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Alerus Financial Corporation Reports Second Quarter 2021 Net Income of $11.7 Million

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GRAND FORKS, N.D., July 28, 2021--(BUSINESS WIRE)--Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $11.7 million for the second quarter of 2021, or $0.66 per diluted common share, compared to net income of $15.2 million, or $0.86 per diluted common share, for the first quarter of 2021, and net income of $11.5 million, or $0.65 per diluted common share, for the second quarter of 2020.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, "Alerus continues to deliver top tier financial performance, driven by our long-term strategies and focus on offering valued advice to clients, resulting in extraordinary revenue diversification and growth opportunities. Alerus continues to establish itself as a premier provider of holistic solutions to our consumer and business clients. Our client base of more than 540,000 consumer clients and 18,300 business clients is a significant differentiator in our ability to continue to grow and provide superior returns to our shareholders.

Our diversified business is rooted by our long-standing culture, focused on advice and working in the best interests of our clients, a foundation which has been built over decades of meeting our clients on their financial journey and guiding them to their path for financial success. This relationship focused model is a key differentiator both in working with clients and attracting talented professionals to our organization.

During the quarter we strengthened our U.S. Small Business Administration, or SBA, lending capabilities with the addition of an experienced SBA team. Led by industry veteran John Kimball, who most recently served as SBA lending manager at a large, regional community bank, the five-person team collectively has more than 100 years of business banking and small business lending experience at community and regional banks. These team members are aligned with our culture of providing expertise and value to our business clients so they can continue to grow and expand."

Quarterly Highlights

  • Return on average total assets of 1.50%, compared to 2.02% for the first quarter of 2021

  • Return on average tangible common equity(1) of 17.36%, compared to 23.03% for the first quarter of 2021

  • Net interest margin (tax-equivalent)(1) was 2.88%, compared to 3.12% for the first quarter of 2021

  • Allowance for loan losses to total loans, excluding Paycheck Protection Program, or PPP, loans, was 2.02%, compared to 2.00% as of December 31, 2020

  • Efficiency ratio(1) of 71.46%, compared to 66.43% for the first quarter of 2021

  • Noninterest income decreased $4.1 million from the first quarter of 2021 and was 63.48% of total revenue, compared to 64.97% for the first quarter of 2021

  • Mortgage originations totaled $545.4 million, a 5.3% increase from the first quarter of 2021

  • Investment securities increased $205.5 million, or 34.7%, from the fourth quarter of 2020

  • Loans held for sale decreased $55.6 million, or 45.4%, from the fourth quarter of 2020

  • Loans held for investment decreased $144.1 million, or 7.3%, from the fourth quarter of 2020

  • Deposits increased $138.9 million, or 5.4%, from the fourth quarter of 2020

(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

Six months ended

June 30,

March 31,

June 30,

June 30,

June 30,

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

2021

2021

2020

2021

2020

Performance Ratios

Return on average total assets

1.50

%

2.02

%

1.68

%

1.76

%

1.31

%

Return on average common equity

13.82

%

18.46

%

15.30

%

16.11

%

11.35

%

Return on average tangible common equity (1)

17.36

%

23.03

%

18.88

%

20.15

%

14.39

%

Noninterest income as a % of revenue

63.48

%

64.97

%

65.55

%

64.26

%

62.69

%

Net interest margin (tax-equivalent) (1)

2.88

%

3.12

%

3.14

%

3.00

%

3.24

%

Efficiency ratio (1)

71.46

%

66.43

%

66.31

%

68.84

%

71.23

%

Net charge-offs/(recoveries) to average loans

%

0.10

%

0.66

%

0.05

%

0.29

%

Dividend payout ratio

24.24

%

17.44

%

23.08

%

20.39

%

31.58

%

Per Common Share

Earnings per common share - basic

$

0.67

$

0.87

$

0.66

$

1.54

$

0.97

Earnings per common share - diluted

$

0.66

$

0.86

$

0.65

$

1.52

$

0.95

Dividends declared per common share

$

0.16

$

0.15

$

0.15

$

0.31

$

0.30

Tangible book value per common share (1)

