UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20202021
☐TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-39036
ALERUS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 45-0375407 |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
organization) | |
| |
401 Demers Avenue | |
Grand Forks, ND | 58201 |
(Address of principal executive offices) | (Zip Code) |
(701) (701) 795-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
| | |||
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
Common Stock, par value $1.00 per share | | ALRS | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Accelerated filer | Non-accelerated filer | Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧
The number of shares of the registrant’s common stock outstanding at October 31, 20202021 was 17,121,863.17,208,077.
Alerus Financial Corporation and Subsidiaries
Table of Contents
Page | ||
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1 | ||
Consolidated Balance Sheets | 1 | |
2 | ||
3 | ||
4 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART 1. FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Alerus Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
| | | | | | |
|
| September 30, |
| December 31, | ||
(dollars in thousands, except share and per share data) |
| 2021 |
| 2020 | ||
Assets |
| (Unaudited) |
| (Audited) | ||
Cash and cash equivalents | | $ | 159,454 | | $ | 172,962 |
Investment securities | |
|
| |
|
|
Available-for-sale, at fair value | |
| 655,282 | |
| 592,342 |
Held-to-maturity, at carrying value | |
| 362,586 | |
| — |
Loans held for sale | |
| 60,912 | |
| 122,440 |
Loans | |
| 1,800,386 | |
| 1,979,375 |
Allowance for loan losses | |
| (32,066) | |
| (34,246) |
Net loans | |
| 1,768,320 | |
| 1,945,129 |
Land, premises and equipment, net | |
| 18,403 | |
| 20,289 |
Operating lease right-of-use assets | |
| 3,821 | |
| 6,918 |
Accrued interest receivable | |
| 8,836 | |
| 9,662 |
Bank-owned life insurance | |
| 32,954 | |
| 32,363 |
Goodwill | |
| 30,201 | |
| 30,201 |
Other intangible assets | |
| 22,593 | |
| 25,919 |
Servicing rights | |
| 1,776 | |
| 1,987 |
Deferred income taxes, net | |
| 11,609 | |
| 9,409 |
Other assets | |
| 38,422 | |
| 44,150 |
Total assets | | $ | 3,175,169 | | $ | 3,013,771 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Deposits | |
|
| |
|
|
Noninterest-bearing | | $ | 797,062 | | $ | 754,716 |
Interest-bearing | |
| 1,916,026 | |
| 1,817,277 |
Total deposits | |
| 2,713,088 | |
| 2,571,993 |
Long-term debt | |
| 58,963 | |
| 58,735 |
Operating lease liabilities | |
| 4,428 | |
| 7,861 |
Accrued expenses and other liabilities | |
| 45,495 | |
| 45,019 |
Total liabilities | |
| 2,821,974 | |
| 2,683,608 |
Stockholders’ equity | |
|
| |
|
|
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding | | | — | | | — |
Common stock, $1 par value, 30,000,000 shares authorized: 17,208,077 and 17,125,270 issued and outstanding | |
| 17,208 | |
| 17,125 |
Additional paid-in capital | |
| 91,783 | |
| 90,237 |
Retained earnings | |
| 243,638 | |
| 212,163 |
Accumulated other comprehensive income (loss) | |
| 566 | |
| 10,638 |
Total stockholders’ equity | |
| 353,195 | |
| 330,163 |
Total liabilities and stockholders’ equity | | $ | 3,175,169 | | $ | 3,013,771 |
| | | | | | |
|
| September 30, |
| December 31, | ||
(dollars in thousands, except share and per share data) |
| 2020 |
| 2019 | ||
Assets |
| | |
| |
|
Cash and cash equivalents | | $ | 95,751 | | $ | 144,006 |
Investment securities, at fair value | |
|
| |
|
|
Available-for-sale | |
| 495,414 | |
| 310,350 |
Equity | |
| — | |
| 2,808 |
Loans held for sale | |
| 111,311 | |
| 46,846 |
Loans | |
| 2,058,419 | |
| 1,721,279 |
Allowance for loan losses | |
| (31,337) | |
| (23,924) |
Net loans | |
| 2,027,082 | |
| 1,697,355 |
Land, premises and equipment, net | |
| 20,493 | |
| 20,629 |
Operating lease right-of-use assets | |
| 8,168 | |
| 8,343 |
Accrued interest receivable | |
| 9,199 | |
| 7,551 |
Bank-owned life insurance | |
| 32,161 | |
| 31,566 |
Goodwill | |
| 27,329 | |
| 27,329 |
Other intangible assets | |
| 15,421 | |
| 18,391 |
Servicing rights | |
| 2,579 | |
| 3,845 |
Deferred income taxes, net | |
| 8,628 | |
| 7,891 |
Other assets | |
| 45,273 | |
| 29,968 |
Total assets | | $ | 2,898,809 | | $ | 2,356,878 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Deposits | |
|
| |
|
|
Noninterest-bearing | | $ | 693,450 | | $ | 577,704 |
Interest-bearing | |
| 1,768,920 | |
| 1,393,612 |
Total deposits | |
| 2,462,370 | |
| 1,971,316 |
Long-term debt | |
| 58,745 | |
| 58,769 |
Operating lease liabilities | |
| 8,671 | |
| 8,864 |
Accrued expenses and other liabilities | |
| 47,020 | |
| 32,201 |
Total liabilities | |
| 2,576,806 | |
| 2,071,150 |
Stockholders’ equity | |
|
| |
|
|
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding | | | — | | | — |
Common stock, $1 par value, 30,000,000 shares authorized: 17,121,863 and 17,049,551 issued and outstanding | |
| 17,122 | |
| 17,050 |
Additional paid-in capital | |
| 89,757 | |
| 88,650 |
Retained earnings | |
| 204,581 | |
| 178,092 |
Accumulated other comprehensive income (loss) | |
| 10,543 | |
| 1,936 |
Total stockholders’ equity | |
| 322,003 | |
| 285,728 |
Total liabilities and stockholders’ equity | | $ | 2,898,809 | | $ | 2,356,878 |
See accompanying notes to consolidated financial statements (unaudited)
1
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars and shares in thousands, except per share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest Income | | | | | | | | | | | | |
Loans, including fees | | $ | 18,888 | | $ | 21,962 | | $ | 58,779 | | $ | 63,876 |
Investment securities | |
|
| |
|
| |
|
| |
|
|
Taxable | |
| 3,249 | |
| 1,973 | |
| 8,547 | |
| 5,497 |
Exempt from federal income taxes | |
| 225 | |
| 238 | |
| 694 | |
| 712 |
Other | |
| 185 | |
| 116 | |
| 432 | |
| 816 |
Total interest income | |
| 22,547 | |
| 24,289 | | | 68,452 | |
| 70,901 |
Interest Expense | |
|
| |
|
| |
|
| |
|
|
Deposits | |
| 880 | |
| 1,683 | |
| 2,781 | |
| 7,633 |
Long-term debt | |
| 535 | |
| 841 | |
| 1,361 | |
| 2,575 |
Total interest expense | |
| 1,415 | |
| 2,524 | |
| 4,142 | |
| 10,208 |
Net interest income | |
| 21,132 | |
| 21,765 | |
| 64,310 | |
| 60,693 |
Provision for loan losses | |
| (2,000) | |
| 3,500 | |
| (2,000) | |
| 9,500 |
Net interest income after provision for loan losses | |
| 23,132 | |
| 18,265 | |
| 66,310 | |
| 51,193 |
Noninterest Income | |
|
| |
|
| |
|
| |
|
|
Retirement and benefit services | |
| 18,031 | |
| 15,104 | |
| 53,157 | |
| 45,034 |
Wealth management | |
| 5,295 | |
| 4,486 | |
| 15,419 | |
| 12,644 |
Mortgage banking | |
| 11,116 | |
| 22,269 | |
| 40,535 | |
| 44,860 |
Service charges on deposit accounts | |
| 357 | |
| 355 | |
| 1,025 | |
| 1,075 |
Net gains (losses) on investment securities | |
| 11 | |
| 1,428 | |
| 125 | |
| 2,722 |
Other | |
| 1,230 | |
| 1,614 | |
| 3,408 | |
| 4,340 |
Total noninterest income | |
| 36,040 | |
| 45,256 | |
| 113,669 | |
| 110,675 |
Noninterest Expense | |
|
| |
|
| |
|
| |
|
|
Compensation | |
| 23,291 | |
| 22,740 | |
| 71,298 | |
| 62,684 |
Employee taxes and benefits | |
| 5,058 | |
| 5,033 | |
| 16,443 | |
| 15,088 |
Occupancy and equipment expense | |
| 2,063 | |
| 2,511 | |
| 6,212 | |
| 7,615 |
Business services, software and technology expense | |
| 5,332 | |
| 4,378 | |
| 15,266 | |
| 13,501 |
Intangible amortization expense | |
| 1,088 | |
| 990 | |
| 3,327 | |
| 2,971 |
Professional fees and assessments | |
| 1,503 | |
| 1,070 | |
| 4,484 | |
| 3,303 |
Marketing and business development | |
| 865 | |
| 929 | |
| 2,310 | |
| 2,088 |
Supplies and postage | |
| 549 | |
| 248 | |
| 1,583 | |
| 1,630 |
Travel | |
| 174 | |
| 26 | |
| 236 | |
| 338 |
Mortgage and lending expenses | |
| 1,231 | |
| 1,434 | |
| 3,762 | |
| 3,916 |
Other | |
| 887 | |
| 855 | |
| 2,712 | |
| 3,540 |
Total noninterest expense | |
| 42,041 | |
| 40,214 | |
| 127,633 | |
| 116,674 |
Income before income taxes | |
| 17,131 | |
| 23,307 | |
| 52,346 | |
| 45,194 |
Income tax expense | |
| 4,064 | |
| 5,648 | |
| 12,370 | |
| 10,698 |
Net income | | $ | 13,067 | | $ | 17,659 | | $ | 39,976 | | $ | 34,496 |
Per Common Share Data | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.75 | | $ | 1.01 | | $ | 2.29 | | $ | 1.98 |
Diluted earnings per common share | | $ | 0.74 | | $ | 0.99 | | $ | 2.26 | | $ | 1.94 |
Dividends declared per common share | | $ | 0.16 | | $ | 0.15 | | $ | 0.47 | | $ | 0.45 |
Average common shares outstanding | |
| 17,205 | |
| 17,121 | |
| 17,182 | |
| 17,101 |
Diluted average common shares outstanding | |
| 17,499 | |
| 17,453 | |
| 17,488 | |
| 17,435 |
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars and shares in thousands, except per share data) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Interest Income | | | | | | | | | | | | |
Loans, including fees | | $ | 21,962 | | $ | 21,886 | | $ | 63,876 | | $ | 65,171 |
Investment securities | |
|
| |
|
| |
|
| |
|
|
Taxable | |
| 1,973 | |
| 1,374 | |
| 5,497 | |
| 4,021 |
Exempt from federal income taxes | |
| 238 | |
| 163 | |
| 712 | |
| 618 |
Other | |
| 116 | |
| 202 | |
| 816 | |
| 603 |
Total interest income | |
| 24,289 | |
| 23,625 | | | 70,901 | |
| 70,413 |
Interest Expense | |
|
| |
|
| |
|
| |
|
|
Deposits | |
| 1,683 | |
| 3,506 | |
| 7,633 | |
| 9,802 |
Short-term borrowings | |
| — | |
| 539 | |
| — | |
| 1,805 |
Long-term debt | |
| 841 | |
| 899 | |
| 2,575 | |
| 2,714 |
Total interest expense | |
| 2,524 | |
| 4,944 | |
| 10,208 | |
| 14,321 |
Net interest income | |
| 21,765 | |
| 18,681 | |
| 60,693 | |
| 56,092 |
Provision for loan losses | |
| 3,500 | |
| 1,498 | |
| 9,500 | |
| 5,515 |
Net interest income after provision for loan losses | |
| 18,265 | |
| 17,183 | |
| 51,193 | |
| 50,577 |
Noninterest Income | |
|
| |
|
| |
|
| |
|
|
Retirement and benefit services | |
| 15,104 | |
| 15,307 | |
| 45,034 | |
| 46,142 |
Wealth management | |
| 4,486 | |
| 3,896 | |
| 12,644 | |
| 11,385 |
Mortgage banking | |
| 22,269 | |
| 8,135 | |
| 44,860 | |
| 19,739 |
Service charges on deposit accounts | |
| 355 | |
| 447 | |
| 1,075 | |
| 1,321 |
Net gains (losses) on investment securities | |
| 1,428 | |
| 48 | |
| 2,722 | |
| 357 |
Other | |
| 1,614 | |
| 1,747 | |
| 4,340 | |
| 5,694 |
Total noninterest income | |
| 45,256 | |
| 29,580 | |
| 110,675 | |
| 84,638 |
Noninterest Expense | |
|
| |
|
| |
|
| |
|
|
Compensation | |
| 22,740 | |
| 20,041 | |
| 62,684 | |
| 54,997 |
Employee taxes and benefits | |
| 5,033 | |
| 4,600 | |
| 15,088 | |
| 15,188 |
Occupancy and equipment expense | |
| 2,768 | |
| 2,700 | |
| 8,392 | |
| 8,086 |
Business services, software and technology expense | |
| 4,420 | |
| 4,224 | |
| 13,384 | |
| 12,044 |
Intangible amortization expense | |
| 990 | |
| 990 | |
| 2,971 | |
| 3,091 |
Professional fees and assessments | |
| 1,031 | |
| 1,051 | |
| 3,231 | |
| 3,146 |
Marketing and business development | |
| 929 | |
| 890 | |
| 2,088 | |
| 2,024 |
Supplies and postage | |
| 247 | |
| 631 | |
| 1,625 | |
| 2,027 |
Travel | |
| 26 | |
| 435 | |
| 338 | |
| 1,335 |
Mortgage and lending expenses | |
| 1,231 | |
| 751 | |
| 3,466 | |
| 1,966 |
Other | |
| 799 | |
| 1,014 | |
| 3,407 | |
| 2,198 |
Total noninterest expense | |
| 40,214 | |
| 37,327 | |
| 116,674 | |
| 106,102 |
Income before income taxes | |
| 23,307 | |
| 9,436 | |
| 45,194 | |
| 29,113 |
Income tax expense | |
| 5,648 | |
| 2,332 | |
| 10,698 | |
| 7,225 |
Net income | | $ | 17,659 | | $ | 7,104 | | $ | 34,496 | | $ | 21,888 |
Per Common Share Data | | | | | | | | | | | | |
Basic earnings per common share | | $ | 1.01 | | $ | 0.49 | | $ | 1.98 | | $ | 1.53 |
Diluted earnings per common share | | $ | 0.99 | | $ | 0.48 | | $ | 1.94 | | $ | 1.49 |
Dividends declared per common share | | $ | 0.15 | | $ | 0.14 | | $ | 0.45 | | $ | 0.42 |
Average common shares outstanding | |
| 17,121 | |
| 14,274 | |
| 17,101 | |
| 13,957 |
Diluted average common shares outstanding | |
| 17,453 | |
| 14,626 | |
| 17,435 | |
| 14,317 |
See accompanying notes to consolidated financial statements (unaudited)
2
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net Income | | $ | 13,067 | | $ | 17,659 | | $ | 39,976 | | $ | 34,496 |
Other Comprehensive Income (Loss), Net of Tax | |
|
| |
|
| |
|
| |
|
|
Unrealized gains (losses) on available-for-sale securities | |
| (2,496) | |
| 2,459 | |
| (13,101) | |
| 14,212 |
Accretion of (gains) losses on debt securities reclassified to held-to-maturity | | | (106) | | | — | | | (221) | | | — |
Reclassification adjustment for losses (gains) realized in income | |
| (11) | |
| (1,428) | |
| (125) | |
| (2,722) |
Total other comprehensive income (loss), before tax | |
| (2,613) | |
| 1,031 | |
| (13,447) | |
| 11,490 |
Income tax expense (benefit) related to items of other comprehensive income | |
| (656) | |
| 259 | |
| (3,375) | |
| 2,883 |
Other comprehensive income (loss), net of tax | |
| (1,957) | |
| 772 | |
| (10,072) | |
| 8,607 |
Total comprehensive income | | $ | 11,110 | | $ | 18,431 | | $ | 29,904 | | $ | 43,103 |
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net Income | | $ | 17,659 | | $ | 7,104 | | $ | 34,496 | | $ | 21,888 |
Other Comprehensive Income (Loss), Net of Tax | |
|
| |
|
| |
|
| |
|
|
Unrealized gains (losses) on available-for-sale securities | |
| 2,459 | |
| 2,187 | |
| 14,212 | |
| 9,307 |
Reclassification adjustment for losses (gains) realized in income | |
| (1,428) | |
| (49) | |
| (2,722) | |
| (379) |
Total other comprehensive income (loss), before tax | |
| 1,031 | |
| 2,138 | |
| 11,490 | |
| 8,928 |
Income tax expense (benefit) related to items of other comprehensive income | |
| 259 | |
| 538 | |
| 2,883 | |
| 2,242 |
Other comprehensive income (loss), net of tax | |
| 772 | |
| 1,600 | |
| 8,607 | |
| 6,686 |
Total comprehensive income | | $ | 18,431 | | $ | 8,704 | | $ | 43,103 | | $ | 28,574 |
See accompanying notes to consolidated financial statements (unaudited)
3
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2021 | |||||||||||||
| | | | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | | Other | | | | ||
| | Common | | Paid-in | | Retained | | Comprehensive | | | | ||||
(dollars and shares in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | |||||
Balance as of June 30, 2021 | | $ | 17,198 | | $ | 91,273 | | $ | 233,397 | | $ | 2,523 | | $ | 344,391 |
Net income | |
| — | |
| — | |
| 13,067 | |
| — | |
| 13,067 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| (1,957) | |
| (1,957) |
Common stock repurchased | |
| (2) | |
| (23) | |
| (50) | |
| — | |
| (75) |
Common stock dividends | |
| — | |
| — | |
| (2,776) | |
| — | |
| (2,776) |
Stock-based compensation expense | |
| — | |
| 545 | |
| — | |
| — | |
| 545 |
Vesting of restricted stock | |
| 12 | | | (12) | |
| — | |
| — | |
| — |
Balance as of September 30, 2021 | | $ | 17,208 | | $ | 91,783 | | $ | 243,638 | | $ | 566 | | $ | 353,195 |
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2021 | |||||||||||||
| | | | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | | Other | | | | ||
| | Common | | Paid-in | | Retained | | Comprehensive | | | | ||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | |||||
Balance as of December 31, 2020 | | $ | 17,125 | | $ | 90,237 | | $ | 212,163 | | $ | 10,638 | | $ | 330,163 |
Net income | |
| — | |
| — | |
| 39,976 | |
| — | |
| 39,976 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| (10,072) | |
| (10,072) |
Common stock repurchased | |
| (18) | |
| (157) | |
| (346) | |
| — | |
| (521) |
Common stock dividends | |
| — | |
| — | |
| (8,155) | |
| — | |
| (8,155) |
Share‑based compensation expense | |
| 8 | |
| 1,796 | |
| — | |
| — | |
| 1,804 |
Vesting of restricted stock | |
| 93 | |
| (93) | |
| — | |
| — | |
| — |
Balance as of September 30, 2021 | | $ | 17,208 | | $ | 91,783 | | $ | 243,638 | | $ | 566 | | $ | 353,195 |
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | ||||||||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | ESOP- | | | | |||
| | Common | | Paid-in | | Retained | | Comprehensive | | Owned | | | | |||||
(dollars and shares in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Total | ||||||
Balance as of June 30, 2020 | | $ | 17,120 | | $ | 89,313 | | $ | 189,528 | | $ | 9,771 | | $ | — | | $ | 305,732 |
Net income | |
| — | |
| — | |
| 17,659 | |
| — | |
| — | |
| 17,659 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 772 | |
| — | |
| 772 |
Common stock repurchased | |
| — | |
| (29) | |
| (7) | |
| — | |
| — | |
| (36) |
Common stock dividends | |
| — | |
| — | |
| (2,599) | |
| — | |
| — | |
| (2,599) |
Stock-based compensation expense | |
| — | |
| 475 | |
| — | |
| — | |
| — | |
| 475 |
Vesting of restricted stock | |
| 2 | |
| (2) | |
| — | |
| — | |
| — | |
| — |
Balance as of September 30, 2020 | | $ | 17,122 | | $ | 89,757 | | $ | 204,581 | | $ | 10,543 | | $ | — | | $ | 322,003 |
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | |||||||||||||
| | | | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | | Other | | | | ||
| | Common | | Paid-in | | Retained | | Comprehensive | | | | ||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | |||||
Balance as of June 30, 2020 | | $ | 17,120 | | $ | 89,313 | | $ | 189,528 | | $ | 9,771 | | $ | 305,732 |
Net income | |
| — | |
| — | |
| 17,659 | |
| — | |
| 17,659 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 772 | |
| 772 |
Common stock repurchased | |
| — | |
| (29) | |
| (7) | |
| — | |
| (36) |
Common stock dividends | |
| — | |
| — | |
| (2,599) | |
| — | |
| (2,599) |
Stock-based compensation expense | |
| — | |
| 475 | |
| — | |
| — | |
| 475 |
Vesting of restricted stock | |
| 2 | |
| (2) | |
| — | |
| — | |
| — |
Balance as of September 30, 2020 | | $ | 17,122 | | $ | 89,757 | | $ | 204,581 | | $ | 10,543 | | $ | 322,003 |
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | ||||||||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | ESOP- | | | | |||
| | Common | | Paid-in | | Retained | | Comprehensive | | Owned | | | | |||||
(dollars and shares in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Total | ||||||
Balance as of December 31, 2019 | | $ | 17,050 | | $ | 88,650 | | $ | 178,092 | | $ | 1,936 | | $ | — | | $ | 285,728 |
Net income | |
| — | |
| — | |
| 34,496 | |
| — | |
| — | |
| 34,496 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 8,607 | |
| — | |
| 8,607 |
Common stock repurchased | |
| (15) | |
| (140) | |
| (217) | |
| — | |
| — | |
| (372) |
Common stock dividends | |
| — | |
| — | |
| (7,790) | |
| — | |
| — | |
| (7,790) |
Share‑based compensation expense | |
| 14 | |
| 1,320 | |
| — | |
| — | |
| — | |
| 1,334 |
Vesting of restricted stock | |
| 73 | |
| (73) | |
| — | |
| — | |
| — | |
| — |
Balance as of September 30, 2020 | | $ | 17,122 | | $ | 89,757 | | $ | 204,581 | | $ | 10,543 | | $ | — | | $ | 322,003 |
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | |||||||||||||
| | | | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | | Other | | | | ||
| | Common | | Paid-in | | Retained | | Comprehensive | | | | ||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | |||||
Balance as of December 31, 2019 | | $ | 17,050 | | $ | 88,650 | | $ | 178,092 | | $ | 1,936 | | $ | 285,728 |
Net income | |
| — | |
| — | |
| 34,496 | |
| — | |
| 34,496 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 8,607 | |
| 8,607 |
Common stock repurchased | |
| (15) | |
| (140) | |
| (217) | |
| — | |
| (372) |
Common stock dividends | |
| — | |
| — | |
| (7,790) | |
| — | |
| (7,790) |
Share‑based compensation expense | |
| 14 | |
| 1,320 | |
| — | |
| — | |
| 1,334 |
Vesting of restricted stock | |
| 73 | |
| (73) | |
| — | |
| — | |
| — |
Balance as of September 30, 2020 | | $ | 17,122 | | $ | 89,757 | | $ | 204,581 | | $ | 10,543 | | $ | 322,003 |
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | ||||||||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | ESOP- | | | | |||
| | Common | | Paid-in | | Retained | | Comprehensive | | Owned | | | | |||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Total | ||||||
Balance as of June 30, 2019 | | $ | 13,816 | | $ | 28,676 | | $ | 169,788 | | $ | 1,485 | | $ | (34,494) | | $ | 179,271 |
Net income | |
| — | |
| — | |
| 7,104 | |
| — | |
| — | |
| 7,104 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 1,600 | |
| — | |
| 1,600 |
Common stock repurchased | |
| (77) | |
| (275) | |
| (1,489) | |
| — | |
| — | |
| (1,841) |
Common stock dividends | |
| — | |
| — | |
| (2,364) | |
| — | |
| — | |
| (2,364) |
ESOP repurchase obligation termination | |
| — | |
| — | |
| — | |
| — | |
| 34,494 | |
| 34,494 |
Initial public offering of 3,289,000 shares of common stock net of issuance costs | | | 3,289 | | | 59,515 | | | — | | | — | | | — | | | 62,804 |
Stock-based compensation expense | |
| — | |
| 335 | |
| — | |
| — | |
| — | |
| 335 |
Vesting of restricted stock | |
| 21 | |
| (21) | |
| — | |
| — | |
| — | |
| — |
Balance as of September 30, 2019 | | $ | 17,049 | | $ | 88,230 | | $ | 173,039 | | $ | 3,085 | | $ | — | | $ | 281,403 |
See accompanying notes to consolidated financial statements (unaudited)
4
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | ||||||||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | Other | | ESOP- | | | | |||
| | Common | | Paid-in | | Retained | | Comprehensive | | Owned | | | | |||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Total | ||||||
Balance as of December 31, 2018 | | $ | 13,775 | | $ | 27,743 | | $ | 159,037 | | $ | (3,601) | | $ | (34,494) | | $ | 162,460 |
Net income | |
| — | |
| — | |
| 21,888 | |
| — | |
| — | |
| 21,888 |
Other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 6,686 | |
| — | |
| 6,686 |
Common stock repurchased | |
| (82) | |
| (291) | |
| (1,574) | |
| — | |
| — | |
| (1,947) |
Common stock dividends | |
| — | |
| — | |
| (6,312) | |
| — | |
| — | |
| (6,312) |
ESOP repurchase obligation termination | |
| — | |
| — | |
| — | |
| — | |
| 34,494 | |
| 34,494 |
Initial public offering of 3,289,000 shares of common stock net of issuance costs | | | 3,289 | | | 59,515 | | | | | | | | | | | | 62,804 |
Share‑based compensation expense | |
| 13 | |
| 1,317 | |
| — | |
| — | |
| — | |
| 1,330 |
Vesting of restricted stock | |
| 54 | |
| (54) | |
| — | |
| — | |
| — | |
| — |
Balance as of September 30, 2019 | | $ | 17,049 | | $ | 88,230 | | $ | 173,039 | | $ | 3,085 | | $ | — | | $ | 281,403 |
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | |
| | Nine months ended | ||||
| | September 30, | ||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Operating Activities |
| |
|
| |
|
Net income | | $ | 39,976 | | $ | 34,496 |
Adjustments to reconcile net income to net cash provided (used) by operating activities | |
|
| |
|
|
Deferred income taxes | |
| 1,176 | |
| (3,620) |
Provision for loan losses | |
| (2,000) | |
| 9,500 |
Depreciation and amortization | |
| 6,726 | |
| 6,657 |
Amortization and accretion of premiums/discounts on investment securities | |
| 2,506 | |
| 1,140 |
Amortization of operating lease right-of-use assets | | | (40) | | | (18) |
Stock-based compensation | |
| 1,804 | |
| 1,334 |
Increase in value of bank-owned life insurance | �� |
| (591) | |
| (595) |
Realized loss (gain) on sale of fixed assets | | | (62) | |
| — |
Realized loss (gain) on derivative instruments | |
| 6,612 | |
| (3,282) |
Realized loss (gain) on loans sold | |
| (39,940) | |
| (37,220) |
Realized loss (gain) on sale of foreclosed assets | |
| (203) | |
| (26) |
Realized loss (gain) on sale of investment securities | |
| (125) | |
| (2,722) |
Realized loss (gain) on servicing rights | |
| (369) | |
| 574 |
Net change in: | |
| | |
| |
Loans held for sale | |
| 101,482 | |
| (27,325) |
Accrued interest receivable | |
| 826 | |
| (1,648) |
Other assets | |
| (1,951) | |
| (2,842) |
Accrued expenses and other liabilities | |
| 1,913 | |
| 5,754 |
Net cash provided (used) by operating activities | |
| 117,740 | |
| (19,843) |
Investing Activities | |
|
| |
|
|
Proceeds from sales or calls of investment securities available-for-sale | |
| 13,189 | |
| 74,630 |
Proceeds from maturities of investment securities available-for-sale | |
| 91,240 | |
| 39,208 |
Purchases of investment securities available-for-sale | |
| (331,785) | |
| (285,830) |
Proceeds from sales or calls of investment securities held-to-maturity | | | 1,763 | | | — |
Proceeds from maturities of investment securities held-to-maturity | | | 2,681 | | | — |
Purchases of investment securities held-to-maturity | | | (218,443) | | | — |
Net (increase) decrease in equity securities | | | — | | | 2,808 |
Net (increase) decrease in loans | |
| 177,675 | |
| (339,758) |
Purchases of premises and equipment | |
| (845) | |
| (2,761) |
Proceeds from sales of foreclosed assets | |
| 539 | |
| 555 |
Net cash provided (used) by investing activities | |
| (263,986) | |
| (511,148) |
Financing Activities | |
|
| |
|
|
Net increase (decrease) in deposits | |
| 141,095 | |
| 491,054 |
Repayments of long-term debt | |
| (49,861) | |
| (156) |
Proceeds from the issuance of subordinated debt | | | 50,000 | | | — |
Cash dividends paid on common stock | |
| (7,975) | |
| (7,790) |
Repurchase of common stock | |
| (521) | |
| (372) |
Net cash provided (used) by financing activities | |
| 132,738 | |
| 482,736 |
Net change in cash and cash equivalents | |
| (13,508) | |
| (48,255) |
Cash and cash equivalents at beginning of period | |
| 172,962 | |
| 144,006 |
Cash and cash equivalents at end of period | | $ | 159,454 | | $ | 95,751 |
See accompanying notes to consolidated financial statements (unaudited)
5
Alerus Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | |
| | Nine months ended | ||||
| | September 30, | ||||
Supplemental Cash Flow Disclosures |
| 2021 |
| 2020 | ||
Cash paid for: | |
|
| |
|
|
Interest | | $ | 3,498 | | $ | 9,838 |
Income taxes | |
| 12,075 | |
| 11,041 |
Non-cash information | |
|
| |
|
|
Loan collateral transferred to foreclosed assets | |
| 1,135 | |
| 531 |
Unrealized gain (loss) on investment securities available-for-sale | |
| (9,851) | |
| 8,607 |
Accretion of unrealized (gain) loss on investment securities held-to-maturity | | | (221) | | | — |
Investment securities transferred to held-to-maturity | | | 149,191 | | | — |
Right-of-use assets obtained in exchange for new operating leases | | | — | | | 1,531 |
| | | | | | |
| | Nine months ended | ||||
| | September 30, | ||||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Operating Activities |
| |
|
| |
|
Net income | | $ | 34,496 | | $ | 21,888 |
Adjustments to reconcile net income to net cash provided (used) by operating activities | |
|
| |
|
|
Deferred income taxes | |
| (3,620) | |
| 149 |
Provision for loan losses | |
| 9,500 | |
| 5,515 |
Depreciation and amortization | |
| 6,657 | |
| 6,500 |
Amortization and accretion of premiums/discounts on investment securities | |
| 1,140 | |
| 832 |
Amortization of operating lease right-of-use assets | | | (18) | | | 3 |
Stock-based compensation | |
| 1,334 | |
| 1,330 |
Increase in value of bank-owned life insurance | |
| (595) | |
| (601) |
Realized loss (gain) on sale of branch | |
| — | |
| (1,544) |
Realized loss (gain) on sale of fixed assets | | | — | |
| (541) |
Realized loss (gain) on derivative instruments | |
| (3,282) | |
| (3,086) |
Realized loss (gain) on loans sold | |
| (37,220) | |
| (12,885) |
Realized loss (gain) on sale of foreclosed assets | |
| (26) | |
| (120) |
Realized loss (gain) on sale of investment securities | |
| (2,722) | |
| (379) |
Realized loss (gain) on servicing rights | |
| 574 | |
| (213) |
Net change in: | |
| | |
| |
Securities held for trading | |
| — | |
| 1,539 |
Loans held for sale | |
| (27,325) | |
| (38,294) |
Accrued interest receivable | |
| (1,648) | |
| 151 |
Other assets | |
| (2,842) | |
| 6,122 |
Accrued expenses and other liabilities | |
| 5,754 | |
| 15,566 |
Net cash provided (used) by operating activities | |
| (19,843) | |
| 1,932 |
Investing Activities | |
|
| |
|
|
Proceeds from sales or calls of investment securities available-for-sale | |
| 74,630 | |
| 32,565 |
Proceeds from maturities of investment securities available-for-sale | |
| 39,208 | |
| 27,818 |
Purchases of investment securities available-for-sale | |
| (285,830) | |
| (80,450) |
Net (increase) decrease in equity securities | |
| 2,808 | |
| 490 |
Net (increase) decrease in loans | |
| (339,758) | |
| 14,213 |
Proceeds from sale of branch | |
| — | |
| 10,379 |
Proceeds from sale of fixed assets | | | — | |
| 875 |
Purchases of premises and equipment | |
| (2,761) | |
| (2,450) |
Proceeds from sales of foreclosed assets | |
| 555 | |
| 1,006 |
Net cash provided (used) by investing activities | |
| (511,148) | |
| 4,446 |
Financing Activities | |
|
| |
|
|
Net increase (decrease) in deposits | |
| 491,054 | |
| 53,241 |
Net increase (decrease) in short-term borrowings | |
| — | |
| (93,460) |
Repayments of long-term debt | |
| (156) | |
| (181) |
Cash dividends paid on common stock | |
| (7,790) | |
| (6,312) |
Repurchase of common stock | |
| (372) | |
| (1,947) |
Proceeds from the issuance of common stock in initial public offering net of issuance costs | | | — | |
| 62,804 |
Net cash provided (used) by financing activities | |
| 482,736 | |
| 14,145 |
Net change in cash and cash equivalents | |
| (48,255) | |
| 20,523 |
Cash and cash equivalents at beginning of period | |
| 144,006 | |
| 40,651 |
Cash and cash equivalents at end of period | | $ | 95,751 | | $ | 61,174 |
See accompanying notes to consolidated financial statements (unaudited)
6
| | | | | | |
| | Nine months ended | ||||
| | September 30, | ||||
Supplemental Cash Flow Disclosures |
| 2020 |
| 2019 | ||
Cash paid for: | |
|
| |
|
|
Interest | | $ | 9,838 | | $ | 13,162 |
Income taxes | |
| 11,041 | |
| 5,550 |
Non-cash information | |
|
| |
|
|
Loan collateral transferred to foreclosed assets | |
| 531 | |
| 766 |
Unrealized gain (loss) on investment securities available-for-sale | |
| 8,607 | |
| 6,686 |
Initial recognition of operating lease right-of-use assets | |
| — | |
| 10,475 |
Initial recognition of operating lease liabilities | |
| — | |
| 10,996 |
Right-of-use assets obtained in exchange for new operating leases | | | 1,531 | | | — |
ESOP repurchase obligation termination | | | — | | | 34,494 |
See accompanying notes to consolidated financial statements (unaudited)
76
Alerus Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 Significant Accounting Policies
Organization
Alerus Financial Corporation, or the Company, is a financial holding company organized under the laws of the state of Delaware. The Company and its subsidiaries operate as a diversified financial services company headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, or the Bank, the Company provides financial solutions to businesses and consumers through four4 distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.
Initial Public Offering
On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On September 25, 2019, the Company sold an additional 429,000 shares of common stock pursuant to the exercise in full, by the underwriters, of their option to purchase additional shares. The aggregate offering price for the shares sold by the Company was $69.1 million, and after deducting $4.7 million of underwriting discounts and $1.6 million of offering expenses paid to third parties, the Company received total net proceeds of $62.8 million.
Basis of Presentation
The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America, or GAAP, for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2019,2020, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.12, 2021.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s principal operating subsidiary is the Bank.
In the normal course of business, the Company may enter into a transaction with a variable interest entity, or VIE. VIE’s are legal entities whose investors lack the ability to make decisions about the entity’s activities, or whose equity investors do not have the right to receive the residual returns of the entity. The applicable accounting guidance requires the Company to perform ongoing quantitative and qualitative analysis to determine whether it must consolidate any VIE. The Company does not have any ownership interest in, or exert any control, over any VIE, and thus no VIE’s are included in the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
8
Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.
