Alerus(ALRS) - 2025 Q2 - Quarterly Report

PART 1. FINANCIAL INFORMATION This section presents the Company's unaudited consolidated financial statements, management's analysis, market risk, and internal controls Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes on accounting policies Consolidated Balance Sheets This section details the Company's financial position, including assets, liabilities, and stockholders' equity, at specific reporting dates | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | Percentage Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------------------ | | Total Assets | $5,323,822 | $5,261,673 | $62,149 | 1.18% | | Cash and cash equivalents | $80,904 | $61,239 | $19,665 | 32.11% | | Investment securities | $806,544 | $866,946 | $(60,402) | -6.97% | | Loans, net | $3,985,379 | $3,932,605 | $52,774 | 1.34% | | Total Liabilities | $4,790,667 | $4,766,263 | $24,404 | 0.51% | | Total Deposits | $4,337,468 | $4,378,410 | $(40,942) | -0.93% | | Noninterest-bearing deposits | $790,300 | $903,466 | $(113,166) | -12.53% | | Interest-bearing deposits | $3,547,168 | $3,474,944 | $72,224 | 2.08% | | Short-term borrowings | $314,600 | $238,960 | $75,640 | 31.65% | | Total Stockholders' Equity | $533,155 | $495,410 | $37,745 | 7.62% | Consolidated Statements of Income This section presents the Company's financial performance over specific periods, detailing revenues, expenses, and net income | Metric (in thousands, except per share) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | Six months ended June 30, 2025 | Six months ended June 30, 2024 | Change (YoY) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | :----------------------------- | :----------------------------- | :----------- | | Total interest income | $70,424 | $53,022 | +32.82% | $138,605 | $102,060 | +35.81% | | Total interest expense | $27,392 | $29,021 | -5.61% | $54,416 | $55,840 | -2.55% | | Net interest income | $43,032 | $24,001 | +79.30% | $84,189 | $46,220 | +82.15% | | Provision for credit losses | $0 | $4,489 | -100.00% | $863 | $4,489 | -80.77% | | Total noninterest income | $31,763 | $27,371 | +16.05% | $59,395 | $52,694 | +12.72% | | Total noninterest expense | $48,438 | $38,752 | +25.00% | $98,805 | $77,771 | +27.04% | | Net income | $20,253 | $6,208 | +226.25% | $33,567 | $12,640 | +165.56% | | Basic earnings per common share | $0.79 | $0.31 | +154.84% | $1.31 | $0.64 | +104.69% | | Diluted earnings per common share | $0.78 | $0.31 | +151.61% | $1.30 | $0.63 | +106.35% | | Dividends declared per common share | $0.21 | $0.20 | +5.00% | $0.41 | $0.39 | +5.13% | Consolidated Statements of Comprehensive Income This section reports net income and other comprehensive income items, reflecting changes in equity from non-owner sources | Metric (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | Six months ended June 30, 2025 | Six months ended June 30, 2024 | Change (YoY) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | :----------------------------- | :----------------------------- | :----------- | | Net Income | $20,253 | $6,208 | +226.25% | $33,567 | $12,640 | +165.56% | | Net change in unrealized gains (losses) on debt securities | $4,586 | $(1,221) | +474.04% | $18,760 | $(4,739) | +495.99% | | Other comprehensive income (loss), net of tax | $3,407 | $(773) | +540.88% | $13,519 | $(1,374) | +1083.26% | | Total comprehensive income (loss) | $23,660 | $5,435 | +335.35% | $47,086 | $11,266 | +317.95% | Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in the Company's equity accounts over time, including net income, dividends, and stock transactions | Metric (in thousands) | Balance as of Dec 31, 2024 | Net Income (YTD) | Other Comprehensive Income (Loss) (YTD) | Common Stock Repurchased (YTD) | Common Stock Dividends (YTD) | Share-based Compensation Expense (YTD) | Vesting of Restricted Stock (YTD) | Balance as of Jun 30, 2025 | | :-------------------------------------- | :------------------------- | :--------------- | :-------------------------------------- | :----------------------------- | :--------------------------- | :------------------------------------- | :----------------------------- | :------------------------- | | Common Stock | $25,345 | — | — | $(8) | — | — | $52 | $25,389 | | Additional Paid-in Capital | $269,708 | — | — | $(168) | — | $1,247 | $(52) | $270,735 | | Retained Earnings | $273,723 | $33,567 | — | — | $(10,412) | — | — | $296,878 | | Accumulated Other Comprehensive Income (Loss) | $(73,366) | — | $13,519 | — | — | — | — | $(59,847) | | Total Stockholders' Equity | $495,410 | $33,567 | $13,519 | $(176) | $(10,412) | $1,247 | — | $533,155 | Consolidated Statements of Cash Flows This section categorizes cash inflows and outflows from operating, investing, and financing activities over specific periods | Metric (in thousands) | Six months ended June 30, 2025 | Six months ended June 30, 2024 | Change (YoY) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net cash provided (used) by operating activities | $18,409 | $(748) | +2560.29% | | Net cash provided (used) by investing activities | $(22,858) | $(127,124) | +82.02% | | Net cash provided (used) by financing activities | $24,114 | $436,120 | -94.47% | | Net change in cash and cash equivalents | $19,665 | $308,248 | -93.62% | | Cash and cash equivalents at end of period | $80,904 | $438,141 | -81.53% | Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations for the consolidated financial statements, covering accounting policies, financial instruments, and regulatory matters NOTE 1 Basis of Presentation This note describes the basis for preparing the unaudited consolidated