$

16.89

$

15.95

$

15.30

Average common shares outstanding - basic

17,194

17,145

17,111

17,170

17,091

Average common shares outstanding - diluted

17,497

17,465

17,445

17,482

17,425

Other Data

Retirement and benefit services assets under administration/management

$

36,964,961

$

34,774,650

$

30,093,095

Wealth management assets under administration/management

3,538,959

3,357,530

2,957,213

Mortgage originations

545,437

518,014

431,638

$

1,063,451

$

660,206

(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 second quarter of 2021 was $21.1 million, a decrease of $898 thousand, or 4.1%, from $22.0 million for the first quarter of 2021, and an increase of $1.0 million, or 5.2%, from $20.1 million for the second quarter of 2020. The linked quarter decrease in net interest income was primarily driven by a $1.2 million decrease in interest income from loans as average total loans decreased $57.5 million while the average yield decreased by 17 basis points. During the second quarter of 2021, average interest earning assets increased $78.2 million, primarily due to increases of $138.4 million in investment securities and $7.3 million in interest-bearing deposits with banks, partially offset by decreases of $57.5 million in loans held for investment and $10.8 million in loans held for sale. The change in the balance sheet mix resulted in a 22 basis point decrease in the average earning asset yield. Net interest income earned from PPP loans during the second quarter of 2021 totaled $2.6 million, a decrease of $477 thousand, from the $3.0 million earned during the first quarter. The cost of interest-bearing liabilities had a modest increase of 2 basis points from the first quarter of 2021 primarily due to increased average balances in interest-bearing demand deposits as well as long-term debt.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 2.88% for the second quarter of 2021, a 24 basis point decrease from 3.12% for the first quarter of 2021, and a 26 basis point decrease from 3.14% in the second quarter of 2020. The linked quarter decrease was primarily due to lower yields on interest earning assets. Excluding PPP loans, net interest margin was 2.75% for the second quarter of 2021, a 20 basis point decrease from 2.95% for the first quarter of 2021. The year over year decrease was primarily attributable to the historically low and flat yield curve and a more liquid balance sheet mix which resulted in a 60 basis point decrease in interest earning asset yields.

Noninterest Income

Noninterest income for the second quarter of 2021 was $36.7 million, a $4.1 million, or 10.1%, decrease from the first quarter of 2021. The decrease was primarily driven by a $4.8 million decrease in mortgage banking revenue. The decrease in mortgage banking revenue was primarily a result of a $6.2 million decline in fair market value of the secondary market hedge, partially offset by a 56 basis point increase in the gain on sale margin.

Noninterest income for the second quarter of 2021 decreased $1.5 million, or 3.9%, from $38.2 million in the second quarter of 2020. This decrease was primarily due to a $5.3 million decrease in mortgage banking revenue, a result of a $11.5 million decline in fair market value on the secondary market hedge, partially offset by a 56 basis point increase in the gain on sale margin. Offsetting this decrease was a $4.2 million increase in retirement and benefit services income, primarily driven by the revenue attributable to the acquisition of Retirement Planning Services, Inc. (doing business as RPS Plan Administrators and 24HourFlex) and a $693 thousand increase in document restatement fees, and a $1.0 million increase in wealth management revenue primarily driven by organic growth and market increases in assets under administration/management.

Noninterest Expense

Noninterest expense for the second quarter of 2021 was $42.6 million, a decrease of $492 thousand, or 1.1%, compared to the first quarter of 2021. The decrease was primarily due to decreases of $447 thousand in other noninterest expense, $313 thousand decrease in occupancy and equipment expense and $241 thousand decrease in employee taxes and benefits, partially offset by a $611 thousand increase in compensation expense. The decrease in other noninterest expense was a result of a loss recognized in the first quarter of 2021 on the redemption of the Company’s subordinated notes which were redeemed during the first quarter. The decrease in occupancy and equipment expense is attributable to the termination of facility leases and closure of nine office locations in 2020. The increase in compensation expense was primarily due to an increase in mortgage related compensation and incentives.

