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Section 1: 10-Q (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, 2019

 

   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 November 7, 2019 was 17,049,439.

 

 

 

 

Table of Contents

Alerus Financial Corporation and Subsidiaries

 

Table of Contents

 

 

Page

Part 1 

FINANCIAL INFORMATION

 

Item 1. 

Consolidated Financial Statements

1

 

Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

1

 

Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2019 and 2018

2

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2019 and 2018

3

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three and nine months ended September 30, 2019 and 2018

4

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2019 and 2018

5

 

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2. 

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

39

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

61

Item 4. 

Controls and Procedures

63

 

 

 

Part 2 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

63

Item 1A. 

Risk Factors

63

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3. 

Defaults Upon Senior Securities

64

Item 4. 

Mine Safety Disclosures

64

Item 5. 

Other Information

64

Item 6. 

Exhibits

65

 

 

 

Signatures 

 

66

 

 

 

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1 - Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

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

    

2019

    

2018

Assets

 

 

  

 

 

  

Cash and cash equivalents

 

$

61,174

 

$

40,651

Investment securities, at fair value

 

 

  

 

 

  

Trading

 

 

 —

 

 

1,539

Available-for-sale

 

 

278,716

 

 

250,174

Equity

 

 

2,675

 

 

3,165

Loans held for sale

 

 

66,021

 

 

14,486

Loans held for branch sale

 

 

 —

 

 

32,031

Loans

 

 

1,686,087

 

 

1,701,850

Allowance for loan losses

 

 

(22,984)

 

 

(22,174)

Net loans

 

 

1,663,103

 

 

1,679,676

Land, premises and equipment, net

 

 

21,150

 

 

21,743

Operating lease right-of-use assets

 

 

8,877

 

 

 —

Accrued interest receivable

 

 

7,412

 

 

7,645

Bank-owned life insurance

 

 

31,364

 

 

30,763

Goodwill

 

 

27,329

 

 

27,329

Other intangible assets

 

 

19,382

 

 

22,473

Servicing rights

 

 

4,146

 

 

4,623

Deferred income taxes, net

 

 

7,695

 

 

10,085

Other assets

 

 

29,267

 

 

32,687

Total assets

 

$

2,228,311

 

$

2,179,070

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest-bearing

 

$

537,951

 

$

550,640

Interest-bearing

 

 

1,295,162

 

 

1,224,456

Total deposits

 

 

1,833,113

 

 

1,775,096

Deposits held for sale

 

 

 —

 

 

24,197

Short-term borrowings

 

 

 —

 

 

93,460

Long-term debt

 

 

58,775

 

 

58,824

Operating lease liabilities

 

 

9,401

 

 

 —

Accrued expenses and other liabilities

 

 

45,619

 

 

30,539

Total liabilities

 

 

1,946,908

 

 

1,982,116

Commitments and contingent liabilities ESOP-owned shares

 

 

 —

 

 

34,494

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: 17,049,493 and 13,775,327 issued and outstanding

 

 

17,049

 

 

13,775

Additional paid-in capital

 

 

88,230

 

 

27,743

Retained earnings

 

 

173,039

 

 

159,037

Accumulated other comprehensive income (loss)

 

 

3,085

 

 

(3,601)

Total stockholders’ equity

 

 

281,403

 

 

196,954

Less ESOP-owned shares

 

 

 —

 

 

(34,494)

Total stockholders’ equity net ESOP-owned shares

 

 

281,403

 

 

162,460

Total liabilities and stockholders’ equity

 

$

2,228,311

 

$

2,179,070

 

See accompanying notes to consolidated financial statements (unaudited)

1

Table of Contents

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)

    

2019

    

2018

    

2019

    

2018

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

21,886

 

$

20,576

 

$

65,171

 

$

59,594

Investment securities

 

 

  

 

 

  

 

 

  

 

 

  

Taxable

 

 

1,374

 

 

1,129

 

 

4,021

 

 

3,475

Exempt from federal income taxes

 

 

163

 

 

301

 

 

618

 

 

927

Other

 

 

202

 

 

191

 

 

603

 

 

475

Total interest income

 

 

23,625

 

 

22,197

 

 

70,413

 

 

64,471

Interest Expense

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

3,506

 

 

1,790

 

 

9,802

 

 

4,481

Short-term borrowings

 

 

539

 

 

575

 

 

1,805

 

 

1,331

Long-term debt

 

 

899

 

 

903

 

 

2,714

 

 

2,688

Total interest expense

 

 

4,944

 

 

3,268

 

 

14,321

 

 

8,500

Net interest income

 

 

18,681

 

 

18,929

 

 

56,092

 

 

55,971

Provision for loan losses

 

 

1,498

 

 

