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Alerus Financial Corporation Reports Third Quarter 2020 Net Income of $17.7 Million

·26 min read

Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $17.7 million for the third quarter of 2020, or $0.99 per diluted common share, compared to net income of $11.5 million, or $0.65 per diluted common share, for the second quarter of 2020, and net income of $7.1 million, or $0.48 per diluted common share, for the third quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, "We are proud to report record quarterly net income of $17.7 million. Despite the uncertain economic environment and ongoing pandemic, our diversified business model demonstrates its value to stockholders as we delivered incredible financial performance throughout 2020. Our "One Alerus" approach to serving clients holistically through advisors and digitally through technology resulted in record levels of mortgage originations and expansions of relationships across our lines of business.

We believe we continue to be agile in our response to the novel coronavirus, or COVID-19 pandemic, by focusing on the health and well-being of our team members and communities, and helping clients during a difficult economic environment. The strength and stability of our balance sheet uniquely positioned our Company to perform well in challenging economic environments. We have a diversified loan portfolio, strong credit quality metrics, and robust levels of loan loss reserves at 1.83% of total loans, excluding Paycheck Protection Program, or PPP, loans. These balance sheet attributes, supported by a diversified business model which generates high levels of revenue despite the low rate environment is proving to be resilient in challenging and uncertain times. These fundamentals paired with the dedication of our team and technology investments are paving our path forward."

Quarterly Highlights

  • Return on average assets of 2.42%, compared to 1.68% for the second quarter of 2020

  • Return on average tangible common equity(1) of 26.67%, compared to 18.88% for the second quarter of 2020

  • Net interest margin (tax-equivalent)(1) was 3.17%, compared to 3.14% for the second quarter of 2020

  • Allowance for loan losses to total loans, excluding PPP loans, was 1.83%, compared to 1.62% as of June 30, 2020

  • Efficiency ratio(1) of 58.42%, compared to 66.31% for the second quarter of 2020

  • Noninterest income as a percentage of total revenue was 67.53%, compared to 65.55% for the second quarter of 2020

  • Mortgage originations totaled $511.6 million, an 18.5% increase from the second quarter of 2020

  • Loans held for investment increased $337.1 million, or 19.6%, from the fourth quarter of 2019

  • Deposits increased $491.1 million, or 24.9%, 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

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

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

2020

2020

2019

2020

2019

Performance Ratios

Return on average total assets

2.42

%

1.68

%

1.29

%

1.71

%

1.34

%

Return on average common equity

22.31

%

15.30

%

12.42

%

15.17

%

13.74

%

Return on average tangible common equity (1)

26.67

%

18.88

%

17.01

%

18.70

%

19.24

%

Noninterest income as a % of revenue

67.53

%

65.55

%

61.29

%

64.58

%

60.14

%

Net interest margin (tax-equivalent) (1)

3.17

%

3.14

%

3.69

%

3.22

%

3.72

%

Efficiency ratio (1)

58.42

%

66.31

%

75.17

%

66.22

%

73.06

%

Net charge-offs/(recoveries) to average loans

(0.11

)

%

0.66

%

(0.06

)

%

0.15

%

0.37

%

Dividend payout ratio

15.15

%

23.08

%

29.17

%

23.20

%

28.19

%

Per Common Share

Earnings per common share - basic (2)

$

1.01

$

0.66

$

0.49

$

1.98

$

1.53

Earnings per common share - diluted (2)

$

0.99

$

0.65

$

0.48

$

1.94

$

1.49

Dividends declared per common share

$

0.15

$

0.15

$

0.14

$

0.45

$

0.42

Tangible book value per common share (1)

$

16.31

$

15.30

$

13.77

Average common shares outstanding - basic

17,121

17,111

14,274

17,101

13,957

Average common shares outstanding - diluted

17,453

17,445

14,626

17,435

14,317

Other Data

Retirement and benefit services assets under administration/management

$

30,470,645

$

30,093,095

$

30,661,226

Wealth management assets under administration/management

3,043,173

2,957,213

2,765,459

Mortgage originations

511,605

431,638

313,527

$

1,171,811

$

685,178

(1)

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

(2)

Earnings per share calculated using the two-class method beginning in the third quarter of 2019.

