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, 2024
☐ 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, 2024 was 19,776,786.
Alerus Financial Corporation and Subsidiaries
Page
Part 1:
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
1
Consolidated Balance Sheets
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Changes in Stockholders’ Equity
4
Consolidated Statements of Cash Flows
5
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
67
Item 4.
Controls and Procedures
69
Part 2:
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
70
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
71
Signatures
72
PART 1. FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
March 31,
December 31,
(dollars in thousands, except share and per share data)
2024
2023
Assets
(Unaudited)
Cash and cash equivalents
$
545,772
129,893
Investment securities
Trading
4,553
—
Available-for-sale, at fair value (amortized cost of $573,733 and $584,754, respectively)
472,272
486,736
Held-to-maturity, at amortized cost (fair value of $249,807 and $258,617, respectively, with an allowance for credit losses on investments of $207 and $213, respectively)
291,932
299,515
Loans held for sale
10,625
11,497
Loans
2,799,475
2,759,583
Allowance for credit losses on loans
(36,584)
(35,843)
Net loans
2,762,891
2,723,740
Land, premises and equipment, net
18,162
17,940
Operating lease right-of-use assets
5,112
5,436
Accrued interest receivable
16,149
15,700
Bank-owned life insurance
33,396
33,236
Goodwill
46,783
Other intangible assets, net
15,834
17,158
Servicing rights
1,983
2,052
Deferred income taxes, net
34,796
34,595
Other assets
77,833
83,432
Total assets
4,338,093
3,907,713
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing
692,500
728,082
Interest-bearing
2,592,469
2,367,529
Total deposits
3,284,969
3,095,611
Short-term borrowings
555,000
314,170
Long-term debt
58,985
58,956
Operating lease liabilities
5,420
5,751
Accrued expenses and other liabilities
62,084
64,098
Total liabilities
3,966,458
3,538,586
Commitments and contingencies (Note 11)
Stockholders’ equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding
Common stock, $1 par value, 30,000,000 shares authorized: 19,776,786 and 19,734,077 issued and outstanding
19,777
19,734
Additional paid-in capital
150,740
150,343
Retained earnings
275,374
272,705
Accumulated other comprehensive income (loss)
(74,256)
(73,655)
Total stockholders’ equity
371,635
369,127
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
39,294
30,933
Taxable
4,568
5,951
Exempt from federal income taxes
174
190
Other
5,002
735
Total interest income
49,038
37,809
Interest Expense
20,152
9,104
5,989
4,393
678
654
Total interest expense
26,819
14,151
Net interest income
22,219
23,658
Provision for credit losses
550
Net interest income after provision for credit losses
23,108
Noninterest Income
Retirement and benefit services
15,655
15,482
Wealth management
6,118
5,194
Mortgage banking
1,670
1,717
Service charges on deposit accounts
389
301
1,491
2,559
Total noninterest income
25,323
25,253
Noninterest Expense
Compensation
19,332
19,158
Employee taxes and benefits
6,188
5,853
Occupancy and equipment expense
1,906
1,899
Business services, software and technology expense
5,345
5,324
Intangible amortization expense
1,324
Professional fees and assessments
1,993
1,152
Marketing and business development
685
686
Supplies and postage
528
460
Travel
292
248
Mortgage and lending expenses
441
497
985
1,268
Total noninterest expense
39,019
37,869
Income before income taxes
8,523
10,492
Income tax expense
2,091
2,306
Net income
6,432
8,186
Per Common Share Data
Basic earnings per common share
0.32
0.41
Diluted earnings per common share
0.40
Dividends declared per common share
0.19
0.18
Average common shares outstanding
19,739
20,028
Diluted average common shares outstanding
19,986
20,246
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Net change in unrealized gains (losses) on debt securities
(3,517)
4,841
Net change in unrealized gain (losses) on cash flow hedging derivatives
684
Net change in unrealized gain (losses) on other derivatives
2,031
(1,725)
Total other comprehensive income (loss), before tax
(802)
3,116
Income tax expense (benefit) related to items of other comprehensive income (loss)
(201)
782
Other comprehensive income (loss), net of tax
(601)
2,334
Total comprehensive income (loss)
5,831
10,520
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
Accumulated
Additional
Common
Paid-in
Retained
Comprehensive
(dollars and shares in thousands)
Stock
Capital
Earnings
Income (Loss)
Total
Balance as of December 31, 2022
19,992
155,095
280,426
(98,641)
356,872
Cumulative effect of change in accounting principles, net of tax
(4,452)
Balance as of January 1, 2023
275,974
352,420
Other comprehensive income (loss)
Common stock repurchased
(17)
(344)
(361)
Common stock dividends
(3,620)
Share‑based compensation expense
159
Vesting of restricted stock
92
(92)
Balance as of March 31, 2023
20,067
154,818
280,540
(96,307)
359,118
Balance as of December 31, 2023
(7)
(146)
(153)
(3,763)
593
50
(50)
Balance as of March 31, 2024
Consolidated Statements of Cash Flows (Unaudited)
Operating Activities
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes
1,459
Depreciation and amortization
2,100
2,130
Amortization and accretion of premiums/discounts on investment securities
424
527
Amortization of operating lease right-of-use assets
(8)
(43)
Originations on loans held for sale
(53,129)
(56,347)
Proceeds on loans held for sale
55,362
50,381
(Increase) in value of bank-owned life insurance
(160)
(224)
Realized loss (gain) on derivative instruments
(678)
(253)
Realized loss (gain) on loans sold
(1,438)
(1,344)
Realized loss (gain) on sale of foreclosed assets
8
Realized loss (gain) on BOLI mortality
(1,196)
Realized loss (gain) on servicing rights
(20)
38
Net change in:
(449)
(114)
(1,071)
4,031
(8,352)
Net cash provided (used) by operating activities
11,989
(2,383)
Investing Activities
Proceeds from sales of trading investment securities
5,502
Purchases of trading investment securities
(10,008)
Proceeds from maturities of investment securities available-for-sale
10,818
16,139
Proceeds from calls of investment securities held-to-maturity
251
126
Proceeds from maturities and paydowns of investment securities held-to-maturity
7,043
7,578
Net (increase) decrease in loans
(40,223)
(42,801)
Net (increase) decrease in FHLB stock
5,075
(225)
Proceeds from BOLI mortality claim
2,828
Purchases of premises and equipment
(881)
(923)
Proceeds from sales of foreclosed assets
34
22
Net cash provided (used) by investing activities
(22,389)
(17,256)
Financing Activities
Net increase (decrease) in deposits
189,358
116,494
Net increase (decrease) in short-term borrowings
240,830
(5,935)
Repayments of long-term debt
Cash dividends paid on common stock
(3,757)
Repurchase of common stock
Net cash provided (used) by financing activities
426,279
106,578
Net change in cash and cash equivalents
415,879
86,939
Cash and cash equivalents at beginning of period
58,242
Cash and cash equivalents at end of period
145,181
Supplemental Cash Flow Disclosures
Interest paid
22,339
15,167
Income taxes paid
Cash dividends declared, not paid
3,763
3,620
Supplemental Disclosures of Noncash Investing and Financing Activities
Loan collateral transferred to foreclosed assets
(5)
Right-of-use assets obtained in exchange for new operating lease liabilities, net
108
257
Change in fair value hedges presented within residential real estate loans and other assets
268
6
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 Basis of Presentation
The accompanying unaudited consolidated interim financial statements and notes thereto of the Company have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America, or GAAP, for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated balance sheets of Alerus Financial Corporation, or the Company, as of March 31, 2024 and December 31, 2023, the consolidated statements of income for the three months ended March 31, 2024 and 2023, consolidated statements of comprehensive income (loss) for the three months ended March 31, 2024 and 2023, the consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2024 and 2023, and the consolidated statements of cash flows for the three months ended March 31, 2024 and 2023.
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. 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. 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, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2024.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile. The last year the Company qualifies as an emerging growth company is 2024.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
NOTE 2 Recent Accounting Pronouncements
The following Financial Accounting Standards Board, or FASB, Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2024, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of March 31, 2024.
Adopted Pronouncements
There have been no new ASUs adopted by the Company since January 1, 2024.
Pronouncements Not Yet Effective
In November 2023, the FASB issued guidance within ASU 2023-07, Segment Reporting (Topic 280). The amendments in this update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures related to significant segment expenses. The amendments do not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments, and all existing segment disclosure requirements in ASC 280 and other Codification topics remain unchanged. The amendments in this update are incremental and require public entities that report segment information to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss as well as other segment items. Annual disclosure of the title and position of the chief operating decision maker and how the reported measures of segment profit or loss are used to assess performance and allocation of resources is also required.
