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Alerus Financial
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ALRS 10Q Quarterly Report

Part 1. Financial Information
Item 1 - 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 Subsequent Events
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-20200331ex311a602cb.htm
EX-31.2 alrs-20200331ex312508ae7.htm
EX-32.1 alrs-20200331ex3212b5df4.htm
EX-32.2 alrs-20200331ex322ed88a0.htm

Alerus Financial Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 alrs-20200331x10q.htm 10-Q alrs_Current_Folio_10Q

 

 

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, 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 May 8, 2020 was 17,105,668.

 

 

 

 

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 March 31, 2020 and December 31, 2019

1

 

Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2020 and 2019

2

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2020 and 2019

3

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three months ended March 31, 2020 and 2019

4

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2020 and 2019

5

 

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2. 

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

35

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

57

Item 4. 

Controls and Procedures

59

 

 

 

Part 2 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

59

Item 1A. 

Risk Factors

60

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3. 

Defaults Upon Senior Securities

61

Item 4. 

Mine Safety Disclosures

62

Item 5. 

Other Information

62

Item 6. 

Exhibits

63

 

 

 

Signatures 

 

64

 

 

 

PART 1. FINANCIAL INFORMATION

Item 1 - Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

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

    

2020

    

2019

Assets

 

 

 

 

 

  

Cash and cash equivalents

 

$

198,489

 

$

144,006

Investment securities, at fair value

 

 

  

 

 

  

Available-for-sale

 

 

354,149

 

 

310,350

Equity

 

 

 —

 

 

2,808

Loans held for sale

 

 

72,258

 

 

46,846

Loans

 

 

1,758,277

 

 

1,721,279

Allowance for loan losses

 

 

(27,019)

 

 

(23,924)

Net loans

 

 

1,731,258

 

 

1,697,355

Land, premises and equipment, net

 

 

20,372

 

 

20,629

Operating lease right-of-use assets

 

 

7,965

 

 

8,343

Accrued interest receivable

 

 

7,425

 

 

7,551

Bank-owned life insurance

 

 

31,763

 

 

31,566

Goodwill

 

 

27,329

 

 

27,329

Other intangible assets

 

 

17,401

 

 

18,391

Servicing rights

 

 

3,277

 

 

3,845

Deferred income taxes, net

 

 

6,185

 

 

7,891

Other assets

 

 

34,207

 

 

29,968

Total assets

 

$

2,512,078

 

$

2,356,878

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest-bearing

 

$

608,559

 

$

577,704

Interest-bearing

 

 

1,512,955

 

 

1,393,612

Total deposits

 

 

2,121,514

 

 

1,971,316

Long-term debt

 

 

58,762

 

 

58,769

Operating lease liabilities

 

 

8,480

 

 

8,864

Accrued expenses and other liabilities

 

 

29,714

 

 

32,201

Total liabilities

 

 

2,218,470

 

 

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: 17,105,668 and 17,049,551 issued and outstanding

 

 

17,106

 

 

17,050

Additional paid-in capital

 

 

88,703

 

 

88,650

Retained earnings

 

 

180,650

 

 

178,092

Accumulated other comprehensive income (loss)

 

 

7,149

 

 

1,936

Total stockholders’ equity

 

 

293,608

 

 

285,728

Total liabilities and stockholders’ equity

 

$

2,512,078

 

$

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

 

 

March 31, 

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

    

2020

    

2019

Interest Income

 

 

 

 

 

 

Loans, including fees

 

$

20,542

 

$

21,573

Investment securities

 

 

  

 

 

  

Taxable

 

 

1,759

 

 

1,309

Exempt from federal income taxes

 

 

235

 

 

244

Other

 

 

570

 

 

184

Total interest income

 

 

23,106

 

 

23,310

Interest Expense

 

 

  

 

 

  

Deposits

 

 

3,392

 

 

2,748

Short-term borrowings

 

 

 —

 

 

531

Long-term debt

 

 

877

 

 

911

Total interest expense

 

 

4,269

 

 

4,190

Net interest income

 

 

18,837

 

 

19,120

Provision for loan losses

 

 

2,500

 

 

2,220

Net interest income after provision for loan losses

 

 

16,337

 

 

16,900

Noninterest Income

 

 

  

 

 

  

Retirement and benefit services

 

 

16,220

 

 

15,059

Wealth management

 

 

4,046

 

 

3,611

Mortgage banking

 

 

5,045

 

 

4,569

Service charges on deposit accounts

 

 

423

 

 

444

Net gains (losses) on investment securities

 

 

 —

 

 

127

Other

 

 

1,455

 

 

1,264

Total noninterest income

 

 

27,189

 

 