1,530

 

 

5,515

 

 

7,080

Net interest income after provision for loan losses

 

 

17,183

 

 

17,399

 

 

50,577

 

 

48,891

Noninterest Income

 

 

  

 

 

  

 

 

  

 

 

  

Retirement and benefit services

 

 

15,307

 

 

15,536

 

 

46,142

 

 

46,873

Wealth management

 

 

3,896

 

 

3,685

 

 

11,385

 

 

10,948

Mortgage banking

 

 

8,135

 

 

5,318

 

 

19,739

 

 

13,551

Service charges on deposit accounts

 

 

447

 

 

442

 

 

1,321

 

 

1,333

Net gains (losses) on investment securities

 

 

48

 

 

13

 

 

357

 

 

119

Other

 

 

1,747

 

 

1,264

 

 

5,694

 

 

3,784

Total noninterest income

 

 

29,580

 

 

26,258

 

 

84,638

 

 

76,608

Noninterest Expense

 

 

  

 

 

  

 

 

  

 

 

  

Compensation

 

 

20,041

 

 

17,873

 

 

54,997

 

 

50,906

Employee benefits

 

 

4,600

 

 

4,314

 

 

15,188

 

 

13,606

Occupancy and equipment expense

 

 

2,700

 

 

2,698

 

 

8,086

 

 

8,215

Business services, software and technology expense

 

 

4,224

 

 

3,731

 

 

12,044

 

 

10,467

Intangible amortization expense

 

 

990

 

 

1,196

 

 

3,091

 

 

3,588

Professional fees and assessments

 

 

1,051

 

 

1,628

 

 

3,146

 

 

3,734

Marketing and business development

 

 

890

 

 

856

 

 

2,024

 

 

2,439

Supplies and postage

 

 

631

 

 

611

 

 

2,027

 

 

1,902

Travel

 

 

435

 

 

382

 

 

1,335

 

 

1,252

Mortgage and lending expenses

 

 

751

 

 

437

 

 

1,966

 

 

1,597

Other

 

 

1,014

 

 

610

 

 

2,198

 

 

2,708

Total noninterest expense

 

 

37,327

 

 

34,336

 

 

106,102

 

 

100,414

Income before income taxes

 

 

9,436

 

 

9,321

 

 

29,113

 

 

25,085

Income tax expense

 

 

2,332

 

 

1,951

 

 

7,225

 

 

5,252

Net income

 

$

7,104

 

$

7,370

 

$

21,888

 

$

19,833

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.49

 

$

0.53

 

$

1.53

 

$

1.44

Diluted earnings per common share

 

$

0.48

 

$

0.52

 

$

1.49

 

$

1.41

Dividends declared per common share

 

$

0.14

 

$

0.13

 

$

0.42

 

$

0.39

Average common shares outstanding

 

 

14,274

 

 

13,777

 

 

13,957

 

 

13,759

Diluted average common shares outstanding

 

 

14,626

 

 

14,071

 

 

14,317

 

 

14,060

 

See accompanying notes to consolidated financial statements (unaudited)

2

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

(dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Net Income

 

$

7,104

 

$

7,370

 

$

21,888

 

$

19,833

Other Comprehensive Income, Net of Tax

 

 

  

 

 

  

 

 

  

 

 

  

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

 

 

2,187

 

 

(1,351)

 

 

9,307

 

 

(5,978)

Reclassification adjustment for losses (gains) realized in income

 

 

(49)

 

 

(13)

 

 

(379)

 

 

(135)

Total other comprehensive income (loss), before tax

 

 

2,138

 

 

(1,364)

 

 

8,928

 

 

(6,113)

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

 

 

538

 

 

(342)

 

 

2,242

 

 

(1,534)

Other comprehensive income (loss), net of tax

 

 

1,600

 

 

(1,022)

 

 

6,686

 

 

(4,579)

Total comprehensive income

 

$

8,704

 

$

6,348

 

$

28,574

 

$

15,254

 

See accompanying notes to consolidated financial statements (unaudited)

3

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Stock-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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

$

13,778

 

$

26,664

 

$

149,541

 

$

(4,617)

 

$

(31,491)

 

$

153,875

Net income

 

 

 

 

 

 

7,370

 

 

 

 

 

 

7,370

Other comprehensive income (loss)

 

 

 

 

 

 

 —

 

 

(1,022)

 

 

 

 

(1,022)

Common stock repurchased

 

 

(2)

 

 

(6)

 

 

(32)

 

 

 

 

 

 

(40)

Common stock dividends

 

 

 —

 

 

 —

 

 

(1,829)

 

 

 

 

 

 

(1,829)

Net change in fair value of ESOP shares

 

 

 —

 

 

 —

 

