.01 %
54,814
3.59 %
428,806
1.71 %
8,474
0.98 %
44,557
1.35 %
52,729
2.03 %
11,230
2.20 %
—
— %
—
— %
—
— %
141,627
2.21 %
Residential agency
Total held-to-maturity
investment securities
8,474
Total investment securities $ 8,497
0.98 %
44,557
0.98 % $ 47,650
1.35 %
52,729
1.46 % $ 107,543
2.03 %
152,857
2.82 % $ 581,663
2.21 %
1.84 %
81
Loans
The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, real estate
construction, commercial real estate (“CRE”), residential real estate, and consumer financing loans.
Total loans outstanding were $2.8 billion as of December 31, 2023, an increase of $315.6 million, or 12.9%,
from December 31, 2022. The increase in total loans was primarily due to organic loan growth due to the Company’s
expanded commercial lending team. The increases in organic loan growth included increases of $245.2 million in CRE,
$47.3 million in residential real estate first mortgages, $26.2 million in real estate construction, and $11.0 million in
commercial and industrial loans, partially offset by a $21.3 million decrease in other revolving and installment loans.
The Company’s loan portfolio is highly diversified. As of December 31, 2023, approximately 21.7% of loans
outstanding were commercial and industrial, while 45.3% of loans outstanding were CRE, and 31.9% of loans
outstanding were residential real estate.
(dollars in thousands)
Commercial and industrial: (1)
General business
Services
Retail trade
Manufacturing
Total commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Multifamily
Office
Medical office or nursing facility
Industrial
Retail
Hotel
Other commercial real estate
Total non-owner occupied
Construction
Agricultural real estate
Total commercial real estate
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
December 31, 2023
December 31, 2022
Balance
Percent of
Portfolio
Balance
Percent of
Portfolio
$
294,149
146,318
91,216
66,638
598,321
$
10.7 %
5.3 %
3.3 %
2.4 %
21.7 %
319,433
108,817
87,525
68,101
583,876
13.1 %
4.5 %
3.6 %
2.8 %
24.0 %
271,619
9.8 %
258,617
10.6 %
245,103
124,684
111,413
104,241
96,578
80,576
51,866
814,461
124,034
40,832
1,250,946
726,879
154,134
29,303
910,316
2,759,583
$
8.9 %
4.5 %
4.0 %
3.8 %
3.5 %
2.9 %
1.9 %
29.5 %
4.5 %
1.5 %
45.3 %
175,708
110,138
42,687
98,470
53,254
15,666
132,093
628,016
55,153
37,694
979,480
26.3 %
5.6 %
1.1 %
33.0 %
100.0 %
$
679,551
150,479
50,608
880,638
2,443,994
7.2 %
4.5 %
1.7 %
4.0 %
2.2 %
0.6 %
5.3 %
25.5 %
2.3 %
1.5 %
39.9 %
27.8 %
6.2 %
2.1 %
36.1 %
100.0 %
(1)
Includes PPP loans of $387 thousand and $737 thousand as of December 31, 2023 and 2022, respectively.
Commercial loans represent loans for working capital, purchases of equipment and other needs of commercial
customers primarily located within our geographical footprint. These loans are underwritten individually and represent
ongoing relationships based on a thorough knowledge of the customer, the customer's industry, and market. While
commercial loans are generally secured by the customer's assets including real property, inventory, accounts receivable,
operating equipment, and other property and may also include personal guarantees of the owners and related parties, the
primary source of repayment of the loans is the ongoing cash flow from operations of the customer's business. In
addition, revolving lines of credit are generally governed by a borrowing base. Inherent lending risks are monitored on a
continuous basis through interim reporting, covenant testing and annual underwriting.
CRE loans consist of term loans secured by a mortgage lien on the real property and includes both owner
occupied CRE loans as well as non-owner-occupied loans. Non-owner occupied CRE loans consist of mortgage loans to
finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and
82
other specific use properties as well as CRE construction loans that are offered to builders and developers generally
within our geographical footprint. The primary risk characteristics in the non-owner-occupied portfolio include impacts
of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires
collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity
investment in the project. The expected cash flows from all significant new or renewed income producing property
commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending
risks are monitored on a continuous basis through quarterly monitoring and our annual underwriting process,
incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan
policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each
asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s
Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite.
Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans
quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product
type and are monitored quarterly by the Bank’s Credit Governance Committee and Bank Board of Directors.
CRE loans may be adversely affected by conditions in the real estate markets or in the general economy. The
Company does not monitor the CRE portfolio for attributes such as loan to value ratios, occupancy rates, and net
operating income as these characteristics are assessed and evaluated on an individual loan basis. Portfolio stress testing
is completed based on property type and takes into consideration changes to net operating income and capitalization
rates. The Company does not have exposure to the office building sector in central business districts as the office
portfolio is generally diversified in suburban markets with strong occupancy levels. As of December 31, 2023, at 202%,
the Company’s applicable investor commercial real estate loans, as a percentage of its risk-based capital, remained
below the regulatory guideline limit of 300%. Construction loans at 31% were also below the regulatory guideline limit
of 100%.
The following table presents the geographical markets of the collateral related to the non-owner occupied
commercial real estate loans for the periods presented:
(dollars in thousands)
Geographical Market:
Minnesota
North Dakota
Arizona
Missouri
Oregon
South Dakota
Other
$
Total non-owner occupied commercial real estate loans
$
December 31, 2023
December 31, 2022
Balance
Percent of
Total
Balance
Percent of
Total
394,754
214,884
139,450
15,969
14,953
14,790
19,661
814,461
48.5 %
26.4 %
17.1 %
2.0 %
1.8 %
1.8 %
2.4 %
100.0 %
$
$
257,844
187,477
143,483
15,963
—
4,438
18,811
628,016
41.1 %
29.9 %
22.8 %
2.5 %
— %
0.7 %
3.0 %
100.0 %
The Bank does not currently monitor owner occupied CRE loans based on geographical markets as the primary
source of repayment for these loans is predicated on the cash flow from the underlying operating entity. These loans are
generally located within the Company’s geographical footprint.
Highly competitive conditions continue to prevail in the small and middle market commercial segments in
which the Company primarily operates. The Company maintains a commitment to generating growth in the Company’s
business portfolio in a manner that adheres to its twin goals of maintaining strong asset quality and producing profitable
margins. The Company continues to invest in additional personnel, technology, and business development resources to
further strengthen its capabilities.
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
83
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.
The Company originates 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 the Company’s fixed rate
residential loans, along with some of the Company’s adjustable rate mortgages are sold to other financial institutions
with which the Company has established a correspondent lending relationship.
The Company’s 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 the Company’s
primary markets. As of December 31, 2023, the Company’s consumer mortgage portfolio was $881.0 million, which
was a $51.0 million, or 9.4%, increase from $830.0 million as of December 31, 2022. Market interest rates, expected
duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in
determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.
84
The following table shows the maturities and sensitivity to interest rates for the loan portfolio as of
December 31, 2023:
(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
One year
or less
After one
but within
five years
December 31, 2023
After five
but within
After
fifteen years fifteen years
Total
$ 127,510 $
9,694
84,702
221,906
279,282 $ 191,529
101,803
10,346
413,383
563,573
615,258
944,658
$
2,191
65,254
67,445
598,321
124,034
1,126,912
1,849,267
— $
5,267
7,746
7,743
20,756
45,545
33,039
2,773
81,357
$ 242,662 $ 1,015,893 $ 696,615
30,295
22,153
18,787
71,235
$
17,025 $
954
65,203
83,182
218,174 $
27,315
386,005
631,494
74,354
8,666
276,182
359,202
645,772
726,879
91,196
154,134
—
29,303
910,316
736,968
$ 804,413 $ 2,759,583
$
— $
—
22,547
22,547
309,553
36,935
749,937
1,096,425
3,360
1,454
1,729
6,543
89,725 $
26,826
6,650
15,249
48,725
37,996
22,367
2,773
63,136
680,219 $ 422,338
485,596
417,414
44,901
14,430
19,751
—
431,844
550,248
$ 454,391 $ 1,646,673
Total loans with fixed interest rates
$
Loans with floating interest rates:
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
$ 110,485 $
8,740
19,499
138,724
61,108 $ 117,175
74,488
1,680
137,201
177,568
256,056
313,164
$
— $
2,191
42,707
44,898
288,768
87,099
376,975
752,842
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans with floating interest rates
1,907
6,292
6,014
14,213
$ 152,937 $
3,469
15,503
3,538
22,510
7,549
10,672
—
18,221
335,674 $ 274,277
241,283
228,358
109,233
76,766
9,552
—
305,124
360,068
$ 350,022 $ 1,112,910
The expected life of the Company’s loan portfolio will differ from contractual maturities because borrowers
may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes
information limited to contractual maturities of the underlying loans.
Asset Quality
The Company’s strategy for credit risk management includes well-defined, centralized credit policies; uniform
underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit
exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit
examinations; and management reviews of loans experiencing deterioration of credit quality. The Company strives to
identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for
credit losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and
continually assesses the adequacy of the allowance. The Company utilized an internal lending division, Special Credit
Services, to develop and implement strategies for the management of individual nonperforming loans.
85
Credit Quality Indicators
Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of
borrowers to service their debt, such as: current financial information, historical payment experience, credit
documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to
pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings.
See Note 6 (Loans and Allowance for Credit Losses) to the consolidated financial statements included in Item 8 of this
Form 10-K for a definition of each of the risk ratings.
The table below represents criticized loans outstanding by loan portfolio segment as of December 31, 2023,
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
Criticized loans as a percent of total loans
December 31,
2023
December 31,
2022
$
$
29,840
20,667
9,170
59,677
105
1,781
—
1,886
61,563
$
$
25,182
262
8,400
33,844
808
632
1
1,441
35,285
2.23 %
1.44 %
Criticized loans represented 2.23% and 1.44% of total loans as of December 31, 2023 and 2022, respectively.
The increase in criticized loans was primarily due to one $20.6 million multi-family construction loan that became
criticized in the third quarter of 2023.
The following table presents information regarding nonperforming assets as of the dates presented:
(dollars in thousands)
Nonaccrual loans
Accruing loans 90+ days past due
Total nonperforming loans
OREO and repossessed assets
Total nonperforming assets
Total restructured accruing loans
Total nonperforming assets and restructured accruing loans
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for credit losses on loans to nonperforming loans
$
$
December 31,
2023
December 31,
2022
$
$
8,596
139
8,735
32
8,767
—
8,767
0.32 %
0.22 %
410 %
3,794
—
3,794
30
3,824
151
3,975
0.16 %
0.10 %
821 %
The allowance for credit losses to nonperforming loans ratio decreased 411 basis points from December 31,
2022. The decrease was primarily the result of a modest increase in nonperforming loans for the year ended December
31, 2023. The increase in nonperforming loans was primarily due to one $6.1 million loan being added to nonperforming
loans for the year ended December 31, 2023.
Interest income lost on nonaccrual loans approximated $467 thousand, $155 thousand, and $183 thousand for
the years ended December 31, 2023, 2022 and 2021, respectively. There was no interest income included in net income
related to nonaccrual loans for the years ended December 31, 2023, 2022 and 2021.
86
Allowance for Credit Losses
The allowance for credit losses, or ACL, on loans is maintained at a level management believes is sufficient to
absorb expected losses in the loan portfolio over the remaining estimated life of loans in the portfolio. Under CECL
accounting standard the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost
basis of loans held for investment to present the net amount expected to be collected. These evaluations are inherently
subjective as they require management to make material estimates, all of which may be susceptible to significant change.
The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.
Management estimates the ACL using relevant information, from internal and external sources, relating to past
events, current conditions, and reasonable supportable forecasts. Historical loss experience provides the basis for
estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current
loan-specific risk characteristics such as different underwriting standards, portfolio mix, delinquency level, or life of the
loan, as well as changes in environmental conditions, levels of economic activity, unemployment rates, property values
and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such
forecasts for the entire life of the financial assets and requires a reversion to historical loss information.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually
are not also included in the collective evaluation. The ACL on individually evaluated loans is recognized on the basis of
the present value of expected future cash flows discounted at the effective interest rate, the fair value of collateral
adjusted of estimated costs to sell, or observable market price as of the relevant date.
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. 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 $2.2 million, $1.1 million, and $0.2 million
for the years ended years ended December 31, 2023, 2022 and 2021, respectively.
87
The following table presents, by loan type, the changes in the allowance for credit losses, after the opening
adjustment related to the adoption of CECL in 2023, for the periods presented:
(dollars in thousands)
Balance—beginning of period (1)
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 provision for credit losses on loans
Balance—end of period
Total loans
Average total loans
Allowance for credit losses on loans to total loans
Net charge-offs/(recoveries) to average total loans (annualized)
2023
35,003
$
Year ended
December 31,
2022
31,572
$
2021
34,246
$
(436)
—
—
(436)
(49)
(77)
(51)
(177)
(613)
1,159
—
45
1,204
330
52
92
474
1,678
(1,065)
645
2,125
(778)
1,992
(1,396)
—
—
(1,396)
—
—
(153)
(153)
(1,549)
461
76
134
671
—
282
170
452
1,123
426
950
551
(151)
1,350
(1,230)
—
(536)
(1,766)
—
—
(156)
(156)
(1,922)
1,660
—
822
2,482
—
123
143
266
2,748
(826)
(1,759)
120
(2,082)
(3,721)
(1,829)
(115)
(273)
(2,217)
—
(225)
35,843
2,759,583
2,535,073
$
$
(1,017)
(344)
11
(1,350)
—
—
31,146
2,443,994
2,059,435
$
$
700
(215)
(264)
221
—
(3,500)
31,572
1,758,020
1,858,686
$
$
1.30 %
(0.04)%
1.27 %
0.02 %
1.80 %
(0.04) %
(1)
Includes a $3.9 million opening adjustment to the beginning balance as of December 31, 2023.
The ACL on loans was $35.8 million at December 31, 2023, compared to $31.1 million at December 31, 2022.
The $4.7 million increase in the allowance for credit losses was primarily due to the adoption of CECL, which resulted
in an additional allowance of $3.9 million in the ACL on loans. The ratio of nonperforming loans to total loans at
December 31, 2023 was 0.32%, compared to 0.16% at December 31, 2022.
88
The following table summarized the activity of the allowance for credit losses on loans, after the opening
adjustment related to the adoption of CECL in 2023, for the periods indicated:
(dollars in thousands)
Balance—beginning of period (1)
Net charge-offs (recoveries):
Commercial net charge-offs (recoveries)
Commercial and Industrial
Real estate construction
Commercial real estate
Total commercial net charge-offs (recoveries)
Consumer net charge-offs (recoveries)
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer net charge-offs (recoveries)
Total net charge-offs (recoveries)
Provision for credit losses on loans
Balance—end of period
2023
35,003
$
Year ended
December 31,
2022
31,572
$
2021
34,246
$
(723)
—
(45)
(768)
(281)
25
(41)
(297)
(1,065)
(225)
35,843
$
935
(76)
(134)
725
—
(282)
(17)
(299)
426
—
31,146
$
(430)
—
(286)
(716)
—
(123)
13
(110)
(826)
(3,500)
31,572
$
Net charge-offs (recoveries) to average loans
Commercial net charge-offs (recoveries) to average loans
Commercial and Industrial
Real estate construction
Commercial real estate
Total commercial net charge-offs (recoveries) to average loans
Consumer net charge-offs (recoveries) to average loans
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer net charge-offs (recoveries) to average loans
Total net charge-offs (recoveries) to average loans
Allowance for credit losses on loans to total loans
Allowance for credit losses on loans to nonaccrual loans
Allowance for credit losses on loans to nonperforming loans
(0.03)%
— %
— %
(0.03)%
(0.01)%
— %
— %
(0.01)%
(0.04)%
1.30 %
417 %
410 %
0.05 %
— %
(0.01)%
0.04 %
— %
(0.01)%
— %
(0.01)%
0.02 %
1.27 %
821 %
821 %
(0.02)%
— %
(0.02)%
(0.04)%
— %
(0.01)%
— %
(0.01)%
(0.04)%
1.80 %
1,521 %
1,437 %
(1)
Includes a $3.9 million opening adjustment to the beginning balance as of December 31, 2023.
The following table presents the allocation of the allowance for credit losses as of the dates presented.
(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
Total loans
December 31, 2023
December 31, 2022
Allocated
Allowance
Percentage
of loans to
total loans
Allocated
Allowance
$
$
9,894
6,111
11,897
6,578
1,151
212
35,843
21.7 %
4.5 %
40.8 %
26.3 %
5.6 %
1.1 %
100.0 %
$
$
9,233
1,437
12,761
5,857
1,318
540
31,146
Percentage
of loans to
total loans
23.9 %
4.0 %
36.0 %
27.8 %
6.2 %
2.1 %
100.0 %
The increase in the allocation of the ACL on loans was primarily driven by the adoption of CECL and strong
organic loan growth.