interim financial statements in accordance with GAAP and Form 10-Q - The unaudited consolidated interim financial statements adhere to Form 10-Q instructions and GAAP, including normal recurring accruals, encompassing Alerus Financial Corporation and its subsidiaries[19][20] NOTE 2 Recent Accounting Pronouncements This note discusses recent accounting standards updates and their potential impact on the Company's financial reporting - No new ASUs have been adopted since January 1, 2025, with ASU 2023-09 on income tax disclosures effective for annual periods beginning after December 15, 2024[22][23] NOTE 3 Investment Securities This note details the Company's investment securities portfolio, including trading, available-for-sale, and held-to-maturity classifications | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Trading securities (fair value) | $1,686 | $3,309 | -49.05% | | Available-for-sale securities (fair value) | $541,152 | $588,053 | -7.97% | | Held-to-maturity securities (amortized cost) | $263,706 | $275,585 | -4.31% | | Total investment securities (fair value) | $772,656 | $825,039 | -6.35% | | Gross unrealized losses (AFS) | $(79,977) | $(98,522) | +18.82% | | Allowance for credit losses (HTM) | $127 | $131 | -3.05% | | Pledged investment securities (carrying value) | $439,100 | $340,200 | +29.07% | - The Company considers unrealized losses on AFS debt securities to be due to interest rate changes, not credit impairment, as they are primarily U.S. government-backed or investment-grade bonds, with no intent to sell before cost recovery[27] NOTE 4 Loans and Allowance for Credit Losses This note provides details on the Company's loan portfolio, including its composition, credit quality, and the allowance for credit losses | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total loans outstanding | $4,044,657 | $3,992,534 | +1.31% | | Allowance for credit losses on loans | $59,278 | $59,929 | -1.09% | | Non-mortgage loans held for sale | $50,160 | $0 | N/A | | Loans pledged | $2,900,000 | $2,900,000 | 0.00% | - The decrease in the ACL on loans was primarily due to the transfer of non-mortgage loans to held for sale, offset by loan growth and economic conditions[39][47] - The Company actively manages its loan portfolio to identify problem credits early, reassess underwriting standards, and monitors credit risk through a structured governance process[47] - As of June 30, 2025, there were no industry concentrations exceeding 10% of the Company's total loan portfolio[48] - The Company provided no modifications to loans under financial difficulty during the three and six months ended June 30, 2025 and 2024, except for Agricultural – Land loans totaling $1.457 million[65][67] NOTE 5 Land, Premises and Equipment, Net This note details the Company's property, plant, and equipment, including their carrying values and associated depreciation expenses | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Land, premises and equipment, net | $42,693 | $39,780 | +7.32% | | Depreciation expense (Q2) | $1,100 | $700 | +57.14% | | Depreciation expense (YTD) | $2,200 | $1,300 | +69.23% | - The Company's West Fargo, North Dakota branch is listed for sale for $3.8 million, with a carrying value of approximately $0.4 million, and is expected to result in a gain on sale[70] NOTE 6 Goodwill and Other Intangible Assets This note outlines the Company's goodwill and other intangible assets, including their carrying amounts and amortization expenses | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total goodwill | $85,634 | $85,634 | 0.00% | | Other intangible assets, net | $38,462 | $43,882 | -12.40% | | Amortization of total intangible assets (Q2) | $2,710 | $1,324 | +104.68% | | Amortization of total intangible assets (YTD) | $5,419 | $2,648 | +104.64% | - The Company determined there was no goodwill impairment as of June 30, 2025[72] NOTE 7 Loan Servicing This note provides information on the Company's loan servicing activities, including the unpaid principal balance of loans serviced and the fair value of servicing rights | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Unpaid principal balance of loans serviced for others | $701,000 | $728,500 | -3.83% | | Fair value of servicing rights | $7,184 | $7,918 | -9.27% | | Weighted-average remaining term (years) | 21.8 | 22.0 | -0.91% | | Prepayment speeds | 12.2% | 9.9% | +23.23% | | Discount rate | 10.5% | 10.5% | 0.00% | NOTE 8 Leases This note details the Company's lease arrangements, including right-of-use assets, lease liabilities, and associated lease costs | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Operating lease right-of-use assets | $12,535 | $13,438 | -6.72% | | Operating lease liabilities | $18,017 | $18,991 | -5.13% | | Weighted-average remaining lease term (years) | 12.5 | 12.6 | -0.79% | | Weighted-average discount rate | 4.6% | 4.5% | +2.22% | | Net lease cost (Q2) | $769 | $664 | +15.81% | | Net lease cost (YTD) | $1,579 | $1,380 | +14.42% | NOTE 9 Deposits This note provides a breakdown of the Company's deposit liabilities, distinguishing between interest-bearing and noninterest-bearing accounts | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total deposits | $4,337,468 | $4,378,410 | -0.93% | | Noninterest-bearing deposits | $790,300 | $903,466 | -12.53% | | Interest-bearing deposits | $3,547,168 | $3,474,944 | +2.08% | | Certificates of deposit > $250,000 | $219,500 | $227,400 | -3.47% | NOTE 10 Short-Term Borrowings This note details the Company's short-term borrowing activities, including Fed funds purchased and FHLB advances | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total