The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and are applied on a retrospective basis. The Company is currently evaluating the impact these amendments will have on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU related to the rate reconciliation and income taxes paid disclosures, to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction disclosures. The amendments allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. The other amendments in this ASU improve the effectiveness and comparability of disclosures by adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (“SEC”) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this ASU should be applied on a prospective basis. Retrospective application is also permitted.
NOTE 3 Investment Securities
Trading securities are reported on the Company’s consolidated balance sheet at fair value. As of March 31, 2024, the fair value of the Company’s trading securities was $4.6 million. There were no trading securities as of December 31, 2023. Changes in fair value of trading securities are recorded in other noninterest income on the Company’s consolidated statements of income. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company’s deferred compensation plan for eligible employees, executives, and directors.
The following tables present amortized cost, gross unrealized gains and losses, allowance for credit losses, or ACL, and fair value of the available-for-sale, or AFS, investment securities and the amortized cost, gross unrealized gains and losses and fair value of held-to-maturity, or HTM, securities as of March 31, 2024 and December 31, 2023:
March 31, 2024
Amortized
Unrealized
Allowance for
Fair
Cost
Gains
Losses
Credit Losses
Value
Available-for-sale
U.S. Treasury and agencies
839
(3)
838
Mortgage backed securities
Residential agency
513,409
(92,516)
420,893
Commercial
1,471
(120)
1,351
Asset backed securities
23
(1)
Corporate bonds
57,991
(8,823)
49,168
Total available-for-sale investment securities
573,733
(101,463)
Held-to-maturity
Obligations of state and political agencies
124,971
(12,985)
110
111,986
167,168
(29,347)
97
137,821
Total held-to-maturity investment securities
292,139
(42,332)
207
249,807
Total investment securities
865,872
(143,795)
722,079
December 31, 2023
1,119
1,120
524,140
(88,547)
435,594
1,476
(123)
1,353
26
25
57,993
(9,349)
48,644
584,754
(98,023)
129,603
(12,613)
114
116,990
170,125
(28,498)
99
141,627
299,728
(41,111)
213
258,617
884,482
(139,134)
745,353
9
The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of March 31, 2024, represent a credit loss impairment. As of March 31, 2024 and December 31, 2023, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions; however, all bonds had an investment grade rating as of March 31, 2024 and December 31, 2023. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.
The ACL on HTM debt securities is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Using a probability of default and loss on given default analysis, the ACL on HTM debt securities was $207 thousand and $213 thousand as of March 31, 2024 and December 31, 2023, respectively.
Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of March 31, 2024, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.6 million and $1.0 million, respectively. As of December 31, 2023, the accrued interest receivable on available-for-sale investment securities and held-to-maturity investment securities totaled $1.5 million and $1.4 million, respectively.
The Company had no sales or calls of AFS investment securities for the three months ended March 31, 2024 and 2023.
The Company had no sales of HTM investment securities for the three months ended March 31, 2024 and 2023.
The following table presents investment securities with gross unrealized losses, for which an ACL has not been recorded at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:
Less than 12 Months
Over 12 Months
Number of
Holdings
454
111
35
420,815
420,850
12
128
489
(101,460)
471,356
471,845
10
112
435,505
435,548
129
532
(98,020)
485,527
486,059
The Company determined that the expected credit loss on its HTM portfolio was $207 thousand and $213 thousand as of March 31, 2024, and December 31, 2023, respectively. The change in the ACL on HTM debt securities was due to a change in the provision for credit losses, with no charge-offs or recoveries for the three months ended March 31, 2024.
As of March 31, 2024 and December 31, 2023, none of the Company’s HTM debt securities were past due or on nonaccrual status. The Company did not recognize any interest income on nonaccrual HTM debt securities during the three months ended March 31, 2024 and 2023.
The following table presents amortized cost and fair value of AFS investment securities and the carrying value and fair value of HTM investment securities as of March 31, 2024, by contractual maturity:
Carrying
Due within one year or less
8,161
7,974
Due after one year through five years
47,376
43,614
473
470
Due after five years through ten years
57,248
49,662
59,467
50,524
Due after 10 years
12,186
10,736
384
385
60,324
51,379
Mortgage-backed securities
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 $559.1 million and $250.0 million were pledged as of March 31, 2024 and December 31, 2023, respectively, to secure public deposits and for other purposes required or permitted by law.
As of March 31, 2024 and December 31, 2023, 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
4,623
FHLB
11,491
16,566
11
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, 2024, the conversion ratio was 1.5875. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (10,992 Class A equivalents) that the Company owned as of March 31, 2024 and December 31, 2023, were carried at a zero cost basis.
NOTE 4 Loans and Allowance for Credit Losses
The following table presents total loans outstanding, by portfolio segment, as of March 31, 2024 and December 31, 2023:
Commercial and industrial
611,695
598,321
Real estate construction
125,966
124,034
Commercial real estate
1,152,948
1,126,912
Total commercial
1,890,609
1,849,267
Consumer
Residential real estate first mortgage
722,151
726,879
Residential real estate junior lien
156,882
154,134
Other revolving and installment
29,833
29,303
Total consumer
908,866
910,316
Total loans
Total loans included net deferred loan fees and costs of $46 thousand and $248 thousand at March 31, 2024 and December 31, 2023, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $4.7 million and $5.1 million as of March 31, 2024 and December 31, 2023, respectively.
Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $12.3 million at March 31, 2024 and $12.2 million at December 31, 2023.
The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends early, implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company monitors and manages credit risk through the following governance structure:
Loans with a carrying value of $1.6 billion as of March 31, 2024 and December 31, 2023, were pledged to secure public deposits, and for other purposes required or permitted by law.
ACL on Loans
The following tables present, by loan portfolio segment, a summary of the changes in the allowance for credit losses on loans for the three months ended March 31, 2024 and 2023:
Three months ended March 31, 2024
Beginning
Provision for
Loan
Ending
Balance
Credit Losses(1)
Charge-offs
Recoveries
9,894
122
(164)
123
9,975
6,111
(189)
5,922
11,897
834
(29)
12,713
27,902
767
(193)
134
28,610
6,578
63
6,641
1,151
1,148
212
(28)
(12)
13
185
7,941
32
35,843
799
(205)
147
36,584
Three months ended March 31, 2023
Adoption
of ASC 326
9,233
(707)
(395)
(175)
56
8,012
1,437
2,549
439
4,425
12,761
(131)
12,676
23,431
1,711
79
25,113
5,858
2,269
187
8,316
1,317
(27)
121
(77)
1,340
540
(96)
(118)
333
7,715
2,146
(82)
20
9,989
Unallocated
31,146
3,857
269
(257)
87
35,102
The ACL on loans at March 31, 2024, was $36.6 million, an increase of $0.7 million, or 2.1%, since December 31, 2023. The increase was primarily due to a combined ACL increase of $1.0 million provision for credit losses in commercial and industrial and commercial real estate loans. This increase was primarily due to recent downgrades in the related loan pools.
Credit Concentrations
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes and state and county codes. Property type coding is used for investment real estate. As of March 31, 2024, the Company’s total exposure to the general business industry and owner occupied real estate was 11.3% and 10.2%, respectively, of total loans. There were no other industry concentrations exceeding 10% of the Company's total loan portfolio as of March 31, 2024.
Credit Quality Indicators
The Company’s consumer loan portfolio is primarily comprised of secured loans that are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred. These loans are rated as either performing or nonperforming.
The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.
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:
14
15
The following tables set forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of March 31, 2024 and December 31, 2023:
Revolving
Term Loans Amortized Cost Basis by Origination Year
Loans Amortized
As of March 31, 2024
2022
2021
2020
Prior
Cost Basis
Pass
41,962
183,564
82,980
56,800
60,343
48,218
95,175
569,042
Special mention
553
7,810
1,878
10,255
Substandard
446
4,960
1,543
5,487
2,976
16,986
32,398
Doubtful
Subtotal
184,563
87,940
66,153
65,830
51,208
114,039
Gross charge-offs for the period ended
164
1,851
26,751
70,126
5,154
100
929
104,911
21,055
91,181
29,459
272,847
262,017
140,221
139,105
267,003
7,854
1,118,506
12,957
1,972
14,929
6,020
2,261
5,187
5,397
648
19,513
278,867
264,278
145,408
152,062
274,372
8,502
29
Performing
5,538
71,933
199,111
216,774
106,562
116,181
751
716,850
Nonperforming
4,361
921
5,301
203,472
216,781
106,574
117,102
2,059
17,642
15,169
5,872
4,528
6,394
102,630
154,294
244
317
1,916
2,588
2,303
5,983
6,711
104,546
880
4,633
5,786
828
3,449
1,747
12,509
29,832
1,748
81,993
584,389
667,826
440,307
332,543
452,070
240,347
202
205
16
As of December 31, 2023
2019
197,533
89,090
67,691
64,272
34,603
15,053
100,239
568,481
464
4,844
236
6,328
94
2,513
15,361
29,840
197,997
93,934
67,927
70,600
34,697
17,566
115,600
39
49
247
90
436
29,902
57,944
14,326
952
103,367
20,667
78,611
272,261
265,549
142,027
153,796
116,861
159,454
7,794
1,117,742
262
587
2,872
3,690
1,759
8,908
266,136
144,899
120,551
161,475
72,180
207,177
218,719
108,100
33,102
87,212
284
726,774
105
87,317
40
18,408
5,946
4,857
1,769
5,280
100,438
152,353
1,781
102,219
77
5,320
6,395
980
4,489
1,554
9,613
31
51
596,068
667,908
452,797
341,964
191,673
273,542
235,631
58
42
253
215
613
Past Due and Nonaccrual Loans
The Company closely monitors the performance of its loan portfolio. A loan is placed on nonaccrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on nonaccrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on nonaccrual status. All previously accrued and unpaid interest is reversed at that time. A loan will return to accrual when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months.