89
Deposits
Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and
economic conditions, and fluctuations in the Company’s customers’ own liquidity needs and may also be influenced by
recent developments in the financial services industry, including the large-scale deposit withdrawals over a short period
of time at Silicon Valley Bank, Signature Bank, and First Republic Bank that resulted in the failure of those institutions.
Total deposits were $3.1 billion as of December 31, 2023, an increase of $180.1 million, or 6.2%, from
December 31, 2022. Interest-bearing deposits increased $313.0 million while noninterest-bearing deposits decreased
$132.9 million. The increase in interest-bearing deposits consisted primarily of increases of $134.4 million in interest-
bearing demand deposits and $199.2 million in time deposits. Noninterest-bearing deposits decreased primarily due to
heightened deposit competition, the impact of rising short-term interest rates on indexed money market deposits, and
clients moving deposits out of noninterest bearing products into interest-bearing products.
Interest-bearing deposit costs were 2.44% and 0.45% for the years ended December 31, 2023 and 2022,
respectively. The increase in interest-bearing deposit costs were the result of a rising interest rate environment and a
highly competitive deposit environment.
The Company competes 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. The mix of average deposits has
been changing throughout the last several years. The weightings of core funds (noninterest checking, interest checking,
savings, and money market accounts) and time deposits’ have increased. The Company is focused on expanding core
account relationships and customers’ preference for unrestricted accounts in the low interest rate environment. The
weighting of time deposits increased as clients are looking for higher yielding alternative investments with increased
short-term rates.
The following table presents the average balances and rates of the Company’s 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, 2023
Year ended
December 31, 2022
Year ended
December 31, 2021
Average
Balance
$ 737,365
768,238
1,118,815
303,746
$ 2,928,164
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
— % $ 851,821
692,287
1.29 %
1,113,426
2.92 %
3.58 %
221,997
1.82 % $ 2,879,531
— % $ 784,998
697,276
0.22 %
1,023,677
0.55 %
0.70 %
215,624
0.32 % $ 2,721,575
— %
0.14 %
0.15 %
0.54 %
0.13 %
The following table presents the contractual maturity of 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,
2023
$
$
48,049
48,010
22,846
2,925
121,830
90
The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC
insurance limit, currently $250,000, were approximately $1.1 billion and $1.8 billion at December 31, 2023 and 2022,
respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory
reporting purposes.
Borrowings and Subordinated Debt
The Company utilizes both short term and long term borrowings as part of its asset/liability management and
funding strategies. Short term borrowings consist of FHLB advances and federal funds purchased. The Company had
$314.2 million and $378.1 million in short term borrowings outstanding at December 31, 2023 and 2022, respectively.
FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of
approximately $1.0 billion and $909.8 million at December 31, 2023 and 2022, respectively.
Long-term debt is utilized to fund longer term assets and as a source of regulatory capital. At
December 31, 2023, the Company 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, on March 30,
2026, the interest rate will reset to a fixed interest rate equal to the 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 the Company has 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 $9.0 million as
of December 31, 2023, compared to $8.8 million as of December 31, 2022. The increase was due to purchase accounting
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 in Item 8 of this Form 10-K.
Selected financial information pertaining to the components of the Company’s borrowings and subordinated
debt as of the dates indicated is as follows:
December 31, 2023
December 31, 2022
December 31, 2021
(dollars in thousands)
Fed funds purchased
FHLB Short-term advances
Subordinated notes
Junior subordinated debentures
Finance lease liability
Total borrowed funds
Balance
$ 114,170
200,000
50,000
8,956
—
$ 373,126
Percent of
Percent of
Portfolio
Balance
Portfolio
Percent of
Balance Portfolio
30.6 % $ 153,080
225,000
53.6 %
50,000
13.4 %
8,843
2.4 %
—
— %
100.0 % $ 436,923
35.0 % $
51.6 %
11.4 %
2.0 %
—
—
—
50,000
8,730
203
100.0 % $ 58,933
— %
— %
84.9 %
14.8 %
0.3 %
100.0 %
91
Capital Resources
The following table summarizes the changes in the Company’s stockholders’ equity for the periods indicated.
(dollars in thousands)
Beginning balance
Cumulative effect of change in accounting principles, net of tax
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,
2021
2022
2023
$ 356,872 $ 359,403 $ 330,163
—
52,681
(14,893)
(712)
—
(10,931)
3,095
$ 369,127 $ 356,872 $ 359,403
—
40,005
(94,386)
(738)
63,830
(13,146)
1,904
(4,452)
11,696
24,986
(6,638)
—
(14,965)
1,628
Total stockholders’ equity was $369.1 million at December 31, 2023, an increase of $12.3 million, or 3.4%,
compared to $356.9 million at December 31, 2022. The increase was primarily due to a $119.4 million increase in other
comprehensive income (loss). The increase in other comprehensive income (loss) was due in part to the sale of AFS
securities as part of the previously reported balance sheet repositioning in the fourth quarter, as well as improved market
conditions, which resulted in a higher fair value of the Company’s available-for-sale investment securities. This increase
was partially offset by a $28.3 million decrease in net income and a $4.5 million decrease to opening stockholders’
equity related to the adoption of the CECL accounting standard.
The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner
while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent
in the Company’s balance sheet, recognizing that unexpected loss is the common denominator of risk and that common
equity has the greatest capacity to absorb unexpected loss.
The Company is subject to various regulatory capital requirements both at the Company and at the Bank level.
Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have an adverse material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines
must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting policies. The Company has consistently maintained regulatory capital ratios at or above the
well capitalized standards.
At December 31, 2023, 2022, and 2021, the Company met all capital adequacy requirements to which the
Company was subject.
92
The table below sets forth the capital ratios for the Company and the Bank as of the dates indicated. See
Note 26 (Regulatory Matters) of the Company’s audited consolidated financial statements included in Item 8 of this
Form 10-K 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,
2023
December 31,
2022
11.82 %
12.10 %
14.76 %
10.57 %
7.94 %
11.40 %
11.40 %
12.51 %
9.92 %
13.39 %
13.69 %
16.48 %
11.25 %
7.74 %
12.76 %
12.76 %
13.83 %
10.48 %
(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, the Company enters 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.
The Company’s 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. The Company decreased its exposure to losses under these
commitments by subjecting them to credit approval and monitoring procedures. The Company assesses 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 (Commitments and Contingencies)
of the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.
Liquidity
Liquidity management is the process by which the Company manages the flow of funds necessary to meet its
financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement
opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers,
expenses of the Company’s operations, and capital expenditures. Liquidity is monitored and closely managed by the
Company’s asset and liability committee, or 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 the Company has
the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure
that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond.
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.
93
At December 31, 2023, the Company had on balance sheet liquidity of $668.2 million, compared to
$778.9 million at December 31, 2022 and $1.1 billion at December 31, 2021. 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, 2023, the Company had $1.0 billion of collateral pledged to the FHLB. Based on this collateral the
Company is eligible to borrow up to $1.0 billion and had $706.6 million available capacity as of December 31, 2023. In
addition, the Company can borrow up to $107.0 million through unsecured lines of credit the Company has established
with four other banks.
In addition, because the Bank is “well capitalized,” it can accept brokered deposits up to 20.0% of total assets
based on current policy limits. Management believed that the Company had adequate resources to fund all of its
commitments as of December 31, 2023 and December 31, 2022.
The Company’s primary sources of liquidity include liquid assets, as well as unencumbered securities that can
be used to collateralize additional funding. At December 31, 2023, the Company had $129.9 million of cash and cash
equivalents of which $91.2 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 the Company would take in response to
both a short-term and long-term funding crisis.
A short term funding crisis would most likely result from a shock to the financial system, either internal or
external, which disrupts orderly short term funding operations. Such a crisis would likely be temporary in nature and
would not involve a change in credit ratings. A long term funding crisis would most likely be the result of both external
and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential
circumstances have been fully addressed through detailed action plans and the establishment of trigger points for
monitoring such events.
Recent Developments
Stockholder Dividend
On February 27, 2024, the Board of Directors of the Company declared a quarterly cash dividend of $0.19 per
common share. This dividend is payable on April 12, 2024, to stockholders of record on March 15, 2024.
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. The Company seeks to achieve consistent growth in net interest income and equity while managing
volatility arising from shifts in market interest rates. The Company’s 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.
94
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 the Company’s assets and liabilities. Basis risk is the risk of
adverse consequence resulting from unequal change in the spread between two or more rates for different instruments
with the same maturity. Yield curve risk is the risk of adverse 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 the Company’s exposure to changes in interest rates. Among the factors
considered are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and
repricing periods. ALCO reviews, on at least a quarterly basis, the interest rate risk position.
The interest rate risk position is measured and monitored at the Bank using net interest income simulation
models and economic value of equity sensitivity analysis that capture both short term and long term interest rate risk
exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest
rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these
measurements rely on estimates of the potential impact that changes in interest rates may have on the value and
prepayment speeds on all components of the Company’s loan portfolio, investment portfolio, as well as embedded
options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the
simulation modeling process. The analysis provides a framework as to what the Company’s overall sensitivity position is
as of the Company’s most recent reported position and the impact that potential changes in interest rates may have on net
interest income and the economic value of the Company’s equity.
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios
including instantaneous shocks.
The estimated impact on the Company’s net interest income in hypothetical rising and declining rate scenarios
assuming immediate, parallel moves in interest rates, calculated as of December 31, 2023 and December 31, 2022, are
presented in the table below.
+400 basis points
+300 basis points
+200 basis points
+100 basis points
−100 basis points
−200 basis points
December 31, 2023
December 31, 2022
Following
12 months
Following
24 months
Following
12 months
1.0 %
0.5 %
0.3 %
0.4 %
−1.0 %
−2.3 %
2.4 %
1.4 %
0.9 %
0.9 %
−1.7 %
−4.1 %
−25.1 %
−18.9 %
−12.7 %
−6.2 %
5.2 %
7.9 %
Following
24 months
−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 slightly asset sensitive, in the
short-term, as of December 31, 2023, demonstrating that an increase in interest rates would have a marginal positive
95
impact on net interest income over the next 12 and 24 months. The balance sheet has shifted from being liability
sensitive as of December 31, 2022. This change is attributable to both the derivatives strategies put in place throughout
2023 that will begin to mature in 2024 as well as deposit growth and the balance sheet repositioning that consisted of
selling fixed rate securities and redeploying the funds into both fixed and floating-rate loans.
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, 2023 and
December 31, 2022, 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,
2023
−15.5 %
−12.6 %
−7.7 %
−3.1 %
1.6 %
2.0 %
December 31,
2022
−19.5 %
−15.3 %
−10.4 %
−4.9 %
4.0 %
5.0 %
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls,
and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management
continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and
employee awareness to assess the impact on earnings and capital and to improve the oversight of the Company’s
operational risk.
Compliance Risk
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from
failure to comply with rules and regulations issued by the various banking agencies and standards of good banking
practice. Activities which may expose the Company to compliance risk include, but are not limited to, those dealing with
the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending
challenges resulting from the expansion of the Company’s banking center network, employment and tax matters.
Strategic and/or Reputation Risk
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully
develop and execute business plans, failure to assess current and new opportunities in business, markets and products,
and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements
that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and
report on various risks, including those related to the development of new products and business initiatives.
96
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Alerus Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Alerus Financial Corporation and its
subsidiaries (the Company) as of December 31, 2023, the related consolidated statement of income,
comprehensive income, changes in stockholders' equity and cash flows for the year then ended, and the
related notes to the consolidated financial statements (collectively, the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
Adoption of New Accounting Standard
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for
credit losses on financial instruments in 2023 due to the adoption of Accounting Standards Update 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audit. 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 U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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. As part of our audit 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.
Accordingly, we express no such opinion.
Our audit 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 audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2022.
Des Moines, Iowa
March 8, 2024
97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Alerus Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Alerus Financial Corporation and
Subsidiaries (the Company) as of December 31, 2022, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended
December 31, 2022, and the related notes (collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2022, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
The Company’s management is responsible for these financial statements. 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinions.
/s/ CliftonLarsonAllen LLP
CliftonLarsonAllen LLP
We have served as the Company’s auditor from 2014 through 2022.
Minneapolis, Minnesota
March 10, 2023
CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.
98
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 (amortized cost of $584,754 and $849,567, respectively)
Held-to-maturity, at amortized cost (fair value of $258,617 and $270,912, respectively, with an
allowance for credit losses on investments of $213 and $0, respectively)
Loans held for sale
Loans
Allowance for credit losses on loans
Net loans
Land, premises and equipment, net
Operating lease right-of-use assets
Accrued interest receivable
Bank-owned life insurance
Goodwill
Other intangible assets, net
Servicing rights
Deferred income taxes, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term debt
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ equity
December 31, December 31,
2023
2022
$
129,893 $
58,242
486,736
717,324
299,515
11,497
2,759,583
(35,843)
2,723,740
17,940
5,436
15,700
33,236
46,783
17,158
2,052
34,595
83,432
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
$ 3,907,713 $ 3,779,637
$
728,082 $
2,367,529
3,095,611
314,170
58,956
5,751
64,098
3,538,586
860,987
2,054,497
2,915,484
378,080
58,843
5,902
64,456
3,422,765
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding
Common stock, $1 par value, 30,000,000 shares authorized: 19,734,077 and 19,991,681 issued and
outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
19,734
150,343
272,705
(73,655)
369,127
19,992
155,095
280,426
(98,641)
356,872
$ 3,907,713 $ 3,779,637
See Accompanying Notes to Consolidated Financial Statements
99
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 credit losses
Net interest income after provision for credit 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,
2022
2023
2021
$
136,918 $
89,907 $
78,133
24,262
740
2,963
164,883
53,387
20,976
2,681
77,044
87,839
2,057
85,782
65,294
21,855
8,411
1,280
(24,643)
8,032
80,229
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
76,290
20,051
7,477
21,053
5,296
6,743
3,027
1,796
1,189
1,902
5,333
150,157
15,854
4,158
11,696 $
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 $
$
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
$
0.59 $
2.12 $
3.02
$
$
0.58 $
0.75 $
2.10 $
0.70 $
19,922
20,143
18,640
18,884
2.97
0.63
17,189
17,486
See Accompanying Notes to Consolidated Financial Statements
100
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Net change in unrealized gains (losses) on debt securities
Net change in unrealized gain (losses) on cash flow hedging derivatives
Net change in unrealized gain (losses) on other derivatives
Total other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other comprehensive income
(loss)
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Year ended
December 31,
2022
40,005 $
2023
11,696 $
$
33,897
(297)
(241)
33,359
(126,016)
—
—
(126,016)
2021
52,681
(19,759)
—
(125)
(19,884)
8,373
24,986
36,682 $
(31,630)
(94,386)
(54,381) $
(4,991)
(14,893)
37,788
$
See Accompanying Notes to Consolidated Financial Statements
101
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Year ended December 31, 2023
Additional
Accumulated
Other
Paid-in
Capital
Retained
Earnings
Comprehensive
Income (Loss)
Total
$
90,237 $ 212,163 $
(dollars in thousands)
Balance 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
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
Cumulative effect of change in accounting principles, net
of tax
Balance as of January 1, 2023
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, 2023
Common
Stock
17,125 $
—
—
(18)
—
9
97
17,213 $
—
—
(26)
—
—
—
(348)
—
3,086
(97)
92,878
—
—
(712)
—
2,681
10
114
19,992
61,149
1,894
(114)
155,095
52,681
—
(346)
(10,931)
—
—
253,567 $
40,005
—
—
(13,146)
—
—
—
280,426
—
19,992
—
—
(375)
—
18
99
—
155,095
—
—
(6,263)
—
1,610
(99)
19,734 $ 150,343 $ 272,705 $
(4,452)
275,974
11,696
—
—
(14,965)
—
—
$
10,638 $ 330,163
52,681
(14,893)
(712)
(10,931)
3,095
—
359,403
40,005
(94,386)
(738)
(13,146)
—
(14,893)
—
—
—
—
(4,255)
—
(94,386)
—
—
—
—
—
(98,641)
63,830
1,904
—
356,872
—
(98,641)
—
24,986
—
—
—
—
(4,452)
352,420
11,696
24,986
(6,638)
(14,965)
1,628
—
(73,655) $ 369,127
See Accompanying Notes to Consolidated Financial Statements
102
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 credit losses
Depreciation and amortization
Amortization and accretion of premiums/discounts on investment securities
Amortization of operating lease right-of-use assets
Share‑based compensation expense
Originations on loans held for sale
Proceeds on loans held for sale
(Increase) in value of bank-owned life insurance
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 BOLI mortality
Realized loss (gain) on servicing rights
Realized loss (gain) on sale of ESOP trustee line of business
Net change in:
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 calls of investment securities held-to-maturity
Proceeds from maturities and paydowns of investment securities held-to-maturity
Purchases of investment securities held-to-maturity
Net (increase) decrease in loans
Net (increase) decrease in FHLB stock
Net cash received (paid) for business combinations
Proceeds from BOLI mortality claim
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,
2022
2021
2023
$ 11,696 $ 40,005 $
52,681
893
2,057
8,525
2,047
(15)
1,628
(296,831)
302,252
(877)
365
(7,323)
(17)
24,643
(1,196)
(3)
(2,775)
913
—
8,467
3,387
(229)
1,904
(604,763)
653,302
(835)
2,006
(11,616)
71
—
—
(702)
—
2,786
(3,500)
8,868
3,744
(58)
3,095
(1,592,108)
1,716,053
(793)
8,459
(48,038)
(275)
(125)
—
(638)
—
(2,831)
(5,528)
(7,728)
28,982
(3,241)
5,324
8,973
102,966
171,758
67,346
—
242
20,623
—
(314,718)
2,796
—
2,828
(3,173)
210
(52,088)
180,127
(63,910)
—
—
(14,822)
(6,638)
94,757
71,651
58,242
—
105,633
(95,600)
963
27,429
—
(416,150)
(15,556)
101,511
—
(1,789)
937
(292,622)
(358,752)
378,080
(203)
—
(12,800)
(738)
5,587
(184,069)
242,311
$ 129,893 $ 58,242 $
1,125
(7,309)
5,865
149,832
13,189
125,581
(571,595)
1,772
12,545
(218,363)
221,006
(716)
—
—
(1,706)
629
(417,658)
348,558
—
(49,920)
50,000
(10,751)
(712)
337,175
69,349
172,962
242,311
See Accompanying Notes to Consolidated Financial Statements
103
Supplemental Cash Flow Disclosures
Interest paid
Income taxes paid
Cash dividends declared, not paid
Cash and cash equivalents acquired
Supplemental Disclosures of Noncash Investing and Financing Activities
Loan collateral transferred to foreclosed assets
Investment securities transferred to held-to-maturity
Right-of-use assets obtained in exchange for new operating lease liabilities, net
Change in fair value hedges presented within residential real estate loans and other
liabilities
Acquisitions
Noncash assets acquired
Liabilities assumed
Issuance of common stock for the acquisition of Metro Phoenix Bank
Net noncash acquired
Year ended
December 31,
2022
2021
2023
$ 72,644 $
10,840
3,757
—
15,095 $
12,531
3,615
101,696
4,538
13,124
2,776
—
(195)
—
1,868
(166)
153
—
4,266
1,176
149,191
267
—
—
—
—
—
297,745
(354,358)
(64,019)
(120,632)
—
—
—
—
—
See Accompanying Notes to Consolidated Financial Statements
104
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.
