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Alerus Financial Corporation Reports Third Quarter 2021 Net Income of $13.1 Million

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GRAND FORKS, N.D., October 27, 2021--(BUSINESS WIRE)--Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $13.1 million for the third quarter of 2021, or $0.74 per diluted common share, compared to net income of $11.7 million, or $0.66 per diluted common share, for the second quarter of 2021, and net income of $17.7 million, or $0.99 per diluted common share, for the third quarter of 2020.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, "Our diversified business model continues to drive strong financial performance, as we ended the third quarter with a return on tangible common equity of over 18.0%. We generated $57.2 million of revenue through continued momentum in our retirement, wealth management and mortgage businesses, while net interest income and loan growth (excluding Paycheck Protection Program, or PPP, loans) showed incremental improvement with average total earning assets growing 10.6% year-over-year. Credit quality was better than expected with another net recovery quarter driving a negative provision for the quarter. Tangible book value grew over 7.0% from a year ago, which includes the intangibles recognized in the December 2020 acquisition of the Denver based, 24HourFlex/RPS. During the quarter, we converted 24HourFlex clients to Alerus and are pleased to see exceptional client retention and growth. We greatly appreciate all of our employees for their continued hard work, remarkable ongoing engagement and dedication to serving our clients, and their ability to help us produce strong returns for our shareholders."

Quarterly Highlights

  • Return on average total assets of 1.62%, compared to 1.50% for the second quarter of 2021

  • Return on average tangible common equity(1) of 18.13%, compared to 17.36% for the second quarter of 2021

  • Net interest margin (tax-equivalent)(1) was 2.78%, compared to 2.88% for the second quarter of 2021

  • Allowance for loan losses to total loans, excluding PPP loans was 1.89%, compared to 2.00% as of December 31, 2020

  • Efficiency ratio(1) of 71.49%, compared to 71.46% for the second quarter of 2021

  • Noninterest income for the second quarter of 2021 was 63.04% of total revenue, compared to 63.48% for the second quarter of 2021

  • Mortgage originations totaled $415.8 million, a 23.8% decrease from the second quarter of 2021

  • Investment securities increased $425.5 million, or 71.8%, since December 31, 2020

  • Loans held for sale decreased $61.5 million, or 50.3%, since December 31, 2020

  • Loans held for investment decreased $179.0 million, or 9.0%, since December 31, 2020. Excluding PPP loans, loans held for investment decreased $14.1 million, or 0.8%, since December 31, 2020

  • Deposits increased $141.1 million, or 5.5%, since December 31, 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

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

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

2021

2021

2020

2021

2020

Performance Ratios

Return on average total assets

1.62

%

1.50

%

2.42

%

1.71

%

1.71

%

Return on average common equity

14.68

%

13.82

%

22.31

%

15.61

%

15.17

%

Return on average tangible common equity (1)

18.13

%

17.36

%

26.67

%

19.44

%

18.70

%

Noninterest income as a % of revenue

63.04

%

63.48

%

67.53

%

63.87

%

64.58

%

Net interest margin (tax-equivalent) (1)

2.78

%

2.88

%

3.17

%

2.92

%

3.22

%

Efficiency ratio (1)

71.49

%

71.46

%

58.42

%

69.69

%

66.22

%

Net charge-offs/(recoveries) to average loans

(0.06)

%

%

(0.11)

%

0.01

%

0.15

%

Dividend payout ratio

21.62

%

24.24

%

15.15

%

20.80

%

23.20

%

Per Common Share

Earnings per common share - basic

$

0.75

$

0.67

$

1.01

$

2.29

$

1.98

Earnings per common share - diluted

$

0.74

$

0.66

$

0.99

$

2.26

$

1.94

Dividends declared per common share

$

0.16

$

0.16

$

0.15

$

0.47

$

0.45

Tangible book value per common share (1)

$

17.46

$

16.89

$

16.31

Average common shares outstanding - basic

17,205

17,194

17,121

17,182

17,101

Average common shares outstanding - diluted

17,499

17,497

17,453

17,488

17,435

Other Data

Retirement and benefit services assets under administration/management

$

36,202,553

$

36,964,961

$

30,470,645

Wealth management assets under administration/management

3,865,062

3,538,959

3,043,173

Mortgage originations

415,792

545,437

511,605

$

1,479,243

$

1,171,811

(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 third quarter of 2021 was $21.1 million, unchanged from the second quarter of 2021. Net interest income decreased $633 thousand, or 2.9%, from $21.8 million for the third quarter of 2020. During the third quarter of 2021, average interest earning assets increased $77.3 million, primarily due to increases of $90.1 million in interest-bearing deposits with banks and $68.6 million in investment securities, partially offset by decreases of $67.1 million in loans held for investment and $14.2 million in loans held for sale. The change in the balance sheet mix resulted in a 12 basis point decrease in the average earning asset yield. Net interest income earned from PPP loans during the third quarter of 2021 totaled $2.1 million, a decrease of $502 thousand, from the $2.6 million earned during the second quarter. The cost of interest-bearing liabilities had a modest decrease of 1 basis point from the second quarter of 2021.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 2.78% for the third quarter of 2021, a 10 basis point decrease from 2.88% for the second quarter of 2021, and a 39 basis point decrease from 3.17% in the third quarter of 2020. The linked quarter decrease was primarily due to lower yields on interest earning assets. Excluding PPP loans, net interest margin was 2.62% for the third quarter of 2021, a 13 basis point decrease from 2.75% for the second 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 58 basis point decrease in interest earning asset yields. The decrease in earning asset yield was offset by a 27 basis point decrease in the average rate paid on interest-bearing liabilities.