25,074

Noninterest Expense

 

 

  

 

 

  

Compensation

 

 

18,731

 

 

16,813

Employee taxes and benefits

 

 

5,308

 

 

5,428

Occupancy and equipment expense

 

 

2,755

 

 

2,745

Business services, software and technology expense

 

 

4,444

 

 

3,798

Intangible amortization expense

 

 

990

 

 

1,051

Professional fees and assessments

 

 

1,040

 

 

1,066

Marketing and business development

 

 

610

 

 

427

Supplies and postage

 

 

703

 

 

733

Travel

 

 

261

 

 

502

Mortgage and lending expenses

 

 

1,043

 

 

446

Other

 

 

841

 

 

505

Total noninterest expense

 

 

36,726

 

 

33,514

Income before income taxes

 

 

6,800

 

 

8,460

Income tax expense

 

 

1,437

 

 

2,024

Net income

 

$

5,363

 

$

6,436

Per Common Share Data

 

 

 

 

 

 

Basic earnings per common share

 

$

0.31

 

$

0.47

Diluted earnings per common share

 

$

0.30

 

$

0.46

Dividends declared per common share

 

$

0.15

 

$

0.14

Average common shares outstanding

 

 

17,070

 

 

13,781

Diluted average common shares outstanding

 

 

17,405

 

 

14,078

 

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)

    

2020

    

2019

Net Income

 

$

5,363

 

$

6,436

Other Comprehensive Income (Loss), Net of Tax

 

 

  

 

 

  

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

 

 

6,959

 

 

3,150

Reclassification adjustment for losses (gains) realized in income

 

 

 —

 

 

(113)

Total other comprehensive income (loss), before tax

 

 

6,959

 

 

3,037

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

 

 

1,746

 

 

762

Other comprehensive income (loss), net of tax

 

 

5,213

 

 

2,275

Total comprehensive income

 

$

10,576

 

$

8,711

 

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, 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

 

 

 —

 

 

 —

 

 

5,363

 

 

 —

 

 

 —

 

 

5,363

Other comprehensive income (loss)

 

 

 —

 

 

 —

 

 

 —

 

 

5,213

 

 

 —

 

 

5,213

Common stock repurchased

 

 

(15)

 

 

(111)

 

 

(210)

 

 

 —

 

 

 —

 

 

(336)

Common stock dividends

 

 

 —

 

 

 —

 

 

(2,595)

 

 

 —

 

 

 —

 

 

(2,595)

Share‑based compensation expense

 

 

 —

 

 

235

 

 

 —

 

 

 —

 

 

 —

 

 

235

Vesting of restricted stock

 

 

71

 

 

(71)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance as of March 31, 2020

 

$

17,106

 

$

88,703

 

$

180,650

 

$

7,149

 

$

 —

 

$

293,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

$

13,775

 

$

27,743

 

$

159,037

 

$

(3,601)

 

$

(34,494)

 

$

162,460

Net income

 

 

 

 

 

 

6,436

 

 

 

 

 

 

6,436

Other comprehensive income (loss)

 

 

 

 

 

 

 —

 

 

2,275

 

 

 

 

2,275

Common stock repurchased

 

 

(4)

 

 

(14)

 

 

(71)

 

 

 

 

 

 

(89)

Common stock dividends

 

 

 

 

 

 

(1,973)

 

 

 

 

 

 

(1,973)

Net change in fair value of ESOP shares

 

 

 

 

 

 

 

 

 

 

 —

 

 

 —

Share‑based compensation expense

 

 

 —

 

 

346

 

 

 

 

 

 

 

 

346

Vesting of restricted stock

 

 

30

 

 

(30)

 

 

 

 

 

 

 

 

 —

Balance as of March 31, 2019

 

$

13,801

 

$

28,045

 

$

163,429

 

$

(1,326)

 

$

(34,494)

 

$

169,455

 

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)

    

2020

    

2019

Operating Activities

 

 

  

 

 

  

Net income

 

$

5,363

 

$

6,436

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

 

 

  

 

 

  

Deferred income taxes

 

 

(40)

 

 

480

Provision for loan losses

 

 

2,500

 

 

2,220

Depreciation and amortization

 

 

2,075

 

 

2,054

Amortization and accretion of premiums/discounts on investment securities

 

 

305

 

 

280

Amortization of operating lease right-of-use assets

 

 

(6)

 

 

 6

Stock-based compensation

 

 

235

 

 

346

Increase in value of bank-owned life insurance

 

 

(197)

 

 

(196)

Realized loss (gain) on forward sale derivatives

 

 

 —

 

 

(11)

Realized loss (gain) on rate lock commitments

 

 

 —

 