Reclassifications
Certain reclassifications have been made to prior year amounts, without impact to net income or total
stockholders’ equity, to conform to the current year’s presentation.
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 credit 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
stockholder approval of any golden parachute payments not previously approved. In addition, even if the Company
complies with the greater obligations of public companies that are not emerging growth companies, the Company may
105
avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long
as the Company is an emerging growth company. The Company will continue to be an emerging growth company until
the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of
common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by
the U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; (2) the last day of the fiscal year in
which the Company has $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a
“large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on
which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in
non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less
attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the
Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and
the Company’s stock price may be more volatile. The last year the Company qualifies as an emerging growth company
is 2024.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised
accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. The Company elected to take advantage of
the benefits of this extended transition period.
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, 2023 and 2022 respectively, 21.7% and 23.9% 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 credit 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, FHLB stock, deposits, and short-term borrowings are reported net.
Interest-bearing deposits in banks are carried at cost.
Investment Securities
Debt securities are classified as available for sale, or AFS, and are carried at estimated fair value with
unrealized gains and losses reported in other comprehensive income (loss). Realized gains (losses) on AFS debt
securities are included in net gains (losses) on investment securities 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.
For AFS debt securities in an unrealized loss position, the Company evaluates the securities to determine
whether the decline in fair value below the amortized cost basis, or impairment, is due to credit-related factors or
noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income (loss),
net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses, or ACL, related to AFS
debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with
106
a corresponding adjustment to earnings as an expense (credit) within the provision for credit losses on the consolidated
statements of income. Both the ACL and the adjustment to net income may be reversed if conditions change. However,
if the Company intends to sell an impaired available-for-sale investment security or is required to sell such a security
before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a
corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted
to fair value, there is no ACL in this situation. Accrued interest receivable is excluded from the estimate of credit losses.
In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or
requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost,
whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuers’ financial condition, macroeconomic trends of the industry
specific to the security, and any other adverse conditions specifically related to the security, among other factors.
As of December 31, 2023 and 2022, there was no ACL carried on the Company’s AFS debt securities nor were
there any permanent write-offs for the years ended December 31, 2023, 2022 and 2021. Refer to Note 5 (Investment
Securities) for further discussion.
Certain debt securities that the Company has an intent to hold to maturity are classified as held-to-maturity, or
HTM, and recorded at amortized cost. Interest earned on HTM 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 AFS to HTM 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 HTM security and are amortized over
the remaining life of the security.
Management measures expected credit losses on HTM debt securities on a collective basis by major security
type. The Company evaluates HTM debt securities by credit rating and an external study, updated quarterly, that
includes historical information such as probability of default and loss going back several years. Accrued interest
receivable on HTM debt securities is excluded from the estimate of credit losses.
A change in the ACL related to HTM debt securities is recorded as an expense (credit) within the provision for
credit losses on the consolidated statements of income.
As of December 31, 2023, there was $213 thousand of ACL carried on the Company’s HTM debt securities. As
of December 31, 2022, there was no allowance carried on the Company’s HTM debt securities. For the years ended
December 31, 2023, 2022 and 2021, there were no permanent write-offs. Refer to Note 5 (Investment Securities) for
further discussion.
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
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.
107
Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance for credit 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 credit 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.
ACL on Loans
Upon adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”), as amended, effective January 1, 2023, the Company began using a
modified-prospective approach. Upon adoption, the Company recorded a cumulative-effective adjustment of $4.5
million reducing retained earnings, with a corresponding adjustment of $172 thousand increasing the ACL on HTM debt
securities, $3.9 million increasing the ACL on loans, and $1.9 million increasing other liabilities for the ACL on off-
balance sheet credit exposures.
Under the current expected credit loss, or CECL, accounting standard the ACL is a valuation estimated at each
balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount
expected to be collected.
The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at
which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as
applicable accretion or amortization of premium, discount and net deferred fees or costs. In the event that collection of
principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner.
Therefore, the Company has made the policy election to exclude accrued interest from the measurement of ACL.
The ACL on loans is increased by charges to provision for credit losses and reduced by charge-offs, net of
recoveries. Management evaluates the appropriateness of the ACL on loans quarterly. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant change from period to period. The ACL
on loans is presented on the consolidated statements of condition.
Loans past due 30 days or more are considered delinquent. In general, secured loans that are delinquent for 90
consecutive days are placed on non-accrual status and may be subject to individual loss assessment in accordance with
established internal policy. In general, unsecured loans that are delinquent for 90 consecutive days have a provision
taken for the full amount of the loan.
In cases where a borrower experiences financial difficulty, the Company may make certain concessions for
which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an
interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-
other than significant payment delay, or some combination of similar types of modifications. During the years ended
December 31, 2023 and 2022, the Company did not provide any modifications to loans under these circumstances that
were experiencing financial difficulty.
108
The ACL on loans reduces the loan portfolio to the net amount expected to be collected, and represents the
expected losses over the life of all loans at the reporting date. The allowance incorporates forward-looking information
and applies a reversion methodology beyond the reasonable and supportable forecast.
The ACL on loans represents the Company's estimated risk of loss within its loan portfolio as of the reporting
date. To appropriately measure expected credit losses, management disaggregates the loan portfolio into pools of similar
risk characteristics (i.e. “segments”). The Company utilizes a discounted cash flow approach to calculate the expected
loss for each segment. Within the discounted cash flow model, a PD and LGD assumption is applied to calculate the
expected loss for each segment. PD is the probability the asset will default within a given timeframe and LGD is the
percentage of assets not expected to be collected due to default. The Company's PD and LGD assumptions is derived
using a combination of external data and internal historical default and loss experience.
As of December 31, 2023, the primary macroeconomic drivers used within the discounted cash flow model included
forecasts of National Unemployment, changes in National GDP, and changes in the National Housing Price Index. These
macroeconomic drivers may change from time to time as a result of management’s assessment of continued suitability of
each factor.
To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts
obtained from various reputable sources, which may include, but is not limited to, the Federal Open Market Committee
forecast and other publicly available forecasts from well recognized, leading economists or firms. External baseline
forecasts are supplemented an assessment of the likelihood of standard alternative scenarios occurring over the forecast
period. The Company’s reasonable and supportable forecast period generally ranges from one to two years, depending
on the facts and circumstances of the current state of the economy, portfolio segment and management’s judgement of
what can be reasonably supported. The model reversion period generally ranges from one to two years, and it also
depends on the current state of the economy and management’s judgments of such. Management monitors and assesses
the forecast and reversion period at least annually. The Company used a one-year forecast and reversion period to
calculate the ACL on loans as of December 31, 2023.
The ACL on loans is calculated over a loan’s contractual life. For term loans, the contractual life is calculated
based on the maturity date. For revolving loans, the contractual life is based on either the estimated maturity date or a
default date. For revolving loans with no stated maturity date, the contractual life is calculated based on the annual
attrition rate for the pool. The contractual term does not include expected extension, renewals or modifications.
The Company's loan portfolio is segmented into 11 homogenous pools as follows based on the various risk
profiles of the Company's loans:
Commercial & Industrial
CRE – Construction, Land & Development
CRE – Multifamily
CRE – Non-Owner Occupied
CRE – Owner Occupied
Agricultural
Residential – 1st Lien
Residential – Construction
Residential – HELOC
Residential – Jr Lien
Consumer
Paycheck Protection Program
In calculating the ACL on loans, the contractual life of a loan must be adjusted for prepayments to arrive at
expected cash flows. The Company models term loans using an annualized prepayment. When the Company has a
109
specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For
revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the cash flow.
The ACL on loans evaluation may also consider various qualitative factors, such as: actual or expected changes
in economic trends and conditions, changes in the value of underlying collateral for loans, changes to lending policies,
underwriting standards and/or management personnel performing such functions, delinquency and other credit quality
trends, credit risk concentrations, if any, changes to the nature of the Company's business impacting the loan portfolio,
and other external factors, that may include, but are not limited to, results of internal loan reviews, examinations by bank
regulatory agencies, or other such events such as a natural disaster.
Certain loans are individually evaluated for estimated credit losses, including those that are classified as substandard
or doubtful and are on non-accrual or that have other unique characteristics differing from the segment. Specific reserves
are established when appropriate for such loans based on the present value of expected future cash flows of the loan or
the estimated realizable value of the collateral, if any.
Management may also adjust its assumptions to account for differences between expected and actual losses from period-
to-period. The variability of management’s assumptions could alter the ACL on loans materially and impact future
results of operations and financial condition. The loss estimation models and methods used to determine the allowance
for credit losses are continually refined and enhanced.
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.
ACL on Off Balance Sheet Credit Exposures
The ACL on off balance sheet credit exposures, excluding those that are unconditionally cancellable by the
Company, estimates the expected losses on the unfunded commitments and standby letters of credit at each reporting
date. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk
characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the
qualifying unfunded loan commitments and standby letters of credit using the Company’s own historical experience to
estimate the expected funded for each loan segment as of the reporting date. Once the expected funded amount for each
loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost
basis for each loan segment, is applied to calculate the ACL on off-balance sheet credit exposures as of the reporting
date.
The ACL on off balance sheet credit exposures is presented within accrued expenses and other liabilities on the
consolidated balance sheet. A charge (credit) to provision for credit losses on the consolidated statements of income is
made to account for the change in the ACL on off-balance sheet exposures between reporting periods.The ACL on off-
balance sheet credit related financial instruments was $7.4 million and $3.2 million as of December 31, 2023 and 2022,
respectively.
Accrued Interest Receivable
Accrued interest receivable, including receivables related to investments and loans, is excluded from the
measurement of the ACL. Accrued interest receivable is written off by reversing previously recognized interest income.
The Company has a robust policy in place to write off accrued interest when a loan is placed on non-accrual. For loans, a
write-off typically occurs when a loan has been in default for 90 days or more.
110
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 performs a quantitative analysis 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 certain 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, 2023, 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.
Mortgage Banking
Residential real estate loans are originated for purposes of being held for investment and held for sale into the
secondary market. The transfer of these financial assets is accounted for as a sale when control over the asset has been
surrendered. Control is deemed to be surrendered when the asset has been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred asset, and the Company records the gain on sale of the financial asset within mortgage banking income on the
consolidated statements of income.
Servicing assets are recognized as separate assets when servicing rights are acquired through the sale of
residential mortgage loans with servicing rights retained. Capitalized servicing rights are initially recorded at estimated
fair value based on assumptions provided by a third-party valuation service. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as servicing cost per
loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds, and default rates and
losses. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees, and is net of estimated fair value adjustments to capitalized
mortgage servicing rights. Capitalized servicing rights are amortized into mortgage banking income in proportion to, and
over the period of, the estimated future servicing income of the underlying loans.
Servicing rights are accounted for at the lower of amortized cost or fair value. 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
111
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.
Leases
The Company leases office space, space for ATM locations and certain branch locations under noncancellable
operating leases, several of which have renewal options to extend the lease terms. Upon commencement of a new lease,
the Company will recognize a right-of-use, or ROU, asset and a corresponding lease liability. The Company makes the
decision on whether to renew an option to extend a lease by considering various factors. The Company will recognize an
adjustment to ROU asset and lease liability when lease agreements are amended and executed. The discount rate used in
determining the present value of lease payments is based on the lessor’s implicit rate in the lease if known or the
Company’s incremental borrowings rate for borrowing terms similar to each lease at commencement date. The Company
has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate
leases, non-lease components, such as common area maintenance charges, real estate taxes and insurance, are not
included in the measurement of the lease liability since they are generally able to be segregated. The Company has
elected the short-term lease recognition exemption for all leases that qualify.
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.
112
Short-Term and Long-Term Borrowings
Short-term borrowings are those that, at time of origination, are scheduled to mature within one year. The
Company’s short-term borrowings include, but are not limited to, FHLB overnight and FHLB advances, federal funds
purchased, and line-of-credit advances.
Long-term borrowings are those that, at time of origination, are scheduled to mature in one or more years. The
Company’s long-term borrowings include, but are not limited to, FHLB advances, subordinated notes payable, trust
preferred securities, and junior subordinated debentures.
Short-term and long-term borrowings on the consolidated statements of income are presented net of
unamortized issuance costs, if any, and amortized over the life of the borrowing.
The Company is required to post collateral for certain borrowings, for which it generally posts loans and/or
investment securities as collateral.
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. The Company
formally documents relationships between hedging instruments and hedged items, as well as its risk management
objectives and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s
inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in
offsetting changes in cash flows or fair values of hedged items. Derivatives designated and qualifying as a hedge of the
exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges. Changes in fair value of a derivative that qualifies as a fair value
hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the
transaction is effective. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future
cash flows, or other types of forecasted transactions, are considered cash flow hedges. Changes in fair value of a
derivative that is effective and that qualifies as a cash flow hedge are recorded in OCI and are reclassified into earnings
when the forecasted transaction or related cash flows affect earnings. The Company will also enter into derivative
contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the
Company elects not to apply hedge accounting. Changes in the fair value of the derivatives not designated are
recognized directly in earnings.
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
113
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
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.
114
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 2023, 2022, or 2021.
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 2020.
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 debt securities, unrealized gains (losses) on cash flow hedging derivatives,
reclassification adjustments for losses (gains) realized in income, and unrealized gains (losses) on other derivatives, 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.
Earnings per Share
Earnings per share are calculated utilizing the two-class method. Earnings per share calculations include shares
related to the Alerus Financial Corporation Employee Stock Ownership Plan. Basic earnings per share is calculated by
dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common
stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share are calculated
by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common
stockholders 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, 2023, and those which are not
yet effective and have been evaluated or are currently being evaluated by management, as of December 31, 2023.