7
Reclassifications
Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
Other Information
On March 11, 2020,As of September 30, 2021, the World Health Organization declared the spread of Coronavirus Disease, 2019, or COVID-19, a worldwide pandemic. The COVID-19, pandemic is having significant effects onongoing. During 2020, the COVID-19 pandemic created disruption in global markets, supply chains, businesses,increased rates of unemployment and communities. Specificadversely impacted many industries, including industries related to the Company, COVID-19collateral underlying certain of our loans, and many of these effects are continuing. In 2021, the U.S. economy has, impacted various partswith certain setbacks, begun reopening and wider distribution of its 2020 operationsvaccines has encouraged greater economic activity. Nonetheless, the economic recovery could remain uneven, particularly given uncertainty with respect to the distribution and financial results, including, but not limitedacceptance of the vaccines and their effectiveness with respect to additional loan loss reserves, costs for emergency preparedness, or potential shortagesnew variants of personnel.the virus. Management believes the Company is taking appropriate actions to mitigate, to the extent possible, the negative impact. However, the full impact of COVID-19 is currently unknown and cannot be reasonably estimated as the events are continuing to unfold as the year progresses.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, or the agencies, issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” or ASC 310-40, a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the Financial Accounting Standards Boards, or FASB, that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance has not had a material impact on the Company’s financial statements for disclosure of the impact to date.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on September 12, 2019; (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities.
9
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
Investment Securities
Held-to-maturity securities consist of debt securities, primarily obligations of state and political agencies. Held-to-maturity securities are carried at amortized cost based on the Company’s intent and ability to hold these securities to maturity. Interest earned on held-to-maturity debt securities is included in interest income. Amortization or accretion of premiums and discounts is also recognized in interest income using the effective interest method over the contractual life of the security and is adjusted to reflect actual prepayments. Transfers of debt securities from available-for-sale to held-to-maturity are made at fair value at the date of transfer. Unrealized holding gains and losses at the date of transfer are included in other comprehensive income and in the carrying value of the held-to-maturity security are amortized over the remaining life of the security.
8
NOTE 2 Recent Accounting Pronouncements
The following FASB Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2020,2021, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of September 30, 2020.2021.
Adopted Pronouncements
In January 2017,2020, the FASB issued ASU No. 2017-04, Simplifying2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Test for Goodwill Impairment. ThisInteractions between Topic 321, Topic 323, and Topic 815. The ASU removes Step 2is based on a consensus of the goodwillEmerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, test, which requires a hypothetical purchaseplus or minus changes resulting from observable price allocation. Under the amended guidance, a goodwill impairment charge will now be recognizedchanges in orderly transactions for the amount by whichidentical or a similar investment of the carrying valuesame issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of a reporting unit exceeds its estimated fair value, not to exceed the carrying amount of goodwill.accounting. For public business entities, thatthe amendments in the ASU are US Securities and Exchange Commission filers, ASU 2017-04, is effective for interim and annual reporting periodsfiscal years beginning after December 15, 2019.2020, and interim periods within those fiscal years. Early adoptions are permitted. The Company adopted ASU 2017-04 effective2020-01 as of January 1, 2020, and2021 the new guidance did not have animplementation had no impact on the Company’sits consolidated financial statements.
In August 2018,March 2020, the FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds, and modifies certain disclosure requirements for estimated fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 22020-04, Reference Rate Reform (Topic 848): Facilitation of the estimated fair value hierarchy, but willEffects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be requireddiscontinued. It is intended to disclosehelp stakeholders during the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value measurements. ASU 2018-13global market-wide reference rate transition period. The guidance is effective for all entities interimas of March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) in response to concerns about structural risks in accounting for reference rate reform. The ASU clarifies certain optional expedients and annual reporting periods beginning after December 15, 2019.exceptions in Topic 848 for contract modifications and hedge accounting to apply to derivatives that are affected by the discontinuing transition. The Company adopted ASU 2018-13 effective January 1,2020-04, as of March 2020 and the revised disclosure requirements didis putting a transition plan together but does not expect adoption to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Company on January 1, 2020, and did not have an impact on the Company’s consolidated financial statements.
Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss, or CECL, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred cost” approach under GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including private companies and smaller reporting companies, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted.
10
As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard but continues to work on its implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics, and quality of our loan portfolio, as well as the general economic conditions and forecasts as of the adoption date.
9
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2019-04.
In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments. In November 2019, the FASB Issued ASU 2019-10, which amends the effective date of this ASU for certain entities, including private companies and smaller reporting companies until after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company can take advantage of this delay and plans to adopt the standard with the amended effective date. This update is not expected to have a significant impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020, for public business entities. For private companies and smaller reporting companies, this guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. As an emerging growth company, the Company can take advantage of this later effective date. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. The Company is currently reviewing the provisions of this new pronouncement but does not expect adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoptions is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03.2020-03, Codification Improvements to Financial Instruments. This ASU represents changes to clarify or improve the Accounting Standards Codification, or ASC, related to seven topics. The amendments make the ASC easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Issues 1, 2, 3, 4, and 5 are conforming amendments and for public business entities effective upon the issuance of the standard. Issues 6 and 7 are amendments that affect the guidance in ASU 2016-13. The Company will consider these clarifications and improvements in determining the appropriate adoption of ASU 2016-13.
11
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
NOTE 3 Investment Securities
The following tables present amortized cost, gross unrealized gain and losses, and fair value of the available-for-sale investment securities and the amortized cost, net unrealized gains, carrying value, gross unrealized gains and losses and fair value of for held-to-maturity as of September 30, 20202021 and December 31, 2019:
| | | | | | | | | | | | |
| | September 30, 2020 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Value | ||||
U.S. Treasury and agencies | | $ | 16,075 | | $ | 34 | | $ | (17) | | $ | 16,092 |
Obligations of state and political agencies | |
| 142,308 | |
| 4,908 | |
| — | |
| 147,216 |
Mortgage backed securities | |
|
| |
| | |
| | |
|
|
Residential agency | |
| 203,812 | |
| 7,933 | |
| (45) | |
| 211,700 |
Commercial | |
| 86,502 | |
| 1,092 | |
| (52) | |
| 87,542 |
Asset backed securities | |
| 123 | |
| 8 | |
| — | |
| 131 |
Corporate bonds | |
| 32,518 | |
| 244 | |
| (29) | |
| 32,733 |
Total available-for-sale investment securities | | $ | 481,338 | | $ | 14,219 | | $ | (143) | | $ | 495,414 |
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Value | ||||
U.S. Treasury and agencies | | $ | 21,246 | | $ | 9 | | $ | (15) | | $ | 21,240 |
Obligations of state and political agencies | |
| 68,162 | |
| 647 | |
| (161) | |
| 68,648 |
Mortgage backed securities | |
|
| |
| | |
| | |
|
|
Residential agency | |
| 180,411 | |
| 2,258 | |
| (131) | |
| 182,538 |
Commercial | |
| 30,752 | |
| 101 | |
| (168) | |
| 30,685 |
Asset backed securities | |
| 139 | |
| 5 | |
| — | |
| 144 |
Corporate bonds | |
| 7,054 | |
| 41 | |
| — | |
| 7,095 |
Total available-for-sale investment securities | | $ | 307,764 | | $ | 3,061 | | $ | (475) | | $ | 310,350 |
2020:
The following tables present
10
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
(dollars in thousands) |
| Cost | | Gains | | Losses |
| Value | ||||
Available-for-sale | | | | | | | | | | | | |
U.S. Treasury and agencies | | $ | 5,382 | | $ | 87 | | $ | — | | $ | 5,469 |
Mortgage backed securities | |
|
| |
| | |
| | |
| |
Residential agency | |
| 523,743 | |
| 2,219 | |
| (7,490) | |
| 518,472 |
Commercial | |
| 91,336 | |
| 3,582 | |
| — | |
| 94,918 |
Asset backed securities | |
| 61 | |
| 3 | |
| — | |
| 64 |
Corporate bonds | |
| 35,038 | |
| 1,321 | |
| — | |
| 36,359 |
Total available-for-sale investment securities | | | 655,560 | | | 7,212 | | | (7,490) | | | 655,282 |
Held-to-maturity | | | | | | | | | | | | |
Obligations of state and political agencies | | | 145,172 | |
| 1,530 | |
| (29) | |
| 146,673 |
Mortgage backed securities | | | | | | | | | | | | |
Residential agency | | | 217,414 | |
| 55 | |
| (602) | |
| 216,867 |
Total held-to-maturity investment securities | | | 362,586 | | | 1,585 | | | (631) | | | 363,540 |
Total investment securities | | $ | 1,018,146 | | $ | 8,797 | | $ | (8,121) | | $ | 1,018,822 |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
(dollars in thousands) |
| Cost | | Gains | | Losses |
| Value | ||||
Available-for-sale | | | | | | | | | | | | |
U.S. Treasury and agencies | | $ | 5,926 | | $ | — | | $ | (19) | | $ | 5,907 |
Obligations of state and political agencies | |
| 148,491 | |
| 5,282 | |
| — | |
| 153,773 |
Mortgage backed securities | |
|
| |
| | |
| | |
|
|
Residential agency | |
| 303,760 | |
| 3,395 | |
| (436) | |
| 306,719 |
Commercial | |
| 89,300 | |
| 5,678 | |
| — | |
| 94,978 |
Asset backed securities | |
| 109 | |
| 6 | |
| — | |
| 115 |
Corporate bonds | |
| 30,552 | |
| 388 | |
| (90) | |
| 30,850 |
Total available-for-sale investment securities | | $ | 578,138 | | $ | 14,749 | | $ | (545) | | $ | 592,342 |
On April 1, 2021, the Company transferred its debt securities consisting of obligations of state and political agencies with a fair value of $149.2 million and a net unrealized gain of $1.3 million from available-for-sale to held-to-maturity.
11
Gross unrealized losses and fair values for available-for-saleon investment securities asand the fair value of September 30, 2020 and December 31, 2019,the related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | ||||||||||||||||
| | Less than 12 Months | | Over 12 Months | | Total | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(dollars in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
U.S. Treasury and agencies | | $ | (9) | | $ | 4,694 | | $ | (8) | | $ | 1,309 | | $ | (17) | | $ | 6,003 |
Obligations of state and political agencies | |
| — | |
| 590 | |
| — | |
| — | |
| — | |
| 590 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| (45) | |
| 15,481 | |
| — | |
| — | |
| (45) | |
| 15,481 |
Commercial | |
| (48) | |
| 25,292 | |
| (4) | |
| 2,603 | |
| (52) | |
| 27,895 |
Asset backed securities | |
| — | |
| — | |
| — | |
| 2 | |
| — | |
| 2 |
Corporate bonds | |
| (29) | |
| 5,971 | |
| — | |
| — | |
| (29) | |
| 5,971 |
Total available-for-sale investment securities | | $ | (131) | | $ | 52,028 | | $ | (12) | | $ | 3,914 | | $ | (143) | | $ | 55,942 |
12
Tableposition as of ContentsSeptember 30, 2021 and December 31, 2020, were as follows:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||||||||
| | Less than 12 Months | | Over 12 Months | | Total | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(dollars in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
U.S. Treasury and agencies | | $ | (5) | | $ | 1,740 | | $ | (10) | | $ | 9,990 | | $ | (15) | | $ | 11,730 |
Obligations of state and political agencies | |
| (140) | |
| 11,959 | |
| (21) | |
| 5,798 | |
| (161) | |
| 17,757 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| (52) | |
| 17,131 | |
| (79) | |
| 14,036 | |
| (131) | |
| 31,167 |
Commercial | |
| (116) | |
| 15,235 | |
| (52) | |
| 6,195 | |
| (168) | |
| 21,430 |
Asset backed securities | |
| — | |
| 2 | |
| — | |
| — | |
| — | |
| 2 |
Corporate bonds | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total available-for-sale investment securities | | $ | (313) | | $ | 46,067 | | $ | (162) | | $ | 36,019 | | $ | (475) | | $ | 82,086 |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||||||||
| | Less than 12 Months | | Over 12 Months | | Total | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(dollars in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
Available-for-sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agencies | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| (7,416) | |
| 340,254 | |
| (74) | |
| 9,057 | |
| (7,490) | |
| 349,311 |
Commercial | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Asset backed securities | |
| — | |
| — | |
| — | |
| 2 | |
| — | |
| 2 |
Corporate bonds | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total available-for-sale investment securities | | | (7,416) | | | 340,254 | | | (74) | | | 9,059 | | | (7,490) | | | 349,313 |
Held-to-maturity | | | | | | | | | | | | | | | | | | |
Obligations of state and political agencies | | | (29) | | | 22,550 | | | — | | | — | | | (29) | | | 22,550 |
Mortgage backed securities | | | | | | | | | | | | | | | | | | |
Residential agency | | | (602) | | | 80,145 | | | | | | | | | (602) | | | 80,145 |
Total held-to-maturity investment securities | | | (631) | | | 102,695 | | | — | | | — | | | (631) | | | 102,695 |
Total investment securities | | $ | (8,047) | | $ | 442,949 | | | (74) | | | 9,059 | | | (8,121) | | | 452,008 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||||||||
| | Less than 12 Months | | Over 12 Months | | Total | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(dollars in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
Available-for-sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agencies | | $ | (10) | | $ | 4,509 | | $ | (9) | | $ | 1,309 | | $ | (19) | | $ | 5,818 |
Obligations of state and political agencies | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| (432) | |
| 68,494 | |
| (4) | |
| 2,356 | |
| (436) | |
| 70,850 |
Commercial | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Asset backed securities | |
| — | |
| — | |
| — | |
| 2 | |
| — | |
| 2 |
Corporate bonds | |
| (90) | |
| 16,454 | |
| — | |
| — | |
| (90) | |
| 16,454 |
Total available-for-sale investment securities | | $ | (532) | | $ | 89,457 | | $ | (13) | | $ | 3,667 | | $ | (545) | | $ | 93,124 |
For all of the above investment securities, the unrealized losses were generally due to changes in interest rates and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their maturity dates. The Company evaluates securities for other-than-temporary impairment, or OTTI, on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, consideration is given to the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities, considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.
For the three and nine months ended September 30, 20202021 and 2019,2020, the Company did not recognize OTTI losses on its investment securities.
12
The following table presents amortized cost and estimated fair value of the available-for-sale and held-to-maturity investment securities as of September 30, 2020,2021, by contractual maturity:
| | | | | | |
| | Amortized | | Fair | ||
(dollars in thousands) |
| Cost |
| Value | ||
Due within one year or less | | $ | 16,132 | | $ | 16,211 |
Due after one year through five years | |
| 26,821 | |
| 27,459 |
Due after five years through ten years | |
| 145,310 | |
| 150,121 |
Due after 10 years | |
| 293,075 | |
| 301,623 |
Total available-for-sale investment securities | | $ | 481,338 | | $ | 495,414 |
| | | | | | | | | | | | |
| | Held-to-maturity | | Available-for-sale | ||||||||
| | Carrying | | Fair | | Amortized | | Fair | ||||
(dollars in thousands) |
| Value | | Value | | Cost |
| Value | ||||
Due within one year or less | | $ | 4,690 | | $ | 4,690 | | $ | — | | $ | — |
Due after one year through five years | |
| 34,282 | |
| 34,359 | |
| 3,270 | |
| 3,376 |
Due after five years through ten years | |
| 75,197 | |
| 76,120 | |
| 83,891 | |
| 87,330 |
Due after 10 years | |
| 248,417 | |
| 248,371 | |
| 568,399 | |
| 564,576 |
Total investment securities | | $ | 362,586 | | $ | 363,540 | | $ | 655,560 | | $ | 655,282 |
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment securities with a total carrying value of $115.4$165.5 million and $136.2$160.8 million were pledged as of September 30, 20202021 and December 31, 2019,2020, respectively, to secure public deposits and for other purposes required or permitted by law.
Proceeds from the sale or call of available-for-sale investment securities, for the three and nine months ended September 30, 20202021 and 2019,2020, are displayed in the table below:
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Proceeds | | $ | 35,125 | | $ | 10,934 | | $ | 74,630 | | $ | 32,565 |
Realized gains | |
| 1,428 | |
| 59 | |
| 2,722 | |
| 357 |
Realized losses | |
| — | |
| (11) | |
| — | |
| (22) |
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Proceeds | | $ | — | | $ | 35,125 | | $ | 13,189 | | $ | 74,630 |
Realized gains | |
| — | |
| 1,428 | |
| 114 | |
| 2,722 |
Realized losses | |
| — | |
| — | |
| — | |
| — |
13
TableProceeds from the sale or call of Contentsheld-to-maturity investment securities, for the three and nine months ended September 30, 2021 and 2020, are displayed in the table below:
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Proceeds | | $ | 348 | | $ | — | | $ | 1,763 | | $ | — |
Realized gains | |
| 11 | |
| — | |
| 11 | |
| — |
Realized losses | |
| — | |
| — | |
| — | |
| — |
During the three and nine months ended September 30, 2021, the Company sold 1 held-to-maturity security with an amortized cost of $330 thousand. Proceeds from the sale totaled $348 thousand, resulting in realized gains of $11 thousand. For this sale of a held-to-maturity security, the Company received evidence of a significant deterioration of the issuer’s creditworthiness. There were 0 sales of held-to-maturity securities during the three and nine months ended September 30, 2020.
As of September 30, 20202021 and December 31, 2019,2020, the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Federal Reserve | | $ | 2,675 | | $ | 2,675 |
FHLB | |
| 3,169 | |
| 3,080 |
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Federal Reserve | | $ | 2,675 | | $ | 2,675 |
FHLB | |
| 3,827 | |
| 3,090 |
These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity
13
securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.
Visa Class B Restricted Shares
In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of September 30, 2020,2021, the conversion ratio was 1.6228. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,236 Class A equivalents) that the Company owned as of September, 30, 20202021 and December 31, 2019,2020, are carried at a zero0 cost basis.
NOTE 4 Loans and Allowance for Loan Losses
The following table presents total loans outstanding, by portfolio segment, as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | |
|
| September 30, |
| December 31, | ||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Commercial | | | | | | |
Commercial and industrial (1) | | $ | 506,599 | | $ | 691,858 |
Real estate construction | |
| 37,751 | |
| 44,451 |
Commercial real estate | |
| 573,518 | |
| 563,007 |
Total commercial | |
| 1,117,868 | |
| 1,299,316 |
Consumer | |
|
| |
|
|
Residential real estate first mortgage | |
| 501,339 | |
| 463,370 |
Residential real estate junior lien | |
| 130,243 | |
| 143,416 |
Other revolving and installment | |
| 50,936 | |
| 73,273 |
Total consumer | |
| 682,518 | |
| 680,059 |
Total loans | | $ | 1,800,386 | | $ | 1,979,375 |
| | | | | | |
|
| September 30, |
| December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Commercial | | | | | | |
Commercial and industrial (1) | | $ | 789,036 | | $ | 479,144 |
Real estate construction | |
| 33,169 | |
| 26,378 |
Commercial real estate | |
| 535,216 | |
| 494,703 |
Total commercial | |
| 1,357,421 | |
| 1,000,225 |
Consumer | |
|
| |
|
|
Residential real estate first mortgage | |
| 469,050 | |
| 457,155 |
Residential real estate junior lien | |
| 152,487 | |
| 177,373 |
Other revolving and installment | |
| 79,461 | |
| 86,526 |
Total consumer | |
| 700,998 | |
| 721,054 |
Total loans | | $ | 2,058,419 | | $ | 1,721,279 |
(1) | Included Paycheck Protection Program, or PPP, loans of |
Total loans included net deferred loan fees and costs of $7.8$2.4 million and $1.0$4.7 million at September 30, 20202021 and December 31, 2019,2020, respectively. Deferred loan fees on PPP loans were $7.4$2.9 million at September 30, 2021 and $4.3 million at December 31, 2020.
Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status. Loan modifications made in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, are included as accruing current.
14
The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||
| | | | | | | | 90 Days | | | | | | | |
| | Accruing | | 30 - 89 Days | | or More | | | | | Total | ||||
(dollars in thousands) |
| Current |
| Past Due |
| Past Due |
| Nonaccrual |
| Loans | |||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 784,282 | | $ | 1,914 | | $ | — | | $ | 2,840 | | $ | 789,036 |
Real estate construction | |
| 32,384 | |
| 785 | |
| — | |
| — | |
| 33,169 |
Commercial real estate | |
| 530,984 | |
| 2,903 | |
| — | |
| 1,329 | |
| 535,216 |
Total commercial | |
| 1,347,650 | |
| 5,602 | |
| — | |
| 4,169 | |
| 1,357,421 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 466,551 | |
| 2,042 | |
| — | |
| 457 | |
| 469,050 |
Residential real estate junior lien | |
| 152,111 | |
| 207 | |
| — | |
| 169 | |
| 152,487 |
Other revolving and installment | |
| 79,221 | |
| 240 | |
| — | |
| — | |
| 79,461 |
Total consumer | |
| 697,883 | |
| 2,489 | |
| — | |
| 626 | |
| 700,998 |
Total loans | | $ | 2,045,533 | | $ | 8,091 | | $ | — | | $ | 4,795 | | $ | 2,058,419 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2021 | ||||||||||||||||||||||||||
| | | | | | | | 90 Days | | | | | | | | | | | | | | 90 Days | | | | | | | ||
| | Accruing | | 30 - 89 Days | | or More | | | | | Total | | Accruing | | 30 - 89 Days | | or More | | | | | Total | ||||||||
(dollars in thousands) |
| Current |
| Past Due |
| Past Due |
| Nonaccrual |
| Loans |
| Current |
| Past Due |
| Past Due |
| Nonaccrual |
| Loans | ||||||||||
Commercial | |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 473,900 | | $ | 382 | | $ | — | | $ | 4,862 | | $ | 479,144 | | $ | 504,309 | | $ | 657 | | $ | — | | $ | 1,633 | | $ | 506,599 |
Real estate construction | |
| 26,251 | |
| 127 | |
| — | |
| — | |
| 26,378 | |
| 37,751 | |
| — | |
| — | |
| — | |
| 37,751 |
Commercial real estate | |
| 492,707 | |
| 556 | |
| — | |
| 1,440 | |
| 494,703 | |
| 569,209 | |
| — | |
| — | |
| 4,309 | |
| 573,518 |
Total commercial | |
| 992,858 | |
| 1,065 | |
| — | |
| 6,302 | |
| 1,000,225 | |
| 1,111,269 | |
| 657 | |
| — | |
| 5,942 | |
| 1,117,868 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 455,244 | |
| 666 | |
| 448 | |
| 797 | |
| 457,155 | |
| 500,350 | |
| 876 | |
| — | |
| 113 | |
| 501,339 |
Residential real estate junior lien | |
| 176,915 | |
| 184 | |
| — | |
| 274 | |
| 177,373 | |
| 129,521 | |
| 552 | |
| — | |
| 170 | |
| 130,243 |
Other revolving and installment | |
| 86,172 | |
| 348 | |
| — | |
| 6 | |
| 86,526 | |
| 50,735 | |
| 197 | |
| — | |
| 4 | |
| 50,936 |
Total consumer | |
| 718,331 | |
| 1,198 | |
| 448 | |
| 1,077 | |
| 721,054 | |
| 680,606 | |
| 1,625 | |
| — | |
| 287 | |
| 682,518 |
Total loans | | $ | 1,711,189 | | $ | 2,263 | | $ | 448 | | $ | 7,379 | | $ | 1,721,279 | | $ | 1,791,875 | | $ | 2,282 | | $ | — | | $ | 6,229 | | $ | 1,800,386 |
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | | | | | | | 90 Days | | | | | | | |
| | Accruing | | 30 - 89 Days | | or More | | | | | Total | ||||
(dollars in thousands) |
| Current |
| Past Due |
| Past Due |
| Nonaccrual |
| Loans | |||||
Commercial | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | | $ | 689,340 | | $ | 500 | | $ | 30 | | $ | 1,988 | | $ | 691,858 |
Real estate construction | |
| 44,451 | |
| — | |
| — | |
| — | |
| 44,451 |
Commercial real estate | |
| 558,127 | |
| 2,449 | |
| — | |
| 2,431 | |
| 563,007 |
Total commercial | |
| 1,291,918 | |
| 2,949 | |
| 30 | |
| 4,419 | |
| 1,299,316 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 461,179 | |
| 1,752 | |
| — | |
| 439 | |
| 463,370 |
Residential real estate junior lien | |
| 143,060 | |
| 191 | |
| — | |
| 165 | |
| 143,416 |
Other revolving and installment | |
| 73,128 | |
| 118 | |
| — | |
| 27 | |
| 73,273 |
Total consumer | |
| 677,367 | |
| 2,061 | |
| — | |
| 631 | |
| 680,059 |
Total loans | | $ | 1,969,285 | | $ | 5,010 | | $ | 30 | | $ | 5,050 | | $ | 1,979,375 |
The Company’s consumer loan portfolio is primarily comprised of secured loans that are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred.
The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.
The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:
Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
15
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well-defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and charged off immediately.
The tables below present total loans outstanding, by loan portfolio segment, and risk category as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||
| | | | | Criticized | | | | |||||||
| | | | | Special | | | | | | | | | | |
(dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | |||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 759,808 | | $ | 8,706 | | $ | 20,522 | | $ | — | | $ | 789,036 |
Real estate construction | |
| 32,140 | |
| 783 | |
| 246 | |
| — | |
| 33,169 |
Commercial real estate | |
| 501,913 | |
| 7,265 | |
| 26,038 | |
| — | |
| 535,216 |
Total commercial | | | 1,293,861 | | | 16,754 | | | 46,806 | | | — | | | 1,357,421 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 467,168 | |
| 1,413 | |
| 469 | |
| — | |
| 469,050 |
Residential real estate junior lien | |
| 149,290 | |
| 2,005 | |
| 1,192 | |
| — | |
| 152,487 |
Other revolving and installment | |
| 79,461 | |
| — | |
| — | |
| — | |
| 79,461 |
Total consumer | |
| 695,919 | |
| 3,418 | |
| 1,661 | |
| — | |
| 700,998 |
Total loans | | $ | 1,989,780 | | $ | 20,172 | | $ | 48,467 | | $ | — | | $ | 2,058,419 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2021 | ||||||||||||||||||||||||||
| | | | | Criticized | | | | | | | | Criticized | | | | ||||||||||||||
| | | | | Special | | | | | | | | | | | | | | Special | | | | | | | | | | ||
(dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | ||||||||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 448,306 | | $ | 9,585 | | $ | 21,253 | | $ | — | | $ | 479,144 | | $ | 498,201 | | $ | 1,777 | | $ | 6,374 | | $ | 247 | | $ | 506,599 |
Real estate construction | |
| 25,119 | |
| 282 | |
| 977 | |
| — | |
| 26,378 | |
| 37,751 | |
| — | |
| — | |
| — | |
| 37,751 |
Commercial real estate | |
| 462,294 | |
| 2,359 | |
| 30,050 | |
| — | |
| 494,703 | |
| 553,492 | |
| 2,316 | |
| 17,710 | |
| — | |
| 573,518 |
Total commercial | | | 935,719 | | | 12,226 | | | 52,280 | | | — | | | 1,000,225 | | | 1,089,444 | | | 4,093 | | | 24,084 | | | 247 | | | 1,117,868 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 456,358 | |
| — | |
| 797 | |
| — | |
| 457,155 | |
| 499,497 | |
| — | |
| 1,842 | |
| — | |
| 501,339 |
Residential real estate junior lien | |
| 176,122 | |
| — | |
| 1,251 | |
| — | |
| 177,373 | |
| 129,303 | |
| — | |
| 940 | |
| — | |
| 130,243 |
Other revolving and installment | |
| 86,520 | |
| — | |
| 6 | |
| — | |
| 86,526 | |
| 50,932 | |
| — | |
| 4 | |
| — | |
| 50,936 |
Total consumer | |
| 719,000 | |
| — | |
| 2,054 | |
| — | |
| 721,054 | |
| 679,732 | |
| — | |
| 2,786 | |
| — | |
| 682,518 |
Total loans | | $ | 1,654,719 | | $ | 12,226 | | $ | 54,334 | | $ | — | | $ | 1,721,279 | | $ | 1,769,176 | | $ | 4,093 | | $ | 26,870 | | $ | 247 | | $ | 1,800,386 |
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | | | | Criticized | | | | |||||||
| | | | | Special | | | | | | | | | | |
(dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | |||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 669,602 | | $ | 5,415 | | $ | 16,841 | | $ | — | | $ | 691,858 |
Real estate construction | |
| 44,451 | |
| — | |
| — | |
| — | |
| 44,451 |
Commercial real estate | |
| 533,733 | |
| 6,686 | |
| 22,588 | |
| — | |
| 563,007 |
Total commercial | | | 1,247,786 | | | 12,101 | | | 39,429 | | | — | | | 1,299,316 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 461,221 | |
| 1,406 | |
| 743 | |
| — | |
| 463,370 |
Residential real estate junior lien | |
| 140,461 | |
| 1,819 | |
| 1,136 | |
| — | |
| 143,416 |
Other revolving and installment | |
| 73,236 | |
| — | |
| 37 | |
| — | |
| 73,273 |
Total consumer | |
| 674,918 | |
| 3,225 | |
| 1,916 | |
| — | |
| 680,059 |
Total loans | | $ | 1,922,704 | | $ | 15,326 | | $ | 41,345 | | $ | — | | $ | 1,979,375 |
The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.
