Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-39036
ALERUS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
45-0375407
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
401 Demers Avenue
Grand Forks, ND
58201
(Address of principal executive offices)
(Zip Code)
(701) 795-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, par value $1.00 per share
ALRS
The Nasdaq Stock Market LLC
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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧
The number of shares of the registrant’s common stock outstanding at April 30, 2022 was 17,288,575.
Alerus Financial Corporation and Subsidiaries
Page
Part 1:
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
1
Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
Consolidated Statements of Income for the three months ended March 31, 2022 and 2021
2
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021
3
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021
4
Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021
5
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
56
Part 2:
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
57
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
58
Signatures
59
PART 1. FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets
March 31,
December 31,
(dollars in thousands, except share and per share data)
2022
2021
Assets
(Unaudited)
(Audited)
Cash and cash equivalents
$
132,832
242,311
Investment securities
Available-for-sale, at fair value
866,333
853,649
Held-to-maturity, at carrying value
340,150
352,061
Loans held for sale
21,864
46,490
Loans
1,818,042
1,758,020
Allowance for loan losses
(31,713)
(31,572)
Net loans
1,786,329
1,726,448
Land, premises and equipment, net
17,619
18,370
Operating lease right-of-use assets
3,360
3,727
Accrued interest receivable
8,516
8,537
Bank-owned life insurance
33,358
33,156
Goodwill
31,490
Other intangible assets
19,197
20,250
Servicing rights
1,771
1,880
Deferred income taxes, net
23,517
11,614
Other assets
49,863
42,708
Total assets
3,336,199
3,392,691
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing
831,558
938,840
Interest-bearing
2,060,709
1,981,711
Total deposits
2,892,267
2,920,551
Long-term debt
58,902
58,933
Operating lease liabilities
3,850
4,275
Accrued expenses and other liabilities
52,675
49,529
Total liabilities
3,007,694
3,033,288
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding
—
Common stock, $1 par value, 30,000,000 shares authorized: 17,288,575 and 17,212,588 issued and outstanding
17,289
17,213
Additional paid-in capital
92,573
92,878
Retained earnings
260,967
253,567
Accumulated other comprehensive income (loss)
(42,324)
(4,255)
Total stockholders’ equity
328,505
359,403
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements (unaudited)
Consolidated Statements of Income (Unaudited)
Three months ended
(dollars and shares in thousands, except per share data)
Interest Income
Loans, including fees
17,292
20,567
Taxable
5,440
2,401
Exempt from federal income taxes
216
236
Other
116
117
Total interest income
23,064
23,321
Interest Expense
829
995
562
288
Total interest expense
1,391
1,283
Net interest income
21,673
22,038
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Retirement and benefit services
17,646
17,255
Wealth management
5,326
4,986
Mortgage banking
4,931
17,132
Service charges on deposit accounts
363
338
Net gains (losses) on investment securities
114
1,204
1,056
Total noninterest income
29,470
40,881
Noninterest Expense
Compensation
19,051
23,698
Employee taxes and benefits
6,162
5,813
Occupancy and equipment expense
2,051
2,231
Business services, software and technology expense
4,924
4,976
Intangible amortization expense
1,053
1,151
Professional fees and assessments
1,541
1,472
Marketing and business development
600
676
Supplies and postage
646
531
Travel
179
26
Mortgage and lending expenses
686
1,332
1,178
1,136
Total noninterest expense
38,071
43,042
Income before income taxes
13,072
19,877
Income tax expense
2,888
4,662
Net income
10,184
15,215
Per Common Share Data
Basic earnings per common share
0.58
0.87
Diluted earnings per common share
0.57
0.86
Dividends declared per common share
0.16
0.15
Average common shares outstanding
17,244
17,145
Diluted average common shares outstanding
17,500
17,465
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities
(46,708)
(18,036)
Accretion of (gains) losses on debt securities reclassified to held-to-maturity
(4,118)
Reclassification adjustment for losses (gains) realized in income
(114)
Total other comprehensive income (loss), before tax
(50,826)
(18,150)
Income tax expense (benefit) related to items of other comprehensive income
(12,757)
(4,556)
Other comprehensive income (loss), net of tax
(38,069)
(13,594)
Total comprehensive income (loss)
(27,885)
1,621
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
Three months ended March 31, 2022
Accumulated
Additional
Common
Paid-in
Retained
Comprehensive
Stock
Capital
Earnings
Income (Loss)
Total
Balance as of December 31, 2021
Other comprehensive income (loss)
Common stock repurchased
(20)
(587)
(607)
Common stock dividends
(2,784)
Share‑based compensation expense
378
Vesting of restricted stock
96
(96)
Balance as of March 31, 2022
Three months ended March 31, 2021
Balance as of December 31, 2020
17,125
90,237
212,163
10,638
330,163
(16)
(134)
(296)
(446)
(2,602)
498
81
(81)
Balance as of March 31, 2021
17,190
90,520
224,480
(2,956)
329,234
Consolidated Statements of Cash Flows (Unaudited)
Operating Activities
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes
854
264
Depreciation and amortization
2,083
2,345
Amortization and accretion of premiums/discounts on investment securities
1,010
794
Amortization of operating lease right-of-use assets
(19)
(8)
Stock-based compensation
Increase in value of bank-owned life insurance
(202)
(193)
Realized loss (gain) on sale of fixed assets
(27)
Realized loss (gain) on derivative instruments
(713)
Realized loss (gain) on loans sold
(3,097)
(14,201)
Realized loss (gain) on sale of foreclosed assets
(23)
Realized loss (gain) on sale of investment securities
Realized loss (gain) on servicing rights
(51)
(165)
Net change in:
27,638
57,823
21
391
(4,818)
(2,050)
872
(4,995)
Net cash provided (used) by operating activities
34,847
54,841
Investing Activities
Proceeds from sales or calls of investment securities available-for-sale
13,189
Proceeds from maturities of investment securities available-for-sale
31,665
27,307
Purchases of investment securities available-for-sale
(95,640)
(262,081)
Proceeds from sales or calls of investment securities held-to-maturity
515
Proceeds from maturities of investment securities held-to-maturity
10,851
Net (increase) decrease in loans
(59,910)
41,391
Purchases of premises and equipment
(130)
(277)
Proceeds from sales of foreclosed assets
101
Net cash provided (used) by investing activities
(112,592)
(180,370)
Financing Activities
Net increase (decrease) in deposits
(28,284)
145,580
Repayments of long-term debt
(59)
(49,748)
Proceeds from the issuance of subordinated debt
50,000
Cash dividends paid on common stock
Repurchase of common stock
Net cash provided (used) by financing activities
(31,734)
142,784
Net change in cash and cash equivalents
(109,479)
Cash and cash equivalents at beginning of period
172,962
Cash and cash equivalents at end of period
190,217
Supplemental Cash Flow Disclosures
Cash paid for:
Interest
926
1,405
Income taxes
12
736
Non-cash information
Loan collateral transferred to foreclosed assets
29
154
Unrealized gain (loss) on investment securities available-for-sale
(33,951)
Accretion of unrealized (gain) loss on investment securities held-to-maturity
6
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 Significant Accounting Policies
Organization
Alerus Financial Corporation, or the Company, is a financial holding company organized under the laws of the state of Delaware. The Company and its subsidiaries operate as a diversified financial services company headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, or the Bank, the Company provides financial solutions to businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.