115
Adopted Pronouncements
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments. The measurement of expected credit losses under the
CECL accounting standard is applicable to financial assets measured at amortized cost, including loan receivables. It
also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of
credit, financial guarantees, and other similar agreements). In addition, ASC 326 made changes to the accounting for
AFS and HTM debt securities. One such change is to require credit losses to be presented as an allowance, rather than as
a write-down.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at
amortized cost, off-balance sheet credit exposures, and AFS and HTM debt securities. Results for reporting periods
beginning after December 31, 2022, are presented under ASC 326, while prior period amounts continue to be reported in
accordance with previously applicable GAAP. Upon adoption, the Company recorded a cumulative-effect adjustment of
$4.5 million reducing retained earnings, with a corresponding adjustment of $3.9 million increasing the ACL on loans,
an adjustment of $172 thousand increasing the ACL on HTM debt securities, an adjustment of $1.9 million increasing
other liabilities for the ACL on off-balance sheet credit exposures, and an adjustment of $1.5 million increasing deferred
tax assets as of January 1, 2023.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with
credit deterioration previously classified as purchased credit impaired and accounted for under ASC 310-30. In
accordance with the standard, management did not reassess whether purchased credit impaired, or PCI, assets met the
criteria of purchased credit deteriorated, or PCD, assets as of the date of adoption.
The following table illustrates the impact of ASC 326:
(dollars in thousands)
Assets:
Investments
Held-to-maturity
Obligations of state and political agencies
Mortgage backed securities
Residential agency
Total allowance for held-to-maturity investment securities
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 allowance for loans
Allowance for credit losses on loans and investments securities
Liabilities:
Allowance for credit losses on unfunded commitments
$
$
As reported
under
ASC 326
January 1, 2023
Pre-ASC 326
Adoption
Pre-tax impact of
ASC 326
Adoption
$
110
$
—
$
62
172
8,526
3,986
12,630
25,142
8,126
1,291
444
9,861
35,003
35,175
5,159
$
$
—
—
9,233
1,437
12,761
23,431
5,857
1,318
540
7,715
31,146
31,146
3,244
$
$
110
62
172
(707)
2,549
(131)
1,711
2,269
(27)
(96)
2,146
3,857
4,029
1,915
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging
– Portfolio Layer Method, which clarifies the guidance on fair value hedge accounting of interest rate risk portfolios of
116
financial assets. ASU 2022-01 updates guidance in Topic 815, to expand the scope of the current last-of-layer method to
allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial
interests secured by a portfolio of financial instruments on a prospective basis. Additionally, ASU 2022-01 clarifies that
basis adjustments related to existing portfolio layer hedge relationships should not be considered when measuring credit
losses on the financial assets included in the closed portfolio. Further, ASU 2022-01 clarifies that any reversal of fair
value hedge basis adjustments associated with an actual breach should be recognized in interest income immediately.
ASU 2022-01 was effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The
Company adopted ASU 2022-01 effective January 1, 2023, and entered into a fair value hedge agreement on February
10, 2023 and adopted the portfolio layer method of accounting for this transaction. This adoption had no impact on the
Company’s consolidated financial statements as the Company did not have any hedged assets using the last-of-layer
hedge accounting method.
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 had not yet adopted the amendment in ASU 2016-13, the effective date for the
amendments in this update are same as the effective date for ASU 2016-13. The Company adopted this ASU on January
1, 2023, and had no loans experience financial difficulty in the current period.
Pronouncements Not Yet Effective
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 the London
Interbank Offered Rate (“LIBOR”) reference 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 issued 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 5.3% of the Company’s loans, as of December 31, 2023.
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
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.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax
Disclosures. The amendments in this ASU related to the rate reconciliation and income taxes paid disclosures improve
117
the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information
in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments allow investors to better
assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning
and operational opportunities affect its income tax rate and prospects for future cash flows. The other amendments in this
Update improve the effectiveness and comparability of disclosures by adding disclosures of pretax income (or loss) and
income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (SEC) Regulation S-X
210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and removing
disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this
ASU are effective for annual periods beginning after December 15, 2024. For entities other than public business entities,
the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for
annual financial statements that have not yet been issued or made available for issuance. The amendments in this Update
should be applied on a prospective basis. Retrospective application is also permitted.
NOTE 3 Business Combinations
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, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was
allocated to the Company’s Banking segment. The purchase consisted of $270.4 million in loans and $353.7 million in
deposits. 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
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
Preliminary Fair Value
Metro Phoenix Bank
Adjustments
As recorded by
the Company
$
$
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
118
The following table presents pro forma information for the years ended December 31, 2022 and 2021, as if the
acquisition had occurred on January 1, 2022. This table has been prepared for comparative purposes only and is not
indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the
periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect
management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration
and consolidation of the acquisition. Pro forma results for the periods presented are:
(dollars in thousands)
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Net income (after tax)
Basic earnings per common share
Diluted earnings per common share
Pro Formas (unaudited)
for the years ended December 31,
2022
107,172
112,755
166,476
40,784
2.17
2.14
$
$
$
$
$
$
2021
104,087
151,499
178,337
58,585
3.36
3.30
The Company recorded acquisition related costs of $2.5 million for the year ended December 31, 2022. These
costs were included in professional fees and assessments expenses in the Company’s consolidated statements of income.
As part of the acquisition of Metro Phoenix Bank, the Company acquired loans that displayed evidence of
deterioration of credit quality since origination and the Company believed it to be 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 in Note 6 (Loans and Allowance for Credit Losses) of the consolidated financial
statements, as of December 31, 2022, were as follows:
(dollars in thousands)
Real estate construction
Outstanding balance
Carrying amount
Allowance for credit losses on loans
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
175
175
151
—
151
177
—
—
177
$
$
$
$
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, 2023 and 2022. In addition to vault cash, the Company held balances at the Federal
Reserve Bank and other financial institutions of $101.0 million and $28.0 million at December 31, 2023 and 2022,
respectively, to meet these requirements. The balances are included in cash and cash equivalents on the Consolidated
Balance Sheets.
119
NOTE 5 Investment Securities
The following tables present amortized cost, gross unrealized gains and losses, allowance for credit losses, and
fair value of the AFS investment securities and HTM investment securities as of December 31, 2023 and 2022:
(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
$
Amortized
Cost
Unrealized
Gains
December 31, 2023
Unrealized
Losses
Allowance for
Credit Losses
Fair
Value
$
1,119
$
4 $
(3)
$
— $
1,120
524,140
1,476
26
57,993
584,754
129,603
170,125
299,728
884,482
1
—
—
—
5
—
(88,547)
(123)
(1)
(9,349)
(98,023)
—
—
—
—
—
435,594
1,353
25
48,644
486,736
(12,613)
114
116,990
—
—
(28,498)
(41,111)
5 $ (139,134)
$
99
213
213 $
141,627
258,617
745,353
$
(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
Amortized
Cost
Unrealized
Gains
December 31, 2022
Unrealized
Losses
Allowance for
Credit Losses
Fair
Value
$
3,518
$
19
$
(17)
N/A $
3,520
705,845
70,669
34
69,501
849,567
137,787
184,115
321,902
$ 1,171,469
$
2
—
—
—
21
—
—
—
21
(118,168)
(7,111)
—
(6,968)
(132,264)
N/A
N/A
N/A
N/A
N/A
587,679
63,558
34
62,533
717,324
(17,736)
N/A
120,051
(33,254)
(50,990)
$ (183,254)
N/A
N/A
N/A $
150,861
270,912
988,236
The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does
not believe that the AFS debt securities that were in an unrealized loss position as of December 31, 2023 represent a
credit loss impairment. As of December 31, 2023 and 2022, the gross unrealized loss positions were primarily related to
mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These
securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and
have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions;
however, all bonds had an investment grade rating as of December 31, 2023 and 2022. Total gross unrealized losses
were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to
the credit quality of the investment securities. The Company does not intend to sell the investment securities that were
in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment
securities before recovery of their amortized cost basis, which may be at maturity.
The ACL on HTM debt securities is estimated using relevant information, from internal and external sources,
relating to past events, current conditions, and reasonable supportable forecasts. Using a probability of default and loss
given default analysis an allowance for credit losses was established in the amount of $213 thousand as of
December 31, 2023.
120
Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued
interest receivable and is excluded from the estimate of credit losses. As of December 31, 2023, the accrued interest
receivable on AFS investment securities and HTM investment securities totaled $1.5 million and $1.4 million,
respectively. As of December 31, 2022, the accrued interest receivable on AFS investment securities and HTM
investment securities totaled $1.9 million and $1.5 million, respectively.
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 AFS to HTM. At December 31, 2023 and 2022,
the net unrealized gains on the transferred securities were $108 thousand and $272 thousand, net of a deferred tax of $55
thousand and $137 thousand, respectively.
Proceeds from the sale of AFS securities for the years ended December 31, 2023, 2022, and 2021 are displayed
in the table below:
(dollars in thousands)
Proceeds
Realized gains
Realized losses
$
2023
171,758
—
(24,643)
Year ended
December 31,
2022
$
$
—
—
—
2021
13,189
114
—
Proceeds from the call of HTM securities for the years ended December 31, 2023, 2022 and 2021 are displayed
in the table below:
(dollars in thousands)
Proceeds
Realized gains
Realized losses
2023
$
Year ended
December 31,
2022
$
242
—
—
$
963
—
—
2021
1,772
11
—
During the years ended December 31, 2023 and 2022, there were no sales of HTM 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.
The following table presents investment securities with gross unrealized losses, for which an ACL has not been
recorded at December 31, 2023 and 2022, aggregated by investment category and length of time that individual
investment securities have been in a continuous loss position:
(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
Less than 12 Months
Number of Unrealized
Holdings Losses
Fair
Value
December 31, 2023
Over 12 Months
Fair
Value
Unrealized
Losses
Total
Unrealized
Losses
Fair
Value
1 $
(3) $
489 $
— $
— $
(3) $
489
112
1
3
12
—
—
—
—
43
—
—
—
(88,547)
(123)
(1)
(9,349)
435,505
1,353
25
48,644
(88,547)
(123)
(1)
(9,349)
435,548
1,353
25
48,644
129 $
(3) $
532 $ (98,020) $ 485,527 $ (98,023) $ 486,059
121
(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
Less than 12 Months
December 31, 2022
Over 12 Months
Total
Number of Unrealized
Holdings Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
1 $
(17) $
509 $
— $
— $
(17) $
509
145 (10,457)
(4,835)
17
—
3
(4,452)
17
79,693
50,437
32
48,048
(107,711)
(2,276)
—
(2,516)
507,418
13,120
2
14,484
(118,168)
(7,111)
—
(6,968)
587,111
63,557
34
62,532
183 (19,761)
178,719
(112,503)
535,024
(132,264)
713,743
181
(3,336)
18,788
(14,400)
98,762
(17,736)
117,550
27
—
—
(33,254)
150,861
(33,254)
150,861
(3,336)
208
268,411
391 $ (23,097) $ 197,507 $ (160,157) $ 784,647 $ (183,254) $ 982,154
249,623
(47,654)
(50,990)
18,788
As of December 31, 2023 and 2022, the unrealized losses on the Company’s AFS debt securities have not been
recognized into income because management does not intend to sell and it is not more-likely-than-not that the Company
will be required to sell any of the debt securities before recovery of its amortized cost basis. Furthermore, the unrealized
losses were due to changes in interest rates and other market conditions, were not reflective of credit events and the
issuers continue to make timely principal and interest payments on the bonds. Agency-backed and government-
sponsored enterprise securities have a long 40-year history with no credit losses, including during times of severe stress.
The principal and interest payments on agency-guaranteed debt is backed by the U.S. government. Government-
sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S.
Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily
marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero
credit losses. Subordinate corporate bonds are primarily comprised of investment grade senior notes and senior
subordinated notes on other financial institutions. HTM municipal debt holdings are comprised solely of high credit
quality state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-
zero credit loss.
The Company determined that the expected credit loss on its HTM portfolio was $213 thousand as of
December 31, 2023. The Company determined that the expected credit loss on its HTM portfolio was immaterial, and
therefore, an allowance was not carried on its HTM debt securities at December 31, 2022.
As of December 31, 2023 and 2022, none of the Company’s HTM debt securities were past due or on non-
accrual status. The Company did not recognize any interest income on non-accrual HTM debt securities during years
ended December 31, 2023, 2022 and 2021.
122
The following table presents amortized cost and fair value of AFS investment securities and the carrying value
and fair value of HTM investment securities at December 31, 2023, by contractual maturity:
(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
Mortgage-backed securities
Residential agency
Total investment securities
Carrying
Value
$
Held-to-maturity
Fair
Value
8,474 $
44,557
52,729
11,230
116,990
8,588 $
47,995
60,289
12,731
129,603
Available-for-sale
Fair
Value
Amortized
Cost
— $
524
59,477
613
60,614
—
521
50,004
617
51,142
170,125
435,594
$ 299,728 $ 258,617 $ 584,754 $ 486,736
141,627
524,140
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 $250.0 million and $260.7 million, were pledged at
December 31, 2023 and 2022, respectively, to secure public deposits and for other purposes required or permitted by
law.
As of December 31, 2023 and 2022, the carrying value of the Company’s Federal Reserve Bank stock and
Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:
(dollars in thousands)
Federal Reserve
FHLB
December 31,
2023
December 31,
2022
$
4,623
16,566
$
4,595
19,362
These securities can only be redeemed or sold at their par value and only to the respective issuing institution or
to another member institution. The Company records these non-marketable equity securities as a component of other
assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity
securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management
considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.
Visa Class B Restricted Shares
In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These
shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A
common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by
Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these
litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund
additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted
Class A shares. As of December 31, 2023, 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, 2023 and 2022, were carried at a zero cost basis.
123
NOTE 6 Loans and Allowance for Credit Losses
The following table presents total loans outstanding, by portfolio segment, as of December 31, 2023 and 2022:
(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, December 31,
2023
2022
$
598,321 $
124,034
1,126,912
1,849,267
583,876
97,810
881,670
1,563,356
726,879
154,134
29,303
910,316
679,551
150,479
50,608
880,638
$ 2,759,583 $ 2,443,994
Total loans include net deferred loan fees and costs of $0.2 million and $0.9 million at December 31, 2023 and
2022, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $5.1 million and
$7.1 million as of December 31, 2023 and 2022, respectively.
Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $12.2 million at
December 31, 2023 and $9.2 million at December 31, 2022.
The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends
early, implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company
continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.
The Company monitors and manages credit risk through the following governance structure:
The Credit Risk team, Collection and Special Assets team and the Credit Governance Committee, which is an
internal management committee comprised of various executives and senior managers across business lines,
including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial
and Retail Banking, oversee the Company's systems and procedures to monitor the credit quality of its loan
portfolio, conduct a loan review program, and maintain the integrity of the loan rating system.
The Loan Committee is responsible for reviewing and approving all credit requests that exceed individual limits
that have not been countersigned by an individual with sufficient assigned authority. This committee has full
authority to commit the Bank to any request that fits within its assigned approval authority.
The adequacy of the ACL is overseen by the ACL Governance Committee, which is an internal management
committee comprised of various Company executives and senior managers across business lines, including
Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and
Retail Banking. The ACL Governance Committee supports the oversight efforts of the Board of Directors.
The Board of Directors has approval authority and responsibility for all matters regarding loan policy, reviews
all loans approved or declined by the Loan Committee, approves lending authority and monitors asset quality
and concentration levels.
The ACL Governance Committee and Bank Board of Directors has approval authority and oversight
responsibility for the ACL adequacy and methodology.
Loans with a carrying value of $1.6 billion and $1.5 billion were pledged at December 31, 2023 and 2022,
respectively, to secure FHLB borrowings, public deposits, and for other purposes required or permitted by law.
124
Segmentation
For purposes of determining the ACL on loans, the Company disaggregates its loans into portfolio segments.
Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level
of allowance. As of December 31, 2023, the Company's loan portfolio segments, as determined based on the unique risk
characteristics of each, included the following:
Commercial & Industrial: Commercial loans consist of revolving and term loan obligations extended to
business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral
generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and
equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the
borrower. Commercial loans may be secured or unsecured.
Commercial Real Estate – Construction, Land & Development: Construction, Land & Development
commercial estate loans primarily consists of loans to commercial real estate construction projects until they are
completed. The construction projects are for real property that may include, but are not limited to multifamily
residential, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities and other specific
use properties. Construction, Land & Development commercial real estate loans are typically written with interest only,
variable rate, multi advance structures. Collateral values are determine based upon appraisals and evaluations in
accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established
policy and regulatory guidelines.
Commercial Real Estate – Multifamily: Multifamily commercial estate loans are investment properties in which
the primary source for repayment of the loan by the borrower is derived from rental income associated with the property
or the proceeds of the sale, refinancing, or permanent refinancing of the property. Multifamily commercial real estate
loans consist of mortgage loans to finance investments in real property including multifamily residential properties,
Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined
based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios
at origination are governed by established policy and regulatory guidelines.
Commercial Real Estate – Non-Owner Occupied: Non-owner occupied commercial estate loans are investment
properties in which the primary source for repayment of the loan by the borrower is derived from rental income
associated with the property or the proceeds of the sale, refinancing, or permanent refinancing of the property. Non
owner occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may
include, but are not limited to, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities
and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures.
Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines.
Maximum loan to value ratios at origination are governed by established policy and regulatory guidelines.
Commercial Real Estate – Owner Occupied: Generally, owner occupied commercial real estate loans are
properties that are owned and operated by the borrower, and the primary source for repayment is the cash flow from the
ongoing operations and activities conducted by the borrower's business. Owner occupied commercial real estate loans
consist of mortgage loans to finance investments in real property that may include, but are not limited to,
commercial/retail office space, restaurants, educational and medical practice facilities and other specific use properties.
Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined
based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan to value ratios at
origination are governed by established policy and regulatory guidelines.
125
Agricultural: Agricultural loans include loans secured by farmland and loans for agricultural production.
Farmland includes purposes such as crop and livestock production. Farmland loans are typically written with amortizing
payment structures. Collateral values for farmland are determined based upon appraisals and evaluations in accordance
with established policy guidelines and maximum loan-to-value ratios at origination are governed by established policy
and regulatory guidelines. Agricultural production loans are for the purpose of financing working capital and/or capital
investment for agriculture production activities. Collateral generally consists of pledges of business assets including, but
not limited to, accounts receivable, inventory, plant and equipment, and/or real estate in applicable. Agricultural
production loans are primarily paid by the operating cash flow of the borrower. Agricultural production loans may be
secured or unsecured.
Residential – 1st Lien: Residential real estate loans held in the Company's loan portfolio are made to borrowers
who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower
qualifications include favorable credit history combined with supportive income requirements and combined loan to
value ratios within established policy guidelines. Collateral consists of senior mortgage liens on one to four family
residences, including for investment purposes.
Residential – Construction: Residential real estate construction loans held in the Company's loan portfolio are
made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting
factors. Borrower qualifications include favorable credit history combined with supportive income requirements and
combined loan-to-value ratios within established policy guidelines. Residential real estate construction loans are
typically written with interest only, variable rate, multi advance structures. Collateral consists of residential construction
projects for one to four family residences, including for investment purposes.
HELOC: Home equity lines of credit are made to qualified individuals and are secured by senior or junior
mortgage liens on owner occupied one to four family homes, condominiums, or vacation homes. Home equity lines of
credit have a variable rate and are billed as interest only payments during the draw period. At the end of the draw period,
the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower
qualifications include favorable credit history combined with supportive income requirements and combined loan-to-
value ratios within established policy guidelines.
Residential – Jr Lien: Residential real estate loans held in the Company's loan portfolio are made to borrowers
who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower
qualifications include favorable credit history combined with supportive income requirements and combined loan to
value ratios within established policy guidelines. Collateral consists of junior mortgage liens on one to four family
residences, including for investment purposes.
Consumer: Consumer loan products including personal lines of credit and amortizing loans made to qualified
individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft
protection. Borrower qualifications include favorable credit history combined with supportive income and collateral
requirements within established policy guidelines, as applicable. Consumer loans may be secured or unsecured.
126
ACL on Loans
The following tables present, by loan portfolio segment, a summary of the changes in the ACL for the
three years ending December 31, 2023, 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
Ending
Beginning Adoption
Balance of ASC 326 Credit Losses(1) Charge-offs Recoveries Balance
Loan
Year ended December 31, 2023
Provision for
Loan
$ 9,233 $
1,437
12,761
23,431
(707) $
2,549
(131)
1,711
5,857
1,318
540
7,715
$ 31,146 $
2,269
(27)
(96)
2,146
3,857 $
645 $
2,125
(778)
1,992
(1,829)
(115)
(273)
(2,217)
(225) $
(436) $
—
—
(436)
1,159 $ 9,894
6,111
11,897
27,902
—
45
1,204
(49)
(77)
(51)
(177)
(613) $
330
52
92
474
6,578
1,151
212
7,941
1,678 $ 35,843
(1) The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss
expense of $2.2 million related to off-balance sheet credit exposure and $40 thousand related to investment securities held-to-maturity.
(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
(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
Beginning
Balance
Year ended December 31, 2022
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$
9,218 $
810
12,778
22,806
950 $
551
(151)
1,350
(1,396) $
—
—
(1,396)
461 $
76
134
671
9,233
1,437
12,761
23,431
6,874
1,380
512
8,766
31,572 $
(1,017)
(344)
11
(1,350)
— $
—
—
(153)
(153)
(1,549) $
—
282
170
452
1,123 $
5,857
1,318
540
7,715
31,146
$
Beginning
Balance
Year ended December 31, 2021
Loan
Provision for
Ending
Loan Losses Charge-offs Recoveries Balance
Loan
$
10,547 $
690
14,574
25,811
(1,759) $
120
(2,082)
(3,721)
(1,230) $
—
(536)
(1,766)
1,660 $
—
822
2,482
9,218
810
12,778
22,806
6,174
1,472
789
8,435
34,246 $
700
(215)
(264)
221
(3,500) $
—
—
(156)
(156)
(1,922) $
—
123
143
266
2,748 $
6,874
1,380
512
8,766
31,572
$
127
The ACL on loans at December 31, 2023, was $35.8 million, an increase of $4.7 million, or 15.1%, since
December 31, 2022. The increase was primarily due to the adoption of CECL, which resulted in an additional allowance
of $3.9 million in the ACL on loans. As of December 31, 2023 and 2022, the significant model inputs and assumptions
used within the discounted cash flow model for purposes of estimating the ACL on loans were:
Macroeconomic (loss) drivers: As of December 31, 2023 and 2022, the following loss drivers for each loan
segment were used to calculate the expected PD over the forecast and reversion period:
Commercial & Industrial – National Unemployment; Change in National GDP
CRE – Construction, Land & Development – National Unemployment; Change in National GDP
CRE – Multifamily – National Unemployment
CRE – Non-Owner Occupied – National Unemployment; Change in National GDP
CRE – Owner Occupied – National Unemployment
Agricultural – (None)
Residential – 1st Lien – National Unemployment; Change in National Home Price Index (“HPI”)
Residential – Construction – National Unemployment; Change in National HPI
Residential – HELOC – National Unemployment; Change in National HPI
Residential – Jr Lien – National Unemployment; Change in National HPI
Consumer – National Unemployment; Change in National GDP
Paycheck Protection Program – (None)
After adoption of ASU 2016-13, given the strong loan growth and the future economic uncertainty, the reserve
increased $840 thousand during 2023. This increase was partially offset by the release of certain qualitative factors due
to strong asset quality and the continued maturity of the overall model. The increase in the reserve represents the
elevated risk of credit loss within the Company's portfolio.
Credit Concentrations
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is
recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local
demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and
owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry
Classification System codes, and state and county codes. Property type coding is used for investment real estate. As of
December 31, 2023, the Company's total exposure to the general business industry was 10.7% of total loans. There
were no other industry concentrations exceeding 10% of the Company's total loan portfolio as of December 31, 2023.
Credit Quality Indicators
The Company’s consumer loan portfolio is primarily comprised of secured loans that are evaluated at
origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate
consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the
consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred. These loans
are rated as either performing or non-performing.
The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and performs
detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the
overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators.
During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors,
trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans.
These credit quality indicators are used to assign a risk rating to each individual loan.
128
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 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.
129
The following table sets forth the amortized cost basis of loans by credit quality indicator and vintage based on
the most recent analysis performed, as of December 31, 2023:
(dollars in thousands)
As of December 31, 2023
Commercial and industrial
Pass
Special mention
Substandard
Doubtful
Subtotal
Gross charge-offs for the year ended
Real estate construction
Pass
Special mention
Substandard
Doubtful
Subtotal
Gross charge-offs for the year ended
Commercial real estate
Pass
Special mention
Substandard
Doubtful
Subtotal
Gross charge-offs for the year ended
Residential real estate first mortgage
Performing
Non-performing
Subtotal
Gross charge-offs for the year ended
Residential real estate junior lien
Performing
Non-performing
Subtotal
Gross charge-offs for the year ended
Other revolving and installment
Performing
Non-performing
Subtotal
Gross charge-offs for the year ended
Total loans
Gross charge-offs for the year ended
Term Loans Amortized Cost Basis by Origination Year
2023
2022
2021
2020
2019
Prior
Revolving
Loans Amortized
Cost Basis
Total
$ 197,533 $ 89,090 $ 67,691 $ 64,272 $ 34,603 $ 15,053 $
—
464
—
—
4,844
—
—
236
—
—
6,328
—
—
94
—
—
2,513
—
$ 197,997 $ 93,934 $ 67,927 $ 70,600 $ 34,697 $ 17,566 $
$
90 $
247 $
39 $
49 $
11 $
— $
$ 29,902 $ 57,944 $ 14,326 $
—
—
—
—
20,667
—
—
—
—
$ 29,902 $ 78,611 $ 14,326 $
$
— $
— $
— $
122 $
—
—
—
122 $
— $
— $
—
—
—
— $
— $
952 $
—
—
—
952 $
— $
$ 272,261 $ 265,549 $ 142,027 $ 153,796 $ 116,861 $ 159,454 $
—
—
—
—
587
—
—
2,872
—
—
—
—
—
3,690
—
262
1,759
—
$ 272,261 $ 266,136 $ 144,899 $ 153,796 $ 120,551 $ 161,475 $
$
— $
— $
— $
— $
— $
— $
$ 72,180 $ 207,177 $ 218,719 $ 108,100 $ 33,102 $ 87,212 $
—
—
—
—
—
105
$ 72,180 $ 207,177 $ 218,719 $ 108,100 $ 33,102 $ 87,317 $
$
40 $
— $
— $
— $
— $
9 $
$ 18,408 $ 15,655 $
—
—
5,946 $
—
4,857 $
—
1,769 $
—
5,280 $
—
$ 18,408 $ 15,655 $ 5,946 $ 4,857 $ 1,769 $ 5,280 $
$
77 $
— $
— $
— $
— $
— $
$
5,320 $
—
5,320 $
4 $
6,395 $
—
6,395 $
2 $
980 $
—
980 $
— $
4,489 $
—
4,489 $
31 $
1,554 $
—
1,554 $
6 $
$
952 $
$
8 $
$ 596,068 $ 667,908 $ 452,797 $ 341,964 $ 191,673 $ 273,542 $
$
215 $
253 $
43 $
58 $
42 $
2 $
952 $
—
—
15,361
—
100,239 $ 568,481
—
29,840
—
115,600 $ 598,321
436
— $
—
—
—
121 $ 103,367
—
20,667
—
121 $ 124,034
—
— $
—
—
—
7,794 $ 1,117,742
262
8,908
—
7,794 $ 1,126,912
—
— $
—
284 $ 726,774
105
284 $ 726,879
49
— $
1,781
100,438 $ 152,353
1,781
102,219 $ 154,134
77
— $
9,613 $
—
9,613 $
— $
29,303
—
29,303
51
235,631 $ 2,759,583
— $
613
The following table sets forth the risk category of loans by class and credit quality indicator used on the most
recent analysis performed as of December 31, 2022:
(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
130
Past Due and Nonaccrual Loans
The Company closely monitors the performance of its loan portfolio. A loan is placed on non-accrual when the
financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as
scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured
by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured.
When one loan to a borrower is placed on non-accrual, all other loans to the borrower are re-evaluated to determine if
they should also be placed on non-accrual. All previously accrued and unpaid interest is reversed at that time. A loan
will return to accrual when collection of principal and interest is assured and the borrower has demonstrated timely
payments of principal and interest for a reasonable period, generally at least six months.
The following tables present past due aging analysis of total loans outstanding, by portfolio segment, as of
December 31, 2023 and 2022, respectively:
December 31, 2023
Accruing
Current
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90 Days
or More
Past Due
Nonaccrual
Total
Loans
$
590,663 $
124,034
1,125,669
1,840,366
724,786
153,220
29,086
907,092
$ 2,747,458 $
924 $
—
128
1,052
901
666
170
1,737
2,789 $
— $
—
—
—
554
—
47
601
601 $
139 $
—
—
139
—
—
—
—
139 $
6,595 $
—
1,115
7,710
598,321
124,034
1,126,912
1,849,267
638
248
—
886
726,879
154,134
29,303
910,316
8,596 $ 2,759,583
December 31, 2022
Accruing
Current
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90 Days
or More
Past Due
Nonaccrual
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
(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
$
580,288 $
97,370
879,830
1,557,488
677,471
149,918
50,360
877,749
$ 2,435,237 $
2,332 $
—
368
2,700
1,234
377
237
1,848
4,548 $
94 $
—
—
94
311
—
10
321
415 $
— $
—
—
—
—
—
—
—
— $
1,162 $
440
1,472
3,074
583,876
97,810
881,670
1,563,356
535
184
1
720
679,551
150,479
50,608
880,638
3,794 $ 2,443,994
131
In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or
more past due and still accruing. The following table presents the amortized cost basis on nonaccrual status loans and
loans 90 days or more past due and still accruing as of December 31, 2023 and 2022:
(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
As of December 31, 2023
Nonaccrual
with no Allowance
for Credit Losses
Nonaccrual
90 Days
or More
Past Due
and Accruing
$
$
79
—
95
174
632
185
—
817
991
$
$
6,595
—
1,115
7,710
638
248
—
886
8,596
December 31, 2022
Nonaccrual
with no Allowance
for Credit Losses
Nonaccrual
$
$
638
—
576
1,214
535
184
1
720
1,934
$
$
1,162
440
1,472
3,074
535
184
1
720
3,794
$
$
$
$
139
—
—
139
—
—
—
—
139
90 Days
or More
Past Due
and Accruing
—
—
—
—
—
—
—
—
—
Interest income that would have been recognized if loans on nonaccrual status had been current in accordance
with their original terms for the years ended December 31, 2023, 2022, and 2021 is estimated to have been $469
thousand, $155 thousand, and $183 thousand, respectively.
The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual.
As a result, the Company did not record any interest income on its nonaccrual loans for the years ended years ended
December 31, 2023, 2022 and 2021. As of December 31, 2023 and 2022, total accrued interest receivable on loans,
which had been excluded from reported amortized cost basis on loans; was $12.2 million and $9.2 million, respectively,
and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not
carried on the accrued interest receivable at either date.
In cases where a borrower experiences financial difficulty, the Company may make certain concessions for
which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an
interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-
other than significant payment delay, or some combination of similar types of modifications. During the years ended
132
December 31, 2023 and 2022, the Company did not provide any modifications to loans under these circumstances that
were experiencing financial difficulty.
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral
type, which are individually evaluated to determine credit losses, and the related ACL allocated to these loans, as of
December 31, 2023:
(dollars in thousands)
Commercial
Commercial and industrial
Commercial real estate
Total commercial
Consumer
Residential real estate first mortgage
Residential real estate junior lien
Total consumer
Total loans
As of December 31, 2023
Primary Type of Collateral
Real estate Equipment
Other
Total
Allowance for
Credit Losses
$
$
6,124 $
695
6,819
638
134
772
7,591 $
— $
—
—
—
22
22
22 $
— $
96
96
6,124 $
791
6,915
—
93
93
189 $
638
249
887
7,802 $
2,384
601
2,985
3
6
9
2,994
Collateral dependent loans are loans for which the repayment is expected to be provided substantially by the
underlying collateral and there are no other available and reliable sources of repayment.
Pre-ASC 326 Adoption impaired loan disclosures
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, 2023 and
2022:
(dollars in thousands)
Commercial
Commercial and industrial
Real estate construction
Commercial real estate
Total commercial
Consumer
Recorded Investment
Allowance for Loan Losses
Individually Collectively
Evaluated Evaluated
Individually Collectively
Total
Evaluated Evaluated Total
December 31, 2022
$
582,563 $
583,876 $
1,313 $
262
1,472
3,047
97,548
880,198
1,560,309
97,810
881,670
1,563,356
275 $
97
582
954
8,958 $
1,340
12,179
22,477
9,233
1,437
12,761
23,431
5,857
5,857
—
1,318
1,318
—
540
540
—
—
7,715
7,715
954 $ 30,192 $ 31,146
Residential real estate first mortgage
Residential real estate junior lien
Other revolving and installment
Total consumer
Total loans
535
184
1
720
679,016
150,295
50,607
879,918
679,551
150,479
50,608
880,638
$
3,767 $ 2,440,227 $ 2,443,994 $
133
The table below summarizes key information on impaired loans as of December 31, 2022:
December 31, 2022
Unpaid
Investment Principal
Recorded
Related
Allowance
$
$
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
(dollars in thousands)
Impaired loans with a valuation allowance
Commercial and industrial
Real estate construction
Commercial real estate
Residential real estate first mortgage
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
134
The table below presents the average recorded investment in impaired loans and interest income for the
two years ending December 31, 2022 and 2021:
Year Ended December 31,
2022
Average
2021
Average
(dollars in thousands)
Impaired loans with 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 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
NOTE 7 Land, Premises and Equipment, Net
Recorded
Investment Income Investment
Interest
Recorded
Interest
Income
$
722 $
442
935
—
—
—
2,099
13 $
—
—
—
—
—
13
517 $
—
187
—
—
—
704
707
—
618
575
191
1
2,092
—
—
—
—
—
—
—
1,988
—
672
23
98
1
2,782
1,429
442
1,553
575
191
1
4,191 $
13
—
—
—
—
—
13 $
2,505
—
859
23
98
1
3,486 $
$
13
—
7
—
—
20
20
—
—
—
—
—
20
33
—
7
—
—
—
40
Components of land, premises and equipment at December 31, 2023 and 2022 were as follows:
(dollars in thousands)
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
December 31,
2023
December 31,
2022
4,542
28,172
2,657
34,086
69,457
(51,517)
17,940
$
$
4,542
26,625
2,657
36,013
69,837
(52,549)
17,288
$
$
Depreciation expense for the years ended December 31, 2023, 2022, and 2021 amounted to $2.5 million,
$3.0 million, and $3.6 million, respectively.