16
The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan losses for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | |||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | |||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 10,797 | | $ | (846) | | $ | (10) | | $ | 432 | | $ | 10,373 |
Real estate construction | |
| 443 | |
| 40 | |
| — | |
| — | |
| 483 |
Commercial real estate | |
| 9,948 | |
| 1,828 | |
| — | |
| 95 | |
| 11,871 |
Total commercial | |
| 21,188 | |
| 1,022 | |
| (10) | |
| 527 | |
| 22,727 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 2,673 | |
| 1,694 | |
| — | |
| — | |
| 4,367 |
Residential real estate junior lien | |
| 1,102 | |
| 28 | |
| — | |
| 81 | |
| 1,211 |
Other revolving and installment | |
| 546 | |
| 108 | |
| (41) | |
| 24 | |
| 637 |
Total consumer | |
| 4,321 | |
| 1,830 | |
| (41) | |
| 105 | |
| 6,215 |
Unallocated | |
| 1,747 | |
| 648 | |
| — | |
| — | |
| 2,395 |
Total | | $ | 27,256 | | $ | 3,500 | | $ | (51) | | $ | 632 | | $ | 31,337 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Three months ended September 30, 2021 | ||||||||||||||||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | | Beginning | | Provision for | | Loan | | Loan | | Ending | ||||||||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||
Commercial | | | | | | | | | | | | | | | |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 12,270 | | $ | (498) | | $ | (2,745) | | $ | 1,346 | | $ | 10,373 | | $ | 9,620 | | $ | (825) | | $ | (747) | | $ | 1,052 | | $ | 9,100 |
Real estate construction | | | 303 | | | 180 | | | — | | | — | | | 483 | |
| 587 | |
| 92 | |
| — | |
| — | |
| 679 |
Commercial real estate | | | 6,688 | | | 5,953 | | | (865) | | | 95 | | | 11,871 | |
| 12,937 | |
| (413) | |
| — | |
| — | |
| 12,524 |
Total commercial | | | 19,261 | | | 5,635 | | | (3,610) | | | 1,441 | | | 22,727 | |
| 23,144 | |
| (1,146) | |
| (747) | |
| 1,052 | |
| 22,303 |
Consumer | | | | | | | | | | | | | | | | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | | | 1,448 | | | 2,914 | | | — | | | 5 | | | 4,367 | |
| 6,176 | |
| 625 | |
| — | |
| — | |
| 6,801 |
Residential real estate junior lien | | | 671 | | | 377 | | | (12) | | | 175 | | | 1,211 | |
| 1,401 | |
| 6 | |
| — | |
| 16 | |
| 1,423 |
Other revolving and installment | | | 352 | | | 371 | | | (194) | | | 108 | | | 637 | |
| 574 | |
| (32) | |
| (46) | |
| 27 | |
| 523 |
Total consumer | | | 2,471 | | | 3,662 | | | (206) | | | 288 | | | 6,215 | |
| 8,151 | |
| 599 | |
| (46) | |
| 43 | |
| 8,747 |
Unallocated | | | 2,192 | | | 203 | | | — | | | — | | | 2,395 | |
| 2,469 | |
| (1,453) | |
| — | |
| — | |
| 1,016 |
Total | | $ | 23,924 | | $ | 9,500 | | $ | (3,816) | | $ | 1,729 | | $ | 31,337 | | $ | 33,764 | | $ | (2,000) | | $ | (793) | | $ | 1,095 | | $ | 32,066 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2021 | ||||||||||||||||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | | Beginning | | Provision for | | Loan | | Loan | | Ending | ||||||||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | ||||||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 11,694 | | $ | (962) | | $ | (324) | | $ | 538 | | $ | 10,946 | | $ | 10,205 | | $ | (1,378) | | $ | (1,224) | | $ | 1,497 | | $ | 9,100 |
Real estate construction | | | 323 | | | 25 | | | — | | | — | | | 348 | | | 658 | | | 21 | | | — | | | — | | | 679 |
Commercial real estate | | | 5,765 | | | (4) | | | — | | | — | | | 5,761 | | | 14,105 | | | (1,049) | | | (536) | | | 4 | | | 12,524 |
Total commercial | | | 17,782 | | | (941) | | | (324) | | | 538 | | | 17,055 | | | 24,968 | �� | | (2,406) | | | (1,760) | | | 1,501 | | | 22,303 |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate first mortgage | | | 1,155 | | | (139) | | | — | | | — | | | 1,016 | | | 5,774 | | | 1,027 | | | — | | | — | | | 6,801 |
Residential real estate junior lien | | | 710 | | | 157 | | | (20) | | | 49 | | | 896 | | | 1,373 | | | (63) | | | — | | | 113 | | | 1,423 |
Other revolving and installment | | | 380 | | | 1 | | | (31) | | | 28 | | | 378 | | | 753 | | | (196) | | | (139) | | | 105 | | | 523 |
Total consumer | | | 2,245 | | | 19 | | | (51) | | | 77 | | | 2,290 | | | 7,900 | | | 768 | | | (139) | | | 218 | | | 8,747 |
Unallocated | | | 1,219 | | | 2,420 | | | — | | | — | | | 3,639 | | | 1,378 | | | (362) | | | — | | | — | | | 1,016 |
Total | | $ | 21,246 | | $ | 1,498 | | $ | (375) | | $ | 615 | | $ | 22,984 | | $ | 34,246 | | $ | (2,000) | | $ | (1,899) | | $ | 1,719 | | $ | 32,066 |
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | |||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | |||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Commercial | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 10,797 | | $ | (846) | | $ | (10) | | $ | 432 | | $ | 10,373 |
Real estate construction | | | 443 | |
| 40 | |
| — | |
| — | | | 483 |
Commercial real estate | | | 9,948 | |
| 1,828 | |
| — | |
| 95 | | | 11,871 |
Total commercial | | | 21,188 | |
| 1,022 | |
| (10) | |
| 527 | | | 22,727 |
Consumer | | | | |
|
| |
|
| |
|
| | | |
Residential real estate first mortgage | | | 2,673 | |
| 1,694 | |
| — | |
| — | | | 4,367 |
Residential real estate junior lien | | | 1,102 | |
| 28 | |
| — | |
| 81 | | | 1,211 |
Other revolving and installment | | | 546 | |
| 108 | |
| (41) | |
| 24 | | | 637 |
Total consumer | | | 4,321 | | | 1,830 | | | (41) | | | 105 | | | 6,215 |
Unallocated | | | 1,747 | |
| 648 | | | — | | | — | | | 2,395 |
Total | | $ | 27,256 | | $ | 3,500 | | $ | (51) | | $ | 632 | | $ | 31,337 |
17
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | |||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | |||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Commercial | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | | $ | 12,127 | | $ | 3,263 | | $ | (5,275) | | $ | 831 | | $ | 10,946 |
Real estate construction | |
| 250 | |
| 97 | |
| (1) | |
| 2 | |
| 348 |
Commercial real estate | |
| 6,279 | |
| (668) | |
| — | |
| 150 | |
| 5,761 |
Total commercial | |
| 18,656 | |
| 2,692 | |
| (5,276) | |
| 983 | |
| 17,055 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 1,156 | |
| (140) | |
| — | |
| — | |
| 1,016 |
Residential real estate junior lien | |
| 805 | |
| 113 | |
| (154) | |
| 132 | |
| 896 |
Other revolving and installment | |
| 380 | |
| 388 | |
| (513) | |
| 123 | |
| 378 |
Total consumer | |
| 2,341 | |
| 361 | |
| (667) | |
| 255 | |
| 2,290 |
Unallocated | |
| 1,177 | |
| 2,462 | |
| — | |
| — | |
| 3,639 |
Total | | $ | 22,174 | | $ | 5,515 | | $ | (5,943) | | $ | 1,238 | | $ | 22,984 |
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | |||||||||||||
| | Beginning | | Provision for | | Loan | | Loan | | Ending | |||||
(dollars in thousands) |
| Balance |
| Loan Losses |
| Charge-offs |
| Recoveries |
| Balance | |||||
Commercial | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | | $ | 12,270 | | $ | (498) | | $ | (2,745) | | $ | 1,346 | | $ | 10,373 |
Real estate construction | |
| 303 | |
| 180 | |
| — | |
| — | |
| 483 |
Commercial real estate | |
| 6,688 | |
| 5,953 | |
| (865) | |
| 95 | |
| 11,871 |
Total commercial | |
| 19,261 | |
| 5,635 | |
| (3,610) | |
| 1,441 | |
| 22,727 |
Consumer | |
| | |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 1,448 | |
| 2,914 | |
| — | |
| 5 | |
| 4,367 |
Residential real estate junior lien | |
| 671 | |
| 377 | |
| (12) | |
| 175 | |
| 1,211 |
Other revolving and installment | |
| 352 | |
| 371 | |
| (194) | |
| 108 | |
| 637 |
Total consumer | |
| 2,471 | |
| 3,662 | |
| (206) | |
| 288 | |
| 6,215 |
Unallocated | |
| 2,192 | |
| 203 | |
| — | |
| — | |
| 2,395 |
Total | | $ | 23,924 | | $ | 9,500 | | $ | (3,816) | | $ | 1,729 | | $ | 31,337 |
The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||||||||
| | Recorded Investment | | Allowance for Loan Losses | |||||||||||||||||
| | Individually | | Collectively | | | | | Individually | | Collectively | | | | | | | ||||
(dollars in thousands) |
| Evaluated |
| Evaluated |
| Total |
| Evaluated |
| Evaluated |
| Unallocated |
| Total | |||||||
Commercial | | |
|
| |
|
| |
| | | | | | | | | | | | |
Commercial and industrial | | $ | 3,497 | | $ | 785,539 | | $ | 789,036 | | $ | 379 | | $ | 9,994 | | $ | — | | $ | 10,373 |
Real estate construction | |
| — | |
| 33,169 | |
| 33,169 | | | — | | | 483 | | | — | | | 483 |
Commercial real estate | |
| 1,525 | |
| 533,691 | |
| 535,216 | | | 9 | | | 11,862 | | | — | | | 11,871 |
Total commercial | |
| 5,022 | |
| 1,352,399 | |
| 1,357,421 | | | 388 | | | 22,339 | | | — | | | 22,727 |
Consumer | |
|
| |
|
| |
|
| | | | | | | | | | | | |
Residential real estate first mortgage | |
| 457 | |
| 468,593 | |
| 469,050 | | | — | | | 4,367 | | | — | | | 4,367 |
Residential real estate junior lien | |
| 229 | |
| 152,258 | |
| 152,487 | | | 19 | | | 1,192 | | | — | | | 1,211 |
Other revolving and installment | |
| — | |
| 79,461 | |
| 79,461 | | | — | | | 637 | | | — | | | 637 |
Total consumer | |
| 686 | |
| 700,312 | |
| 700,998 | | | 19 | | | 6,196 | | | — | | | 6,215 |
Total loans | | $ | 5,708 | | $ | 2,052,711 | | $ | 2,058,419 | | $ | 407 | | $ | 28,535 | | $ | 2,395 | | $ | 31,337 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2021 | |||||||||||||||||||||||||||||||||||
| | Recorded Investment | | Allowance for Loan Losses | | Recorded Investment | | Allowance for Loan Losses | |||||||||||||||||||||||||||||||
| | Individually | | Collectively | | | | | Individually | | Collectively | | | | | | | | Individually | | Collectively | | | | | Individually | | Collectively | | | | ||||||||
(dollars in thousands) |
| Evaluated |
| Evaluated |
| Total |
| Evaluated |
| Evaluated |
| Unallocated |
| Total |
| Evaluated |
| Evaluated |
| Total |
| Evaluated |
| Evaluated |
| Total | |||||||||||||
Commercial | | |
|
| |
|
| |
| | | | | | | | | | | | | | |
|
| |
|
| |
| | | | | | | | | |
Commercial and industrial | | $ | 976 | | $ | 478,168 | | $ | 479,144 | | $ | 189 | | $ | 12,081 | | $ | — | | $ | 12,270 | | $ | 2,161 | | $ | 504,438 | | $ | 506,599 | | $ | 536 | | $ | 8,564 | | $ | 9,100 |
Real estate construction | |
| — | |
| 26,378 | |
| 26,378 | | | — | | | 303 | | | — | | | 303 | |
| — | |
| 37,751 | |
| 37,751 | | | — | | | 679 | | | 679 |
Commercial real estate | |
| 5,925 | |
| 488,778 | |
| 494,703 | | | 2,946 | | | 3,742 | | | — | | | 6,688 | |
| 4,493 | |
| 569,025 | |
| 573,518 | | | 11 | | | 12,513 | | | 12,524 |
Total commercial | |
| 6,901 | |
| 993,324 | |
| 1,000,225 | | | 3,135 | | | 16,126 | | | — | | | 19,261 | |
| 6,654 | |
| 1,111,214 | |
| 1,117,868 | | | 547 | | | 21,756 | | | 22,303 |
Consumer | |
|
| |
|
| |
|
| | | | | | | | | | | | | |
|
| |
|
| |
|
| | | | | | | | | |
Residential real estate first mortgage | |
| 782 | |
| 456,373 | |
| 457,155 | | | — | | | 1,448 | | | — | | | 1,448 | |
| 121 | |
| 501,218 | |
| 501,339 | | | — | | | 6,801 | | | 6,801 |
Residential real estate junior lien | |
| 266 | | | 177,107 | |
| 177,373 | | | — | | | 671 | | | — | | | 671 | |
| 172 | |
| 130,071 | |
| 130,243 | | | 8 | | | 1,415 | | | 1,423 |
Other revolving and installment | |
| 5 | |
| 86,521 | |
| 86,526 | | | 3 | | | 349 | | | — | | | 352 | |
| 4 | |
| 50,932 | |
| 50,936 | | | 4 | | | 519 | | | 523 |
Total consumer | |
| 1,053 | |
| 720,001 | |
| 721,054 | | | 3 | | | 2,468 | | | — | | | 2,471 | |
| 297 | |
| 682,221 | |
| 682,518 | | | 12 | | | 8,735 | | | 8,747 |
Unallocated | | | — | | | — | | | — | | | — | | | — | | | 1,016 | |||||||||||||||||||||
Total loans | | $ | 7,954 | | $ | 1,713,325 | | $ | 1,721,279 | | $ | 3,138 | | $ | 18,594 | | $ | 2,192 | | $ | 23,924 | | $ | 6,951 | | $ | 1,793,435 | | $ | 1,800,386 | | $ | 559 | | $ | 30,491 | | $ | 32,066 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||||||||
| | Recorded Investment | | Allowance for Loan Losses | ||||||||||||||
| | Individually | | Collectively | | | | | Individually | | Collectively | | | | ||||
(dollars in thousands) |
| Evaluated |
| Evaluated |
| Total |
| Evaluated |
| Evaluated |
| Total | ||||||
Commercial | | |
|
| |
|
| |
| | | | | | | | | |
Commercial and industrial | | $ | 2,616 | | $ | 689,242 | | $ | 691,858 | | $ | 336 | | $ | 9,869 | | $ | 10,205 |
Real estate construction | |
| — | |
| 44,451 | |
| 44,451 | | | — | | | 658 | | | 658 |
Commercial real estate | |
| 5,224 | |
| 557,783 | |
| 563,007 | | | 837 | | | 13,268 | | | 14,105 |
Total commercial | |
| 7,840 | |
| 1,291,476 | |
| 1,299,316 | | | 1,173 | | | 23,795 | | | 24,968 |
Consumer | |
|
| |
|
| |
|
| | | | | | | | | |
Residential real estate first mortgage | |
| 439 | |
| 462,931 | |
| 463,370 | | | — | | | 5,774 | | | 5,774 |
Residential real estate junior lien | |
| 224 | | | 143,192 | |
| 143,416 | | | 19 | | | 1,354 | | | 1,373 |
Other revolving and installment | |
| 27 | |
| 73,246 | |
| 73,273 | | | 13 | | | 740 | | | 753 |
Total consumer | |
| 690 | |
| 679,369 | |
| 680,059 | | | 32 | | | 7,868 | | | 7,900 |
Unallocated | | | — | | | — | | | — | | | — | | | — | | | 1,378 |
Total loans | | $ | 8,530 | | $ | 1,970,845 | | $ | 1,979,375 | | $ | 1,205 | | $ | 31,663 | | $ | 34,246 |
18
The tables below summarize key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses.
| | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| December 31, 2019 | ||||||||||||||
| | Recorded | | Unpaid | | Related |
| Recorded | | Unpaid | | Related | ||||||
(dollars in thousands) |
| Investment |
| Principal |
| Allowance |
| Investment |
| Principal |
| Allowance | ||||||
Impaired loans with a valuation allowance | |
|
| |
|
| |
|
| | | | | | | | | |
Commercial and industrial | | $ | 2,523 | | $ | 2,609 | | $ | 379 | | $ | 639 | | $ | 727 | | $ | 189 |
Commercial real estate | |
| 196 | |
| 196 | |
| 9 | |
| 5,718 | |
| 5,823 | |
| 2,946 |
Residential real estate junior lien | |
| 19 | |
| 20 | | | 19 | | | — | |
| — | |
| — |
Other revolving and installment | |
| — | |
| — | |
| — | | | 5 | |
| 6 | |
| 3 |
Total impaired loans with a valuation allowance | | | 2,738 | | | 2,825 | | | 407 | | | 6,362 | | | 6,556 | | | 3,138 |
Impaired loans without a valuation allowance |
| |
|
| |
|
| |
| | | | | | | | | |
Commercial and industrial | | | 974 | | | 1,159 | | | — | | | 337 | | | 1,110 | | | — |
Commercial real estate | |
| 1,329 | |
| 1,448 | |
| — | | | 207 | |
| 236 | |
| — |
Residential real estate first mortgage | |
| 457 | |
| 469 | |
| — | | | 782 | |
| 797 | |
| — |
Residential real estate junior lien | |
| 210 | |
| 256 | |
| — | | | 266 | |
| 372 | |
| — |
Other revolving and installment | |
| — | |
| — | |
| — | | | — | |
| — | |
| — |
Total impaired loans without a valuation allowance | | | 2,970 | | | 3,332 | | | — | | | 1,592 | | | 2,515 | | | — |
Total impaired loans | |
|
| |
|
| |
|
| | | | | | | | | |
Commercial and industrial | | | 3,497 | | | 3,768 | | | 379 | | | 976 | | | 1,837 | | | 189 |
Commercial real estate | |
| 1,525 | |
| 1,644 | |
| 9 | |
| 5,925 | |
| 6,059 | |
| 2,946 |
Residential real estate first mortgage | | | 457 | | | 469 | | | — | | | 782 | | | 797 | | | — |
Residential real estate junior lien | |
| 229 | |
| 276 | |
| 19 | |
| 266 | |
| 372 | |
| — |
Other revolving and installment | |
| — | |
| — | |
| — | |
| 5 | |
| 6 | |
| 3 |
Total impaired loans | | $ | 5,708 | | $ | 6,157 | | $ | 407 | | $ | 7,954 | | $ | 9,071 | | $ | 3,138 |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| December 31, 2020 | ||||||||||||||
| | Recorded | | Unpaid | | Related |
| Recorded | | Unpaid | | Related | ||||||
(dollars in thousands) |
| Investment |
| Principal |
| Allowance |
| Investment |
| Principal |
| Allowance | ||||||
Impaired loans with a valuation allowance | |
|
| |
|
| |
|
| | | | | | | | | |
Commercial and industrial | | $ | 710 | | $ | 725 | | $ | 536 | | $ | 723 | | $ | 725 | | $ | 336 |
Commercial real estate | |
| 777 | |
| 920 | |
| 11 | |
| 3,948 | |
| 3,974 | |
| 837 |
Residential real estate junior lien | |
| 8 | |
| 8 | | | 8 | | | 19 | |
| 20 | | | 19 |
Other revolving and installment | |
| 4 | |
| 4 | |
| 4 | | | 27 | |
| 27 | |
| 13 |
Total impaired loans with a valuation allowance | | | 1,499 | | | 1,657 | | | 559 | | | 4,717 | | | 4,746 | | | 1,205 |
Impaired loans without a valuation allowance |
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
Commercial and industrial | | | 1,451 | | | 1,603 | | | — | | | 1,893 | | | 2,173 | | | — |
Commercial real estate | |
| 3,716 | | | 3,872 | |
| — | | | 1,276 | |
| 1,415 | |
| — |
Residential real estate first mortgage | |
| 121 | |
| 123 | |
| — | | | 439 | |
| 464 | |
| — |
Residential real estate junior lien | |
| 164 | |
| 194 | |
| — | | | 205 | |
| 306 | |
| — |
Other revolving and installment | |
| — | |
| — | |
| — | | | — | |
| — | |
| — |
Total impaired loans without a valuation allowance | | | 5,452 | | | 5,792 | | | — | | | 3,813 | | | 4,358 | | | — |
Total impaired loans | |
|
| |
|
| |
|
| | |
| |
|
| |
|
|
Commercial and industrial | | | 2,161 | | | 2,328 | | | 536 | | | 2,616 | | | 2,898 | | | 336 |
Commercial real estate | |
| 4,493 | |
| 4,792 | |
| 11 | |
| 5,224 | |
| 5,389 | |
| 837 |
Residential real estate first mortgage | | | 121 | | | 123 | | | — | | | 439 | | | 464 | | | — |
Residential real estate junior lien | |
| 172 | |
| 202 | |
| 8 | |
| 224 | |
| 326 | |
| 19 |
Other revolving and installment | |
| 4 | |
| 4 | |
| 4 | |
| 27 | |
| 27 | |
| 13 |
Total impaired loans | | $ | 6,951 | | $ | 7,449 | | $ | 559 | | $ | 8,530 | | $ | 9,104 | | $ | 1,205 |
The table below presents the average recorded investment in impaired loans and interest income for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Three months ended September 30, | ||||||||||||||||||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||||||||||||||
| | Average | | | | | Average | | | | | Average | | | | | Average | | | | ||||
| | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | ||||||||
(dollars in thousands) |
| Investment |
| Income |
| Investment |
| Income |
| Investment |
| Income |
| Investment |
| Income | ||||||||
Impaired loans with a valuation allowance | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 2,541 | | $ | 14 | | $ | 1,964 | | $ | 4 | | $ | 719 | | $ | 3 | | $ | 2,541 | | $ | 14 |
Commercial real estate | | | 197 | | | 8 | | | 1,623 | | | 2 | | | 779 | | | 2 | | | 197 | | | 8 |
Residential real estate first mortgage | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Residential real estate junior lien | | | 19 | | | — | | | 619 | | | 1 | | | 8 | | | — | | | 19 | | | — |
Other revolving and installment | | | — | | | — | | | 5 | | | — | | | 4 | | | — | | | — | | | — |
Total impaired loans with a valuation allowance | | | 2,757 | | | 22 | | | 4,211 | | | 7 | | | 1,510 | | | 5 | | | 2,757 | | | 22 |
Impaired loans without a valuation allowance |
| | | | | | | | | | | |
| | | | | | | | | | | |
Commercial and industrial | | | 1,013 | | | 24 | | | 1,206 | | | 7 | | | 2,016 | | | 5 | | | 1,013 | | | 24 |
Commercial real estate | | | 1,330 | | | — | | | — | | | — | | | 3,793 | | | — | | | 1,330 | | | — |
Residential real estate first mortgage | | | 459 | | | — | | | 183 | | | — | | | 121 | | | — | | | 459 | | | — |
Residential real estate junior lien | | | 211 | | | 3 | | | 297 | | | — | | | 166 | | | — | | | 211 | | | 3 |
Other revolving and installment | | | — | | | — | | | 2 | | | — | | | — | | | — | | | — | | | — |
Total impaired loans without a valuation allowance | | | 3,013 | | | 27 | | | 1,688 | | | 7 | | | 6,096 | | | 5 | | | 3,013 | | | 27 |
Total impaired loans | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 3,554 | | | 38 | | | 3,170 | | | 11 | | | 2,735 | | | 8 | | | 3,554 | | | 38 |
Commercial real estate | | | 1,527 | | | 8 | | | 1,623 | | | 2 | | | 4,572 | | | 2 | | | 1,527 | | | 8 |
Residential real estate first mortgage | | | 459 | | | — | | | 183 | | | — | | | 121 | | | — | | | 459 | | | — |
Residential real estate junior lien | | | 230 | | | 3 | | | 916 | | | 1 | | | 174 | | | — | | | 230 | | | 3 |
Other revolving and installment | | | — | | | — | | | 7 | | | — | | | 4 | | | — | | | — | | | — |
Total impaired loans | | $ | 5,770 | | $ | 49 | | $ | 5,899 | | $ | 14 | | $ | 7,606 | | $ | 10 | | $ | 5,770 | | $ | 49 |
19
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||||||||||||||
| | Average | | | | | Average | | | | | Average | | | | | Average | | | | ||||
| | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | ||||||||
(dollars in thousands) |
| Investment |
| Income |
| Investment |
| Income |
| Investment |
| Income |
| Investment |
| Income | ||||||||
Impaired loans with a valuation allowance | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | | $ | 3,815 | | $ | 14 | | $ | 2,473 | | $ | 12 | | $ | 818 | | $ | 10 | | $ | 3,815 | | $ | 14 |
Commercial real estate | |
| 200 | |
| 8 | |
| 1,668 | |
| 6 | |
| 782 | |
| 6 | |
| 200 | |
| 8 |
Residential real estate junior lien | |
| 20 | |
| — | |
| 621 | |
| 3 | |
| 11 | |
| — | |
| 20 | |
| — |
Other revolving and installment | |
| — | |
| — | |
| 5 | |
| — | |
| 3 | |
| — | |
| — | |
| — |
Total impaired loans with a valuation allowance | | | 4,035 | | | 22 | | | 4,767 | | | 21 | | | 1,614 | | | 16 | | | 4,035 | | | 22 |
Impaired loans without a valuation allowance | | |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
Commercial and industrial | | | 1,154 | | | 26 | | | 2,979 | | | 23 | | | 2,061 | | | 15 | | | 1,154 | | | 26 |
Real estate construction | | | — | | | — | | | — | | | — | ||||||||||||
Commercial real estate | |
| 1,699 | |
| — | |
| — | |
| — | |
| 3,980 | |
| — | |
| 1,699 | |
| — |
Residential real estate first mortgage | |
| 467 | |
| — | |
| 92 | |
| — | |
| 114 | |
| — | |
| 467 | |
| — |
Residential real estate junior lien | |
| 217 | |
| 3 | |
| 302 | | | — | |
| 190 | |
| — | |
| 217 | | | 3 |
Other revolving and installment | |
| — | |
| — | |
| 4 | |
| — | |
| — | |
| — | |
| — | |
| — |
Total impaired loans without a valuation allowance | | | 3,537 | | | 29 | | | 3,377 | | | 23 | | | 6,345 | | | 15 | | | 3,537 | | | 29 |
Total impaired loans | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | | | 4,969 | | | 40 | | | 5,452 | | | 35 | | | 2,879 | | | 25 | | | 4,969 | | | 40 |
Real estate construction | | | — | | | — | | | — | | | — | ||||||||||||
Commercial real estate | |
| 1,899 | |
| 8 | |
| 1,668 | |
| 6 | |
| 4,762 | |
| 6 | |
| 1,899 | |
| 8 |
Residential real estate first mortgage | |
| 467 | |
| — | |
| 92 | |
| — | |
| 114 | |
| — | |
| 467 | |
| — |
Residential real estate junior lien | |
| 237 | |
| 3 | |
| 923 | |
| 3 | |
| 201 | |
| — | |
| 237 | |
| 3 |
Other revolving and installment | |
| — | |
| — | |
| 9 | |
| — | |
| 3 | |
| — | |
| — | |
| — |
Total impaired loans | | $ | 7,572 | | $ | 51 | | $ | 8,144 | | $ | 44 | | $ | 7,959 | | $ | 31 | | $ | 7,572 | | $ | 51 |
Loans with a carrying value of $1.2 billion as of September 30, 20202021 and December 31, 2019,2020, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDR concessions can include a reduction of interest rates, an extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.
During the third quarter of 2020,2021, there were no0 loans modified as a TDR as a result of changing the terms allowing for interest rate reductions and an extension of the maturity dates. During the third quarter of 2020, there were 0 loans modified as a TDR. As of
The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs or whose loans are on nonaccrual.
Beginning in 2020, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, through September 30, 2020,2021, the Company had entered into modifications on 552587 loans representing $151.4$154.5 million in principal balances, since the beginning of the COVID-19 pandemic. Of those loans, 278 loans with a total outstanding principal balance of $16.9$3.4 million, have been granted second deferral, 56additional deferrals, 2 loans with a total outstanding principal balance of $12.0 million$69 thousand remain on the first deferral and the remaining loans have been returned to a normal payment status. These deferrals were generally no more than 90 days in duration and were not considered TDRs in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020. During the first quarter of 2019, there was one loan modified as a TDR as a result of extending the amortization period. As of December 31, 2019, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for loan losses allocated to the loan modified as troubled debt restructuring.
The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.TDRs.
20
NOTE 5 Goodwill and Other Intangible Assets
The following table summarizes the carrying amount of goodwill, by segment, as of September 30, 20202021 and December 31, 2019:
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Banking | | $ | 20,131 | | $ | 20,131 |
Retirement and benefit services | | | 7,198 | | | 7,198 |
Total goodwill | | $ | 27,329 | | $ | 27,329 |
2020:
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, | | December 31, | ||||||||||||||||
(dollars in thousands) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Total |
| Gross Carrying Amount |
| Accumulated Amortization |
| Total |
| 2021 |
| 2020 | ||||||||
Identifiable customer intangibles | | $ | 31,857 | | $ | (16,689) | | $ | 15,168 | | $ | 31,857 | | $ | (14,287) | | $ | 17,570 | ||||||
Core deposit intangible assets | | | 3,793 | | | (3,540) | | | 253 | | | 4,993 | | | (4,172) | | | 821 | ||||||
Total intangible assets | | $ | 35,650 | | $ | (20,229) | | $ | 15,421 | | $ | 36,850 | | $ | (18,459) | | $ | 18,391 | ||||||
Banking | | $ | 20,131 | | $ | 20,131 | ||||||||||||||||||
Retirement and benefit services | | | 10,070 | | | 10,070 | ||||||||||||||||||
Total goodwill | | $ | 30,201 | | $ | 30,201 |
Amortization of intangible assets was $1.0 million for each of the three months ended September 30, 2020, and 2019, respectively. Amortization of intangible assets was $3.0 and $3.1 million for the nine months ended September 30, 2020, and 2019, respectively.
Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was no0 goodwill impairment as of September 30, 2020.2021.
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||||||||||||||
(dollars in thousands) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Total |
| Gross Carrying Amount |
| Accumulated Amortization |
| Total | ||||||
Identifiable customer intangibles | | $ | 43,346 | | $ | (20,753) | | $ | 22,593 | | $ | 43,346 | | $ | (17,490) | | $ | 25,856 |
Core deposit intangible assets | | | — | | | — | | | — | | | 3,793 | | | (3,730) | | | 63 |
Total intangible assets | | $ | 43,346 | | $ | (20,753) | | $ | 22,593 | | $ | 47,139 | | $ | (21,220) | | $ | 25,919 |
Amortization of intangible assets was $1.1 million and $1.0 million for the three months ended September 30, 2021, and 2020, respectively. Amortization of intangible assets was $3.3 million and $3.0 million for the nine months ended September 30, 2021, and 2020, respectively.
NOTE 6 Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $476.3$401.4 million and $541.9$445.5 million as of September 30, 20202021 and December 31, 2019,2020, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.
The following table summarizes the Company’s activity related to servicing rights for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Balance, beginning of period | | $ | 2,891 | | $ | 4,300 | | $ | 3,845 | | $ | 4,623 |
Additions | | | 42 | | | 179 | |
| 154 | |
| 279 |
Amortization | | | (296) | | | (287) | |
| (692) | |
| (690) |
(Impairment)/Recovery | | | (58) | | | (46) | |
| (728) | |
| (66) |
Balance, end of period | | $ | 2,579 | | $ | 4,146 | | $ | 2,579 | | $ | 4,146 |
| | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Balance, beginning of period | | $ | 1,964 | | $ | 2,891 | | $ | 1,987 | | $ | 3,845 |
Additions | | | 84 | | | 42 | |
| 195 | |
| 154 |
Amortization | | | (195) | | | (296) | |
| (580) | |
| (692) |
(Impairment)/Recovery | | | (77) | | | (58) | |
| 174 | |
| (728) |
Balance, end of period | | $ | 1,776 | | $ | 2,579 | | $ | 1,776 | | $ | 2,579 |
21
The following is a summary of key data and assumptions used in the valuation of servicing rights as of September 30, 20202021 and December 31, 2019.2020. Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements.
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
(dollars in thousands) | | 2020 | | 2019 | | ||
Fair value of servicing rights | | $ | 2,579 | | $ | 3,845 | |
Weighted-average remaining term, years | |
| 20.0 | |
| 20.1 | |
Prepayment speeds | |
| 23.8 | % |
| 11.8 | % |
Discount rate | |
| 9.0 | % |
| 9.4 | % |
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
(dollars in thousands) | | 2021 | | 2020 | | ||
Fair value of servicing rights | | $ | 1,776 | | $ | 1,987 | |
Weighted-average remaining term, years | |
| 20.4 | |
| 20.1 | |
Prepayment speeds | |
| 15.4 | % |
| 17.7 | % |
Discount rate | |
| 9.3 | % |
| 9.0 | % |
NOTE 7 Leases
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for offices and office equipment rentals with terms extending through 2027. Portions of certain properties are subleased for terms extending through 2024. Substantially all of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated financial statements. The Company has one1 existing finance lease for the Company’s headquarters building with a lease term through 2022.
The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial statements.
| | | | | | | | |
|
|
|
| September 30, |
| December 31, | ||
(dollars in thousands) |
| |
| 2020 |
| 2019 | ||
Lease Right-of-Use Assets | | Classification | | | | | | |
Operating lease right-of-use assets |
| Operating lease right-of-use assets | | $ | 8,168 | | $ | 8,343 |
Finance lease right-of-use assets |
| Land, premises and equipment, net | |
| 231 | |
| 318 |
Total lease right-of-use assets | | | | $ | 8,399 | | $ | 8,661 |
Lease Liabilities |
|
| |
| | |
|
|
Operating lease liabilities |
| Operating lease liabilities | | $ | 8,671 | | $ | 8,864 |
Finance lease liabilities |
| Long-term debt | |
| 484 | |
| 640 |
Total lease liabilities | | | | $ | 9,155 | | $ | 9,504 |
| | | | | | | | |
|
|
|
| September 30, |
| December 31, | ||
(dollars in thousands) |
| |
| 2021 |
| 2020 | ||
Lease Right-of-Use Assets | | Classification | | | | | | |
Operating lease right-of-use assets |
| Operating lease right-of-use assets | | $ | 3,821 | | $ | 6,918 |
Finance lease right-of-use assets |
| Land, premises and equipment, net | |
| 116 | |
| 202 |
Total lease right-of-use assets | | | | $ | 3,937 | | $ | 7,120 |
Lease Liabilities |
|
| |
| | |
|
|
Operating lease liabilities |
| Operating lease liabilities | | $ | 4,428 | | $ | 7,861 |
Finance lease liabilities |
| Long-term debt | |
| 261 | |
| 430 |
Total lease liabilities | | | | $ | 4,689 | | $ | 8,291 |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one1 or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.
| | | | | |
| | September 30, | | December 31, |
|
|
| 2020 |
| 2019 | |
Weighted-average remaining lease term, years | | | | | |
Operating leases |
| 5.5 | | 6.2 | |
Finance leases |
| 0.8 | | 2.8 | |
Weighted-average discount rate |
| | |
| |
Operating leases |
| 2.8 | % | 3.1 | % |
Finance leases |
| 7.8 | % | 7.8 | % |
| | | | | |
| | September 30, | | December 31, |
|
|
| 2021 |
| 2020 | |
Weighted-average remaining lease term, years | | | | | |
Operating leases |
| 3.4 | | 5.8 | |
Finance leases |
| 1.0 | | 1.8 | |
Weighted-average discount rate |
| | |
| |
Operating leases |
| 2.6 | % | 2.9 | % |
Finance leases |
| 7.8 | % | 7.8 | % |
As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable
22
payments such as common area maintenance and utilities. Variable lease cost also includes payments for usage or maintenance of those capitalized equipment operating leases.
The following table presents lease costs and other lease information for the three and nine months ending September 30, 20202021 and 2019.2020.
| | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 | | 2019 | ||||
Lease costs |
| | | | | |
| | | | |
|
Operating lease cost | | $ | 634 | | $ | 602 | | $ | 1,825 | | $ | 1,772 |
Variable lease cost | | | 223 | | | 222 | |
| 888 | |
| 633 |
Short-term lease cost | | | 102 | | | 122 | |
| 304 | |
| 416 |
Finance lease cost | | | | | | | |
|
| |
|
|
Interest on lease liabilities | | | 10 | | | 14 | |
| 33 | |
| 45 |
Amortization of right-of-use assets | | | 29 | | | 29 | |
| 87 | |
| 87 |
Sublease income | | | (57) | | | (65) | |
| (175) | |
| (202) |
Net lease cost | | $ | 941 | | $ | 924 | | $ | 2,962 | | $ | 2,751 |
Other information | | | | | | | | | | |
|
|
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases | | $ | 628 | | $ | 600 | | $ | 1,807 | | $ | 1,774 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | — | | | — | | | 1,531 | |
| — |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | — | | | — | | | — | |
| — |
| | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 | | 2020 | ||||
Lease costs |
| | | | | |
| | | | |
|
Operating lease cost | | $ | 429 | | $ | 634 | | $ | 1,417 | | $ | 1,825 |
Variable lease cost | | | 192 | | | 223 | |
| 583 | |
| 888 |
Short-term lease cost | | | 89 | | | 102 | |
| 172 | |
| 304 |
Finance lease cost | | | | | | | |
|
| |
|
|
Interest on lease liabilities | | | 7 | | | 10 | |
| 22 | |
| 33 |
Amortization of right-of-use assets | | | 29 | | | 29 | |
| 87 | |
| 87 |
Sublease income | | | (51) | | | (57) | |
| (163) | |
| (175) |
Net lease cost | | $ | 695 | | $ | 941 | | $ | 2,118 | | $ | 2,962 |
Other information | | | | | | | | | | |
|
|
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases | | $ | 411 | | $ | 628 | | $ | 1,372 | | $ | 1,807 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | — | | | — | | | — | |
| 1,531 |
Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of September 30, 20202021 were as follows:
| | | | | | |
| | Finance | | Operating | ||
(dollars in thousands) |
| Leases |
| Leases | ||
Twelve months ended | | | | | | |
September 30, 2021 | | $ | 251 | | $ | 2,179 |
September 30, 2022 | |
| 251 | |
| 2,095 |
September 30, 2023 | |
| 21 | |
| 1,832 |
September 30, 2024 | |
| — | |
| 1,065 |
September 30, 2025 | |
| — | |
| 707 |
Thereafter | |
| — | |
| 1,753 |
Total future minimum lease payments | | $ | 523 | | $ | 9,631 |
Amounts representing interest | |
| (39) | |
| (960) |
Total operating lease liabilities | | $ | 484 | | $ | 8,671 |
| | | | | | |
| | Finance | | Operating | ||
(dollars in thousands) |
| Leases |
| Leases | ||
Twelve months ended | | | | | | |
September 30, 2022 | | $ | 251 | | $ | 1,597 |
September 30, 2023 | |
| 21 | |
| 1,439 |
September 30, 2024 | |
| — | |
| 676 |
September 30, 2025 | |
| — | |
| 389 |
September 30, 2026 | |
| — | |
| 250 |
Thereafter | |
| — | |
| 238 |
Total future minimum lease payments | | $ | 272 | | $ | 4,589 |
Amounts representing interest | |
| (11) | |
| (161) |
Total operating lease liabilities | | $ | 261 | | $ | 4,428 |
NOTE 8 Deposits
The components of deposits in the consolidated balance sheets as of September 30, 20202021 and December 31, 20192020 were as follows:
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Noninterest-bearing | | $ | 693,450 | | $ | 577,704 |
Interest-bearing | |
|
| |
|
|
Interest-bearing demand | |
| 590,366 | |
| 458,689 |
Savings accounts | |
| 78,659 | |
| 55,777 |
Money market savings | |
| 892,473 | |
| 683,064 |
Time deposits | |
| 207,422 | |
| 196,082 |
Total interest-bearing | |
| 1,768,920 | |
| 1,393,612 |
Total deposits | | $ | 2,462,370 | | $ | 1,971,316 |
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Noninterest-bearing | | $ | 797,062 | | $ | 754,716 |
Interest-bearing | |
|
| |
|
|
Interest-bearing demand | |
| 673,916 | |
| 618,900 |
Savings accounts | |
| 92,632 | |
| 79,902 |
Money market savings | |
| 924,678 | |
| 909,137 |
Time deposits | |
| 224,800 | |
| 209,338 |
Total interest-bearing | |
| 1,916,026 | |
| 1,817,277 |
Total deposits | | $ | 2,713,088 | | $ | 2,571,993 |
23
NOTE 9 Short-Term Borrowings
There were no short-term borrowings outstanding as of September 30, 2020 and December 31, 2019.
