Alerus(ALRS) - 2021 Q4 - Annual Report

PART I Item 1. Business Alerus Financial Corporation is a diversified financial services company offering banking, retirement and benefit services, wealth management, and mortgage solutions, emphasizing a client-centric 'One Alerus' approach. - Total Assets were $3.4 billion as of December 31, 2021[11] - Total Loans were $1.8 billion as of December 31, 2021[11] - Total Deposits were $2.9 billion as of December 31, 2021[11] - Stockholders' Equity was $359.4 million as of December 31, 2021[11] - Retirement & Benefit Services AUA/AUM totaled $36.7 billion as of December 31, 2021[11] - Wealth Management AUA/AUM totaled $4.0 billion as of December 31, 2021[11] - Mortgage Originations for FY2021 were $1.8 billion[11] - Alerus Financial Corporation is a diversified financial services company providing banking, retirement and benefit services, wealth management, and mortgage solutions, with a majority of revenue from noninterest income[10][12] - On December 8, 2021, the company entered into a merger agreement with MPB BHC, Inc., with MPB merging into Alerus, valued at approximately $85.3 million[14] - The 'One Alerus' initiative, launched in 2017, focuses on providing integrated, high-tech, high-touch financial solutions through a primary point of contact and an integrated client-access portal (My Alerus)[16][17][18] Company Overview and History Alerus Financial Corporation, founded in 1879, evolved into a diversified financial services company through organic and acquisition growth, rebranding in 2000. - Alerus Financial Corporation, founded in 1879 as the Bank of Grand Forks, rebranded in 2000 to reflect its evolution into a diversified financial services company, experiencing significant organic and acquisition growth[10][13] Recent Developments Alerus Financial Corporation entered a merger agreement with MPB BHC, Inc. on December 8, 2021, valued at approximately $85.3 million. - Alerus Financial Corporation entered into an Agreement and Plan of Merger with MPB BHC, Inc. on December 8, 2021, where MPB will merge into Alerus, with an aggregate transaction value of approximately $85.3 million[14] Our Business Model and Products and Services The company employs a client-centric 'One Alerus' business model, providing integrated financial solutions and proactive advice to targeted business and consumer segments. - The company's client-centric business model, driven by the 'One Alerus' initiative, targets specific business and consumer segments with complex financial needs, offering proactive advice and an integrated client-access portal (My Alerus)[15][16][17][18][20] Banking The banking segment provides diverse commercial and consumer lending and deposit products, with core deposits representing 96.9% of total deposits as of December 31, 2021. - The banking segment offers diverse commercial and consumer lending products, including real estate and industrial loans, and a broad range of deposit products, with core deposits totaling $2.8 billion (96.9% of total deposits) as of December 31, 2021[21][22][23] - Synergistic deposits from retirement and benefit services and wealth management segments totaled $669.0 million, including $153.2 million from HSA deposits, as of December 31, 2021[23] Retirement and Benefit Services The retirement and benefit services segment offers nationwide administration, investment advisory, and various benefit program services, including ESOP, payroll, HSA, and FSA. - The retirement and benefit services business provides nationwide retirement plan administration, investment advisory, ESOP fiduciary, payroll, HSA, FSA, and government health insurance program services[25] Wealth Management The wealth management division provides comprehensive financial planning, investment management, trust, estate administration, custody, and brokerage services. - The wealth management division offers financial planning, investment management (including proprietary Dimension and Blueprint strategies), personal and corporate trust services, estate administration, custody, and brokerage services[26] Mortgage The mortgage business originates first and second residential mortgage loans, primarily for purchases and refinances, with a significant portion from the Twin Cities MSA. - The mortgage business originates first and second mortgage loans, primarily for residential property purchases (51.2% in 2021) and refinances (48.8%), with 90.2% of originations from the Twin Cities MSA in 2021[27] - The company originates and sells servicing-released whole loans in the secondary market, with $1.8 billion in mortgage originations for the year ended December 31, 2021[27][29] Our Banking Market Areas The company's primary banking markets are concentrated in North Dakota, Minnesota's Twin Cities MSA, and Arizona's Phoenix MSA. - Primary banking markets include North Dakota (Grand Forks, Fargo, West Fargo, Northwood), Minnesota (Twin Cities MSA), and Arizona (Scottsdale, Mesa)[30][31][33][34] - The Bank of North Dakota expands lending capacity and offers additional financing options and deposit management for municipal/county governments without collateral requirements[32] Our National Market The retirement and benefit services segment operates nationally, serving clients across all 50 states under a dedicated National Market President. - The retirement and benefit services business serves clients in all 50 states, with a formalized 'National Market' overseen by a National Market President[35] National Market Metrics (as of Dec 31, 2021) | Metric | Value (as of Dec 31, 2021) | | :----------------------------------- | :------------------------- | | Retirement & Benefit Services AUA/AUM | $28.4 billion (77.4% of total) | | Wealth Management AUA/AUM | $577.9 million (14.3% of total) | | Loans | $38.6 million (2.2% of total) | | Deposits | $671.3 million (23.0% of total) | Competition Alerus operates in a highly competitive financial services industry, competing with diverse institutions across banking, mortgage, wealth management, and record-keeping sectors. - The financial services industry is highly competitive, with Alerus competing against banks, nonbank institutions, and online businesses across commercial and consumer banking, mortgages, wealth advisory, investment management, trust, and record-keeping[38] - Alerus differentiates itself through an integrated, high-touch service offering and a sophisticated relationship-oriented approach[38] Human Capital Resources The company fosters a culture based on core values, supported by a Talent Management Program focused on leadership development and continuous employee training. Employee Count (approx.) | Employee Category | Count (approx.) | | :-------------------------- | :-------------- | | Total Employees | 836 | | Full-time Employees | 779 | | Part-time Employees | 57 | | Male | 284 | | Female | 552 | | White | 758 | | Other Ethnicities | 78 | Employees by Operating Segment | Operating Segment | Employees |\n| :-------------------------- | :-------- | | Banking | 94 | | Mortgage | 111 | | Retirement and Benefits | 224 | | Wealth Management | 21 | | Sales and Service | 222 | | Client Service Center | 35 | | Staff Areas (HR, IT, Audit, Legal, Compliance, Executives) | 129 | - The company's culture is built on core values like 'Do the Right Thing' and 'Cherish People', supported by a Talent Management Program focused on leadership essentials and continuous development through Alerus University and other programs[40][41][42] - Compensation programs are designed to align with company performance, balancing short-term and long-term incentives, and include a comprehensive benefits package[43][44] Corporate Information Alerus Financial Corporation's principal executive office is in Grand Forks, North Dakota, with SEC filings available on its investor relations website. - Alerus Financial Corporation's principal executive office is in Grand Forks, North Dakota[45] - Its SEC filings are accessible via its investor relations website[47] SUPERVISION AND REGULATION Alerus Financial Corporation and its subsidiary, Alerus Financial, N.A., are extensively regulated by federal agencies, with regulations primarily aimed at protecting depositors rather than stockholders. - Alerus Financial Corporation and its subsidiary, Alerus Financial, N.A., are extensively regulated by federal agencies including the Federal Reserve, OCC, FDIC, and CFPB, with regulations primarily aimed at protecting depositors rather than stockholders[48][49] - The company operates under a comprehensive supervisory framework that includes regular examinations, capital requirements (Basel III Rule), and prompt corrective action provisions based on capital levels[50][51][55][56][59][60][61][64] COVID-19 Pandemic Federal bank regulatory agencies provided guidance and relief measures to banks during the COVID-19 pandemic, including capital buffer use and revised examination methods. - Federal bank regulatory agencies issued guidance and took steps to help banks navigate the COVID-19 pandemic, including encouraging capital buffer use, permitting reporting extensions, and revamping examination methods to off-site reviews[52] The Role of Capital Banks must maintain minimum capital levels under Basel III rules, which enhanced capital quantity and quality by introducing Common Equity Tier 1 Capital requirements. - Banks are required to hold minimum capital levels based on Basel III rules, which increased the quantity and quality of capital, introducing Common Equity Tier 1 Capital and more stringent criteria for other capital forms[54][55][56][57] Basel III Minimum Capital Ratios | Capital Ratio | Requirement | | :---------------------------- | :---------- | | Common Equity Tier 1 Capital | 4.5% | | Tier 1 Capital | 6% | | Total Capital (Tier 1 + Tier 2) | 8% | | Leverage Ratio (Tier 1 to total average assets) | 4% | - To make capital distributions without restriction, institutions must maintain an additional 2.5% Common Equity Tier 1 Capital as a capital conservation buffer, increasing minimum ratios to 7% (CET1), 8.5% (Tier 1), and 10.5% (Total Capital)[60] - As of December 31, 2021, both the Bank and the Company were well-capitalized and in compliance with the capital conservation buffer[63] Prompt Corrective Action Federal banking regulators possess broad 'prompt corrective action' powers, enabling interventions from capital restoration plans to receiver appointments based on an institution's capital levels. - Federal banking regulators have broad powers for 'prompt corrective action' based on an institution's capital level, ranging from requiring capital restoration plans to appointing a receiver[64] Community Bank Capital Simplification The Regulatory Relief Act permits community banks under $10 billion in assets to adopt a simplified Community Bank Leverage Ratio framework, requiring a CBLR exceeding 9%. - The Regulatory Relief Act allows community banks with less than $10 billion in assets to elect a simplified Community Bank Leverage Ratio (CBLR) framework, requiring a CBLR greater than 9%[65] Supervision and Regulation of the Company As a financial holding company, Alerus Financial Corporation is regulated by the Federal Reserve, mandated to provide financial and managerial strength to its subsidiary bank. - Alerus Financial Corporation, as a financial holding company, is regulated by the Federal Reserve under the BHCA, requiring it to act as a source of financial and managerial strength to its subsidiary bank[66] - Financial holding companies can engage in a wider range of nonbanking activities, including securities and insurance, provided both the company and its bank are well-capitalized and well-managed, and the bank has a satisfactory CRA rating[72] - The company's ability to pay dividends is subject to Delaware General Corporation Law and Federal Reserve policies, which may restrict payments if earnings are insufficient or capital ratios are not met[74][75] Supervision and Regulation of the Bank Alerus Financial, N.A., a national bank, is chartered by the OCC and subject to extensive supervision and enforcement by the OCC, FDIC, and other federal regulations. - Alerus Financial, N.A., a national bank, is chartered by the OCC and is subject to examination, supervision, and enforcement by the OCC, FDIC, and other federal laws like ERISA for its trust activities[81][82][83][84] - The Bank is required to pay FDIC deposit insurance premiums based on a risk-based assessment system, with the reserve ratio at 1.27% as of September 30, 2021[85][89] - The Federal Reserve reduced all reserve requirements to zero percent in March 2020, freeing banks from mandated reserve maintenance and allowing them to loan or invest previously unavailable funds[106] - The Bank did not exceed the interagency guidelines for Commercial Real Estate (CRE) lending concentrations as of December 31, 2021[109][110] Item 1A. Risk Factors Investing in Alerus Financial Corporation's common stock involves significant risks across credit, operational, strategic, reputational, liquidity, funding, legal, accounting, compliance, and market categories. - The company's business is highly dependent on managing credit risk, with 72.6% of its loan portfolio comprised of real estate loans as of December 31, 2021, making it vulnerable to real estate market fluctuations[120][134] - Noninterest income, a significant portion of total revenue (62.9% in 2021), is susceptible to economic and market conditions, potentially impacting fee-based services from retirement, wealth management, and mortgage segments[154][155] - The company faces operational risks including fraudulent activity, information security breaches, and reliance on third-party technology systems, which could lead to financial losses, reputational damage, or regulatory scrutiny[172][173][176][177][178] - Liquidity risk is a concern, with a high concentration of large depositors (16.4% of total deposits from 10 largest relationships as of December 31, 2021) and dependence on Bank dividends for parent company cash flow[244][245] - The company is subject to extensive and evolving regulatory frameworks, including Basel III capital requirements, consumer protection laws, and anti-money laundering statutes, with non-compliance potentially leading to sanctions or increased costs[272][273][275][285][287][288][290] Summary Key risks encompass credit, operational, strategic, reputational, liquidity, funding, legal, accounting, compliance, and COVID-19 pandemic-related factors, impacting loan portfolios, fee-based services, growth, and regulatory adherence. - Key risks include credit risks (managing loan losses, economic conditions, real estate market health, loan concentrations), operational/strategic/reputational risks (fee-based services impact, growth strategies, cybersecurity, LIBOR transition, key personnel retention), liquidity/funding risks (managing liquidity, depositor concentrations, dividend dependence), legal/accounting/compliance risks (risk management framework, litigation, regulatory changes), and COVID-19 pandemic-related risks[113][115][116][117][118][119] Credit Risks The company's business is exposed to credit risks from borrower defaults and collateral insufficiency, requiring robust credit risk management, underwriting, and adequate allowance for loan losses. - The company's business relies on effective credit risk management, with exposure to borrower defaults and collateral insufficiency, necessitating disciplined underwriting and adequate allowance for loan losses[120][121] Allowance for Loan Losses (as of Dec 31, 2021) | Metric | Value | | :----------------------------------- | :--------- | | Allowance for Loan Losses to Total Loans | 1.80% | | Allowance for Loan Losses to Nonperforming Loans | 1,437.05% | - The future implementation of the CECL accounting standard (effective January 1, 2023, for Alerus) is expected to increase allowance levels and data collection requirements, potentially impacting financial condition and results[124][125][126] - A significant portion of the loan portfolio (72.6% at Dec 31, 2021) is real estate-backed, making the company vulnerable to declines in real estate values and liquidity, and environmental factors[134] - Commercial loans (24.8% of portfolio at Dec 31, 2021) and commercial real estate loans (36.4% of portfolio, 186.9% of Bank's total capital) carry higher risks due to dependence on business operations and real estate market health[138][140] Nonperforming Assets (as of Dec 31, 2021) | Metric | Value | | :----------------------------------- | :--------- | | Nonperforming Loans | $2.2 million (0.12% of total loans) | | Nonperforming Assets | $3.1 million (0.09% of total assets) | | Accruing Loans 31-89 days delinquent | $2.3 million | Operational, Strategic and Reputational Risks Operational, strategic, and reputational risks include susceptibility of noninterest income to market conditions, challenges in growth strategies, and dependence on key personnel. - Noninterest income, primarily from fee-based services, is susceptible to economic/market conditions and competition, with the retirement and benefit services business experiencing $6.0 billion in AUA/AUM outflows in 2021[154][155] - The company's organic growth strategy relies on leveraging business lines and enhancing brand awareness, while acquisition growth is crucial for market share expansion, as evidenced by the MPB BHC, Inc. acquisition[160][161][162] - Acquisitions pose financial, execution, and operational risks, including integrating operations, potential unknown liabilities, and the inability to realize expected benefits[163][164] - The company is highly dependent on its executive management team and key personnel; loss of these individuals or inability to attract/retain qualified staff could impair strategic plans and client relationships[188][189][190][191][192] - A transition away from LIBOR to alternative reference rates like SOFR could negatively affect income, expenses, and the value of financial contracts due to calculation differences and required system/model changes[181][182][183][184] Liquidity and Funding Risks The company faces liquidity and funding risks from managing excess funds, potential negative impacts on net interest margin, and reliance on client deposits and Bank dividends. - Liquidity is critical, with challenges in deploying excess funds and potential negative impacts on net interest margin due to increased liquidity and loan competition[236] - The company's primary funding source is client deposits, which can decrease if alternative investments are perceived as more attractive, potentially increasing funding costs[237] - A high concentration of large depositors (16.4% of total deposits from 10 largest relationships at Dec 31, 2021) poses a liquidity risk if significant withdrawals occur[244] - The company's ability to pay dividends and service debt is largely dependent on dividends from the Bank, which are subject to federal and state regulatory limitations[245] Legal, Accounting and Compliance Risks Legal, accounting, and compliance risks stem from the company's risk management framework, extensive financial reporting standards, and the highly regulated financial services industry. - The company's risk management framework, based on management assumptions and judgment, may not effectively mitigate all risks or losses, potentially leading to unexpected losses or adverse regulatory consequences[254] - As a public company, Alerus is subject to significant financial reporting standards (GAAP, SEC rules) and Sarbanes-Oxley Act requirements, necessitating enhanced internal controls and potentially increasing compliance costs[260][262] - The company is exposed to increased litigation and regulatory risks due to the highly regulated financial services industry, with potential for significant fines, penalties, or business restrictions from enforcement actions[265][266] - Goodwill ($31.5 million at Dec 31, 2021) from acquisitions is tested annually for impairment, and any impairment charge could negatively impact financial condition and results[271] - Compliance with privacy, information security, and data protection laws (e.g., Gramm-Leach-Bliley Act, CCPA) could increase costs and restrict business activities, with non-compliance leading to investigations, fines, or reputational damage[293][294][295][314][315][316] COVID-19 Pandemic-Related Risks The COVID-19 pandemic continues to disrupt the U.S. economy and banking industry, posing uncertain impacts on client businesses, employment, and operational continuity. - The COVID-19 pandemic continues to disrupt the U.S. economy and banking industry, impacting client businesses, consumer confidence, employment, and vendor services, with the ultimate impact on Alerus remaining uncertain[321][322][323] - The pandemic could create widespread business continuity issues, affecting employee and client engagement in financial transactions, and potentially leading to personnel shortages or disruptions if third-party vendors are impacted[324][325] Market and Interest Rate Risks The company's earnings and cash flows are exposed to market and interest rate risks, potentially impacting net interest income, asset values, and funding costs. - The company's earnings and cash flows are subject to interest rate risk, with fluctuations potentially affecting net interest income, values of managed assets, and funding costs[326][328] - The balance sheet was liability sensitive as of December 31, 2021, indicating that an increase in interest rates would negatively impact net interest income over the next 12 and 24 months[510] Estimated Impact on Net Interest Income (Immediate Parallel Rate Shifts) | Rate Shift | 12 months following (Dec 31, 2021) | 24 months following (Dec 31, 2021) | | :---------------- | :--------------------------------- | :--------------------------------- | | +400 basis points | -8.2% | -2.9% | | +300 basis points | -6.1% | -2.3% | | +200 basis points | -4.1% | -1.8% | | +100 basis points | -2.0% | -1.3% | | -100 basis points | -10.6% | -15.7% | - The company could recognize losses on its $1.2 billion securities portfolio (35.5% of total assets at Dec 31, 2021) if interest rates increase or economic conditions deteriorate, leading to market value decreases or other-than-temporary impairments[332] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC. Item 2. Properties Alerus Financial Corporation's corporate headquarters is in Grand Forks, North Dakota, and it operates 18 offices across North Dakota, Minnesota, and Arizona. - Alerus Financial Corporation's corporate headquarters is located at 401 Demers Avenue, Grand Forks, North Dakota[343] - The company operates 18 offices: 7 full-service banking offices in North Dakota, 6 in the Twin Cities MSA (Minnesota), and 2 in the Phoenix MSA (Arizona), plus 3 retirement and benefits services offices in Minnesota, Colorado, and Michigan[343] - As of December 31, 2021, seven office properties were owned and eleven were leased, reflecting a shift towards technology solutions and a hybrid work environment, leading to the closure of nine office locations in 2020[343] Item 3. Legal Proceedings Neither Alerus Financial Corporation nor its subsidiaries are currently party to any material pending legal proceedings, beyond routine litigation incidental to the Bank's business. - The Company and its subsidiaries are not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank's business[344] - No proceedings by governmental authorities are contemplated against the Company or its subsidiaries[346] Item 4. Mine Safety Disclosures This item is not applicable to Alerus Financial Corporation. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alerus Financial Corporation's common stock trades on Nasdaq under 'ALRS', with 231 holders of record and an estimated 2,313 beneficial holders as of February 28, 2022. - Alerus Financial Corporation's common stock trades on the Nasdaq Stock Market under the symbol 'ALRS'[351] Common Stock Holders (as of Feb 28, 2022) | Category | Count | | :------------------- | :---- | | Holders of Record | 231 | | Estimated Beneficial Holders | 2,313 | - The Board of Directors approved a stock repurchase program on February 18, 2021, authorizing the repurchase of up to 770,000 shares over 36 months; no shares were repurchased under this program as of December 31, 2021[350][367] - The company has a policy of paying quarterly dividends, with a declared dividend of $0.16 per common share on January 19, 2022, payable April 8, 2022[354][367] Market Information As of February 28, 2022, the company had 231 holders of record and an estimated 2,313 beneficial holders of its common stock. - As of February 28, 2022, the Company had 231 holders of record and an estimated 2,313 additional beneficial holders of its common stock[348] Stock Repurchase Plans The Board approved a stock repurchase program for up to 770,000 shares in February 2021, though no repurchases occurred under this program by December 31, 2021. - On February 18, 2021, the Board approved a stock repurchase program for up to 770,000 shares over 36 months; no shares were repurchased under this program as of December 31, 2021[350] - Shares repurchased by the Company in 2021 were for employees to pay withholding taxes on restricted stock awards, not under the publicly announced program[350] Performance Graph This section presents a performance graph comparing the cumulative total return of the company's common stock against selected market indices. Cumulative Stockholder Return (Indexed to $100 on Sep 13, 2019) | Date | Alerus Financial Corporation | Nasdaq Composite Index | S&P U.S. Banks - Midwest Region Index | | :--------------- | :--------------------------- | :--------------------- | :------------------------------------ | | Sep 13, 2019 | $100.00 | $100.00 | $100.00 | | Dec 31, 2019 | $105.21 | $109.73 | $107.90 | | Dec 31, 2020 | $129.70 | $157.62 | $91.77 | | Dec 31, 2021 | $141.67 | $191.34 | $122.56 | Dividend Policy The company maintains a quarterly dividend policy, with future payments subject to board discretion, financial performance, capital levels, and regulatory restrictions. - The company's policy is to pay quarterly dividends, with an intention to maintain or increase current levels, but future payments are at the board's discretion and depend on financial performance, capital, and regulations[354] Dividend Restrictions Dividend payments are restricted by Delaware General Corporation Law and federal banking regulations, including Federal Reserve guidelines and limitations on Bank dividends. - Dividend payments are subject to Delaware General Corporation Law, which limits payments to surplus or net profits, and federal banking laws/regulations, including Federal Reserve guidelines and restrictions on dividends from the Bank[355][357] - Under junior subordinated debentures, dividends on capital stock are restricted if an event of default occurs, payment obligations are in default, or interest payments on debentures are deferred[356] Use of Proceeds The company generated $62.8 million in net proceeds from its September 2019 IPO of 3,289,000 shares, used to pay down short-term borrowings. - The company sold 3,289,000 shares in its initial public offering in September 2019, generating $62.8 million in net proceeds, which have been maintained on deposit with the Bank to pay down short-term borrowings[358][359] Item 6. [Reserved] This item is reserved and contains no information. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Alerus Financial Corporation reported a net income of $52.7 million for FY2021, an increase of 17.9% from FY2020, driven by a decrease in provision for loan losses and an increase in net interest income, partially offset by lower noninterest income and higher noninterest expense. FY2021 Key Financial Highlights | Metric | 2021 Value | 2020 Value | Change ($M) | Change (%) | | :----------------------------------- | :----------- | :----------- | :---------- | :--------- | | Net Income | $52.7 million | $44.7 million | $8.0 | 17.9% | | Diluted EPS | $2.97 | $2.52 | $0.45 | 17.9% | | Return on Average Total Assets | 1.66% | 1.61% | 0.05% | 3.1% | | Total Assets (Dec 31) | $3.4 billion | $3.0 billion | $379.0 | 12.6% | | Total Loans (Dec 31) | $1.8 billion | $2.0 billion | -$221.4 | -11.2% | | Total Deposits (Dec 31) | $2.9 billion | $2.6 billion | $348.6 | 13.6% | - The increase in net income was primarily due to a $14.4 million decrease in provision for loan losses and a $3.3 million increase in net interest income, partially offset by a $2.0 million decrease in noninterest income and a $5.1 million increase in noninterest expense[399][401] - Noninterest income represented 62.9% of total operating revenue in 2021, down from 64.1% in 2020, indicating a continued reliance on fee-based services[413] - The allowance for loan losses to nonperforming loans ratio significantly increased by 763 basis points from December 31, 2020, to 1,437.05% at December 31, 2021, primarily due to a decrease in nonperforming loans[469] Overview Alerus Financial Corporation is a diversified financial services company based in Grand Forks, North Dakota, offering banking, retirement, wealth management, and mortgage solutions. - Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, North Dakota, offering banking, retirement and benefit services, wealth management, and mortgage solutions[361] - The company's business model generates strong financial performance and a diversified revenue stream, with a majority of overall revenue from noninterest income[362] Key Financial Metrics (as of Dec 31, 2021) | Metric | Value (as of Dec 31, 2021) | | :----------------------------------- | :------------------------- | | Total Assets | $3.4 billion | | Total Loans | $1.8 billion | | Total Deposits | $2.9 billion | | Stockholders' Equity | $359.4 million | | Retirement & Benefit Services AUA/AUM | $36.7 billion | | Wealth Management AUA/AUM | $4.0 billion | | Mortgage Originations (FY2021) | $1.8 billion | Recent Developments The COVID-19 pandemic did not adversely impact the company's financial condition as of December 31, 2021, though economic recovery remains uncertain amid new variants and policy changes. - The COVID-19 pandemic's impact on the company's financial condition and results of operations was not adverse as of December 31, 2021, but economic recovery remains uncertain due to new variants and policy changes[364][365] - Recent policy developments include the American Rescue Plan Act of 2021 and the PPP Extension Act of 2021, providing economic assistance and extending PPP loan application deadlines[366] - The Board declared a quarterly cash dividend of $0.16 per common share on January 19, 2022, and approved a stock repurchase program for up to 770,000 shares on February 18, 2021, with no repurchases under the program as of December 31, 2021[367] Net Interest Income Net interest income represents the difference between interest earned on assets and interest paid on liabilities, influenced by loan growth, repayments, and interest rate fluctuations. - Net interest income is the difference between interest earned on assets (loans, securities) and interest paid on liabilities (deposits, borrowings), influenced by loan growth, repayments, and interest rate changes[368] Noninterest Income Noninterest income primarily comprises fees from retirement and benefit services, wealth management, mortgage banking, deposit service charges, and other transactional sources. - Noninterest income primarily consists of fees from retirement and benefit services (largest source), wealth management, mortgage banking (gains on originations/sales), service charges on deposit accounts, and other sources like debit card interchange income[369][370][371][373] Noninterest Expense Noninterest expense encompasses compensation, employee benefits, occupancy, equipment, technology, intangible amortization, professional fees, marketing, and other operational costs. - Noninterest expense includes compensation and employee benefits, occupancy and equipment, business services/software/technology, intangible amortization, professional fees/assessments, marketing, supplies, travel, mortgage/lending expenses, and other operational costs[374][375][376][377] Operating Segments The company operates through four segments: banking, retirement and benefit services, wealth management, and mortgage, with profitability assessed before income tax and direct expense allocations. - The company has four operating segments: banking, retirement and benefit services, wealth management, and mortgage, with profitability measured by income before income tax and direct expense allocations[378] Critical Accounting Policies Critical accounting policies involve investment securities classification, allowance for loan losses, intangible assets, income taxes, and fair value measurements, all requiring significant management judgment and estimates. - Critical accounting policies include investment securities classification (trading, available-for-sale, held-to-maturity), allowance for loan losses (inherently subjective estimates), intangible assets (goodwill impairment, core deposit amortization), income taxes (deferred tax assets/liabilities, valuation allowance), and fair value measurements (using Level 1, 2, and 3 hierarchies)[379][380][381][382][383][386][387] Selected Financial Data This section presents a five-year summary of key income statement, balance sheet, and performance ratio data. Selected Income Statement Data (in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Net interest income | $87,099 | $83,846 | $74,551 | $75,224 | $67,670 | | Provision for loan losses | $(3,500) | $10,900 | $7,312 | $8,610 | $3,280 | | Noninterest income | $147,387 | $149,371 | $114,194 | $102,749 | $103,045 | | Noninterest expense | $168,909 | $163,799 | $142,537 | $136,325 | $134,920 | | Income before income taxes | $69,077 | $58,518 | $38,896 | $33,038 | $32,515 | | Income tax expense | $16,396 | $13,843 | $9,356 | $7,172 | $17,514 | | Net income | $52,681 | $44,675 | $29,540 | $25,866 | $15,001 | | Earnings - basic | $3.02 | $2.57 | $1.96 | $1.88 | $1.10 | | Earnings - diluted | $2.97 | $2.52 | $1.91 | $1.84 | $1.07 | | Dividends declared | $0.63 | $0.60 | $0.57 | $0.53 | $0.48 | Selected Performance Ratios | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :----------------------------------- | :------ | :------ | :------ | :------ | :------ | | Return on average total assets | 1.66% | 1.61% | 1.34% | 1.21% | 0.75% | | Return on average common equity | 15.22% | 14.40% | 12.78% | 13.81% | 8.49% | | Noninterest income as a % of revenue | 62.86% | 64.05% | 60.50% | 57.73% | 60.36% | | Net interest margin (taxable-equivalent basis) | 2.90% | 3.22% | 3.65% | 3.84% | 3.74% | | Efficiency ratio | 70.02% | 68.40% | 73.22% | 73.80% | 75.36% | | Dividend payout ratio | 21.21% | 23.81% | 29.84% | 28.82% | 44.82% | | Average equity to average assets | 10.89% | 11.18% | 10.45% | 8.80% | 8.83% | Selected Balance Sheet Data (Period Ending, in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Loans | $1,758,020 | $1,979,375 | $1,721,279 | $1,701,850 | $1,574,474 | | Allowance for loan losses | $(31,572) | $(34,246) | $(23,924) | $(22,174) | $(16,564) | | Investment securities | $1,205,710 | $592,342 | $313,158 | $254,878 | $274,411 | | Assets | $3,392,691 | $3,013,771 | $2,356,878 | $2,179,070 | $2,136,081 | | Deposits | $2,920,551 | $2,571,993 | $1,971,316 | $1,775,096 | $1,834,962 | | Total stockholders' equity | $359,403 | $330,163 | $285,728 | $196,954 | $179,594 | Asset Quality Ratios | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :----------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Net charge-offs/(recoveries) to average loans | (0.04)% | 0.03% | 0.33% | 0.18% | 0.16% | | Nonperforming loans to total loans | 0.12% | 0.26% | 0.45% | 0.41% | 0.37% | | Nonperforming assets to total assets | 0.09% | 0.17% | 0.33% | 0.33% | 0.30% | | Allowance for loan losses to total loans | 1.80% | 1.73% | 1.39% | 1.30% | 1.05% | | Allowance for loan losses to nonperforming loans | 1,437.05% | 674.13% | 305.66% | 318.45% | 282.04% | Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures The company uses non-GAAP financial measures, such as tangible common equity ratios and tax-equivalent net interest margin, to supplement GAAP results and assess capital adequacy and performance. - The company supplements GAAP results with non-GAAP measures like tangible common equity to tangible assets, tangible common equity per share, return on average tangible common equity, net interest margin (tax-equivalent), and efficiency ratio to evaluate capital adequacy and performance[391][393] Non-GAAP Financial Measures (as of Dec 31) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :----------------------------------- | :------ | :------ | :------ | :------ | :------ | | Tangible common equity to tangible assets | 9.21% | 9.27% | 10.38% | 6.91% | 6.01% | | Tangible book value per common share | $17.87 | $16.00 | $14.08 | $10.68 | $9.14 | | Return on average tangible common equity | 18.89% | 17.74% | 17.46% | 21.02% | 18.04% | | Net interest margin (tax-equivalent) | 2.90% | 3.22% | 3.65% | 3.84% | 3.74% | | Efficiency ratio | 70.02% | 68.40% | 73.22% | 73.80% | 75.36% | Results of Operations Net income for FY2021 increased by $8.0 million (17.9%) to $52.7 million, with diluted EPS rising to $2.97 from $2.52 in FY2020. - Net income for FY2021 increased by $8.0 million (17.9%) to $52.7 million, with diluted EPS of $2.97, up from $2.52 in FY2020[399] - The increase in net income was primarily due to a $14.4 million decrease in provision for loan losses (including a $3.5 million reversal and $826 thousand in net recoveries) and a $3.3 million increase in net interest income[399][401] - These positive factors were partially offset by a $2.0 million decrease in noninterest income (driven by a $13.1 million decrease in mortgage banking revenue) and a $5.1 million increase in noninterest expense[401] Net Interest Income—With Nontaxable Income Converted to Fully Taxable Equivalent, or FTE Net interest income increased by $3.3 million (3.9%) to $87.1 million in 2021, despite a 32 basis point decrease in net interest margin to 2.90%. - Net interest income increased by $3.3 million (3.9%) to $87.1 million in 2021, while net interest margin decreased by 32 basis points to 2.90%[402] - The decrease in net interest margin was primarily due to a 60 basis point decrease in average yield on interest-earning assets, partially offset by a 43 basis point decrease in average rate paid on interest-bearing liabilities[402] - Interest income from investment securities increased by $5.2 million, while interest income from loans decreased by $8.3 million[401] Net Interest Income (FTE Basis, in thousands) | Metric | 2021 | 2020 | 2019 | | :----------------------------------- | :---------- | :---------- | :---------- | | Total interest income | $93,149 | $96,557 | $93,647 | | Total interest expense | $5,558 | $12,256 | $18,749 | | Net interest income (FTE) | $87,591 | $84,301 | $74,898 | | Net interest margin (FTE basis) | 2.90% | 3.22% | 3.65% | Provision for Loan Losses The company recorded a $3.5 million reversal of provision for loan losses in 2021, a notable shift from the $10.9 million provision in 2020, reflecting improved credit quality. - The company recorded a $3.5 million reversal of provision for loan losses in 2021, a significant change from the $10.9 million provision in 2020, driven by $826 thousand in net recoveries and improved credit quality indicators[410] Noninterest Income Total noninterest income decreased by $2.0 million (1.3%) to $147.4 million in 2021, mainly due to reduced mortgage banking revenue and investment securities gains. - Total noninterest income decreased by $2.0 million (1.3%) to $147.4 million in 2021, primarily due to a $13.1 million decrease in mortgage banking revenue and a $2.6 million decrease in investment securities gains[412] - Offsetting decreases were a $10.8 million increase in retirement and benefit services revenue (due to acquisition and AUA/AUM growth) and a $3.6 million increase in wealth management revenue[412] Noninterest Income (in thousands) | Category | 2021 | 2020 | Change ($) | Change (%) | | :----------------------------- | :---------- | :---------- | :---------- | :--------- | | Retirement and benefit services | $71,709 | $60,956 | $10,753 | 17.6% | | Wealth management | $21,052 | $17,451 | $3,601 | 20.6% | | Mortgage banking | $48,502 | $61,641 | $(13,139) | (21.3)% |\n| Net gains (losses) on investment securities | $125 | $2,737 | $(2,612) | (95.4)% | | Total noninterest income | $147,387 | $149,371 | $(1,984) | (1.3)% | Noninterest Expense Total noninterest expense increased by $5.1 million (3.1%) to $168.9 million in 2021, primarily due to higher compensation, employee benefits, professional fees, and technology expenses. - Total noninterest expense increased by $5.1 million (3.1%) to $168.9 million in 2021, driven by higher compensation ($4.2M), employee taxes and benefits ($2.0M), professional fees ($1.5M), and business services/software/technology ($1.4M)[415][416] - Offsetting decreases included occupancy and equipment expense (due to facility lease terminations and office closures), mortgage and lending expenses (valuation of mortgage servicing rights), and other noninterest expense (settlement recovery on wire fraud)[415][418] Noninterest Expense (in thousands) | Category | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------- | :---------- | :---------- | :---------- | :--------- | | Compensation | $93,386 | $89,206 | $4,180 | 4.7% | | Employee taxes and benefits | $22,033 | $20,050 | $1,983 | 9.9% | | Occupancy and equipment expense | $8,148 | $10,058 | $(1,910) | (19.0)% | | Business services, software and technology expense | $20,486 | $19,135 | $1,351 | 7.1% | | Professional fees and assessments | $6,292 | $4,834 | $1,458 | 30.2% | | Mortgage and lending expenses | $4,250 | $5,707 | $(1,457) | (25.5)% | | Other | $3,949 | $5,182 | $(1,233) | (23.8)% | | Total noninterest expense | $168,909 | $163,799 | $5,110 | 3.1% | Income Taxes Income tax expense for FY2021 was $16.4 million on $69.1 million of pre-tax income, yielding an effective tax rate of 23.7%, consistent with the prior year. - Income tax expense for FY2021 was $16.4 million on $69.1 million of pre-tax income, resulting in an effective tax rate of 23.7%, a modest change from 23.6% in FY2020[419] Segment Reporting The company's four operating segments are Banking, Retirement and Benefit Services, Wealth Management, and Mortgage, with financial information presented before indirect overhead allocations and income tax expense. - The company's four operating segments are Banking, Retirement and Benefit Services, Wealth Management, and Mortgage, with financial information presented before indirect overhead allocations and income tax expense[420][421] Banking The banking segment reported a $14.2 million increase in net income before taxes and indirect allocations to $51.6 million in 2021, driven by lower loan loss provision and higher net interest income. - The banking segment reported net income before taxes and indirect allocations of $51.6 million in 2021, a $14.2 million increase from 2020, driven by decreased provision for loan losses and noninterest expense, and increased net interest income[422] Retirement and Benefit Services The retirement and benefit services segment reported a $5.8 million