NOTE 8 Goodwill and Other Intangible Assets
As of December 31, 2023 and 2022, goodwill totaled $46.8 million and $47.1 million, respectively.
135
The following table summarizes the carrying amounts of goodwill, by segment, as of December 31, 2023 and
2022:
(dollars in thousands)
Banking
Retirement and benefit services
Total goodwill
December 31,
2023
December 31,
2022
$
$
35,260
11,523
46,783
$
$
35,260
11,827
47,087
In the third quarter of 2023, the Company sold an ESOP trustee line of business. The reduction in goodwill in
2023 of $304 thousand was attributed to the sale of this line of business.
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as
follows:
December 31, 2023
December 31, 2022
(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
Gross
Carrying
Amount
Accumulated
Amortization Total
(29,959) $ 11,464 $ 41,423 $
5,694
(31,857) $ 17,158 $ 49,015 $
(1,898)
7,592
(25,927) $ 15,496
6,959
(26,560) $ 22,455
(633)
Aggregate amortization expense for the years ended December 31, 2023, 2022, and 2021 was $5.3 million,
$4.8 million, and $4.4 million, respectively.
Estimated aggregate amortization expense for future years is as follows:
(dollars in thousands)
2024
2025
2026
2027
2028
Thereafter
Total
NOTE 9 Loan Servicing
$
$
Amount
5,043
3,904
2,275
2,275
1,642
2,019
17,158
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of loans serviced for others totaled $190.0 million and $213.5 million at December 31, 2023 and
2022, 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.
136
The following table summarizes the Company’s activity related to servicing rights for the years ended
December 31, 2023, 2022, and 2021:
(dollars in thousands)
Servicing Assets:
Balance at beginning of year
Additions (1)
Amortization (2)
Balance at end of year
Less valuation reserve (3)
Balance at end of year, net of valuation reserve
Fair value, beginning of year
Fair value, end of year
Year ended
December 31,
2022
2023
2021
$
$
$
$
2,643
300
(595)
2,348
(296)
2,052
2,314
2,062
$
$
$
$
1,880
1,538
(524)
2,894
(251)
2,643
1,892
2,314
$
$
$
$
1,987
1,553
(745)
2,795
(915)
1,880
2,137
1,892
(1) Associated income was reported within mortgage banking income, net on the consolidated statements of income.
(2) Associated amortization expense was reported within other noninterest income on the consolidated statements of income.
(3) Associated valuation reserve was reported within mortgage and lending expenses on the consolidated statements of income.
The following is a summary of key data and assumptions used in the valuation of servicing rights as of
December 31, 2023 and 2022. Increases or decreases in any one of these assumptions would result in lower or higher fair
value measurements.
(dollars in thousands)
Fair value of servicing rights
Weighted-average remaining term, years
Prepayment speeds
Discount rate
NOTE 10 Leases
December 31, December 31,
2023
2022
$
$
2,052
18.8
6.2 %
11.1 %
2,643
20.5
6.9 %
10.5 %
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified
property, plant or equipment for a period of time in exchange for consideration. Substantially all 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 2037. Portions of certain properties are subleased for terms extending through 2024. Substantially all
of the Company’s leases are classified as operating leases. The Company has no existing finance leases.
The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less),
or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the
classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial statements
as of December 31, 2023 and 2022:
(dollars in thousands)
Lease Right-of-Use Assets
Operating lease right-of-use assets
Lease Liabilities
Operating lease liabilities
Classification
Operating lease right-of-use assets $
5,436 $
5,419
December 31, December 31,
2023
2022
Operating lease liabilities
$
5,751 $
5,902
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of
the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease
agreements often 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. The Company utilizes its incremental borrowing rate at lease inception,
137
on a collateralized basis, over a similar term for the discount rate. For the Company’s only finance lease, the Company
utilized its incremental borrowing rate at lease inception.
Weighted-average remaining lease term, years
Operating leases
Weighted-average discount rate
Operating leases
December 31,
2023
December 31,
2022
7.3
5.0
3.9 %
3.1 %
As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components
and instead to account for them as a single lease component, the variable lease cost primarily represents variable
payments such as common area maintenance utilities. Variable lease cost also includes payments for usage or
maintenance of those capitalized equipment operating leases.
The following table presents lease costs and other lease information for the years ending December 31, 2023,
2022 and 2021:
(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
Year ended
December 31,
2022
2023
2021
$
$
1,914 $
1,159
167
—
—
(219)
3,021 $
1,799
899
217
7
87
(238)
2,771
$
$
$
$
1,827
823
181
25
116
(228)
2,744
1,763
267
Operating
Leases
1,626
1,243
1,064
516
311
1,831
6,591
(840)
5,751
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
1,755 $
1,868
1,706
4,266
Future minimum payments for leases with initial or remaining terms of one year or more as of
December 31, 2023 are as follows:
(dollars in thousands)
Year ended
December 31, 2024
December 31, 2025
December 31, 2026
December 31, 2027
December 31, 2028
Thereafter
Total future minimum lease payments
Amounts representing interest
Total operating lease liabilities
$
$
$
138
NOTE 11 Other Assets
Other assets on the balance sheet consisted of the following balances at December 31, 2023 and 2022:
(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
NOTE 12 Deposits
December 31, December 31,
2023
2022
$
$
4,623 $
32
5,766
14
13,510
11,561
16,566
8,943
16,512
5,905
83,432 $
4,595
30
6,770
14
14,684
2,856
19,362
6,333
17,642
3,426
75,712
The components of deposits in the consolidated balance sheets at December 31, 2023 and 2022 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,
2023
728,082 $
2022
860,987
$
840,711
82,485
1,032,771
411,562
2,367,529
706,275
99,882
1,035,981
212,359
2,054,497
$ 3,095,611 $ 2,915,484
The aggregate amount of deposit overdrafts included as loans were $140 thousand and $202 thousand at
December 31, 2023 and 2022, respectively.
Certificates of deposit in excess of $250,000 totaled $121.8 million and $51.1 million at December 31, 2023
and 2022, respectively.
At December 31, 2023, the scheduled maturities of certificates of deposit were as follows:
(dollars in thousands)
2024
2025
2026
2027
2028
Thereafter
Total
Amount
386,419
11,536
6,775
1,856
688
4,288
411,562
$
$
139
NOTE 13 Short-Term Borrowings
Short-term borrowings at December 31, 2023, 2022, and 2021 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,
2022
2023
2021
$ 114,170 $ 153,080 $
287,768
492,060
63,296
251,880
5.31 %
5.51 %
2.46 %
4.26 %
$ 200,000 $ 225,000 $
113,973
200,000
89,932
225,000
5.39 %
5.50 %
3.10 %
4.31 %
—
3
—
— %
— %
—
—
—
— %
— %
The Company had outstanding credit capacity with the FHLB of $706.6 million and $531.6 million at
December 31, 2023 and 2022, 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
December 31, 2023 and 2022. The Company has an unused $20.0 million unsecured line of credit with Bank of North
Dakota.
NOTE 14 Long-Term Debt
Long-term debt at December 31, 2023 and 2022 consisted of the following:
December 31, 2023
(dollars in thousands)
Subordinated notes payable
Carrying
Face
Value
Value
$ 50,000 $ 50,000 Fixed
Interest Rate
Period End
Interest
Maturity
Rate
Call Date
3.50 % 3/30/2031 3/31/2026
Date
Junior subordinated debenture (Trust I)
4,124
3,583
Junior subordinated debenture (Trust II)
6,186
5,373
Three-month CME SOFR
+ 0.26% + 3.10%
Three-month CME SOFR
+ 0.26% + 1.80%
8.72 % 6/26/2033 6/26/2008
7.45 % 9/15/2036 9/15/2011
Total long-term debt
$ 60,310 $ 58,956
December 31, 2022
Period End
Interest
Maturity
Rate
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
Carrying
Face
Value
Value
$ 50,000 $ 50,000 Fixed
Interest Rate
Junior subordinated debenture (Trust I)
4,124
3,537
Junior subordinated debenture (Trust II)
6,186
5,306
Three-month
LIBOR + 3.10%
Three-month
LIBOR + 1.80%
Total long-term debt
$ 60,310 $ 58,843
140
NOTE 15 Commitments and Contingencies
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.
A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of
December 31, 2023 and 2022, respectively, was as follows:
(dollars in thousands)
Commitments to extend credit
Standby letters of credit
Total
December 31, December 31,
$
2023
942,413 $
10,045
$
952,458 $
2022
806,431
13,089
819,520
The Company had an allowance for loan losses on unfunded commitments of $3.2 million as of
December 31, 2022. Upon the adoption of the CECL accounting standard, the Company recorded an additional $1.9
million reserve for unfunded commitments. For the year ended December 31, 2023, the Company recorded an additional
$2.3 million in provision for credit losses on unfunded commitments for a total of $7.4 million of allowance for credit
losses on unfunded commitments as of December 31, 2023.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s
creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income producing commercial properties.
The Company was not required to perform on any financial guarantees and did not incur any losses on its
commitments during the past two years.
The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure
public unit deposits. The Company had no letters of credit outstanding with the FHLB as of December 31, 2023 or 2022.
With the Bank of North Dakota, the Company had one letter of credit outstanding as of December 31, 2023 in the
amount of $182.0 million. There were no letters of credit outstanding with the Bank of North Dakota as of
December 31, 2022. Letters of credit with the Bank of North Dakota were collateralized by loans pledged to the Bank of
North Dakota in the amount of $454.6 million and $215.5 million as of December 31, 2023 and 2022, respectively.
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.
141
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. Since inception, all awards issued under the plan
have been restricted stock and restricted stock units. Any shares subject to an award that is cancelled, forfeited, or
expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan.
However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such
shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company
to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that
were not issued upon the settlement of the award. Restricted stock units issued do not participate in dividends and
recipients are not entitled to vote these restricted stock units until shares of the Company’s common stock are delivered
after vesting of the restricted stock units. Shares vest, become exercisable and contain such other terms and conditions as
determined by the compensation committee and set forth in individual agreements with the participant receiving the
award. Awards issued to Company directors are not subject to any service requirements and vest immediately. The plan
authorizes the issuance of up to 1,100,000 shares of common stock. As of December 31, 2023, 779,307 shares of
common stock are still available for issue under the plan.
The compensation expense relating to awards under these plans was $1.6 million in 2023, $1.9 million in 2022,
and $3.1 million in 2021. The number of unvested shares outstanding was 120,497 and 128,267 as of
December 31, 2023 and 2022, respectively. The number of unvested units outstanding was 111,160 and 110,219 as of
December 31, 2023 and 2022, respectively.
The following table presents the activity in the stock plans for the years ended December 31, 2023, and 2022
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,
2023
Weighted-
Average Grant
Date Fair Value Awards
2022
Weighted-
Average Grant
Date Fair Value
Awards
238,486 $
117,706
(98,138)
(26,397)
231,657 $
23.65
19.95
21.44
21.33
22.96
260,850 $
102,265
(113,562)
(11,067)
238,486 $
21.04
25.44
19.25
23.90
23.65
As of December 31, 2023 and 2022, there was $2.7 million and $2.5 million, respectively, of unrecognized
compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized
over a weighted-average period of 2.3 and 2.7 years, as of December 31, 2023 and 2022, respectively.
142
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 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. For the years ended December 31, 2023, 2022 and 2021,
there were no unallocated ESOP shares outstanding. 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, 2023, 2022, and 2021 were as follows:
(dollars in thousands)
Salary reduction plan
ESOP
Total
Total ESOP shares outstanding
NOTE 19 Noninterest Income
December 31,
2023
December 31,
2022
December 31,
2021
$
$
2,933
1,604
4,537
1,152,017
$
$
3,148
1,932
5,080
1,111,424
$
$
3,123
2,014
5,137
1,207,952
The following table presents the Company’s noninterest income for the years ended December 31, 2023, 2022,
and 2021.
(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.
2023
65,294
21,855
8,411
1,280
(24,643)
2,222
877
1,433
3,500
80,229
$
$
Year ended
December 31,
2022
$
$
67,135
20,870
16,921
1,434
—
2,246
836
1,429
352
111,223
$
$
2021
71,709
21,052
48,502
1,395
125
2,180
793
1,218
413
147,387
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, 2023 and 2022, the
Company did not have any significant contract balances.
143
Contract acquisition costs: In connection with the adoption of Topic 606, an entity is required to capitalize, and
subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are
expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a
contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales
commission). The Company utilizes the practical expedient which allows entities to immediately expense contract
acquisition costs when the asset would have resulted from capitalizing these costs would have been amortized in one
year or less.
NOTE 20 Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2023, 2022, and 2021 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
2023
$
851 $
1,151
2,002
9,005 $
727
9,732
10,731
2,212
12,943
2,415
(259)
2,156
4,158 $
2,298
147
2,445
12,177 $
2,879
574
3,453
16,396
$
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2023 and 2022 were as follows:
(dollars in thousands)
Deferred Tax Assets
Allowance for credit 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
Unrealized loss on derivative and hedge instruments
Unfunded commitment liability
Operating lease liabilities
Other
Total deferred tax assets from temporary differences
Deferred Tax Liabilities
Accumulated depreciation
Goodwill and intangible amortization
Servicing assets
Prepaid expenses
Operating lease right-of-use assets
Other
Total deferred tax liabilities from temporary differences
Net Deferred Tax Assets
$
144
December 31, December 31,
2023
2022
$
9,002 $
2,253
327
2,176
931
—
143
24,548
135
1,913
1,486
129
43,043
737
3,840
530
1,188
1,539
614
8,448
34,595 $
7,818
2,455
417
3,363
1,665
3
74
33,056
—
814
—
70
49,735
835
5,115
663
552
—
201
7,366
42,369
The reconciliation between applicable income taxes and the amount computed at the applicable statutory
Federal tax rate for years ending December 31, 2023, 2022, and 2021 was as follows:
2023
Percent of
Year ended December 31,
2022
Percent of
2021
Percent of
(dollars in thousands)
Taxes at statutory federal income tax rate
Tax effect of:
Tax exempt income
State income taxes, net of federal benefits
Nondeductible items and other
Applicable income taxes
Amount Pretax Income Amount Pretax Income Amount Pretax Income
21.0 %
$ 3,329
21.0 % $ 10,958
21.0 % $ 14,506
(715)
715
829
$ 4,158
(4.5)%
(514)
4.5 % 2,297
(564)
5.2 %
26.2 % $ 12,177
(1.0)%
(556)
4.4
2,973
(527)
(1.1)
23.3 % $ 16,396
(0.8)%
4.3 %
(0.8)%
23.7 %
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 for the periods presented:
(dollars in thousands)
Investment
Low income housing tax
credit
Total
Accounting Method
Proportional amortization
December 31, 2023
Investment Unfunded Commitment
December 31, 2022
Investment Unfunded Commitment
$ 17,906 $
$ 17,906 $
12,347 $ 17,906 $
12,347 $ 17,906 $
15,559
15,559
The following table presents a summary of the amortization expense and tax benefit recognized for the
Company’s qualified affordable housing projects for the periods presented:
(dollars in thousands)
Low income housing tax credit
Total
Year ended December 31,
2023
2022
Amortization
Expense (1)
Tax Benefit
Recognized (2)
Amortization
Expense (1)
Tax Benefit
Recognized (2)
$
$
1,130
1,130
$
$
(1,418)
(1,418)
$
$
264
264
$
$
(373)
(373)
(1) The amortization expense for low income housing tax credits were included in income tax expense.
(2) All of the tax benefits recognized were included in income tax expense.
145
NOTE 22 Segment Reporting
Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating
decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision
maker is the President and Chief Executive Officer of the Company. Reportable segments are determined based on the
services offered, the significance of the services offered, the significance of those services to the Company’s financial
statements, and management’s regular review of the operating results of those services. The Company operates through
four operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.
