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Alerus Financial Corporation Reports Fourth Quarter 2020 Net Income of $10.2 Million

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Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $10.2 million for the fourth quarter of 2020, or $0.57 per diluted common share, compared to net income of $17.7 million, or $0.99 per diluted common share, for the third quarter of 2020, and net income of $7.7 million, or $0.43 per diluted common share, for the fourth quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, "Alerus continues to be a purpose-driven company, focused on its business model, strategy and culture. In a year filled with so much uncertainty and adversity, our business strategy of serving as trusted advisors to our clients delivered to our shareholders record annual net income of $44.7 million, a 51.2% increase over 2019. In 2020, we continued to execute on our acquisition strategy, and on December 16, 2020, we closed our acquisition of Retirement Planning Services, Inc. (doing business as RPS Plan Administrators and 24HourFlex). This acquisition allowed Alerus to add talent, increase market share in the desirable Rocky Mountain region, and expand products and services to the newly acquired clients as well as existing Alerus clients through our collaborative "One Alerus" business model and culture.

In this challenging environment we also remain committed to managing expenses. Our ability to continue serving clients and the transition of most of our employees to a remote working environment prompted the closure of six of our 23 offices. We are very proud of our companys performance, ability to focus on long-term growth for our shareholders through our diversified business model, solid financial foundation and strategic focus on serving clients holistically and in their best interests."

Quarterly Highlights

  • Return on average assets of 1.34%, compared to 2.42% for the third quarter of 2020

  • Return on average tangible common equity (1) of 15.13%, compared to 26.67% for the third quarter of 2020

  • Net interest margin (tax-equivalent) (1) was 3.23%, compared to 3.17% for the third quarter of 2020

  • Allowance for loan losses to total loans, excluding Paycheck Protection Program, or PPP, loans, was 2.00%, compared to 1.83% as of September 30, 2020

  • Efficiency ratio (1) of 74.44%, compared to 58.42% for the third quarter of 2020

  • Noninterest income as a percentage of total revenue was 62.57%, compared to 67.53% for the third quarter of 2020

  • Mortgage originations totaled $607.2 million, an 18.7% increase from the third quarter of 2020

  • Loans held for investment increased $258.1 million, or 15.0%, from the fourth quarter of 2019

  • Deposits increased $600.7 million, or 30.5%, from the fourth quarter of 2019

(1)

Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

Selected Financial Data (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

 

 

Three months ended

 

Year ended

 

 

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

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

 

2020

 

 

2020

 

 

2019

 

2020

 

2019

 

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

 

1.34

 

%

 

2.42

 

%

 

1.33

%

 

1.61

%

 

1.34

%

Return on average common equity

 

 

12.30

 

%

 

22.31

 

%

 

10.65

%

 

14.40

%

 

12.78

%

Return on average tangible common equity (1)

 

 

15.13

 

%

 

26.67

 

%

 

13.78

%

 

17.74

%

 

17.46

%

Noninterest income as a % of revenue

 

 

62.57

 

%

 

67.53

 

%

 

61.56

%

 

64.05

%

 

60.50

%

Net interest margin (tax-equivalent) (1)

 

 

3.23

 

%

 

3.17

 

%

 

3.45

%

 

3.22

%

 

3.65

%

Efficiency ratio (1)

 

 

74.44

 

%

 

58.42

 

%

 

73.68

%

 

68.40

%

 

73.22

%

Net charge-offs/(recoveries) to average loans

 

 

(0.30

)

%

 

(0.11

)

%

 

0.20

%

 

0.03

%

 

0.33

%

Dividend payout ratio

 

 

26.32

 

%

 

15.15

 

%

 

34.88

%

 

23.81

%

 

29.84

%

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.58

 

 

$

1.01

 

 

$

0.44

 

$

2.57

 

$

1.96

 

Earnings per common share - diluted

 

$

0.57

 

 

$

0.99

 

 

$

0.43

 

$

2.52

 

$

1.91

 

Dividends declared per common share

 

$

0.15

 

 

$

0.15

 

 

$

0.15

 

$

0.60

 

$

0.57

 