Basis of Presentation
The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America, or GAAP, for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s principal operating subsidiary is the Bank.
In the normal course of business, the Company may enter into a transaction with a variable interest entity, or VIE. VIE’s 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 VIE’s are included in the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.
Reclassifications
Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
As of March 31, 2022, the Coronavirus Disease, or COVID-19, pandemic was ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. Beginning in 2021 and continuing into 2022, the U.S. economy, with certain setbacks, started reopening and wider distribution of vaccines encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the continued distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold.
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, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
NOTE 2 Recent Accounting Pronouncements
The following FASB Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2022, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of March 31, 2022.
Adopted Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,
8
2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. The Company adopted ASU 2019-12, as of January 2022. The new guidance did not have an impact on the Company’s consolidated financial statements.
Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss, or CECL, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred cost” approach under GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including private companies and smaller reporting companies, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard but continues to work on its implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2019-04.
In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief, to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments. In November 2019, the FASB Issued ASU 2019-10, which amends the effective date of this ASU for certain entities, including private companies and smaller reporting companies, until after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. This update is not expected to have a significant impact on the Company’s consolidated financial statements
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU represents changes to clarify or improve the Accounting Standards Codification, or ASC, related to seven topics. The amendments make the ASC easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Issues 1, 2, 3, 4, and 5 are conforming amendments and for public business entities effective upon the issuance of the standard. Issues 6 and 7 are amendments that affect the guidance in ASU 2016-13. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2016-13.
NOTE 3 Investment Securities
The following tables present amortized cost, gross unrealized gain and losses, and fair value of the available-for-sale investment securities and the amortized cost, net unrealized gains, carrying value, gross unrealized gains and losses and fair value of for held-to-maturity as of March 31, 2022 and December 31, 2021:
9
March 31, 2022
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-sale
U.S. Treasury and agencies
4,107
60
4,167
Mortgage backed securities
Residential agency
765,363
229
(54,471)
711,121
Commercial
85,123
185
(2,576)
82,732
Asset backed securities
41
42
Corporate bonds
69,033
(1,293)
68,271
Total available-for-sale investment securities
923,667
1,006
(58,340)
Held-to-maturity
Obligations of state and political agencies
141,373
(7,594)
133,780
198,777
(14,731)
184,046
Total held-to-maturity investment securities
(22,325)
317,826
Total investment securities
1,263,817
1,007
(80,665)
1,184,159
December 31, 2021
5,028
75
5,103
717,781
1,213
(11,837)
707,157
88,362
2,674
(123)
90,913
52
49,035
1,398
(11)
50,422
860,258
5,362
(11,971)
144,543
1,110
(349)
145,304
207,518
(3,145)
204,373
(3,494)
349,677
1,212,319
6,472
(15,465)
1,203,326
10
Gross unrealized losses on investment securities and the fair value of the related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021, were as follows:
Less than 12 Months
Over 12 Months
(30,707)
462,087
(23,764)
219,167
681,254
70,176
38,240
(34,576)
570,503
219,169
789,672
131,278
315,324
(56,901)
885,827
1,104,996
(10,156)
554,811
(1,681)
55,082
609,893
17,470
5,989
(10,290)
578,270
55,084
633,354
53,210
257,583
(13,784)
835,853
890,937
For all of the above investment securities, the unrealized losses were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their maturity dates. The Company expects that it could see a continued increase in unrealized losses if the Federal Reserve continues to raise interest rates. The Company evaluates securities for other-than-temporary impairment, or OTTI, on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, consideration is given to the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities, considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.
For the three months ended March 31, 2022 and 2021, the Company did not recognize OTTI losses on its investment securities.
11
The following table presents amortized cost and fair value of available-for-sale and carrying value and fair value of held-to-maturity investment securities as of March 31, 2022, by contractual maturity:
Carrying
Due within one year or less
7,452
7,423
Due after one year through five years
35,474
33,923
8,456
8,316
Due after five years through ten years
73,557
69,032
100,021
98,740
Due after 10 years
223,667
207,448
815,189
759,276
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 $270.0 million and $192.8 million were pledged as of March 31, 2022 and December 31, 2021, respectively, to secure public deposits and for other purposes required or permitted by law.
Proceeds from the sale or call of available-for-sale investment securities, for the three months ended March 31, 2022 and 2021, are displayed in the table below:
Proceeds
Realized gains
Realized losses
Proceeds from the call of held-to-maturity investment securities, for the three months ended March 31, 2022 and 2021, are displayed in the table below:
As of March 31, 2022 and December 31, 2021, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:
Federal Reserve
2,675
FHLB
4,246
3,806
These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. 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 March 31, 2022, the conversion ratio was 1.6181. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,204 Class A equivalents) that the Company owned as of March 31, 2022 and December 31, 2021, were carried at a zero cost basis.
NOTE 4 Loans and Allowance for Loan Losses
The following table presents total loans outstanding, by portfolio segment, as of March 31, 2022 and December 31, 2021:
Commercial and industrial (1)
467,449
436,761
Real estate construction
41,604
40,619
Commercial real estate
602,158
598,893
Total commercial
1,111,211
1,076,273
Consumer
Residential real estate first mortgage
522,489
510,716
Residential real estate junior lien
130,604
125,668
Other revolving and installment
53,738
45,363
Total consumer
706,831
681,747
Total loans
Total loans included net deferred loan fees and costs of $444 thousand and $231 thousand at March 31, 2022 and December 31, 2021, respectively. Deferred loan fees on PPP loans were $333 thousand at March 31, 2022 and $881 thousand at December 31, 2021.
Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status. Loan modifications made in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions, as issued on April 7, 2020, are included as accruing current.
13
The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of March 31, 2022 and December 31, 2021:
90 Days
Accruing
30 - 89 Days
or More
Current
Past Due
Nonaccrual
Commercial and industrial
465,678
218
146
1,407
601,087
442
629
1,108,369
660
2,036
520,043
687
1,759
129,934
445
225
53,518
171
49
703,495
1,303
2,033
1,811,864
1,963
4,069
435,135
168
121
1,337
598,264
1,074,018
1,966
508,925
1,770
125,412
167
89
45,242
679,579
2,058
110
1,753,597
2,226
2,076
Interest income foregone on nonaccrual loans approximated $36 thousand and $80 thousand for the three months ended March 31, 2022 and 2021, respectively.
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.
The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.