Results of Operations

Net Interest Income

Net interest income for the third quarter of 2020 was $21.8 million, an increase of $1.7 million, or 8.3%, from $20.1 million for the second quarter of 2020. The increase was primarily driven by a decrease of $875 thousand in interest expense on deposits, an increase of $590 thousand in interest income from loans, and a $207 thousand increase in interest income from investment securities. The decrease in interest expense on deposits was primarily a result of a 25 basis point decrease in the cost of interest-bearing deposits, partially offset by a $119.6 million increase in average interest-bearing deposit balances. The increase in interest income from loans was primarily driven by a $74.3 million increase in average balance of PPP loans offset by a 4 basis point decrease in average yield. Interest and fees recognized on PPP loans totaled $3.2 million in the third quarter, an increase of $1.1 million from the second quarter. The increase in interest income from investment securities was primarily a result of a $74.5 million increase in average balances partially offset by a 21 basis point decrease in the average yield.

Compared to the third quarter of 2019, net interest income for the third quarter of 2020 increased $3.1 million, or 16.5%, primarily due to a $2.4 million decrease in interest expense and a $664 thousand increase in interest income. The decrease in interest expense was primarily due to an 84 basis point decrease in the average rate paid on interest-bearing liabilities. The increase in interest income was primarily due to a $674 thousand increase in interest income from investment securities driven by a $186.1 million increase in average balances partially offset by a 39 basis point decrease in the average yield.

Net Interest Margin (Tax-Equivalent)

Net interest margin (tax-equivalent), a non-GAAP financial measure, increased to 3.17% for the third quarter of 2020, compared with 3.14% for the second quarter of 2020. The increase in net interest margin was primarily due to a 26 basis point decrease in the average rate on total interest-bearing liabilities partially offset by a 14 basis point decrease in the average earning asset yield. The decrease in the average rate on total interest-bearing liabilities was primarily due to a 35 basis point decrease in the average rate on money market and savings deposits and a 32 basis point decrease in the average rate on time deposits. The decrease in average earning asset yield was due to the continued low interest rate environment and a change in balance sheet mix.

Compared to the third quarter of 2019, net interest margin (tax-equivalent) for the third quarter of 2020 decreased 52 basis points from 3.69%. This decrease was the combined result of sustained lower interest rates and balance sheet mix. The average yield on interest earning assets decreased 112 basis points on an average balance increase of $727.6 million, or 36.1%. The average rate paid on interest-bearing liabilities decreased 84 basis points on an average balance increase of $407.9 million, or 29.0%.

Noninterest Income

Noninterest income for the third quarter of 2020 was $45.3 million, a $7.0 million, or 18.4%, increase from the second quarter of 2020. The increase was primarily driven by a $4.7 million increase in mortgage banking revenue, a $1.4 million increase in retirement and benefit services revenue, and a $374 thousand increase in wealth management revenue. The increase in mortgage banking revenue was primarily due to an $80.0 million increase in mortgage originations along with a 38 basis point increase in the gain on sale margin. The increase in retirement and benefit services revenue was primarily due to a $712 thousand increase in asset based revenue as a result of an increase in the average balance of assets under administration/management. In addition, the second quarter of 2020 included a downward adjustment to revenue sharing of $660 thousand.

Noninterest income for the third quarter of 2020 increased $15.7 million, or 53.0%, from $29.6 million in the third quarter of 2019. Mortgage banking revenue increased $14.1 million as mortgage originations increased from $313.5 million in the third quarter of 2019 to $511.6 million in the third quarter of 2020, and the gain on sale margin increased 75 basis points. In addition, the unrealized gain from the change in fair value of secondary market derivatives increased $5.2 million. Gains on investment securities were $1.4 million during the third quarter of 2020, compared to $48 thousand during the third quarter of 2019.