Tangible book value per common share (1)

 

$

16.00

 

 

$

16.31

 

 

$

14.08

 

 

 

 

 

 

 

Average common shares outstanding - basic

 

 

17,122

 

 

 

17,121

 

 

 

17,049

 

 

17,106

 

 

14,736

 

Average common shares outstanding - diluted

 

 

17,450

 

 

 

17,453

 

 

 

17,397

 

 

17,438

 

 

15,093

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement and benefit services assets under administration/management

 

$

34,199,954

 

 

$

30,470,645

 

 

$

31,904,648

 

 

 

 

 

 

 

Wealth management assets under administration/management

 

 

3,338,594

 

 

 

3,043,173

 

 

 

3,103,056

 

 

 

 

 

 

 

Mortgage originations

 

 

607,166

 

 

 

511,605

 

 

 

261,263

 

$

1,778,977

 

$

946,441

 

(1)

Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

Results of Operations

Net Interest Income

Net interest income for the fourth quarter of 2020 was $23.2 million, an increase of $1.4 million, or 6.4%, from $21.8 million for the third quarter of 2020, and an increase of $4.7 million, or 25.4%, from $18.5 million for the fourth quarter of 2019. The linked quarter increase in net interest income was primarily driven by an increase in interest and loan fees recognized on PPP loans of $3.9 million compared to $3.2 million of interest and fees on PPP loans in the third quarter. During the fourth quarter of 2020 approximately $83.6 million of PPP loans were forgiven or repaid and average interest earning assets increased by $125.0 million, primarily due to an increase of $105.5 million in investment securities and a $32.2 million increase in loans held for sale. The cost of interest-bearing liabilities decreased 12 basis points from the third quarter of 2020.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 3.23% for the fourth quarter of 2020, a 6 basis point increase from 3.17% for the third quarter of 2020, and a 22 basis point decrease from 3.45% in the fourth quarter of 2019. The linked quarter increase was primarily due to the loan fees recognized on forgiven PPP loans, partially offset by lower yields on interest earning assets. The year over year decrease was primarily attributed to the historically low and flat yield curve and a more liquid balance sheet mix which resulted in a 76 basis point decrease in interest earning asset yields and compressed net interest margin.

Noninterest Income

Noninterest income for the fourth quarter of 2020 was $38.7 million, a $6.6 million, or 14.5%, decrease from the third quarter of 2020. The decrease was primarily driven by a $5.5 million decrease in mortgage banking revenue, a $1.4 million decrease in net gains on investment securities, and a $777 thousand decrease in other noninterest income. These decreases were partially offset by increases of $818 thousand in retirement and benefit services revenue and $321 thousand in wealth management revenue. The decrease in mortgage banking revenue was primarily due to an $8.3 million decrease in the change in fair value of secondary market derivatives and a 15 basis point decrease in the gain on sale margin, partially offset by a $95.6 million increase in mortgage originations. The decrease in the fair value of secondary market derivatives was due to a decrease of $251.7 million in the hedged pipeline for the fourth quarter of 2020, as compared to the change during the third quarter of 2020. The decrease in other noninterest income was primarily due to losses on assets of $707 thousand as we closed two branches and terminated leases at four offices during the quarter. The increase in retirement and benefit services revenue was primarily due to seasonally higher ESOP transactional trustee fees, distribution and health and welfare account fees.

Noninterest income for the fourth quarter of 2020 increased $9.1 million, or 30.9%, from $29.6 million in the fourth quarter of 2019. This increase was primarily due to a $10.7 million increase in mortgage banking revenue as mortgage originations increased from $261.3 million in the fourth quarter of 2019 to $607.2 million in the fourth quarter of 2020. The increase was partially offset by a decrease in retirement and benefit services revenue of $1.7 million due to a decline in revenue sharing and plan document fees.