The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:
Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
14
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well-defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and charged off immediately.
The tables below present total loans outstanding, by loan portfolio segment, and risk category as of March 31, 2022 and December 31, 2021:
Criticized
Special
Pass
Mention
Substandard
Doubtful
463,278
4,171
592,748
9,410
1,097,630
13,581
520,438
129,830
774
53,689
703,957
2,874
1,801,587
16,455
430,235
480
6,046
585,291
13,602
1,056,145
19,648
510,375
341
124,898
770
680,636
1,111
1,736,781
20,759
The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical
15
net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.
The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan losses for the three months ended March 31, 2022 and 2021:
Beginning
Provision for
Loan
Ending
Balance
Loan Losses
Charge-offs
Recoveries
8,925
771
126
9,795
783
27
810
12,376
(441)
11,946
22,084
357
137
22,551
6,532
129
6,661
1,295
92
1,400
481
145
(18)
36
644
8,308
366
8,705
Unallocated
1,180
(723)
457
31,572
(45)
186
31,713
10,205
316
(204)
170
10,487
658
(60)
598
14,105
277
(536)
13,849
24,968
533
(740)
173
24,934
5,774
273
6,047
1,373
(168)
83
1,288
753
(83)
(44)
40
666
7,900
22
123
8,001
1,378
(555)
823
34,246
(784)
296
33,758
16
The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of March 31, 2022 and December 31, 2021:
Recorded Investment
Allowance for Loan Losses
Individually
Collectively
Evaluated
1,584
465,865
339
9,456
806
601,352
11,942
2,390
1,108,821
343
22,208
520,730
226
130,378
18
626
2,034
704,797
8,687
4,424
1,813,618
361
30,895
1,831
434,930
278
8,647
809
598,084
12,371
2,640
1,073,633
283
21,801
510,695
91
125,577
112
681,635
2,752
1,755,268
30,109
17
The tables below summarize key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses.
Recorded
Unpaid
Related
Investment
Principal
Allowance
Impaired loans with a valuation allowance
508
532
464
177
199
180
203
Total impaired loans with a valuation allowance
725
625
667
Impaired loans without a valuation allowance
1,076
1,188
1,386
1,575
684
24
256
120
Total impaired loans without a valuation allowance
3,699
3,896
2,127
2,403
Total impaired loans
1,720
2,039
883
887
4,667
3,070
The table below presents the average recorded investment in impaired loans and interest income for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
Average
Income
528
1,816
2,793
138
33
38
749
4,680
151
1,126
1,258
642
2,158
435
230
176
3,766
4,027
1,654
3,074
35
822
4,951
209
50
4,515
8,707
Loans with a carrying value of $1.3 billion as of March 31, 2022 and $1.2 billion as of December 31, 2021, were pledged to secure public deposits, and for other purposes required or permitted by law.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDR concessions can include a reduction of interest rates, an extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.
During the first quarter of 2022, there were no loans modified as a TDR. During the first quarter of 2021, there were no loans modified as a TDR.
The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs or whose loans are on nonaccrual
NOTE 5 Goodwill and Other Intangible Assets
The following table summarizes the carrying amount of goodwill, by segment, as of March 31, 2022 and December 31, 2021:
Banking
20,131
11,359
Total goodwill
Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was no goodwill impairment as of March 31, 2022.
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
Gross Carrying Amount
Accumulated Amortization
Identifiable customer intangibles
42,057
(22,860)
(21,807)
Total intangible assets
Amortization of intangible assets was $1.1 million and $1.2 million for the three months ended March 31, 2022, and 2021, respectively.
NOTE 6 Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $325.0 million and $345.8 million as of March 31, 2022 and December 31, 2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.
The following table summarizes the Company’s activity related to servicing rights for the three months ended March 31, 2022 and 2021:
19
Balance, beginning of period
1,987
Additions
Amortization
(159)
(200)
(Impairment)/Recovery
46
Balance, end of period
1,952
The following is a summary of key data and assumptions used in the valuation of servicing rights as of March 31, 2022 and December 31, 2021. Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements:
Fair value of servicing rights
Weighted-average remaining term, years
20.7
20.3
Prepayment speeds
8.8
%
14.2
Discount rate
10.0
9.5
NOTE 7 Leases
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for offices and office equipment rentals with terms extending through 2027. 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 one existing finance lease for the Company’s headquarters building with a lease term through October 31, 2022.
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:
Lease Right-of-Use Assets
Classification
Finance lease right-of-use assets
87
Total lease right-of-use assets
3,418
3,814
Lease Liabilities
Finance lease liabilities
143
Total lease liabilities
3,993
4,478
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount 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. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.
20
Weighted-average remaining lease term, years
Operating leases
3.3
3.4
Finance leases
0.5
0.8
Weighted-average discount rate
2.3
2.5
7.8
As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for usage or maintenance of those capitalized equipment operating leases.
The following table presents lease costs and other lease information for the three months ending March 31, 2022 and 2021:
Lease costs
Operating lease cost
411
496
Variable lease cost
213
233
Short-term lease cost
45
37
Finance lease cost
Interest on lease liabilities
Amortization of right-of-use assets
Sublease income
(57)
Net lease cost
645
743
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases
392
487
Right-of-use assets obtained in exchange for new operating lease liabilities
Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of March 31, 2022 were as follows:
Finance
Operating
Leases
Twelve months ended
March 31, 2023
1,597
March 31, 2024
1,439
March 31, 2025
March 31, 2026
389
March 31, 2027
250
Thereafter
238
Total future minimum lease payments
4,589
Amounts representing interest
(3)
(739)
Total operating lease liabilities
NOTE 8 Deposits
The components of deposits in the consolidated balance sheets as of March 31, 2022 and December 31, 2021 were as follows:
Interest-bearing demand
760,321
714,669
Savings accounts
99,299
96,825
Money market savings
976,905
937,305
Time deposits
224,184
232,912
Total interest-bearing
NOTE 9 Long-Term Debt
Long-term debt as of March 31, 2022 and December 31, 2021 consisted of the following:
Period End
Face
Maturity
Interest Rate
Rate
Date
Call Date
Subordinated notes payable
Fixed
3.50
3/30/2031
3/31/2026
Junior subordinated debenture (Trust I)
4,124
3,503
Three-month LIBOR + 3.10%
4.07
6/26/2033
6/26/2008
Junior subordinated debenture (Trust II)
6,186
5,256
Three-month LIBOR + 1.80%
2.63
9/15/2036
9/15/2011
Finance lease liability
2,700
7.81
10/31/2022
N/A
Total long-term debt
63,010
12/30/2025
12/30/2020
3,492
3.32
5,238
2.00
NOTE 10 Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Bank has outstanding commitment and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.
