Company Quick10K Filing
Alerus Financial
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

ALRS 10Q Quarterly Report

Part 1. Financial Information
Item 1 - Consolidated Financial Statements
Note 1 Significant Accounting Policies
Note 2 Recent Accounting Pronouncements
Note 3 Investment Securities
Note 4 Loans and Allowance for Loan Losses
Note 5 Goodwill and Other Intangible Assets
Note 6 Loan Servicing
Note 7 Leases
Note 8 Deposits
Note 9 Short - Term Borrowings
Note 10 Long - Term Debt
Note 11 Financial Instruments with Off - Balance Sheet Risk
Note 12 Share - Based Compensation
Note 13 Income Taxes
Note 14 Segment Reporting
Note 15 Earnings per Share
Note 16 Derivative Instruments
Note 17 Regulatory Matters
Note 18 Fair Value of Assets and Liabilities
Note 19 Covid - 19 Pandemic Response
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 alrs-20200930ex31153e995.htm
EX-31.2 alrs-20200930ex3126f165a.htm
EX-32.1 alrs-20200930ex321a71f96.htm
EX-32.2 alrs-20200930ex322ef9d40.htm

Alerus Financial Earnings 2020-09-30

Balance SheetIncome StatementCash Flow

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

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.


Alerus Financial Corporation and Subsidiaries

Table of Contents

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


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)

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)

    

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)

    

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, 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)

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

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, 

(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)

7


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.

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.

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.

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.

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.

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.

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.

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 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

12


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