Noninterest expense for the second quarter of 2021 increased $2.8 million, or 7.1%, from $39.7 million in the second quarter of 2020. The increase was primarily attributable to increased compensation expense, employee taxes and benefits, primarily as a result of the significant year over year increase in mortgage originations. Additionally, compensation expense and employee taxes and benefits increased as a result of the acquisition of RPS, as the number of full time employees increased from 791 employees in the second quarter of 2020 to 835 employees in the second quarter of 2021.

Financial Condition

Total assets were $3.2 billion as of June 30, 2021, an increase of $143.5 million, or 4.8%, from December 31, 2020. The overall increase in total assets included increases of $205.5 million in investment securities and $142.5 million in cash and cash equivalents, partially offset by a $55.6 million decrease in loans held for sale and a $144.1 million decrease in loans held for investment.

Loans

Total loans were $1.84 billion as of June 30, 2021, a decrease of $144.1 million, or 7.3%, from December 31, 2020. The decrease was primarily due to a $119.1 million decrease in the commercial and industrial loan portfolio, as approximately $213.5 million of PPP loans were forgiven, and $110.5 million of new PPP loans were funded. Excluding PPP loans, the commercial loan portfolio decreased by $18.6 million, or 1.8%, from December 31, 2020. The consumer loan portfolio decreased $22.0 million from December 31, 2020, due to high levels of refinancing and our strategic exit from indirect lending.

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

(dollars in thousands)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Commercial

Commercial and industrial (1)

$

572,734

$

678,029

$

691,858

$

789,036

$

794,204

Real estate construction

36,549

40,473

44,451

33,169

31,344

Commercial real estate

567,987

569,451

563,007

535,216

519,104

Total commercial

1,177,270

1,287,953

1,299,316

1,357,421

1,344,652

Consumer

Residential real estate first mortgage

470,822

454,958

463,370

469,050

456,737

Residential real estate junior lien

130,180

130,299

143,416

152,487

154,351

Other revolving and installment

57,040

64,135

73,273

79,461

78,457

Total consumer

658,042

649,392

680,059

700,998

689,545

Total loans

$

1,835,312

$

1,937,345

$

1,979,375

$

2,058,419

$

2,034,197

__________________________________

(1)

Includes PPP loans of $165.0 million at June 30, 2021, $256.8 million at March 31, 2021, $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 $2.71 billion as of June 30, 2021, an increase of $138.9 million, or 5.4%, from December 31, 2020. Interest-bearing deposits increased $134.8 million while noninterest-bearing deposits increased $4.1 million. Key drivers of the increase included ongoing higher depositor balances due to the uncertain economic environment, government stimulus programs and volatile financial markets. Although overall deposits increased, there was a $44.0 million decrease in synergistic deposits, primarily in the retirement and benefit services accounts as participants moved balances back into the markets. Excluding synergistic deposits, commercial transaction deposits increased $113.9 million, or 10.3%, while consumer transaction deposits increased, $75.8 million, or 11.8%, since December 31, 2020. Noninterest-bearing deposits as a percentage of total deposits was 28.0% as of June 30, 2021 compared to 29.3% as of December 31, 2020.

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

(dollars in thousands)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Noninterest-bearing demand

$

758,820

$

775,434

$

754,716

$

693,450

$

700,892

Interest-bearing

Interest-bearing demand

736,043

674,466

618,900

590,366

579,840

Savings accounts

89,437

87,492

79,902

78,659

75,973

Money market savings

920,831

967,273

909,137

892,473

892,717

Time deposits

205,809

212,908

209,338

207,422

203,731

Total interest-bearing

1,952,120

1,942,139

1,817,277

1,768,920

1,752,261

Total deposits

$

2,710,940

$

2,717,573

$

2,571,993

$

2,462,370

$

2,453,153

Asset Quality

Total nonperforming assets were $7.8 million as of June 30, 2021, an increase of $2.7 million, or 52.0%, from December 31, 2020. As of June 30, 2021, the allowance for loan losses was $33.8 million, or 1.84% of total loans, compared to $34.2 million, or 1.73% of total loans, as of December 31, 2020. Excluding PPP loans, the ratio of allowance for loan losses to total loans was 2.02% at June 30, 2021, compared to 2.00% as of December 31, 2020.