A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of March 31, 2022 and December 31, 2021, respectively, was as follows:
Commitments to extend credit
650,087
668,115
Standby letters of credit
10,591
10,529
660,678
678,644
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 a $150 thousand letter of credit with the FHLB as of March 31, 2022 and December 31, 2021. With the Bank of North Dakota, the Company had no letters of credit outstanding as of March 31, 2022 and December 31, 2021. Bank of North Dakota potential letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of $227.9 million and $229.7 million as of March 31, 2022 and December 31, 2021, respectively.
NOTE 11 Share-Based Compensation
Before May 6, 2016, the Company granted equity awards pursuant to the Alerus Financial Corporation 2009 Stock Plan. The awards were in the form of restricted stock or restricted stock units and represent an element of employee compensation. The Related compensation expense for the awards is based on the fair value of Alerus Financial Corporation common stock at the time of grant. The value of awards that are expected to vest is amortized as an expense over the applicable vesting periods. The ability to grant awards under this plan has expired.
On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan gives the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards and were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of March 31, 2022, 948,428 shares of common stock are still available for issuance under the plan.
The compensation expense relating to awards under these plans was $378 thousand and $498 thousand for the three months ended March 31, 2022 and 2021, respectively.
23
The following table presents the activity in the stock plans for the three months ended March 31, 2022 and 2021:
Three months ended March 31,
Weighted-
Average Grant
Awards
Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period
260,850
21.04
325,030
19.48
Granted
70,850
28.39
59,374
26.36
Vested
(96,618)
18.66
(81,092)
20.72
Forfeited or cancelled
(2,209)
22.75
Outstanding at end of period
232,873
23.33
303,312
20.49
As of March 31, 2022, there was $3.1 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.9 years.
NOTE 12 Income Taxes
The components of income tax expense (benefit) for the three months ended March 31, 2022 and 2021 were as follows:
Percent of
Amount
Pretax Income
Taxes at statutory federal income tax rate
2,745
21.0
4,174
Tax effect of:
Tax exempt income
(117)
(0.9)
(153)
(0.8)
State income taxes, net of federal benefits
579
4.4
4.3
Nondeductible items and other
(319)
(2.4)
(213)
(1.1)
Applicable income taxes
22.1
23.4
It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.
NOTE 13 Tax Credit Investments
The Company invests in qualified affordable housing projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.
The following table presents a summary of the Company’s investments in qualified affordable housing project tax credit investments as of March 31, 2022 and December 31, 2021:
Unfunded Commitment
Accounting Method
Low income housing tax credit
Proportional amortization
12,906
11,686
7,906
6,999
NOTE 14 Segment Reporting
The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial statements, and management’s regular review of the operating results of those services. The Company operates through four operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.
The financial information presented for each segment includes net interest income, provision for loan losses, direct noninterest income, and direct noninterest expense, before indirect allocations. Corporate Administration includes the indirect overhead and is set forth in the table below. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes.
The following table presents key metrics related to the Company’s segments for the periods presented:
Retirement and
Wealth
Corporate
Benefit Services
Management
Mortgage
Administration
Consolidated
21,525
709
(561)
Noninterest income
1,538
Noninterest expense
12,694
8,432
1,838
5,020
10,087
Net income before taxes
10,369
9,214
3,488
620
(10,619)
21,880
446
(288)
1,522
(14)
11,084
10,112
2,335
10,853
8,658
12,318
7,143
2,651
6,725
(8,960)
The Banking division offers a complete line of loan, deposit, cash management, and treasury services through fourteen offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segment’s balance sheet.
Retirement and Benefit Services
Retirement and Benefit Services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; ESOP trustee, recordkeeping, and administration; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, COBRA recordkeeping and administration services, and payroll to employers; and payroll and HRIS services for employers. In addition, the division operates within each of the banking markets, as well as in Lansing, Michigan and Littleton, Colorado.
Wealth Management
The Wealth Management division provides advisory and planning services, investment management, and trust and fiduciary services to clients across the Company’s footprint.
25
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 15 Earnings Per Share
The calculation of basic and diluted earnings per share using the two-class method for the three months ending March 31, 2022 and 2021 are presented below:
Dividends and undistributed earnings allocated to participating securities
125
254
Net income available to common shareholders
10,059
14,961
Weighted-average common shares outstanding for basic earnings per share
Dilutive effect of stock-based awards
320
Weighted-average common shares outstanding for diluted earnings per share
Earnings per common share:
NOTE 16 Derivative Instruments
The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with U.S. financial institutions in order to minimize risk to the Company. These swaps are derivatives but are not designated as hedging instruments.
The Company did not have any derivatives designated as hedging instruments as of March 31, 2022 and December 31, 2021. The following table presents the amounts recorded in the Company’s consolidated balance sheets, for derivatives not designated as hedging instruments, as of March 31, 2022 and December 31, 2021:
Notional
Asset Derivatives
Consolidated Balance Sheet Location
Interest rate swaps
3,642
44,480
1,366
44,826
Interest rate lock commitments
882
53,070
1,507
52,316
Forward loan sales commitments
490
13,418
TBA mortgage backed securities
1,230
80,466
97,000
Total asset derivatives
5,754
178,016
3,397
207,560
Liability Derivatives
3,644
1,368
Total liability derivatives
The gain (loss) recognized on derivative instruments for the three months ended March 31, 2022 and 2021 was as follows:
Consolidated Statements
of Income Location
Other noninterest income
(710)
(6,245)
(490)
(1,635)
2,503
8,961
Total gain/(loss) from derivative instruments
1,083
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 March 31, 2022 and December 31, 2021 was $19 thousand and $19 thousand, respectively. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.
NOTE 17 Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes at March 31, 2022 and December 31, 2021, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.
The following table presents the Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2022 and December 31, 2021:
Minimum to be
Requirements
Well Capitalized
for Capital
Under Prompt
Actual
Adequacy Purposes
Corrective Action
Ratio
Common equity tier 1 capital to risk weighted assets
322,985
14.27
101,863
4.50
Bank
305,828
13.52
101,817
147,070
6.50
Tier 1 capital to risk weighted assets
.
331,743
14.66
135,817
6.00
135,757
181,009
8.00
Total capital to risk weighted assets
410,081
18.12
181,090
334,153
14.77
226,261
10.00
Tier 1 capital to average assets
10.30
128,837
4.00
9.50
128,768
160,960
5.00
314,628
14.65
96,647
297,453
13.87
96,538
139,444
323,358
15.06
128,862
128,718
171,624
400,263
18.64
171,816
324,328
15.12
214,530
9.79
132,112
9.01
132,039
165,049
The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules included the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of March 31, 2022, the ratios for the Company and the Bank were sufficient to meet the conservation buffer. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development, or HUD, regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of March 31, 2022, and December 31, 2021, the Company was in compliance with the aforementioned guidelines.
NOTE 18 Stock Repurchase Program
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended March 31, 2022, there were no shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.
NOTE 19 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.
28
Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.
Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their estimated fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at estimated fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired financial instruments at estimated fair value in the future.
Recurring Basis
The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures.