Noninterest Expense

Noninterest expense for the fourth quarter of 2020 was $47.1 million, an increase of $6.9 million, or 17.2%, compared to the third quarter of 2020. The increase was primarily due to increases of $3.8 million in compensation expense, $1.3 million in business services, software and technology expense, $779 thousand in other noninterest expense, and $438 thousand in professional fees and assessments. The increase in compensation expense was primarily due to increased mortgage incentives resulting from increased mortgage originations, increased incentives for retirement and benefit services driven by a seasonal increase in revenue, and an increase in performance bonus expense due to the Companys record financial performance. Business services, software and technology expense increased following purchases of computer equipment, supplies and allowances for home office equipment as the vast majority of our employees work remotely during the ongoing COVID-19 pandemic. Professional fees and assessments increased due to legal and consulting fees related to the acquisition of Retirement Planning Services, Inc.

Noninterest expense for the fourth quarter of 2020 increased $10.7 million, or 29.3%, from $36.4 million in the fourth quarter of 2019. The increase was primarily attributable to increased compensation expense, employee taxes and benefits and mortgage and lending expenses, primarily as a result of the significant increase in mortgage originations. Other increases including business services, software and technology, professional fees and assessments and other noninterest expenses, are consistent with the linked quarter increases noted above.

Financial Condition

Total assets were $3.0 billion as of December 31, 2020, an increase of $656.9 million, or 27.9%, from December 31, 2019. The overall increase in total assets included increases of $282.0 million in available-for-sale investment securities, $258.1 million in loans, $75.6 million in loans held for sale, and $29.0 million in cash and cash equivalents.

Loans

Total loans were $1.98 billion as of December 31, 2020, an increase of $258.1 million, or 15.0%, from December 31, 2019. The increase was primarily due to increases of $212.7 million in commercial and industrial loans and $68.3 million in our commercial real estate loan portfolio, partially offset by a $41.0 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $268.4 million in PPP loans, offset by a decrease in commercial lines of credit due to continued low line utilization.

The following table presents the composition of our loan portfolio as of the dates indicated:

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

(dollars in thousands)

 

2020

 

2020

 

2020

 

2020

 

2019

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial (1)

 

$

691,858

 

$

789,036

 

$

794,204

 

$

502,637

 

$

479,144

Real estate construction

 

 

44,451

 

 

33,169

 

 

31,344

 

 

25,487

 

 

26,378

Commercial real estate

 

 

563,007

 

 

535,216

 

 

519,104

 

 

522,106

 

 

494,703

Total commercial

 

 

1,299,316

 

 

1,357,421

 

 

1,344,652

 

 

1,050,230

 

 

1,000,225

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate first mortgage

 

 

463,370

 

 

469,050

 

 

456,737

 

 

457,895

 

 

457,155

Residential real estate junior lien

 

 

143,416

 

 

152,487

 

 

154,351

 

 

170,538

 

 

177,373

Other revolving and installment

 

 

73,273

 

 

79,461

 

 

78,457

 

 

79,614

 

 

86,526

Total consumer

 

 

680,059

 

 

700,998

 

 

689,545

 

 

708,047

 

 

721,054

Total loans

 

$

1,979,375

 

$

2,058,419

 

$

2,034,197

 

$

1,758,277

 

$

1,721,279

(1)

Includes PPP loans of $268.4 million at December 31, 2020, $348.9 million at September 30, 2020 and $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.57 billion as of December 31, 2020, an increase of $600.7 million, or 30.5%, from December 31, 2019. Interest-bearing deposits increased $423.7 million while non-interest bearing deposits increased $177.0 million. Key drivers of the increase in deposits included strong deposit production from new and existing PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and volatile financial markets. The increase in interest-bearing deposits included a $184.0 million increase in synergistic deposits, including health savings account deposits from our retirement and benefit services and wealth management segments, bringing our total sourced deposits outside of our branch footprint to $595.6 million. Commercial transaction deposits increased $289.5 million, or 35.5%, while consumer transaction deposits increased $108.1 million, or 20.2%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 29.3% as of December 31, 2020 and 2019, respectively.

