Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $15.2 million for the first quarter of 2021, or $0.86 per diluted common share, compared to net income of $10.2 million, or $0.57 per diluted common share, for the fourth quarter of 2020, and net income of $5.4 million, or $0.30 per diluted common share, for the first quarter of 2020.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, “We are pleased to report our record performance of 2020 carried through into the first quarter of 2021. We believe Alerus continues to be well positioned for growth with our diversified business model, large and growing client base, and holistic, advisor-focused approach to serving clients. We started 2021 with several hiring initiatives and were pleased to have two high performing mortgage bankers join our Twin Cities team in the first quarter. We continue to focus on adding talent to our organization, especially in areas that will grow revenue.

Our fee income business lines delivered strong results lead by our mortgage division with mortgage originations exceeding $500 million for the quarter. Retirement and benefits revenue increased over 8% during the quarter as the integration of our recent acquisition of RPS/24HourFlex continues to perform as planned. Wealth management revenue grew almost 4% during the quarter as our advisors remained focused on proactive outreach to clients in our local footprint and nationwide.

On the banking side, we continued to see stable credit quality, strengthening local economies and low levels of loan deferrals during the quarter. Our reserve levels remain very robust at over 2% of loans (excluding Paycheck Protection Program, or PPP). In addition, we saw a modest uptick in commercial line utilization, solid loan demand, and building pipelines.

In addition to our emphases on growth, we are also focused on technology investments. Over the last several years, we have invested in new technology for both our business and consumer clients, and now, we continue to develop robotics and other automation processes to improve our efficiency and support our ongoing growth initiatives. Today, we have 26 automated process robots in production across our organization. Many of these robots were developed within the last year to support unprecedented mortgage volume and new loans under the PPP. Furthermore, we recently became one of 66 limited partners in a fund focused on the acceleration of technology for community banks. We believe this is a valued partnership that will allow us to stay abreast of emerging technology trends in the community banking landscape.

Also in the first quarter, we redeemed our previously issued subordinated debt with a rate of 5.75% and refinanced with subordinated debt issued to the Bank of North Dakota with an initial fixed annual rate of 3.50%. Our capital levels remain strong and we believe we have strong capital return potential with our proven ability to execute accretive M&A, our history of strong dividend yields, and our newly approved stock buyback plan. We believe our ability to execute a diversified business model in tandem with our strong financial foundation will maximize stockholder value long-term.”

Quarterly Highlights

• Return on average total assets of 2.02%, compared to 1.34% for the fourth quarter of 2020
• Return on average tangible common equity⁽¹⁾ of 23.03%, compared to 15.13% for the fourth quarter of 2020
• Net interest margin (tax-equivalent)⁽¹⁾ was 3.12%, compared to 3.23% for the fourth quarter of 2020
• Allowance for loan losses to total loans, excluding Paycheck Protection Program, or PPP, loans, was 2.01%, compared to 2.00% as of December 31, 2020
• Efficiency ratio⁽¹⁾ of 66.43%, compared to 74.44% for the fourth quarter of 2020
• Noninterest income increased $2.2 million and was 64.97% of total revenue, compared to 62.57% for the fourth quarter of 2020
• Mortgage originations totaled $518.0 million, a 14.7% decrease from the fourth quarter of 2020
• Investment securities increased $202.8 million, or 34.2%, from the fourth quarter of 2020
• Loans held for sale decreased $43.8 million, or 35.8%, from the fourth quarter of 2020
• Loans held for investment decreased $42.0 million, or 2.1%, from the fourth quarter of 2020
• Deposits increased $145.6 million, or 5.7%, from the fourth quarter of 2020

(1) Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

(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 first quarter of 2021 was $22.0 million, a decrease of $1.1 million, or 4.8%, from $23.2 million for the fourth quarter of 2020, and an increase of $3.2 million, or 17.0%, from $18.8 million for the first quarter of 2020. The linked quarter decrease in net interest income was primarily driven by a $2.0 million decrease in interest income from loans, the largest component of which was an $854 thousand decrease on interest and loan fees recognized on PPP loans. During the first quarter of 2021, average interest earning assets increased $10.5 million, primarily due to increases of $113.2 million in investment securities and $20.3 million in interest-bearing deposits with banks, partially offset by decreases of $82.5 million in loans held for investment and $40.6 million in loans held for sale. The change in the balance sheet mix resulted in a 21 basis point decrease in the average earning asset yield. The cost of interest-bearing liabilities decreased 16 basis points from the fourth quarter of 2020 primarily due to continued downward repricing of time deposits. The balance in average long-term liabilities decreased $33.0 million due to the redemption of a $50.0 million subordinated note that was completed on January 29, 2021. On March 30, 2021, we issued a $50.0 million subordinated note to the Bank of North Dakota, and as a result we anticipate the average balance of long-term liabilities to increase in the second quarter of 2021.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 3.12% for the first quarter of 2021, an 11 basis point decrease from 3.23% for the fourth quarter of 2020, and a 23 basis point decrease from 3.35% in the first quarter of 2020. The linked quarter decrease was primarily due to lower yields on interest earning assets, partially offset by lower rates on interest-bearing liabilities. Excluding PPP loans, net interest margin was 2.95% for the first quarter of 2021, an 8 basis point decrease from 3.03% for the fourth quarter of 2020. 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 81 basis point decrease in interest earning asset yields and compressed net interest margin.