17
The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of March 31, 2024 and December 31, 2023:
90 Days
Accruing
30 - 59 Days
60 - 89 Days
or More
Current
Past Due
Nonaccrual
605,573
5,486
1,151,672
474
802
1,883,211
1,067
6,288
717,046
4,478
627
155,919
509
429
29,735
64
33
902,700
5,051
1,057
2,785,911
101
7,345
590,663
924
139
6,595
1,125,669
1,115
1,840,366
1,052
7,710
724,786
901
554
638
153,220
666
29,086
170
47
907,092
1,737
601
886
2,747,458
2,789
8,596
In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following table presents the amortized cost basis on nonaccrual status loans and loans 90 days or more past due and still accruing as of March 31, 2024 and December 31, 2023:
with no Allowance
for Credit Losses
and Accruing
95
621
1,050
1,214
18
632
817
991
Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended March 31, 2024 and 2023, is estimated to have been $651 thousand and $38 thousand, respectively.
The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual status. As a result, the Company did not record any interest income on its nonaccrual loans for the three months ended March 31, 2024 and 2023. At March 31, 2024 and December 31, 2023, total accrued interest receivable on loans, which had been excluded from reported amortized cost basis on loans, was $12.3 million and $12.2 million, respectively, and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
In cases where a borrower experiences financial difficulty, the Company may make certain concessions for which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During the three months ended March 31, 2024 and 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.
The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of March 31, 2024 and December 31, 2023:
Primary Type of Collateral
Real estate
Equipment
5,070
2,280
515
555
366
5,585
5,625
2,646
430
1,056
41
6,682
2,649
19
6,124
2,384
695
96
791
6,819
6,915
2,985
93
249
772
887
7,591
189
7,802
2,994
Collateral dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.
NOTE 5 Goodwill and Other Intangible Assets
The following table summarizes the carrying amount of goodwill, by segment, as of March 31, 2024 and December 31, 2023:
Banking
35,260
11,523
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, 2024.
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset, as of March 31, 2024 and December 31, 2023, were as follows:
Gross Carrying Amount
Accumulated Amortization
Identifiable customer intangibles
41,423
(30,967)
10,456
(29,959)
11,464
Core deposit intangible assets
7,592
(2,214)
5,378
(1,898)
5,694
Total intangible assets
49,015
(33,181)
(31,857)
Amortization of intangible assets was $1.3 million for both the three months ended March 31, 2024 and 2023.
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 $185.7 million and $190.0 million as of March 31, 2024 and December 31, 2023, 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, 2024 and 2023:
Servicing Assets:
Balance at beginning of year
2,643
Additions (1)
260
261
Amortization (2)
(89)
(183)
Balance at end of year
2,223
2,721
Less valuation reserve (3)
(240)
(300)
Balance at end of year, net of valuation reserve
2,421
Fair value, beginning of year
2,062
2,314
Fair value, end of year
2,083
2,236
The following is a summary of key data and assumptions used in the valuation of servicing rights as of March 31, 2024 and December 31, 2023. 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
18.8
Prepayment speeds
6.2
%
Discount rate
11.1
NOTE 7 Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee are comprised of real property for offices and office equipment rentals with terms extending through 2037. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases. The Company has no existing finance leases.
21
The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial statements as of March 31, 2024 and December 31, 2023:
Lease Right-of-Use Assets
Classification
Lease Liabilities
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.
Weighted-average remaining lease term, years
Operating leases
7.4
7.3
Weighted-average discount rate
3.8
3.9
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 ended March 31, 2024 and 2023:
Lease costs
Operating lease cost
461
581
Variable lease cost
266
225
Short-term lease cost
36
Finance lease cost
Interest on lease liabilities
Amortization of right-of-use assets
Sublease income
(48)
(60)
Net lease cost
715
789
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases
479
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, 2024 were as follows:
Operating
Leases
Twelve months ended
March 31, 2025
1,641
1,267
March 31, 2026
1,088
March 31, 2027
March 31, 2028
335
Thereafter
1,832
Total future minimum lease payments
6,703
Amounts representing interest
(1,283)
Total operating lease liabilities
NOTE 8 Deposits
The components of deposits in the consolidated balance sheets as of March 31, 2024 and December 31, 2023 were as follows:
Interest-bearing demand
938,751
840,711
Savings accounts
82,727
82,485
Money market savings
1,114,262
1,032,771
Time deposits
456,729
411,562
Total interest-bearing
Certificates of deposit in excess of $250,000 totaled $150.8 million and $121.8 million at March 31, 2024 and December 31, 2023, respectively.
NOTE 9 Short-Term Borrowings
Short-term borrowings at March 31, 2024 and December 31, 2023 consisted of the following:
Fed funds purchased
114,170
Bank Term Funding Program (1)
355,000
FHLB short-term advances
200,000
NOTE 10 Long-Term Debt
Long-term debt as of March 31, 2024 and December 31, 2023 consisted of the following:
Period End
Face
Interest
Maturity
Interest Rate
Rate
Date
Call Date
Subordinated notes payable
50,000
Fixed
3.50
3/30/2031
3/31/2026
Junior subordinated debenture (Trust I)
4,124
3,594
Three-month CME SOFR + 0.26% + 3.10%
8.67
6/26/2033
6/26/2008
Junior subordinated debenture (Trust II)
6,186
5,391
Three-month CME SOFR + 0.26% + 1.80%
7.39
9/15/2036
9/15/2011
Total long-term debt
60,310
3,583
8.72
5,373
7.45
NOTE 11 Commitments and Contingencies
Commitments
In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Company exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.
A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of March 31, 2024 and December 31, 2023, respectively, was as follows:
Commitments to extend credit
916,200
942,413
Standby letters of credit
12,755
10,045
928,955
952,458
The Company establishes an ACL on unfunded commitments, except those that are unconditionally cancellable by the Company. As of March 31, 2024 and December 31, 2023, the ACL on unfunded commitments was $6.6 million and $7.4 million, respectively. The ACL on unfunded commitments was presented within accrued expenses and other liabilities on the consolidated balance sheet. For the three months ended March 31, 2024 and 2023, the provision (recovery) for credit losses on unfunded commitments was ($794) thousand and $230 thousand, respectively.
24
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.
The Company was not required to perform on any financial guarantees and did not incur any losses on its commitments during the past two years.
The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had no letters of credit outstanding with the FHLB as of March 31, 2024 or December 31, 2023. With the Bank of North Dakota, the Company had letters of credit outstanding in the amount of $200.0 million and $182.0 million as of March 31, 2024 and December 31, 2023, respectively. Letters of credit with the Bank of North Dakota were collateralized by loans pledged to the Bank of North Dakota in the amount of $460.9 million and $454.6 million as of March 31, 2024 and December 31, 2023, respectively.
Legal Contingencies
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that, based on the information currently available, the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements.
Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.
The Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed as of March 31, 2024 and December 31, 2023, respectively.
NOTE 12 Share-Based Compensation
On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Since inception, all awards issued under the plan have been restricted stock and restricted stock units. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Restricted stock units issued do not participate in dividends and recipients are not entitled to vote these restricted stock units until shares of the Company’s common stock are delivered after vesting of the restricted stock units. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. Awards issued to Company directors are not subject to any service requirements and vest immediately. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of March 31, 2024, 716,917 shares of common stock are still available for issuance under the plan.
The compensation expense relating to awards under these plans was $593 thousand and $159 thousand for the three months ended March 31, 2024 and 2023, respectively.