The following table presents information related to short-term borrowings for the three and nine months ending September 30, 2020 and 2019:
| | | | | | | |
| | Three months ended | | ||||
| | September 30, | | ||||
(dollars in thousands) |
| 2020 |
| 2019 | | ||
Fed funds purchased |
| | | | | | |
Balance as of end of period | | $ | — | | $ | — | |
Average daily balance | | | — | | | 61,386 | |
Maximum month-end balance | | | — | | | 124,250 | |
Weighted-average rate | | | | | | | |
During period | | | — | % | | 2.40 | % |
End of period | | | — | % | | 2.30 | % |
FHLB Short-term advances | | | | | | | |
Balance as of end of period | | $ | — | | $ | — | |
Average daily balance | | | — | | | 25,815 | |
Maximum month-end balance | | | — | | | — | |
Weighted-average rate | | | | | | | |
During period | | | — | % | | 2.58 | % |
End of period | | | — | % | | — | % |
| | | | | | | |
| | Nine months ended | |||||
| | September 30, | |||||
(dollars in thousands) |
| 2020 |
| 2019 | | ||
Fed funds purchased |
| | | | | | |
Balance as of end of period | | $ | — | | $ | — | |
Average daily balance | | | 107 | | | 82,504 | |
Maximum month-end balance | | | — | | | 139,605 | |
Weighted-average rate | | | | | | | |
During period | | | — | % | | 2.54 | % |
End of period | | | — | % | | 2.30 | % |
FHLB Short-term advances | | | | | | | |
Balance as of end of period | | $ | — | | $ | — | |
Average daily balance | | | — | | | 12,985 | |
Maximum month-end balance | | | — | | | 135,000 | |
Weighted-average rate | | | | | | | |
During period | | | — | % | | 2.44 | % |
End of period | | | — | % | | — | % |
24
NOTE 10 Long-Term Debt
Long-term debt as of September 30, 20202021 and December 31, 20192020 consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, 2020 | ||||||||||||
| | | | | | | | | | Period End | | | | |
| | Face | | Carrying | | | | Interest | | Maturity | | | ||
(dollars in thousands) |
| Value |
| Value |
| Interest Rate |
| Rate |
| Date |
| Call Date | ||
Subordinated notes payable | | $ | 50,000 | | $ | 49,672 |
| Fixed |
| 5.75 | % | 12/30/2025 |
| 12/30/2020 |
Junior subordinated debenture (Trust I) | |
| 4,124 | |
| 3,436 |
| Three-month LIBOR + 3.10% | | 3.33 | % | 6/26/2033 |
| 6/26/2008 |
Junior subordinated debenture (Trust II) | |
| 6,186 | |
| 5,153 |
| Three-month LIBOR + 1.80% | | 2.05 | % | 9/15/2036 |
| 9/15/2011 |
Finance lease liability | |
| 2,700 | |
| 484 |
| Fixed |
| 7.81 | % | 10/31/2022 |
| N/A |
Total long-term debt | | $ | 63,010 | | $ | 58,745 |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2021 | ||||||||||||||||||||||||
| | | | | | | | | | Period End | | | | | | | | | | | | | | Period End | | | | |
| | Face | | Carrying | | | | Interest | | Maturity | | | | Face | | Carrying | | | | Interest | | Maturity | | | ||||
(dollars in thousands) |
| Value |
| Value |
| Interest Rate |
| Rate |
| Date |
| Call Date |
| Value |
| Value |
| Interest Rate |
| Rate |
| Date |
| Call Date | ||||
Subordinated notes payable | | $ | 50,000 | | $ | 49,625 |
| Fixed |
| 5.75 | % | 12/30/2025 |
| 12/30/2020 | | $ | 50,000 | | $ | 50,000 | | Fixed | | 3.50 | % | 3/30/2031 | | 3/31/2026 |
Junior subordinated debenture (Trust I) | |
| 4,124 | |
| 3,402 |
| Three-month LIBOR + 3.10% | | 5.05 | % | 6/26/2033 |
| 6/26/2008 | | | 4,124 | | | 3,481 |
| Three-month LIBOR + 3.10% | | 3.23 | % | 6/26/2033 |
| 6/26/2008 |
Junior subordinated debenture (Trust II) | |
| 6,186 | |
| 5,102 |
| Three-month LIBOR + 1.80% | | 3.69 | % | 9/15/2036 |
| 9/15/2011 | |
| 6,186 | |
| 5,221 |
| Three-month LIBOR + 1.80% | | 1.92 | % | 9/15/2036 |
| 9/15/2011 |
Finance lease liability | |
| 2,700 | |
| 640 |
| Fixed |
| 7.81 | % | 10/31/2022 |
| N/A | |
| 2,700 | |
| 261 |
| Fixed |
| 7.81 | % | 10/31/2022 |
| N/A |
Total long-term debt | | $ | 63,010 | | $ | 58,769 |
|
|
|
|
|
|
|
| | $ | 63,010 | | $ | 58,963 |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||||
| | | | | | | | | | Period End | | | | |
| | Face | | Carrying | | | | Interest | | Maturity | | | ||
(dollars in thousands) |
| Value |
| Value |
| Interest Rate |
| Rate |
| Date |
| Call Date | ||
Subordinated notes payable | | $ | 50,000 | | $ | 49,688 |
| Three-month LIBOR + 4.12% |
| 4.36 | % | 12/30/2025 |
| 12/30/2020 |
Junior subordinated debenture (Trust I) | |
| 4,124 | |
| 3,447 |
| Three-month LIBOR + 3.10% | | 3.35 | % | 6/26/2033 |
| 6/26/2008 |
Junior subordinated debenture (Trust II) | |
| 6,186 | |
| 5,170 |
| Three-month LIBOR + 1.80% | | 2.02 | % | 9/15/2036 |
| 9/15/2011 |
Finance lease liability | |
| 2,700 | |
| 430 |
| Fixed |
| 7.81 | % | 10/31/2022 |
| N/A |
Total long-term debt | | $ | 63,010 | | $ | 58,735 |
|
|
|
|
|
|
|
|
NOTE 1110 Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Bank has outstanding commitment and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.
A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk iswas as follows:
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Commitments to extend credit | | $ | 596,642 | | $ | 586,365 |
Standby letters of credit | |
| 7,073 | |
| 8,516 |
Total | | $ | 603,715 | | $ | 594,881 |
| | | | | | |
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Commitments to extend credit | | $ | 622,465 | | $ | 611,140 |
Standby letters of credit | |
| 11,028 | |
| 6,510 |
Total | | $ | 633,493 | | $ | 617,650 |
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.
The Company was not required to perform on any financial guarantees and did not incur any losses on its commitments during the past two years.
2524
The Company utilizes standby letters of credit issued by either the Federal Home Loan BankFHLB or the Bank of North Dakota to secure public unit deposits. The Company had a $150 thousand letter of credit with the Federal Home Loan BankFHLB as of September 30, 20202021 and December 31, 2019.2020. With the Bank of North Dakota, the Company had $19.0 million of0 letters of credit outstanding as of September 30, 20202021 and $20.0 million as of December 31, 2019.2020. Bank of North Dakota letters of credit were collateralized by loans pledged to the Bank of North Dakota in the amount of $239.3$230.2 million and $242.0$245.7 million as of September 30, 20202021 and December 31, 2019,2020, respectively.
NOTE 1211 Share-Based Compensation
The Company has granted equity awards pursuant to the Alerus Financial Corporation 2009 Stock Plan. The awards were in the form of restricted stock or restricted stock units and are considered to represent an element of employee compensation. Compensation expense for the awards is based on the fair value of Alerus Financial Corporation common stock at the time of grant. The value of awards that are expected to vest are amortized into expense over the vesting periods. The ability to grant awards under this plan has expired.
On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of September 30, 2020, 28,2422021, 37,789 stock awards and 49,60491,302 restricted stock units had been issued under the plan.
Compensation expense relating to awards under these plans was $475$545 thousand and $335$475 thousand for the three months ended September 30, 20202021 and 2019,2020, respectively. Compensation expense relating to awards under these plans was $1.3$1.8 million and $1.2$1.3 million for the nine months ended September 30, 20202021 and 2019,2020, respectively.
The following table presents the activity in the stock plans for the nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 | ||||||
| | | | Weighted- | | | | Weighted- | ||
| | |
| Average Grant | | | | Average Grant | ||
|
| Awards |
| Date Fair Value |
| Awards |
| Date Fair Value | ||
Restricted Stock and Restricted Stock Unit Awards |
| |
| | | | |
| | |
Outstanding at beginning of period |
| 347,211 |
| $ | 18.64 | | 337,014 |
| $ | 18.36 |
Granted |
| 77,846 |
| | 19.53 | | 70,617 |
| | 19.87 |
Vested |
| (87,939) |
| | 16.24 | | (53,882) |
| | 18.69 |
Forfeited or cancelled |
| (7,590) |
| | 19.75 | | (6,138) |
| | 17.34 |
Outstanding at end of period | | 329,528 | | $ | 19.46 | | 347,611 | | $ | 18.64 |
| | | | | | | | | | |
| | Nine months ended September 30, 2021 | | Nine months ended September 30, 2020 | ||||||
| | | | Weighted- | | | | Weighted- | ||
| | |
| Average Grant | | | | Average Grant | ||
|
| Awards |
| Date Fair Value |
| Awards |
| Date Fair Value | ||
Restricted Stock and Restricted Stock Unit Awards |
| |
| | | | |
| | |
Outstanding at beginning of period |
| 325,030 |
| $ | 19.48 | | 347,211 |
| $ | 18.64 |
Granted |
| 66,664 |
| | 26.63 | | 77,846 |
| | 19.53 |
Vested |
| (101,108) |
| | 20.46 | | (87,939) |
| | 16.24 |
Forfeited or cancelled |
| — |
| | — | | (7,590) |
| | 19.75 |
Outstanding at end of period | | 290,586 | | $ | 20.77 | | 329,528 | | $ | 19.46 |
As of September 30, 2020,2021, there was $3.2$2.5 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 3.473.31 years.
2625
NOTE 1312 Income Taxes
The components of income tax expense (benefit) for the three and nine months ended September 30, 2021 and 2020 and 2019 arewere as follows:
| | | | | | | | | | | | |
| | Three months ended September 30, | | |||||||||
| | 2020 | | | 2019 | | ||||||
|
| | |
| Percent of |
|
| | |
| Percent of |
|
(dollars in thousands) | | Amount | | Pretax Income |
| | Amount | | Pretax Income |
| ||
Taxes at statutory federal income tax rate | | $ | 4,894 |
| 21.0 | % | | $ | 1,982 |
| 21.0 | % |
Tax effect of: | | | |
| | | | | |
| | |
Tax exempt income | | | (134) |
| (0.6) | % | | | (107) |
| (1.1) | % |
Other | | | 888 |
| 3.8 | % | | | 457 |
| 4.8 | % |
Applicable income taxes | | $ | 5,648 | | 24.2 | % | | $ | 2,332 | | 24.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | Three months ended September 30, | | ||||||||||||||||||
| | 2020 | | | 2019 | | | 2021 | | | 2020 | | ||||||||||||
|
| | |
| Percent of |
|
| | |
| Percent of |
|
| | |
| Percent of |
|
| | |
| Percent of |
|
(dollars in thousands) | | Amount | | Pretax Income |
| | Amount | | Pretax Income |
| | Amount | | Pretax Income |
| | Amount | | Pretax Income |
| ||||
Taxes at statutory federal income tax rate | | $ | 9,491 |
| 21.0 | % | | $ | 6,114 |
| 21.0 | % | | $ | 3,598 |
| 21.0 | % | | $ | 4,894 |
| 21.0 | % |
Tax effect of: | |
|
|
|
| | |
|
|
|
| | | | |
| | | | | |
| | |
Tax exempt income | |
| (382) |
| (0.8) | % | |
| (329) |
| (1.1) | % | | | (134) |
| (0.8) | % | | | (134) |
| (0.6) | % |
Other | | | 1,589 | | 3.5 | % | | | 1,440 | | 4.9 | % | | | 600 |
| 3.5 | % | | | 888 |
| 3.8 | % |
Applicable income taxes | | $ | 10,698 |
| 23.7 | % | | $ | 7,225 |
| 24.8 | % | | $ | 4,064 | | 23.7 | % | | $ | 5,648 | | 24.2 | % |
| | | | | | | | | | | | |
| | Nine months ended September 30, | | |||||||||
| | 2021 | | | 2020 | | ||||||
|
| | |
| Percent of |
|
| | |
| Percent of |
|
(dollars in thousands) | | Amount | | Pretax Income |
| | Amount | | Pretax Income |
| ||
Taxes at statutory federal income tax rate | | $ | 10,993 |
| 21.0 | % | | $ | 9,491 |
| 21.0 | % |
Tax effect of: | |
|
|
|
| | |
|
|
|
| |
Tax exempt income | |
| (434) |
| (0.8) | % | |
| (382) |
| (0.8) | % |
Other | | | 1,811 | | 3.5 | % | | | 1,589 | | 3.5 | % |
Applicable income taxes | | $ | 12,370 |
| 23.7 | % | | $ | 10,698 |
| 23.7 | % |
It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.
NOTE 1413 Segment Reporting
The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial statements, and management’s regular review of the operating results of those services. The Company operates through four4 operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.
The financial information presented for each segment includes net interest income, provision for loan losses, direct noninterest income, and direct noninterest expense, before indirect allocations. Corporate Administration includes the indirect overhead and is set forth in the table below. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes.
The following table presents key metrics related to the Company’s segments for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | ||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | |||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||
Net interest income | | $ | 21,994 | | $ | — | | $ | — | | $ | 613 | | $ | (842) | | $ | 21,765 |
Provision for loan losses | |
| 3,500 | |
| — | �� |
| — | |
| — | |
| — | |
| 3,500 |
Noninterest income | |
| 3,398 | |
| 15,104 | |
| 4,486 | |
| 22,269 | |
| (1) | |
| 45,256 |
Noninterest expense | |
| 10,876 | |
| 8,347 | |
| 2,110 | |
| 9,769 | |
| 9,112 | |
| 40,214 |
Net income before taxes | | $ | 11,016 | | $ | 6,757 | | $ | 2,376 | | $ | 13,113 | | $ | (9,955) | | $ | 23,307 |
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2021 | ||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | |||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||
Net interest income | | $ | 21,168 | | $ | — | | $ | — | | $ | 499 | | $ | (535) | | $ | 21,132 |
Provision for loan losses | |
| (2,000) | |
| — | |
| — | |
| — | |
| — | |
| (2,000) |
Noninterest income | |
| 1,576 | |
| 18,031 | |
| 5,295 | |
| 11,116 | |
| 22 | |
| 36,040 |
Noninterest expense | |
| 11,403 | |
| 10,320 | |
| 2,219 | |
| 8,464 | |
| 9,635 | |
| 42,041 |
Net income before taxes | | $ | 13,341 | | $ | 7,711 | | $ | 3,076 | | $ | 3,151 | | $ | (10,148) | | $ | 17,131 |
2726
| | | | | | | | | | | | | | | | | | |
|
| Nine months ended September 30, 2020 | ||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | |||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||
Net interest income | | $ | 61,857 | | $ | — | | $ | — | | $ | 1,411 | | $ | (2,575) | | $ | 60,693 |
Provision for loan losses | | | 9,500 | | | — | | | — | | | — | | | — | | | 9,500 |
Noninterest income | | | 8,129 | | | 45,034 | | | 12,644 | | | 44,860 | | | 8 | | | 110,675 |
Noninterest expense | | | 34,887 | |
| 25,472 | |
| 6,254 | |
| 23,228 | | | 26,833 | | | 116,674 |
Net income before taxes | | $ | 25,599 | | $ | 19,562 | | $ | 6,390 | | $ | 23,043 | | $ | (29,400) | | $ | 45,194 |
| | | | | | | | | | | | | | | | | | |
|
| Nine months ended September 30, 2021 | ||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | |||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||
Net interest income | | $ | 64,236 | | $ | — | | $ | — | | $ | 1,435 | | $ | (1,361) | | $ | 64,310 |
Provision for loan losses | | | (2,000) | | | — | | | — | | | — | | | — | | | (2,000) |
Noninterest income | | | 4,564 | | | 53,157 | | | 15,419 | | | 40,535 | | | (6) | | | 113,669 |
Noninterest expense | | | 33,401 | |
| 30,420 | |
| 6,682 | |
| 29,978 | | | 27,152 | | | 127,633 |
Net income before taxes | | $ | 37,399 | | $ | 22,737 | | $ | 8,737 | | $ | 11,992 | | $ | (28,519) | | $ | 52,346 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | | | | | Retirement and | | Wealth | | | | | Corporate | | | | ||||||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||||||||
Net interest income | | $ | 19,193 | | $ | — | | $ | — | | $ | 384 | | $ | (896) | | $ | 18,681 | | $ | 21,994 | | $ | — | | $ | — | | $ | 613 | | $ | (842) | | $ | 21,765 |
Provision for loan losses | | | 1,498 | | | — | | | — | | | — | | | — | | | 1,498 | | | 3,500 | | | — | | | — | | | — | | | — | | | 3,500 |
Noninterest income | | | 1,695 | | | 15,307 | | | 3,896 | | | 8,135 | | | 547 | | | 29,580 | | | 3,398 | | | 15,104 | | | 4,486 | | | 22,269 | | | (1) | | | 45,256 |
Noninterest expense | | | 10,800 | | | 8,551 | | | 1,835 | | | 7,256 | | | 8,885 | | | 37,327 | | | 10,876 | |
| 8,347 | |
| 2,110 | |
| 9,769 | | | 9,112 | | | 40,214 |
Net income before taxes | | $ | 8,590 | | $ | 6,756 | | $ | 2,061 | | $ | 1,263 | | $ | (9,234) | | $ | 9,436 | | $ | 11,016 | | $ | 6,757 | | $ | 2,376 | | $ | 13,113 | | $ | (9,955) | | $ | 23,307 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Nine months ended September 30, 2019 |
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| | | | | Retirement and | | Wealth | | | | | Corporate | | | | | | | | Retirement and | | Wealth | | | | | Corporate | | | | ||||||
(dollars in thousands) |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated |
| Banking |
| Benefit Services |
| Management |
| Mortgage |
| Administration |
| Consolidated | ||||||||||||
Net interest income | | $ | 57,987 | | $ | — | | $ | — | | $ | 818 | | $ | (2,713) | | $ | 56,092 | | $ | 61,857 | | $ | — | | $ | — | | $ | 1,411 | | $ | (2,575) | | $ | 60,693 |
Provision for loan losses | |
| 5,515 | |
| — | |
| — | |
| — | |
| — | |
| 5,515 | |
| 9,500 | |
| — | |
| — | |
| — | |
| — | |
| 9,500 |
Noninterest income | |
| 5,273 | |
| 46,142 | |
| 11,385 | |
| 19,739 | |
| 2,099 | |
| 84,638 | |
| 8,129 | |
| 45,034 | |
| 12,644 | |
| 44,860 | |
| 8 | |
| 110,675 |
Noninterest expense | |
| 30,880 | |
| 26,142 | |
| 5,936 | |
| 17,184 | |
| 25,960 | |
| 106,102 | |
| 34,887 | |
| 25,472 | |
| 6,254 | |
| 23,228 | |
| 26,833 | |
| 116,674 |
Net income before taxes | | $ | 26,865 | | $ | 20,000 | | $ | 5,449 | | $ | 3,373 | | $ | (26,574) | | $ | 29,113 | | $ | 25,599 | | $ | 19,562 | | $ | 6,390 | | $ | 23,043 | | $ | (29,400) | | $ | 45,194 |
Banking
The Banking division offers a complete line of loan, deposit, cash management, and treasury services through fifteen14 offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segment’s balance sheet.
Retirement and Benefit Services
Retirement and Benefit Services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; ESOP trustee, recordkeeping, and administration; investment fiduciary services to retirement plans; health savings accounts, flex spending accounts, COBRA recordkeeping and administration services, and payroll to employers; and payroll and HIRSHRIS services for employers. In addition, the division operates within each of the banking markets, as well as in Albert Lea, Minnesota, Lansing, Michigan Bedford, New Hampshire, and 13 satellite offices.Littleton, Colorado.
Wealth Management
The Wealth Management division provides advisory and planning services, investment management, and trust and fiduciary services to clients across the Company’s footprint.
Mortgage
The Mortgage division offers first and second mortgage loans through a centralized mortgage unit in Minneapolis, Minnesota, as well as through the Banking office locations.
2827
NOTE 1514 Earnings Per Share
Beginning in the third quarter of 2019, the Company elected to prospectively use the two-class method in calculating earnings per share due to the restricted stock awards and restricted stock units qualifying as participating securities. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings. Average shares of common stock for diluted net income per common share include shares to be issued upon the vesting of restricted stock awards and restricted stock units granted under the Company's share-based compensation plans.
The calculation of basic and diluted earnings per share using the two-class method for the three and nine months ending September 30, 20202021 and 20192020 are presented below:
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars and shares in thousands, except per share data) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income | | $ | 17,659 | | $ | 7,104 | | $ | 34,496 | | $ | 21,888 |
Dividends and undistributed earnings allocated to participating securities | | | 315 | | | 154 | | | 600 | | | 514 |
Net income available to common shareholders | | $ | 17,344 | | $ | 6,950 | | $ | 33,896 | | $ | 21,374 |
Weighted-average common shares outstanding for basic earnings per share | | | 17,121 | | | 14,274 | | | 17,101 | |
| 13,957 |
Dilutive effect of stock-based awards | | | 332 | |
| 352 | |
| 334 | |
| 360 |
Weighted-average common shares outstanding for diluted earnings per share | | | 17,453 | | | 14,626 | | | 17,435 | | | 14,317 |
Earnings per common share: | | | | | | | | | | | | |
Basic earnings per common share | | $ | 1.01 | | $ | 0.49 | | $ | 1.98 | | $ | 1.53 |
Diluted earnings per common share | | $ | 0.99 | | $ | 0.48 | | $ | 1.94 | | $ | 1.49 |
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars and shares in thousands, except per share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income | | $ | 13,067 | | $ | 17,659 | | $ | 39,976 | | $ | 34,496 |
Dividends and undistributed earnings allocated to participating securities | | | 196 | | | 315 | | | 628 | | | 600 |
Net income available to common shareholders | | $ | 12,871 | | $ | 17,344 | | $ | 39,348 | | $ | 33,896 |
Weighted-average common shares outstanding for basic earnings per share | | | 17,205 | | | 17,121 | | | 17,182 | |
| 17,101 |
Dilutive effect of stock-based awards | | | 294 | |
| 332 | |
| 306 | |
| 334 |
Weighted-average common shares outstanding for diluted earnings per share | | | 17,499 | | | 17,453 | | | 17,488 | | | 17,435 |
Earnings per common share: | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.75 | | $ | 1.01 | | $ | 2.29 | | $ | 1.98 |
Diluted earnings per common share | | $ | 0.74 | | $ | 0.99 | | $ | 2.26 | | $ | 1.94 |
NOTE 1615 Derivative Instruments
The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with U.S. financial institutions in order to minimize risk to the Company. These swaps are derivatives but are not designated as hedging instruments.
The Company did not have any derivatives designated as hedging instruments as of September 30, 20202021 and December 31, 2019.2020. The following table presents the amounts recorded in the Company’s consolidated balance sheets, for derivatives not designated as hedging instruments, as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | |
| | | | September 30, 2020 | | December 31, 2019 | ||||||||
| | | | Fair | | Notional | | Fair | | Notional | ||||
(dollars in thousands) |
| |
| Value |
| Amount |
| Value |
| Amount | ||||
Asset Derivatives |
| Consolidated Balance Sheet Location |
| |
|
| |
|
| |
|
| |
|
Interest rate lock commitments |
| Accrued interest and Other assets | | $ | 13,133 | | $ | 401,313 | | $ | 1,228 | | $ | 45,715 |
Forward loan sales commitments |
| Accrued interest and Other assets | |
| 1,545 | |
| 54,310 | |
| 393 | |
| 12,784 |
Total asset derivatives |
|
| | $ | 14,678 | | $ | 455,623 | | $ | 1,621 | | $ | 58,499 |
Liability Derivatives |
|
| |
|
| |
|
| |
|
| |
|
|
TBA mortgage backed securities |
| Accrued expenses and other liabilities | | $ | 1,960 | | $ | 380,063 | | $ | 109 | | $ | 68,500 |
Total liability derivatives |
|
| | $ | 1,960 | | $ | 380,063 | | $ | 109 | | $ | 68,500 |
| | | | | | | | | | | | | | |
| | | | September 30, 2021 | | December 31, 2020 | ||||||||
| | | | Fair | | Notional | | Fair | | Notional | ||||
(dollars in thousands) |
| |
| Value |
| Amount |
| Value |
| Amount | ||||
Asset Derivatives |
| Consolidated Balance Sheet Location |
| |
|
| |
|
| |
|
| |
|
Interest rate swaps |
| Other assets | | $ | 1,060 | | $ | 45,171 | | $ | 569 | | $ | 44,597 |
Interest rate lock commitments |
| Other assets | | | 2,813 | | | 107,769 | | | 10,124 | | | 270,103 |
Forward loan sales commitments |
| Other assets | |
| 602 | |
| 18,877 | |
| 2,664 | |
| 86,990 |
TBA mortgage backed securities |
| Other assets | |
| 405 | |
| 189,470 | |
| — | |
| — |
Total asset derivatives |
|
| | $ | 4,880 | | $ | 361,287 | | $ | 13,357 | | $ | 401,690 |
Liability Derivatives |
|
| |
|
| |
|
| |
|
| |
|
|
Interest rate swaps |
| Accrued expenses and other liabilities | | $ | 1,062 | | $ | 45,171 | | $ | 572 | | $ | 44,597 |
TBA mortgage backed securities |
| Accrued expenses and other liabilities | | | — | | | — | | | 2,339 | | | 307,000 |
Total liability derivatives |
|
| | $ | 1,062 | | $ | 45,171 | | $ | 2,911 | | $ | 351,597 |
29
The gain (loss) recognized on derivative instruments for the three and nine months ended September 30, 20202021 and 20192020 was as follows:
| | | | | | | | | | | | | | |
| | | | Three months ended | | Nine months ended | ||||||||
| | Consolidated Statements of | | September 30, | | September 30, | | September 30, | | September 30, | ||||
(dollars in thousands) |
| of Income Location |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Interest rate lock commitments |
| Mortgage banking/Other noninterest income | | $ | 5,647 | | $ | (257) | | $ | 11,226 | | $ | 2,024 |
Forward loan sales commitments |
| Mortgage banking | | | 369 | | | (199) | | | 1,152 | | | 454 |
TBA mortgage backed securities |
| Mortgage banking | | | (3,747) | | | 680 | |
| (9,099) | |
| (104) |
Total gain/(loss) from derivative instruments |
| | | $ | 2,269 | | $ | 224 | | $ | 3,279 | | $ | 2,374 |
28
| | | | | | | | | | | | | | |
| | | | Three months ended | | Nine months ended | ||||||||
| | Consolidated Statements | | September 30, | | September 30, | | September 30, | | September 30, | ||||
(dollars in thousands) |
| of Income Location |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest rate swaps |
| Other noninterest income | | $ | 1 | | $ | (3) | | $ | 2 | | $ | (3) |
Interest rate lock commitments |
| Mortgage banking | | | (1,793) | | | 5,650 | | | (7,298) | | | 11,229 |
Forward loan sales commitments |
| Mortgage banking | | | (499) | | | 369 | | | (2,061) | | | 1,152 |
TBA mortgage backed securities |
| Mortgage banking | | | (690) | | | (3,747) | |
| 4,865 | |
| (9,099) |
Total gain/(loss) from derivative instruments |
| | | $ | (2,981) | | $ | 2,269 | | $ | (4,492) | | $ | 3,279 |
The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at September 30, 20202021 and December 31, 2019, respectively2020 was $5.1$2.1 million and $853 thousand.$2.7 million, respectively. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.
NOTE 1716 Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes at September 30, 20202021 and December 31, 2019,2020, each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.
The following table presents the Company’s and the Bank’s actual capital amounts and ratios as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| |||||||||||||
| | | | | | | | | | | | | Minimum to be | | ||
| | | | | | | | Requirements | | | Well Capitalized |
| ||||
| | | | | | | | for Capital | | | Under Prompt |
| ||||
| | Actual | | Adequacy Purposes | | Corrective Action |
| |||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Common equity tier 1 capital to risk weighted assets |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Consolidated | | $ | 270,679 |
| 13.08 | % | $ | 93,151 |
| 4.50 | % | $ | N/A |
| N/A | |
Bank | |
| 257,835 |
| 12.47 | % |
| 93,076 |
| 4.50 | % |
| 134,443 |
| 6.50 | % |
Tier 1 capital to risk weighted assets | |
|
|
| |
|
|
|
|
|
|
| . |
|
| |
Consolidated | |
| 278,959 |
| 13.48 | % |
| 124,202 |
| 6.00 | % |
| N/A |
| N/A | |
Bank | |
| 257,835 |
| 12.47 | % |
| 124,102 |
| 6.00 | % |
| 165,469 |
| 8.00 | % |
Total capital to risk weighted assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 354,573 |
| 17.13 | % |
| 165,603 |
| 8.00 | % |
| N/A |
| N/A | |
Bank | |
| 283,758 |
| 13.72 | % |
| 165,469 |
| 8.00 | % |
| 206,836 |
| 10.00 | % |
Tier 1 capital to average assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 278,959 |
| 9.76 | % |
| 114,293 |
| 4.00 | % |
| N/A |
| N/A | |
Bank | |
| 257,835 |
| 9.03 | % |
| 114,207 |
| 4.00 | % |
| 142,759 |
| 5.00 | % |
| | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| |||||||||||||
| | | | | | | | | | | | | Minimum to be | | ||
| | | | | | | | Requirements | | | Well Capitalized |
| ||||
| | | | | | | | for Capital | | | Under Prompt |
| ||||
| | Actual | | Adequacy Purposes | | Corrective Action |
| |||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Common equity tier 1 capital to risk weighted assets |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Consolidated | | $ | 302,306 |
| 14.52 | % | $ | 93,671 |
| 4.50 | % | $ | N/A |
| N/A | |
Bank | |
| 286,436 |
| 13.77 | % |
| 93,579 |
| 4.50 | % |
| 135,170 |
| 6.50 | % |
Tier 1 capital to risk weighted assets | |
|
|
| |
|
|
|
|
|
|
| . |
|
| |
Consolidated | |
| 310,698 |
| 14.93 | % |
| 124,895 |
| 6.00 | % |
| N/A |
| N/A | |
Bank | |
| 286,436 |
| 13.77 | % |
| 124,772 |
| 6.00 | % |
| 166,363 |
| 8.00 | % |
Total capital to risk weighted assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 386,793 |
| 18.58 | % |
| 166,526 |
| 8.00 | % |
| N/A |
| N/A | |
Bank | |
| 312,505 |
| 15.03 | % |
| 166,363 |
| 8.00 | % |
| 207,954 |
| 10.00 | % |
Tier 1 capital to average assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 310,698 |
| 9.88 | % |
| 125,777 |
| 4.00 | % |
| N/A |
| N/A | |
Bank | |
| 286,436 |
| 9.11 | % |
| 125,708 |
| 4.00 | % |
| 157,135 |
| 5.00 | % |
3029
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| |||||||||||||
| | | | | | | | | | | | | Minimum to be | | ||
| | | | | | | | Requirements | | | Well Capitalized |
| ||||
| | | | | | | | for Capital | | | Under Prompt |
| ||||
| | Actual | | Adequacy Purposes | | Corrective Action |
| |||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Common equity tier 1 capital to risk weighted assets |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Consolidated | | $ | 239,672 |
| 12.48 | % | $ | 86,452 |
| 4.50 | % | $ | N/A |
| N/A | |
Bank | |
| 228,512 |
| 11.91 | % |
| 86,362 |
| 4.50 | % |
| 124,745 |
| 6.50 | % |
Tier 1 capital to risk weighted assets | |
|
|
| |
|
|
|
|
|
|
| . |
|
| |
Consolidated | |
| 247,866 |
| 12.90 | % |
| 115,270 |
| 6.00 | % |
| N/A |
| N/A | |
Bank | |
| 228,512 |
| 11.91 | % |
| 115,149 |
| 6.00 | % |
| 153,532 |
| 8.00 | % |
Total capital to risk weighted assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 321,415 |
| 16.73 | % |
| 153,693 |
| 8.00 | % |
| N/A |
| N/A | |
Bank | |
| 252,436 |
| 13.15 | % |
| 153,532 |
| 8.00 | % |
| 191,915 |
| 10.00 | % |
Tier 1 capital to average assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 247,866 |
| 11.05 | % |
| 91,504 |
| 4.00 | % |
| N/A |
| N/A | |
Bank | |
| 228,512 |
| 10.20 | % |
| 89,615 |
| 4.00 | % |
| 112,018 |
| 5.00 | % |
| | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| |||||||||||||
| | | | | | | | | | | | | Minimum to be | | ||
| | | | | | | | Requirements | | | Well Capitalized |
| ||||
| | | | | | | | for Capital | | | Under Prompt |
| ||||
| | Actual | | Adequacy Purposes | | Corrective Action |
| |||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Common equity tier 1 capital to risk weighted assets |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Consolidated | | $ | 265,490 |
| 12.75 | % | $ | 93,723 |
| 4.50 | % | $ | N/A |
| N/A | |
Bank | |
| 251,806 |
| 12.10 | % |
| 93,632 |
| 4.50 | % |
| 135,246 |
| 6.50 | % |
Tier 1 capital to risk weighted assets | |
|
|
| |
|
|
|
|
|
|
| . |
|
| |
Consolidated | |
| 273,797 |
| 13.15 | % |
| 124,964 |
| 6.00 | % |
| N/A |
| N/A | |
Bank | |
| 251,806 |
| 12.10 | % |
| 124,843 |
| 6.00 | % |
| 166,457 |
| 8.00 | % |
Total capital to risk weighted assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 349,620 |
| 16.79 | % |
| 166,618 |
| 8.00 | % |
| N/A |
| N/A | |
Bank | |
| 277,916 |
| 13.36 | % |
| 166,457 |
| 8.00 | % |
| 208,071 |
| 10.00 | % |
Tier 1 capital to average assets | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated | |
| 273,797 |
| 9.24 | % |
| 118,587 |
| 4.00 | % |
| N/A |
| N/A | |
Bank | |
| 251,806 |
| 8.50 | % |
| 118,511 |
| 4.00 | % |
| 148,139 |
| 5.00 | % |
The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules included the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At September 30, 2020,2021, the ratios for the Company and the Bank were sufficient to meet the conservation buffer. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development, or HUD, regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of September 30, 2020,2021, and December 31, 2019,2020, the Company was in compliance with HUDthe aforementioned guidelines.
NOTE 17 Stock Repurchase Program
On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the nine months ended September 30, 2021, there were 0 shares repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.
NOTE 18 Fair Value of Assets and Liabilities
The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the estimated fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is
30
significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized based on the following inputs to the valuation techniques as follows:
Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2—Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.
Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their estimated fair value.
31
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at estimated fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired financial instruments at estimated fair value in the future.
Recurring Basis
The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures.
The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | |
|
| September 30, 2021 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Available-for-sale | |
|
| |
|
| |
|
| |
|
|
U.S. treasury and government agencies | | $ | — | | $ | 5,469 | | $ | — | | $ | 5,469 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| — | |
| 518,472 | |
| — | |
| 518,472 |
Commercial | |
| — | |
| 94,918 | |
| — | |
| 94,918 |
Asset backed securities | |
| — | |
| 64 | |
| — | |
| 64 |
Corporate bonds | |
| — | |
| 36,359 | |
| — | |
| 36,359 |
Total available-for-sale investment securities | | $ | — | | $ | 655,282 | | $ | — | | $ | 655,282 |
Other assets | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 4,880 | | $ | — | | $ | 4,880 |
Other liabilities | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 1,062 | | $ | — | | $ | 1,062 |
| | | | | | | | | | | | |
|
| September 30, 2020 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Available-for-sale and securities | |
|
| |
|
| |
|
| |
|
|
U.S. treasury and government agencies | | $ | — | | $ | 16,092 | | $ | — | | $ | 16,092 |
Obligations of state and political agencies | |
| — | |
| 147,216 | |
| — | |
| 147,216 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| — | |
| 211,700 | |
| — | |
| 211,700 |
Commercial | |
| — | |
| 87,542 | |
| — | |
| 87,542 |
Asset backed securities | |
| — | |
| 131 | |
| — | |
| 131 |
Corporate bonds | |
| — | |
| 32,733 | |
| — | |
| 32,733 |
Total available-for-sale securities | | $ | — | | $ | 495,414 | | $ | — | | $ | 495,414 |
Other assets | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 14,678 | | $ | — | | $ | 14,678 |
Other liabilities | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 1,960 | | $ | — | | $ | 1,960 |
31
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Available-for-sale | |
|
| |
|
| |
|
| |
|
|
U.S. treasury and government agencies | | $ | — | | $ | 5,907 | | $ | — | | $ | 5,907 |
Obligations of state and political agencies | |
| — | |
| 153,773 | |
| — | |
| 153,773 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| — | |
| 306,719 | |
| — | |
| 306,719 |
Commercial | |
| — | |
| 94,978 | |
| — | |
| 94,978 |
Asset backed securities | |
| — | |
| 115 | |
| — | |
| 115 |
Corporate bonds | |
| — | |
| 30,850 | |
| — | |
| 30,850 |
Total available-for-sale investment securities | | $ | — | | $ | 592,342 | | $ | — | | $ | 592,342 |
Other assets | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 13,357 | | $ | — | | $ | 13,357 |
Other liabilities | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 2,911 | | $ | — | | $ | 2,911 |
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Available-for-sale and equity securities | |
|
| |
|
| |
|
| |
|
|
U.S. treasury and government agencies | | $ | — | | $ | 21,240 | | $ | — | | $ | 21,240 |
Obligations of state and political agencies | |
| — | |
| 68,648 | |
| — | |
| 68,648 |
Mortgage backed securities | |
|
| |
|
| |
|
| |
|
|
Residential agency | |
| — | |
| 182,538 | |
| — | |
| 182,538 |
Commercial | |
| — | |
| 30,685 | |
| — | |
| 30,685 |
Asset backed securities | |
| — | |
| 144 | |
| — | |
| 144 |
Corporate bonds | |
| — | |
| 7,095 | |
| — | |
| 7,095 |
Equity securities | |
| 2,808 | |
| — | |
| — | |
| 2,808 |
Total available-for-sale and equity securities | | $ | 2,808 | | $ | 310,350 | | $ | — | | $ | 313,158 |
Other assets | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 1,621 | | $ | — | | $ | 1,621 |
Other liabilities | |
|
| |
|
| |
|
| |
|
|
Derivatives | | $ | — | | $ | 109 | | $ | — | | $ | 109 |
The following is a description of the valuation methodologies used for instruments measured at estimated fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities, Available-for-Sale
When available, the Company uses quoted market prices to determine the estimated fair value of investment securities; such itemsGenerally, debt securities are classified in Level 1 of the estimated fair value hierarchy. For the Company’s investment securities for which quoted prices are not available for identical investment securities in an active market, the Company determines estimated fair value utilizing vendors who apply matrixvalued using pricing for similar bonds for which no pricessecurities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are observable or may compile prices from various sources. These models are primarily industry-standard models that
32
consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Estimated fair values from these models are verified, where possible, against quoted prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, cannot be obtained, or cannot be corroborated, a security is generally classified as Level 3.
Derivatives
All of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts.
Nonrecurring Basis
Certain assets are measured at estimated fair value on a nonrecurring basis. These assets are not measured at estimated fair value on an ongoing basis; however, they are subject to estimated fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.
Net impairment related to nonrecurring estimated fair value measurements of certain assets as of September 30, 20202021 and December 31, 20192020 consisted of the following:
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
(dollars in thousands) |
| Level 2 |
| Level 3 |
| Total |
| Impairment | ||||
Loans held for sale | | $ | 60,912 | | $ | — | | $ | 60,912 | | $ | — |
Impaired loans | |
| — | |
| 6,392 | |
| 6,392 | |
| 559 |
Foreclosed assets | |
| — | |
| 862 | |
| 862 | |
| — |
Servicing rights | |
| — | |
| 1,776 | |
| 1,776 | |
| — |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
(dollars in thousands) |
| Level 2 |
| Level 3 |
| Total |
| Impairment | ||||
Loans held for sale | | $ | 122,440 | | $ | — | | $ | 122,440 | | $ | — |
Impaired loans | |
| — | |
| 7,325 | |
| 7,325 | |
| 1,205 |
Foreclosed assets | |
| — | |
| 63 | |
| 63 | |
| — |
Servicing rights | |
| — | |
| 1,987 | |
| 1,987 | |
| — |
| | | | | | | | | | | | |
| | September 30, 2020 | ||||||||||
(dollars in thousands) |
| Level 2 |
| Level 3 |
| Total |
| Impairment | ||||
Loans held for sale | | $ | 111,311 | | $ | — | | $ | 111,311 | | $ | — |
Impaired loans | |
| — | |
| 5,301 | |
| 5,301 | |
| 407 |
Foreclosed assets | |
| — | |
| 10 | |
| 10 | |
| — |
Servicing rights | |
| — | |
| 2,579 | |
| 2,579 | |
| — |
32
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
(dollars in thousands) |
| Level 2 |
| Level 3 |
| Total |
| Impairment | ||||
Loans held for sale | | $ | 46,846 | | $ | — | | $ | 46,846 | | $ | — |
Impaired loans | |
| — | |
| 4,816 | |
| 4,816 | |
| 3,138 |
Foreclosed assets | |
| — | |
| 8 | |
| 8 | |
| — |
Servicing rights | |
| — | |
| 3,845 | |
| 3,845 | |
| — |
Loans Held for Sale
Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.
Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value, represent additional net write-downs during the period to record these loans at the lower of cost or estimated fair value, subsequent to their initial classification as loans held for sale.
33
The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of September 30, 2020,2021, and December 31, 2019,2020, were as follows:
| | | | | | | | | | | |
| | | | | September 30, 2020 | | |||||
(dollars in thousands) | | | | | | | | | | Weighted | |
Asset Type |
| Valuation Technique |
| Unobservable Input | Fair Value |
| Range |
| Average |
| |
Impaired loans |
| Appraisal value |
| Property specific adjustment | $ | 5,301 |
| N/A | | N/A |
|
Foreclosed assets |
| Appraisal value |
| Property specific adjustment |
| 10 |
| N/A |
| N/A |
|
Servicing rights |
| Discounted cash flows |
| Prepayment speed assumptions |
| 2,579 |
| 315-485 |
| 396 |
|
|
|
|
| Discount rate |
|
|
| 9.0 | % | 9.0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2019 | | | | | | September 30, 2021 | | ||||||||||
(dollars in thousands) | | | | | | | | | | Weighted |
| | | | | | | | | | Weighted | |
Asset Type |
| Valuation Technique |
| Unobservable Input | Fair Value |
| Range |
| Average |
|
| Valuation Technique |
| Unobservable Input | Fair Value |
| Range |
| Average |
| ||
Impaired loans |
| Appraisal value |
| Property specific adjustment | $ | 4,816 |
| N/A |
| N/A | |
| Appraisal value |
| Property specific adjustment | $ | 6,392 |
| N/A | | N/A |
|
Foreclosed assets |
| Appraisal value |
| Property specific adjustment |
| 8 |
| N/A |
| N/A | |
| Appraisal value |
| Property specific adjustment |
| 862 |
| N/A |
| N/A |
|
Servicing rights |
| Discounted cash flows |
| Prepayment speed assumptions |
| 3,845 |
| 123-267 |
| 194 | |
| Discounted cash flows |
| Prepayment speed assumptions |
| 1,776 |
| 184-392 |
| 257 |
|
|
|
|
| Discount rate |
|
|
| 9.4 | % | 9.4 | % |
|
|
| Discount rate |
|
|
| 9.3 | % | 9.3 | % |
| | | | | | | | | | | |
| | | | | December 31, 2020 | | |||||
(dollars in thousands) | | | | | | | | | | Weighted |
|
Asset Type |
| Valuation Technique |
| Unobservable Input | Fair Value |
| Range |
| Average |
| |
Impaired loans |
| Appraisal value |
| Property specific adjustment | $ | 7,325 |
| N/A |
| N/A | |
Foreclosed assets |
| Appraisal value |
| Property specific adjustment |
| 63 |
| N/A |
| N/A | |
Servicing rights |
| Discounted cash flows |
| Prepayment speed assumptions |
| 1,987 |
| 191-403 |
| 285 | |
|
|
|
| Discount rate |
|
|
| 9.0 | % | 9.0 | % |
Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all non-financial instruments, are excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances, as of September 30, 20202021 and December 31, 2019,2020, were not carried at estimated fair value in their entirety on the consolidated balance sheets.
Cash and Cash Equivalents and Accrued Interest
The carrying amounts reported in the consolidated balance sheets approximate those assets and liabilities estimated fair values.
33
Investment Securities, Held-to-Maturity
The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.
Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, estimated fair values are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Bank-Owned Life Insurance
Bank-owned life insurance is carried at the amount due upon surrender of the policy, which is also the estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying insurance contract.
34
Deposits
The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the consolidated balance sheet date. The estimated fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.
Short-Term Borrowings and Long-Term Debt
For variable-rate borrowings that reprice frequently, estimated fair values are based on carrying values. The estimated fair value of fixed-rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Credit-Related Commitments
Off-balance sheet credit related commitments are generally of short-term nature. The contract amount of such commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:
| | | | | | | | | | | | | | | |
| | September 30, 2021 | |||||||||||||
| | Carrying | | Estimated Fair Value | |||||||||||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 159,454 | | $ | 159,454 | | $ | — | | $ | — | | $ | 159,454 |
Investment securities held-to-maturity | | | 362,586 | | | — | | | 363,540 | | | — | | | 363,540 |
Loans | |
| 1,768,320 | |
| — | |
| — | |
| 1,814,289 | |
| 1,814,289 |
Accrued interest receivable | |
| 8,836 | |
| 8,836 | |
| — | |
| — | |
| 8,836 |
Bank-owned life insurance | |
| 32,954 | |
| — | |
| 32,954 | |
| — | |
| 32,954 |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Noninterest-bearing deposits | | $ | 797,062 | | $ | — | | $ | 797,062 | | $ | — | | $ | 797,062 |
Interest-bearing deposits | |
| 1,691,226 | |
| — | |
| 1,691,226 | |
| — | |
| 1,691,226 |
Time deposits | |
| 224,800 | |
| — | |
| — | |
| 225,353 | |
| 225,353 |
Long-term debt | |
| 58,963 | |
| — | |
| 58,319 | |
| — | |
| 58,319 |
Accrued interest payable | |
| 1,298 | |
| 1,298 | |
| — | |
| — | |
| 1,298 |
| | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||
| | Carrying | | Estimated Fair Value | |||||||||||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 95,751 | | $ | 95,751 | | $ | — | | $ | — | | $ | 95,751 |
Loans | |
| 2,027,082 | |
| — | |
| — | |
| 2,075,044 | |
| 2,075,044 |
Accrued interest receivable | |
| 9,199 | |
| 9,199 | |
| — | |
| — | |
| 9,199 |
Bank-owned life insurance | |
| 32,161 | |
| — | |
| 32,161 | |
| — | |
| 32,161 |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Noninterest-bearing deposits | | $ | 693,450 | | $ | — | | $ | 693,450 | | $ | — | | $ | 693,450 |
Interest-bearing deposits | |
| 1,561,498 | |
| — | |
| 1,561,498 | |
| — | |
| 1,561,498 |
Time deposits | |
| 207,422 | |
| — | |
| — | |
| 208,990 | |
| 208,990 |
Long-term debt | |
| 58,745 | |
| — | |
| 56,219 | |
| — | |
| 56,219 |
Accrued interest payable | |
| 1,408 | |
| 1,408 | |
| — | |
| — | |
| 1,408 |
34
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | Carrying | | Estimated Fair Value | |||||||||||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 172,962 | | $ | 172,962 | | $ | — | | $ | — | | $ | 172,962 |
Loans | |
| 1,945,129 | |
| — | |
| — | |
| 1,992,394 | |
| 1,992,394 |
Accrued interest receivable | |
| 9,662 | |
| 9,662 | |
| — | |
| — | |
| 9,662 |
Bank-owned life insurance | |
| 32,363 | |
| — | |
| 32,363 | |
| — | |
| 32,363 |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Noninterest-bearing deposits | | $ | 754,716 | | $ | — | | $ | 754,716 | | $ | — | | $ | 754,716 |
Interest-bearing deposits | |
| 1,607,939 | |
| — | |
| 1,607,939 | |
| — | |
| 1,607,939 |
Time deposits | |
| 209,338 | |
| — | |
| — | |
| 210,637 | |
| 210,637 |
Long-term debt | |
| 58,735 | |
| — | |
| 56,131 | |
| — | |
| 56,131 |
Accrued interest payable | |
| 654 | |
| 654 | |
| — | |
| — | |
| 654 |
| | | | | | | | | | | | | | | |
| | December 31, 2019 | |||||||||||||
| | Carrying | | Estimated Fair Value | |||||||||||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 144,006 | | $ | 144,006 | | $ | — | | $ | — | | $ | 144,006 |
Loans | |
| 1,697,355 | |
| — | |
| — | |
| 1,693,824 | |
| 1,693,824 |
Accrued interest receivable | |
| 7,551 | |
| 7,551 | |
| — | |
| — | |
| 7,551 |
Bank-owned life insurance | |
| 31,566 | |
| — | |
| 31,566 | |
| — | |
| 31,566 |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Noninterest-bearing deposits | | $ | 577,704 | | $ | — | | $ | 577,704 | | $ | — | | $ | 577,704 |
Interest-bearing deposits | |
| 1,197,530 | |
| — | |
| 1,197,530 | |
| — | |
| 1,197,530 |
Time deposits | |
| 196,082 | |
| — | |
| — | |
| 196,182 | |
| 196,182 |
Long-term debt | |
| 58,769 | |
| — | |
| 58,239 | |
| — | |
| 58,239 |
Accrued interest payable | |
| 1,038 | |
| 1,038 | |
| — | |
| — | |
| 1,038 |
NOTE 19 COVID-19 Pandemic Response
On March 27,As discussed in “Note 1 Significant Accounting Policies,” the full extent of the impact of COVID-19 on the U.S. economy generally and the Company is uncertain. In the second quarter of 2020, President Trump signed into Law the Coronavirus Aid Relief and Economic Security Act, or CARES Act,Company became a lender under the PPP which established a $2.0 trillion economic stimulus package, including cash payments to individuals,
35
supplemental unemployment insurance benefits and a $349 billion loan programwas administered through the U.S. Small Business Administration, or SBA, referredan agency of the U.S Department of the Treasury, which works with financial institutions in providing loans to as the PPP. Under thesmall businesses. The PPP, which is meant to aid small businesses sole proprietorships, independent contractors,during the COVID-19 pandemic, was created under the Coronavirus Aid Relief, and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP.Economic Security, or CARES, Act, which was signed into law on March 27, 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See “Note 4 Loans and Allowance for Loan Losses” for additional discussion regarding TDRs.
On April 2, 2020, the SBA issued an interim final rule, announcing the implementation of sections 1102 and 1106 of the CARES Act. Section 1102 of the CARES Act temporarily added a new program, the PPP, to the SBA’s 7(a) Loan Program. Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses nationwide adversely impacted by COVID-19.
As an SBA-Certified Preferred lender, we were delegated the authority as part of the CARES Act to make PPP SBA-guaranteed financing available to eligible borrowers. As of September 30, 2020, we2021, the Company had assisted 1,6322,454 new and existing clients secure a total of approximately $363.6$474.2 million of PPP financing. The SBA pays a processing fee based on the balance of the financing outstanding at the time of final disbursement. The processing fees were as follows: five percent for loans of not more than $350 thousand, three percent for loans of more than $350 thousand and less than $2 million, and one percent for loans of at least $2 million. Net processing fees in the amount of $11.0$15.7 million are being deferred and recognized as interest income on a level yield method over the life of the respective loans. See “Note 4 Loans and Allowance for Loan Losses” for additional discussion on the remaining deferred costs associated with PPP financing.
On April 7, 2020, the Board of Governors of the Federal Reserve System, or FRB, authorized each of the Federal Reserve Banks to establish the Payment Protection Program Lending Facility, or PPPL Facility, pursuant to section 13(3) of the Federal Reserve Act. Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the SBA under the PPP established by the CARES Act.
On April 15, 2020, we executed a PPPL Facility Agreement with the Federal Reserve Bank of Minneapolis. The PPP loans guaranteed by the SBA are eligible to serve as collateral for the PPPL Facility. The PPPL Facility provided us with additional liquidity, if necessary, to facilitate lending to small businesses under the PPP. As of September 30, 2020, we have not had a need to utilize the PPPL Facility.
3635
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, 20202021 and 2019.2020. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the Securities and Exchange Commission on March 26, 2020.12, 2021.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements we make regarding our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
● |
our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; |
● | new or revised accounting standards, including as a result of the future implementation of the new Current Expected Credit Loss standard; |
● | business and economic conditions generally and in the financial services industry, nationally and within our market areas; |
● | the overall health of the local and national real estate market; |
● | concentrations within our loan portfolio; |
● | the level of nonperforming assets on our balance sheet; |
● |
37
the impact of economic or market conditions on our fee-based services; |
● | our ability to implement our organic and acquisition growth strategies; |
● | potential impairment to the goodwill we recorded in connections with our past acquisitions; |
36
● | our ability to continue to grow our retirement and benefit services business; |
● | our ability to continue to originate a sufficient volume of residential mortgages; |
● |
the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; |
● | interruptions involving our information technology and telecommunications systems or third-party servicers; |
● |
developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates; |
● | potential losses incurred in connection with mortgage loan repurchases; |
● | the composition of our executive management team and our ability to attract and retain key personnel; |
● | severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 pandemic, acts of war or terrorism, or other adverse external events; |
● | any material weaknesses in our internal control over financial reporting; |
● | our ability to successfully manage liquidity risk; |
● | concentrations of large depositors; |
● | our dependence on dividends from the Bank; |
● | the effectiveness of our risk management framework; |
● | the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; |
● | the extensive regulatory framework that applies to us; |
● | the impact of recent and future legislative and regulatory changes; |
● | the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, including due to supply chain disruptions, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic; |
● | interest rate risks associated with our business; |
● | fluctuations in the values of the securities held in our securities portfolio; |
● | governmental monetary, trade and fiscal policies; |
● | rapid technological change in the financial services industry; |
● | increased competition in the financial services industry; |
● | our ability to manage mortgage pipeline risk; |
37
● | changes to U.S. or state tax laws, regulations and guidance, including recent proposals to increase the federal corporate tax rate; |
● | our success at managing the risks involved in the foregoing items; and |
38
● | any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus Financial Corporation with the Securities and Exchange Commission. |
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
We are a diversified financial services company headquartered in Grand Forks, North Dakota. Through our subsidiary, Alerus Financial, National Association, or the Bank, we provide financial solutions to businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth management and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.
Our business model produces strong financial performance and a diversified revenue stream, which has helped us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, or GAAP. The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in Note 1 – Significant Accounting Policies of the Notes to the Consolidated Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no significant changes in critical accounting policies, or the assumptions and judgments utilized in applying these policies since December 31, 2019.2020.
The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
Recent Developments
Impact of COVID-19
As of September 30, 2021, the COVID-19 pandemic remains ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries,
38
including industries related to the collateral underlying certain of our loans, and many of these effects are continuing. In 2021, the U.S. economy has, with certain setbacks, begun reopening and wider distribution of vaccines has encouraged increased economic activity. The progression of the COVID-19 pandemic in the United States has not had an adverse impact on our financial condition and results of operations as of and for the three and nine months ended September 30, 2020, but it is expected2021. Nonetheless, the economic recovery could remain gradual and uneven and could be hindered by persistent or resurgent infection rates, particularly given uncertainty with respect to have a complexthe distribution and significant impact onacceptance of the economy,vaccines and their effectiveness with respect to the banking industry and our Company in future fiscal periods, all subject to a high degreenew variants of uncertainty.the virus.
Effects on Our Market Areas. Our primary banking market areas are the states of North Dakota, Minnesota and Arizona. Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit
39
services at all of our banking offices located in our three primary market areas. In addition, we operate twoone retirement and benefitsbenefit services officesoffice in Minnesota, twoone in Michigan and one in New Hampshire.
In Minnesota, the Governor ordered individuals to stay at home and non-essential businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 28, 2020, and was in effect until May 18, 2020. The state has now implemented a four phase stay safe plan to reopen businesses in the area. Similarly, in Arizona, the Governor ordered individuals to stay at home and non-essential businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 31, 2020, and expired on May 15, 2020, and the Governor announced new guidance for protecting businesses and their customers as they reopen. The state has implemented a four phase reopening plan that requires benchmarks be met for a certain period of time before transitioning from one phase to another. In North Dakota, the Governor did not issue an order requiring individuals to stay at home, but placed certain restrictions on bars, restaurants and gyms. These orders have been lifted and North Dakota is now working toward a “Smart Restart” program to encourage businesses to open safely and take precautions to slow the spread of COVID-19. In response to these orders, the Bank has been serving its customers through its drive-up windows at various branch locations and through online and mobile banking. The Bank is also permitting certain visits to its branches on a limited basis and by appointment only. In Minnesota and Arizona, the Bank is offering appointments to our customers to meet us with safeguards in place that materially comply with CDC guidance. In North Dakota, certain offices have re-opened for business with safeguards in place that materially comply with CDC guidance.Colorado.
Each state has experienced a dramatic and sudden increase in unemployment levels as a resultof our market areas continues to have different responses to the COVID-19 pandemic due to the availability of the curtailment of business activities. According to data released byCOVID-19 vaccines and varying infection rates. Based on the U.S. Department of Labor, initial claims for unemployment insurance have spiked in recent months in each ofcurrent environment, it is unclear how the states in our banking markets, a trend we expectmarket areas will continue to continue forchange policies in response to the foreseeable future until restrictions are lifted. To date, many of the public healthCOVID-19 pandemic and economic effects of COVID-19 have been concentrated in the largest U.S. cities,whether any such as New York, but we are beginning to see similar effects in smaller citieschanges will negatively impact our customers and communities, where many of our banking operations are focused.regional economies.
Policy and Regulatory DevelopmentsDevelopments.. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, includingpandemic. Most recently, these have included the following:
● | On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, or the Plan, a $1.9 trillion COVID-19 relief bill. The |
● | On March |
40
Effects on Our BusinessResponse.. We currently expect that the COVID-19 pandemic and the specific developments referred to above will continue to have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the retail, restaurant, and hospitality industries will continue to endure significant economic distress, which could cause them to draw on their existing lines of credit and could adversely affect their ability and willingness to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. In addition, we expect to see decreases in our total assets under administration and assets under management and a decrease in mortgage loan originations. As a result, we anticipate that our financial condition, capital levels and results of operations will be significantly and adversely affected, as described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
● |
● | Client Service.We offered payment deferrals and interest only payment options for consumer, small business, and commercial customers for initial terms of up to 90 days. We offered payment extensions for mortgage customers for initial terms of up to 90 days. As of September 30, |
41
$3.4 million have been granted |
● |
We participated in the SBA’s PPP. As of September 30, |
39
Shareholder Dividend and Stock Repurchases
On July 23, 2020,26, 2021, the Company’s Board of Directors of the Company declared a quarterly cash dividend of $0.15$0.16 per common share. This dividend was paid out on October 9, 2020,8, 2021, to stockholders of record atas of the close of business on September 17, 2021.
On February 18, 2020.
Although2021, the Board of Directors is closely monitoring the impacts of the COVID-19 pandemic, it is the current expectation and intent of the Board of Directors to continue withCompany approved a quarterly cash dividend.
We currently do not have an authorized stock repurchase program, butor the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. As of September 30, 2021, no shares had been repurchased under the Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.
42
Operating Results Overview
The following table summarizes key financial results as of and for the periods indicated:
| | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | |||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | |||||
(dollars and shares in thousands, except per share data) |
| 2021 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Performance Ratios | |
| | |
| | |
| | |
| | |
| | |
Return on average total assets | |
| 1.62 | % |
| 1.50 | % |
| 2.42 | % |
| 1.71 | % |
| 1.71 | % |
Return on average common equity | |
| 14.68 | % |
| 13.82 | % |
| 22.31 | % |
| 15.61 | % |
| 15.17 | % |
Return on average tangible common equity (1) | |
| 18.13 | % |
| 17.36 | % |
| 26.67 | % |
| 19.44 | % |
| 18.70 | % |
Noninterest income as a % of revenue | |
| 63.04 | % |
| 63.48 | % |
| 67.53 | % |
| 63.87 | % |
| 64.58 | % |
Net interest margin (taxable-equivalent basis) (1) | |
| 2.78 | % |
| 2.88 | % |
| 3.17 | % |
| 2.92 | % |
| 3.22 | % |
Efficiency ratio (1) | |
| 71.49 | % |
| 71.46 | % |
| 58.42 | % |
| 69.69 | % |
| 66.22 | % |
Average equity to average assets | |
| 11.07 | % |
| 10.88 | % |
| 10.83 | % | | 10.97 | % | | 11.29 | % |
Net charge-offs/(recoveries) to average loans | | | (0.06) | % |
| — | % |
| (0.11) | % |
| 0.01 | % |
| 0.15 | % |
Dividend payout ratio | |
| 21.62 | % | | 24.24 | % | | 15.15 | % | | 20.80 | % | | 23.20 | % |
Per Common Share | |
| | |
| | |
| | |
| | |
| | |
Earnings per common share - basic | | $ | 0.75 | | $ | 0.67 | | $ | 1.01 | | $ | 2.29 | | $ | 1.98 | |
Earnings per common share - diluted | | $ | 0.74 | | $ | 0.66 | | $ | 0.99 | | $ | 2.26 | | $ | 1.94 | |
Dividends declared per common share | | $ | 0.16 | | $ | 0.16 | | $ | 0.15 | | $ | 0.47 | | $ | 0.45 | |
Tangible book value per common share (1) | | $ | 17.46 | | $ | 16.89 | | $ | 16.31 | | | | | | | |
Average common shares outstanding - basic | |
| 17,205 | |
| 17,194 | |
| 17,121 | |
| 17,182 | |
| 17,101 | |
Average common shares outstanding - diluted | |
| 17,499 | |
| 17,497 | |
| 17,453 | |
| 17,488 | |
| 17,435 | |
Other Data | | | | |
| | |
| | |
| | |
| | |
Retirement and benefit services assets under administration/management | | $ | 36,202,553 | | $ | 36,964,961 | | $ | 30,470,645 | | | | | | | |
Wealth management assets under administration/management | | | 3,865,062 | | | 3,538,959 | | | 3,043,173 | | | | | | | |
Mortgage originations | | | 415,792 | | | 545,437 | | | 511,605 | | $ | 1,479,243 | | $ | 1,171,811 | |
| | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | |||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | |||||
(dollars and shares in thousands, except per share data) |
| 2020 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
Performance Ratios | |
| | |
| | |
| | |
| | |
| | |
Return on average total assets | |
| 2.42 | % |
| 1.68 | % |
| 1.29 | % |
| 1.71 | % |
| 1.34 | % |
Return on average common equity | |
| 22.31 | % |
| 15.30 | % |
| 12.42 | % |
| 15.17 | % |
| 13.74 | % |
Return on average tangible common equity (1) | |
| 26.67 | % |
| 18.88 | % |
| 17.01 | % |
| 18.70 | % |
| 19.24 | % |
Noninterest income as a % of revenue | |
| 67.53 | % |
| 65.55 | % |
| 61.29 | % |
| 64.58 | % |
| 60.14 | % |
Net interest margin (taxable-equivalent basis) (1) | |
| 3.17 | % |
| 3.14 | % |
| 3.69 | % |
| 3.22 | % |
| 3.72 | % |
Efficiency ratio (1) | |
| 58.42 | % |
| 66.31 | % |
| 75.17 | % |
| 66.22 | % |
| 73.06 | % |
Net charge-offs/(recoveries) to average loans | | | (0.11) | % |
| 0.66 | % |
| (0.06) | % |
| 0.15 | % |
| 0.37 | % |
Dividend payout ratio | |
| 15.15 | % | | 23.08 | % | | 29.17 | % | | 23.20 | % | | 28.19 | % |
Per Common Share | |
| | |
| | |
| | |
| | |
| | |
Earnings per common share - basic | | $ | 1.01 | | $ | 0.66 | | $ | 0.49 | | $ | 1.98 | | $ | 1.53 | |
Earnings per common share - diluted | | $ | 0.99 | | $ | 0.65 | | $ | 0.48 | | $ | 1.94 | | $ | 1.49 | |
Dividends declared per common share | | $ | 0.15 | | $ | 0.15 | | $ | 0.14 | | $ | 0.45 | | $ | 0.42 | |
Tangible book value per common share (1) | | $ | 16.31 | | $ | 15.30 | | $ | 13.77 | | | | | | | |
Average common shares outstanding - basic | |
| 17,121 | |
| 17,111 | |
| 14,274 | |
| 17,101 | |
| 13,957 | |
Average common shares outstanding - diluted | |
| 17,453 | |
| 17,445 | |
| 14,626 | |
| 17,435 | |
| 14,317 | |
Other Data | | | | |
| | |
| | |
| | |
| | |
Retirement and benefit services assets under administration/management | | $ | 30,470,645 | | $ | 30,093,095 | | $ | 30,661,226 | | | | | | | |
Wealth management assets under administration/management | | | 3,043,173 | | | 2,957,213 | | | 2,765,459 | | | | | | | |
Mortgage originations | | | 511,605 | | | 431,638 | | | 313,527 | | $ | 1,171,811 | | $ | 685,178 | |
(1) | Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.” |
40
Selected Financial Data
The following tables summarize selected financial data as of and for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | Three months ended | | Nine months ended | ||||||||||||||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | ||||||||||
(dollars in thousands) |
| 2020 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||||
Selected Average Balance Sheet Data | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Loans | | $ | 2,034,778 | | $ | 1,986,028 | | $ | 1,691,542 | | $ | 1,917,894 | | $ | 1,715,629 | | $ | 1,820,871 | | $ | 1,887,986 | | $ | 2,034,778 | | $ | 1,884,308 | | $ | 1,917,894 |
Investment securities | |
| 443,705 | |
| 369,247 | |
| 257,561 | |
| 383,591 | |
| 255,903 | |
| 869,421 | |
| 800,812 | |
| 443,705 | |
| 778,307 | |
| 383,591 |
Assets | |
| 2,908,144 | |
| 2,740,330 | |
| 2,176,862 | |
| 2,690,182 | |
| 2,185,868 | |
| 3,190,877 | |
| 3,119,740 | |
| 2,908,144 | |
| 3,119,819 | |
| 2,690,182 |
Deposits | |
| 2,454,865 | |
| 2,329,192 | |
| 1,763,217 | |
| 2,270,781 | |
| 1,779,610 | |
| 2,720,047 | |
| 2,677,258 | |
| 2,454,865 | |
| 2,671,344 | |
| 2,270,781 |
Short-term borrowings | |
| — | |
| 321 | |
| 87,201 | |
| 107 | |
| 95,489 | |
| 10 | |
| — | |
| — | |
| 3 | |
| 107 |
Long-term debt | |
| 58,739 | |
| 58,747 | |
| 58,776 | |
| 58,747 | |
| 58,798 | |
| 58,968 | |
| 58,996 | |
| 58,739 | |
| 48,002 | |
| 58,747 |
Stockholders’ equity | |
| 314,921 | |
| 301,719 | |
| 226,931 | |
| 303,825 | |
| 212,911 | |
| 353,196 | |
| 339,439 | |
| 314,921 | |
| 342,344 | |
| 303,825 |
| | | | | | | | | | | | |
| | September 30, | | June 30, | | December 31, | | September 30, | ||||
(dollars in thousands) |
| 2021 |
| 2021 |
| 2020 |
| 2020 | ||||
Selected Period End Balance Sheet Data | | | | | | | | | | | | |
Loans | | $ | 1,800,386 | | $ | 1,835,312 | | $ | 1,979,375 | | $ | 2,058,419 |
Allowance for loan losses | |
| (32,066) | |
| (33,764) | |
| (34,246) | |
| (31,337) |
Investment securities | |
| 1,017,868 | |
| 797,862 | |
| 592,342 | |
| 495,414 |
Assets | |
| 3,175,169 | |
| 3,157,229 | |
| 3,013,771 | |
| 2,898,809 |
Deposits | |
| 2,713,088 | |
| 2,710,940 | |
| 2,571,993 | |
| 2,462,370 |
Long-term debt | |
| 58,963 | |
| 58,992 | |
| 58,735 | |
| 58,745 |
Total stockholders’ equity | |
| 353,195 | |
| 344,391 | |
| 330,163 | |
| 322,003 |
43
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | |||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | |||||
(dollars in thousands) |
| 2021 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Selected Income Statement Data | | | | | | | | | | | | | | | |
Net interest income | | $ | 21,132 | | $ | 21,140 | | $ | 21,765 | | $ | 64,310 | | $ | 60,693 |
Provision for loan losses | |
| (2,000) | |
| — | |
| 3,500 | |
| (2,000) | |
| 9,500 |
Noninterest income | |
| 36,040 | |
| 36,748 | |
| 45,256 | |
| 113,669 | |
| 110,675 |
Noninterest expense | |
| 42,041 | |
| 42,550 | |
| 40,214 | |
| 127,633 | |
| 116,674 |
Income before income taxes | |
| 17,131 | |
| 15,338 | |
| 23,307 | |
| 52,346 | |
| 45,194 |
Income tax expense | |
| 4,064 | |
| 3,644 | |
| 5,648 | |
| 12,370 | |
| 10,698 |
Net income | | $ | 13,067 | | $ | 11,694 | | $ | 17,659 | | $ | 39,976 | | $ | 34,496 |
| | | | | | | | | | | | |
| | September 30, | | June 30, | | December 31, | | September 30, | ||||
(dollars in thousands) |
| 2020 |
| 2020 |
| 2019 |
| 2019 | ||||
Selected Period End Balance Sheet Data | | | | | | | | | | | | |
Loans | | $ | 2,058,419 | | $ | 2,034,197 | | $ | 1,721,279 | | $ | 1,686,087 |
Allowance for loan losses | |
| (31,337) | |
| (27,256) | |
| (23,924) | |
| (22,984) |
Investment securities | |
| 495,414 | |
| 393,727 | |
| 313,158 | |
| 281,391 |
Assets | |
| 2,898,809 | |
| 2,875,457 | |
| 2,356,878 | |
| 2,228,311 |
Deposits | |
| 2,462,370 | |
| 2,453,153 | |
| 1,971,316 | |
| 1,833,113 |
Long-term debt | |
| 58,745 | |
| 58,754 | |
| 58,769 | |
| 58,775 |
Total stockholders’ equity | |
| 322,003 | |
| 305,732 | |
| 285,728 | |
| 281,403 |
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | |||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | |||||
(dollars in thousands) |
| 2020 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Selected Income Statement Data | | | | | | | | | | | | | | | |
Net interest income | | $ | 21,765 | | $ | 20,091 | | $ | 18,681 | | $ | 60,693 | | $ | 56,092 |
Provision for loan losses | |
| 3,500 | |
| 3,500 | |
| 1,498 | |
| 9,500 | |
| 5,515 |
Noninterest income | |
| 45,256 | |
| 38,230 | |
| 29,580 | |
| 110,675 | |
| 84,638 |
Noninterest expense | |
| 40,214 | |
| 39,734 | |
| 37,327 | |
| 116,674 | |
| 106,102 |
Income before income taxes | |
| 23,307 | |
| 15,087 | |
| 9,436 | |
| 45,194 | |
| 29,113 |
Income tax expense | |
| 5,648 | |
| 3,613 | |
| 2,332 | |
| 10,698 | |
| 7,225 |
Net income | | $ | 17,659 | | $ | 11,474 | | $ | 7,104 | | $ | 34,496 | | $ | 21,888 |
Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, we routinely supplement our evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders' equity less goodwill and other intangible assets; (ii) tangible book value per common equity per share as tangible common equity divided by shares of common stock outstanding; (iii) tangible assets as total assets, less goodwill and other intangible assets; (iv) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (v) net interest margin (tax-equivalent) as net interest income plus a tax-equivalent adjustment, divided by average earning assets; and (vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment.
4441
The following tables present these non-GAAP financial measures along with the most directly comparable financial measures calculated in accordance with GAAP for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| September 30, | | June 30, | | December 31, | | September 30, | |
| September 30, | | June 30, | | December 31, | | September 30, | | ||||||||
|
| 2020 |
| 2020 |
| 2019 |
| 2019 |
| |||||||||||||||||
(dollars and shares in thousands, except per share data) |
| 2021 |
| 2021 |
| 2020 |
| 2020 |
| |||||||||||||||||
Tangible common equity to tangible assets |
| |
| | | | | | | |
| | |
| |
| | | | | | | |
| | |
Total common stockholders’ equity | | $ | 322,003 | | $ | 305,732 | | $ | 285,728 | | $ | 281,403 | | | $ | 353,195 | | $ | 344,391 | | $ | 330,163 | | $ | 322,003 | |
Less: Goodwill | |
| 27,329 | |
| 27,329 | |
| 27,329 | |
| 27,329 | | |
| 30,201 | |
| 30,201 | |
| 30,201 | |
| 27,329 | |
Less: Other intangible assets | |
| 15,421 | |
| 16,411 | |
| 18,391 | |
| 19,382 | | |
| 22,593 | |
| 23,680 | |
| 25,919 | |
| 15,421 | |
Tangible common equity (a) | |
| 279,253 | |
| 261,992 | |
| 240,008 | |
| 234,692 | | |
| 300,401 | |
| 290,510 | |
| 274,043 | |
| 279,253 | |
Total assets | |
| 2,898,809 | |
| 2,875,457 | |
| 2,356,878 | |
| 2,228,311 | | |
| 3,175,169 | |
| 3,157,229 | |
| 3,013,771 | |
| 2,898,809 | |
Less: Goodwill | |
| 27,329 | |
| 27,329 | |
| 27,329 | |
| 27,329 | | |
| 30,201 | |
| 30,201 | |
| 30,201 | |
| 27,329 | |
Less: Other intangible assets | |
| 15,421 | |
| 16,411 | |
| 18,391 | |
| 19,382 | | |
| 22,593 | |
| 23,680 | |
| 25,919 | |
| 15,421 | |
Tangible assets (b) | |
| 2,856,059 | |
| 2,831,717 | |
| 2,311,158 | |
| 2,181,600 | | |
| 3,122,375 | |
| 3,103,348 | |
| 2,957,651 | |
| 2,856,059 | |
Tangible common equity to tangible assets (a)/(b) | |
| 9.78 | % |
| 9.25 | % |
| 10.38 | % |
| 10.76 | % | |
| 9.62 | % |
| 9.36 | % |
| 9.27 | % |
| 9.78 | % |
Tangible book value per common share | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total common stockholders’ equity | | $ | 322,003 | | $ | 305,732 | | $ | 285,728 | | $ | 281,403 | | | $ | 353,195 | | $ | 344,391 | | $ | 330,163 | | $ | 322,003 | |
Less: Goodwill | | | 27,329 | | | 27,329 | | | 27,329 | | | 27,329 | | | | 30,201 | | | 30,201 | | | 30,201 | | | 27,329 | |
Less: Other intangible assets | | | 15,421 | | | 16,411 | | | 18,391 | | | 19,382 | | | | 22,593 | | | 23,680 | | | 25,919 | | | 15,421 | |
Tangible common equity (c) | | | 279,253 | | | 261,992 | | | 240,008 | | | 234,692 | | | | 300,401 | | | 290,510 | | | 274,043 | | | 279,253 | |
Total common shares issued and outstanding (d) | | | 17,122 | | | 17,120 | |
| 17,050 | |
| 17,049 | | | | 17,208 | | | 17,198 | |
| 17,125 | |
| 17,122 | |
Tangible book value per common share (c)/(d) | | $ | 16.31 | | $ | 15.30 | | $ | 14.08 | | $ | 13.77 | | | $ | 17.46 | | $ | 16.89 | | $ | 16.00 | | $ | 16.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | Three months ended | | Nine months ended | | ||||||||||||||||||||||
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | | September 30, | | June 30, | | September 30, | | September 30, | | September 30, | | ||||||||||
|
| 2020 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||||||
(dollars and shares in thousands, except per share data) |
| 2021 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||||||||||||
Return on average tangible common equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 17,659 | | $ | 11,474 | | $ | 7,104 | | $ | 34,496 | | $ | 21,888 | | | $ | 13,067 | | $ | 11,694 | | $ | 17,659 | | $ | 39,976 | | $ | 34,496 | |
Add: Intangible amortization expense (net of tax) | |
| 782 | |
| 783 | |
| 782 | |
| 2,347 | |
| 2,442 | | |
| 860 | |
| 860 | |
| 782 | |
| 2,628 | |
| 2,347 | |
Net income, excluding intangible amortization (e) | |
| 18,441 | |
| 12,257 | |
| 7,886 | |
| 36,843 | |
| 24,330 | | |
| 13,927 | |
| 12,554 | |
| 18,441 | |
| 42,604 | |
| 36,843 | |
Average total equity | |
| 314,921 | |
| 301,719 | |
| 226,931 | |
| 303,825 | |
| 212,911 | | |
| 353,196 | |
| 339,439 | |
| 314,921 | |
| 342,344 | |
| 303,825 | |
Less: Average goodwill | |
| 27,329 | |
| 27,329 | |
| 27,329 | |
| 27,329 | |
| 27,329 | | |
| 30,201 | |
| 30,201 | |
| 27,329 | |
| 30,201 | |
| 27,329 | |
Less: Average other intangible assets (net of tax) | |
| 12,565 | |
| 13,345 | |
| 15,697 | |
| 13,343 | |
| 16,502 | | |
| 18,272 | |
| 19,123 | |
| 12,565 | |
| 19,124 | |
| 13,343 | |
Average tangible common equity (f) | |
| 275,027 | |
| 261,045 | |
| 183,905 | |
| 263,153 | |
| 169,080 | | |
| 304,723 | |
| 290,115 | |
| 275,027 | |
| 293,019 | |
| 263,153 | |
Return on average tangible common equity (e)/(f) | |
| 26.67 | % |
| 18.88 | % |
| 17.01 | % |
| 18.70 | % |
| 19.24 | % | |
| 18.13 | % |
| 17.36 | % |
| 26.67 | % |
| 19.44 | % |
| 18.70 | % |
Net interest margin (tax-equivalent) | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| | |
Net interest income | | $ | 21,765 | | $ | 20,091 | | $ | 18,681 | | $ | 60,693 | | $ | 56,092 | | | $ | 21,132 | | $ | 21,140 | | $ | 21,765 | | $ | 64,310 | | $ | 60,693 | |
Tax-equivalent adjustment | |
| 116 | |
| 109 | |
| 81 | |
| 325 | |
| 257 | | |
| 115 | |
| 135 | |
| 116 | |
| 392 | |
| 325 | |
Tax-equivalent net interest income (g) | |
| 21,881 | |
| 20,200 | |
| 18,762 | |
| 61,018 | |
| 56,349 | | |
| 21,247 | |
| 21,275 | |
| 21,881 | |
| 64,702 | |
| 61,018 | |
Average earning assets (h) | |
| 2,744,758 | |
| 2,584,037 | |
| 2,017,198 | |
| 2,534,038 | |
| 2,024,814 | | |
| 3,035,798 | |
| 2,958,468 | |
| 2,744,758 | |
| 2,958,742 | |
| 2,534,038 | |
Net interest margin (tax-equivalent) (g)/(h) | |
| 3.17 | % |
| 3.14 | % |
| 3.69 | % |
| 3.22 | % |
| 3.72 | % | |
| 2.78 | % |
| 2.88 | % |
| 3.17 | % |
| 2.92 | % |
| 3.22 | % |
Efficiency ratio | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| | |
Noninterest expense | | $ | 40,214 | | $ | 39,734 | | $ | 37,327 | | $ | 116,674 | | $ | 106,102 | | | $ | 42,041 | | $ | 42,550 | | $ | 40,214 | | $ | 127,633 | | $ | 116,674 | |
Less: Intangible amortization expense | |
| 990 | |
| 991 | |
| 990 | |
| 2,971 | |
| 3,091 | | |
| 1,088 | |
| 1,088 | |
| 990 | |
| 3,327 | |
| 2,971 | |
Adjusted noninterest expense (i) | |
| 39,224 | |
| 38,743 | |
| 36,337 | |
| 113,703 | |
| 103,011 | | |
| 40,953 | |
| 41,462 | |
| 39,224 | |
| 124,306 | |
| 113,703 | |
Net interest income | |
| 21,765 | |
| 20,091 | |
| 18,681 | |
| 60,693 | |
| 56,092 | | |
| 21,132 | |
| 21,140 | |
| 21,765 | |
| 64,310 | |
| 60,693 | |
Noninterest income | |
| 45,256 | |
| 38,230 | |
| 29,580 | |
| 110,675 | |
| 84,638 | | |
| 36,040 | |
| 36,748 | |
| 45,256 | |
| 113,669 | |
| 110,675 | |
Tax-equivalent adjustment | |
| 116 | |
| 109 | |
| 81 | |
| 325 | |
| 257 | | |
| 115 | |
| 135 | |
| 116 | |
| 392 | |
| 325 | |
Total tax-equivalent revenue (j) | |
| 67,137 | |
| 58,430 | |
| 48,342 | |
| 171,693 | |
| 140,987 | | |
| 57,287 | |
| 58,023 | |
| 67,137 | |
| 178,371 | |
| 171,693 | |
Efficiency ratio (i)/(j) | |
| 58.42 | % |
| 66.31 | % |
| 75.17 | % |
| 66.22 | % |
| 73.06 | % | |
| 71.49 | % |
| 71.46 | % |
| 58.42 | % |
| 69.69 | % |
| 66.22 | % |
4542
Discussion and Analysis of Results of Operations
Net Income
Net income for the three months ended September 30, 20202021 was $17.7$13.1 million, or $0.99$0.74 per diluted common share, a $10.6$4.6 million increasedecrease as compared to $7.1$17.7 million, or $0.48$0.99 per diluted common share, for the three months ended September 30, 2019.2020. This increasedecrease in net income was primarily due to a $15.7decrease of $9.2 million in noninterest income as well as a $1.8 million increase in noninterest income and a $3.1 million increase in net interest income,expense, partially offset by increases of $2.9a $5.5 million decrease in noninterest expense, $2.0 million inthe provision expense, and $3.3 million in income tax expense. The increasedecrease in noninterest income was primarily dueattributable to a $14.1$11.2 million increasedecrease in mortgage banking revenue, due to an increasea result of a $95.8 million decrease in mortgage originations. The increasedecrease in noninterest expensethe provision for loan losses was primarily attributable to an increase in compensation expense related to the increase in mortgage originations.driven by net recoveries and continuous improvements of credit quality indicators and economic conditions.
Net income for the nine months ended September 30, 20202021 was $40.0 million, or $2.26 per diluted common share, a $5.5 million increase as compared to $34.5 million, or $1.94 per diluted common share, compared to $21.9 million, or $1.49 per diluted common share for the nine months ended September 30, 2019. The increase of $12.6 million was due to increases of $26.0 million in noninterest income and $4.6 million in net interest income, partially offset by increases of $10.6 million in noninterest expense and $3.5 million in income tax expense.2020. The increase in noninterestnet income was primarily due to a $25.1$11.5 million decrease in provision expense, a $3.6 million increase in mortgage banking revenue asnet interest income and a result of a $486.6$3.0 million increase in mortgage originations.noninterest income, partially offset by a $11.0 million increase in noninterest expense. The decrease in provision expense was primarily due to a reduction in net charge-offs, improved economic conditions and credit quality indicators. The increase in noninterest expense was primarily attributabledue to an $8.6 million increase in compensation expense which was due to a combination of increased mortgage incentives as a result of the $307.4 million increase in mortgage originations, along with an increase in compensation expense related tofrom the increase in mortgage originations.acquisition of RPS.
Net Interest Income
Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three and nine months ended September 30, 20202021 and 2019.
In response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds rate by a total of 150 basis points in March 2020. This decrease impacts the comparability of net interest income between 2019 and 2020. We anticipate that our interest income will be significantly and adversely affected in future periods as a result of the COVID-19 pandemic, including as a result of the effects of lower interest rates.
Net interest income for the three months ended September 30, 20202021 was $21.8$21.1 million, an increasea decrease of $3.1 million$633 thousand from $18.7$21.8 million for the three months ended September 30, 2019.2020. The threedecrease included a $1.7 million decrease in interest income, offset by a $1.1 million decrease in interest expense. The decrease in interest income was primarily a result of a $3.1 million decrease in interest income from loans due to a decrease of $213.9 million in average loans driven primarily by PPP loan forgiveness. Partially offsetting this decrease was a $1.3 million increase in interest income from investment securities as a result of a $425.7 million increase in average balances. The decrease in interest expense was primarily due to a 27 basis point decrease in the cost of interest-bearing liabilities.
Net interest income for the nine months ended September 30, 2020 included2021 was $64.3 million, a $2.4$3.6 million increase, or 6.0%, from $60.7 million for the nine months ended September 30, 2020. The change in net interest income was due to a $6.1 million decrease in interest expense, compared to the same period in 2019 andpartially offset by a $664 thousand increase in$2.4 million decrease of interest income. The decrease in interest expense was primarily driven by a decrease of $1.8$4.9 million in deposit interest expense and a decrease of $539 thousand in interest expense on short-term borrowings. The decrease in deposit interest expense for the three months ended September 30, 2020, compared to the same period 2019 was driven primarily by a 72 basis point reduction in the average rate paid on interest-bearing deposits, partially offset by a $495.2 million increase in the average balance of interest-bearing deposits. The decrease in interest expense paid on short-term borrowings for the three months ended September 30, 2020, was primarily due to an $87.2deposits and a $1.2 million decrease in the average balance in short-term borrowings.interest expense paid on long-term debt. The increasedecrease in interest income was primarily driven bydue to a $674 thousand increase in$5.1 million decrease on interest income from investment securities as a result of a $186.1 million increase in the average balance of investment securities.
Net interest income for the nine months ended September 30, 2020 was $60.7 million, an increase of $4.6 million from $56.1 million for the nine months ended September 30, 2019. The increase in net interest income was primarily drivenloans partially offset by a decrease of $4.1 million in interest expense as well as a $488 thousand increase in interest income. The decrease in interest expense was driven by a $2.2 million decrease in deposit interest expense. The increase in interest income was primarily driven by a $1.6$3.0 million increase in interest income from investment securities, partially offset by a $1.3 million decrease in interest and fees on loans. The decrease in interest expense on deposits was due to a 39 basis point reduction in the average rate paid on interest-bearing deposits, partially offset by a $336.0 million increase in the average balance of interest-bearing deposits. The increase in interest income from investment securities was
46
primarily due to a $127.7 increase in the average balance of investment securities. The decrease in interest and fees on loans was primarily driven by a 66 basis point decrease in the average yield on total loans.
Our net interest margin (on a fully tax-equivalent, or FTE, basis) for the three months ended September 30, 20202021 was 3.17%2.78%, compared to 3.69%3.17% for the same period in 2019.2020. The decrease in net interest margin from the third quarter of 20192020 was due todriven by a 11258 basis point lower average earning asset yield, partially offset by an 84a 27 basis point decrease in the average rate paid on interest-bearing liabilities. The decrease in the average earning asset yield was primarily due to an 86 basis point decreasea change in balance sheet mix as the average yield on total loans. The declinebalance in loan yield was primarily due to the addition of PPP loan balances which averaged $348.1investment securities increased $425.7 million during the quarteralong with a yield$112.0 million increase in interest-bearing deposits with banks.
43
Our net interest margin (on a FTE basis) for the nine months ended September 30, 2021 was 2.92%, compared to 3.22% for the same period in 2020. The decreasechange in the average rate paid on total interest-bearing liabilitiesnet interest margin was primarily due to a 10064 basis point decrease in average earning asset yield, partially offset by a 53 basis point decrease in the average rate paid on money market and savings deposits.
Our net interest margin (FTE) forinterest-bearing liabilities. Also contributing to the nine months ended September 30, 2020 was 3.22%, compared to 3.72% for the same period in 2019. The decrease in net interest margin was primarily attributable to a 92 basis point decrease on the average earning asset yield, partially offset by a 52 basis point decreasechange in the average rate onbalance sheet mix as we had increases of $57.5 million in interest-bearing liabilities. The decreasedeposits with banks and $394.7 million in the average earning asset yield was primarily due to a 66 basis point reduction in the average yield on total loans. The decline in loan yield was primarily due to PPP loan balances which averaged $207.8 million for the nine months ended September 30, 2020 with a yield of 3.37%.The decrease in average rate on interest-bearing liabilities was the result of a 57 basis point decrease in the average rate on money market and savings deposits and a $95.4 million decrease in the average balance on short-term borrowings.investment securities.
As a result of the recent reductions in the target federal funds interest rate, as well as the impact of the COVID-19 pandemic, and related future loan charge-offs that we expect to incur, we anticipate that our net interest income and net interest margin (on a FTE basis) will decreaseremain under pressure in future periods. These decreasesAny decrease in net interest income or net interest margin will be partially offset by the processing fees received from PPP financing, which fees are being deferred and recognized as an adjustment to interest income over the life of the loans.
4744
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields on assets, and average yields earned, and rates paid for the three and nine months ended September 30, 20202021 and 2019.2020. We derived these yields and rates by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | ||||||||||||||
| | 2021 | | 2020 | | ||||||||||||
| | | | | Interest | | Average | | | | | Interest | | Average | | ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | ||||
(dollars in thousands) |
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||
Interest Earning Assets | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with banks | | $ | 281,768 | | $ | 114 |
| 0.16 | % | $ | 169,770 | | $ | 51 |
| 0.12 | % |
Investment securities (1) | |
| 869,421 | |
| 3,534 |
| 1.61 | % |
| 443,705 | |
| 2,274 |
| 2.04 | % |
Loans held for sale | |
| 57,233 | |
| 346 |
| 2.40 | % |
| 90,634 | |
| 555 |
| 2.44 | % |
Loans | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Commercial: | |
|
| |
| |
|
| |
|
| |
| |
|
| |
Commercial and industrial | |
| 544,811 | |
| 6,803 |
| 4.95 | % |
| 782,853 | |
| 8,543 |
| 4.34 | % |
Real estate construction | |
| 37,743 | |
| 380 |
| 3.99 | % |
| 32,747 | |
| 368 |
| 4.47 | % |
Commercial real estate | |
| 567,696 | |
| 5,245 |
| 3.67 | % |
| 525,514 | |
| 5,315 |
| 4.02 | % |
Total commercial | |
| 1,150,250 | |
| 12,428 |
| 4.29 | % |
| 1,341,114 | |
| 14,226 |
| 4.22 | % |
Consumer | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Residential real estate first mortgage | |
| 487,699 | |
| 4,077 |
| 3.32 | % |
| 460,995 | |
| 4,588 |
| 3.96 | % |
Residential real estate junior lien | |
| 129,239 | |
| 1,490 |
| 4.57 | % |
| 153,326 | |
| 1,749 |
| 4.54 | % |
Other revolving and installment | |
| 53,683 | |
| 602 |
| 4.45 | % |
| 79,343 | |
| 897 |
| 4.50 | % |
Total consumer | |
| 670,621 | |
| 6,169 |
| 3.65 | % |
| 693,664 | |
| 7,234 |
| 4.15 | % |
Total loans (1) | |
| 1,820,871 | |
| 18,597 |
| 4.05 | % |
| 2,034,778 | |
| 21,460 |
| 4.20 | % |
Federal Reserve/FHLB Stock | |
| 6,505 | |
| 71 |
| 4.33 | % |
| 5,871 | |
| 65 |
| 4.40 | % |
Total interest earning assets | |
| 3,035,798 | | | 22,662 |
| 2.96 | % |
| 2,744,758 | |
| 24,405 |
| 3.54 | % |
Noninterest earning assets | | | 155,079 | | | | | | | | 163,386 | | | | | | |
Total assets | | $ | 3,190,877 | | |
|
|
| | $ | 2,908,144 | |
|
|
|
| |
Interest-Bearing Liabilities | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing demand deposits | | $ | 692,873 | | $ | 240 |
| 0.14 | % | $ | 589,633 | | $ | 395 |
| 0.27 | % |
Money market and savings deposits | |
| 1,009,564 | |
| 365 |
| 0.14 | % |
| 961,669 | |
| 781 |
| 0.32 | % |
Time deposits | |
| 217,756 | |
| 275 |
| 0.50 | % |
| 204,969 | |
| 507 |
| 0.98 | % |
Short-term borrowings | |
| 10 | |
| — |
| — | % |
| — | |
| — |
| — | % |
Long-term debt | |
| 58,968 | |
| 535 |
| 3.60 | % |
| 58,739 | |
| 841 |
| 5.70 | % |
Total interest-bearing liabilities | |
| 1,979,171 | |
| 1,415 |
| 0.28 | % |
| 1,815,010 | |
| 2,524 |
| 0.55 | % |
Noninterest-Bearing Liabilities and Stockholders' Equity | |
| | | | |
|
| |
| | |
|
|
|
| |
Noninterest-bearing deposits | |
| 799,854 | | | |
|
| |
| 698,594 | |
|
|
|
| |
Other noninterest-bearing liabilities | |
| 58,656 | | | |
|
| |
| 79,619 | |
|
|
|
| |
Stockholders’ equity | |
| 353,196 | | | |
|
| |
| 314,921 | |
|
|
|
| |
Total liabilities and stockholders’ equity | | $ | 3,190,877 | | | |
|
| | $ | 2,908,144 | |
|
|
|
| |
Net interest income | | | | | $ | 21,247 |
|
| |
|
| | $ | 21,881 |
|
| |
Net interest rate spread | |
| | |
| | | 2.68 | % |
|
| |
|
|
| 2.99 | % |
Net interest margin on FTE basis (1) | |
| | |
| | | 2.78 | % |
|
| |
|
|
| 3.17 | % |
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | ||||||||||||||
| | 2020 | | 2019 | | ||||||||||||
| | | | | Interest | | Average | | | | | Interest | | Average | | ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | ||||
(dollars in thousands) |
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||
Interest Earning Assets | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with banks | | $ | 169,770 | | $ | 51 |
| 0.12 | % | $ | 12,998 | | $ | 83 |
| 2.53 | % |
Investment securities (1) | |
| 443,705 | |
| 2,274 |
| 2.04 | % |
| 257,561 | |
| 1,580 |
| 2.43 | % |
Loans held for sale | |
| 90,634 | |
| 555 |
| 2.44 | % |
| 45,794 | |
| 359 |
| 3.11 | % |
Loans | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Commercial: | |
|
| |
| |
|
| |
|
| |
| |
|
| |
Commercial and industrial | |
| 782,853 | |
| 8,543 |
| 4.34 | % |
| 494,081 | |
| 6,830 |
| 5.48 | % |
Real estate construction | |
| 32,747 | |
| 368 |
| 4.47 | % |
| 25,137 | |
| 352 |
| 5.56 | % |
Commercial real estate | |
| 525,514 | |
| 5,315 |
| 4.02 | % |
| 439,751 | |
| 5,866 |
| 5.29 | % |
Total commercial | |
| 1,341,114 | |
| 14,226 |
| 4.22 | % |
| 958,969 | |
| 13,048 |
| 5.40 | % |
Consumer | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Residential real estate first mortgage | |
| 460,995 | |
| 4,588 |
| 3.96 | % |
| 454,971 | |
| 4,789 |
| 4.18 | % |
Residential real estate junior lien | |
| 153,326 | |
| 1,749 |
| 4.54 | % |
| 184,124 | |
| 2,611 |
| 5.63 | % |
Other revolving and installment | |
| 79,343 | |
| 897 |
| 4.50 | % |
| 93,478 | |
| 1,117 |
| 4.74 | % |
Total consumer | |
| 693,664 | |
| 7,234 |
| 4.15 | % |
| 732,573 | |
| 8,517 |
| 4.61 | % |
Total loans (1) | |
| 2,034,778 | |
| 21,460 |
| 4.20 | % |
| 1,691,542 | |
| 21,565 |
| 5.06 | % |
Federal Reserve/FHLB Stock | |
| 5,871 | |
| 65 |
| 4.40 | % |
| 9,303 | |
| 119 |
| 5.07 | % |
Total interest earning assets | |
| 2,744,758 | | | 24,405 |
| 3.54 | % |
| 2,017,198 | |
| 23,706 |
| 4.66 | % |
Noninterest earning assets | | | 163,386 | | | | | | | | 159,664 | | | | | | |
Total assets | | $ | 2,908,144 | | |
|
|
| | $ | 2,176,862 | |
|
|
|
| |
Interest-Bearing Liabilities | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing demand deposits | | $ | 589,633 | | $ | 395 |
| 0.27 | % | $ | 424,896 | | $ | 522 |
| 0.49 | % |
Money market and savings deposits | |
| 961,669 | |
| 781 |
| 0.32 | % |
| 649,190 | |
| 2,162 |
| 1.32 | % |
Time deposits | |
| 204,969 | |
| 507 |
| 0.98 | % |
| 187,023 | |
| 822 |
| 1.74 | % |
Short-term borrowings | |
| — | |
| — |
| — | % |
| 87,201 | |
| 539 |
| 2.46 | % |
Long-term debt | |
| 58,739 | |
| 841 |
| 5.70 | % |
| 58,776 | |
| 899 |
| 6.07 | % |
Total interest-bearing liabilities | |
| 1,815,010 | |
| 2,524 |
| 0.55 | % |
| 1,407,086 | |
| 4,944 |
| 1.39 | % |
Noninterest-Bearing Liabilities and Stockholders' Equity | |
| | | | |
|
| |
| | |
|
|
|
| |
Noninterest-bearing deposits | |
| 698,594 | | | |
|
| |
| 502,108 | |
|
|
|
| |
Other noninterest-bearing liabilities | |
| 79,619 | | | |
|
| |
| 40,737 | |
|
|
|
| |
Stockholders’ equity | |
| 314,921 | | | |
|
| |
| 226,931 | |
|
|
|
| |
Total liabilities and stockholders’ equity | | $ | 2,908,144 | | | |
|
| | $ | 2,176,862 | |
|
|
|
| |
Net interest income | | | | | $ | 21,881 |
|
| |
|
| | $ | 18,762 |
|
| |
Net interest rate spread | |
| | |
| | | 2.99 | % |
|
| |
|
|
| 3.27 | % |
Net interest margin on FTE basis (2) | |
| | |
| | | 3.17 | % |
|
| |
|
|
| 3.69 | % |
(1) | Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent. |
4845
| | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | ||||||||||||||
| | 2021 | | 2020 | | ||||||||||||
|
| | |
| Interest |
| Average |
| | |
| Interest |
| Average | | ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | ||||
(dollars in thousands) | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | ||||
Interest Earning Assets |
| |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing deposits with banks | | $ | 219,636 | | $ | 227 | | 0.14 | % | $ | 162,134 | | $ | 615 | | 0.51 | % |
Investment securities (1) | |
| 778,307 | |
| 9,425 | | 1.62 | % |
| 383,591 | |
| 6,398 | | 2.23 | % |
Loans held for sale | |
| 70,218 | |
| 1,180 | | 2.25 | % |
| 64,555 | |
| 1,274 | | 2.64 | % |
Loans | |
|
| |
|
| |
| |
|
| |
|
| |
| |
Commercial: | |
|
| |
| | |
| |
|
| |
| | |
| |
Commercial and industrial | |
| 615,310 | |
| 21,780 | | 4.73 | % |
| 667,742 | |
| 22,397 | | 4.48 | % |
Real estate construction | |
| 41,812 | |
| 1,304 | | 4.17 | % |
| 30,385 | |
| 1,055 | | 4.64 | % |
Commercial real estate | |
| 565,861 | |
| 15,744 | | 3.72 | % |
| 515,761 | |
| 16,646 | | 4.31 | % |
Total commercial | |
| 1,222,983 | |
| 38,828 | | 4.24 | % |
| 1,213,888 | |
| 40,098 | | 4.41 | % |
Consumer | |
|
| |
|
| |
| |
|
| |
|
| |
| |
Residential real estate first mortgage | |
| 468,395 | |
| 12,371 | | 3.53 | % |
| 460,505 | |
| 13,968 | | 4.05 | % |
Residential real estate junior lien | |
| 132,145 | |
| 4,619 | | 4.67 | % |
| 163,332 | |
| 5,921 | | 4.84 | % |
Other revolving and installment | |
| 60,785 | |
| 1,989 | | 4.37 | % |
| 80,169 | |
| 2,751 | | 4.58 | % |
Total consumer | |
| 661,325 | |
| 18,979 | | 3.84 | % |
| 704,006 | |
| 22,640 | | 4.30 | % |
Total loans (1) | |
| 1,884,308 | |
| 57,807 | | 4.10 | % |
| 1,917,894 | |
| 62,738 | | 4.37 | % |
Federal Reserve/FHLB Stock | |
| 6,273 | |
| 205 | | 4.37 | % |
| 5,864 | |
| 201 | | 4.58 | % |
Total interest earning assets | |
| 2,958,742 | |
| 68,844 | | 3.11 | % |
| 2,534,038 | |
| 71,226 | | 3.75 | % |
Noninterest earning assets | | | 161,077 | | | | | | | | 156,144 | | | | | | |
Total assets | | $ | 3,119,819 | |
|
| |
| | $ | 2,690,182 | |
|
| |
| |
Interest-Bearing Liabilities | |
|
| |
|
| |
| |
|
| |
|
| |
| |
Interest-bearing demand deposits | | $ | 678,015 | | $ | 740 | | 0.15 | % | $ | 528,024 | | $ | 1,328 | | 0.34 | % |
Money market and savings deposits | |
| 1,018,347 | |
| 1,131 | | 0.15 | % |
| 889,039 | |
| 4,363 | | 0.66 | % |
Time deposits | |
| 212,297 | |
| 910 | | 0.57 | % |
| 201,747 | |
| 1,942 | | 1.29 | % |
Short-term borrowings | |
| 3 | |
| — | | — | % |
| 107 | |
| — | | — | % |
Long-term debt | |
| 48,002 | |
| 1,361 | | 3.79 | % |
| 58,747 | |
| 2,575 | | 5.85 | % |
Total interest-bearing liabilities | |
| 1,956,664 | |
| 4,142 | | 0.28 | % |
| 1,677,664 | |
| 10,208 | | 0.81 | % |
Noninterest-Bearing Liabilities and Stockholders' Equity | |
| | |
|
| |
| |
| | |
|
| |
| |
Noninterest-bearing deposits | | | 762,685 | |
|
| |
| |
| 651,971 | | | | | | |
Other noninterest-bearing liabilities | |
| 58,126 | |
|
| |
| |
| 56,722 | |
|
| |
| |
Stockholders’ equity | |
| 342,344 | |
|
| |
| |
| 303,825 | |
|
| |
| |
Total liabilities and stockholders’ equity | | $ | 3,119,819 | |
|
| |
| | $ | 2,690,182 | |
|
| |
| |
Net interest income | |
|
| | $ | 64,702 | |
| |
|
| | $ | 61,018 | |
| |
Net interest rate spread | |
|
| |
|
| | 2.83 | % |
|
| |
|
| | 2.94 | % |
Net interest margin on FTE basis (1) | |
|
| |
|
| | 2.92 | % |
|
| |
|
| | 3.22 | % |
| | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | ||||||||||||||
| | 2020 | | 2019 | | ||||||||||||
|
| | |
| Interest |
| Average |
| | |
| Interest |
| Average |
| ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | ||||
(dollars in thousands) | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | ||||
Interest Earning Assets |
| |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing deposits with banks | | $ | 162,134 | | $ | 615 |
| 0.51 | % | $ | 12,910 | | $ | 231 |
| 2.39 | % |
Investment securities (1) | |
| 383,591 | |
| 6,398 |
| 2.23 | % |
| 255,903 | |
| 4,803 |
| 2.51 | % |
Loans held for sale | |
| 64,555 | |
| 1,274 |
| 2.64 | % |
| 30,734 | |
| 745 |
| 3.24 | % |
Loans | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Commercial: | |
|
| |
| |
|
| |
|
| |
| |
|
| |
Commercial and industrial | |
| 667,742 | |
| 22,397 |
| 4.48 | % |
| 509,806 | |
| 20,966 |
| 5.50 | % |
Real estate construction | |
| 30,385 | |
| 1,055 |
| 4.64 | % |
| 23,532 | |
| 975 |
| 5.54 | % |
Commercial real estate | |
| 515,761 | |
| 16,646 |
| 4.31 | % |
| 444,964 | |
| 16,768 |
| 5.04 | % |
Total commercial | |
| 1,213,888 | |
| 40,098 |
| 4.41 | % |
| 978,302 | |
| 38,709 |
| 5.29 | % |
Consumer | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Residential real estate first mortgage | |
| 460,505 | |
| 13,968 |
| 4.05 | % |
| 455,898 | |
| 14,496 |
| 4.25 | % |
Residential real estate junior lien | |
| 163,332 | |
| 5,921 |
| 4.84 | % |
| 186,744 | |
| 8,028 |
| 5.75 | % |
Other revolving and installment | |
| 80,169 | |
| 2,751 |
| 4.58 | % |
| 94,685 | |
| 3,286 |
| 4.64 | % |
Total consumer | |
| 704,006 | |
| 22,640 |
| 4.30 | % |
| 737,327 | |
| 25,810 |
| 4.68 | % |
Total loans (1) | |
| 1,917,894 | |
| 62,738 |
| 4.37 | % |
| 1,715,629 | |
| 64,519 |
| 5.03 | % |
Federal Reserve/FHLB Stock | |
| 5,864 | |
| 201 |
| 4.58 | % |
| 9,638 | |
| 372 |
| 5.16 | % |
Total interest earning assets | |
| 2,534,038 | |
| 71,226 |
| 3.75 | % |
| 2,024,814 | |
| 70,670 |
| 4.67 | % |
Noninterest earning assets | | | 156,144 | | | | | | | | 161,054 | | | | | | |
Total assets | | $ | 2,690,182 | |
|
|
|
| | $ | 2,185,868 | |
|
|
|
| |
Interest-Bearing Liabilities | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing demand deposits | | $ | 528,024 | | $ | 1,328 |
| 0.34 | % | $ | 423,181 | | $ | 1,415 |
| 0.45 | % |
Money market and savings deposits | |
| 889,039 | |
| 4,363 |
| 0.66 | % |
| 675,921 | |
| 6,217 |
| 1.23 | % |
Time deposits | |
| 201,747 | |
| 1,942 |
| 1.29 | % |
| 183,686 | |
| 2,170 |
| 1.58 | % |
Short-term borrowings | |
| 107 | |
| — |
| — | % |
| 95,489 | |
| 1,805 |
| 2.53 | % |
Long-term debt | |
| 58,747 | |
| 2,575 |
| 5.85 | % |
| 58,798 | |
| 2,714 |
| 6.17 | % |
Total interest-bearing liabilities | |
| 1,677,664 | |
| 10,208 |
| 0.81 | % |
| 1,437,075 | |
| 14,321 |
| 1.33 | % |
Noninterest-Bearing Liabilities and Stockholders' Equity | |
| | |
|
|
|
| |
| | |
|
|
|
| |
Noninterest-bearing deposits | | | 651,971 | |
|
|
|
| |
| 496,822 | | | | | | |
Other noninterest-bearing liabilities | |
| 56,722 | |
|
|
|
| |
| 39,060 | |
|
|
|
| |
Stockholders’ equity | |
| 303,825 | |
|
|
|
| |
| 212,911 | |
|
|
|
| |
Total liabilities and stockholders’ equity | | $ | 2,690,182 | |
|
|
|
| | $ | 2,185,868 | |
|
|
|
| |
Net interest income | |
|
| | $ | 61,018 |
|
| |
|
| | $ | 56,349 |
|
| |
Net interest rate spread | |
|
| |
|
|
| 2.94 | % |
|
| |
|
|
| 3.34 | % |
Net interest margin on FTE basis (2) | |
|
| |
|
|
| 3.22 | % |
|
| |
|
|
| 3.72 | % |
(1) | Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent. |
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the
4946
change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | Nine months ended September 30, 2020 | | Three Months Ended September 30, 2021 | | Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||
| | Compared with | | Compared with | | Compared with | | Compared with | ||||||||||||||||||||||||||||
| | Three Months Ended September 30, 2019 | | Nine months ended September 30, 2019 | | Three Months Ended September 30, 2020 | | Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||
| | Change due to: | | Interest | | Change due to: | | Interest | | Change due to: | | Interest | | Change due to: | | Interest | ||||||||||||||||||||
(tax-equivalent basis, dollars in thousands) |
| Volume |
| Rate |
| Variance |
| Volume |
| Rate |
| Variance |
| Volume |
| Rate |
| Variance |
| Volume |
| Rate |
| Variance | ||||||||||||
Interest earning assets | | | | | | | | | |
| |
|
| |
|
| |
| | | | | | | | | |
| |
|
| |
|
| |
|
Interest-bearing deposits with banks | | $ | 997 | | $ | (1,029) | | $ | (32) | | $ | 2,670 | | $ | (2,286) | | $ | 384 | | $ | 34 | | $ | 29 | | $ | 63 | | $ | 219 | | $ | (607) | | $ | (388) |
Investment securities | |
| 1,137 | |
| (443) | |
| 694 | |
| 2,399 | |
| (804) | |
| 1,595 | |
| 2,189 | |
| (929) | |
| 1,260 | |
| 6,584 | |
| (3,557) | |
| 3,027 |
Loans held for sale | |
| 351 | |
| (155) | |
| 196 | |
| 820 | |
| (291) | |
| 529 | |
| (205) | |
| (4) | |
| (209) | |
| 112 | |
| (206) | |
| (94) |
Loans | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | |
| 3,978 | |
| (2,265) | |
| 1,713 | |
| 6,503 | |
| (5,072) | |
| 1,431 | |
| (2,604) | |
| 864 | |
| (1,740) | |
| (1,757) | |
| 1,140 | |
| (617) |
Real estate construction | |
| 106 | |
| (90) | |
| 16 | |
| 284 | |
| (204) | |
| 80 | |
| 56 | |
| (44) | |
| 12 | |
| 397 | |
| (148) | |
| 249 |
Commercial real estate | |
| 1,140 | |
| (1,691) | |
| (551) | |
| 2,671 | |
| (2,793) | |
| (122) | |
| 427 | |
| (497) | |
| (70) | |
| 1,615 | |
| (2,517) | |
| (902) |
Total commercial | |
| 5,224 | |
| (4,046) | |
| 1,178 | |
| 9,458 | |
| (8,069) | |
| 1,389 | |
| (2,121) | |
| 323 | |
| (1,798) | |
| 255 | |
| (1,525) | |
| (1,270) |
Consumer | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 63 | |
| (264) | |
| (201) | |
| 147 | |
| (675) | |
| (528) | |
| 267 | |
| (778) | |
| (511) | |
| 239 | |
| (1,836) | |
| (1,597) |
Residential real estate junior lien | |
| (436) | |
| (426) | |
| (862) | |
| (1,008) | |
| (1,099) | |
| (2,107) | |
| (276) | |
| 17 | |
| (259) | |
| (1,129) | |
| (173) | |
| (1,302) |
Other revolving and installment | |
| (168) | |
| (52) | |
| (220) | |
| (504) | |
| (31) | |
| (535) | |
| (291) | |
| (4) | |
| (295) | |
| (664) | |
| (98) | |
| (762) |
Total consumer | |
| (541) | |
| (742) | |
| (1,283) | |
| (1,365) | |
| (1,805) | |
| (3,170) | |
| (300) | |
| (765) | |
| (1,065) | |
| (1,554) | |
| (2,107) | |
| (3,661) |
Total loans | |
| 4,683 | |
| (4,788) | |
| (105) | |
| 8,093 | |
| (9,874) | |
| (1,781) | |
| (2,421) | |
| (442) | |
| (2,863) | |
| (1,299) | |
| (3,632) | |
| (4,931) |
Federal Reserve/FHLB Stock | |
| (44) | |
| (10) | |
| (54) | |
| (146) | |
| (25) | |
| (171) | |
| 7 | |
| (1) | |
| 6 | |
| 14 | |
| (10) | |
| 4 |
Total interest income | |
| 7,124 | |
| (6,425) | |
| 699 | |
| 13,836 | |
| (13,280) | |
| 556 | |
| (396) | |
| (1,347) | |
| (1,743) | |
| 5,630 | |
| (8,012) | |
| (2,382) |
Interest-bearing liabilities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Interest-bearing demand deposits | |
| 203 | |
| (330) | |
| (127) | |
| 353 | |
| (440) | |
| (87) | |
| 70 | |
| (225) | |
| (155) | |
| 381 | |
| (969) | |
| (588) |
Money market and savings deposits | |
| 1,037 | |
| (2,418) | |
| (1,381) | |
| 1,962 | |
| (3,816) | |
| (1,854) | |
| 39 | |
| (455) | |
| (416) | |
| 638 | |
| (3,870) | |
| (3,232) |
Time deposits | |
| 78 | |
| (393) | |
| (315) | |
| 214 | |
| (442) | |
| (228) | |
| 32 | |
| (264) | |
| (232) | |
| 102 | |
| (1,134) | |
| (1,032) |
Short-term borrowings | |
| (539) | |
| — | |
| (539) | |
| (1,807) | |
| 2 | |
| (1,805) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Long-term debt | |
| (1) | |
| (57) | |
| (58) | |
| (2) | |
| (137) | |
| (139) | |
| 3 | |
| (309) | |
| (306) | |
| (470) | |
| (744) | |
| (1,214) |
Total interest expense | |
| 778 | |
| (3,198) | |
| (2,420) | |
| 720 | |
| (4,833) | |
| (4,113) | |
| 144 | |
| (1,253) | |
| (1,109) | |
| 651 | |
| (6,717) | |
| (6,066) |
Change in net interest income | | $ | 6,346 | | $ | (3,227) | | $ | 3,119 | | $ | 13,116 | | $ | (8,447) | | $ | 4,669 | | $ | (540) | | $ | (94) | | $ | (634) | | $ | 4,979 | | $ | (1,295) | | $ | 3,684 |
Provision for Loan Losses
The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.
We recorded a $2.0 million reversal of the provision for loan losses of $3.5for the three and nine months ended September 30, 2021, a $5.5 million decrease compared to the provision for the three months ended September 30, 2020 a $2.0and an $11.5 million increasedecrease compared to the $1.5 recorded for the three months ended September 30, 2019. The increase in provision expense was primarily due to allocations of reserves for the economic uncertainties related to COVID-19. We expect the provision for loan losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline, and loan defaults may increase, as a result of COVID-19.
We recorded a provision for loan losses of $9.5 million for the nine months ended September 30, 2020,2020. Management believes that a $4.0 million increase comparednegative adjustment to the $5.5 million forprovision in the nine months ended September 30, 2019. The increasethird quarter of 2021 was prudent and was driven by net recoveries in provision expense was primarily due to allocationsfour of reserves for the last five quarters and continuous improvements of credit quality indicators and economic uncertainties related to COVID-19.conditions.
50
Noninterest Income
Our noninterest income is generated from four primary sources: (1) retirement and benefit services; (2) wealth management; (3) mortgage banking; and (4) other general banking services.
47
The following table presents our noninterest income for the three and nine months ended September 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | Three months ended | | Nine months ended | | ||||||||||||||||
| | September 30, | | September 30, | | | September 30, | | September 30, | | ||||||||||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
Retirement and benefit services | | $ | 15,104 | | $ | 15,307 | | $ | 45,034 | | $ | 46,142 | | | $ | 18,031 | | $ | 15,104 | | $ | 53,157 | | $ | 45,034 | |
Wealth management | |
| 4,486 | |
| 3,896 | |
| 12,644 | |
| 11,385 | | |
| 5,295 | |
| 4,486 | |
| 15,419 | |
| 12,644 | |
Mortgage banking | |
| 22,269 | |
| 8,135 | |
| 44,860 | |
| 19,739 | | |
| 11,116 | |
| 22,269 | |
| 40,535 | |
| 44,860 | |
Service charges on deposit accounts | |
| 355 | |
| 447 | |
| 1,075 | |
| 1,321 | | |
| 357 | |
| 355 | |
| 1,025 | |
| 1,075 | |
Net gains (losses) on investment securities | |
| 1,428 | |
| 48 | |
| 2,722 | |
| 357 | | |
| 11 | |
| 1,428 | |
| 125 | |
| 2,722 | |
Other | |
| 1,614 | |
| 1,747 | |
| 4,340 | |
| 5,694 | | |
| 1,230 | |
| 1,614 | |
| 3,408 | |
| 4,340 | |
Total noninterest income | | $ | 45,256 | | $ | 29,580 | | $ | 110,675 | | $ | 84,638 | | | $ | 36,040 | | $ | 45,256 | | $ | 113,669 | | $ | 110,675 | |
Noninterest income as a % of revenue | | | 67.53 | % | | 61.29 | % | | 64.58 | % | | 60.14 | % | | | 63.04 | % | | 67.53 | % | | 63.87 | % | | 64.58 | % |
Total noninterest income for the three months ended September 30, 20202021, was $45.3$36.0 million, an increasea decrease of $15.7$9.2 million, or 53.0%20.4%, compared to $29.6$45.3 million for the three months ended September 30, 2019.2020. The increasedecrease in noninterest income was primarily due to an increasedriven by decreases of $14.1$11.2 million in mortgage banking revenue and $1.4 million in net gains on investment securities. These decreases were partially offset by a $1.4$2.9 million increase in net gainsretirement and losses on investment securities,benefit services revenue and a $590$809 thousand increase in wealth management revenue, partially offset by a $203 thousandrevenue. The decrease in retirement and benefit services revenue. Mortgagemortgage banking revenue increasedwas primarily due to a $198.1$7.8 million increase in mortgage originations along with a 75 basis point increasedecrease in the gain on sale margin. Wealth management revenue increased aschange in fair value of the secondary market hedge driven by a result of an increasereduction in the average balance of assets under administration/management.hedged pipeline. The decreaseincrease in retirement and benefit services revenue was primarily due to a $347$1.8 million in revenue attributable to the acquisition of RPS and $892 thousand decrease in asset baseddocument restatement fees. Wealth management revenue increased primarily due to organic growth and market increases in assets under administration/management.
Total noninterest income for the nine months ended September 30, 20202021, was $110.7$113.7 million, an increase of $26.0$3.0 million, or 30.8%2.7%, compared to $84.6$110.7 million for the nine months ended September 30, 2019.2020. The increasechange in noninterest income was primarily driven by an increaseincreases of $25.1$8.1 million in retirement and benefit services revenue and $2.8 million in wealth management revenue, partially offset by a $4.3 million decrease in mortgage banking revenue and a $2.4$2.6 million decrease in net gains on investment securities. The increase in retirement and benefit services revenue was primarily a result of a $4.5 million in revenue attributable to the acquisition of RPS and a $1.7 million increase in net gains and losses on investment securities,document restatement fees as well as organic growth from an increase in assets under administration/management. Wealth management revenue increased due to increases in assets under administration/management as a result of reasons previously discussed. The decrease in mortgage banking revenue was the result of a $17.7 million decrease in the change in fair value of the secondary market hedge, partially offset by a $1.4an increase of $307.4 million decrease in other noninterest income. Mortgage banking revenue increased as mortgage originations increased from $685.2 million for the nine months ended September 30, 2019 to $1.17 billion for the nine months ended September 30, 2020, along with a 35and an 11 basis point increase in the gain on sale margin. Other noninterest income decreased $1.4 million for the nine months ended September 30 of 2020 due to a $1.5 million gain on the sale of a branch that occurred in 2019.
We anticipate that our noninterest income will be significantly adversely affected in future periods as a result of the COVID-19 pandemicincreasing interest rates and the related decline in global economic conditions and significant volatility in the global stock markets. We expect retirement and benefit services asset based revenue will be adversely affected by reduced assets under administration and assets under management, waived transaction and participant related fees, and a decline in ESOP transaction fees. We expect wealth management asset based revenue will be adversely affected by reduced assets under administration and assets under management and we also expect increased unemployment and recessionary concernsinflationary pressure, which will adversely affect mortgage originations and mortgage banking revenue in future periods.revenue.
Noninterest income as a percentage of total operating revenue, which consists of net interest income plus noninterest income, was 63.0% for the three months ended September 30, 2021, compared to 67.5% for the three months ended September 30, 2020 compared to 61.3%and was 63.9% for the threenine months ended September 30, 2019. The increase was due2021, compared to noninterest income increasing by 53.0% while net interest income increased by only 16.5%.
Noninterest income as a percentage of total operating revenue was 64.6% for the nine months ended September 30, 2020, compared to 60.1% for the nine months ended September 30, 2019. The increase was due to noninterest income increasing by 30.8% while net interest income increased by only 8.2%.2020.
51
See “NOTE 1413 Segment Reporting” for additional discussion regarding our business lines.
48
Noninterest Expense
The following table presents noninterest expense for the three and nine months ended September 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | Three months ended | | Nine months ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Compensation | | $ | 22,740 | | $ | 20,041 | | $ | 62,684 | | $ | 54,997 | | $ | 23,291 | | $ | 22,740 | | $ | 71,298 | | $ | 62,684 |
Employee taxes and benefits | |
| 5,033 | |
| 4,600 | |
| 15,088 | |
| 15,188 | |
| 5,058 | |
| 5,033 | |
| 16,443 | |
| 15,088 |
Occupancy and equipment expense | |
| 2,768 | |
| 2,700 | |
| 8,392 | |
| 8,086 | |
| 2,063 | |
| 2,511 | |
| 6,212 | |
| 7,615 |
Business services, software and technology expense | |
| 4,420 | |
| 4,224 | |
| 13,384 | |
| 12,044 | |
| 5,332 | |
| 4,378 | |
| 15,266 | |
| 13,501 |
Intangible amortization expense | |
| 990 | |
| 990 | |
| 2,971 | |
| 3,091 | |
| 1,088 | |
| 990 | |
| 3,327 | |
| 2,971 |
Professional fees and assessments | | | 1,031 | |
| 1,051 | |
| 3,231 | |
| 3,146 | | | 1,503 | |
| 1,070 | |
| 4,484 | |
| 3,303 |
Marketing and business development | | | 929 | |
| 890 | |
| 2,088 | |
| 2,024 | | | 865 | |
| 929 | |
| 2,310 | |
| 2,088 |
Supplies and postage | | | 247 | |
| 631 | |
| 1,625 | |
| 2,027 | | | 549 | |
| 248 | |
| 1,583 | |
| 1,630 |
Travel | | | 26 | |
| 435 | |
| 338 | |
| 1,335 | | | 174 | |
| 26 | |
| 236 | |
| 338 |
Mortgage and lending expenses | | | 1,231 | |
| 751 | |
| 3,466 | |
| 1,966 | | | 1,231 | |
| 1,434 | |
| 3,762 | |
| 3,916 |
Other | |
| 799 | |
| 1,014 | |
| 3,407 | |
| 2,198 | |
| 887 | |
| 855 | |
| 2,712 | |
| 3,540 |
Total noninterest expense | | $ | 40,214 | | $ | 37,327 | | $ | 116,674 | | $ | 106,102 | | $ | 42,041 | | $ | 40,214 | | $ | 127,633 | | $ | 116,674 |
Total noninterest expense for the three months ended September 30, 20202021 was $40.2$42.0 million, an increase of $2.9$1.8 million, or 7.7%4.5%, compared to $37.3$40.2 million for the three months ended September 30, 2019.2020. The increase in noninterest expense was driven by increases of $2.7 million in compensation expense, $480 thousand in mortgage and lending expenses, $433 thousand in employee taxes and benefits, and $196$954 thousand in business services, software and technology expense, $551 thousand in compensation expense and $433 thousand in professional fees and assessments. These increases were partially offset by decreases of $448 thousand in occupancy and equipment expense as well as a $409$203 thousand decrease in travel and a $384 thousand decrease in supplies and postage. Increases in compensation, employee taxes and benefits and mortgage and lending expenses. Business services, software and technology expense increased due to non-recurring expenses wererelated to investments in automated processing and integration expenses associated with the acquisition of RPS. The increase in compensation expense was a direct result of increasesthe acquisition of RPS, as the number of full-time employees increased from 790 employees in the third quarter of 2020 to 825 employees in the third quarter of 2021 and partially offset by decreased mortgage incentives due to a $95.8 million decrease in mortgage originations. The increase in business services, softwareprofessional fees and technology expensesassessments was primarily a result of an increase in information technology service expenses related to our “One Alerus” initiative and additional equipment purchases.increased legal fees. The decrease in travel was a direct result of COVID-19occupancy and the decrease in supplies and postageequipment expense was due to athe closure of certain offices in 2021 due to our ongoing hybrid work environment. The decrease in mortgage and lending expenses was due to decreased mortgage originations. Occupancy and equipment expense decreased due to the closure of certain offices in 2021 due to our transition to E-statements for our retirement and benefit services segment.a hybrid work environment.
Total noninterest expense for the nine months ended September 30, 20202021 was $116.7$127.6 million, an increase of $10.6$11.0 million or 10.0%9.4%, compared to $106.1$116.7 million for the nine months ended September 30, 2019.2020. The increase in noninterest expense was due toprimarily driven by increases of $7.7$8.6 million in compensation expense, $1.5$1.8 million in mortgage and lending expense, $1.3 in business services, software and technology expense and $1.2$1.4 million in other noninterest expense,employee taxes and benefits, partially offset by decreases of $1.0$1.4 million in traveloccupancy and $402equipment expense and $828 thousand in supplies and postage.other noninterest expense. The increases in compensation and mortgage and lending expenses were a result of increased mortgage originations. The increasechanges in business services, software and technology expense, was duecompensation, employee and benefits, and occupancy and equipment expenses were similar to our continued investment in software and technology related to our “One Alerus” initiative.the changes stated previously. The increasedecrease in other noninterest expense was primarily due todriven by a $1.2 million increase$758 thousand decrease in the provision for unfunded commitments. The decrease in travel was a direct resultUnfunded commitments decreased 4.3% from the third quarter of COVID-19 and the decrease in supplies and postage was due to a transition to E-statements for our retirement and benefit services segment.2020.
Income Tax Expense
Income tax expense is an estimate based on the amount we expect to owe the respective taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due, or to be received from, taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. If the final resolution of taxes payable differs from our estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.
5249
For the three months ended September 30, 2020,2021, we recognized income tax expense of $5.6$4.1 million on $23.3 million of pre-tax income, resulting in an effective tax rate of 24.2%, compared to income tax expense of $2.3 million on $9.4 million of pre-tax income for the three months ended September 30, 2019, resulting in an effective tax rate of 24.7%.
For the nine months ended September 30, 2020, we recognized income tax expense of $10.7 million on $45.2$17.1 million of pre-tax income, resulting in an effective tax rate of 23.7%, compared to income tax expense of $7.2$5.6 million on $29.1$23.3 million of pre-tax income for the three months ended September 30, 2020, resulting in an effective tax rate of 24.2%.
For the nine months ended September 30, 2021, we recognized income tax expense of $12.4 million on $52.3 million of pre-tax income, resulting in an effective tax rate of 23.7%, compared to income tax expense of $10.7 million on $45.2 million of pre-tax income for the nine months ended September 2019,30, 2020, resulting in an effective tax rate of 24.8%23.7%. The decrease in the effective tax rate was primarily due to additional tax benefits from share-based compensation for the nine months ended September 30, 2020, as compared to the same period in 2019.
Financial Condition
Overview
Total assets were $2.9$3.2 billion as of September 30, 2020,2021, an increase of $541.9$161.4 million, or 23.0%5.4%, as compared to December 31, 2019.2020. The overall increase in total assets was primarily due to increases of $337.1$425.5 million in loans, $185.1 million in available-for-sale investments, $64.5investment securities, partially offset by decreases of $179.0 million in loans held for sale,investment and $15.3$61.5 million in other assets.loans held for sale. The decrease in loans held for investment was primarily due to PPP loan balances decreasing by $164.9 million from December 31, 2020.
Loans
The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, residential real estate, and consumer financing loans. The goal of the overall portfolio mix is to diversify with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories. As of September 30, 2020,2021, the portfolio mix was 38.3%28.1% commercial and industrial, 26.0%32.0% commercial real estate, 30.2%35.0% residential real estate and 5.5%4.9% in other categories. Commercial and industrial loans included $348.9$103.5 million of PPP loans as of September 30, 2020.2021.
The following table presents the composition of total loans outstanding by portfolio segment as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | | December 31, 2020 | | | | | | | | ||||||
| | | | | Percent of | | | | | | Percent of | | | Change | | |||
(dollars in thousands) | | Balance |
| Portfolio | |
| Balance |
| Portfolio |
|
| | Amount |
| Percent |
| ||
Commercial |
| | |
| | |
| | |
| |
| | | | | |
|
Commercial and industrial (1) |
| $ | 506,599 | | 28.1 | % | | $ | 691,858 | | 35.0 | % | | $ | (185,259) | | (26.8) | % |
Real estate construction | |
| 37,751 | | 2.1 | % | |
| 44,451 | | 2.2 | % | |
| (6,700) | | (15.1) | % |
Commercial real estate | |
| 573,518 | | 32.0 | % | |
| 563,007 | | 28.5 | % | |
| 10,511 | | 1.9 | % |
Total commercial | |
| 1,117,868 | | 62.2 | % | |
| 1,299,316 | | 65.7 | % | |
| (181,448) | | (14.0) | % |
Consumer | |
| | | | | |
| | | | | |
| | | | |
Residential real estate first mortgage | |
| 501,339 | | 27.8 | % | |
| 463,370 | | 23.4 | % | |
| 37,969 | | 8.2 | % |
Residential real estate junior lien | |
| 130,243 | | 7.2 | % | |
| 143,416 | | 7.2 | % | |
| (13,173) | | (9.2) | % |
Other revolving and installment | |
| 50,936 | | 2.8 | % | |
| 73,273 | | 3.7 | % | |
| (22,337) | | (30.5) | % |
Total consumer | |
| 682,518 | | 37.8 | % | |
| 680,059 | | 34.3 | % | |
| 2,459 | | 0.4 | % |
Total loans | | $ | 1,800,386 | | 100.0 | % | | $ | 1,979,375 | | 100.0 | % | | $ | (178,989) | | (9.0) | % |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | | December 31, 2019 | | | | | | | | ||||||
| | | | | Percent of | | | | | | Percent of | | | Change | | |||
(dollars in thousands) | | Balance |
| Portfolio | |
| Balance |
| Portfolio |
|
| | Amount |
| Percent |
| ||
Commercial |
| | |
| | |
| | |
| |
| | | | | |
|
Commercial and industrial (1) |
| $ | 789,036 | | 38.3 | % | | $ | 479,144 | | 27.8 | % | | $ | 309,892 | | 64.7 | % |
Real estate construction | |
| 33,169 | | 1.6 | % | |
| 26,378 | | 1.5 | % | |
| 6,791 | | 25.7 | % |
Commercial real estate | |
| 535,216 | | 26.0 | % | |
| 494,703 | | 28.8 | % | |
| 40,513 | | 8.2 | % |
Total commercial | |
| 1,357,421 | | 65.9 | % | |
| 1,000,225 | | 58.1 | % | |
| 357,196 | | 35.7 | % |
Consumer | |
| | | | | |
| | | | | |
| | | | |
Residential real estate first mortgage | |
| 469,050 | | 22.8 | % | |
| 457,155 | | 26.6 | % | |
| 11,895 | | 2.6 | % |
Residential real estate junior lien | |
| 152,487 | | 7.4 | % | |
| 177,373 | | 10.3 | % | |
| (24,886) | | (14.0) | % |
Other revolving and installment | |
| 79,461 | | 3.9 | % | |
| 86,526 | | 5.0 | % | |
| (7,065) | | (8.2) | % |
Total consumer | |
| 700,998 | | 34.1 | % | |
| 721,054 | | 41.9 | % | |
| (20,056) | | (2.8) | % |
Total loans | | $ | 2,058,419 | | 100.0 | % | | $ | 1,721,279 | | 100.0 | % | | $ | 337,140 | | 19.6 | % |
(1) | Included PPP loans of |
Total loans outstanding were $2.06$1.80 billion as of September 30, 2020, an increase2021, a decrease of $337.1$179.0 million, or 19.6%9.0%, from December 31, 2019.2020. The increasedecrease was primarily due to increasesdecreases of $309.9$185.3 million in commercial and industrial loans and $40.5$6.7 million in ourreal estate construction loans, partially offset by increases of $10.5 million in the commercial real estate loan portfolio partially offset by a $20.1and $2.5 million decrease in ourthe consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $348.9 million in netExcluding PPP loans, offsetthe commercial portfolio decreased by a decrease of $64.6$16.5 million, or 7.64% in operating line utilization.1.6%, from December 31, 2020.
5350
Consistent with regulatory guidance urging banks to work with borrowers during this unprecedented situationthe COVID-19 pandemic and as outlined in the CARES Act, the Company offered a payment deferral program for its lending clients that arewere adversely affected by COVID-19. These deferrals were generally no more than 90 days in duration. As of September 30, 2020,2021, the Company had executed 552587 of these deferrals representing $151.4$154.5 million. Of those loans, 278 loans with a total outstanding principal balance of $16.9$3.4 million have been granted second deferrals, 562 loans with a total outstanding principal balance of $12.0 million$69 thousand remain on the first deferral and the remaining loans have been returned to a normal payment status. In accordance with the Interagency Statement on Loan Modifications and Reporting for Financial institutions as issued on April 7, 2020, these short-term deferrals were not considered TDRs. See “NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for additional information regarding TDRs.
We anticipate that loan growth will slow down in the future for our commercial and industrial, commercial real estate, residential real estate, and consumer loan portfolios as a result of COVID-19higher levels of liquidity and the related decline in economic conditionscompetition in our market areas.
The following table presents the maturities and types of interest rates for the loan portfolio as of September 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | September 30, 2021 | ||||||||||||||||||||
| | | | | After one | | | | | | | | | | | After one | | | | | | | ||
| | One year | | but within | | After | | | | | One year | | but within | | After | | | | ||||||
(dollars in thousands) |
| or less |
| five years |
| five years |
| Total |
| or less |
| five years |
| five years |
| Total | ||||||||
Commercial |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 133,279 | | $ | 594,853 | | $ | 60,904 | | $ | 789,036 | | $ | 124,595 | | $ | 317,946 | | $ | 64,058 | | $ | 506,599 |
Real estate construction | |
| 3,229 | |
| 12,393 | |
| 17,547 | |
| 33,169 | |
| 8,284 | |
| 28,833 | |
| 634 | |
| 37,751 |
Commercial real estate | |
| 41,059 | |
| 223,196 | |
| 270,961 | |
| 535,216 | |
| 39,765 | |
| 230,117 | |
| 303,636 | |
| 573,518 |
Total commercial | |
| 177,567 | |
| 830,442 | |
| 349,412 | |
| 1,357,421 | |
| 172,644 | |
| 576,896 | |
| 368,328 | |
| 1,117,868 |
Consumer | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential real estate first mortgage | |
| 17,962 | |
| 18,645 | |
| 432,443 | |
| 469,050 | |
| 10,188 | |
| 16,085 | |
| 475,066 | |
| 501,339 |
Residential real estate junior lien | |
| 17,021 | |
| 54,292 | |
| 81,174 | |
| 152,487 | |
| 10,543 | |
| 32,009 | |
| 87,691 | |
| 130,243 |
Other revolving and installment | |
| 10,707 | |
| 55,260 | |
| 13,494 | |
| 79,461 | |
| 7,543 | |
| 40,413 | |
| 2,980 | |
| 50,936 |
Total consumer | |
| 45,690 | |
| 128,197 | |
| 527,111 | |
| 700,998 | |
| 28,274 | |
| 88,507 | |
| 565,737 | |
| 682,518 |
Total loans | | $ | 223,257 | | $ | 958,639 | | $ | 876,523 | | $ | 2,058,419 | | $ | 200,918 | | $ | 665,403 | | $ | 934,065 | | $ | 1,800,386 |
Sensitivity of loans to changes in interest rates | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Fixed interest rates | |
|
| | $ | 822,116 | | $ | 395,404 | |
|
| |
|
| | $ | 526,838 | | $ | 510,687 | |
|
|
Floating interest rates | |
|
| |
| 136,523 | |
| 481,119 | |
|
| |
|
| |
| 138,565 | |
| 423,378 | |
|
|
Total | |
|
| | $ | 958,639 | | $ | 876,523 | |
|
| |
|
| | $ | 665,403 | | $ | 934,065 | |
|
|
As of September 30, 2020, 62.1%2021, 62.8% of the loan portfolio bore interest at fixed rates and 37.9%37.2% at floating rates. The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.
Asset Quality
Our strategy for credit risk management includes well-defined, centralized credit policies; uniform underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and management reviews of loans experiencing deterioration of credit quality. We strive to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.
5451
Credit Quality Indicators
Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See ���NOTE“NOTE 4 Loans and Allowance for Loan Losses” to the consolidated financial statements for a definition of each of the risk ratings.
The table below presents criticized loans outstanding by loan portfolio segment as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, | | | September 30, | | December 31, | | ||||
(dollars in thousands) |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Commercial |
| |
| | | | |
| |
| | | | |
Commercial and industrial | | $ | 29,228 | | $ | 30,838 | | | $ | 8,398 | | $ | 22,256 | |
Real estate construction | |
| 1,029 | | | 1,259 | | |
| — | | | — | |
Commercial real estate | |
| 33,303 | | | 32,409 | | |
| 20,026 | | | 29,274 | |
Total commercial | |
| 63,560 | | | 64,506 | | |
| 28,424 | | | 51,530 | |
Consumer | |
|
| | | | | |
|
| | | | |
Residential real estate first mortgage | |
| 1,882 | | | 797 | | |
| 1,842 | | | 2,149 | |
Residential real estate junior lien | |
| 3,197 | | | 1,251 | | |
| 940 | | | 2,955 | |
Other revolving and installment | | | — | | | 6 | | | | 4 | | | 37 | |
Total consumer | |
| 5,079 | | | 2,054 | | |
| 2,786 | | | 5,141 | |
Total loans | | $ | 68,639 | | $ | 66,560 | | | $ | 31,210 | | $ | 56,671 | |
Criticized loans as a percent of total loans | | | 3.33 | % | | 3.87 | % | | | 1.73 | % | | 2.86 | % |
The following table presents information regarding nonperforming assets as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, | | | September 30, | | December 31, | | ||||
(dollars in thousands) |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Nonaccrual loans |
| $ | 4,795 |
| $ | 7,379 |
|
| $ | 6,229 |
| $ | 5,050 |
|
Accruing loans 90+ days past due |
| | — |
| | 448 |
|
| | — |
| | 30 |
|
Total nonperforming loans | | | 4,795 | | | 7,827 | | | | 6,229 | | | 5,080 | |
OREO and repossessed assets | |
| 10 | |
| 8 | | |
| 862 | |
| 63 | |
Total nonperforming assets | | | 4,805 | | | 7,835 | | | | 7,091 | | | 5,143 | |
Total restructured accruing loans | | | 858 | | | 957 | | | | 714 | | | 3,427 | |
Total nonperforming assets and restructured accruing loans | | $ | 5,663 | | $ | 8,792 | | | $ | 7,805 | | $ | 8,570 | |
Nonperforming loans to total loans | |
| 0.23 | % |
| 0.45 | % | |
| 0.35 | % |
| 0.26 | % |
Nonperforming assets to total assets | |
| 0.17 | % |
| 0.33 | % | |
| 0.22 | % |
| 0.17 | % |
Allowance for loan losses to nonperforming loans | |
| 654 | % |
| 306 | % | |
| 515 | % |
| 674 | % |
The ratio of nonperforming loans to total loans at September 30, 2020 was 0.23%. Nonperforming assets as a percentage of total assets was 0.17% at September 30, 2020.
Interest income lost on nonaccrual loans approximated $159$85 thousand and $130$159 thousand for the three months ended September 30, 20202021, and 2019,2020, respectively. There was no interest income included in net interest income related to nonaccrual loans for the three months ended September 30, 20202021 and 2019.2020.
Interest income lost on nonaccrual loans approximated $473$197 thousand and $277$473 thousand for the nine months ended September 30, 20202021, and 2019,2020, respectively. There was no interest income included in net interest income related to nonaccrual loans for the nine months ended September 30, 20202021 and 2019.2020.
55
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of incurred credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred losses in the loan portfolio given the conditions at the time. Management determines the
52
adequacy of the allowance based on periodic evaluations of the loan portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic and other conditions. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change.
5653
The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | Three months ended | | Nine months ended | | ||||||||||||||||
| | September 30, | | September 30, | | | September 30, | | September 30, | | ||||||||||||||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
Balance—beginning of period | | $ | 27,256 | | $ | 21,246 | | $ | 23,924 | | $ | 22,174 | | | $ | 33,764 | | $ | 27,256 | | $ | 34,246 | | $ | 23,924 | |
Commercial loan charge-offs | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Commercial and Industrial | |
| (10) | |
| (324) | |
| (2,745) | |
| (5,275) | | |
| (747) | |
| (10) | |
| (1,224) | |
| (2,745) | |
Real estate construction | |
| — | |
| — | |
| — | |
| (1) | | |
| — | |
| — | |
| — | |
| — | |
Commercial real estate | |
| — | |
| — | |
| (865) | |
| — | | |
| — | |
| — | |
| (536) | |
| (865) | |
Total commercial loan charge-offs | |
| (10) | |
| (324) | |
| (3,610) | |
| (5,276) | | |
| (747) | |
| (10) | |
| (1,760) | |
| (3,610) | |
Consumer loan charge-offs | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Residential real estate first mortgage | |
| — | |
| — | |
| — | |
| — | | |
| — | |
| — | |
| — | |
| — | |
Residential real estate junior lien | |
| — | |
| (20) | |
| (12) | |
| (154) | | |
| — | |
| — | |
| — | |
| (12) | |
Other revolving and installment | |
| (41) | |
| (31) | |
| (194) | |
| (513) | | |
| (46) | |
| (41) | |
| (139) | |
| (194) | |
Total consumer loan charge-offs | |
| (41) | |
| (51) | |
| (206) | |
| (667) | | |
| (46) | |
| (41) | |
| (139) | |
| (206) | |
Total loan charge-offs | |
| (51) | |
| (375) | |
| (3,816) | |
| (5,943) | | |
| (793) | |
| (51) | |
| (1,899) | |
| (3,816) | |
Commercial loan recoveries | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Commercial and Industrial | |
| 432 | |
| 538 | |
| 1,346 | |
| 831 | | |
| 1,052 | |
| 432 | |
| 1,497 | |
| 1,346 | |
Real estate construction | |
| — | |
| — | |
| — | |
| 2 | | |
| — | |
| — | |
| — | |
| — | |
Commercial real estate | |
| 95 | |
| — | |
| 95 | |
| 150 | | |
| — | |
| 95 | |
| 4 | |
| 95 | |
Total commercial recoveries | |
| 527 | |
| 538 | |
| 1,441 | |
| 983 | | |
| 1,052 | |
| 527 | |
| 1,501 | |
| 1,441 | |
Consumer loan recoveries | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Residential real estate first mortgage | |
| — | |
| — | |
| 5 | |
| — | | |
| — | |
| — | |
| — | |
| 5 | |
Residential real estate junior lien | |
| 81 | |
| 49 | |
| 175 | |
| 132 | | |
| 16 | |
| 81 | |
| 113 | |
| 175 | |
Other revolving and installment | |
| 24 | |
| 28 | |
| 108 | |
| 123 | | |
| 27 | |
| 24 | |
| 105 | |
| 108 | |
Total consumer loan recoveries | |
| 105 | |
| 77 | |
| 288 | |
| 255 | | |
| 43 | |
| 105 | |
| 218 | |
| 288 | |
Total loan recoveries | |
| 632 | |
| 615 | |
| 1,729 | |
| 1,238 | | |
| 1,095 | |
| 632 | |
| 1,719 | |
| 1,729 | |
Net loan charge-offs (recoveries) | |
| (581) | |
| (240) | |
| 2,087 | |
| 4,705 | | |
| (302) | |
| (581) | |
| 180 | |
| 2,087 | |
Commercial loan provision | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Commercial and Industrial | |
| (846) | |
| (962) | |
| (498) | |
| 3,263 | | |
| (825) | |
| (846) | |
| (1,378) | |
| (498) | |
Real estate construction | |
| 40 | |
| 25 | |
| 180 | |
| 97 | | |
| 92 | |
| 40 | |
| 21 | |
| 180 | |
Commercial real estate | |
| 1,828 | |
| (4) | |
| 5,953 | |
| (668) | | |
| (413) | |
| 1,828 | |
| (1,049) | |
| 5,953 | |
Total commercial loan provision | |
| 1,022 | |
| (941) | |
| 5,635 | |
| 2,692 | | |
| (1,146) | |
| 1,022 | |
| (2,406) | |
| 5,635 | |
Consumer loan provision | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Residential real estate first mortgage | |
| 1,694 | |
| (139) | |
| 2,914 | |
| (140) | | |
| 625 | |
| 1,694 | |
| 1,027 | |
| 2,914 | |
Residential real estate junior lien | |
| 28 | |
| 157 | |
| 377 | |
| 113 | | |
| 6 | |
| 28 | |
| (63) | |
| 377 | |
Other revolving and installment | |
| 108 | |
| 1 | |
| 371 | |
| 388 | | |
| (32) | |
| 108 | |
| (196) | |
| 371 | |
Total consumer loan provision | |
| 1,830 | |
| 19 | |
| 3,662 | |
| 361 | | |
| 599 | |
| 1,830 | |
| 768 | |
| 3,662 | |
Unallocated provision expense | |
| 648 | |
| 2,420 | |
| 203 | |
| 2,462 | | |
| (1,453) | |
| 648 | |
| (362) | |
| 203 | |
Total loan loss provision | |
| 3,500 | |
| 1,498 | |
| 9,500 | |
| 5,515 | | |
| (2,000) | |
| 3,500 | |
| (2,000) | |
| 9,500 | |
Balance—end of period | | $ | 31,337 | | $ | 22,984 | | $ | 31,337 | | $ | 22,984 | | | $ | 32,066 | | $ | 31,337 | | $ | 32,066 | | $ | 31,337 | |
Total loans | | $ | 2,058,419 | | $ | 1,686,087 | | $ | 2,058,419 | | $ | 1,686,087 | | | $ | 1,800,386 | | $ | 2,058,419 | | $ | 1,800,386 | | $ | 2,058,419 | |
Average total loans | | | 2,034,778 | | | 1,691,542 | | | 1,917,894 | | | 1,715,629 | | | | 1,820,871 | | | 2,034,778 | | | 1,884,308 | | | 1,917,894 | |
Allowance for loan losses to total loans | |
| 1.52 | % |
| 1.36 | % |
| 1.52 | % |
| 1.36 | % | |
| 1.78 | % |
| 1.52 | % |
| 1.78 | % |
| 1.52 | % |
Net charge-offs/(recoveries) to average total loans (annualized) | |
| (0.11) | % |
| (0.06) | % |
| 0.15 | % |
| 0.37 | % | |
| (0.06) | % |
| (0.11) | % |
| 0.01 | % |
| 0.15 | % |
The allowance for loan losses was $31.3$32.1 million as of September 30, 2020,2021, compared to $23.9$34.2 million as of December 31, 2019.2020. The $7.4$2.2 million increasedecrease in the allowance for loan losses was primarily due to additionala $2.0 million reversal of the provision for loan losses expense in the third quarter of $9.5 million, partially offset by net charge-offs of $2.1 million. The increase in provision expense was primarily due to allocations of reserves for the economic uncertainties related to COVID-19.2021. As of September 30, 2020,2021, the allowance for loan losses represented 1.52%1.78% of total loans. Excluding PPP loans, the ratio of allowance for loan losses to total loans increased 44 basis points to 1.83%was 1.89% at September 30, 2020,2021, compared to 1.39%2.00% as of December 31, 2019. For the nine months ended September 30, 2020, the ratio of net charge-offs to average total loans was 0.15%.2020.