The financial information presented for each segment includes net interest income, provision for credit losses,
noninterest income, and direct and indirect noninterest expense. Corporate administration includes all remaining income
and expenses not allocated to the four operating segments.
The following table presents key metrics related to the Company’s segments as of and for the periods presented:
Year ended December 31, 2023
(dollars in thousands)
Net interest income (loss)
Provision for credit losses
Noninterest income (loss)
Noninterest expense
Net income (loss) before taxes $
Total assets
Banking
$
89,693 $
2,057
(15,428)
61,023
11,185 $
$ 3,821,989 $
Wealth
Retirement and
Benefit Services Management
— $
—
65,294
53,307
11,987 $
34,352 $
— $
—
21,855
13,477
8,378 $
4,757 $
Corporate
827 $
—
8,411
14,606
(5,368) $
11,736 $
Administration Consolidated
87,839
(2,681) $
2,057
—
80,229
97
150,157
7,744
(10,328) $
15,854
34,879 $ 3,907,713
Mortgage
(dollars in thousands)
Net interest income (loss)
Provision for credit losses
Noninterest income
Noninterest expense
Net income (loss) before taxes $
Total assets
Year ended December 31, 2022
$
Wealth
Banking
100,190 $
—
6,199
62,789
43,600 $
$ 3,697,608 $
Retirement and
Benefit Services Management
— $
—
67,135
55,178
11,957 $
40,821 $
— $
—
20,870
11,876
8,994 $
4,032 $
Corporate
1,879 $
—
16,921
21,272
(2,472) $
10,620 $
Administration Consolidated
99,729
(2,340) $
—
—
111,223
98
158,770
7,655
(9,897) $
52,182
26,556 $ 3,779,637
Mortgage
(dollars in thousands)
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Total assets
Banking
Year ended December 31, 2021
Banking
$
87,014 $
(3,500)
6,091
53,121
43,484 $
$
$ 3,254,979 $
Wealth
Retirement and
Benefit Services Management
— $
—
71,709
55,802
15,907 $
44,953 $
— $
—
21,052
11,571
9,481 $
3,644 $
Corporate
1,981 $
—
48,502
39,518
10,965 $
75,713 $
Administration Consolidated
87,099
(1,896) $
(3,500)
—
147,387
33
168,909
8,897
69,077
(10,760) $
13,402 $ 3,392,691
Mortgage
The Banking division offers a complete line of loan, deposit, cash management, and treasury services through
fifteen 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.
146
Retirement and Benefit Services
Retirement and Benefit Services provides the following services nationally: recordkeeping and administration
services to qualified retirement plans; recordkeeping, and administration services to other types of retirement plans;
investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, and COBRA
recordkeeping and administration services. The division operates within each of the banking markets, as well as in East
Lansing, Michigan and Lakewood, 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 a centralized mortgage unit in
Minneapolis, Minnesota, as well as through the banking office locations.
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, 2023, 2022, and 2021 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 stockholders
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,
$
$
2023
11,696 $
(5)
11,701 $
19,922
221
20,143
2022
40,005
416
39,589
18,640
244
18,884
$
$
2021
52,681
802
51,879
17,189
297
17,486
$
$
0.59 $
0.58 $
2.12
2.10
$
$
3.02
2.97
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, 2023 and 2022:
(dollars in thousands)
Beginning balance
New loans and advances
Repayments
Changes to related parties (1)
Ending balance
Year ended December 31,
2023
2022
$
$
130
1,313
(665)
257
1,035
$
$
34
145
(95)
46
130
(1)
Represents changes related to directors that were added to the Board during the year.
147
Deposits from related parties held by the Bank at December 31, 2023 and 2022, amounted to $710 thousand
and $587 thousand, respectively.
NOTE 25 Derivative Instruments
The Company uses a variety of derivative instruments to mitigate exposure to both market and credit risks
inherent in its business activities. The Company manages these risks as part of its overall asset and liability management
process and through its policies and procedures. Derivatives represent contracts between parties that usually require little
or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a
notional amount and an underlying as specified in the contract.
Derivatives are often measured in terms of notional amount, but this amount is generally not exchanged, and it
is not recorded on the Company’s consolidated balance sheet. The notional amount is the basis to which the underlying
is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate,
security price, credit spread, or other index. Residential and commercial real estate loan commitments associated with
loans to be sold also qualify as derivative instruments.
Derivatives Designated as Hedging Instruments
The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate,
liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under
GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is
designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a
fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum,
quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of
the hedged item(s). As of December 31, 2023, the Company only uses fair value and cash flow hedges.
Fair value hedges: These derivatives are interest rate swaps the Company uses to hedge the change in fair value
related to interest rate changes of its underlying mortgage-backed investment securities and mortgage loan pools. The
interest rate swaps are carried on the Company’s Consolidated Balance Sheet at their fair value in other assets (when the
fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). The changes in fair
value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair
value of the interest rate swaps due to changes in benchmark interest rates are recorded as an adjustment to the hedged
instruments and offset in the same interest income line items.
Cash flow hedges: These derivatives are interest rate swaps the Company uses to hedge the variability of
expected future cash flows due to market interest changes. The interest rate swap is carried on the Company’s
consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and
other liabilities (when the fair value is negative). Changes in fair value of derivatives designated as cash flow hedges are
recorded in other comprehensive income (loss), or OCI, until the cash flows of the hedged items are realized. If a
derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in OCI is
amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted
transaction is no longer probable, hedge accounting is ceased and any gain or loss included in OCI is reported in
earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts
remain within accumulated other comprehensive income (loss), or AOCI. There were no cash flow hedges at December
31, 2022. The Company estimates that an additional $0.3 million will be reclassified as an increase to interest expense
over the next 12 months. All cash flow hedges were highly effective for the year ended December 31, 2023. As of
December 31, 2023, the maximum length of time over which forecasted transactions are hedged is 12 months.
148
Derivatives Not Designated as Hedging Instruments
Interest rate swaps: The Company periodically enters into commercial loan interest rate swap agreements in
order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These
derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while
simultaneously entering into an offsetting interest rate swap with an institutional counterparty.
Interest rate lock commitments, forward loan sales commitments and to be announced (TBA) mortgage backed
securities: The Company enters into forward delivery contracts to sell mortgage loans at specific prices and dates in
order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest
rate lock commitments.
The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of
December 31, 2023 and 2022:
(dollars in thousands)
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps
Cash flow hedges:
Interest rate swaps
Total derivatives designated as hedging
instruments
Not designated as hedging instruments:
Asset Derivatives
Interest rate swaps (1)
Interest rate lock commitments
Forward loan sales commitments
December 31, 2023
Fair
December 31, 2022
Notional
Value Amount Value Amount
Notional
Fair
Consolidated Balance Sheet Location
Accrued expenses and other liabilities $ 352 $ 600,000 $
— $
—
Accrued expenses and other liabilities
297
200,000
—
—
$ 649 $ 800,000 $
— $
—
Other assets
Other assets
Other assets
$ 8,327 $ 120,671 $ 6,277 $ 43,430
10,462
351
8,126
190
121
7
179
6
Total asset derivatives not designated as
hedging instruments
Liability Derivatives
Interest rate swaps (1)
To-be-announced mortgage backed securities Accrued expenses and other liabilities
Accrued expenses and other liabilities $ 8,348 $ 120,671 $ 6,277 $ 43,430
25,750
20,500
183
26
$ 8,512 $ 128,987 $ 6,405 $ 54,243
Total liability derivatives not designated as
hedging instruments
$ 8,531 $ 141,171 $ 6,303 $ 69,180
(1) Reported fair values include accrued interest receivable and payable.
The following table shows the effective portion of the gains (losses) recognized in other comprehensive income
(loss) and the gains (losses), before tax, reclassified from OCI into earnings for the periods indicated:
(dollars in thousands)
Derivatives designated as hedging instruments
For the year ended December 31, 2023
Cash flow hedges:
Interest rate swaps
Gains (Losses)
Recognized in
OCI
Gains (Losses)
Reclassified
from OCI
into Earnings
$
176
$
473
149
The following table shows the effect of fair value and cash flow hedge accounting on derivatives designated as
hedging instruments in the Consolidated Statements of Income:
(dollars in thousands)
For the year ended December 31, 2023
Total amounts in the Consolidated Statements of Income
Fair value hedges:
Interest rate swaps
Cash flow hedges:
Interest rate swaps
Location and Amount of Gains (Losses) Recognized in Income
Interest Expense
Interest Income
Loans,
including
fees
Investment
securities -
Taxable
Short-term
borrowings
$
136,918
$
24,262
$
20,976
252
—
1,881
—
—
(473)
The following table shows the notional amount, carrying amount and associated cumulative basis adjustments
related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in
fair value hedging relationships at December 31, 2023:
(dollars in thousands)
Mortgage-backed securities
Residential agency (1)
Mortgage loan pools (2)
Total
December 31, 2023
Notional
Amount
Carrying Amount
of Hedged Assets/
Liabilities
Cumulative Fair
Value Hedging
Adjustment in the
Carrying Amount of
Hedged Assets/
Liabilities
$
$
200,000
400,000
600,000
$
$
200,241
400,098
600,339
$
$
241
98
339
(1)
Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the
portfolio layer method. At December 31, 2023, the amortized cost of the closed portfolios used in these hedging relationships was $323.4 million.
(2) These amounts include the amortized cost basis of residential real estate loans that were used to designate hedging relationships in which the
hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At
December 31, 2023, the amortized cost basis of the residential real estate loans used in these hedging relationships was $687.5 million.
The gain (loss) recognized on derivatives not designated as hedging relationships for years ended
December 31, 2023, 2022, and 2021 was as follows:
(dollars in thousands)
Derivatives not designated as
hedging instruments
Interest rate swaps
Interest rate lock commitments
Forward loan sales commitments
To-be-announced mortgage backed
securities
Total gain (loss) from derivatives
not designated as hedging
instruments
Consolidated Statements of Income Location
Other noninterest income
$
Mortgage banking
Mortgage banking
Mortgage banking
Year ended December 31,
2023
2022
(20) $
165
(1)
2 $
(1,464)
(483)
2021
1
(8,660)
(2,174)
118
4,916
5,220
$
262 $
2,971 $
(5,613)
150
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, 2023 and 2022, respectively, was $550 thousand and $309 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.
Credit Risk-Related Contingent Features
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative
contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the
Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all
swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits,
monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring
credit losses on derivative contracts with institutional counterparties is remote.
The Company has agreements with its derivative counterparties that contain a provision where, if the Company
defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by
the lender, the Company could also be declared in default on its derivative obligations. In addition, the Company also
has agreements with certain of its derivative counterparties that contain a provision where, if the Company fails to
maintain its status as a well-capitalized institution, the counterparty could terminate the derivative position(s) and the
Company could be required to settle its obligations under the agreements.
As of December 31, 2023 and 2022, the fair value of derivatives in a net liability position, which included
accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $649 thousand
and $0, respectively. As of December 31, 2023 and 2022, the Company had minimum collateral posting thresholds with
certain of its derivative counterparties and has posted cash collateral of $550 thousand and $309, respectively. If the
Company had breached any of these provisions at December 31, 2023 or 2022, it could have been required to settle its
obligations under the agreements at their termination value of $649 thousand and $0, respectively.
151
Balance Sheet Offsetting
The following table presents the Company’s derivative positions and the potential effect of netting
arrangements on its financial position as of the dates indicated:
Gross Amount
Not Offset in the
Consolidated
Balance Sheets
(dollars in thousands)
December 31, 2023
Derivative assets:
Interest rate swaps - Company (1)
Interest rate swaps - dealer bank (1)
To-be-announced mortgage backed
securities
Total
Derivative liabilities:
Interest rate swaps - Company (1)
Interest rate swaps - customer (2)
To-be-announced mortgage backed
securities
Total
December 31, 2022
Derivative assets:
Interest rate swaps - Company (1)
Interest rate swaps - dealer bank (1)
To-be-announced mortgage backed
securities
Total
Derivative liabilities:
Interest rate swaps - customer (2)
To-be-announced mortgage backed
securities
Total
Gross Amount Net Amount
Gross Amount
Recognized in the Offset in the
Consolidated
Balance Sheets Balance Sheets Pledged (Received) Net Amount
Presented in the
Consolidated
Consolidated
Balance Sheets
Cash Collateral
$
$
$
$
$
$
$
$
— $
8,327
—
8,327 $
649 $
8,348
183
9,180 $
— $
6,277
—
6,277 $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
8,327
—
8,327 $
649 $
8,348
183
9,180 $
— $
6,277
—
6,277 $
— $
(1,740)
—
(1,740) $
550 $
—
—
550 $
— $
(6,030)
—
(6,030) $
—
6,587
—
6,587
99
8,348
183
8,630
—
247
—
247
6,277 $
— $
6,277 $
309 $
5,968
26
6,303 $
—
— $
26
6,303 $
—
309 $
26
5,994
(1) The Company maintains a master netting agreement with each counterparty and settles collateral on a net basis for all interest rate swaps with
counterparty banks.
(2) The Company manages its net exposure on its customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting
practices. The Company does not post collateral to its customers as part of its contract.
NOTE 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.
152
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, 2023 and 2022, each of the Company and the Bank met all of
the capital adequacy requirements to which it is subject.
As of December 31, 2023, 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, 2023 and
2022 are presented in the following table:
December 31, 2023
(dollars in thousands)
Common equity tier 1 capital to risk weighted assets
Consolidated (1)
Bank
Tier 1 capital to risk weighted assets
Consolidated (1)
Bank
Total capital to risk weighted assets
Consolidated (1)
Bank
Tier 1 capital to average assets
Consolidated (1)
Bank
Minimum to be
Well Capitalized
Under Prompt
Corrective Action (1)
Amount Ratio Amount Ratio Amount Ratio
for Capital
Adequacy Purposes
Minimum Required
Actual
$ 382,578
367,445
11.82 % $ 145,605
11.40 % 145,101
391,534
367,445
12.10 % 194,139
11.40 % 193,468
4.50 % $
N/A
4.50 % 209,590
.
6.00 %
N/A
6.00 % 257,957
N/A
6.50 %
N/A
8.00 %
477,590
403,501
14.76 % 258,853
12.51 % 257,957
8.00 %
N/A
8.00 % 322,446
N/A
10.00 %
391,534
367,445
10.57 % 148,111
9.92 % 148,186
N/A
4.00 %
4.00 % 185,232
N/A
5.00 %
(1) “Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank
holding companies.
December 31, 2022
(dollars in thousands)
Common equity tier 1 capital to risk weighted assets
Consolidated (1)
Bank
Tier 1 capital to risk weighted assets
Consolidated (1)
Bank
Total capital to risk weighted assets
Consolidated (1)
Bank
Tier 1 capital to average assets
Consolidated (1)
Bank
Minimum to be
Well Capitalized
Under Prompt
Corrective Action (1)
Amount Ratio Amount Ratio Amount Ratio
for Capital
Adequacy Purposes
Minimum Required
Actual
$ 389,335
370,749
13.39 % $ 130,862
12.76 % 130,791
398,179
370,749
13.69 % 174,482
12.76 % 174,388
4.50 % $
N/A
4.50 % 188,920
.
6.00 %
N/A
6.00 % 232,517
N/A
6.50 %
N/A
8.00 %
479,325
401,895
16.48 % 232,643
13.83 % 232,517
8.00 %
N/A
8.00 % 290,646
N/A
10.00 %
398,179
370,749
11.25 % 141,514
10.48 % 141,440
4.00 %
N/A
4.00 % 176,800
N/A
5.00 %
(1) “Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank
holding companies.
153
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, 2023 and 2022, the Company was in
compliance with HUD guidelines.
NOTE 27 Other Comprehensive Income (Loss)
The following tables present a reconciliation of the changes in the components of other comprehensive income
and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:
2023
Tax
Year ended December 31,
2022
Tax
Pre-Tax
Amount
(Expense) After-Tax
Amount
Benefit
Pre-Tax
Amount
(Expense) After-Tax
Pre-Tax
Amount Amount
Benefit
2021
Tax
(Expense) After-Tax
Amount
Benefit
$ 58,868 $ (14,775) $ 44,093 $ (125,634) $ 31,534 $ (94,100) $ (19,433) $ 4,878 $ (14,555)
(328)
82
(246)
(382)
96
(286)
(326)
82
(244)
(24,643)
33,897
6,185
(8,508)
(18,458)
25,389
—
(126,016)
—
31,630
—
(94,386)
—
(19,759)
—
4,960
—
(14,799)
176
(59)
117
(473)
(297)
119
60
(354)
(237)
(241)
75
(166)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(125)
—
—
—
31
—
—
—
(94)
(dollars in thousands)
Debt Securities:
Change in fair value
Less: reclassification adjustment from
amortization of securities transferred
from AFS to HTM (1)
Less: reclassification adjustment for
net realized losses (2)
Net change
Cash Flow Hedges:
Change in fair value
Less: reclassified AOCI gain (loss)
into interest expense (3)
Net change
Other Derivatives:
Change in fair value
Less: reclassified AOCI gain (loss)
into interest expense (4)
Net change
—
(94)
Other comprehensive income (loss) $ 33,359 $ (8,373) $ 24,986 $ (126,016) $ 31,630 $ (94,386) $ (19,884) $ 4,991 $ (14,893)
—
(166)
—
(125)
—
(241)
—
—
—
75
—
—
—
—
—
31
(1) Reclassified into taxable and/or exempt from federal income taxes interest income on investment securities on the consolidated statements of
income. Refer to Note 5 (Investment Securities) for further details.