The following table presents the activity in the stock plans for the three months ended March 31, 2024 and 2023:
Three months ended March 31,
Weighted-
Average Grant
Awards
Date Fair Value
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period
231,657
22.96
238,929
23.66
Granted
60,976
21.83
82,810
20.85
Vested
(38,149)
26.05
(91,867)
21.29
Forfeited or cancelled
(22,204)
21.39
Outstanding at end of period
254,484
22.18
207,668
23.83
As of March 31, 2024, there was $3.6 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 2.4 years.
NOTE 13 Income Taxes
The components of income tax expense (benefit) for the three months ended March 31, 2024 and 2023 were as follows:
Percent of
Amount
Pretax Income
Taxes at statutory federal income tax rate
1,790
21.0
2,203
Tax effect of:
Tax exempt income
(229)
(2.7)
(144)
(1.4)
State income taxes, net of federal benefits
413
4.8
4.4
Nondeductible items and other
117
1.4
(214)
(2.0)
Applicable income taxes
24.5
22.0
It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.
NOTE 14 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 credits as of March 31, 2024 and December 31, 2023:
Investment
Unfunded Commitment
Accounting Method
Low income housing tax credit
Proportional amortization
17,906
7,466
12,347
The following table presents a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects for the three months ended March 31, 2024 and 2023:
Amortization
Tax Benefit
Expense (1)
Recognized (2)
432
(381)
360
(227)
NOTE 15 Segment Reporting
Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. Reportable segments are determined based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial statements, and management’s regular review of the operating results of those services. The Company currently operates through three operating segments: Banking, Retirement and Benefit Services, and Wealth Management. In prior periods, the Company had a fourth operating segment, Mortgage. As of January 1, 2024, the Mortgage division was fully integrated into the Banking division by the Company to reflect the way the Company currently manages and views the business. The Company has restated all historical periods presented within these financial statements, and has not included the Mortgage operating segment.
The financial information presented for each segment includes net interest income, provision for credit losses, noninterest income, and direct and indirect noninterest expense. Corporate Administration includes all remaining income and expenses not allocated to the three operating segments.
27
The following table presents key metrics related to the Company’s segments for the periods presented:
Retirement and
Wealth
Corporate
Benefit Services
Management
Administration
Consolidated
Net interest income (loss)
22,897
Noninterest income (loss)
3,490
60
Noninterest expense
18,666
14,189
3,750
2,414
Net income (loss) before taxes
7,721
1,466
2,368
(3,032)
4,262,600
33,636
4,787
37,070
24,312
(654)
Noninterest income
4,539
18,650
13,595
3,362
2,262
9,651
1,887
(2,878)
3,818,449
38,419
4,111
25,794
3,886,773
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; recordkeeping and administration services to other types of retirement plans; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, and COBRA recordkeeping and administration services. The division operates within each of the banking markets, as well as in 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.
28
NOTE 16 Earnings Per Share
The calculation of basic and diluted earnings per share using the two-class method for the three months ended March 31, 2024 and 2023 are presented below:
Dividends and undistributed earnings allocated to participating securities
57
Net income available to common stockholders
6,392
8,129
Weighted-average common shares outstanding for basic earnings per share
Dilutive effect of stock-based awards
218
Weighted-average common shares outstanding for diluted earnings per share
Earnings per common share:
NOTE 17 Derivative Instruments
The company uses a variety of derivative instruments to mitigate exposure to both market and credit risks inherent in its business activities. The Company manages these risks as part of its overall asset and liability management process and through its policies and procedures. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.
Derivatives are often measured in terms of notional amount, but this amount is generally not exchanged, and it is not recorded on the Company’s consolidated balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate, security price, credit spread, or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.
Derivatives Designated as Hedging Instruments
The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s). As of March 31, 2024, the Company only uses fair value and cash flow hedges.
Fair value hedges: These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying mortgage-backed investment securities and mortgage loan pools. The interest rate swaps are carried on the Company’s Consolidated Balance Sheet at their fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). The changes in fair value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair value of the interest rate swaps due to changes in benchmark interest rates are recorded as an adjustment to the hedged instruments and offset in the same interest income line items.
Cash flow hedges: These derivatives are interest rate swaps the Company uses to hedge the variability of expected future cash flows due to market interest changes. The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), or OCI, until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in OCI is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in OCI is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within accumulated other comprehensive income (loss), or AOCI. The Company estimates that an additional $0.4 million will be reclassified as a decrease to interest expense over the next 12 months. All cash flow hedges were highly effective for the three months ended March 31, 2024. As of March 31, 2024, the maximum length of time over which forecasted transactions are hedged is 12 months.
Derivatives Not Designated as Hedging Instruments
Interest rate swaps: The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.
Interest rate lock commitments, forward loan sales commitments and to be announced (TBA) mortgage backed securities: The Company enters into forward delivery contracts to sell mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments.
The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of March 31, 2024 and December 31, 2023:
Derivative Assets
Derivative Liabilities
Notional
Location
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps
600,000
Other Assets
1,938
Cash flow hedges:
386
Total derivatives designated as hedging instruments
800,000
2,324
Not designated as hedging instruments:
Interest rate swaps (1)
120,304
6,294
Interest rate lock commitments
24,426
409
Forward loan sales commitments
To-be-announced mortgage backed securities
46,000
Total asset derivatives not designated as hedging instruments
144,730
166,304
6,318
352
297
649
120,671
8,327
8,348
8,126
179
20,500
183
128,987
8,512
141,171
8,531
30
The following table shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses), before tax, reclassified from other comprehensive income (loss) into earnings for the periods indicated:
Gains (Losses)
Reclassified
Recognized in
from OCI
OCI
into Earnings
Derivatives designated as hedging instruments
For the three months ended March 31, 2024
946
For the three months ended March 31, 2023
The following table shows the effect of fair value and cash flow hedge accounting on derivatives designated as hedging instruments in the Consolidated Statements of Income:
Location and Amount of Gains (Losses) Recognized in Income
Loans,
including
securities -
Short-term
fees
borrowings
Total amounts in the Consolidated Statements of Income
153
642
The following tables show the notional amount, carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships at March 31, 2024 and December 31, 2023, respectively:
Cumulative Fair
Value Hedging
Adjustment in the
Carrying Amount
Carrying Amount of
of Hedged Assets/
Hedged Assets/
Residential agency (1)
198,210
(1,790)
Mortgage loan pools (2)
400,000
399,830
(170)
598,040
(1,960)
200,241
241
400,098
98
600,339
339
The gain (loss) recognized on derivatives not designated as hedging relationships for the three months ended March 31, 2024 and 2023 was as follows:
Derivatives not designated as hedging instruments
Consolidated Statements of Income Location
Other noninterest income
340
(6)
(173)
Total gain (loss) from derivatives not designated as hedging instruments
209
161
The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. These requirements are dependent on certain specified credit measures. There was no collateral posted with third parties at March 31, 2024. The amount of collateral posted with third parties was $550 thousand at December 31, 2023. 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.
Credit Risk-Related Contingent Features
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.
The Company has agreements with its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where, if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.
As of March 31, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which included accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $0 and $649 thousand, respectively. As of March 31, 2024 and December 31, 2023, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $550 thousand, respectively. If the Company had breached any of these provisions at March 31, 2024 or December 31, 2023, it could have been required to settle its obligations under the agreements at their termination value of $0 and $649 thousand, respectively.
Balance Sheet Offsetting
The following tables present the Company’s derivative positions and the potential effect of netting arrangements on its financial position as of the dates indicated:
Gross Amount
Not Offset in the
Balance Sheets
Net Amount
Recognized in the
Offset in the
Presented in the
Cash Collateral
Pledged (Received)
Derivative assets:
Interest rate swaps − Company (1)
(2,459)
(135)
Interest rate swaps − dealer bank (1)
(4,681)
1,613
8,618
(7,140)
1,478
Derivative liabilities:
Interest rate swaps − customer (2)
(1,740)
6,587
9,180
8,630
NOTE 18 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023:
Minimum to be
Minimum Required
Well Capitalized
for Capital
Under Prompt
Actual
Adequacy Purposes
Corrective Action (1)
Ratio
Common equity tier 1 capital to risk weighted assets
Consolidated (1)
387,012
11.87
146,733
4.50
N/A
Bank
371,632
11.73
142,616
206,001
6.50
Tier 1 capital to risk weighted assets
.
395,997
12.14
195,644
6.00
190,155
253,540
8.00
Total capital to risk weighted assets
486,789
14.93
260,858
411,294
12.98
316,925
10.00
Tier 1 capital to average assets
9.89
160,216
4.00
9.30
159,882
199,852
5.00
382,578
11.82
145,605
367,445
11.40
145,101
209,590
391,534
12.10
194,139
193,468
257,957
477,590
14.76
258,853
403,501
12.51
322,446
10.57
148,111
9.92
148,186
185,232
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 include 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, 2024, the capital 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, 2024 and December 31, 2023, the Company was in compliance with the aforementioned guidelines.