Noninterest Income

Noninterest income for the third quarter of 2021 was $36.0 million, a $708 thousand, or 1.9%, decrease from the second quarter of 2021. The decrease was primarily driven by a $1.2 million decrease in mortgage banking revenue, a result of a decrease of $129.6 million in mortgage originations. The decrease in mortgage banking revenue was partially offset by modest increases in both retirement and benefit services and wealth management revenue.

Noninterest income for the third quarter of 2021 decreased $9.2 million, or 20.4%, from $45.3 million in the third quarter of 2020. This decrease was primarily due to an $11.2 million decrease in mortgage banking revenue, a result of a $7.8 million decrease in the fair market value on the secondary market hedge, a decrease of $95.8 million in mortgage originations, and a 4 basis point decrease in the gain on sale margin. Partially offsetting this decrease was a $2.9 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), or RPS, and a $893 thousand increase in document restatement fees. In addition, wealth management revenue increased $809 thousand, or 18.0%, primarily driven by organic growth and market increases in assets under management.

Noninterest Expense

Noninterest expense for the third quarter of 2021 was $42.0 million, a decrease of $509 thousand, or 1.2%, compared to the second quarter of 2021. The decrease was primarily due to decreases of $1.0 million in compensation expense, $514 thousand in employee benefits and taxes, partially offset by increases of $374 thousand in business services, software and technology expense and $198 thousand in other noninterest expense. The decreases in compensation expense and employee taxes and benefits were primarily attributable to the $129.6 million decrease in mortgage originations from the previous quarter, partially offset by other personnel related accruals. The increase in business services, software and technology expense is primarily a result of non-recurring expenses related to investments in automated processing and integration expenses associated with the acquisition of RPS. The increase in other noninterest expense is primarily attributable to a $234 thousand increase in the provision for unfunded commitments. The increase in the provision for unfunded commitments was a result of lower credit line utilization. Unfunded commitments increased 2.0% from the second quarter of 2021.

Noninterest expense for the third quarter of 2021 increased $1.8 million, or 4.5%, from $40.2 million in the third quarter of 2020. The increase was primarily attributable to increases of business services, software and technology expense as well as compensation expense, partially offset by decreased occupancy and equipment expense. Business services, software and technology expense increased primarily as a result of our increased investment in processing innovations as previously stated. Additionally, compensation expense increased as a result of the acquisition of RPS, as the number of full time employees increased from 790 employees in the third quarter of 2020 to 825 employees in the third quarter of 2021. Occupancy and equipment expense decreased due to the closure of certain offices in 2021 due to our transition to a hybrid work environment.

Financial Condition

Total assets were $3.2 billion as of September 30, 2021, an increase of $161.4 million, or 5.4%, from December 31, 2020. The overall increase in total assets included an increase of $425.5 million in investment securities, partially offset by a $179.0 million decrease in loans held for investment and a $61.5 million decrease in loans held for sale. The decrease in loans held for investment was primarily due to PPP loan balances decreasing by $164.9 million from December 31, 2020.

Loans

Total loans were $1.80 billion as of September 30, 2021, a decrease of $179.0 million, or 9.0%, from December 31, 2020. The decrease was primarily due to a $185.3 million decrease in the commercial and industrial loan portfolio, primarily attributable to a $164.9 million decrease in PPP loans. Excluding PPP loans, the commercial loan portfolio decreased by $16.5 million, or 1.6%, from December 31, 2020, primarily as a result of lower credit line utilization. The outstanding balances of lines of credit decreased $2.0 million, or 0.4%, from December 31, 2020. The consumer loan portfolio increased $2.5 million from December 31, 2020, due to a net increase of $24.8 million in residential real estate mortgages, which was partially offset by a decrease in other consumer loans as a result of discontinuing our indirect auto lending.

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)

2021

2021

2021

2020

2020

Commercial

Commercial and industrial (1)

$

506,599

$

572,734

$

678,029

$

691,858

$

789,036

Real estate construction

37,751

36,549

40,473

44,451

33,169

Commercial real estate

573,518

567,987

569,451

563,007

535,216

Total commercial

1,117,868

1,177,270

1,287,953

1,299,316

1,357,421

Consumer

Residential real estate first mortgage

501,339

470,822

454,958

463,370

469,050

Residential real estate junior lien

130,243

130,180

130,299

143,416

152,487

Other revolving and installment

50,936

57,040

64,135

73,273

79,461

Total consumer

682,518

658,042

649,392

680,059

700,998

Total loans

$

1,800,386

$

1,835,312

$

1,937,345

$

1,979,375

$

2,058,419

_________________

(1)

Includes PPP loans of $103.5 million at September 30, 2021, $165.0 million at June 30, 2021, $256.8 million at March 31, 2021, $268.4 million at December 31, 2020 and $348.9 million at September 30, 2020.