short-term borrowings | $314,600 | $238,960 | +31.65% | | Fed funds purchased | $114,600 | $38,960 | +194.14% | | FHLB short-term advances | $200,000 | $200,000 | 0.00% | NOTE 11 Long-Term Debt This note describes the Company's long-term debt obligations, including subordinated notes and junior subordinated debentures | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total long-term debt | $59,126 | $59,069 | +0.10% | | Subordinated notes payable | $50,000 | $50,000 | 0.00% | | Junior subordinated debenture (Trust I) | $3,650 | $3,628 | +0.61% | | Junior subordinated debenture (Trust II) | $5,476 | $5,441 | +0.64% | - Subordinated notes payable have a fixed interest rate of 3.50% and mature on March 30, 2031, with a call date of March 31, 2026[87] - Junior subordinated debentures feature floating interest rates linked to three-month CME SOFR plus a spread[87] NOTE 12 Commitments and Contingencies This note discloses the Company's off-balance sheet commitments and potential contingent liabilities, including legal proceedings | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Commitments to extend credit | $1,002,440 | $1,090,114 | -8.04% | | Standby letters of credit | $17,943 | $30,033 | -40.26% | | Total off-balance sheet risk | $1,020,383 | $1,120,147 | -8.89% | | ACL on unfunded commitments | $4,800 | $7,500 | -36.00% | | Provision (recovery) for credit losses on unfunded commitments (YTD) | $(2,700) | $(500) | -440.00% | - The Company is subject to a pending DOL lawsuit related to its previously sold ESOP fiduciary services business[96] - Management believes a material loss contingency is reasonably possible but not probable, and the ultimate loss cannot be reasonably estimated due to early proceedings and lack of damage specificity[97][99] NOTE 13 Share-Based Compensation This note details the Company's share-based compensation plans, including expense recognition and shares available for issuance | Metric (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Compensation expense | $648 | $121 | +435.54% | | Shares available for issuance | 555,709 | N/A | N/A | | Unrecognized compensation expense | $4,400 | N/A | N/A | - The Company's 2019 Equity Incentive Plan authorizes up to 1,100,000 shares of common stock, with 555,709 shares still available as of June 30, 2025[101][103] - Unrecognized compensation expense of $4.4 million is expected to be recognized over a weighted-average period of 2.2 years[103] NOTE 14 Income Taxes This note provides information on the Company's income tax expense, effective tax rates, and the impact of recent tax legislation | Metric (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Income tax expense | $6,104 | $1,923 | +217.42% | | Effective tax rate | 23.2% | 23.7% | -2.11% | | Income tax expense (YTD) | $10,349 | $4,014 | +157.83% | | Effective tax rate (YTD) | 23.6% | 24.1% | -2.07% | - The President signed H.R. 1, the 'One Big Beautiful Bill Act,' into law on July 4, 2025, which includes changes to federal tax law allowing more favorable deductibility of certain business expenses[107] - The Company is currently evaluating the impact of this legislation on future periods[107] NOTE 15 Tax Credit Investments This note describes the Company's investments in tax credit projects and the associated tax benefits recognized | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Low income housing tax credit investment | $22,906 | $17,906 | +27.92% | | Unfunded Commitment | $6,907 | $3,968 | +74.09% | | Tax Benefit Recognized (Q2) | $(673) | $(370) | +81.89% | | Tax Benefit Recognized (YTD) | $(1,025) | $(751) | +36.48% | - The Company invests in qualified affordable housing projects for community reinvestment and tax credits, limiting investments to existing lending relationships and projects within its market area[108] NOTE 16 Segment Reporting This note provides financial information by reportable segment, including net income before taxes for Banking, Retirement and Benefit Services, and Wealth - The Company operates through three reportable segments: Banking, Retirement and Benefit Services, and Wealth[113][114] - Performance is assessed based on net income (loss) before taxes, with certain expenses allocated across segments[117] | Segment (in thousands) | Net Income (Loss) Before Taxes (Q2 2025) | Net Income (Loss) Before Taxes (Q2 2024) | Change (QoQ) | | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Banking | $24,672 | $6,279 | +292.94% | | Retirement and Benefit Services | $2,858 | $2,656 | +7.60% | | Wealth | $2,231 | $2,452 | -8.97% | | Corporate Administration | $(3,404) | $(3,256) | +4.54% | | Consolidated Total | $26,357 | $8,131 | +224.15% | NOTE 17 Earnings Per Share This note presents the calculation of basic and diluted earnings per common share, including the weighted-average shares outstanding | Metric (in thousands, except per share) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net income available to common stockholders | $20,048 | $6,170 | +224.93% | | Basic earnings per common share | $0.79 | $0.31 | +154.84% | | Diluted earnings per common share | $0.78 | $0.31 | +151.61% | | Weighted-average common shares outstanding (diluted) | 25,714 | 20,050 | +28.25% | - There were no antidilutive shares for the three and six months ended June 30, 2025 and 2024[124] NOTE 18 Derivative Instruments This note describes the Company's use of derivative instruments to manage market and credit risks, including their fair values and hedging designations - The Company uses derivative instruments, including interest rate swaps and forward loan sales commitments, to mitigate exposure to market