NOTE 19 Other Comprehensive Income (Loss)
The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:
For the Three Months Ended
March 31, 2023
Tax
Pre-Tax
(Expense)
After-Tax
Benefit
Debt Securities:
Change in fair value
(3,443)
864
(2,579)
4,754
(1,193)
3,561
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM (1)
74
(18)
(87)
(65)
Less: reclassification adjustment for net realized losses (2)
Net change
882
(2,635)
(1,215)
3,626
Cash Flow Hedges:
(576)
370
Less: reclassified AOCI gain (loss) into interest expense (3)
(66)
196
(510)
Other Derivatives:
(171)
1,860
433
(1,292)
Less: reclassified AOCI gain (loss) into interest expense (4)
201
(782)
Net Unrealized
Gains (Losses) on
Cash Flow
on Other
Debt Securities (1)
Hedges (1)
Derivatives (1)
AOCI (1)
Balance at December 31, 2023
(73,158)
(237)
(260)
Other comprehensive income (loss) before reclassifications
(349)
Less: Amounts reclassified from AOCI
252
Balance at March 31, 2024
(75,793)
(63)
1,600
Balance at December 31, 2022
(98,547)
(94)
Balance at March 31, 2023
(94,921)
(1,386)
NOTE 20 Stock Repurchase Program
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Old Stock Repurchase Program, which authorized the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Old Stock Repurchase Program expired on February 18, 2024.
37
On December 12, 2023, the Board of Directors of the Company approved a new stock repurchase program, or the New Stock Repurchase Program, which authorizes the Company to repurchase up to 1,000,000 shares of its common stock subject to certain limitations and conditions. The New Stock Repurchase Program became effective February 18, 2024, and will expire on February 18, 2027. On February 18, 2024, the New Stock Repurchase Program replaced and superseded the Old Stock Repurchase Program.
The New Stock Repurchase Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended March 31, 2024, there were no shares repurchased under the Old Stock Repurchase Program or the New Stock Repurchase Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.
NOTE 21 Fair Value of Assets and Liabilities
The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized based on the following inputs to the valuation techniques as follows:
Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.
Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their estimated fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at estimated fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired financial instruments at estimated fair value in the future.
Recurring Basis
The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures.
The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of March 31, 2024 and December 31, 2023:
Level 1
Level 2
Level 3
U.S. treasury and government agencies
Derivatives
9,027
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, Trading for Deferred Compensation
The fair value of trading securities for deferred compensation is reported using market quoted prices as such securities and underlying securities are actively traded and no valuation adjustments have been applied and therefore are classified as Level 1.
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.
The estimated fair value of certain assets on a nonrecurring basis as of March 31, 2024 and December 31, 2023 consisted of the following:
Collateral dependent loans
4,033
Foreclosed assets
3,998
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.
The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of March 31, 2024 and December 31, 2023, were as follows:
Weighted
Asset Type
Valuation Technique
Unobservable Input
Fair Value
Range
Average
Individually evaluated
Appraisal value
Property specific adjustment
10.0
Property specific adjustment (1)
Discounted cash flows
Prepayment speed assumptions
82-172
103
85-151
104
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, 2024 and December 31, 2023, 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.
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 values of fixed-rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Credit-Related Commitments
Off-balance sheet credit related commitments are generally of short-term nature. The contract amount of such commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at the dates indicated are as follows:
Estimated Fair Value
Financial Assets
Investment securities held-to-maturity
Loans, net
2,623,566
Financial Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
2,135,740
454,272
57,983
Accrued interest payable
11,304
2,590,535
1,955,967
408,910
57,437
6,826
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion explains the Company’s financial condition and results of operations as of and for the three months ended March 31, 2024 and 2023. 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, 2023, filed with the SEC on March 8, 2024.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized,” “target” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements the Company make regarding the Company’s projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on the Company’s current beliefs, expectations and assumptions regarding the Company’s business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. The Company’s actual results and financial condition may differ materially from those indicated in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause the Company’s actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:
44
Any forward-looking statement made by the Company in this report is based only on information currently available to the Company and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
The Company is a commercial wealth bank and national retirement services provider headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, or the Bank, the Company provides financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth management. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.
The Company’s business model produces strong financial performance and a diversified revenue stream, which has helped the Company establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. The Company generates a majority of overall revenue from noninterest income, which is driven primarily by the Company’s retirement and benefit services, wealth management and mortgage business lines. The remainder of the Company’s revenue consists of net interest income, which the Company derives from offering traditional banking products and services.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues, and expenses reported. Actual results could differ materially from our current estimates as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near term change, including (i) the ACL, including the ACL on investment securities, loans, and unfunded commitments; (ii) goodwill and intangible assets impairment; and (iii) fair value measurements.
There have been no material changes to the Company’s critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2023. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for discussion of the Company’s critical accounting policies.
45
Refer to “NOTE 2 Recent Accounting Pronouncements” of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.
The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
Recent Developments
Shareholder Dividend
On February 28, 2024, the Board of Directors of the Company declared a quarterly cash dividend of $0.19 per common share. This dividend was paid on April 12, 2024, to stockholders of record at the close of business on March 15, 2024.
Operating Results Overview
The following table summarizes key financial results as of and for the periods indicated:
Performance Ratios
Return on average total assets
0.63
(1.51)
0.88
Return on average common equity
7.04
(16.75)
9.17
Return on average tangible common equity (1)
9.78
(18.85)
12.58
Noninterest income as a % of revenue
53.26
3.54
51.63
Net interest margin (taxable-equivalent basis)
2.30
2.37
2.70
Adjusted net interest margin (tax-equivalent basis) (1)
2.44
Efficiency ratio (1)
78.88
165.40
74.53
Adjusted efficiency ratio (1)
79.07
Average equity to average assets
8.87
9.03
9.54
Net charge-offs/(recoveries) to average loans
0.01
(0.04)
0.03
Dividend payout ratio
59.38
(26.03)
45.00
Per Common Share
Earnings (losses) per common share − basic
(0.74)
Earnings (losses) per common share − diluted
(0.73)
Book value per common share
18.79
18.71
17.90
Tangible book value per common share (1)
15.63
15.46
14.50
Average common shares outstanding − basic
19,761
Average common shares outstanding − diluted
19,996
Other Data
Retirement and benefit services assets under administration/management
38,488,523
36,682,425
33,404,342
Wealth management assets under administration/management
4,242,408
4,018,846
3,675,684
Mortgage originations
54,101
65,488
77,728
46
Selected Financial Data
The following tables summarize selected financial data as of and for the periods indicated:
Selected Average Balance Sheet Data
2,768,514
2,653,622
2,457,154
775,305
921,555
1,034,288
4,139,053
3,868,561
3,791,536
3,163,565
2,994,900
2,933,022
Fed funds purchased and Bank Term Funding Program
282,614
189,568
290,187
80,000
58,971
58,943
58,858
367,248
349,382
361,857
Selected Period End Balance Sheet Data
2,486,625
(35,102)
768,757
786,251
1,019,473
3,031,978
58,872
Selected Income Statement Data
21,552
23,659
1,507
38,654
37,870
Income (loss) before income taxes
(17,818)
Income tax expense (benefit)
(3,064)
2,307
Net income (loss)
(14,754)
8,185
Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, adjusted tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, adjusted efficiency ratio, adjusted noninterest income, net interest margin (tax-equivalent), and adjusted net interest margin (tax-equivalent). 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) adjusted tangible common equity as total common stockholders’ equity less goodwill, other intangible assets, and cash proceeds from BTFP; (iii) tangible book value per common share as tangible common equity divided by shares of common stock outstanding; (iv) tangible assets as total assets, less goodwill and other intangible assets; (v) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment; (vii) adjusted efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment less net gains (losses) on investment securities; (viii) adjusted noninterest income as noninterest income adjusted for net gains (losses) on investment securities; and (ix) adjusted net interest margin (tax equivalent) as net interest income less cash interest income and interest expense related to BTFP, adjusted for tax equivalent related to loans and securities, and adjust interest earning assets less average cash proceeds balance from BTFP.