The following table presents the composition of our deposit portfolio as of the dates indicated:

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

(dollars in thousands)

 

2020

 

2020

 

2020

 

2020

 

2019

Noninterest-bearing demand

 

$

754,716

 

$

693,450

 

$

700,892

 

$

608,559

 

$

577,704

Interest-bearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

618,900

 

 

590,366

 

 

579,840

 

 

477,752

 

 

458,689

Savings accounts

 

 

79,902

 

 

78,659

 

 

75,973

 

 

60,181

 

 

55,777

Money market savings

 

 

909,137

 

 

892,473

 

 

892,717

 

 

773,652

 

 

683,064

Time deposits

 

 

209,338

 

 

207,422

 

 

203,731

 

 

201,370

 

 

196,082

Total interest-bearing

 

 

1,817,277

 

 

1,768,920

 

 

1,752,261

 

 

1,512,955

 

 

1,393,612

Total deposits

 

$

2,571,993

 

$

2,462,370

 

$

2,453,153

 

$

2,121,514

 

$

1,971,316

Asset Quality

Total nonperforming assets were $5.1 million as of December 31, 2020, a decrease of $2.7 million, or 34.4%, from December 31, 2019. As of December 31, 2020, the allowance for loan losses was $34.2 million, or 1.73% of total loans, compared to $23.9 million, or 1.39% of total loans, as of December 31, 2019. Excluding PPP loans, the ratio of allowance for loan losses to total loans increased 61 basis points to 2.00% as of December 31, 2020, compared to 1.39% as of December 31, 2019.

The following table presents selected asset quality data as of and for the periods indicated:

 

 

As of and for the three months ended

 

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

(dollars in thousands)

 

2020

 

 

2020

 

 

2020

 

2020

 

 

2019

 

Nonaccrual loans

 

$

5,050

 

 

$

4,795

 

 

$

5,328

 

$

6,959

 

 

$

7,379

 

Accruing loans 90+ days past due

 

 

30

 

 

 

 

 

 

 

 

11

 

 

 

448

 

Total nonperforming loans

 

 

5,080

 

 

 

4,795

 

 

 

5,328

 

 

6,970

 

 

 

7,827

 

OREO and repossessed assets

 

 

63

 

 

 

10

 

 

 

26

 

 

209

 

 

 

8

 

Total nonperforming assets

 

$

5,143

 

 

$

4,805

 

 

$

5,354

 

$

7,179

 

 

$

7,835

 

Net charge-offs/(recoveries)

 

 

(1,509

)

 

 

(581

)

 

 

3,264

 

 

(595

)

 

 

857

 

Net charge-offs/(recoveries) to average loans

 

 

(0.30

)

%

 

(0.11

)

%

 

0.66

%

 

(0.14

)

%

 

0.20

%

Nonperforming loans to total loans

 

 

0.26

 

%

 

0.23

 

%

 

0.26

%

 

0.40

 

%

 

0.45

%

Nonperforming assets to total assets

 

 

0.17

 

%

 

0.17

 

%

 

0.19

%

0.29

%

0.33

%

Allowance for loan losses to total loans

1.73

%

1.52

%

1.34

%

1.54

%

1.39

%

Allowance for loan losses to nonperforming loans

674

%

654

%

512

%

388

%

306

%

For the fourth quarter of 2020, we had net recoveries of $1.5 million compared to net recoveries of $581 thousand for the third quarter of 2020 and $857 thousand of net charge-offs for the fourth quarter of 2019. The net recoveries for the fourth quarter of 2020 were primarily due to a $2.6 million recovery from one commercial client that was previously charged off during the second quarter of 2019.

The provision for loan losses for the fourth quarter of 2020 was $1.4 million, a decrease of $2.1 million, or 60.0%, from the third quarter of 2020 and a decrease of $397 thousand from the fourth quarter of 2019. The decrease in provision expense was primarily due to the net recoveries during the quarter. We have increased allocations of reserves during the year for the economic uncertainties related to COVID-19, which increased the allowance for loan losses balance by $10.3 million to $34.2 million at December 31, 2020, a 43.1% increase from December 31, 2019.

The ratio of nonperforming loans to total loans at December 31, 2020 was 0.26%, and if PPP loans were excluded, this ratio would have been 0.30%. Nonperforming assets as a percentage of total assets was 0.17% at December 31, 2020. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.19% at December 31, 2020.

During 2020, we had entered into principal and interest deferrals on 577 loans, representing $153.6 million in principal balances, since the beginning of the pandemic. Of those loans, 18 loans with a total outstanding principal balance of $8.4 million have been granted second deferrals, 21 loans with a total outstanding principal balance of $3.7 million remain on the first deferral and the remaining loans have been returned to normal payment status. All of these loan modifications were accounted for in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, or have been evaluated under existing accounting policies, and are not considered troubled debt restructurings.

Capital

Total stockholders’ equity was $330.2 million as of December 31, 2020, an increase of $44.4 million from December 31, 2019. The tangible book value per common share, a non-GAAP financial measure, increased to $16.00 as of December 31, 2020, from $14.08 as of December 31, 2019. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.27% as of December 31, 2020, from 10.38% as of December 31, 2019. The tangible common equity to tangible assets ratio, excluding PPP loans, was 10.19% as of December 31, 2020.

The following table presents our capital ratios as of the dates indicated:

December 31,

September 30,

December 31,

2020

2020

2019

Capital Ratios(1)

Alerus Financial Corporation

Common equity tier 1 capital to risk weighted assets

12.75

%

13.08

%

12.48

%

Tier 1 capital to risk weighted assets

13.15

%

13.48

%

12.90

%

Total capital to risk weighted assets

16.79

%

17.13

%

16.73

%

Tier 1 capital to average assets

9.24

%

9.76

%

11.05

%

Tangible common equity / tangible assets (2)

9.27

%

9.78

%

10.38

%

Alerus Financial, N.A.

Common equity tier 1 capital to risk weighted assets

12.10

%

12.47

%

11.91

%

Tier 1 capital to risk weighted assets

12.10

%

12.47

%

11.91

%

Total capital to risk weighted assets

13.36

%

13.72

%

13.15

%

Tier 1 capital to average assets

8.50

%

9.03

%

10.20

%

(1)

Capital ratios for the current quarter are to be considered preliminary until the Call Report for Alerus Financial, N.A. is filed.

(2)

Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

Conference Call

The Company will host a conference call at 9:00 a.m. Central Time on Thursday, January 28, 2021, to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company’s investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, ND. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to businesses and consumers through four distinct business segments—banking, retirement and benefit services, wealth management, and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology. Alerus Financial banking and wealth management offices are located in Grand Forks and Fargo, ND, the Minneapolis-St. Paul, MN metropolitan area and Scottsdale and Mesa, AZ. Alerus Retirement and Benefits plan administration offices are located in St. Paul, MN, East Lansing, MI, and Littleton, CO.

Non-GAAP Financial Measures

Some of the financial measures included in this press release are not measures of financial performance recognized by U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible common equity per share, return on average tangible common equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy. Reconciliations of non-GAAP disclosures used in this press release to the comparable GAAP measures are provided in the accompanying tables. Management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.

These non-GAAP financial measures should not be considered in isolation or as a substitute for total stockholders’ equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as "may", "might", "should", "could", "predict", "potential", "believe", "expect", "continue", "will", "anticipate", "seek", "estimate", "intend", "plan", "projection", "would", "annualized", "target" and "outlook", or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements we make regarding our projected growth, anticipated future financial performance, financial condition, credit quality, management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients, and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in response to the pandemic; our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the implementation of the new Current Expected Credit Loss Standard; business and economic conditions generally and in the financial services industry, nationally and within our market areas; the overall health of the local and national real estate market; concentrations within our loan portfolio; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid technological change in the financial services industry; increased competition in the financial services industry; our ability to successfully manage liquidity risk; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; potential impairment to the goodwill we recorded in connection with our past acquisitions; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; interest rate risks associated with our business; fluctuations in the values of the securities held in our securities portfolio; governmental monetary, trade and fiscal policies; severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic, acts of war or terrorism or other adverse external events; any material weaknesses in our internal control over financial reporting; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative rates; our success at managing the risks involved in the foregoing items; and any other risks described in the "Risk Factors" sections of the reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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

December 31,

December 31,

2020

2019

Assets

(Unaudited)

(Audited)

Cash and cash equivalents

$

172,962

$

144,006

Investment securities, at fair value

Available-for-sale

592,342

310,350

Equity

2,808

Loans held for sale

122,440

46,846

Loans

1,979,375

1,721,279

Allowance for loan losses

(34,246

)

(23,924

)

Net loans

1,945,129

1,697,355

Land, premises and equipment, net

20,289

20,629

Operating lease right-of-use assets

6,918

8,343

Accrued interest receivable

9,662

7,551

Bank-owned life insurance

32,363

31,566

Goodwill

30,201

27,329

Other intangible assets

25,919

18,391

Servicing rights

1,987

3,845

Deferred income taxes, net

9,409

7,891

Other assets

44,150

29,968

Total assets

$

3,013,771

$

2,356,878

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing

$

754,716

$

577,704

Interest-bearing

1,817,277

1,393,612

Total deposits

2,571,993

1,971,316

Long-term debt

58,735

58,769

Operating lease liabilities

7,861

8,864

Accrued expenses and other liabilities

45,019

32,201

Total liabilities

2,683,608

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: 17,125,270 and 17,049,551 issued and outstanding

17,125

17,050

Additional paid-in capital

90,237

88,650

Retained earnings

212,163

178,092

Accumulated other comprehensive income (loss)

10,638

1,936

Total stockholders’ equity

330,163

285,728

Total liabilities and stockholders’ equity

$

3,013,771

$

2,356,878

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

2020

2020

2019

2020

2019

Interest Income

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Audited)

Loans, including fees

$

22,549

$

21,962

$

20,659

$

86,425

$

85,830

Investment securities

Taxable

2,301

1,973

1,555

7,798

5,576

Exempt from federal income taxes

237

238

180

949

798

Other

114

116

493

930

1,096

Total interest income

25,201

24,289

22,887

96,102

93,300

Interest Expense

Deposits

1,210

1,683

3,532

8,843

13,334

Short-term borrowings

1,805

Long-term debt

838

841

896

3,413

3,610

Total interest expense

2,048

2,524

4,428

12,256

18,749

Net interest income

23,153

21,765

18,459

83,846

74,551

Provision for loan losses

1,400

3,500

1,797

10,900

7,312

Net interest income after provision for loan losses

21,753

18,265

16,662

72,946

67,239

Noninterest Income

Retirement and benefit services

15,922

15,104

17,669

60,956

63,811

Wealth management

4,807

4,486

4,117

17,451

15,502

Mortgage banking

16,781

22,269

6,066

61,641

25,805

Service charges on deposit accounts

334

355

451

1,409

1,772

Net gains (losses) on investment securities

15

1,428

2,737

357

Other

837

1,614

1,253

5,177

6,947

Total noninterest income

38,696

45,256

29,556

149,371

114,194

Noninterest Expense

Compensation

26,522

22,740

19,021

89,206

74,018

Employee taxes and benefits

4,962

5,033

4,268

20,050

19,456

Occupancy and equipment expense

2,681

2,768

2,665

11,073

10,751

Business services, software and technology expense

5,740

4,420

4,337

19,124

16,381

Intangible amortization expense

990

990

990

3,961

4,081

Professional fees and assessments

1,469

1,031

865

4,700

4,011

Marketing and business development

1,045

929

1,138

3,133

3,162

Supplies and postage

544

247

695

2,169

2,722

Travel

21

26

452

359

1,787

Mortgage and lending expenses

1,573

1,231

887

5,039

2,853

Other

1,578

799

1,117

4,985

3,315

Total noninterest expense

47,125

40,214

36,435

163,799

142,537

Income before income taxes

13,324

23,307

9,783

58,518

38,896

Income tax expense

3,144

5,648

2,131

13,843

9,356

Net income

$

10,180

$

17,659

$

7,652

$

44,675

$

29,540

Per Common Share Data

Earnings per common share

$

0.58

$

1.01

$

0.44

$

2.57

$

1.96

Diluted earnings per common share

$

0.57

$

0.99

$

0.43

$

2.52

$

1.91

Dividends declared per common share

$

0.15

$

0.15

$

0.15

$

0.60

$

0.57

Average common shares outstanding

17,122

17,121

17,049

17,106

14,736

Diluted average common shares outstanding

17,450

17,453

17,397

17,438

15,093

Alerus Financial Corporation and Subsidiaries

Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures (unaudited)