and credit risks[125][127][131][132] - Some derivatives are designated as fair value or cash flow hedges, while others are not designated for hedging[125][127][131][132] | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total notional amount (hedging instruments) | $200,000 | $400,000 | -50.00% | | Total notional amount (non-hedging instruments) | $454,468 | $407,867 | +11.43% | | Total derivative assets (fair value) | $11,348 | $9,105 | +24.63% | | Total derivative liabilities (fair value) | $11,225 | $8,600 | +30.52% | | Gain (loss) from derivatives not designated as hedging (Q2) | $222 | $319 | -30.39% | - The Company is exposed to credit risk from counterparties, minimized through credit approvals, limits, monitoring, and collateral[140][141] - Agreements with counterparties contain provisions for default or failure to maintain 'well-capitalized' status, which could require settlement of obligations[142] NOTE 19 Regulatory Matters This note provides information on the Company's compliance with regulatory capital adequacy requirements and its 'well capitalized' status - Alerus Financial Corporation and its subsidiary bank met all regulatory capital adequacy requirements as of June 30, 2025, and December 31, 2024, maintaining 'well capitalized' status[150][153] | Capital Ratio | June 30, 2025 | December 31, 2024 | | :-------------------------------------- | :------------ | :---------------- | | Consolidated Common equity tier 1 capital to risk weighted assets | 10.54% | 9.91% | | Consolidated Tier 1 capital to risk weighted assets | 10.74% | 10.12% | | Consolidated Total capital to risk weighted assets | 13.10% | 12.49% | | Consolidated Tier 1 capital to average assets | 9.16% | 8.65% | | Bank Common equity tier 1 capital to risk weighted assets | 10.78% | 10.18% | | Bank Tier 1 capital to risk weighted assets | 10.78% | 10.18% | | Bank Total capital to risk weighted assets | 12.04% | 11.43% | | Bank Tier 1 capital to average assets | 9.34% | 8.69% | NOTE 20 Other Comprehensive Income (Loss) This note details the components of other comprehensive income (loss), including unrealized gains and losses on debt securities and derivatives | Metric (in thousands, after-tax) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net change in unrealized gains (losses) on debt securities | $3,435 | $(914) | +475.93% | | Net change in unrealized gains (losses) on cash flow hedges | $(110) | $(16) | +587.50% | | Net change in unrealized gains (losses) on other derivatives | $82 | $157 | -47.80% | | Other comprehensive income (loss), net of tax | $3,407 | $(773) | +540.88% | | Accumulated Other Comprehensive Income (Loss) (AOCI) | $(59,847) | $(75,029) | +20.10% | NOTE 21 Stock Repurchase Program This note provides information on the Company's stock repurchase program, including authorization and repurchase activity - The Board of Directors approved a stock repurchase program on December 12, 2023, authorizing the repurchase of up to 1,000,000 shares of common stock, effective February 18, 2024, and expiring on February 18, 2027[160][161] - No shares were repurchased under this program for the six months ended June 30, 2025[161] NOTE 22 Fair Value of Assets and Liabilities This note explains the Company's fair value measurements for assets and liabilities, categorized into a three-level hierarchy based on input observability - The Company categorizes assets and liabilities measured at fair value into a three-level hierarchy based on input priority: Level 1 for quoted prices in active markets, Level 2 for observable inputs, and Level 3 for unobservable inputs[162][163][164] | Asset/Liability Type (in thousands) | June 30, 2025 Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------------------- | :----------------------- | :------ | :------ | :------ | | Trading securities | $1,686 | $1,686 | $0 | $0 | | Available-for-sale investment securities | $541,152 | $0 | $541,152 | $0 | | Servicing rights | $7,184 | $0 | $0 | $7,184 | | Derivatives (assets) | $11,348 | $0 | $11,348 | $0 | | Derivatives (liabilities) | $11,225 | $0 | $11,225 | $0 | | Non-mortgage loans held for sale (nonrecurring) | $50,160 | $0 | $0 | $50,160 | | Collateral dependent loans (nonrecurring) | $29,722 | $0 | $0 | $29,722 | | Foreclosed assets (nonrecurring) | $751 | $0 | $0 | $751 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, discussing key drivers of income, asset quality, and capital resources General This section explains the Company's financial condition and results of operations for the reported interim periods - The discussion explains the Company's financial condition and results of operations for the three and six months ended June 30, 2025 and 2024, noting that annualized interim results may not be indicative of full-year or future periods[187] Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to inherent uncertainties and risks that could cause actual results to differ materially - This section contains forward-looking statements based on current beliefs and assumptions, subject to inherent uncertainties, risks, and changes in circumstances that could cause actual results to differ materially[188][189] - Key risk factors include economic conditions, interest rate risk, credit risk, regulatory changes, and litigation[193] Company Overview This section provides a brief overview of Alerus Financial Corporation as a commercial wealth bank and national retirement services provider - Alerus Financial Corporation is a commercial wealth bank and national retirement services provider, offering financial solutions through banking, retirement and benefit services, and wealth