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

As of and for the three months ended

(dollars in thousands)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Nonaccrual loans

$

6,960

$

4,756

$

5,050

$

4,795

$

5,328

Accruing loans 90+ days past due

30

Total nonperforming loans

6,960

4,756

5,080

4,795

5,328

OREO and repossessed assets

858

139

63

10

26

Total nonperforming assets

$

7,818

$

4,895

$

5,143

$

4,805

$

5,354

Net charge-offs/(recoveries)

(6

)

488

(1,509

)

(581

)

3,264

Net charge-offs/(recoveries) to average loans

%

0.10

%

(0.30

)%

(0.11

)%

0.66

%

Nonperforming loans to total loans

0.38

%

0.25

%

0.26

%

0.23

%

0.26

%

Nonperforming assets to total assets

0.25

%

0.16

%

0.17

%

0.17

%

0.19

%

Allowance for loan losses to total loans

1.84

%

1.74

%

1.73

%

1.52

%

...

1.34

%

Allowance for loan losses to nonperforming loans

485

%

710

%

674

%

654

%

512

%

For the second quarter of 2021, we had net recoveries of $6 thousand compared to net charge-offs of $488 thousand for the first quarter of 2021 and $3.3 million of net charge-offs for the second quarter of 2020.

There was no provision recorded for the second quarter of 2021, no change from the first quart...er of 2021 and a decrease of $3.5 million from the second quarter of 2020. Management decided additional provisions were not necessary in the second quarter of 2021 as credit quality indicators remained strong and loan balances decreased.

The ratio of nonperforming loans to total loans at June 30, 2021 was 0.38%, and if PPP loans were excluded, this ratio would have been 0.42%. Nonperforming assets as a percentage of total assets was 0.25% at June 30, 2021. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.26% at June 30, 2021.

Beginning in 2020, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, through June 30, 2021, we had entered into principal and interest deferrals on 584 loans, representing $154.5 million in total outstanding principal balances. Of those loans, 12 loans with a total outstanding principal balance of $5.3 million have been granted additional deferrals, 4 loans with a total outstanding principal balance of $653 thousand remain on the first deferral and the remaining loans have been returned to normal payment status. These loan modifications are not considered troubled debt restructurings.

Capital

Total stockholders’ equity was $344.4 million as of June 30, 2021, an increase of $14.2 million from December 31, 2020. The tangible book value per common share, a non-GAAP financial measure, increased to $16.89 as of June 30, 2021, from $16.00 as of December 31, 2020. Tangible common equity to tangible assets, a non-GAAP financial measure, increased to 9.36% as of June 30, 2021, from 9.27% as of December 31, 2020.

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

June 30,

December 31,

June 30,

2021

2020

2020

Capital Ratios(1)

Alerus Financial Corporation Consolidated

Common equity tier 1 capital to risk weighted assets

14.30

%

12.75

%

12.58

%

Tier 1 capital to risk weighted assets

14.71

%

13.15

%

12.99

%

Total capital to risk weighted assets

18.43

%

16.79

%

16.70

%

Tier 1 capital to average assets

9.62

%

9.24

%

9.75

%

Tangible common equity / tangible assets (2)

9.36

%

9.27

%

9.25

%

Alerus Financial, N.A.

