Alerus Financial Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow

10-Q 1 alrs-20200930x10q.htm 10-Q

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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 September 30, 2020

☐ 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 October 31, 2020 was 17,121,863.

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Alerus Financial Corporation and Subsidiaries

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		Page
Part 1:	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets (Unaudited) as of September 30, 2020 and December 31, 2019	1
	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019	2
	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019	3
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 4.	Controls and Procedures	65

Part 2:	OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71

Signatures		72

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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)	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)

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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)	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)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)


	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)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


	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


	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


	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)

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	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

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	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)

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	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)

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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.

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, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.

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.

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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.

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, 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 on global markets, supply chains, businesses, and communities. Specific to the Company, COVID-19 has impacted various parts of its 2020 operations and financial results, including, but not limited to, additional loan loss reserves, costs for emergency preparedness, or potential shortages of personnel. 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.

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Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

NOTE 2 Recent Accounting Pronouncements

The following FASB Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2020, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of September 30, 2020.

Adopted Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its estimated fair value, not to exceed the carrying amount of goodwill. For public business entities that are US Securities and Exchange Commission filers, ASU 2017-04, is effective for interim and annual reporting periods beginning after December 15, 2019. The Company adopted ASU 2017-04 effective January 1, 2020, and the new guidance did not have an impact on the Company’s consolidated financial statements.

In August 2018, 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 2 of the estimated fair value hierarchy, but will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value measurements. ASU 2018-13 is effective for all entities interim and annual reporting periods beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020, and the revised disclosure requirements did not 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.

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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.

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. 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.

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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 as of September 30, 2020 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

The following tables present unrealized losses and fair values for available-for-sale investment securities as of September 30, 2020 and December 31, 2019, 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

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	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

10-Q	2020-09-30	Filed 2020-11-05
10-Q	2020-06-30	Filed 2020-08-06
10-Q	2020-03-31	Filed 2020-05-13
10-K	2019-12-31	Filed 2020-03-26
10-Q	2019-09-30	Filed 2019-11-07
S-1	2019-08-16	Public Filing

8-K	2021-02-17	Officers, Other Events, Exhibits
8-K	2021-01-29	Other Events
8-K	2021-01-27	Earnings, Regulation FD, Exhibits
8-K	2020-12-02	Other Events, Exhibits
8-K	2020-11-17
8-K	2020-10-28
8-K	2020-08-05
8-K	2020-07-28
8-K	2020-07-28
8-K	2020-05-12
8-K	2020-05-12
8-K	2020-04-28
8-K	2020-04-28
8-K	2020-03-10
8-K	2020-02-19
8-K	2020-01-28
8-K	2019-11-11
8-K	2019-10-24
8-K	2019-09-25
8-K	2019-09-17

EX-31.1	alrs-20200930ex31153e995.htm
EX-31.2	alrs-20200930ex3126f165a.htm
EX-32.1	alrs-20200930ex321a71f96.htm
EX-32.2	alrs-20200930ex322ef9d40.htm

ALRS 10Q Quarterly Report

Alerus Financial Earnings 2020-09-30