The following tables present these non-GAAP financial measures along with the most directly comparable financial measures calculated in accordance with GAAP as of and for the periods indicated:
Tangible common equity to tangible assets
Total common stockholders’ equity
Less: Goodwill
47,087
Less: Other intangible assets
21,131
Tangible common equity (a)
309,018
305,186
290,900
Tangible assets (b)
4,275,476
3,843,772
3,818,555
Tangible common equity to tangible assets (a)/(b)
7.23
7.94
7.62
Adjusted Tangible Common Equity to Tangible Assets
Less: Cash proceeds from BTFP
Adjusted tangible assets (c)
3,920,476
Adjusted tangible common equity to tangible assets (a)/(c)
7.88
Tangible book value per common share
Tangible common equity (d)
Total common shares issued and outstanding (e)
Tangible book value per common share (d)/(e)
48
Return on average tangible common equity
Add: Intangible amortization expense (net of tax)
1,046
Net income (loss), excluding intangible amortization (f)
7,478
(13,708)
9,232
Average total equity
Less: Average goodwill
Less: Average other intangible assets (net of tax)
13,018
14,067
17,209
Average tangible common equity (g)
307,447
288,532
297,561
Return on average tangible common equity (f)/(g)
Efficiency ratio
Less: Intangible amortization expense
Adjusted noninterest expense (h)
37,695
37,330
36,545
Tax-equivalent adjustment
226
124
Total tax-equivalent revenue (i)
47,789
22,569
49,035
Efficiency ratio (h)/(i)
Adjusted Efficiency Ratio
Adjusted noninterest expense (j)
Less: Net gains (losses) on investment securities
(24,643)
Total tax-equivalent revenue (k)
47,212
Adjusted efficiency ratio (j)/(k)
Adjusted Noninterest Income
Add: Net gains (losses) on investment securities
Adjusted noninterest income
25,434
Adjusted Net Interest Margin (Tax-Equivalent)
Less: BTFP cash interest income
3,615
Add: BTFP interest expense
3,266
Net interest income excluding BTFP impact
21,870
Add: Tax equivalent adjustment for loans and securities
Adjusted net interest income (l)
22,117
21,778
23,782
Interest earning assets
3,921,529
3,645,184
3,567,402
Less: Average cash proceeds balance from BTFP
269,176
Adjusted interest earning assets (m)
3,652,353
Adjusted net interest margin (tax-equivalent) (l)/(m)
Discussion and Analysis of Results of Operations
Net income for the three months ended March 31, 2024, was $6.4 million, or $0.32 per diluted common share, a $1.8 million, or 21.4%, decrease compared to $8.2 million, or $0.40 per diluted common share, for the three months ended March 31, 2023. Earnings for the first quarter of 2024 compared to the first quarter of 2023 decreased primarily due to a $1.4 million decrease in net interest income and $1.2 million increase in noninterest expense. This negative result was partially offset by a $0.6 million decrease in provision for credit losses 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, 2024 and 2023.
Net interest income for the three months ended March 31, 2024, was $22.2 million, a decrease of $1.4 million, or 6.1%, compared to $23.7 million for the three months ended March 31, 2023. Net interest income for the first quarter of 2024 decreased compared to the first quarter of 2023 primarily due to the increasing cost of interest-bearing liabilities as interest expense increased $12.7 million mainly driven by an increase of 133 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $456.3 million. This was partially offset by an $11.2 million increase in interest income, as interest earning assets increased $354.1 million while the interest earning asset yield increased 74 basis points. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.
Net interest margin (on a tax-equivalent basis) for the three months ended March 31, 2024, was 2.30%, compared to 2.70% for the same period in 2023. The decrease in net interest margin (on a tax-equivalent basis) was mainly attributable to higher earning assets at lower yields resulting from the BTFP opportunity. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings, was 2.44% for the first quarter of 2024, a 26 basis point decrease from 2.70% for the first quarter of 2023. The decrease in adjusted net interest margin (on a tax-equivalent basis) (non-GAAP) from the year reflected higher cost of funds from continued growth on interest-bearing deposits, partially offset by higher yields on new loans.
The higher target federal funds interest rate continues to pressure funding costs. However, the Company anticipates that net interest income and net interest margin (on an adjusted tax equivalent basis) will recover in future periods as interest-earning assets remix at higher rates and the increases in deposit costs slow.
The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three months ended March 31, 2024 and 2023. The Company derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual status, 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 fully taxable equivalent (“FTE”) basis.
Income/
Yield/
Expense
Interest Earning Assets
Interest-bearing deposits with banks
352,038
4,665
5.33
41,947
334
3.23
Investment securities (1)
4,788
2.48
6,192
2.43
9,014
127
5.67
10,345
4.98
Commercial:
599,456
10,323
6.93
559,416
8,394
6.09
127,587
8.04
103,099
1,668
6.56
1,134,540
15,730
5.58
911,634
11,126
4.95
1,861,583
28,602
6.18
1,574,149
21,188
5.46
723,315
7,281
4.05
688,754
6,387
3.76
154,781
3,024
7.86
149,720
2,661
7.21
28,835
6.43
44,531
643
5.86
906,931
10,766
4.77
883,005
9,691
4.45
Total loans (1)
39,368
5.72
30,879
5.10
Federal Reserve/FHLB Stock
16,658
337
8.14
23,668
401
6.87
Total interest earning assets
49,285
5.05
37,933
4.31
Noninterest earning assets
217,524
224,134
Interest-Bearing Liabilities
Interest-bearing demand deposits
869,060
4,249
1.97
746,660
1,594
0.87
Money market and savings deposits
1,186,900
11,117
3.77
1,165,269
6,232
2.17
431,679
4,786
4.46
231,959
1,278
2.23
3,508
4.99
3,467
4.85
2,481
926
4.69
4.62
4.51
Total interest-bearing liabilities
3,029,224
3.56
2,572,933
Noninterest-Bearing Liabilities and Stockholders' Equity
675,926
789,134
Other noninterest-bearing liabilities
66,655
67,612
Net interest income on FTE basis (1)
22,466
Net interest rate spread on FTE basis (1)
1.49
2.08
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 interest earning assets and the interest incurred on interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.
Compared with
Change due to:
(tax-equivalent basis, dollars in thousands)
Volume
Variance
2,490
1,841
4,331
(1,565)
(1,404)
(16)
606
1,323
1,929
399
482
881
2,743
1,861
4,604
3,748
3,666
7,414
323
571
894
91
272
363
(182)
890
1,075
3,933
4,556
8,489
(64)
4,722
6,630
11,352
Interest-bearing liabilities
265
2,390
2,655
4,768
4,885
1,107
2,401
(91)
132
1,399
156
1,555
2,798
9,870
12,668
Change in net interest income
1,924
(3,240)
(1,316)
Provision for Credit Losses
The provision for credit losses was made up of the following components for the periods presented:
Provision (recovery) for loan losses
Provision (recovery) for credit losses on unfunded commitments
(793)
230
Provision (recovery) for HTM debt securities
52
The Company’s noninterest income is generated from retirement and benefit services, wealth management, mortgage banking, and other general banking services.
The following table presents the Company’s noninterest income for the three months ended March 31, 2024 and 2023:
Total noninterest income for the three months ended March 31, 2024 was $25.3 million, a $70 thousand, or 0.3%, increase compared to $25.3 million for the three months ended March 31, 2023. The increase in noninterest income was primarily driven by an increase of $0.9 million in wealth management revenue and $0.2 million in retirement and benefit services revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets. This increase was offset by a $1.1 million decrease in other noninterest income, primarily due to $1.2 million in proceeds on a bank-owned life insurance claim in the first quarter of 2023. Noninterest income for the three months ended March 31, 2023, included revenue of $0.9 million related to the ESOP trustee business that was subsequently divested in the third quarter of 2023.
The Company anticipates that noninterest income will continue to be significantly adversely affected in future periods as a result of increasing interest rates and inflationary pressure, which have begun, and will continue, to adversely affect mortgage originations and mortgage banking revenue.
See “NOTE 15 Segment Reporting” of the consolidated financial statements for additional discussion regarding the Company’s business lines.
The following table presents noninterest expense for the three months ended March 31, 2024 and 2023:
53
Total noninterest expense for the three months ended March 31, 2024, was $39.0 million, a $1.2 million, or 3.0%, increase compared to $37.9 million for the three months ended March 31, 2023. The year over year increase was primarily driven by higher professional fees and assessments due to an increase in FDIC assessments and an increase in recruitment expense driven by talent acquisitions in the first quarter of 2024.
Income Tax Expense
Income tax expense is an estimate based on the amount the Company expects to owe the respective taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due, or to be received from, taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. If the final resolution of taxes payable differs from the Company’s estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.
For the three months ended March 31, 2024, the Company recognized income tax expense of $2.1 million on $8.5 million of pre-tax income, resulting in an effective tax rate of 24.5%, compared to income tax expense of $2.3 million on $10.5 million of pre-tax income for the three months ended March 31, 2023, resulting in an effective tax rate of 22.0%.