 

12

Realized loss (gain) on sale of foreclosed assets

 

 

(63)

 

 

(57)

Realized loss (gain) on sale of investment securities

 

 

 —

 

 

(113)

Realized loss (gain) on servicing rights

 

 

381

 

 

(67)

Net change in:

 

 

 

 

 

 

Securities held for trading

 

 

 —

 

 

1,539

Loans held for sale

 

 

(25,412)

 

 

(13,069)

Accrued interest receivable

 

 

126

 

 

(332)

Other assets

 

 

(4,038)

 

 

2,657

Accrued expenses and other liabilities

 

 

(2,395)

 

 

(3,584)

Net cash provided (used) by operating activities

 

 

(21,166)

 

 

(1,399)

Investing Activities

 

 

  

 

 

  

Proceeds from sales or calls of investment securities available-for-sale

 

 

4,000

 

 

4,763

Proceeds from maturities of investment securities available-for-sale

 

 

9,003

 

 

10,282

Purchases of investment securities available-for-sale

 

 

(50,148)

 

 

(17,901)

Net (increase) decrease in equity securities

 

 

2,808

 

 

248

Net (increase) decrease in loans

 

 

(36,637)

 

 

(10,368)

Proceeds from sale of fixed assets

 

 

 —

 

 

 —

Purchases of premises and equipment

 

 

(689)

 

 

(1,366)

Proceeds from sales of foreclosed assets

 

 

96

 

 

254

Net cash provided (used) by investing activities

 

 

(71,567)

 

 

(14,088)

Financing Activities

 

 

  

 

 

  

Net increase (decrease) in deposits

 

 

150,198

 

 

103,201

Net increase (decrease) in short-term borrowings

 

 

 —

 

 

(81,410)

Repayments of long-term debt

 

 

(51)

 

 

(45)

Cash dividends paid on common stock

 

 

(2,595)

 

 

(1,973)

Repurchase of common stock

 

 

(336)

 

 

(89)

Net cash provided (used) by financing activities

 

 

147,216

 

 

19,684

Net change in cash and cash equivalents

 

 

54,483

 

 

4,197

Cash and cash equivalents at beginning of period

 

 

144,006

 

 

40,651

Cash and cash equivalents at end of period

 

$

198,489

 

$

44,848

 

See accompanying notes to consolidated financial statements (unaudited)

5

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31, 

Supplemental Cash Flow Disclosures

    

2020

    

2019

Cash paid for:

 

 

  

 

 

  

Interest

 

$

4,128

 

$

3,290

Income taxes

 

 

 —

 

 

103

Non-cash information

 

 

  

 

 

  

Loan collateral transferred to foreclosed assets

 

 

234

 

 

142

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

 

 

5,213

 

 

2,275

Initial recognition of operating lease right-of-use assets

 

 

 —

 

 

10,000

Initial recognition of operating lease liabilities

 

 

 —

 

 

10,521

Right-of-use assets obtained in exchange for new operating leases.

 

 

183

 

 

 —

 

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 is a financial holding company organized under the laws of the state of Delaware. Alerus Financial Corporation, or the Company, and its subsidiaries is a diversified financial services company headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, or the Bank, the Company provides innovative and comprehensive 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.

7

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 is expected to impact 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 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 is expected to have 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.

8

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 March 31, 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, 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 transfer 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, 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 a material 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.

9

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 through 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. This update is not expected to have a significant impact on the Company’s consolidated financial statements.

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.

 

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 March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Value

U.S. Treasury and agencies

 

$

16,538

 

$

93

 

$

(4)

 

$

16,627

Obligations of state and political agencies

 

 

67,921

 

 

1,212

 

 

(27)

 

 

69,106

Mortgage backed securities

 

 

  

 

 

 

 

 

 

 

 

  

Residential agency

 

 

221,844

 

 

7,483

 

 

(18)

 

 

229,309

Commercial

 

 

29,128

 

 

899

 

 

(117)

 

 

29,910

Asset backed securities

 

 

134

 

 

 7

 

 

 —

 

 

141

Corporate bonds

 

 

9,039

 

 

18

 

 

(1)

 

 

9,056

Total available-for-sale investment securities

 

$

344,604

 

$

9,712

 

$

(167)

 

$

354,149

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Less than 12 Months

 

Over 12 Months

 

Total

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

(dollars in thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

U.S. Treasury and agencies

 

$

(4)

 

$

1,342

 

$

 —

 

$

 —

 

$

(4)

 

$

1,342

Obligations of state and political agencies

 

 

(27)

 

 

12,420

 

 

 —

 

 

 —

 

 

(27)

 

 

12,420

Mortgage backed securities