Deposits

Total deposits were $2.71 billion as of September 30, 2021, an increase of $141.1 million, or 5.5%, from December 31, 2020. Interest-bearing deposits increased $98.7 million, while noninterest-bearing deposits increased $42.3 million. Key drivers of the increase included ongoing higher depositor balances due to the uncertain economic environment, government stimulus programs and volatile financial markets. Synergistic deposits decreased $19.6 million to $576.0 million as retirement participants transitioned balances back into the markets. Excluding synergistic deposits, commercial transaction deposits increased $112.5 million, or 10.2%, while consumer transaction deposits increased, $31.2 million, or 4.8%, since December 31, 2020. Noninterest-bearing deposits as a percentage of total deposits were 29.4% as of September 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:

September 30,

June 30,

March 31,

December 31,

September 30,

(dollars in thousands)

2021

2021

2021

2020

2020

Noninterest-bearing demand

$

797,062

$

758,820

$

775,434

$

754,716

$

693,450

Interest-bearing

Interest-bearing demand

673,916

736,043

674,466

618,900

590,366

Savings accounts

92,632

89,437

87,492

79,902

78,659

Money market savings

924,678

920,831

967,273

909,137

892,473

Time deposits

224,800

205,809

212,908

209,338

207,422

Total interest-bearing

1,916,026

1,952,120

1,942,139

1,817,277

1,768,920

Total deposits

$

2,713,088

$

2,710,940

$

2,717,573

$

2,571,993

$

2,462,370

Asset Quality

Total nonperforming assets were $7.1 million as of September 30, 2021, an increase of $1.9 million, or 37.9%, from December 31, 2020. As of September 30, 2021, the allowance for loan losses was $32.1 million, or 1.78% 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 1.89% at September 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

September 30,

June 30,

March 31,

December 31,

September 30,

(dollars in thousands)

2021

2021

2021

2020

2020

Nonaccrual loans

$

6,229

$

6,960

$

4,756

$

5,050

$

4,795

Accruing loans 90+ days past due

30

Total nonperforming loans

6,229

6,960

4,756

5,080

4,795

OREO and repossessed assets

862

858

139

63

10

Total nonperforming assets

$

7,091

$

7,818

$

4,895

$

5,143

$

4,805

Net charge-offs/(recoveries)

(302)

(6)

488

(1,509)

(581)

Net charge-offs/(recoveries) to average loans

(0.06)

%

%

0.10

%

(0.30)

%

(0.11)

%

Nonperforming loans to total loans

0.35

%

0.38

%

0.25

%

0.26

%

0.23

%

Nonperforming assets to total assets

0.22

%

0.25

%

0.16

%

0.17

%

0.17

%

Allowance for loan losses to total loans

1.78

%

1.84

%

1.74

%

1.73

%

1.52

%

Allowance for loan losses to nonperforming loans

515

%

485

%

710

%

674

%

654

%

For the third quarter of 2021, we had net recoveries of $302 thousand compared to net recoveries of $6 thousand for the second quarter of 2021 and $581 thousand of net recoveries for the third quarter of 2020.

There was a $2.0 million reversal of provision for loan losses recorded for the third quarter of 2021, a $2.0 million decrease from the second quarter of 2021, and a decrease of $5.5 million from the third quarter of 2020. The negative provision in the third quarter of 2021 was driven by net recoveries in four of the last five quarters and continuous improvements of credit quality indicators and economic conditions.

The ratio of nonperforming loans to total loans at September 30, 2021 was 0.35%. Excluding PPP loans, the ratio of nonperforming loans to total loans was 0.37% at September 30, 2021. Nonperforming assets as a percentage of total assets was 0.22% at September 30, 2021. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.23% at September 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 September 30, 2021, we had entered into principal and interest deferrals on 587 loans, representing $154.5 million in total outstanding principal balances. Of those loans, 8 loans with a total outstanding principal balance of $3.4 million have been granted additional deferrals, 2 loans with a total outstanding principal balance of $69 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 $353.2 million as of September 30, 2021, an increase of $23.0 million, or 7.0%, from December 31, 2020. Tangible book value per common share, a non-GAAP financial measure, increased to $17.46 as of September 30, 2021, from $16.00 as of December 31, 2020. Tangible common equity to tangible assets, a non-GAAP financial measure, increased to 9.62% as of September 30, 2021, from 9.27% as of December 31, 2020.

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

September 30,

December 31,

September 30,

2021

2020

2020

Capital Ratios(1)

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