The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
Level 1
Level 2
Level 3
U.S. treasury and government agencies
Derivatives
Other liabilities
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.
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.
Net impairment related to nonrecurring estimated fair value measurements of certain assets as of March 31, 2022 and December 31, 2021 consisted of the following:
Impairment
Impaired loans
4,063
Foreclosed assets
865
2,469
885
Loans Held for Sale
Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.
Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value, represent additional net write-downs during the period to record these loans at the lower of cost or estimated fair value, subsequent to their initial classification as loans held for sale.
30
The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of March 31, 2022, and December 31, 2021, were as follows:
Weighted
Asset Type
Valuation Technique
Unobservable Input
Fair Value
Range
Appraisal value
Property specific adjustment
Discounted cash flows
Prepayment speed assumptions
126-174
147
161-327
237
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 March 31, 2022 and December 31, 2021, were not carried at estimated fair value in their entirety on the consolidated balance sheets.
Cash and Cash Equivalents and Accrued Interest
The carrying amounts reported in the consolidated balance sheets approximate those assets’ and liabilities’ estimated fair values.
Investment Securities, Held-to-Maturity
The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.
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.
31
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.
The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the consolidated balance sheet date. The estimated fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.
Short-Term Borrowings and Long-Term Debt
For variable-rate borrowings that reprice frequently, estimated fair values are based on carrying values. The estimated fair value of fixed-rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Credit-Related Commitments
Off-balance sheet credit related commitments are generally of short-term nature. The contract amount of such commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at the dates indicated are as follows:
Estimated Fair Value
Financial Assets
Investment securities held-to-maturity
Loans, net
1,800,339
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
1,836,525
223,127
61,651
Accrued interest payable
2,139
32
1,760,784
1,748,799
232,970
57,772
1,674
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion explains our financial condition and results of operations as of and for the three months ended March 31, 2022 and 2021. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 11, 2022.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements we make regarding our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
We are a diversified financial services company headquartered in Grand Forks, North Dakota. Through our subsidiary, Alerus Financial, National Association, or the Bank, we provide financial solutions to businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth management and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.
Our business model produces strong financial performance and a diversified revenue stream, which has helped us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, or GAAP. The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in critical accounting policies, or the assumptions and judgments utilized in applying these policies since December 31, 2021.
The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the
transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
Recent Developments
Impact of COVID-19
As of March 31, 2022, the COVID-19 pandemic remained ongoing. The progression of the COVID-19 pandemic in the United States did not have an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2022. Nonetheless, the economic recovery could remain gradual and uneven and could be hindered by persistent or resurgent infection rates, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to the new variants of the virus.
Effects on Our Market Areas. Our primary banking market areas are the states of North Dakota, Minnesota and Arizona. Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit services at all of our banking offices located in our three primary market areas. In addition, we operate one retirement and benefit services office in Minnesota, one in Michigan and one in Colorado.
Each of our market areas continues to have different responses to the COVID-19 pandemic due to the availability of the COVID-19 vaccines and varying infection rates. Based on the current environment, it is unclear how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and whether any such changes will negatively impact our customers and regional economies.
Operating Results Overview
The following table summarizes key financial results as of and for the periods indicated:
Performance Ratios
Return on average total assets
1.26
1.50
2.02
Return on average common equity
11.78
14.13
18.46
Return on average tangible common equity (1)
14.72
17.36
23.03
Noninterest income as a % of revenue
57.62
59.67
64.97
Net interest margin (taxable-equivalent basis)
2.83
2.84
3.12
Efficiency ratio (1)
72.25
71.06
66.43
Average equity to average assets
10.67
10.65
10.97
Net charge-offs/(recoveries) to average loans
(0.03)
(0.22)
0.10
Dividend payout ratio
28.07
22.22
17.44
Per Common Share
Earnings per common share - basic
0.73
Earnings per common share - diluted
0.72
Book value per common share
19.00
20.88
19.15
Tangible book value per common share (1)
16.07
17.87
15.95
Average common shares outstanding - basic
17,210
Average common shares outstanding - diluted
17,480
Other Data
Retirement and benefit services assets under administration/management
35,333,131
36,732,938
34,774,650
Wealth management assets under administration/management
4,584,856
4,039,931
3,357,530
Mortgage originations
186,762
356,821
518,014
Selected Financial Data
The following tables summarize selected financial data as of and for the periods indicated:
Selected Average Balance Sheet Data
1,768,226
1,782,657
1,945,437
1,216,256
1,119,370
662,413
3,286,809
3,353,900
3,047,261
2,816,828
2,870,631
2,615,579
58,908
58,938
25,677
350,545
357,084
334,188
Selected Period End Balance Sheet Data
1,937,345
(33,758)
1,206,483
1,205,710
795,097
3,151,756
2,717,573
59,020
Selected Income Statement Data
22,789
(1,500)
33,718
41,276
16,731
4,026
12,705
Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, we routinely supplement our evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders' equity less goodwill and other intangible assets; (ii) tangible book value per common share as tangible common equity divided by shares of common stock outstanding; (iii) tangible assets as total assets, less goodwill and other intangible assets; (iv) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; and (v) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment.
The following tables present these non-GAAP financial measures along with the most directly comparable financial measures calculated in accordance with GAAP for the periods indicated:
Tangible common equity to tangible assets
Total common stockholders’ equity
Less: Goodwill
30,201
Less: Other intangible assets
24,768
Tangible common equity (a)
277,818
307,663
274,265
Tangible assets (b)
3,285,512
3,340,951
3,096,787
Tangible common equity to tangible assets (a)/(b)
8.46
9.21
8.86
Tangible book value per common share
Tangible common equity (c)
Total common shares issued and outstanding (d)
Tangible book value per common share (c)/(d)
Return on average tangible common equity
Add: Intangible amortization expense (net of tax)
832
909
Net income, excluding intangible amortization (e)
11,016
13,537
16,124
Average total equity
Less: Average goodwill
30,930
Less: Average other intangible assets (net of tax)
15,569
16,843
19,995
Average tangible common equity (f)
303,486
309,311
283,992
Return on average tangible common equity (e)/(f)
Efficiency ratio
Less: Intangible amortization expense
Adjusted noninterest expense (g)
37,018
40,223
41,891
Tax-equivalent adjustment
94
99
Total tax-equivalent revenue (h)
51,237
56,606
63,062
Efficiency ratio (g)/(h)
39
Discussion and Analysis of Results of Operations
Net income for the three months ended March 31, 2022 was $10.2 million, or $0.57 per diluted common share, a $5.0 million decrease as compared to $15.2 million, or $0.86 per diluted common share, for the three months ended March 31, 2021. The decrease in net income was primarily attributable to decreases of $11.4 million in noninterest income and $365 thousand in net interest income, partially offset by decreases of $5.0 million in noninterest expense and $1.8 million in income tax expense.