management[194] - The Company generates a majority of its overall revenue from noninterest income[195] Critical Accounting Policies This section discusses the Company's critical accounting policies that involve significant judgments and uncertainties - Critical accounting policies involve significant judgments and uncertainties, including the Allowance for Credit Losses (ACL) on loans, goodwill impairment, and fair value of acquired loans[196] - There have been no material changes to these policies since the Annual Report on Form 10-K for the year ended December 31, 2024[197] Recent Developments This section outlines recent significant events, including dividend declarations and asset sales - The Board of Directors declared a quarterly cash dividend of $0.21 per common share on May 22, 2025[199] - The Company's West Fargo, North Dakota branch is listed for sale for $3.8 million, with an expected gain on sale as its carrying value is approximately $0.4 million[200] Operating Results Overview This section provides a summary of key performance ratios and metrics for the Company's operating results | Performance Ratio | Q2 2025 | Q2 2024 | Change (QoQ) | | :-------------------------------------- | :------ | :------ | :----------- | | Return on average total assets | 1.53% | 0.58% | +163.79% | | Return on average common equity | 15.82% | 6.76% | +134.02% | | Net interest margin (taxable-equivalent) | 3.51% | 2.39% | +46.86% | | Efficiency ratio | 60.66% | 72.50% | -16.20% | | Diluted earnings per common share | $0.78 | $0.31 | +151.61% | | Mortgage originations (in thousands) | $134,634 | $109,254 | +23.23% | Selected Financial Data This section presents key financial metrics and balances for comparative periods, highlighting significant changes in the Company's financial position and performance | Metric (in thousands) | June 30, 2025 | June 30, 2024 | Change (YoY) | | :-------------------------------------- | :------------ | :------------ | :----------- | | Average Loans | $4,079,084 | $2,837,232 | +43.77% | | Average Deposits | $4,305,275 | $3,230,699 | +33.27% | | Period End Total Assets | $5,323,822 | $4,358,623 | +22.15% | | Period End Total Stockholders' Equity | $533,155 | $373,226 | +42.87% | | Net Interest Income (Q2) | $43,032 | $24,001 | +79.30% | | Net Income (Q2) | $20,253 | $6,208 | +226.25% | Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures This section provides reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures, used by management to analyze performance - Management uses non-GAAP financial measures to analyze performance and evaluate capital adequacy, believing these measures are frequently used by financial analysts and investors to compare banking organizations with significant goodwill or other intangible assets[204] | Non-GAAP Metric | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Tangible common equity to tangible assets | 7.87% | 7.13% | +10.38% | | Tangible book value per common share | $16.11 | $14.44 | +11.56% | | Adjusted diluted earnings per common share (Q2) | $0.72 | $0.34 | +111.76% | | Adjusted efficiency ratio (Q2) | 62.35% | 70.80% | -11.93% | Discussion and Analysis of Results of Operations This section provides a detailed narrative analysis of the Company's financial performance, explaining significant changes in income, expenses, and segment results Net Income This section analyzes the drivers of the Company's net income and diluted earnings per common share for the reported periods | Metric (in millions, except per share) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net income | $20.3 | $6.2 | +227.42% | | Diluted common share | $0.78 | $0.31 | +151.61% | | Net income (YTD) | $33.6 | $12.6 | +166.67% | | Diluted common share (YTD) | $1.30 | $0.63 | +106.35% | - The significant increase in net income was primarily driven by a $19.0 million increase in net interest income and a $4.4 million increase in noninterest income, partially offset by a $9.6 million increase in noninterest expense[210][212] Net Interest Income This section analyzes the Company's net interest income and net interest margin, explaining changes in interest income and expense | Metric (in millions) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net interest income | $43.0 | $24.0 | +79.17% | | Net interest margin (tax-equivalent) | 3.51% | 2.39% | +46.86% | | Net interest income (YTD) | $84.2 | $46.2 | +82.25% | | Net interest margin (tax-equivalent, YTD) | 3.46% | 2.35% | +47.23% | - The increase in net interest income was primarily due to a $17.4 million increase in interest income, as average earning assets increased by $1.0 billion and the average interest earning asset yield increased by 43 basis points[214][216] - Interest expense decreased by $1.6 million due to an 85 basis point decline in the average rate paid on interest-bearing liabilities, partially offset by a $714.9 million increase in the average balance of interest-bearing liabilities[214][216] - These changes were largely influenced by the HMNF transaction and organic loan and deposit growth[214][216] Provision for Credit Losses This section discusses the Company's provision for credit losses, explaining the factors contributing to its changes | Metric (in millions) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Provision for credit losses | $0.0 | $4.5 | -100.00% | | Provision for credit losses (YTD) | $0.9 | $4.5 | -80.00% | - The decrease in the provision for credit losses was primarily driven by changes in net loans and a decrease in the required reserve for unfunded commitments[225][226] Noninterest Income This section analyzes the components of the Company's