Noninterest Expense

Noninterest expense for the third quarter of 2020 was $40.2 million, an increase of $480 thousand, or 1.2%, compared to the second quarter of 2020. The increase was due to increases of $1.5 million in compensation expense, $380 thousand in marketing and business development expense and $286 thousand in employee taxes and benefits, partially offset by decreases of $968 thousand in other noninterest expense and $428 thousand in supplies and postage expenses. The increase in compensation expense was primarily driven by an increase in mortgage originations. Marketing and business development expense increased due to seasonally higher advertising expenses. Other noninterest expense decreased primarily due to a $990 thousand decrease in the provision for unused commitments. Supplies and postage expenses decreased due to the transition from paper statements to E-statements for the retirement and benefit services segment.

Compared to the third quarter of 2019, noninterest expense for the third quarter of 2020 increased $2.9 million, or 7.7%, from $37.3 million. The increase was attributable to increases of $2.7 million in compensation expense, $480 thousand in mortgage and lending expense, and $433 thousand in employee taxes and benefits, partially offset by decreases of $409 thousand in travel expense and $384 thousand in supplies and postage expense. The increases in compensation expense and mortgage and lending expense were primarily the result of higher mortgage originations.

Financial Condition

Total assets were $2.9 billion as of September 30, 2020, an increase of $541.9 million, or 23.0%, from December 31, 2019. The increase in total assets included increases of $337.1 million in loans, $185.1 million in available-for-sale investment securities, $64.5 million in loans held for sale, and $15.3 million in other assets.

Loans

Total loans were $2.06 billion as of September 30, 2020, an increase of $337.1 million, or 19.6%, from December 31, 2019. The increase was primarily due to increases of $309.9 million in commercial and industrial loans and $40.5 million in our commercial real estate loan portfolio, partially offset by a $20.1 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $348.9 million in net PPP loans, offset by a 7.64% decrease in operating line utilization, or a $64.6 million decrease in funded balances.

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

September 30,

June 30,

March 31,

December 31,

September 30,

(dollars in thousands)

2020

2020

2020

2019

2019

Commercial

Commercial and industrial (1)

$

789,036

$

794,204

$

502,637

$

479,144

$

485,183

Real estate construction

33,169

31,344

25,487

26,378

21,674

Commercial real estate

535,216

519,104

522,106

494,703

444,600

Total commercial

1,357,421

1,344,652

1,050,230

1,000,225

951,457

Consumer

Residential real estate first mortgage

469,050

456,737

457,895

457,155

459,763

Residential real estate junior lien

152,487

154,351

170,538

177,373

182,516

Other revolving and installment

79,461

78,457

79,614

86,526

92,351

Total consumer

700,998

689,545

708,047

721,054

734,630

Total loans

$

2,058,419

$

2,034,197

$

1,758,277

$

1,721,279

$

1,686,087

(1)

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

Deposits

Total deposits were $2.46 billion as of September 30, 2020, an increase of $491.1 million, or 24.9%, from December 31, 2019. Interest-bearing deposits increased $375.3 million while non-interest bearing deposits increased $115.7 million. Key drivers of the increase in deposits included deposits from new and existing PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and financial markets. The increase in interest-bearing deposits included a $128.8 million increase in synergistic deposits from our retirement and benefit services and wealth management segments. In addition, health savings account deposits were $131.5 million as of September 30, 2020, an increase of $11.8 million, or 9.9%, from December 31, 2019. Commercial transaction deposits increased $292.6 million, or 35.9%, while consumer transaction deposits increased $43.3 million, or 8.1%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 28.2% and 29.3% as of September 30, 2020 and December 31, 2019, respectively.