Net Interest Income
Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three months ended March 31, 2022 and 2021.
Net interest income for the three months ended March 31, 2022 was $21.7 million, a decrease of $365 thousand from $22.0 million for the three months ended March 31, 2021. The decrease in net interest income was primarily a result of a $3.3 million decrease in interest income from loans, partially offset by a $3.0 million increase in interest income from investment securities. The decrease in interest income earned on loans was primarily the result of a $177.2 million decrease in average loans. This was offset by a $553.8 million increase in average investment securities, as we’ve continued to update our balance sheet mix.
Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended March 31, 2022 was 2.83%, compared to 3.12% for the same period in 2021. This decrease was primarily due to a 29 basis point decrease in the overall yield of our interest earning assets, the largest component of which was a 27 basis point decrease in our loan yield. The loan yield decrease was primarily driven by a $240.3 million decrease in our average commercial and industrial loans, of which, $231.5 million were PPP loans. Excluding PPP loans, average loans would have increased $54.3 million.
As a result of the expected increases in the target federal funds interest rate, we anticipate that our net interest income and net interest margin (on a FTE basis) will remain under pressure in future periods.
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three months ended March 31, 2022 and 2021. We derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.
Income/
Yield/
Expense
Interest Earning Assets
Interest-bearing deposits with banks
105,726
0.18
184,376
53
0.12
Investment securities (1)
5,713
1.90
1.65
24,656
156
2.57
82,249
432
2.13
Commercial:
434,656
5,016
4.68
674,935
7,863
4.72
41,139
395
3.89
45,264
471
4.22
601,024
5,399
3.64
560,986
5,243
3.79
1,076,819
10,810
1,281,185
13,577
4.30
514,724
4,433
3.49
457,882
4,247
3.76
125,997
1,382
4.45
137,745
1,650
4.86
50,686
548
4.38
68,625
741
691,407
6,363
3.73
664,252
6,638
4.05
Total loans (1)
17,173
3.94
20,215
4.21
Federal Reserve/FHLB Stock
6,486
70
5,780
64
4.49
Total interest earning assets
3,121,350
23,158
3.01
2,880,255
23,464
3.30
Noninterest earning assets
165,459
167,006
Interest-Bearing Liabilities
Interest-bearing demand deposits
714,472
215
642,832
247
Money market and savings deposits
1,043,430
367
0.14
1,030,348
403
227,485
0.44
210,719
345
0.66
Fed funds purchased
3.87
4.55
Total interest-bearing liabilities
2,044,295
0.28
1,909,576
0.27
Noninterest-Bearing Liabilities and Stockholders' Equity
831,441
731,680
Other noninterest-bearing liabilities
60,528
71,817
21,767
22,181
Net interest rate spread
2.73
3.03
Net interest margin on FTE basis (1)
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 our interest earning assets and the interest incurred on our 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.
Compared with
Change due to:
(tax-equivalent basis, dollars in thousands)
Volume
Variance
Interest earning assets
(7)
2,253
760
3,013
(302)
(276)
(2,796)
(2,847)
(43)
(33)
(76)
374
(218)
(2,465)
(2,767)
527
(341)
(141)
(127)
(268)
(194)
192
(467)
(275)
(2,273)
(769)
(3,042)
(2)
(337)
(306)
Interest-bearing liabilities
(32)
(41)
(36)
(125)
(98)
Short-term borrowings
373
(99)
274
433
(325)
108
Change in net interest income
(770)
356
(414)
Provision for Loan Losses
The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.
There was no provision expense recorded for the first quarter of 2022, no change from the first quarter of 2021. Management saw modest net recoveries in the first quarter of 2022, which supported the decision that no additional provision expense should be recognized.
Our noninterest income is generated from four primary sources: (1) retirement and benefit services; (2) wealth management; (3) mortgage banking; and (4) other general banking services.
The following table presents our noninterest income for the three months ended March 31, 2022 and 2021:
Total noninterest income for the three months ended March 31, 2022, was $29.5 million, a decrease of $11.4 million, or 27.9%, compared to $40.9 million for the three months ended March 31, 2021. The year over year decrease in noninterest income was primarily attributable to a $12.2 million decrease in mortgage banking revenue, a result of a $331.3 million, or 63.9%, decrease in mortgage originations compared to March 31, 2021. Partially offsetting this decrease were increases of $391 thousand of retirement and benefit services revenue, $340 thousand of wealth management revenue and $148 thousand in other noninterest income. Retirement and benefit services revenue increased primarily due to a $588 thousand increase in non-asset based fees, specifically including a $280 thousand increase in record keepings fees and $252 thousand in health and welfare income. Wealth management revenue increased as a result of $280 thousand in fee revenue earned from blueprint accounts and $209 thousand in fee revenue earned from dimension accounts.
We anticipate that our noninterest income will be significantly adversely affected in future periods as a result of increasing interest rates and inflationary pressure, which will adversely affect mortgage originations and mortgage banking revenue.
Noninterest income as a percentage of total operating revenue, which consists of net interest income plus noninterest income, was 57.6% for the three months ended March 31, 2022, compared to 65.0% for the three months ended March 31, 2021.
See “NOTE 13 Segment Reporting” for additional discussion regarding our business lines.
The following table presents noninterest expense for the three months ended March 31, 2022 and 2021.
43
Total noninterest expense for the three months ended March 31, 2022 was $38.1 million, a decrease of $5.0 million, or 11.5%, compared to $43.0 million for the three months ended March 31, 2021. The year over year decrease in noninterest expense was primarily attributable to decreases of $4.6 million in compensation expense and $646 thousand in mortgage and lending expense. Partially offsetting these decreases were increases of $349 thousand in employee and benefits expense, $153 thousand in travel expense, and $115 thousand in supplies and postage. The decreases in compensation expense and mortgage and lending expense were a result of the decrease in mortgage originations as previously stated. Employee taxes and benefits expense increased primarily due to an increase in group insurance. Travel expenses have increased as the effect of the COVID-19 pandemic subsides, and our employees have started to resume serving clients face-to-face.
Income Tax Expense
Income tax expense is an estimate based on the amount we expect to owe the respective taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due, or to be received from, taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. If the final resolution of taxes payable differs from our estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.
For the three months ended March 31, 2022, we recognized income tax expense of $2.9 million on $13.1 million of pre-tax income, resulting in an effective tax rate of 22.1%, compared to income tax expense of $4.7 million on $19.9 million of pre-tax income for the three months ended March 31, 2021, resulting in an effective tax rate of 23.4%.
Financial Condition
Total assets were $3.3 billion as of March 31, 2022, a decrease of $56.5 million, or 1.7%, as compared to December 31, 2021. The overall change in assets included decreases of $109.5 million in cash and cash equivalents, $11.9 million in investment securities held-to-maturity, and $24.6 million in loans held for sale. Partially offsetting these decreases, was a $60.0 million increase in loans held for investment and a $12.7 million increase in investments available-for-sale. If PPP loans were excluded, loans held for investment would have increased $80.5 million, or 4.7%, from December 31, 2021.