5754
Based on current economic indicators, the Company increased the economic factors within the allowance for loan losses evaluation. We expect that the allowance for loan losses as a percent of total loans may increase in future periods based on our belief that the credit quality of our loan portfolio may decline, and loan defaults may increase, as a result of COVID-19.
The following table presents the allocation of the allowance for loan losses as of the dates presented.
| | | | | | | | | | | | | | | | | | | | | | | ||
| | September 30, 2020 | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 | | ||||||||||||||
| | | | | Percentage | | | | | Percentage | | | | | | Percentage | | | | | Percentage | | ||
| | Allocated | | of loans to | | Allocated | | of loans to | | | Allocated | | of loans to | | Allocated | | of loans to | | ||||||
(dollars in thousands) |
| Allowance |
| total loans | |
| Allowance |
| total loans | |
| Allowance |
| total loans | |
| Allowance |
| total loans | | ||||
Commercial and industrial | | $ | 10,373 | | 38.3 | % | | $ | 12,270 | | 27.8 | % | | $ | 9,100 | | 28.1 | % | | $ | 10,205 | | 35.0 | % |
Real estate construction | |
| 483 | | 1.6 | % | |
| 303 | | 1.5 | % | |
| 679 | | 2.1 | % | |
| 658 | | 2.2 | % |
Commercial real estate | |
| 11,871 | | 26.0 | % | |
| 6,688 | | 28.8 | % | |
| 12,524 | | 32.0 | % | |
| 14,105 | | 28.5 | % |
Residential real estate first mortgage | |
| 4,367 | | 22.8 | % | |
| 1,448 | | 26.6 | % | |
| 6,801 | | 27.8 | % | |
| 5,774 | | 23.4 | % |
Residential real estate junior lien | |
| 1,211 | | 7.4 | % | |
| 671 | | 10.3 | % | |
| 1,423 | | 7.2 | % | |
| 1,373 | | 7.2 | % |
Other revolving and installment | |
| 637 | | 3.9 | % | |
| 352 | | 5.0 | % | |
| 523 | | 2.8 | % | |
| 753 | | 3.7 | % |
Unallocated | |
| 2,395 | | — | % | |
| 2,192 | | — | % | |
| 1,016 | | — | % | |
| 1,378 | | — | % |
Total loans | | $ | 31,337 | | 100.0 | % | | $ | 23,924 | | 100.0 | % | | $ | 32,066 | | 100.0 | % | | $ | 34,246 | | 100.0 | % |
In the ordinary course of business, we enter into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located in accrued expenses and other liabilities on the Consolidated Balance Sheets. The reserve for unfunded commitments was $1.9 million as of September 30, 2020, an increase of $800 thousand, as compared to December 31, 2019.2021.
Loans Held for Sale
Loans held for sale represent loans to consumers for the purchase or refinance of a residence that we have originated and intend to sell into the secondary market. Loans held for sale were $111.3$60.9 million as of September 30, 2020, an increase2021, a decrease of $64.5$61.5 million, as compared to December 31, 2019.2020. The increasedecrease in loans held for sale was primarily due to increaseda decrease in mortgage originations through September and investor pipeline capacity.originations. Mortgage loan originations totaled $511.6$415.8 million for the three months ended September 30, 20202021, compared to $261.3$607.2 million for the three months ended December 31, 2019.2020.
Investment Securities
The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. In the second quarter of 2021, we transferred our investment securities of obligations of state and political agencies from available-for-sale to held-to-maturity to protect capital and reduce volatility in other comprehensive income due to market value changes.
5855
The following table presents the fair value composition of our investment securities portfolio as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| September 30, 2020 | | December 31, 2019 | | | | |
| September 30, 2021 |
| December 31, 2020 | | | |
| ||||||||||||||||
| | | | | Percent of | | | | | Percent of | | Change | | | | | | Percent of | | | | | Percent of | | Change | | ||||||
(dollars in thousands) |
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| Amount |
| Percent |
|
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| Amount |
| Percent |
| ||||||
Available-for-sale | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
U.S. Treasury and agencies | | $ | 16,092 | | 3.2 | % | $ | 21,240 | | 6.8 | % | $ | (5,148) | | (24.2) | % | | | 5,469 | | 0.5 | % | | 5,907 | | 1.0 | % | $ | (438) | | (7.4) | % |
Obligations of state and political agencies | | | 147,216 | | 29.7 | % | | 68,648 | | 21.9 | % | | 78,568 | | 114.5 | % | | | — | | - | % | | 153,773 | | 26.0 | % | | (153,773) | | (100.0) | % |
Mortgage backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Agency | | | 211,700 | | 42.8 | % | | 182,538 | | 58.3 | % | | 29,162 | | 16.0 | % | | | 518,472 | | 50.9 | % | | 306,719 | | 51.8 | % | | 211,753 | | 69.0 | % |
Commercial | | | 87,542 | | 17.7 | % | | 30,685 | | 9.8 | % | | 56,857 | | 185.3 | % | | | 94,918 | | 9.3 | % | | 94,978 | | 16.0 | % | | (60) | | (0.1) | % |
Asset backed securities | | | 131 | | — | % | | 144 | | — | % | | (13) | | (9.0) | % | | | 64 | | - | % | | 115 | | — | % | | (51) | | (44.3) | % |
Corporate bonds | | | 32,733 | | 6.6 | % | | 7,095 | | 2.3 | % | | 25,638 | | 361.4 | % | | | 36,359 | | 3.6 | % | | 30,850 | | 5.2 | % | | 5,509 | | 17.9 | % |
Total available-for-sale | |
| 495,414 | | 100.0 | % |
| 310,350 | | 99.1 | % |
| 185,064 | | 59.6 | % | ||||||||||||||||
Equity | |
| — | | - | % |
| 2,808 | | 0.9 | % |
| (2,808) | | (100.0) | % | ||||||||||||||||
Total available-for-sale investment securities | |
| 655,282 | | 64.3 | % |
| 592,342 | | 100.0 | % |
| 62,940 | | 10.6 | % | ||||||||||||||||
Held-to-maturity | | | | | | | | | | | | | | | | | ||||||||||||||||
Obligations of state and political agencies | |
| 145,172 | | 14.3 | % |
| — | | — | % |
| 145,172 | | — | % | ||||||||||||||||
Mortgage backed securities | | | | | | | | | | | | | | | | | ||||||||||||||||
Residential Agency | | | 217,414 | | 21.4 | % | | — | | — | % | | 217,414 | | — | % | ||||||||||||||||
Total held-to-maturity investment securities | | | 362,586 | | 35.7 | % | | — | | — | % | | 145,172 | | — | % | ||||||||||||||||
Total investment securities | | $ | 495,414 | | 100.0 | % | $ | 313,158 | | 100.0 | % | $ | 182,256 | | 58.2 | % | | $ | 1,017,868 | | 100.0 | % | $ | 592,342 | | 100.0 | % | $ | 208,112 | | 35.1 | % |
The investment securities available-for-sale presented in the following table are reported at fair value and by contractual maturity as of September 30, 2020.2021. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax-equivalent basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity as of September 30, 2020 |
| | Maturity as of September 30, 2021 |
| ||||||||||||||||||||||||||||||||||||
| | One year or less | | One to five years | | Five to ten years | | After ten years |
| | One year or less | | One to five years | | Five to ten years | | After ten years |
| ||||||||||||||||||||||||
|
| Fair |
| Average |
| Fair |
| Average |
| Fair |
| Average |
| Fair |
| Average |
|
| Fair |
| Average |
| Fair |
| Average |
| Fair |
| Average |
| Fair |
| Average |
| ||||||||
(dollars in thousands) | | Value | | Yield | | Value | | Yield | | Value | | Yield | | Value | | Yield |
| | Value | | Yield | | Value | | Yield | | Value | | Yield | | Value | | Yield |
| ||||||||
Available-for-sale |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
U.S. Treasury and agencies | | $ | 10,034 |
| 1.52 | % | $ | — |
| — | % | $ | 1,576 |
| 0.92 | % | $ | 4,482 |
| 0.71 | % | | $ | — |
| — | % | $ | — |
| — | % | $ | 1,357 |
| 0.92 | % | $ | 4,112 |
| 0.71 | % |
Obligations of state and political agencies | |
| 2,127 |
| 1.56 | % |
| 23,873 |
| 1.46 | % |
| 72,932 |
| 1.85 | % |
| 48,284 |
| 2.34 | % | |||||||||||||||||||||
Mortgage backed securities | |
|
|
|
| |
|
|
| | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
| | |
|
|
|
| |
|
|
|
| |
Residential Agency | |
| 2 |
| 4.36 | % |
| 1,447 |
| 2.81 | % |
| 51,703 |
| 2.34 | % |
| 158,548 |
| 2.21 | % | |
| — |
| — | % |
| 3,376 |
| 2.54 | % |
| 13,787 |
| 2.06 | % |
| 501,309 |
| 1.28 | % |
Commercial | |
| — |
| — | % |
| 2,139 |
| 3.30 | % |
| 5,225 |
| 2.24 | % |
| 80,178 |
| 1.50 | % | |
| — |
| — | % |
| — |
| — | % |
| 35,827 |
| 2.80 | % |
| 59,091 |
| 2.56 | % |
Asset backed securities | |
| — |
| — | % |
| — |
| — | % |
| — |
| — | % |
| 131 |
| 5.44 | % | |
| — |
| — | % |
| — |
| — | % |
| — |
| — | % |
| 64 |
| 5.31 | % |
Corporate bonds | |
| 4,048 |
| 2.57 | % |
| — |
| 2.63 | % |
| 18,685 |
| 4.85 | % |
| 10,000 |
| 3.88 | % | |
| — |
| — | % |
| — |
| — | % |
| 36,359 |
| 4.29 | % |
| — |
| — | % |
Total available-for-sale | | $ | 16,211 |
| 1.79 | % | $ | 27,459 |
| 1.67 | % | $ | 150,121 |
| 2.42 | % | $ | 301,623 |
| 2.07 | % | |||||||||||||||||||||
Total available-for-sale investment securities | | | — |
| — | % | | 3,376 |
| 2.54 | % | | 87,330 |
| 3.28 | % | | 564,576 |
| 1.41 | % | |||||||||||||||||||||
Held-to-maturity | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
Obligations of state and political agencies | | | 4,690 | | 0.26 | % | | 34,359 | | 0.98 | % | | 76,120 | | 1.76 | % | | 31,504 | | 2.20 | % | |||||||||||||||||||||
Mortgage backed securities | |
|
|
|
| |
|
|
| | |
|
|
|
| |
|
|
|
| | |||||||||||||||||||||
Residential Agency | |
| — |
| — | % |
| — |
| — | % |
| — |
| — | % |
| 216,867 |
| 1.85 | % | |||||||||||||||||||||
Total held-to-maturity investment securities | | | 4,690 | | 0.26 | % | | 34,359 | | 0.98 | % | | 76,120 | | 1.76 | % | | 248,371 | | 1.89 | % | |||||||||||||||||||||
Total investment securities | | $ | 4,690 | | 0.26 | % | $ | 37,735 | | 1.12 | % | $ | 163,450 | | 2.57 | % | $ | 812,947 | | 1.55 | % |
Deposits
Total deposits were $2.46$2.71 billion as of September 30, 2020,2021, an increase of $491.1$141.1 million, or 24.9%5.5%, as compared tofrom December 31, 2019.2020. Interest-bearing deposits increased $375.3$98.7 million while noninterest-bearing deposits increased $115.7$42.3 million. The increase in deposits was primarily due to higher customer balances resultingKey drivers included inflows from PPP loans, government stimulus programs and higher depositor balances due to the uncertain economic environment.environment and volatile financial markets. The increase in interest-bearing deposits included a $128.8increases of $55.0 million increase in interest-bearing demand deposits, $28.3 million in money market accounts and savings
56
accounts and $15.5 million in time deposits. Although overall deposits increased, we saw that within interest-bearing and noninterest-bearing deposits, synergistic deposits decreased $19.6 million from our retirement and benefit services and wealth management segments. In addition, health savings account, or HSA, deposits were $131.5 millionsegments as participants transitioned balances back into the markets. As of September 30, 2020, an increase2021, the total sourced deposits outside of $11.8our branch footprint was $576.0 million. Excluding synergistic deposits, commercial transaction deposits increased $112.5 million, or 9.9%10.2%, fromwhile consumer transaction deposits increased $31.2 million, or 4.8%, since December 31, 2019. Noninterest-bearing deposits as a percent of total deposits was 28.2% and 29.3% as of September 30, 2020 and December 31, 2019, respectively. Total deposits represented 95.6% of total liabilities as of September 30, 2020.
We expect that deposit levels will generally decrease in future periods as a result of the distressed economic conditions in our market areas as a result of the COVID-19 pandemic and as clients continue to utilize funds received from PPP loans.
59
The following table presents the composition of our deposit portfolio as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| September 30, 2020 | | December 31, 2019 | | | | | | |
| September 30, 2021 | | December 31, 2020 | | | | | | | ||||||||||||
| | | | | Percent of | | | | | Percent of | | Change | | | | | | Percent of | | | | | Percent of | | Change | | ||||||
(dollars in thousands) |
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| Amount |
| Percent |
|
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| Amount |
| Percent |
| ||||||
Noninterest-bearing demand | | $ | 693,450 | | 28.2 | % | $ | 577,704 | | 29.3 | % | $ | 115,746 | | 20.0 | % | | $ | 797,062 | | 29.4 | % | $ | 754,716 | | 29.3 | % | $ | 42,346 | | 5.6 | % |
Interest-bearing demand | |
| 590,366 | | 24.0 | % |
| 458,689 | | 23.3 | % |
| 131,677 | | 28.7 | % | |
| 673,916 | | 24.8 | % |
| 618,900 | | 24.1 | % |
| 55,016 | | 8.9 | % |
Money market and savings | |
| 971,132 | | 39.4 | % |
| 738,841 | | 37.5 | % |
| 232,291 | | 31.4 | % | |
| 1,017,310 | | 37.5 | % |
| 989,039 | | 38.5 | % |
| 28,271 | | 2.9 | % |
Time deposits | |
| 207,422 | | 8.4 | % |
| 196,082 | | 9.9 | % |
| 11,340 | | 5.8 | % | |
| 224,800 | | 8.3 | % |
| 209,338 | | 8.1 | % |
| 15,462 | | 7.4 | % |
Total deposits | | $ | 2,462,370 | | 100.0 | % | $ | 1,971,316 | | 100.0 | % | $ | 491,054 | | 24.9 | % | | $ | 2,713,088 | | 100.0 | % | $ | 2,571,993 | | 100.0 | % | $ | 141,095 | | 5.5 | % |
The following table presents the average balances and rates of our deposit portfolio for the three months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Three months ended | | | Three months ended | | Three months ended | | ||||||||||||
| | September 30, 2020 | | September 30, 2019 | | | September 30, 2021 | | September 30, 2020 | | ||||||||||||
| | Average | | Average | | Average | | Average | | | Average | | Average | | Average | | Average | | ||||
(dollars in thousands) |
| Balance |
| Rate |
| Balance |
| Rate |
|
| Balance |
| Rate |
| Balance |
| Rate |
| ||||
Noninterest-bearing demand | | $ | 698,594 | | — | % | $ | 502,108 | | — | % | | $ | 799,854 | | — | % | $ | 698,594 | | — | % |
Interest-bearing demand | | | 589,633 | | 0.27 | % | | 424,896 | | 0.49 | % | | | 692,873 | | 0.14 | % | | 589,633 | | 0.27 | % |
Money market and savings | | | 961,669 | | 0.32 | % | | 649,190 | | 1.32 | % | | | 1,009,564 | | 0.14 | % | | 961,669 | | 0.32 | % |
Time deposits | | | 204,969 | | 0.98 | % | | 187,023 | | 1.74 | % | | | 217,756 | | 0.50 | % | | 204,969 | | 0.98 | % |
Total deposits | | $ | 2,454,865 | | 0.27 | % | $ | 1,763,217 | | 0.79 | % | | $ | 2,720,047 | | 0.13 | % | $ | 2,454,865 | | 0.27 | % |
The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $100 thousand and over, that were outstanding, as of the dates presented:
| | | | | | |
| | September 30, | | September 30, | ||
(dollars in thousands) |
| 2020 |
| 2021 | ||
Maturing in: |
| |
|
| |
|
3 months or less | | $ | 52,348 | | $ | 76,902 |
3 months to 6 months | |
| 47,944 | |
| 58,486 |
6 months to 1 year | |
| 12,061 | |
| 4,375 |
1 year or greater | |
| 11,281 | |
| 8,379 |
Total | | $ | 123,634 | | $ | 148,142 |
Borrowings
Borrowings as of September 30, 20202021 and December 31, 20192020 were as follows:
| | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | ||||||
| | | | | Percent of | | | | | Percent of | |
(dollars in thousands) |
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| ||
Subordinated notes | | | 50,000 | | 84.8 | % | | 49,688 | | 84.6 | % |
Junior subordinated debentures | |
| 8,702 | | 14.8 | % | | 8,617 | | 14.7 | % |
Finance lease liability | | | 261 | | 0.4 | % | | 430 | | 0.7 | % |
Total borrowed funds | | $ | 58,963 | | 100.0 | % | $ | 58,735 | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | | | | | | ||||||
| | | | | Percent of | | | | | Percent of | | Change | | |||
(dollars in thousands) |
| Balance |
| Portfolio |
| Balance |
| Portfolio |
| Amount |
| Percent |
| |||
Subordinated notes | | $ | 49,672 | | 84.6 | % | $ | 49,625 | | 84.4 | % | $ | 47 | | 0.1 | % |
Junior subordinated debentures | |
| 8,589 | | 14.6 | % | | 8,504 | | 14.5 | % |
| 85 | | 1.0 | % |
Finance lease liability | | | 484 | | 0.8 | % | | 640 | | 1.1 | % | | (156) | | (24.3) | % |
Total borrowed funds | | $ | 58,745 | | 100.0 | % | $ | 58,769 | | 100.0 | % | $ | (24) | | — | % |
57
In the first quarter of 2021, we redeemed our previously issued subordinated debt with an initial fixed rate of 5.75% and issued new subordinated debt to the Bank of North Dakota with an initial fixed rate of 3.50%.
Capital Resources
Stockholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available-for-sale securities.
Stockholders' equity increased $36.3$23.0 million to $322.0$353.2 million as of September 30, 2020,2021, compared to $285.7$330.2 million as of December 31, 2019.2020. The increase in stockholders' equity was primarily driven by $34.5$40.0 million ofin net
60
income, for the nine months ended September 30, 2020, and an increase of $8.6 million of accumulated other comprehensive income. These increases were partially offset by $7.8$8.2 million in dividends declared on common stock.stock and a $10.1 million decrease in accumulated other comprehensive income. Tangible common equity to tangible assets, a non-GAAP financial measure, decreasedincreased to 9.78%9.62% as of September 30, 2020,2021, from 10.38%9.27% as of December 31, 2019.2020. Tangible common equity to tangible assets would have been 11.14%9.95% as of September 30, 2021 and 10.19% as of December 31, 2020, if PPP loans were excluded.
We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk, and that common equity has the greatest capacity to absorb unexpected loss.
We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.
At September 30, 20202021 and December 31, 2019,2020, we met all the capital adequacy requirements to which we were subject. The table below presents the Company’s and the Bank’s regulatory capital ratios as of September 30, 20202021 and December 31, 2019:2020:
| | | | | |
| | September 30, | | December 31, | |
Capital Ratios |
| 2021 |
| 2020 |
|
Alerus Financial Corporation Consolidated |
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets | | 14.52 | % | 12.75 | % |
Tier 1 capital to risk weighted assets | | 14.93 | % | 13.15 | % |
Total capital to risk weighted assets | | 18.58 | % | 16.79 | % |
Tier 1 capital to average assets | | 9.88 | % | 9.24 | % |
Tangible common equity to tangible assets (1) | | 9.62 | % | 9.27 | % |
| | |
| |
|
Alerus Financial, National Association | | |
| |
|
Common equity tier 1 capital to risk weighted assets | | 13.77 | % | 12.10 | % |
Tier 1 capital to risk weighted assets | | 13.77 | % | 12.10 | % |
Total capital to risk weighted assets | | 15.03 | % | 13.36 | % |
Tier 1 capital to average assets | | 9.11 | % | 8.50 | % |
| | | | | |
| | September 30, | | December 31, | |
Capital Ratios |
| 2020 |
| 2019 |
|
Alerus Financial Corporation |
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets | | 13.08 | % | 12.48 | % |
Tier 1 capital to risk weighted assets | | 13.48 | % | 12.90 | % |
Total capital to risk weighted assets | | 17.13 | % | 16.73 | % |
Tier 1 capital to average assets | | 9.76 | % | 11.05 | % |
Tangible common equity to tangible assets (1) | | 9.78 | % | 10.38 | % |
| | |
| |
|
Alerus Financial, National Association | | |
| |
|
Common equity tier 1 capital to risk weighted assets | | 12.47 | % | 11.91 | % |
Tier 1 capital to risk weighted assets | | 12.47 | % | 11.91 | % |
Total capital to risk weighted assets | | 13.72 | % | 13.15 | % |
Tier 1 capital to average assets | | 9.03 | % | 10.20 | % |
The capital ratios for the Company and the Bank, as of September 30, 2020,2021, as shown in the above tables, were at levels above the regulatory minimums to be considered “well capitalized”. See “Note 1716 Regulatory Matters” to the consolidated financial statements for additional information.
6158
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
In the ordinary course of our operations, we enter into certain contractual obligations. The following table presents our contractual obligations by maturity as of September 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | September 30, 2021 | ||||||||||||||||||||||||||
| | Less than | | One to | | Three to | | Over | | | | | Less than | | One to | | Three to | | Over | | | | ||||||||
(dollars in thousands) |
| one year |
| three years |
| five years |
| five years |
| Total |
| one year |
| three years |
| five years |
| five years |
| Total | ||||||||||
Operating lease obligations | | $ | 2,179 | | $ | 3,927 | | $ | 1,772 | | $ | 1,753 | | $ | 9,631 | | $ | 1,597 | | $ | 2,115 | | $ | 639 | | $ | 238 | | $ | 4,589 |
Time deposits | |
| 178,362 | |
| 17,514 | |
| 6,220 | |
| 5,326 | |
| 207,422 | |
| 200,773 | |
| 14,065 | |
| 7,875 | |
| 2,087 | |
| 224,800 |
Subordinated notes payable | |
| — | |
| — | |
| — | |
| 49,672 | |
| 49,672 | | | — | | | — | | | — | | | 50,000 | | | 50,000 |
Junior subordinated debenture (Trust I) | |
| — | |
| — | |
| — | |
| 3,436 | |
| 3,436 | |
| — | |
| — | |
| — | |
| 3,481 | |
| 3,481 |
Junior subordinated debenture (Trust II) | |
| — | |
| — | |
| — | |
| 5,153 | |
| 5,153 | |
| — | |
| — | |
| — | |
| 5,221 | |
| 5,221 |
Finance lease liability | |
| 251 | |
| 272 | |
| — | |
| — | |
| 523 | |
| 251 | |
| 21 | |
| — | |
| — | |
| 272 |
Total contractual obligations | | $ | 180,792 | | $ | 21,713 | | $ | 7,992 | | $ | 65,340 | | $ | 275,837 | | $ | 202,621 | | $ | 16,201 | | $ | 8,514 | | $ | 61,027 | | $ | 288,363 |
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normal credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitments is considered immaterial for disclosure purposes.
A summary of the contractual amounts of our exposure to off-balance sheet agreements as of September 30, 20202021 and December 31, 2019, is2020, was as follows:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
(dollars in thousands) |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Commitments to extend credit | | $ | 596,642 | | $ | 586,365 | | $ | 622,465 | | $ | 611,140 |
Standby letters of credit | |
| 7,073 | |
| 8,516 | |
| 11,028 | |
| 6,510 |
Total | | $ | 603,715 | | $ | 594,881 | | $ | 633,493 | | $ | 617,650 |
Liquidity
Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. Liquidity is monitored and closely managed by our asset and liability committee, or the ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is the ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. The ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.
As of September 30, 2020,2021, we had on balance sheet liquidity of $311.1$789.5 million, compared to $250.7$511.1 million as of December 31, 2019.2020. On balance sheet liquidity includes total due from banks,cash and cash equivalents, federal funds sold, interest-bearing deposits with banks, unencumbered securities available-for-sale, and over collateralized securities pledging positions.positions available-for-sale.
6259
The Bank is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2020,2021, we had no outstanding fed funds purchased from the FHLB and $565.3$658.2 million of collateral pledged to the FHLB. Based on this collateral, we were eligible to borrow up to $565.0$657.9 million from the FHLB. In addition, we can borrow up to $102.0 million through the unsecured lines of credit we have established with four other banks.
In addition, because the Bank is “well capitalized,” we can accept wholesale deposits up to 20.0% of total assets based on current policy limits.limits, or $635.0 million as of September 30, 2021. Management believed that we had adequate resources to fund all of our commitments as of September 30, 20202021 and December 31, 2019.2020.
Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding.
Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of COVID-19 could place increased demand on our liquidity if we experience significant credit deterioration and as we meet borrowers’ needs. Accordingly, management has addressed this issue by formulating a liquidity contingency plan, which has been reviewed and approved by both the Bank’s board of directors and the ALCO. The plan addresses the actions that we would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of both external and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s board of directors approves policy limits with respect to interest rate risk.
Interest Rate Risk
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.
Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan
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prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.
Management regularly reviews our exposure to changes in interest rates. Among the factors considered are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. The ALCO reviews, on at least a quarterly basis, the interest rate risk position.
The interest-rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on our net interest income as of September 30, 20202021 and December 31, 2019,2020, assuming immediate parallel moves in interest rates is presented in the table below.
| | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | September 30, 2021 | | December 31, 2020 |
| ||||||||
|
| Following |
| Following |
| Following |
| Following |
|
| Following |
| Following |
| Following |
| Following |
|
| | 12 months | | 24 months | | 12 months | | 24 months |
| | 12 months | | 24 months | | 12 months | | 24 months |
|
+400 basis points |
| 3.5 | % | −1.7 | % | 5.5 | % | 12.2 | % |
| −2.2 | % | 5.9 | % | 10.2 | % | 7.3 | % |
+300 basis points |
| 2.6 | % | −4.6 | % | 4.2 | % | 9.0 | % |
| −1.5 | % | 2.3 | % | 7.9 | % | 3.2 | % |
+200 basis points |
| 1.7 | % | −7.6 | % | 2.9 | % | 5.7 | % |
| −0.9 | % | −1.3 | % | 5.5 | % | −1.0 | % |
+100 basis points |
| 0.9 | % | −10.6 | % | 1.5 | % | 2.4 | % |
| −0.2 | % | −4.9 | % | 3.2 | % | −5.3 | % |
−100 basis points |
| −2.8 | % | −18.6 | % | −5.4 | % | −11.9 | % |
| −11.1 | % | −21.0 | % | −4.9 | % | −18.8 | % |
−200 basis points |
| N/A | % | N/A | % | N/A | % | N/A | % |
| N/A | % | N/A | % | N/A | % | N/A | % |
Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.
Management uses economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.
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The table below presents the change in the economic value of equity as of September 30, 20202021 and December 31, 2019,2020, assuming immediate parallel shifts in interest rates.
| | | | | | | | | | |
| | September 30, | | December 31, |
| | September 30, | | December 31, |
|
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
|
+400 basis points |
| 11.2 | % | 12.8 | % |
| −21.8 | % | 12.1 | % |
+300 basis points |
| 11.7 | % | 11.4 | % |
| −14.1 | % | 12.6 | % |
+200 basis points |
| 11.1 | % | 9.2 | % |
| −7.0 | % | 11.9 | % |
+100 basis points |
| 8.5 | % | 6.1 | % |
| −1.0 | % | 9.5 | % |
−100 basis points |
| −43.1 | % | −23.2 | % |
| −31.9 | % | −51.0 | % |
−200 basis points |
| N/A | % | N/A | % |
| N/A | % | N/A | % |
Operational Risk
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.
Compliance Risk
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of our banking center network, employment and tax matters.
Strategic and/or Reputation Risk
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various risks, including those related to the development of new products and business initiatives.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company or its subsidiaries, to which we or any of our subsidiaries is a party or to which our property is the subject. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
In additionThere have been no material changes to the risk factors set forth under Part I, Item 1A “Risk Factors”disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, the following risk factors apply to the Company:
The outbreak of Coronavirus Disease 2019, or COVID-19, has led to an economic recession and other severe disruptions to the U.S. economy and has adversely impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations to us. As a result, we are starting to see the impact from COVID-19 on our business, and we believe that it will be significant, adverse, and potentially material.
Currently, COVID-19 is spreading through the United States and the world. The spread of COVID-19 has caused severe disruptions to the U.S. economy at large, and for small businesses, in particular, which has disrupted our operations. We are starting to see the impact from COVID-19 on our business, and we believe that it will be significant, adverse, and potentially material. The responses on the part of the U.S. and global governments and populations have created a recessionary environment, reduced economic activity, and caused significant volatility in the global stock markets. We expect that we will experience significant disruptions across our business due to these effects, leading to decreased earnings and significant loan defaults and slowdowns in our loan collections. We expect retirement and benefit services and wealth management asset based revenue will be adversely affected by reduced assets under administration and assets under management, and we also expect increased unemployment and recessionary concerns will adversely affect mortgage originations and mortgage banking revenue in future periods.
The outbreak of COVID-19 has resulted in a decline in our clients’ businesses, a decrease in consumer confidence, an increase in unemployment, and a disruption in the services provided by our vendors. Continued disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans and declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, the value of loan collateral (particularly in real estate), loan originations, and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government initially introduced a number of programs designed to soften the impact of COVID-19 on small businesses, the lack of additional programs may cause our borrowers to not be able to satisfy their financial obligations to us.
In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in, or have exposure to, the retail, restaurant, and hospitality industries and are located in areas that are, or were, quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and consumer loan portfolios. As COVID-19 cases have begun to surge in recent months, any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations to us and could result in loan defaults.
The ultimate extent of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets, the development and distribution of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal
66
economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets in response to the recent surge in the number of COVID-19 cases.
As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including but not limited to:
Overall, we believe that the economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals,
67
supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:
The COVID-19 pandemic has significantly affected the financial markets and the Federal Reserve has taken a number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and our net interest margin and our profitability. The Federal Reserve also launched the Main Street Lending Program, which offers deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs, and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.
COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market areas, including because of illness, quarantines, government actions or other restrictions in connectionfiled with the COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.
As a participating lender in the PPP, we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP. The PPP openedSEC on April 3, 2020; however, because of the shortMarch 12, 2021.
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timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized and such funds became available for PPP loans beginning on April 27, 2020.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by the PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Repurchases of Equity Securities
The following table presents information related to repurchases of shares of our common stock for each calendar month in the third quarter of 2020.2021.
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | Total Number of | | Maximum Number of |
| | Total Number | | Average | | Shares Purchased as | | Shares that May | |
| | of Shares | | Price Paid | | Part of Publicly | | Yet be Purchased | |
(dollars in thousands, except per share data) |
| Purchased (1) |
| per Share |
| Announced Plans |
| Under the Plan (2) | |
July |
| 1,634 |
| $ | 32.08 |
| — |
| 770,000 |
August |
| 786 |
|
| 28.20 |
| — |
| 770,000 |
September |
| — |
|
| — |
| — |
| 770,000 |
Total |
| 2,420 |
| $ | 30.82 |
| — |
| 770,000 |
| | | | | | | | | | |
| | | | | | | | | Maximum | |
| | | | | | | Total Number of | | Amount That May | |
| | Total Number | | Average | | Shares Purchased as | | Yet be Purchased | ||
| | of Shares | | Price Paid | | Part of Publicly | | Under the Plan | ||
(dollars in thousands, except per share data) |
| Purchased (1) |
| per Share |
| Announced Plans |
| Or program | ||
July |
| 536 |
| $ | 19.43 |
| — |
| $ | — |
August |
| 76 |
|
| 19.86 |
| — |
|
| — |
September |
| — |
|
| — |
| — |
|
| — |
Total |
| 612 |
| $ | 19.48 |
| — |
| $ | — |
(1) | Shares repurchased by the Company represent shares surrendered by employees to the Company to pay withholding taxes on the vesting of restricted stock awards. |
(2) | On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Program, which authorizes the Company to repurchase up to 770,000 shares of its common stock, subject to certain limitations and conditions. The Program was effective immediately and will continue for a period of 36 months. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. |
Use of Proceeds from Registered Securities
On September 17, 2019, the Company sold 2,860,000 shares of common stock in its initial public offering. On September 25, 2019, the Company sold 429,000 additional shares of common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares to cover over-allotments. All of the shares were sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-233339), which was declared effective by the SEC on September 12, 2019. The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “ALRS”.
There has been no material change in the planned use of proceeds from the initial public offering as described in the Company’s prospectus filed with the SEC on September 13, 2019, pursuant to Rule 424(b)(4) under the Securities Act of 1933. From the effective date of the registration statement through September 30, 2020,2021, the Company has
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maintained the net proceeds of the initial public offering on deposit with the Bank. The Bank has used the deposits of the Company to pay down short-term borrowings.
69
7064
Exhibit No. |
| Description |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
31.1 | Chief Executive Officer’s Certifications required by Rule13(a)-14(a) – filed herewith.
| |
31.2 | Chief Financial Officer’s Certifications required by Rule13(a)-14(a) – filed herewith.
| |
32.1 |
| |
32.2 | ||
| | |
101.INS | |
|
| | |
101.SCH | |
|
| | |
101.CAL | |
|
| | |
101.DEF | |
|
| | |
101.LAB | |
|
| | |
101.PRE | |
|
| | |
104 | | Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibits 101) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
| | |
| ALERUS FINANCIAL CORPORATION | |
| | |
Date: November | By: | /s/ Randy L. Newman |
| | Name: Randy L. Newman |
| | Title: Chairman, Chief Executive Officer and President (Principal Executive Officer) |
| | |
Date: November | By: | /s/ Katie A. Lorenson |
| | Name: Katie A. Lorenson |
| | Title: Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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