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

September 30,

June 30,

March 31,

December 31,

September 30,

(dollars in thousands)

2020

2020

2020

2019

2019

Noninterest-bearing demand

$

693,450

$

700,892

$

608,559

$

577,704

$

537,951

Interest-bearing

Interest-bearing demand

590,366

579,840

477,752

458,689

424,249

Savings accounts

78,659

75,973

60,181

55,777

55,513

Money market savings

892,473

892,717

773,652

683,064

622,647

Time deposits

207,422

203,731

201,370

196,082

192,753

Total interest-bearing

1,768,920

1,752,261

1,512,955

1,393,612

1,295,162

Total deposits

$

2,462,370

$

2,453,153

$

2,121,514

$

1,971,316

$

1,833,113

Asset Quality

Total nonperforming assets were $5.0 million as of September 30, 2020, a decrease of $3.0 million, or 38.7%, from December 31, 2019. As of September 30, 2020, the allowance for loan losses was $31.3 million, or 1.52% 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 44 basis points to 1.83% as of September 30, 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

September 30,

June 30,

March 31,

December 31,

September 30,

(dollars in thousands)

2020

2020

2020

2019

2019

Nonaccrual loans

$

4,795

$

5,328

$

6,959

$

7,379

$

5,107

Accruing loans 90+ days past due

11

448

45

Total nonperforming loans

4,795

5,328

6,970

7,827

5,152

OREO and repossessed assets

10

26

209

8

84

Total nonperforming assets

$

4,805

$

5,354

$

7,179

$

7,835

$

5,236

Net charge-offs/(recoveries)

(581

)

3,264

(595

)

857

(240

)

Net charge-offs/(recoveries) to average loans

(0.11

)

%

0.66

%

(0.14

)

%

0.20

%

(0.06

)

%

Nonperforming loans to total loans

0.23

%

0.26

%

0.40

%

0.45

%

0.31

%

Nonperforming assets to total assets

0.17

%

0.19

%

0.29

%

0.33

%

0.23

%

Allowance for loan losses to total loans

1.52

%

1.34

%

1.54

%

1.39

%

1.36

%

Allowance for loan losses to nonperforming loans

654

%

512

%

388

%

306

%

446

%

For the third quarter of 2020, we had net recoveries of $581 thousand compared to net charge-offs of $3.3 million for the second quarter of 2020 and $240 thousand of net recoveries for the third quarter of 2019.

The provision for loan losses for the third quarter of 2020 was $3.5 million, which was the same amount as the second quarter of 2020 and an increase of $2.0 million from the third quarter of 2019. The increase in provision expense was due to allocations of reserves for the economic uncertainties related to COVID-19, which increased the allowance for loan losses balance by $7.4 million to $31.3 million at September 30, 2020, a 31.0% increase from December 31, 2019.

The ratio of nonperforming loans to total loans at September 30, 2020 was 0.23%, and if PPP loans were excluded, this ratio would have been 0.28%. Nonperforming assets as a percentage of total assets was 0.17% at September 30, 2020. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.19% at September 30, 2020.

As of September 30, 2020, we had entered into principal and interest deferrals of 552 loans representing $151.4 million in principal balances, since the beginning of the pandemic. Of those loans, 27 loans with a total outstanding principal balance of $16.9 million, have been granted second deferrals, 56 loans with a total outstanding principal balance of $12.0 million remain on the first deferral and the remaining loans have been returned to a 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 $322.0 million as of September 30, 2020, an increase of $36.3 million from December 31, 2019. The tangible book value per common share increased to $16.31 as of September 30, 2020, from $14.08 as of December 31, 2019. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.78% as of September 30, 2020, from 10.38% as of December 31, 2019. Tangible common equity to tangible assets would have been 11.14% as of September 30, 2020, if PPP loans were excluded.

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

September 30,

December 31,

September 30,

2020

2019

2019

Capital Ratios(1)

Alerus Financial Corporation

Common equity tier 1 capital to risk weighted assets

13.08

%

12.48

%

12.38

%

Tier 1 capital to risk weighted assets

13.48

%

12.90

%

12.81

%

Total capital to risk weighted assets

17.13

%

16.73

%

16.67

%

Tier 1 capital to average assets

9.76

%

11.05

%

11.33

%

Tangible common equity / tangible assets (2)

9.78

%

10.38

%

10.76

%

Alerus Financial, N.A.

Common equity tier 1 capital to risk weighted assets

12.47

%

11.91

%

11.84

%

Tier 1 capital to risk weighted assets

12.47

%

11.91

%

11.84

%

Total capital to risk weighted assets

13.72

%

13.15

%

13.06

%

Tier 1 capital to average assets

9.03

%

10.20

%

10.47

%

(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, October 29, 2020, 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 and Albert Lea, MN, East Lansing and Troy, MI, and Bedford, NH.

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)

September 30,

December 31,

2020

2019

Assets

(Unaudited)

(Audited)

Cash and cash equivalents

$

95,751

$

144,006

Investment securities, at fair value

Available-for-sale

495,414

310,350

Equity

2,808

Loans held for sale

111,311

46,846

Loans

2,058,419

1,721,279

Allowance for loan losses

(31,337

)

(23,924

)

Net loans

2,027,082

1,697,355

Land, premises and equipment, net

20,493

20,629

Operating lease right-of-use assets

8,168

8,343

Accrued interest receivable

9,199

7,551

Bank-owned life insurance

32,161

31,566

Goodwill

27,329

27,329

Other intangible assets

15,421

18,391

Servicing rights

2,579

3,845

Deferred income taxes, net

8,628

7,891

Other assets

45,273

29,968

Total assets

$

2,898,809

$

2,356,878

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing

$

693,450

$

577,704

Interest-bearing

1,768,920

1,393,612

Total deposits

2,462,370

1,971,316

Long-term debt

58,745

58,769

Operating lease liabilities

8,671

8,864

Accrued expenses and other liabilities

47,020

32,201

Total liabilities

2,576,806

2,071,150

Stockholders’ equity

Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding

Common stock, $1 par value, 30,000,000 shares authorized: 17,121,863 and 17,049,551 issued and outstanding

17,122

17,050

Additional paid-in capital

89,757

88,650

Retained earnings

204,581

178,092

Accumulated other comprehensive income (loss)

