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Section 1: 8-K (8-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): October 28, 2020

Alerus Financial Corporation

(Exact Name of Registrant as Specified in Charter)

Delaware

001-39036

45-0375407

(State or Other Jurisdiction of Incorporation)

(Commission File Number)

(IRS Employer Identification No.)

401 Demers Avenue

Grand Forks, North Dakota 58201

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (701) 795-3200

N/A

(Former Name or Former Address, if Changed Since Last Report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading symbol

    

Name of each exchange on which registered

Common Stock, $1.00 par value per share

ALRS

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b–2 of the Securities Exchange Act of 1934 (§ 240.12b–2 of this chapter).

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 


Item 2.02.     Results of Operations and Financial Condition.

On October 28, 2020, Alerus Financial Corporation (the “Company”) issued a press release announcing its financial results for the three and nine months ended September 30, 2020. A copy of the press release is attached as Exhibit 99.1 to this Form 8-K and is incorporated herein by reference.

The information in Item 2.02 of this Current Report on Form 8-K, and the related Exhibit 99.1, attached hereto is being “furnished” and will not, except to the extent required by applicable law or regulation, be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor will any of such information or exhibits be deemed incorporated by reference to any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as may be expressly set forth by specific reference in such filing.

Item 7.01.     Regulation FD Disclosure.

On October 28, 2020, the Company posted a presentation to the Company’s investor relations website, located at investors.alerus.com. The presentation is also attached hereto as Exhibit 99.2.

The information in Item 7.01 of this Current Report on Form 8-K, and the related Exhibit 99.2, attached hereto is being “furnished” and will not, except to the extent required by applicable law or regulation, be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor will any of such information or exhibits be deemed incorporated by reference to any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as may be expressly set forth by specific reference in such filing.

Item 9.01.     Financial Statements and Exhibits.

(d)  Exhibits

Exhibit No.

    

Description

99.1

Press Release of Alerus Financial Corporation, dated October 28, 2020

99.2

Investor Presentation


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: October 28, 2020

Alerus Financial Corporation

By:

/s/ Randy L. Newman

Name:

Randy L. Newman

Title:

Chairman, Chief Executive Officer and President


(Back To Top)

Section 2: EX-99.1 (EX-99.1)

Exhibit 99.1

Graphic

FOR RELEASE (10.28.2020)

Katie A. Lorenson, Chief Financial Officer

952.417.3725 (Office)

ALERUS FINANCIAL CORPORATION REPORTS

THIRD QUARTER 2020 NET INCOME OF $17.7 MILLION

GRAND FORKS, N.D. (October 28, 2020) – 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

2


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.

3


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.

4


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.

5


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”,

6


“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.

7


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

8


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

9


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

%  

10


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