(2) Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to Note 5 (Investment Securities) for
further details.
(3) Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to Note 25 (Derivative Instruments)
for further details.
(4) Reclassified into interest income on loans, including fees and/or interest income on taxable investment securities on the consolidated statements
of income. Refer to Note 25 (Derivative Instruments) for further details.
154
The following table presents the changes in each component of AOCI for the periods indicated:
(dollars in thousands)
Balance at December 31, 2020
Other comprehensive income (loss) before reclassifications
Less: Amounts reclassified from AOCI
Other comprehensive income (loss)
Balance at December 31, 2021
Other comprehensive income (loss) before reclassifications
Less: Amounts reclassified from AOCI
Other comprehensive income (loss)
Balance at December 31, 2022
Other comprehensive income (loss) before reclassifications
Less: Amounts reclassified from AOCI
Other comprehensive income (loss)
Balance at December 31, 2023
(1) All amounts net of tax.
NOTE 28 Stock Repurchase Program
Net Unrealized
Net Unrealized Gains (Losses) on
Gains (Losses) on
Debt Securities (1)
Cash Flow
Hedges (1)
Net Unrealized
Gains (Losses)
on Other
Derivatives (1)
$
$
10,638
(14,555)
(244)
(14,799)
(4,161)
(94,100)
(286)
(94,386)
(98,547)
44,093
(18,704)
25,389
(73,158)
$
$
—
—
—
—
—
—
—
—
—
117
(354)
(237)
(237)
$
$
—
—
(94)
(94)
(94)
—
—
—
(94)
(166)
—
(166)
(260)
$
$
AOCI (1)
10,638
(14,555)
(338)
(14,893)
(4,255)
(94,100)
(286)
(94,386)
(98,641)
44,044
(19,058)
24,986
(73,655)
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Old
Stock Repurchase Program, which authorized the Company to repurchase up to 770,000 shares of its common stock
subject to certain limitations and conditions. The Old Stock Repurchase Program was terminated on/expired on February
18, 2024.
On December 12, 2023, the Board of Directors of the Company approved a new stock repurchase program, or
the New Stock Repurchase Program, which authorizes the Company to repurchase up to 1,000,000 shares of its common
stock subject to certain limitations and conditions. The New Stock Repurchase Program became effective February 18,
2024, and will expire on February 18, 2027. On February 18, 2024, the New Stock Repurchase Program replaced and
superseded the Old Stock Repurchase Program.
The New Stock Repurchase Program does not obligate the Company to repurchase any shares of its common
stock and there is no assurance that the Company will do so. For the year ended December 31, 2023, the Company
repurchased 356,474 shares, from time-to-time, under the Old Stock Repurchase Program. For the year ended
December 31, 2022, the Company did not repurchase any shares under the Old Stock Repurchase Program. The
Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.
NOTE 29 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.
155
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).
The following tables present the balances of the assets and liabilities measured at estimated fair value on a
recurring basis at December 31, 2023 and 2022:
(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, 2023
$
— $
1,120 $
— $
1,120
—
—
—
—
— $
435,594
1,353
25
48,644
486,736 $
—
—
—
—
— $
435,594
1,353
25
48,644
486,736
— $
8,512 $
— $
8,512
— $
9,180 $
— $
9,180
$
$
$
Level 1
Level 2
Level 3
Total
December 31, 2022
$
— $
3,520 $
— $
3,520
—
—
—
—
— $
587,679
63,558
34
62,533
717,324 $
—
—
—
—
— $
587,679
63,558
34
62,533
717,324
— $
6,405 $
— $
6,405
— $
6,303 $
— $
6,303
$
$
$
156
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, Available-for-sale
Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and
other pricing models utilizing observable inputs and therefore are classified as Level 2.
Derivatives
All of the Company’s derivatives are traded in over the counter markets where quoted market prices are not
readily available. For these derivatives, estimated fair value is measured using internally developed models that use
primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2.
Examples of Level 2 derivatives are basic interest rate swaps and forward contracts.
Nonrecurring Basis
Certain assets are measured at estimated fair value on a nonrecurring basis. These assets are not measured at
estimated fair value on an ongoing basis; however, they are subject to estimated fair value adjustments in certain
circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized
impairment.
The estimated fair value of certain assets on a nonrecurring basis for the years ended December 31, 2023 and
2022 consisted of the following:
(dollars in thousands)
Collateral dependent loans
Foreclosed assets
Servicing rights
(dollars in thousands)
Collateral dependent loans
Foreclosed assets
Servicing rights
Loans Held for Sale
$
$
December 31, 2023
Level 1
Level 2
Level 3
Total
$
—
—
—
$
—
—
—
$
3,998
32
2,052
3,998
32
2,052
December 31, 2022
Level 1
Level 2
Level 3
Total
$
—
—
—
$
—
—
—
$
2,813
30
2,643
2,813
30
2,643
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.
157
The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair value as of
December 31, 2023 and 2022, respectively, were as follows:
(dollars in thousands)
Asset Type
Individually evaluated
Valuation Technique
Appraisal value
Foreclosed assets
Appraisal value
Servicing rights
Discounted cash flows
Unobservable Input
Property specific
adjustment
Property specific
adjustment (1)
Prepayment speed
assumptions
Discount rate
December 31, 2023
Fair Value Range
Weighted
Average
$
3,998
10.0 %
10.0 %
32
N/A
N/A
2,052
85-151
11.1 %
104
11.1 %
(1) There were no discounts taken on the collateral that comprises the balance of foreclosed assets as of December 31, 2023.
(dollars in thousands)
Asset Type
Individually evaluated
Valuation Technique
Appraisal value
Foreclosed assets
Appraisal value
Servicing rights
Discounted cash flows
Unobservable Input
Property specific
adjustment
Property specific
adjustment (1)
Prepayment speed
assumptions
Discount rate
December 31, 2022
Fair Value Range
Average
Weighted
$
2,813
10.0 %
10.0 %
30
N/A
N/A
2,643
103-137
10.5 %
115
10.5 %
(1) There were no discounts taken on the collateral that comprises the balance of foreclosed assets as of December 31, 2022.
Disclosure of estimated fair value information about financial instruments, for which it is practicable to
estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted
market prices are not available, estimated fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate
of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain
financial instruments, with an estimated fair value that is not practicable to estimate and all non-financial instruments,
are excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not
necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances, as of
December 31, 2023 and 2022, were not carried at estimated fair value in their entirety on the consolidated balance
sheets.
Cash and Due from Banks and Accrued Interest
The carrying amounts reported in the consolidated balance sheets approximate those assets and liabilities
estimated fair values.
Investment Securities, Held-to-Maturity
The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar
securities, recently executed transactions and pricing models.
158
Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, estimated fair values
are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Bank-Owned Life Insurance
Bank-owned life insurance is carried at the amount due upon surrender of the policy, which is also the
estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying
insurance contract.
Deposits
The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the
consolidated balance sheet date. The estimated fair values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to
a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.
Short-Term Borrowings and Long-Term Debt
For variable-rate borrowings that reprice frequently, estimated fair values are based on carrying values. The
estimated fair values of fixed-rate borrowings are estimated using discounted cash flow analysis, based on the
Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Credit-Related Commitments
Off-balance sheet credit related commitments are generally of short-term nature. The contract amount of such
commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan
commitments which are generally priced at market at the time of funding.
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at
the dates indicated are as follows:
(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
Carrying
Amount
Level 1
December 31, 2023
Estimated Fair Value
Level 3
Level 2
Total
$ 129,893 $ 129,893 $
— $
299,515
2,723,740
15,700
33,236
—
—
15,700
—
258,617
—
—
33,236
— $ 129,893
258,617
—
2,590,535
2,590,535
15,700
—
33,236
—
$ 728,082 $
1,955,967
411,562
314,170
58,956
6,826
— $ 728,082 $
—
—
314,170
—
6,826
1,955,967
408,910
—
57,437
—
— $ 728,082
1,955,967
—
408,910
—
314,170
—
57,437
—
6,826
—
159
(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
Carrying
Amount
Level 1
December 31, 2022
Estimated Fair Value
Level 3
Level 2
Total
$
58,242 $ 58,242 $
— $
321,902
2,412,848
12,869
33,991
—
—
12,869
—
270,912
—
—
33,991
— $
—
2,311,956
—
—
58,242
270,912
2,311,956
12,869
33,991
$ 860,987 $
1,842,138
212,359
378,080
58,843
2,426
— $ 860,987 $
—
—
378,080
—
2,426
1,842,138
208,550
—
56,116
—
— $ 860,987
1,842,138
—
208,550
—
378,080
—
56,116
—
2,426
—
160
NOTE 30 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
December 31, December 31,
2023
2022
$
70,853 $
354,303
757
9,968
435,881 $
58,956 $
7,798
66,754
369,127
369,127
435,881 $
$
$
$
84,017
338,595
904
487
424,003
58,843
8,288
67,131
356,872
356,872
424,003
Year ended December 31,
2022
2023
2021
$ 21,000 $ 18,500 $ 16,000
4
16,004
5,293
10,711
40,642
51,353
1,328
$ 11,696 $ 40,005 $ 52,681
16
18,516
6,583
11,933
26,424
38,357
1,648
24
21,024
6,043
14,981
(4,826)
10,155
1,541
Alerus Financial Corporation
Parent Company Condensed Balance Sheets
(dollars in thousands)
Assets
Cash and cash equivalents
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
161
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
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 31 Subsequent Events
Year ended December 31,
2022
2023
2021
$
11,696 $
40,005 $
52,681
4,826
—
1,628
(9,854)
8,296
(26,424)
87
1,904
419
15,991
(40,642)
115
3,095
1,266
16,515
—
—
(189)
(189)
—
—
(14,822)
(6,638)
(21,460)
(13,164)
84,017
70,853 $
(12,800)
(738)
(13,538)
2,264
81,753
84,017 $
(10,751)
(712)
(11,463)
5,052
76,701
81,753
$
Subsequent events have been evaluated through March 8, 2024, which is the date these financial statements
were issued.
162
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, 2023, 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, 2023, 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 effectiveness of the Company’s internal control over financial reporting as of
December 31, 2023. 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, 2023 based on the specified criteria.
163
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
During the fiscal quarter ended December 31, 2023, none of the Company’s directors or executive officers
adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was
intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
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, as well as information relating to compliance with Section 16 of the
Exchange Act, is set forth under the headings “Proposal 1 – Election of Directors,” “Corporate Governance and the
Board of Directors” and “Security Ownership of Certain Beneficial Owners” appearing in the Company’s Proxy
Statement for the 2024 annual meeting of stockholders 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, 2023, 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 2024 annual meeting of stockholders 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, 2023, 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 its equity compensation plans, as well as the number of securities remaining available for future
issuance under these plans as of December 31, 2023. 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 Company’s consolidated financial
statements included in Item 8 of this Form 10-K.
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
(a)
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(b)
Weighted-average exercise
price of outstanding
options, warrants and
rights
(c)
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
231,657 $
—
231,657 $
22.96
—
22.96
779,307
—
779,307
164
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 2024 annual meeting of
stockholders to be filed with the SEC within 120 days of the Company’s fiscal year end, December 31, 2023, 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 2024 annual meeting of stockholders 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, 2023, 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 RSM US LLP as the Company’s Independent Registered Public Accounting Firm” appearing in the Company’s Proxy
Statement for the 2024 annual meeting of stockholders 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, 2023, which is incorporated herein by
reference.
165
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 49)
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
97
98
99
100
101
102
103
105
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†
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)
166
Exhibit
Number
10.2†
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
10.3†
Alerus Financial Corporation 2009 Stock Plan (incorporated herein by reference to Exhibit 10.7 on
Form S-1 filed on August 16, 2019)
10.4†
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)
10.5†
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)
10.6†
Alerus Financial Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.10 on
Form S-1 filed on August 16, 2019)
10.7†
Alerus Financial Short Term Incentive Plan
10.8†
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)
10.9†
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)
10.10†
Alerus Financial Corporation Employee Stock Ownership Plan (incorporated herein by reference to
Exhibit 10.14 on Form S-1 filed on August 16, 2019)
10.11†
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)
10.12†
Fourth Amendment of Alerus Financial Corporation Employee Stock Ownership Plan
10.13†
Fifth Amendment of Alerus Financial Corporation Employee Stock Ownership Plan
10.14†
Alerus Financial Corporation 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit
10.15 on Form S-1 filed on August 16, 2019)
10.15†
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)
10.16†
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)
10.17†
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)
167
Exhibit
Number
10.18†
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
10.19†
Alerus Financial Corporation Long-Term Incentive Plan (incorporated herein by reference to Exhibit
10.1 on From 8-K filed on February 22, 2021)
10.20†
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)
10.21†
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)
10.22†
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)
10.23†
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)
10.24†
10.25†
10.26†
10.27†
10.28†
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)
10.29†
Alerus Financial Corporation Deferred Compensation Plan (incorporated herein by reference to
Exhibit 10.1 on Form 8-K filed on December 14, 2023)
10.30†
Amendment to Alerus Financial Corporation Deferred Compensation Plan for Directors (incorporated
herein by reference to Exhibit 10.2 on Form 8-K filed December 14, 2023)
10.31†
Amendment to Alerus Financial Corporation Deferred Compensation Plan for Executives
(incorporated herein by reference to Exhibit 10.3 on Form 8-K filed December 14, 2023)
10.32†
Executive Severance Agreement by and between Alerus Financial Corporation and Forrest Wilson,
dated February 26, 2024
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)
168
Exhibit
Number
21.1
23.1
23.2
31.1
Subsidiaries of Alerus Financial Corporation
Description
Consent of CliftonLarsonAllen LLP
Consent of RSM US 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
32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
97.1
Alerus Financial Corporation Clawback Policy
†
Indicates a management contract or compensatory plan or arrangement.
169
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.
170
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 8, 2024
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/ Kari A. Koob
Kari A. Koob
/s/ Daniel E. Coughlin
Daniel E. Coughlin
/s/ Kevin D. Lemke
Kevin D. Lemke
/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
/s/ Nikki L. Sorum
Nikki L. Sorum
/s/ John Uribe
John Uribe
Director, President and Chief Executive
Officer
(Principal Executive Officer)
March 8, 2024
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
March 8, 2024
Director of Accounting
(Principal Accounting Officer)
March 8, 2024
Director
March 8, 2024
Director
March 8, 2024
Director
March 8, 2024
Director
March 8, 2024
Director
Director
March 8, 2024
March 8, 2024
Director
March 8, 2024
Director
March 8, 2024
171
EXECUTIVE MANAGEMENT
Katie Lorenson
President and
Chief Executive Officer
7 years with Alerus
Al Villalon
Executive Vice President,
Chief Financial Officer
2 years with Alerus
Jim Collins
Executive Vice President,
Chief Banking and
Revenue Officer
2 years with Alerus
Forrest Wilson
Executive Vice President,
Chief Retirement
Services Officer
Joined Alerus in 2024
Karin Taylor
Executive Vice President,
Chief Risk and
Operating Officer
6 years with Alerus
Missy Keney
Executive Vice President,
Chief Engagement Officer
19 years with Alerus
Jon Hendry
Executive Vice President,
Chief Technology Officer
40 years with Alerus
Daniel E. Coughlin
Chairman, Alerus Financial Corp.
Kevin D. Lemke
President, Virtual Systems, Inc.
BOARD OF DIRECTORS
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
Randy L. Newman
Former Chairman, President, and
CEO, Alerus
Nikki L. Sorum
Former Head of Sales and
Distribution, Thrivent Advisors
Former Senior Vice President,
Private Client Group, RBC Wealth
Management
Former Partner, McKinsey & Co.
John Uribe
Chief Financial Officer,
Blue Cross and Blue Shield of
Minnesota
Galen G. Vetter
Former Chief Financial Officer and
Senior Vice President, 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
MEMBER FDIC :: ©2024 ALERUS FINANCIAL CORPORATION
800.279.3200 :: INVESTORS.ALERUS.COM