10,543

1,936

Total stockholders’ equity

322,003

285,728

Total liabilities and stockholders’ equity

$

2,898,809

$

2,356,878

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

2020

2020

2019

2020

2019

Interest Income

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Loans, including fees

$

21,962

$

21,372

$

21,886

$

63,876

$

65,171

Investment securities

Taxable

1,973

1,765

1,374

5,497

4,021

Exempt from federal income taxes

238

239

163

712

618

Other

116

130

202

816

603

Total interest income

24,289

23,506

23,625

70,901

70,413

Interest Expense

Deposits

1,683

2,558

3,506

7,633

9,802

Short-term borrowings

539

1,805

Long-term debt

841

857

899

2,575

2,714

Total interest expense

2,524

3,415

4,944

10,208

14,321

Net interest income

21,765

20,091

18,681

60,693

56,092

Provision for loan losses

3,500

3,500

1,498

9,500

5,515

Net interest income after provision for loan losses

18,265

16,591

17,183

51,193

50,577

Noninterest Income

Retirement and benefit services

15,104

13,710

15,307

45,034

46,142

Wealth management

4,486

4,112

3,896

12,644

11,385

Mortgage banking

22,269

17,546

8,135

44,860

19,739

Service charges on deposit accounts

355

297

447

1,075

1,321

Net gains (losses) on investment securities

1,428

1,294

48

2,722

357

Other

1,614

1,271

1,747

4,340

5,694

Total noninterest income

45,256

38,230

29,580

110,675

84,638

Noninterest Expense

Compensation

22,740

21,213

20,041

62,684

54,997

Employee taxes and benefits

5,033

4,747

4,600

15,088

15,188

Occupancy and equipment expense

2,768

2,869

2,700

8,392

8,086

Business services, software and technology expense

4,420

4,520

4,224

13,384

12,044

Intangible amortization expense

990

991

990

2,971

3,091

Professional fees and assessments

1,031

1,160

1,051

3,231

3,146

Marketing and business development

929

549

890

2,088

2,024

Supplies and postage

247

675

631

1,625

2,027

Travel

26

51

435

338

1,335

Mortgage and lending expenses

1,231

1,192

751

3,466

1,966

Other

799

1,767

1,014

3,407

2,198

Total noninterest expense

40,214

39,734

37,327

116,674

106,102

Income before income taxes

23,307

15,087

9,436

45,194

29,113

Income tax expense

5,648

3,613

2,332

10,698

7,225

Net income

$

17,659

$

11,474

$

7,104

$

34,496

$

21,888

Per Common Share Data

Earnings per common share

$

1.01

$

0.66

$

0.49

$

1.98

$

1.53

Diluted earnings per common share

$

0.99

$

0.65

$

0.48

$

1.94

$

1.49

Dividends declared per common share

$

0.15

$

0.15

$

0.14

$

0.45

$

0.42

Average common shares outstanding

17,121

17,111

14,274

17,101

13,957

Diluted average common shares outstanding

17,453

17,445

14,626

17,435

14,317

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)

September 30,

June 30,

December 31,

September 30,

2020

2020

2019

2019

Tangible Common Equity to Tangible Assets

Total common stockholders’ equity

$

322,003

$

305,732

$

285,728

$

281,403

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible common equity (a)

279,253

261,992

240,008

234,692

Total assets

2,898,809

2,875,457

2,356,878

2,228,311

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible assets (b)

2,856,059

2,831,717

2,311,158

2,181,600

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

9.78

%

9.25

%

10.38

%

10.76

%

Tangible Book Value Per Common Share

Total common stockholders’ equity

$

322,003

$

305,732

$

285,728

$

281,403

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible common equity (c)

279,253

261,992

240,008

234,692

Total common shares issued and outstanding (d)

17,122

17,120

17,050

17,049

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

$

16.31

$

15.30

$

14.08

$

13.77

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

2020

2020

2019

2020

2019

Return on Average Tangible Common Equity

Net income

$

17,659

$

11,474

$

7,104

$

34,496

$

21,888

Add: Intangible amortization expense (net of tax)

782

783

782

2,347

2,442

Net income, excluding intangible amortization (e)

18,441

12,257

7,886

36,843

24,330

Average total equity

314,921

301,719

226,931

303,825

212,911

Less: Average goodwill

27,329

27,329

27,329

27,329

27,329

Less: Average other intangible assets (net of tax)

12,565

13,345

15,697

13,343

16,502

Average tangible common equity (f)

275,027

261,045

183,905

263,153

169,080

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

26.67

%

18.88

%

17.01

%

18.70

%

19.24

%

Net Interest Margin (tax-equivalent)

Net interest income

$

21,765

$

20,091

$

18,681

$

60,693

$

56,092

Tax-equivalent adjustment

116

109

81

325

257

Tax-equivalent net interest income (g)

21,881

20,200

18,762

61,018

56,349

Average earning assets (h)

2,744,758

2,584,037

2,017,198

2,534,038

2,024,814

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

3.17

%

3.14

%

3.69

%

3.22

%

3.72

%

Efficiency Ratio

Noninterest expense

$

40,214

$

39,734

$

37,327

$

116,674

$

106,102

Less: Intangible amortization expense

990

991

990

2,971

3,091

Adjusted noninterest expense (i)

39,224

38,743

36,337

113,703

103,011

Net interest income

21,765

20,091

18,681

60,693

56,092

Noninterest income

45,256

38,230

29,580

110,675

84,638

Tax-equivalent adjustment

116

109

81

325

257

Total tax-equivalent revenue (j)

67,137

58,430

48,342

171,693

140,987

Efficiency ratio (i)/(j)

58.42

%

66.31

%

75.17

%

66.22

%

73.06

%

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

Three months ended

Nine months ended

September 30, 2020

June 30, 2020

September 30, 2019

September 30, 2020

September 30, 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

$

169,770

0.12

%

$

153,197

0.16

%

$

12,998

2.53

%

$

162,134

0.51

%

$

12,910

2.39

%

Investment securities (1)