Financial Condition
Total assets were $4.3 billion as of March 31, 2024, an increase of $430.4 million, or 11.0%, compared to December 31, 2023. The increase was primarily due to a $415.9 million increase in cash and cash equivalents and a $39.9 million increase in loans, partially offset by a decrease of $17.5 million in investment securities. The increase in cash and cash equivalents was primarily driven by the net proceeds from BTFP borrowings.
Investment Securities
The following table presents the fair value composition of the Company’s investment securities portfolio as of March 31, 2024 and December 31, 2023:
Portfolio
0.1
0.2
58.3
58.4
6.8
6.5
65.4
65.3
15.5
15.7
19.1
19.0
34.6
34.7
100.0
The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance
54
sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.
The investment securities presented in the following table are reported at fair value and by contractual maturity as of March 31, 2024. 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, assuming a 21.00% income tax rate.
Maturity as of March 31, 2024
One year or less
One to five years
Five to ten years
After ten years
Yield
5.89
368
5.94
2.76
3,017
4,142
3.07
413,722
1.71
2.40
4.19
5.04
3.69
3,487
2.93
54,666
3.61
414,107
1.08
1.43
2.04
2.21
2.24
148,557
7,986
47,101
1.54
104,328
2.87
562,664
1.85
The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, real estate construction, commercial real estate (“CRE”), residential real estate, and other revolving and installment loans.
Total loans outstanding were $2.8 billion as of March 31, 2024, an increase of $39.9 million, or 1.4%, from December 31, 2023. The increase was primarily driven by a $28.0 million increase in CRE loans and a $13.4 million increase in commercial and industrial loans, offset by a $2.0 million decrease in residential real estate loans.
55
The Company’s loan portfolio is highly diversified. As of March 31, 2024, approximately 21.8% of loans outstanding were commercial and industrial, while 45.7% of loans outstanding were CRE, and 31.4% of loans outstanding were residential real estate.
Commercial and industrial:
General business
316,298
11.3
294,149
10.7
Services
147,584
5.3
146,318
Retail trade
79,620
2.8
91,216
3.3
Manufacturing
68,193
2.4
66,638
Total commercial and industrial
21.8
21.7
Commercial real estate:
Owner occupied
285,149
10.2
271,619
9.8
Non-owner occupied
Multifamily
260,609
9.3
245,103
8.9
Office
133,284
124,684
4.5
Industrial
103,303
3.7
104,241
Retail
96,023
3.4
96,578
3.5
Hotel
67,288
80,576
2.9
Medical office
63,775
2.3
63,788
Medical or nursing facility
47,302
1.7
47,625
Other commercial real estate
55,066
1.9
51,866
Total non-owner occupied
826,650
29.5
814,461
Construction
Agricultural real estate
41,149
1.5
40,832
Total commercial real estate
1,278,914
45.7
1,250,946
45.3
25.8
26.3
5.6
1.1
32.5
33.0
Despite headwinds from a higher interest rate environment and competition in the Company’s market areas, the Company anticipates continued loan growth for the commercial and industrial and commercial real estate loan portfolios as a result of recently added production talent.
Commercial loans represent loans for working capital, purchases of equipment and other needs of commercial customers primarily located within the Bank’s geographical footprint. These loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and the customer’s market. While commercial loans are generally secured by the customer’s assets, including real property, inventory, accounts receivable, operating equipment and other property, and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer’s business. In addition, revolving lines of credit are generally governed by a borrowing base. Inherent lending risks are monitored on a continuous basis through interim reporting, covenant testing and annual underwriting.
CRE loans consist of term loans secured by a mortgage lien on real property and include both owner occupied CRE loans as well as non-owner occupied loans. Non-owner occupied CRE loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and other specific use properties as well as CRE construction loans that are offered to builders and developers generally within the Bank’s geographical footprint. The primary risk characteristics in the non-owner occupied portfolio include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each
asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite. Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product type and are monitored quarterly by the Bank’s Credit Governance Committee and Bank Board of Directors.
CRE loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company does not monitor the CRE portfolio for attributes such as loan-to-value ratios, occupancy rates or net operating income, as these characteristics are assessed and evaluated on an individual loan basis. Portfolio stress testing is completed based on property type and takes into consideration changes to net operating income and capitalization rates. The Company does not have exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with strong occupancy levels.
The following table presents the geographical markets of the collateral related to the non-owner occupied CRE loans for the periods presented:
Geographical Market:
Minnesota
408,858
49.5
394,754
48.5
North Dakota
212,551
25.7
214,884
26.4
Arizona
130,568
15.8
139,450
17.1
Missouri
15,970
15,969
2.0
Oregon
14,956
1.8
14,953
South Dakota
14,720
14,790
29,027
19,661
Total non-owner occupied commercial real estate loans
The Bank does not currently monitor owner occupied CRE loans based on geographical markets, as the primary source of repayment for these loans is predicated on the cash flow from the underlying operating entity. These loans are generally located within the Company’s geographical footprint.
Highly competitive conditions continue to prevail in the small- and middle-market commercial segments in which the Company primarily operates. The Company maintains a commitment to generating growth in the Company’s business portfolio in a manner that adheres to its twin goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities.
Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. Residential real estate loans also include home equity loans and lines of credit that are secured by a first or second lien on the borrower’s residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.
Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.
The Company originates both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of the Company’s fixed rate residential loans, along with some of the Company’s adjustable rate mortgages are sold to other financial institutions with which the Company has established a correspondent lending relationship.
The Company’s consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of March 31, 2024, the Company’s consumer mortgage portfolio was $879.0 million, which was a $2.0 million, or 0.2%, decrease from $881.0 million as of December 31, 2023. Market interest rates, expected duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.
The following table presents the maturities and types of interest rates for the loan portfolio as of March 31, 2024:
After one
After five
One year
but within
After
or less
five years
fifteen years
149,102
259,712
202,881
12,214
109,851
1,709
2,192
91,414
610,152
384,410
66,972
252,730
979,715
589,000
69,164
4,601
33,865
43,388
640,297
8,684
21,224
32,724
94,250
10,442
16,808
2,583
23,727
71,897
78,695
734,547
276,457
1,051,612
667,695
803,711
Loans with fixed interest rates:
19,540
211,917
79,223
310,680
10,220
22,143
32,397
78,793
415,228
253,237
23,456
770,714
108,553
649,288
332,494
1,113,791
2,576
30,943
36,759
410,236
480,514
6,312
22,269
14,091
44,986
1,520
13,417
17,520
6,410
50,672
61,611
424,327
543,020
Total loans with fixed interest rates
114,963
699,960
394,105
447,783
1,656,811
Loans with floating interest rates:
129,562
47,795
123,658
301,015
1,994
87,708
1,675
93,569
12,621
194,924
131,173
43,516
382,234
144,177
330,427
256,506
45,708
776,818
2,025
2,922
6,629
230,061
241,637
6,370
14,912
10,455
80,159
111,896
8,922
3,391
12,313
17,317
21,225
17,084
310,220
365,846
Total loans with floating interest rates
161,494
351,652
273,590
355,928
1,142,664
The expected life of the Company’s loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.
Asset Quality
The Company’s strategy for credit risk management includes well-defined, centralized credit policies; uniform underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and management reviews of loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for credit losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. The Company utilized an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.
Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See “NOTE 4 Loans and Allowance for Credit Losses” of 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, 2024 and December 31, 2023:
42,653
34,442
9,170
98,150
59,677
7,890
1,886
106,040
61,563
Criticized loans as a percent of total loans
3.79
The following table presents information regarding nonperforming assets as of March 31, 2024 and December 31, 2023:
Nonaccrual loans
Accruing loans 90+ days past due
Total nonperforming loans
8,735
OREO and repossessed assets
Total nonperforming assets
7,348
8,767
Total restructured accruing loans
Total nonperforming assets and restructured accruing loans
Nonperforming loans to total loans
0.26
Nonperforming assets to total assets
0.17
0.22
Allowance for credit losses on loans to nonperforming loans
498
410
59
Interest income lost on nonaccrual loans approximated $651 thousand and $38 thousand for the three months ended March 31, 2024 and 2023, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended March 31, 2024 and 2023.
Allowance for Credit Losses
The allowance for credit losses, or ACL, on loans is maintained at a level management believes is sufficient to absorb expected losses in the loan portfolio over the remaining estimated life of loans in the portfolio. Under CECL accounting standard the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.
Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current loan-specific risk characteristics such as different underwriting standards, portfolio mix, delinquency level, or life of the loan, as well as changes in environmental conditions, levels of economic activity, unemployment rates, property values and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical loss information.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. The ACL on individually evaluated loans is recognized on the basis of the present value of expected future cash flows discounted at the effective interest rate, the fair value of collateral adjusted of estimated costs to sell, or observable market price as of the relevant date.