The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and consumer loans. The goal of the overall portfolio mix is to diversify with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories. As of March 31, 2022, the portfolio mix was 25.7% commercial and industrial, 33.1% commercial real estate, 35.9% residential real estate and 5.3% in other categories.
44
The following table presents the composition of total loans outstanding by portfolio segment as of March 31, 2022 and December 31, 2021:
Change
Portfolio
Percent
25.7
24.8
30,688
7.0
985
2.4
33.1
34.1
3,265
61.1
61.2
34,938
3.2
28.7
29.1
11,773
7.2
7.1
4,936
3.9
3.0
2.6
8,375
18.5
38.9
38.8
25,084
3.7
100.0
60,022
Total loans outstanding were $1.8 billion as of March 31, 2022, an increase of $60.0 million, or 3.4%, from December 31, 2021. This increase was primarily a result of increases of $30.7 million in commercial and industrial loans, $3.3 million in commercial real estate loans, $16.7 million in residential loans, and $9.4 million in other loan categories. If PPP loans were excluded, commercial and industrial loans would have increased $51.1 million, or 12.7%, from December 31, 2021, primarily as a result of increased credit line utilization.
We anticipate that loan growth will slow down in the future for our commercial and industrial, commercial real estate, residential real estate, and consumer loan portfolios as a result of the increasing interest rate environment and competition in our market areas.
The following table presents the maturities and types of interest rates for the loan portfolio as of March 31, 2022:
After one
After five
One year
but within
After
or less
five years
fifteen years
132,727
244,050
80,684
9,988
20,617
17,294
3,693
24,079
228,237
322,616
27,226
177,423
489,581
406,993
37,214
3,630
16,123
45,092
457,644
8,490
28,263
30,813
63,038
10,613
41,431
1,694
22,733
85,817
77,599
520,682
200,156
575,398
484,592
557,896
Loans with fixed interest rates:
14,756
200,338
62,273
9,274
286,641
9,094
1,977
31,688
17,272
173,837
171,363
10,681
373,153
52,645
383,269
235,613
19,955
691,482
3,467
13,047
41,761
309,951
368,226
3,441
6,748
10,973
24,427
1,675
28,319
8,583
48,114
54,428
313,216
424,341
Total loans with fixed interest rates
61,228
431,383
290,041
333,171
1,115,823
Loans with floating interest rates:
117,971
43,712
18,411
714
180,808
8,200
1,716
9,916
6,807
54,400
151,253
16,545
229,005
124,778
106,312
171,380
17,259
419,729
163
3,076
3,331
147,693
154,263
5,049
21,515
19,840
59,773
106,177
8,938
13,112
22,050
14,150
37,703
23,171
207,466
282,490
Total loans with floating interest rates
138,928
144,015
194,551
224,725
702,219
The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.
Asset Quality
Our strategy for credit risk management includes well-defined, centralized credit policies; uniform underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and management reviews of loans experiencing deterioration of credit quality. We strive to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.
Credit Quality Indicators
Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See “NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for a definition of each of the risk ratings.
The table below presents criticized loans outstanding by loan portfolio segment as of March 31, 2022 and December 31, 2021:
6,526
20,128
21,239
Criticized loans as a percent of total loans
0.91
1.21
The following table presents information regarding nonperforming assets as of March 31, 2022 and December 31, 2021:
Nonaccrual loans
Accruing loans 90+ days past due
Total nonperforming loans
4,215
2,197
OREO and repossessed assets
Total nonperforming assets
5,080
3,082
Total restructured accruing loans
355
Total nonperforming assets and restructured accruing loans
5,435
3,758
Nonperforming loans to total loans
0.23
Nonperforming assets to total assets
0.09
Allowance for loan losses to nonperforming loans
752
1,437
Interest income lost on nonaccrual loans approximated $29 thousand and $80 thousand for the three months ended March 31, 2022 and 2021, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended March 31, 2022 and 2021.
The allowance for loan losses represents management’s estimate of incurred credit losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred losses in the loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic and other conditions. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated
47
economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change.
The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented:
Balance—beginning of period
Commercial loan charge-offs
Commercial and Industrial
Total commercial loan charge-offs
Consumer loan charge-offs
Total consumer loan charge-offs
Total loan charge-offs
Commercial loan recoveries
Total commercial recoveries
Consumer loan recoveries
Total consumer loan recoveries
Total loan recoveries
Net loan charge-offs (recoveries)
488
Commercial loan provision
Total commercial loan provision
Consumer loan provision
Total consumer loan provision
Unallocated provision expense
Total loan loss provision
Balance—end of period
Average total loans
Allowance for loan losses to total loans
1.74
Net charge-offs/(recoveries) to average total loans (annualized)
The allowance for loan losses was $31.7 million as of March 31, 2022, compared to $31.6 million as of December 31, 2021. The $141 thousand increase was the result of $141 thousand net recoveries and no additional provision expense. As of March 31, 2022, the allowance for loan losses represented 1.74% of total loans.
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The following table presents the allocation of the allowance for loan losses as of the dates presented:
Percentage
Allocated
of loans to
total loans
In the ordinary course of business, we enter into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was $2.1 million as of March 31, 2022.
Loans held for sale represent loans to consumers for the purchase or refinance of a residence that we have originated and intend to sell into the secondary market. Loans held for sale were $21.9 million as of March 31, 2022, a decrease of $24.6 million, or 53.0%, as compared to December 31, 2021. The decrease in loans held for sale was primarily the result of a $170.1 million decrease in mortgage originations, as compared to the three months ending December 31, 2021.
Investment Securities
The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.
The following table presents the fair value composition of our investment securities portfolio as of March 31, 2022 and December 31, 2021:
0.3
0.4
58.9
58.7
6.9
7.5
5.7
4.2
71.8
70.8
11.7
12.0
16.5
17.2
28.2
29.2
The investment securities presented in the following table are reported at fair value and by contractual maturity as of March 31, 2022. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis.
Maturity as of March 31, 2022
One year or less
One to five years
Five to ten years
After ten years
Yield
1,147
0.92
3,020
0.71
3.60
3,060
2.52
11,468
2.34
696,592
1.75
2.88
25,838
2.79
51,638
2.56
5.17
5.29
60,271
3.85
8,000
3.75
2.75
3.36
1.82
1.14
0.95
1.84
23,402
2.24
1.88
1.92
7,424
42,239
1.30
167,772
2.74
966,724
Total deposits were $2.9 billion as of March 31, 2022, a decrease of $28.3 million, or 1.0%, from December 31, 2021. Interest-bearing deposits increased $79.0 million while noninterest-bearing deposits decreased $107.3 million. The increase in interest-bearing deposits included increases of $45.7 million in interest-bearing demand deposits, $39.6 million in money market accounts, and a $2.5 million increase in savings accounts, partially offset by an $8.7 million decrease in time deposits. Synergistic deposits decreased $26.1 million from December 31, 2021. Excluding synergistic deposits, commercial transaction deposits decreased $16.7 million, or 1.3%, partially offset by a $21.7 million increase in consumer transaction deposits.