Common equity tier 1 capital to risk weighted assets

13.57

%

12.10

%

11.99

%

Tier 1 capital to risk weighted assets

13.57

%

12.10

%

11.99

%

Total capital to risk weighted assets

14.82

%

13.36

%

13.24

%

Tier 1 capital to average assets

8.98

%

8.50

%

9.00

%

(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, July 29, 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 business and consumer clients through four distinct business segments—banking, retirement and benefit services, wealth management, and mortgage. Alerus provides clients with a primary point of contact to help fully understand the unique needs and delivery channel preferences of each client. Clients are provided with competitive products, valuable insight and sound advice supported by digital solutions designed to meet the clients’ needs. 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; changes to U.S. tax laws, regulations and guidance; 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)

June 30,
2021

December 31,
2020

Assets

(Unaudited)

(Audited)

Cash and cash equivalents

$

315,430

$

172,962

Investment securities

Available-for-sale, at fair value

651,546

592,342

Held-to-maturity, at carrying value

146,316

Loans held for sale

66,856

122,440

Loans

1,835,312

1,979,375

Allowance for loan losses

(33,764

)

(34,246

)

Net loans

1,801,548

1,945,129

Land, premises and equipment, net

18,847

20,289

Operating lease right-of-use assets

4,203

6,918

Accrued interest receivable

8,463

9,662

Bank-owned life insurance

32,752

32,363

Goodwill

30,201

30,201

Other intangible assets

23,680

25,919

Servicing rights

1,964

1,987

Deferred income taxes, net

11,522

9,409

Other assets

43,901

44,150

Total assets

$

3,157,229

$

3,013,771

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing

$

758,820

$

754,716

Interest-bearing

1,952,120

1,817,277

Total deposits

2,710,940

2,571,993

Long-term debt

58,992

58,735

Operating lease liabilities

4,868

7,861

Accrued expenses and other liabilities

38,038

45,019

Total liabilities

2,812,838

2,683,608

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: 17,197,771 and 17,125,270 issued and outstanding

17,198

17,125

Additional paid-in capital

91,273

90,237

Retained earnings

233,397

212,163

Accumulated other comprehensive income (loss)