In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets. The expense for provision (recovery) for unfunded commitments for the three months ended March 31, 2024 and 2023, was ($0.8) million and $0.2 million, respectively.
The following table presents, by loan type, the changes in the allowance for credit losses on loans for the periods presented:
Balance—beginning of period
35,003
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)
Commercial loan provision
Total commercial loan provision
Consumer loan provision
Total consumer loan provision
Total provision for credit losses on loans
Balance—end of period
Average total loans
Allowance for credit losses on loans to total loans
1.31
1.41
Net charge-offs/(recoveries) to average total loans (annualized)
61
The following table summarizes the activity in the allowance for credit losses on loans for the periods indicated:
Net charge-offs (recoveries):
Commercial net charge-offs (recoveries)
119
(11)
Total commercial net charge-offs (recoveries)
Consumer net charge-offs (recoveries)
(2)
Total consumer net charge-offs (recoveries)
62
Total net charge-offs (recoveries)
Provision for credit losses on loans
Net charge-offs (recoveries) to average loans
Commercial net charge-offs (recoveries) to average loans
0.02
Total commercial net charge-offs (recoveries) to average loans
Consumer net charge-offs (recoveries) to average loans
Total consumer net charge-offs (recoveries) to average loans
Total net charge-offs (recoveries) to average loans
Allowance for credit losses on loans to nonaccrual loans
1,657
The following table presents the allocation of the allowance for credit losses on loans as of the dates presented:
Percentage
Allocated
of loans to
Allowance
total loans
41.2
40.8
In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. An ACL on off-balance sheet credit exposures is measured using similar internal and external assumptions as the ACL on loans. This allowance is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The ACL for unfunded commitments was $6.6 million and $5.4 million as of March 31, 2024 and 2023, respectively.
Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and economic conditions, and fluctuations in the Company’s customers’ own liquidity needs and may also be influenced by recent developments in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in recent bank failures.
Total deposits were $3.3 billion as of March 31, 2024, an increase of $189.4 million, or 6.1%, from December 31, 2023. Interest-bearing deposits increased $224.9 million while noninterest-bearing deposits decreased $35.6 million. The increase in total deposits was due to both seasonal inflows of public funds deposit balances and expanded commercial deposit relationships, along with time deposit and synergistic deposit growth. Noninterest-bearing deposits decreased from 23.5% of total deposits to 21.1% as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.
The following table presents the composition of the Company’s deposit portfolio as of March 31, 2024 and December 31, 2023:
Change
Percent
Noninterest-bearing demand
21.1
23.5
(35,582)
(4.9)
28.6
27.2
98,040
11.7
Money market and savings
1,196,989
36.4
1,115,256
36.0
81,733
13.9
13.3
45,167
11.0
6.1
The following table presents the average balances and rates of the Company’s deposit portfolio for the three months ended March 31, 2024 and 2023:
2.56
1.26
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, 2024:
Maturing in:
3 months or less
54,618
3 months to 6 months
79,005
6 months to 1 year
14,031
1 year or greater
3,128
150,782
The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.2 billion at March 31, 2024 These amounts were estimated based on the same methodologies used for regulatory reporting purposes.
Borrowings
Borrowings as of March 31, 2024 and December 31, 2023 were as follows:
30.6
57.8
FHLB Short-term advances
32.6
53.6
Subordinated notes
8.1
13.4
Junior subordinated debentures
8,985
8,956
Total borrowed funds
613,985
373,126
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 increased $2.5 million, or 0.7%, to $371.6 million as of March 31, 2024, compared to $369.1 million as of December 31, 2023. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.23% as of March 31, 2024, from 7.94% as of December 31, 2023. Common equity tier 1 capital to risk weighted assets increased to 11.86% as of March 31, 2024, from 11.82% as of December 31, 2023.
The Company strives to maintain an adequate capital base to support the Company’s activities in a safe and sound manner while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in the Company’s balance sheet, recognizing that unexpected loss is the common denominator of risk, and that common equity has the greatest capacity to absorb unexpected loss.
The Company is subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting policies. The Company has consistently maintained regulatory capital ratios at or above the well-capitalized standards.
At March 31, 2024 and December 31, 2023, the Company met all the capital adequacy requirements to which the Company was subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of March 31, 2024 and December 31, 2023:
Capital Ratios
Alerus Financial Corporation Consolidated
11.86
12.13
14.79
Tangible common equity to tangible assets (1)
Alerus Financial, National Association
11.71
12.87
The capital ratios for the Company and the Bank, as of March 31, 2024, as shown in the above table, were at levels above the regulatory minimums to be considered “well capitalized.” See “NOTE 18 Regulatory Matters” of the consolidated financial statements for additional information.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of the Company’s customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normal credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitments is considered immaterial for disclosure purposes.
A summary of the contractual amounts of the Company’s exposure to off-balance sheet agreements as of March 31, 2024 and December 31, 2023, was as follows:
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Liquidity
Liquidity management is the process by which the Company manages the flow of funds necessary to meet the Company’s financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of the Company’s operations, and capital expenditures. Liquidity is monitored and closely managed by the Company’s asset and liability committee, or the ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is the ALCO’s responsibility to ensure the Company has the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. The ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.
As of March 31, 2024, the Company had on balance sheet liquidity of $712.3 million, compared to $668.2 million as of December 31, 2023. 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, 2024, the Company had no federal funds purchased and $200.0 million in short-term borrowings from the FHLB. As of March 31, 2024, the Company had $1.6 billion of collateral pledged to the FHLB and based on this collateral, the Company was eligible to borrow up to an additional $898.0 million from the FHLB. In addition, the Company can borrow up to $107.0 million through the unsecured lines of credit the Company has established with four other correspondent banks.
In addition, because the Bank is “well capitalized,” the Company can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or $867.6 million, as of March 31, 2024. Management believed that the Company had adequate resources to fund all of the Company’s commitments as of March 31, 2024 and December 31, 2023.
The Company’s primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding.
Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of the recent rise in inflation and rising interest rates could place increased demand on the Company’s liquidity if the Company experiences significant credit deterioration and as the Company meets borrowers’ needs. Accordingly, management has addressed this issue by formulating a liquidity contingency plan, which has been reviewed and approved by both the Bank’s board of directors and the ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of both external and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.
66
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. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.
Interest Rate Risk
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.
Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact the Company’s assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.
Management regularly reviews the Company’s exposure to changes in interest rates. Among the factors considered are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. The ALCO reviews, on at least a quarterly basis, the interest rate risk position.
The interest-rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of the Company’s loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. The balance sheet composition and size are assumed to remain static in the simulation modeling process. The analysis provides a framework as to what the Company’s overall sensitivity position is as of the Company’s most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of the Company’s equity.
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on the Company’s net interest income as of March 31, 2024 and December 31, 2023, assuming immediate parallel moves in interest rates, is presented in the table below:
Following
12 months
24 months
+400 basis points
10.9
8.0
1.0
+300 basis points
0.5
+200 basis points
4.3
0.3
0.9
+100 basis points
3.0
0.4
−100 basis points
−0.8
−2.9
−1.0
−1.7
−200 basis points
−5.9
−2.3
−4.1
−300 basis points
−9.6
−7.2
−400 basis points
−2.2
−10.2
−5.0
−7.6
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, 2024 and December 31, 2023, assuming immediate parallel shifts in interest rates:
−8.5
−15.5
−7.1
−12.6
−3.5
−7.7
−1.2
−3.1
1.6
−0.4
−3.0
−0.3
−5.6
Operational Risk
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of the Company’s operational risk.
Compliance Risk
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose the Company to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of the Company’s banking center network, employment and tax matters.
68
Strategic and/or Reputation Risk
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various risks, including those related to the development of new products and business initiatives.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the President and Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer, its Chief Financial Officer and its Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 the Company or any of its subsidiaries are a party or to which the Company's property is the subject.
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 8, 2024.
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 the Company’s common stock for each calendar month in the first quarter of 2024:
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 1-31, 2024
902
20.62
1,000,000
February 1-29, 2024
1,856
22.39
March 1-31, 2024
33,658
22.06
36,416
22.04
Use of Proceeds from Registered Securities
Item 3 – Defaults Upon Senior Securities
Item 4 – Mine Safety Disclosures
Not Applicable.
Item 5 – Other Information
During the fiscal quarter ended March 31, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Item 6 – Exhibits
Exhibit No.
Description
3.1
Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019).
3.2
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
Executive Severance Agreement by and between Alerus Financial Corporation and Forrest Wilson, dated February 26, 2024 (incorporated by reference to Exhibit 10.32 on Form 10-K filed on March 8, 2024)
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.
32.1
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
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 2, 2024
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)