The following table presents the composition of our deposit portfolio as of March 31, 2022 and December 31, 2021:
Noninterest-bearing demand
32.1
(107,282)
(11.4)
26.3
24.5
45,652
6.4
Money market and savings
1,076,204
37.2
1,034,130
35.4
42,074
4.1
8.0
(8,728)
(3.7)
(1.0)
The following table presents the average balances and rates of our deposit portfolio for the three months ended March 31, 2022 and 2021:
The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $250 thousand and over, that were outstanding, as of March 31, 2022:
Maturing in:
3 months or less
3 months to 6 months
50,471
6 months to 1 year
31,799
1 year or greater
83,099
Borrowings
Borrowings as of March 31, 2022 and December 31, 2021 were as follows:
Subordinated notes
84.9
Junior subordinated debentures
8,759
14.9
8,730
14.8
0.2
Total borrowed funds
Capital Resources
Stockholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available-for-sale securities.
Stockholders' equity decreased $30.9 million, or 8.6%, to $328.5 million as of March 31, 2022, compared to $359.4 million as of December 31, 2021, primarily due to a $38.1 million decrease in other comprehensive income, due
51
to rising interest rates that resulted in a lower fair value on our investment securities available-for-sale. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 8.46% as of March 31, 2022, from 9.21% as of December 31, 2021.
We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk, and that common equity has the greatest capacity to absorb unexpected loss.
We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.
At March 31, 2022 and December 31, 2021, we met all the capital adequacy requirements to which we were subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of March 31, 2022 and December 31, 2021:
Capital Ratios
Alerus Financial Corporation Consolidated
Tangible common equity to tangible assets (1)
Alerus Financial, National Association
The capital ratios for the Company and the Bank, as of March 31, 2022, as shown in the above tables, were at levels above the regulatory minimums to be considered “well capitalized”. See “Note 16 Regulatory Matters” to the consolidated financial statements for additional information.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normal credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitments is considered immaterial for disclosure purposes.
A summary of the contractual amounts of our exposure to off-balance sheet agreements as of March 31, 2022 and December 31, 2021, was as follows:
Liquidity
Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. Liquidity is monitored and closely managed by our asset and liability committee, or the ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is the ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. The ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.
As of March 31, 2022, we had on balance sheet liquidity of $998.7 million, compared to $1.1 billion as of 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. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of March 31, 2022, we had no outstanding fed funds purchased from the FHLB and $760.7 million of collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to $760.4 million from the FHLB. In addition, we can borrow up to $102.0 million through the unsecured lines of credit we have established with four other banks.
In addition, because the Bank is “well capitalized,” we can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or $667.2 million, as of March 31, 2022. Management believed that we had adequate resources to fund all of our commitments as of March 31, 2022 and December 31, 2021.
Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding.
Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of COVID-19 could place increased demand on our liquidity if we experience significant credit deterioration and as we meet borrowers’ needs. Accordingly, management has addressed this issue by formulating a liquidity contingency plan, which has been reviewed and approved by both the Bank’s board of directors and the ALCO. The plan addresses the actions that we would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of both external and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.
Interest Rate Risk
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.
Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.
Management regularly reviews our exposure to changes in interest rates. Among the factors considered are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. The ALCO reviews, on at least a quarterly basis, the interest rate risk position.
The interest-rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on our net interest income as of March 31, 2022 and December 31, 2021, assuming immediate parallel moves in interest rates is presented in the table below:
Following
12 months
24 months
+400 basis points
−6.9
2.8
−8.2
−2.9
+300 basis points
−5.3
2.9
−6.1
−2.3
+200 basis points
−3.8
3.1
−4.1
−1.8
+100 basis points
−2.1
3.5
−2.0
−1.3
−100 basis points
−4.5
−5.6
−10.6
−15.7
−200 basis points
Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.
Management uses an economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.
The table below presents the change in the economic value of equity as of March 31, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates:
−22.1
−26.0
−15.2
−16.8
−8.7
−3.1
−1.4
−31.2
Operational Risk
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.
Compliance Risk
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of our banking center network, employment and tax matters.
Strategic and/or Reputation Risk
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements
55
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1 – Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company or its subsidiaries, to which we or any of our subsidiaries are a party or to which our property is the subject. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Item 1A – Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Repurchases of Equity Securities
The following table presents information related to repurchases of shares of our common stock for each calendar month in the first quarter of 2022:
Total Number of
Maximum Number of
Total Number
Shares Purchased as
Shares that May
of Shares
Price Paid
Part of Publicly
Yet be Purchased
(dollars in thousands, except per share data)
Purchased (1)
per Share
Announced Plans
Under the Plan (2)
January
240
29.28
770,000
February
20,391
29.43
March
20,631
Use of Proceeds from Registered Securities
On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On September 25, 2019, the Company sold 429,000 additional shares of common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares to cover over-allotments. All of the shares were sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-233339), which was declared effective by the SEC on September 12, 2019. The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “ALRS”.
There has been no material change in the planned use of proceeds from the initial public offering as described in the Company’s prospectus filed with the SEC on September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933. From the effective date of the registration statement through March 31, 2022, the Company has maintained the net proceeds of the initial public offering on deposit with the Bank. The Bank has used the deposits of the Company to pay down short-term borrowings.
Item 3 – Defaults Upon Senior Securities
Item 4 – Mine Safety Disclosures
Not Applicable.
Item 5 – Other Information
Item 6 – Exhibits
Exhibit No.
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).
10.1
Employment Offer Letter between Alerus Financial Corporation and Alan Villalon dated January 11, 2022 (incorporated by reference to Exhibit 10.24 on Form 10-K filed on March 11, 2022).
10.2
Executive Severance Agreement by and between Alerus Financial Corporation and Alan Villalon, dated January 11, 2022 (incorporated by reference to Exhibit 10.25 on Form 10-K filed on March 11, 2022).
31.1
Chief Executive Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.
31.2
Chief Financial Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.
Chief Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
32.2
Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
101.INS
iXBRL Instance Document
101.SCH
iXBRL Taxonomy Extension Schema
101.CAL
iXBRL Taxonomy Extension Calculation Linkbase
101.DEF
iXBRL Taxonomy Extension Definition Linkbase
101.LAB
iXBRL Taxonomy Extension Label Linkbase
101.PRE
iXBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibits 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
Date: May 6, 2022
By:
/s/ Katie A. Lorenson
Name: Katie A. Lorenson
Title: President and Chief Executive Officer (Principal Executive Officer)
/s/ Alan A. Villalon
Name: Alan A. Villalon
Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer)