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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39036

ALERUS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

45-0375407

(State or other jurisdiction of incorporation or

(I.R.S. Employer Identification No.)

organization)

401 Demers Avenue

Grand Forks, ND

58201

(Address of principal executive offices)

(Zip Code)

(701) 795-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

Title of each class

    

Trading symbol

    

Name of each exchange on which registered

Common Stock, par value $1.00 per share

ALRS

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No 

The number of shares of the registrant’s common stock outstanding at April 30, 2023 was $20,066,807.

Alerus Financial Corporation and Subsidiaries

Table of Contents

Page

Part 1:

FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

1

Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

1

Consolidated Statements of Income for the three months ended March 31, 2023 and 2022

2

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022

3

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022

4

Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022

5

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

60

Item 4.

Controls and Procedures

62

Part 2:

OTHER INFORMATION

Item 1.

Legal Proceedings

63

Item 1A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

65

Signatures

66

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

    

March 31, 

    

December 31, 

(dollars in thousands, except share and per share data)

    

2023

    

2022

Assets

 

(Unaudited)

 

(Audited)

Cash and cash equivalents

$

145,181

$

58,242

Investment securities

 

  

 

  

Available-for-sale, at fair value

 

705,825

 

717,324

Held-to-maturity, at carrying value (allowance for credit losses on investments of $223 March 31, 2023)

 

313,648

 

321,902

Loans held for sale

 

16,900

 

9,488

Loans

 

2,486,625

 

2,443,994

Allowance for credit losses on loans

 

(35,102)

 

(31,146)

Net loans

 

2,451,523

 

2,412,848

Land, premises and equipment, net

 

17,631

 

17,288

Operating lease right-of-use assets

 

5,122

 

5,419

Accrued interest receivable

 

12,983

 

12,869

Bank-owned life insurance

 

32,583

 

33,991

Goodwill

 

47,087

 

47,087

Other intangible assets

 

21,131

 

22,455

Servicing rights

 

2,421

 

2,643

Deferred income taxes, net

 

41,620

 

42,369

Other assets

 

73,118

 

75,712

Total assets

$

3,886,773

$

3,779,637

Liabilities and Stockholders’ Equity

 

  

 

  

Deposits

 

  

 

  

Noninterest-bearing

$

792,977

$

860,987

Interest-bearing

 

2,239,001

 

2,054,497

Total deposits

 

3,031,978

 

2,915,484

Short-term borrowings

 

372,145

 

378,080

Long-term debt

 

58,872

 

58,843

Operating lease liabilities

 

5,545

 

5,902

Accrued expenses and other liabilities

 

59,115

 

64,456

Total liabilities

 

3,527,655

 

3,422,765

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: 20,066,807 and 19,991,681 issued and outstanding

 

20,067

 

19,992

Additional paid-in capital

 

154,818

 

155,095

Retained earnings

 

280,540

 

280,426

Accumulated other comprehensive income (loss)

 

(96,307)

 

(98,641)

Total stockholders’ equity

 

359,118

 

356,872

Total liabilities and stockholders’ equity

$

3,886,773

$

3,779,637

See accompanying notes to consolidated financial statements (unaudited)

1

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

Three months ended

March 31, 

(dollars and shares in thousands, except per share data)

    

2023

    

2022

Interest Income

Loans, including fees

$

30,933

$

17,292

Investment securities

 

  

 

  

Taxable

 

5,951

 

5,440

Exempt from federal income taxes

 

190

 

216

Other

 

735

 

116

Total interest income

37,809

 

23,064

Interest Expense

 

  

 

  

Deposits

 

9,104

 

829

Short-term borrowings

 

4,393

 

Long-term debt

 

654

 

562

Total interest expense

 

14,151

 

1,391

Net interest income

 

23,658

 

21,673

Provision for credit losses

 

550

 

Net interest income after provision for credit losses

 

23,108

 

21,673

Noninterest Income

 

  

 

  

Retirement and benefit services

 

15,482

 

17,646

Wealth management

 

5,194

 

5,326

Mortgage banking

 

1,717

 

4,931

Service charges on deposit accounts

 

301

 

363

Other

 

2,559

 

1,204

Total noninterest income

 

25,253

 

29,470

Noninterest Expense

 

  

 

  

Compensation

 

19,158

 

19,051

Employee taxes and benefits

 

5,853

 

6,162

Occupancy and equipment expense

 

1,899

 

2,051

Business services, software and technology expense

 

5,324

 

4,924

Intangible amortization expense

 

1,324

 

1,053

Professional fees and assessments

 

1,152

 

1,541

Marketing and business development

 

686

 

600

Supplies and postage

 

460

 

646

Travel

 

248

 

179

Mortgage and lending expenses

 

497

 

686

Other

 

1,268

 

1,178

Total noninterest expense

 

37,869

 

38,071

Income before income taxes

 

10,492

 

13,072

Income tax expense

 

2,306

 

2,888

Net income

$

8,186

$

10,184

Per Common Share Data

Basic earnings per common share

$

0.41

$

0.58

Diluted earnings per common share

$

0.40

$

0.57

Dividends declared per common share

$

0.18

$

0.16

Average common shares outstanding

 

20,028

 

17,244

Diluted average common shares outstanding

 

20,246

 

17,500

See accompanying notes to consolidated financial statements (unaudited)

2

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

Three months ended

March 31, 

(dollars in thousands)

    

2023

    

2022

Net Income

$

8,186

$

10,184

Other Comprehensive Income (Loss), Net of Tax

 

  

 

  

Unrealized gains (losses) on available-for-sale securities

 

4,928

 

(50,725)

Accretion of (gains) losses on debt securities reclassified to held-to-maturity

(87)

(101)

Net change in unrealized gain (losses) on derivatives

(1,725)

Total other comprehensive income (loss), before tax

 

3,116

 

(50,826)

Income tax expense (benefit) related to items of other comprehensive income (loss)

 

782

 

(12,757)

Other comprehensive income (loss), net of tax

 

2,334

 

(38,069)

Total comprehensive income (loss)

$

10,520

$

(27,885)

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 March 31, 2023

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars in thousands)

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance as of December 31, 2022

$

19,992

$

155,095

$

280,426

$

(98,641)

$

356,872

Cumulative effect of change in accounting principles, net of tax

(4,452)

(4,452)

Balance as of January 1, 2023

19,992

155,095

275,974

(98,641)

352,420

Net income

 

 

 

8,186

 

 

8,186

Other comprehensive income (loss)

 

 

 

 

2,334

 

2,334

Common stock repurchased

 

(17)

 

(344)

 

 

 

(361)

Common stock dividends

 

 

 

(3,620)

 

 

(3,620)

Share‑based compensation expense

 

 

159

 

 

 

159

Vesting of restricted stock

 

92

 

(92)

 

 

 

Balance as of March 31, 2023

$

20,067

$

154,818

$

280,540

$

(96,307)

$

359,118

Three months ended March 31, 2022

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

(dollars in thousands)

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance as of December 31, 2021

$

17,213

$

92,878

$

253,567

$

(4,255)

$

359,403

Net income

 

 

 

10,184

 

 

10,184

Other comprehensive income (loss)

 

 

 

 

(38,069)

 

(38,069)

Common stock repurchased

 

(20)

 

(587)

 

 

 

(607)

Common stock dividends

 

 

 

(2,784)

 

 

(2,784)

Share‑based compensation expense

 

 

378

 

 

 

378

Vesting of restricted stock

 

96

 

(96)

 

 

 

Balance as of March 31, 2022

$

17,289

$

92,573

$

260,967

$

(42,324)

$

328,505

See accompanying notes to consolidated financial statements (unaudited)

4

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Three months ended

March 31, 

(dollars in thousands)

    

2023

    

2022

Operating Activities

 

  

 

  

Net income

$

8,186

$

10,184

Adjustments to reconcile net income to net cash provided (used) by operating activities

 

  

 

  

Deferred income taxes

 

1,459

 

854

Provision for credit losses

 

550

 

Depreciation and amortization

 

2,130

 

2,083

Amortization and accretion of premiums/discounts on investment securities

 

527

 

1,010

Amortization of operating lease right-of-use assets

(43)

(19)

Stock-based compensation

 

159

 

378

Originations on loans held for sale

(56,347)

(151,709)

Proceeds on loans held for sale

50,381

179,347

Increase (decrease) in value of bank-owned life insurance

 

1,408

 

(202)

Realized loss (gain) on sale of fixed assets

(28)

 

Realized loss (gain) on derivative instruments

 

(253)

 

4

Realized loss (gain) on loans sold

 

(1,344)

 

(3,097)

Realized loss (gain) on sale of foreclosed assets

 

8

 

(8)

Realized loss (gain) on servicing rights

 

38

 

(51)

Net change in:

 

 

Accrued interest receivable

 

(114)

 

21

Other assets

 

2,080

 

(4,371)

Accrued expenses and other liabilities

 

(8,352)

 

863

Net cash provided (used) by operating activities

 

445

 

35,287

Investing Activities

 

  

 

  

Proceeds from maturities of investment securities available-for-sale

 

16,139

 

31,665

Purchases of investment securities available-for-sale

 

 

(95,640)

Proceeds from calls of investment securities held-to-maturity

126

515

Proceeds from maturities of investment securities held-to-maturity

7,578

10,851

Net (increase) decrease in loans

 