noninterest income, highlighting significant increases from various sources | Metric (in millions) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Total noninterest income | $31.8 | $27.4 | +16.06% | | Gain on sale of non-mortgage loan | $2.1 | $0.0 | N/A | | Wealth revenue | $7.4 | $6.4 | +15.63% | | Mortgage banking revenue | $3.7 | $2.6 | +42.31% | - The increase in noninterest income was primarily driven by a $2.1 million gain on the sale of a PCD hospitality loan, a 15.8% increase in wealth revenue due to improved markets and the HMNF transaction, and a 43.0% increase in mortgage banking revenue from a higher gain on sale rate and increased mortgage servicing revenue due to the HMNF transaction[227][228] Noninterest Expense This section examines the Company's noninterest expenses, detailing the factors contributing to their changes | Metric (in millions) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Total noninterest expense | $48.4 | $38.8 | +24.74% | | Compensation | $24.3 | $20.3 | +19.70% | | Employee taxes and benefits | $6.6 | $5.1 | +29.41% | | Intangible amortization expense | $2.7 | $1.3 | +107.69% | | Occupancy and equipment expense | $2.6 | $1.8 | +44.44% | - The increase in noninterest expense was primarily driven by higher compensation, employee taxes and benefits, intangible amortization, and occupancy and equipment expenses, largely due to increased headcount and branch footprint resulting from the HMNF transaction[230][231] Income Tax Expense This section analyzes the Company's income tax expense and effective tax rate for the reported periods | Metric (in millions) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Change (QoQ) | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Income tax expense | $6.1 | $1.9 | +221.05% | | Pre-tax income | $26.4 | $8.1 | +225.93% | | Effective tax rate | 23.2% | 23.7% | -2.11% | Segment Reporting This section provides a detailed breakdown of financial performance by the Company's operating segments - The Banking segment's net income before taxes significantly increased, while Retirement and Benefit Services saw a modest increase, and Wealth experienced a slight decrease[239][241][244] | Segment (in thousands) | Net Income Before Taxes (Q2 2025) | Net Income Before Taxes (Q2 2024) | Change (QoQ) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Banking | $21,268 | $5,530 | +284.59% | | Retirement and Benefit Services | $2,858 | $2,656 | +7.60% | | Wealth | $2,231 | $2,452 | -8.97% | Financial Condition This section details the Company's balance sheet changes, highlighting the increase in total assets driven by loan growth and the composition of its investment securities and diversified loan portfolio Overview This section provides a high-level summary of the changes in the Company's total assets and their primary drivers - Total assets increased by $62.1 million, or 1.2%, to $5.3 billion as of June 30, 2025, primarily due to a $52.1 million increase in loans held for investment and a $50.2 million non-cash transfer to non-mortgage loans held for sale, partially offset by decreases in investment securities[245] Investment Securities This section describes the composition and changes in the Company's investment securities portfolio | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total available-for-sale investment securities | $541,152 | $588,053 | -7.97% | | Total held-to-maturity investment securities | $231,504 | $236,986 | -2.31% | | Total investment securities | $772,656 | $825,039 | -6.35% | - The investment portfolio composition reflects the Company's strategy for liquidity, interest rate risk balance, and revenue generation, with actual maturities potentially differing from contractual due to call or prepayment rights[247] Loans This section provides a detailed analysis of the Company's loan portfolio, including its diversification across various segments and associated risk management | Loan Segment (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total loans outstanding | $4,044,657 | $3,992,534 | +1.31% | | Commercial and industrial | $675,892 | $666,727 | +1.37% | | Total commercial real estate | $2,013,869 | $1,996,243 | +0.88% | | Total agricultural | $134,326 | $124,307 | +8.06% | | Total consumer | $1,220,570 | $1,205,257 | +1.27% | | Residential real estate (RRE) portfolio | $1,179,566 | $1,161,135 | +1.59% | - The loan portfolio is diversified across commercial and industrial, commercial real estate, agricultural, and consumer loans[250] - Commercial real estate loans are monitored for market conditions, cash flow, and collateral, with policies reviewed semi-annually[253][254] - The RRE portfolio has minimal direct exposure to subprime mortgages[262] Asset Quality This section outlines the Company's credit risk management, including loan risk ratings, nonperforming assets, and the Allowance for Credit Losses (ACL) Credit Quality Indicators This section discusses the Company's credit quality indicators, including risk ratings for loans and trends in criticized loans | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total criticized loans | $212,592 | $198,281 | +7.22% | | Criticized loans as a percent of total loans | 5.26% | 4.97% | +5.84% | - Loans are assigned risk ratings (pass, special mention, substandard, doubtful, loss) based on borrower's ability to service debt, financial condition, and economic trends[266] - Criticized loans increased, indicating ongoing monitoring of credit risk[267] Nonperforming Assets This section details the Company's nonperforming assets, including nonperforming loans and their ratios to total loans and assets | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total nonperforming loans | $51,478 | $62,886 | -18.14% | | Total nonperforming assets | $52,229 | $62,886 | -16.94% | | Nonperforming loans to total loans | 1.27% | 1.58% | -19.62% | | Nonperforming assets to total assets | 0.98% | 1.20% | -18.33% | | ACL on loans to nonperforming loans | 115% | 95% | +21.05% | - Nonperforming assets decreased, driven by a reduction in nonaccrual loans and accruing loans 90+ days past due[268] - Interest income lost on nonaccrual loans was approximately $2.3 million for the six months ended June 30, 2025[268] Allowance for Credit Losses This section explains the methodology for estimating the Allowance for Credit Losses (ACL) and its changes, including net charge-offs | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | ACL on loans at end of period | $59,278 | $59,929 | -1.09% | | Net charge-offs (recoveries) (Q2) | $3,767 | $2,522 | +49.37% | | Net charge-offs (recoveries) (YTD) | $4,174 | $2,580 | +61.78% | | ACL on loans to total loans | 1.47% | 1.31% | +12.21% | | ACL on loans to nonaccrual loans | 115.61% | 138.79% | -16.70% | | Net charge-offs/(recoveries) to average total loans (annualized, Q2) | 0.37% | 0.36% | +2.78% | - The ACL on loans is maintained to absorb expected losses, estimated using historical loss experience adjusted for current conditions and forecasts[269][270] - A $3.4 million charge-off in Q2 2025 was related to the sale and transfer of non-owner occupied commercial real estate hospitality loans[272] Deposits This section analyzes the Company's deposit portfolio, noting a slight decrease in total deposits due to seasonal outflows and reduced synergistic deposits, partially offset by an increase in brokered deposits | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total deposits | $4,337,468 | $4,378,410 | -0.93% | | Noninterest-bearing demand | $790,300 | $903,466 | -12.53% | | Interest-bearing demand | $1,214,597 | $1,220,173 | -0.46% | | Money market and savings | $1,534,102 | $1,547,806 | -0.88% | | Time deposits | $798,469 | $706,965 | +12.94% | | Total uninsured deposits | $1,400,000 | $1,500,000 | -6.67% | - The decrease in total deposits was primarily due to seasonal outflows from public funds depositors and a decrease in clearing and synergistic deposits, partially offset by an increase in brokered deposit balances to diversify funding structure[277] Borrowings This section details the Company's borrowed funds, showing an increase driven by Fed funds purchased, while FHLB short-term advances remained constant | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Total borrowed funds | $373,726 | $298,029 | +25.47% | | Fed funds purchased | $114,600 | $38,960 | +194.14% | | FHLB short-term advances | $200,000 | $200,000 | 0.00% | | Subordinated notes | $50,000 | $50,000 | 0.00% | | Junior subordinated debentures | $9,126 | $9,069 | +0.63% | Capital Resources This section highlights the growth in stockholders' equity and the Company's strong capital ratios, which exceed regulatory minimums and reflect its 'well capitalized' status | Capital Metric | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Stockholders' equity | $533,200 | $495,400 | +7.63% | | Tangible common equity to tangible assets | 7.87% | 7.13% | +10.38% | | Common equity tier 1 capital to risk weighted assets (Consolidated) | 10.54% | 9.91% | +6.36% | | Common equity tier 1 capital to risk weighted assets (Bank) | 10.78% | 10.18% | +5.89% | - The Company consistently maintains regulatory capital ratios at or above the 'well-capitalized' standards, ensuring an adequate capital base to support its activities and absorb unexpected losses[287][289] Off-Balance Sheet Arrangements This section summarizes the Company's off-balance sheet credit-related commitments, which primarily consist of commitments to extend credit and standby letters of credit | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | Commitments to extend credit | $1,002,440 | $1,090,114 | -8.04% | | Standby letters of credit | $17,943 | $30,033 | -40.26% | | Total off-balance sheet arrangements | $1,020,383 | $1,120,147 | -8.89% | - The credit risks associated with these commitments are managed with the same policies as on-balance sheet loans, and collateral may be required based on creditworthiness[291] Liquidity This section describes the Company's liquidity management process, which involves monitoring funds to meet financial commitments and having contingency plans for potential funding crises | Metric (in millions) | June 30, 2025 | December 31, 2024 | Change | | :-------------------------------------- | :------------ | :---------------- | :----- | | On-balance sheet liquidity | $505.9 | $579.0 | -12.62% | | Off-balance sheet liquidity | $2,200.0 | $2,300.0 | -4.35% | | Available FHLB borrowing capacity | $1,100.0 | N/A | N/A | | Unsecured lines of credit | $127.0 | N/A | N/A | - Liquidity is managed by the ALCO, which ensures sufficient funds for normal operations and maintains a contingency funding policy for stress events[293] - The Bank, being 'well capitalized,' can accept wholesale deposits up to 20.0% of total assets[297] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the Company's exposure to market risk, primarily interest rate risk, and outlines its management strategies and other operational and compliance risks Interest Rate Risk This section details the Company's management of interest rate risk through monitoring, simulation models, and sensitivity analysis - Interest rate risk is actively managed through monitoring loan and deposit flows, investment and funding activities, and using net