2,523

10,638

Total stockholders’ equity

344,391

330,163

Total liabilities and stockholders’ equity

$

3,157,229

$

3,013,771

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

Three months ended

Six months ended

June 30,

2021

March 31,

2021

June 30,

2020

June 30,

2021

June 30,

2020

Interest Income

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Loans, including fees

$

19,324

$

20,567

$

21,372

$

39,891

$

41,914

Investment securities

Taxable

2,897

2,401

1,765

5,298

3,524

Exempt from federal income taxes

233

236

239

469

474

Other

130

117

130

247

700

Total interest income

22,584

23,321

23,506

45,905

46,612

Interest Expense

Deposits

906

995

2,558

1,901

5,950

Long-term debt

538

288

857

826

1,734

Total interest expense

1,444

1,283

3,415

2,727

7,684

Net interest income

21,140

22,038

20,091

43,178

38,928

Provision for loan losses

3,500

6,000

Net interest income after provision for loan losses

21,140

22,038

16,591

43,178

32,928

Noninterest Income

Retirement and benefit services

17,871

17,255

13,710

35,126

29,930

Wealth management

5,138

4,986

4,112

10,124

8,158

Mortgage banking

12,287

17,132

17,546

29,419

22,591

Service charges on deposit accounts

330

338

297

668

720

Net gains (losses) on investment securities

114

1,294

114

1,294

Other

1,122

1,056

1,271

2,178

2,726

Total noninterest income

36,748

40,881

38,230

77,629

65,419

Noninterest Expense

Compensation

24,309

23,698

21,213

48,007

39,944

Employee taxes and benefits

5,572

5,813

4,747

11,385

10,055

Occupancy and equipment expense

1,918

2,231

2,612

4,149

5,104

Business services, software and technology expense

4,958

4,976

4,580

9,934

9,123

Intangible amortization expense

1,088

1,151

991

2,239

1,981

Professional fees and assessments

1,509

1,472

1,177

2,981

2,233

Marketing and business development

769

676

549

1,445

1,159

Supplies and postage

503

531

675

1,034

1,382

Travel

36

26

51

62

312

Mortgage and lending expenses

1,199

1,332

1,341

2,531

2,482

Other

689

1,136

1,798

1,825

2,685

Total noninterest expense

42,550

43,042

39,734

85,592

76,460

Income before income taxes

15,338

19,877

15,087

35,215

21,887

Income tax expense

3,644

4,662

3,613

8,306

5,050

Net income

$

11,694

$

15,215

$

11,474

$

26,909

$

16,837

Per Common Share Data

Earnings per common share

$

0.67

$

0.87

$

0.66

$

1.54

$

0.97

Diluted earnings per common share

$

0.66

$

0.86

$

0.65

$

1.52

$

0.95

Dividends declared per common share

$

0.16

$

0.15

$

0.15

$

0.31

$

0.30

Average common shares outstanding

17,194

17,145

17,111

17,170

17,091

Diluted average common shares outstanding

17,497

17,465

17,445

17,482

17,425

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)

June 30,
2021

March 31,
2021

December 31,
2020

June 30,
2020

Tangible Common Equity to Tangible Assets

Total common stockholders’ equity

$

344,391

$

329,234

$

330,163

$

305,732

Less: Goodwill

30,201

30,201

30,201

27,329

Less: Other intangible assets

23,680

24,768

25,919

16,411

Tangible common equity (a)

290,510

274,265

274,043

261,992

Total assets

3,157,229

3,151,756

3,013,771

2,875,457

Less: Goodwill

30,201

30,201

30,201

27,329

Less: Other intangible assets

23,680

24,768

25,919

16,411

Tangible assets (b)

3,103,348

3,096,787

2,957,651

2,831,717

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

9.36

%

8.86

%

9.27

%

9.25

%

Tangible Book Value Per Common Share

Total common stockholders’ equity

$

344,391

$

329,234

$

330,163

$

305,732

Less: Goodwill

30,201

30,201

30,201

27,329

Less: Other intangible assets

23,680

24,768

25,919

16,411

Tangible common equity (c)

290,510

274,265

274,043

261,992

Total common shares issued and outstanding (d)

17,198

17,190

17,125

17,120

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

$

16.89

$

15.95

$

16.00

$

15.30

Three months ended

Six months ended

June 30,

March 31,

June 30,

June 30,

June 30,

2021

2021

2020

2021

2020

Return on Average Tangible Common Equity

Net income

$

11,694

$

15,215

$

11,474

$

26,909

$

16,837

Add: Intangible amortization expense (net of tax)

860

909

783

1,769

1,565

Net income, excluding intangible amortization (e)

12,554

16,124

12,257

28,678

18,402

Average total equity

339,439

334,188

301,719

336,830

298,221

Less: Average goodwill

30,201

30,201

27,329

30,201

27,329

Less: Average other intangible assets (net of tax)

19,123

19,995

13,345

19,556

13,737

Average tangible common equity (f)

290,115

283,992

261,045

287,073

257,155

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

17.36

%

23.03

%

18.88

%

20.15

%

14.39

%

Net Interest Margin (tax-equivalent)

Net interest income

$

21,140

$

22,038

$

20,091

$

43,178

$

38,928

Tax-equivalent adjustment

135

143

109

278

209

Tax-equivalent net interest income (g)

21,275

22,181

20,200

43,456

39,137

Average earning assets (h)

2,958,468

2,880,255

2,584,037

2,919,578

2,427,519

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

2.88

%

3.12

%

3.14

%

3.00

%

3.24

%

Efficiency Ratio

Noninterest expense

$

42,550

$

43,042

$

39,734

$

85,592

$

76,460

Less: Intangible amortization expense

1,088

1,151

991

2,239

1,981

Adjusted noninterest expense (i)

41,462

41,891

38,743

83,353

74,479

Net interest income

21,140

22,038

20,091

43,178

38,928

Noninterest income

36,748

40,881

38,230

77,629

65,419

Tax-equivalent adjustment

135

143

109

278

209

Total tax-equivalent revenue (j)

58,023

63,062

58,430

121,085

104,556

Efficiency ratio (i)/(j)

71.46

%

66.43

%

66.31

%

68.84

%

71.23

%

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

Three months ended

Six months ended

June 30, 2021

March 31, 2021

June 30, 2020

June 30, 2021

June 30, 2020

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

$

191,695

0.12

%

$

184,376

0.12

%

$

153,197

0.16

%

$

188,056

0.12

%

$

158,274

0.72

%

Investment securities (1)