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

December 31,

September 30,

December 31,

2020

2020

2019

Tangible Common Equity to Tangible Assets

Total common stockholders’ equity

$

330,163

$

322,003

$

285,728

Less: Goodwill

30,201

27,329

27,329

Less: Other intangible assets

25,919

15,421

18,391

Tangible common equity (a)

274,043

279,253

240,008

Total assets

3,013,771

2,898,809

2,356,878

Less: Goodwill

30,201

27,329

27,329

Less: Other intangible assets

25,919

15,421

18,391

Tangible assets (b)

2,957,651

2,856,059

2,311,158

Tangible common equity to tangible assets (a)/(b)

9.27

%

9.78

%

10.38

%

Tangible Book Value Per Common Share

Total common stockholders’ equity

$

330,163

$

322,003

$

285,728

Less: Goodwill

30,201

27,329

27,329

Less: Other intangible assets

25,919

15,421

18,391

Tangible common equity (c)

274,043

279,253

240,008

Total common shares issued and outstanding (d)

17,125

17,122

17,050

Tangible book value per common share (c)/(d)

$

16.00

$

16.31

$

14.08

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

2020

2020

2019

2020

2019

Return on Average Tangible Common Equity

Net income

$

10,180

$

17,659

$

7,652

$

44,675

$

29,540

Add: Intangible amortization expense (net of tax)

782

782

782

3,129

3,224

Net income, excluding intangible amortization (e)

10,962

18,441

8,434

47,804

32,764

Average total equity

329,210

314,921

285,017

310,208

231,084

Less: Average goodwill

27,766

27,329

27,329

27,439

27,329

Less: Average other intangible assets (net of tax)

13,206

12,565

14,912

13,309

16,101

Average tangible common equity (f)

288,238

275,027

242,776

269,460

187,654

Return on average tangible common equity (e)/(f)

15.13

%

26.67

%

13.78

%

17.74

%

17.46

%

Net Interest Margin (tax-equivalent)

Net interest income

$

23,153

$

21,765

$

18,459

$

83,846

$

74,551

Tax-equivalent adjustment

131

116

89

455

347

Tax-equivalent net interest income (g)

23,284

21,881

18,548

84,301

74,898

Average earning assets (h)

2,869,767

2,744,758

2,135,682

2,618,427

2,052,758

Net interest margin (tax-equivalent) (g)/(h)

3.23

%

3.17

%

3.45

%

3.22

%

3.65

%

Efficiency Ratio

Noninterest expense

$

47,125

$

40,214

$

36,435

$

163,799

$

142,537

Less: Intangible amortization expense

990

990

990

3,961

4,081

Adjusted noninterest expense (i)

46,135

39,224

35,445

159,838

138,456

Net interest income

23,153

21,765

18,459

83,846

74,551

Noninterest income

38,696

45,256

29,556

149,371

114,194

Tax-equivalent adjustment

131

116

89

455

347

Total tax-equivalent revenue (j)

61,980

67,137

48,104

233,672

189,092

Efficiency ratio (i)/(j)

74.44

%

58.42

%

73.68

%

68.40

%

73.22

%

Alerus Financial Corporation and Subsidiaries

Analysis of Average Balances, Yields, and Rates (unaudited)

(dollars in thousands)

Three months ended

Year ended

December 31, 2020

September 30, 2020

December 31, 2019

December 31, 2020

December 31, 2019

Average

Average

Average

Average

Average

Average

Yield/

Average

Yield/

Average

Yield/

Average

Yield/

Average

Yield/

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Interest Earning Assets

Interest-bearing deposits with banks

$

164,052

0.12

%

$

169,770

0.12

%

$

100,058

1.69

%

$

162,616

0.41

%

$

34,876

1.88

%

Investment securities (1)