interest income simulation models and economic value of equity sensitivity analysis to capture short-term and long-term exposure[301][304][305] | Interest Rate Shift | Net Interest Income Sensitivity (12 months, June 30, 2025) | Net Interest Income Sensitivity (12 months, December 31, 2024) | | :-------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | | +400 basis points | 0.5% | 1.7% | | +300 basis points | 0.3% | 1.2% | | +200 basis points | 0.5% | 1.1% | | +100 basis points | 0.4% | 0.6% | | -100 basis points | 0.6% | 0.4% | | -200 basis points | 1.0% | 0.7% | | -300 basis points | 1.8% | 0.8% | | -400 basis points | 4.3% | 4.0% | | Interest Rate Shift | Economic Value of Equity Sensitivity (June 30, 2025) | Economic Value of Equity Sensitivity (December 31, 2024) | | :-------------------------------------- | :--------------------------------------------------- | :--------------------------------------------------- | | +400 basis points | -2.5% | -6.2% | | +300 basis points | -4.0% | -4.8% | | +200 basis points | -1.6% | -2.4% | | +100 basis points | -0.2% | -0.8% | | -100 basis points | -0.5% | 0.1% | | -200 basis points | -2.2% | -0.9% | | -300 basis points | -6.6% | -3.6% | | -400 basis points | -13.8% | -8.5% | Operational Risk This section defines operational risk and outlines the Company's strategies for managing it through internal controls and processes - Operational risk, defined as loss from human behavior, failed internal systems, or external influences, is managed through continuous strengthening of internal controls, enterprise risk management, operating processes, and employee awareness[311] Compliance Risk This section addresses compliance risk, which is the potential for regulatory sanctions or financial loss due to non-compliance with rules and regulations - Compliance risk, the risk of regulatory sanctions or financial loss from non-compliance with rules and regulations, is addressed across various activities including anti-money laundering, privacy, community reinvestment, and fair lending[312] Strategic and/or Reputation Risk This section discusses strategic and/or reputation risk, encompassing losses from impaired reputation or failure to execute business plans - Strategic and/or reputation risk, encompassing loss from impaired reputation or failure to execute business plans, is mitigated through initiatives that enhance management's understanding and reporting of risks related to new products and business initiatives[313] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures, concluding their effectiveness, and outlines the remediation of a previously identified material weakness Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the Company's disclosure controls and procedures as evaluated by management - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025, providing reasonable assurance for timely and accurate reporting of information required under the Exchange Act[314] Changes in Internal Control over Financial Reporting This section describes any material changes in the Company's internal control over financial reporting during the period - A material weakness related to goodwill calculation identified in the 2024 Form 10-K has been addressed through the design and implementation of new control activities and employee training on business combination accounting[316] - No other material changes to internal control over financial reporting occurred during the quarter[316] PART II—OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, other information, exhibits, and signatures Item 1. Legal Proceedings This section refers to the detailed disclosures on legal proceedings, litigation, and regulatory actions provided in Note 12 of the consolidated financial statements - For information regarding litigation, other disputes, and regulatory proceedings, refer to the 'Legal Contingencies' section in Note 12 of the consolidated financial statements[318] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - 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 14, 2025[319] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities and details common stock repurchases made for withholding taxes on restricted stock awards - No unregistered sales of equity securities occurred[320] - The Company repurchased 67,826 shares of common stock in May 2025 at an average price of $21.59 per share, primarily for withholding taxes on vesting restricted stock awards[321] - No shares were repurchased under the publicly announced stock repurchase program during the second quarter of 2025[322] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[324] Item 4. Mine Safety Disclosures This section states that the disclosures related to mine safety are not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[325] Item 5. Other Information This section reports that no directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2025 - No directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2025[326] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and XBRL data files - The exhibits include the Company's Third Amended and Restated Certificate of Incorporation, Second Amended and Restated Bylaws, CEO and CFO certifications (Rule 13(a)-14(a) and 18 U.S.C. Section 1350), and iXBRL taxonomy files[327] Signatures This section contains the required signatures of the Company's President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, certifying the filing of the report - The report was signed on August 5, 2025, by Katie A. Lorenson, President and Chief Executive Officer, and Alan A. Villalon, Executive Vice President and Chief Financial Officer[331]