800,812

1.60

%

662,413

1.65

%

369,247

2.25

%

731,995

1.62

%

353,203

2.35

%

Loans held for sale

71,447

2.26

%

82,249

2.13

%

69,606

2.69

%

76,818

2.19

%

51,372

2.81

%

Loans

Commercial:

Commercial and industrial

627,613

4.55

%

674,935

4.72

%

739,816

4.12

%

651,143

4.64

%

609,553

4.57

%

Real estate construction

42,511

4.28

%

45,264

4.22

%

31,660

4.48

%

43,880

4.25

%

29,191

4.73

%

Commercial real estate

568,827

3.71

%

560,986

3.79

%

513,497

4.31

%

564,928

3.75

%

510,831

4.46

%

Total commercial

1,238,951

4.15

%

1,281,185

4.30

%

1,284,973

4.21

%

1,259,951

4.23

%

1,149,575

4.53

%

Consumer

Residential real estate first mortgage

459,278

3.53

%

457,882

3.76

%

459,789

4.09

%

458,584

3.65

%

460,258

4.10

%

Residential real estate junior lien

129,544

4.58

%

137,745

4.86

%

163,345

4.79

%

133,622

4.72

%

168,390

4.98

%

Other revolving and installment

60,213

4.31

%

68,625

4.38

%

77,921

4.56

%

64,396

4.35

%

80,587

4.63

%

Total consumer

649,035

3.81

%

664,252

4.05

%

701,055

4.31

%

656,602

3.93

%

709,235

4.37

%

Total loans (1)

1,887,986

4.04

%

1,945,437

4.21

%

1,986,028

4.24

%

1,916,553

4.13

%

1,858,810

4.47

%

Federal Reserve/FHLB stock

6,528

4.36

%

5,780

4.49

%

5,959

4.59

%

6,156

4.42

%

5,860

4.67

%

Total interest earning assets

2,958,468

3.08

%

2,880,255

3.30

%

2,584,037

3.68

%

2,919,578

3.19

%

2,427,519

3.88

%

Noninterest earning assets

161,272

167,006

156,293

164,124

152,476

Total assets

$

3,119,740

$

3,047,261

$

2,740,330

$

3,083,702

$

2,579,995

Interest-Bearing Liabilities

Interest-bearing demand deposits

$

697,789

0.14

%

$

642,832

0.16

%

$

534,733

0.30

%

$

670,462

0.15

%

$

496,880

0.38

%

Money market and savings deposits

1,015,358

0.14

%

1,030,348

0.16

%

900,812

0.67

%

1,022,812

0.15

%

852,325

0.85

%

Time deposits

208,338

0.56

%

210,719

0.66

%

201,147

1.30

%

209,521

0.61

%

200,117

1.44

%

Short-term borrowings

%

%

321

%

%

161

%

Long-term debt

58,996

3.66

%

25,677

4.55

%

58,747

5.87

%

42,429

3.93

%

58,751

5.94

%

Total interest-bearing liabilities

1,980,481

0.29

%

1,909,576

0.27

%

1,695,760

0.81

%

1,945,224

0.28

%

1,608,234

0.96

%

Noninterest-Bearing Liabilities and Stockholders' Equity

Noninterest-bearing deposits

755,773

731,680

692,500

743,793

628,404

Other noninterest-bearing liabilities

44,047

71,817

50,351

57,855

45,136

Stockholders’ equity

339,439

334,188

301,719

336,830

298,221

Total liabilities and stockholders’ equity

$

3,119,740

$

3,047,261

$

2,740,330

$

3,083,702

$

2,579,995

Net interest rate spread

2.79

%

3.03

%

2.87

%

2.91

%

2.92

%

Net interest margin, tax-

equivalent (2)

2.88

%

3.12

%

3.14

%

3.00

%

3.24

%

(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/20210728005993/en/

Contacts

Katie A. Lorenson, Chief Financial Officer

952.417.3725 (Office)