549,198

1.88

%

443,705

2.04

%

296,773

2.38

%

425,219

2.12

%

266,204

2.47

%

Loans held for sale

122,820

2.18

%

90,634

2.44

%

51,766

3.01

%

79,201

2.46

%

36,035

3.16

%

Loans

Commercial:

Commercial and industrial

745,415

4.91

%

782,853

4.34

%

473,489

5.30

%

687,266

4.60

%

500,652

5.45

%

Real estate construction

40,009

4.31

%

32,747

4.47

%

23,901

5.20

%

32,804

4.54

%

23,625

5.45

%

Commercial real estate

545,432

3.82

%

525,514

4.02

%

460,457

4.71

%

523,219

4.18

%

448,869

4.95

%

Total commercial

1,330,856

4.45

%

1,341,114

4.22

%

957,847

5.01

%

1,243,289

4.42

%

973,146

5.22

%

Consumer

Residential real estate first mortgage

471,125

3.73

%

460,995

3.96

%

454,854

4.15

%

463,174

3.97

%

455,635

4.23

%

Residential real estate junior lien

149,456

4.72

%

153,326

4.54

%

179,714

5.29

%

159,844

4.81

%

184,972

5.63

%

Other revolving and installment

76,466

4.53

%

79,343

4.50

%

88,896

4.69

%

79,238

4.57

%

93,226

4.65

%

Total consumer

697,047

4.03

%

693,664

4.15

%

723,464

4.50

%

702,256

4.23

%

733,833

4.64

%

Total loans (1)

2,027,903

4.30

%

2,034,778

4.20

%

1,681,311

4.79

%

1,945,545

4.35

%

1,706,979

4.97

%

Federal Reserve/FHLB stock

5,794

4.46

%

5,871

4.40

%

5,774

4.67

%

5,846

4.55

%

8,664

5.08

%

Total interest earning assets

2,869,767

3.51

%

2,744,758

3.54

%

2,135,682

4.27

%

2,618,427

3.69

%

2,052,758

4.56

%

Noninterest earning assets

158,417

163,386

153,838

156,713

159,235

Total assets

$

3,028,184

$

2,908,144

$

2,289,520

$

2,775,140

$

2,211,993

Interest-Bearing Liabilities

Interest-bearing demand deposits

$

622,854

0.19

%

$

589,633

0.27

%

$

442,945

0.52

%

$

551,861

0.29

%

$

428,162

0.47

%

Money market and savings deposits

1,012,497

0.20

%

961,669

0.32

%

698,533

1.19

%

920,072

0.53

%

681,621

1.22

%

Time deposits

208,378

0.79

%

204,969

0.98

%

195,963

1.72

%

203,413

1.16

%

186,781

1.62

%

Short-term borrowings

%

%

%

80

%

71,421

2.53

%

Long-term debt

58,726

5.68

%

58,739

5.70

%

58,760

6.05

%

58,742

5.81

%

58,789

6.14

%

Total interest-bearing liabilities

1,902,455

0.43

%

1,815,010

0.55

%

1,396,201

1.26

%

1,734,168

0.71

%

1,426,774

1.31

%

Noninterest-Bearing Liabilities and Stockholders' Equity

Noninterest-bearing deposits

738,319

698,594

559,363

673,676

512,586

Other noninterest-bearing liabilities

58,200

79,619

48,939

57,088

41,549

Stockholders’ equity

329,210

314,921

285,017

310,208

231,084

Total liabilities and stockholders’ equity

$

3,028,184

$

2,908,144

$

2,289,520

$

2,775,140

$

2,211,993

Net interest rate spread

3.08

%

2.99

%

3.01

%

2.98

%

3.25

%

Net interest margin, tax-equivalent (2)

3.23

%

3.17

%

3.45

%

3.22

%

3.65

%

(1)

Taxable-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.

(2)

Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

View source version on businesswire.com: https://www.businesswire.com/news/home/20210127005207/en/

Contacts

Katie A. Lorenson, Chief Financial Officer
952.417.3725 (Office)