443,705

2.04

%

369,247

2.25

%

257,561

2.43

%

383,591

2.23

%

255,903

2.51

%

Loans held for sale

90,634

2.44

%

69,606

2.69

%

45,794

3.11

%

64,555

2.64

%

30,734

3.24

%

Loans

Commercial:

Commercial and industrial

782,853

4.34

%

739,816

4.12

%

494,081

5.48

%

667,742

4.48

%

509,806

5.50

%

Real estate construction

32,747

4.47

%

31,660

4.48

%

25,137

5.56

%

30,385

4.64

%

23,532

5.54

%

Commercial real estate

525,514

4.02

%

513,497

4.31

%

439,751

5.29

%

515,761

4.31

%

444,964

5.04

%

Total commercial

1,341,114

4.22

%

1,284,973

4.21

%

958,969

5.40

%

1,213,888

4.41

%

978,302

5.29

%

Consumer

Residential real estate first mortgage

460,995

3.96

%

459,789

4.09

%

454,971

4.18

%

460,505

4.05

%

455,898

4.25

%

Residential real estate junior lien

153,326

4.54

%

163,345

4.79

%

184,124

5.63

%

163,332

4.84

%

186,744

5.75

%

Other revolving and installment

79,343

4.50

%

77,921

4.56

%

93,478

4.74

%

80,169

4.58

%

94,685

4.64

%

Total consumer

693,664

4.15

%

701,055

4.31

%

732,573

4.61

%

704,006

4.30

%

737,327

4.68

%

Total loans (1)

2,034,778

4.20

%

1,986,028

4.24

%

1,691,542

5.06

%

1,917,894

4.37

%

1,715,629

5.03

%

Federal Reserve/FHLB stock

5,871

4.40

%

5,959

4.59

%

9,303

5.07

%

5,864

4.58

%

9,638

5.16

%

Total interest earning assets

2,744,758

3.54

%

2,584,037

3.68

%

2,017,198

4.66

%

2,534,038

3.75

%

2,024,814

4.67

%

Noninterest earning assets

163,386

156,293

159,664

156,144

161,054

Total assets

$

2,908,144

$

2,740,330

$

2,176,862

$

2,690,182

$

2,185,868

Interest-Bearing Liabilities

Interest-bearing demand deposits

$

589,633

0.27

%

$

534,733

0.30

%

$

424,896

0.49

%

$

528,024

0.34

%

$

423,181

0.45

%

Money market and savings deposits

961,669

0.32

%

900,812

0.67

%

649,190

1.32

%

889,039

0.66

%

675,921

1.23

%

Time deposits

204,969

0.98

%

201,147

1.30

%

187,023

1.74

%

201,747

1.29

%

183,686

1.58

%

Short-term borrowings

%

321

%

87,201

2.46

%

107

%

95,489

2.53

%

Long-term debt

58,739

5.70

%

58,747

5.87

%

58,776

6.07

%

58,747

5.85

%

58,798

6.17

%

Total interest-bearing liabilities

1,815,010

0.55

%

1,695,760

0.81

%

1,407,086

1.39

%

1,677,664

0.81

%

1,437,075

1.33

%

Noninterest-Bearing Liabilities and Stockholders' Equity

Noninterest-bearing deposits

698,594

692,500

502,108

651,971

496,822

Other noninterest-bearing liabilities

79,619

50,351

40,737

56,722

39,060

Stockholders’ equity

314,921

301,719

226,931

303,825

212,911

Total liabilities and stockholders’ equity

$

2,908,144

$

2,740,330

$

2,176,862

$

2,690,182

$

2,185,868

Net interest rate spread

2.99

%

2.87

%

3.27

%

2.94

%

3.34

%

Net interest margin, tax-equivalent (2)

3.17

%

3.14

%

3.69

%

3.22

%

3.72

%

(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/20201028006234/en/

Contacts

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