(42,801)

 

(59,910)

Net (increase) decrease in FHLB stock

(225)

 

(440)

Purchases of premises and equipment

 

(923)

 

(130)

Proceeds from sales of foreclosed assets

 

22

 

57

Net cash provided (used) by investing activities

 

(20,084)

 

(113,032)

Financing Activities

 

  

 

  

Net increase (decrease) in deposits

 

116,494

 

(28,284)

Net increase (decrease) in short-term borrowings

 

(5,935)

 

Repayments of long-term debt

 

 

(59)

Cash dividends paid on common stock

 

(3,620)

 

(2,784)

Repurchase of common stock

 

(361)

 

(607)

Net cash provided (used) by financing activities

 

106,578

 

(31,734)

Net change in cash and cash equivalents

 

86,939

 

(109,479)

Cash and cash equivalents at beginning of period

 

58,242

 

242,311

Cash and cash equivalents at end of period

$

145,181

$

132,832

See accompanying notes to consolidated financial statements (unaudited)

5

Three months ended

March 31, 

Supplemental Cash Flow Disclosures

    

2023

    

2022

Cash paid for:

 

  

 

  

Interest

$

15,167

$

926

Income taxes

 

 

12

Non-cash information

 

  

 

  

Loan collateral transferred to foreclosed assets

 

 

29

Unrealized gain (loss) on investment securities available-for-sale

 

2,421

 

(37,968)

Accretion of unrealized (gain) loss on investment securities held-to-maturity

(87)

(101)

Right-of-use assets obtained in exchange for new operating lease liabilities

257

See accompanying notes to consolidated financial statements (unaudited)

6

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 four distinct business lines—banking, retirement and benefit services, wealth management, and mortgage.

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America, or GAAP, for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2023.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s principal operating subsidiary is the Bank.

In the normal course of business, the Company may enter into a transaction with a variable interest entity or VIE. VIE’s are legal entities whose investors lack the ability to make decisions about the entity’s activities, or whose equity investors do not have the right to receive the residual returns of the entity. The applicable accounting guidance requires the Company to perform ongoing quantitative and qualitative analysis to determine whether it must consolidate any VIE. The Company does not have any ownership interest in, or exert any control, over any VIE, and thus no VIE’s are included in the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for credit 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.

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 $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities.

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.

Allowance for credit losses

Investment securities available-for-sale. For available-for-sale investment securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in fair value below the amortized cost basis, or impairment, is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses, or ACL, related to investment securities available-for-sale on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available-for-sale investment security or is required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating available-for-sale securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

Accrued interest receivable is excluded from the estimate of credit losses.

Investment securities held-to-maturity. Management measures expected credit losses on held-to-maturity investment securities on a collective basis by major security type. The Company evaluates held-to-maturity investment securities by credit rating and an external study, updated annually, that includes historical information such as

8

probability of default and loss going back several years. Accrued interest receivable on held-to-maturity investment securities is excluded from the estimate of credit losses.

Loans held for investment. Under the current expected credit loss, or CECL, model the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected.

The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premium, discount and net deferred fees or costs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made the policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the ACL through a charge to provision for credit losses when the Company deems all or a portion of the financial asset will be uncollectible; the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgement to determine when a financial asset is deemed uncollectible; however, generally, an asset will be considered uncollectible no later than when all efforts of collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.

Upon the adoption of the CECL model, the Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Upon the adoption of the CECL model, the ACL was determined for each pool and added to the pools’ carrying amount to establish a new amortized cost basis. Loans that do not share similar risk characteristics are evaluated on an individual basis.

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current loan-specific risk characteristics such as different underwriting standards, portfolio mix, delinquency level, or life of the loan, as well as changes in environmental conditions, levels of economic activity, unemployment rates, property values and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical loss information.

Ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, credit performance trends, portfolio duration and other forecasts.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. The ACL on individually evaluated loans is recognized on the basis of the present value of expected future cash flows discounted at the effective interest rate, the fair value of collateral adjusted of estimated costs to sell, or observable market price as of the relevant date.

Reserve for off-balance sheet credit exposures. In estimating expected credit losses for off-balance sheet credit exposures, the Company is required to estimate expected credit losses over the contractual period in which it is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. To be considered unconditionally cancellable for accounting purposes, the Company must have the ability to, at any time, with or without cause, refuse to extend credit under the commitment. Off-balance sheet credit exposure segments share the same risk characteristics as portfolio loans. The Company incorporates a probability of funding and utilizes the ACL loss rates to calculate the reserve. The reserve for off-balance sheet credit exposure is carried on the balance sheet in accrued expenses and other liabilities rather than as a component of the allowance. The reserve for off-balance sheet credit exposure is adjusted as a provision for off-balance sheet credit exposure reported as a component of the provision for credit loss expense in the accompanying unaudited Consolidated Statements of Income.