increase in net income before taxes and indirect allocations to $31.5 million in 2021. - The retirement and benefit services segment reported net income before taxes and indirect allocations of $31.5 million in 2021, a $5.8 million increase from 2020[423] - Revenue increased by $10.8 million (17.6%) to $71.7 million, primarily due to the acquisition of Retirement Planning Services, Inc. and a 7.4% increase in AUA/AUM to $36.7 billion[425][427] Retirement and Benefit Services AUA & AUM (in thousands) | Metric | 2021 | 2020 | 2019 | | :----------------------------------- | :------------ | :------------ | :------------ | | Balance beginning of period | $34,199,954 | $31,904,648 | $27,812,149 | | Acquired assets | — | $1,258,382 | — | | Inflows | $5,589,925 | $4,829,449 | $5,009,789 | | Outflows | $(6,010,136) | $(6,828,573) | $(5,406,667) | | Market impact | $2,953,195 | $3,036,048 | $4,489,377 | | Balance end of period | $36,732,938 | $34,199,954 | $31,904,648 | Wealth Management The wealth management division reported a $3.0 million (33.0%) increase in net income before taxes and indirect allocations to $12.2 million in 2021. - The wealth management division reported net income before taxes and indirect allocations of $12.2 million in 2021, a $3.0 million (33.0%) increase from 2020[428] - Noninterest income increased by $3.6 million (20.6%) due to a $632.2 million (24.5%) increase in combined AUA and AUM to $3.2 billion (excluding brokerage assets)[428][432] Wealth Management AUA & AUM (in thousands) | Metric | 2021 | 2020 | 2019 | | :----------------------------------- | :------------ | :------------ | :------------ | | Total Wealth Management balance beginning of period | $2,578,053 | $2,413,068 | $1,851,815 | | Inflows | $1,304,307 | $729,120 | $864,218 | | Outflows | $(957,795) | $(874,169) | $(576,454) | | Market impact | $285,677 | $310,034 | $273,489 | | Total Wealth Management balance end of period | $3,210,242 | $2,578,053 | $2,413,068 | Mortgage The mortgage division reported a $14.1 million decrease in net income before taxes and indirect allocations to $13.3 million in 2021. - The mortgage division reported net income before taxes and indirect allocations of $13.3 million in 2021, a $14.1 million decrease from 2020[433] - Mortgage noninterest income decreased by $13.1 million (21.3%) to $48.5 million, primarily due to a $17.3 million decrease in the fair value of secondary market derivatives, partially offset by increased originations[433] Financial Condition Total assets increased by $379.0 million (12.6%) to $3.4 billion at December 31, 2021, primarily due to growth in investment securities and cash. - Total assets increased by $379.0 million (12.6%) to $3.4 billion at December 31, 2021, driven by increases in investment securities and cash, partially offset by decreases in net loans and loans held for sale[434] Investment Securities Investment securities totaled $1.2 billion at December 31, 2021, reflecting a strategic increase to utilize excess liquidity, with a portion transferred to held-to-maturity to reduce volatility. - Total investment securities increased to $1.2 billion at December 31, 2021, from $592.3 million in 2020, representing 35.5% of total assets, reflecting a strategic decision to utilize excess liquidity[437] - The net pre-tax unrealized market value on available-for-sale investment portfolio shifted from a $14.2 million gain in 2020 to a $6.6 million loss in 2021, due to interest rate environment changes[438] - In Q2 2021, the company transferred state and political agency obligations from available-for-sale to held-to-maturity to protect capital and reduce volatility from market value changes[436] Investment Securities Portfolio (in thousands, as of Dec 31, 2021) | Category | Balance | % of Portfolio | | :------------------------------------- | :---------- | :------------- | | Available-for-sale | | | | U.S. Treasury and agencies | $5,103 | 0.4% | | Residential agency MBS | $707,157 | 58.7% | | Commercial MBS | $90,913 | 7.5% | | Corporate bonds | $50,422 | 4.2% | | Total Available-for-sale | $853,649 | 70.8% | | Held-to-maturity | | | | Obligations of state and political agencies | $144,543 | 12.0% | | Residential agency MBS | $207,518 | 17.2% | | Total Held-to-maturity | $352,061 | 29.2% | | Total Investment Securities | $1,205,710 | 100.0% | Loans Total loans outstanding decreased by $221.4 million (11.2%) to $1.8 billion at December 31, 2021, primarily driven by a reduction in PPP loans. - Total loans outstanding decreased by $221.4 million (11.2%) to $1.8 billion at December 31, 2021, primarily due to a $234.8 million decrease in PPP loans[450] - Excluding PPP loans, total loans increased by $13.5 million (0.8%), driven by residential real estate first mortgages and commercial real estate loans[450] Loans Outstanding by Type (in thousands, as of Dec 31, 2021) | Loan Type | Balance | % of Portfolio | | :----------------------------- | :---------- | :------------- | | Commercial and industrial (incl. PPP) | $436,761 | 24.8% | | Real estate construction | $40,619 | 2.3% | | Commercial real estate | $598,893 | 34.1% | | Residential real estate first mortgage | $510,716 | 29.1% | | Residential real estate junior lien | $125,668 | 7.1% | | Other revolving and installment | $45,363 | 2.6% | | Total Loans | $1,758,020 | 100.0% | - The loan portfolio is diversified by industry (e.g., real estate 39%, retail trade 10%) and market distribution (Twin Cities MSA 52.8%, eastern North Dakota 36.7%, Phoenix MSA 8.3%, national market 2.2%)[451][452] Asset Quality The company's asset quality is managed through a credit risk strategy encompassing defined policies, uniform underwriting, continuous monitoring, and early identification of problem loans. - The company's credit risk management strategy includes well-defined policies, uniform underwriting, ongoing risk monitoring, and early identification of problem loans, with an internal Special Credit Services division for nonperforming loans[459][460] - Nonperforming assets include loans 90+ days past due, nonaccrual loans, foreclosed assets, and OREO; performing troubled debt restructurings (TDRs) are not considered nonperforming[462] Nonperforming Assets (in thousands