 

 

 

 

 

(3,003)

 

 

(3,003)

Stock-based compensation expense

 

 

 —

 

 

237

 

 

 

 

 

 

 

 

237

Vesting of restricted stock

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 —

Balance as of September 30, 2018

 

$

13,776

 

$

26,895

 

$

155,050

 

$

(5,639)

 

$

(34,494)

 

$

155,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

$

13,699

 

$

26,040

 

$

140,986

 

$

(1,131)

 

$

(31,491)

 

$

148,103

Net income

 

 

 

 

 

 

19,833

 

 

 

 

 

 

19,833

Adjustment for adoption of ASU 2016-01

 

 

 

 

 

 

(71)

 

 

71

 

 

 

 

 —

Other comprehensive income (loss)

 

 

 

 

 

 

 —

 

 

(4,579)

 

 

 

 

(4,579)

Common stock repurchased

 

 

(11)

 

 

(39)

 

 

(212)

 

 

 

 

 

 

(262)

Common stock dividends

 

 

 

 

 

 

(5,486)

 

 

 

 

 

 

(5,486)

Net change in fair value of ESOP shares

 

 

 

 

 

 

 

 

 

 

(3,003)

 

 

(3,003)

Stock-based compensation expense

 

 

11

 

 

971

 

 

 

 

 

 

 

 

982

Vesting of restricted stock

 

 

77

 

 

(77)

 

 

 

 

 

 

 

 

 —

Balance as of September 30, 2018

 

$

13,776

 

$

26,895

 

$

155,050

 

$

(5,639)

 

$

(34,494)

 

$

155,588

 

See accompanying notes to consolidated financial statements (unaudited)

4

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 

(dollars in thousands)

    

2019

    

2018

Operating Activities

 

 

  

 

 

  

Net income

 

$

21,888

 

$

19,833

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

 

 

  

 

 

  

Deferred income taxes

 

 

149

 

 

(1,907)

Provision for loan losses

 

 

5,515

 

 

7,080

Depreciation and amortization

 

 

6,503

 

 

6,591

Amortization and accretion of premiums/discounts on investment securities

 

 

832

 

 

1,227

Stock-based compensation

 

 

1,330

 

 

982

Increase in value of bank-owned life insurance

 

 

(601)

 

 

(602)

Realized loss (gain) on sale of branch

 

 

(1,544)

 

 

 —

Realized loss (gain) on sale of fixed assets

 

 

(541)

 

 

 —

Realized loss (gain) on forward sale derivatives

 

 

(7)

 

 

 —

Realized loss (gain) on rate lock commitments

 

 

12

 

 

(24)

Realized loss (gain) on sale of foreclosed assets

 

 

(120)

 

 

187

Realized loss (gain) on sale of investment securities

 

 

(379)

 

 

(135)

Realized loss (gain) on servicing rights

 

 

(213)

 

 

(497)

Net change in:

 

 

 

 

 

 

Securities held for trading

 

 

1,539

 

 

51

Loans held for sale

 

 

(51,535)

 

 

(9,734)

Accrued interest receivable

 

 

151

 

 

(993)

Other assets

 

 

3,287

 

 

6,707

Accrued expenses and other liabilities

 

 

15,666

 

 

(1,417)

Net cash provided (used) by operating activities

 

 

1,932

 

 

27,349

Investing Activities

 

 

  

 

 

  

Proceeds from sales of investment securities available-for-sale

 

 

32,565

 

 

2,466

Proceeds from maturities of investment securities available-for-sale

 

 

27,818

 

 

26,120

Purchases of investment securities available-for-sale

 

 

(80,450)

 

 

(10,493)

Net (increase) decrease in equity securities

 

 

490

 

 

2,698

Net (increase) decrease in loans

 

 

14,213

 

 

(153,475)

Proceeds from sale of branch

 

 

10,379

 

 

 —

Proceeds from sale of fixed assets

 

 

875

 

 

 —

Purchases of premises and equipment

 

 

(2,450)

 

 

(2,314)

Proceeds from sales of foreclosed assets

 

 

1,006

 

 

687

Net cash provided (used) by investing activities

 

 

4,446

 

 

(134,311)

Financing Activities

 

 

  

 

 

  

Net increase (decrease) in deposits

 

 

53,241

 

 

(17,253)

Net increase (decrease) in short-term borrowings

 

 

(93,460)

 

 

43,930

Repayments of long-term debt

 

 

(181)

 

 

(128)

Cash dividends paid on common stock

 

 

(6,312)

 

 

(5,486)

Repurchase of common stock

 

 

(1,947)

 

 

(262)

Proceeds from the issuance of common stock in initial public offering net of issuance costs

 

 

62,804

 

 

 —