9

NOTE 2 Recent Accounting Pronouncements

The following Financial Accounting Standards Board, or FASB, Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2023, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of March 31, 2023.

Adopted Pronouncements

On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The measurement of expected credit losses under the CECL accounting standard is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar agreements). In addition, ASC 326 made changes to the accounting for held-to-maturity debt securities. One such change is to require credit losses to be presented as an allowance, rather than as a write-down.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, off-balance sheet credit exposures, and held-to-maturity securities. Results for reporting periods beginning after December 31, 2022, are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $4.5 million as of January 1, 2023, for the cumulative effect of adopting ASC 326.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether purchased credit impaired, or PCI, assets met the criteria of purchased credit deteriorated, or PCD, assets as of the date of adoption.

The following table illustrates the impact of ASC 326:

January 1, 2023

As reported

Pre-tax impact of

(dollars in thousands)

    

under

Pre-ASC 326

ASC 326

Assets:

 

ASC 326

Adoption

Adoption

Investments

Held-to-maturity

Obligations of state and political agencies

$

110

$

$

110

Mortgage backed securities

Residential agency

62

62

Total allowance for held-to-maturity investment securities

172

172

Loans

Commercial

Commercial and industrial

8,296

9,158

(862)

Real estate construction

3,964

1,446

2,518

Commercial real estate

12,264

12,688

(424)

Total commercial

24,524

23,292

1,232

Consumer

Residential real estate first mortgage

7,849

5,769

2,080

Residential real estate junior lien

1,222

1,289

(67)

Other revolving and installment

424

528

(104)

Total consumer

9,495

7,586

1,909

Unallocated

984

268

716

Total allowance for loans

35,003

31,146

3,857

Allowance for credit losses on loans and investments securities

$

35,175

$

31,146

$

4,029

Liabilities:

Allowance for credit losses on unfunded commitments

$

5,159

$

3,244

$

1,915

10

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method, which clarifies the guidance on fair value hedge accounting of interest rate risk portfolios of financial assets. ASU 2022-01 updates guidance in Topic 815, to expand the scope of the current last-of-layer method to allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interest secured by a portfolio of financial instruments on a prospective basis. Additionally, ASU 2022-01 clarifies that basis adjustments related to existing portfolio layer hedge relationships should not be considered when measuring credit losses on the financial assets included in the closed portfolio. Further, ASU 2022-01 clarifies that any reversal of fair value hedge basis adjustments associated with an actual breach should be recognized in interest income immediately. ASU 2022-01 was effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2022-01 effective January 1, 2023 and entered into a fair value hedge agreement on February 10, 2023 and adopted the portfolio layer method of accounting for this transaction. This adoption had no impact on our consolidated financial statements as we did not have any hedged assets using the last-of-layer hedge accounting method.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for Troubled Debt Restructurings, or TDRs, by creditors in Subtopic 310-40. Receivables – Troubled Debt Restructurings by Creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. For public business entities, this amendment also has vintage disclosures that require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20 Financial Instruments – Credit Losses – Measured at Amortized Cost. For entities that had not yet adopted the amendment in AS 2016-13, the effective date for the amendments in this update are same as the effective date for ASU 2016-13. The Company adopted this ASU on January 1, 2023, and had no loans experience financial difficulty in the current period.

NOTE 3 Investment Securities

The following tables present amortized cost, gross unrealized gains and losses, and fair value of the available-for-sale investment securities and the amortized cost, gross unrealized gains and losses and fair value of held-to-maturity securities as of March 31, 2023 and December 31, 2022:

March 31, 2023

Amortized

Unrealized

Unrealized

Allowance for

Fair

(dollars in thousands)

    

Cost

Gains

Losses

Credit Losses

    

Value

Available-for-sale

U.S. Treasury and agencies

$

3,264

$

15

$

(12)

$

$

3,267

Mortgage backed securities

 

  

 

 

 

Residential agency

 

691,334

 

1

 

(109,716)

 

581,619

Commercial

 

69,011

 

 

(6,240)

 

62,771

Asset backed securities

 

32

 

 

 

32

Corporate bonds

 

69,499

 

 

(11,363)

 

58,136

Total available-for-sale investment securities

833,140

16

(127,331)

705,825

Held-to-maturity

Obligations of state and political agencies

132,433

 

 

(14,149)

117

 

118,284

Mortgage backed securities

Residential agency

181,438

 

 

(31,848)

106

 

149,590

Total held-to-maturity investment securities

313,871

(45,997)

223

267,874

Total investment securities

$

1,147,011

$

16

$

(173,328)

$

223

$

973,699

11

December 31, 2022