Noninterest Income

Noninterest income for the first quarter of 2021 was $40.9 million, a $2.2 million, or 5.6%, increase from the fourth quarter of 2020. The increase was primarily driven by a $1.3 million increase in retirement and benefit services revenue, a $351 thousand increase in mortgage banking revenue, and a $219 thousand increase in other noninterest income. The increase in retirement and benefit services income was primarily driven by the revenue attributable to the acquisition of Retirement Planning Services, Inc. (doing business as RPS Plan Administrators and 24HourFlex). The increase in mortgage banking revenue was primarily a result of a $3.0 million increase in the change in fair market value of the secondary market hedge, partially offset by a 28 basis point decrease in the gain on sale margin.

Noninterest income for the first quarter of 2021 increased $13.7 million, or 50.4%, from $27.2 million in the first quarter of 2020. This increase was primarily due to a $12.1 million increase in mortgage banking revenue, as mortgage originations increased from $228.6 million in the first quarter of 2020 to $518.0 million in the first quarter of 2021, and a $1.6 million increase in the change in fair market value of the secondary market hedge.

Noninterest Expense

Noninterest expense for the first quarter of 2021 was $43.0 million, a decrease of $4.1 million, or 8.7%, compared to the fourth quarter of 2020. The decrease was primarily due to decreases of $2.8 million in compensation expense, $659 thousand in business services, software and technology expense, $506 thousand in other noninterest expense, and $458 thousand in mortgage and lending expenses, partially offset by an $851 thousand increase in employee taxes and benefits driven by seasonally higher payroll related taxes. The decrease in compensation expense was primarily due to a decrease in mortgage related compensation and incentives.

Noninterest expense for the first quarter of 2021 increased $6.3 million, or 17.2%, from $36.7 million in the first quarter of 2020. The increase was primarily attributable to increased compensation expense, employee taxes and benefits and mortgage and lending expenses, primarily as a result of the significant year over year increase in mortgage originations. Additional compensation expense and employee taxes and benefits also increased as a result of the acquisition of RPS.

Financial Condition

Total assets were $3.2 billion as of March 31, 2021, an increase of $138.0 million, or 4.6%, from December 31, 2020. The overall increase in total assets included increases of $202.8 million in available-for-sale investment securities and $17.3 million in cash and cash equivalents, partially offset by a $43.8 million decrease in loans held for sale and a $42.0 million decrease in loans held for investment.

Loans

Total loans were $1.94 billion as of March 31, 2021, a decrease of $42.0 million, or 2.1%, from December 31, 2020. The decrease was primarily due to a $13.8 million decrease in the commercial and industrial loan portfolio, as approximately $93.6 million of PPP loans were forgiven, and $83.4 million of new PPP loans were originated and funded. The consumer loan portfolio decreased $30.7 million from December 31, 2020, due to high levels of refinancing and our strategic exit from indirect lending.

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

(1) Includes PPP loans of $256.8 million at March 31, 2021, $268.4 million at December 31, 2020, $348.9 million at September 30, 2020 and $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.72 billion as of March 31, 2021, an increase of $145.6 million, or 5.7%, from December 31, 2020. Interest-bearing deposits increased $124.9 million while noninterest-bearing deposits increased $20.7 million. Key drivers of the increase included inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and volatile financial markets. The increase in interest-bearing deposits included increases of $55.6 million in interest-bearing demand deposits, a $58.1 million increase in money market accounts, a $7.6 million increase in savings accounts and a $3.6 million increase in time deposits. Although overall deposits increased, there was a $26.6 million decrease in synergistic deposits, primarily in the retirement and benefit services money market accounts. Excluding synergistic deposits, commercial transaction deposits increased $135.2 million, or 12.2%, while consumer transaction deposits increased $24.3 million, or 3.8%, since December 31, 2020. Noninterest-bearing deposits as a percentage of total deposits was 28.5% as of March 31, 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:

Asset Quality

Total nonperforming assets were $4.9 million as of March 31, 2021, a decrease of $248 thousand, or 4.8%, from December 31, 2020. As of March 31, 2021, the allowance for loan losses was $33.8 million, or 1.74% of total loans, compared to $34.2 million, or 1.73% of total loans, as of December 31, 2020. Excluding PPP loans, the ratio of allowance for loan losses to total loans was 2.01% as of March 31, 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:

For the first quarter of 2021, we had net charge-offs of $488 thousand compared to net recoveries of $1.5 million for the fourth quarter of 2020 and $595 thousand for the first quarter of 2020. The net charge-offs for the first quarter of 2021 were primarily due to a $452 thousand charge-off related to one commercial real estate client. Management does not believe that this charge-off was a result of economic uncertainties in the current environment.

The provision for loan losses for the first quarter of 2021 was zero, a decrease of $1.4 million from the fourth quarter of 2020 and a decrease of $2.5 million from the first quarter of 2020. Management decided additional provisions were not necessary in the first quarter of 2021 as credit quality indicators remained strong and loan balances decreased.

The ratio of nonperforming loans to total loans at March 31, 2021 was 0.25%, and if PPP loans were excluded, this ratio would have been 0.28%. Nonperforming assets as a percentage of total assets was 0.16% at March 31, 2021. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.17% at March 31, 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 March 31, 2021, we had entered into principal and interest deferrals on 582 loans, representing $154.0 million in total outstanding principal balances. Of those loans, 16 loans with a total outstanding principal balance of $7.6 million have been granted additional deferrals, 6 loans with a total outstanding principal balance of $767 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 $329.2 million as of March 31, 2021, a decrease of $929 thousand from December 31, 2020. The tangible book value per common share, a non-GAAP financial measure, decreased to $15.95 as of March 31, 2021, from $16.00 as of December 31, 2020. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 8.86% as of March 31, 2021, from 9.27% as of December 31, 2020, primarily due to a $13.6 million decrease in accumulated other comprehensive income. The tangible common equity to tangible assets ratio, a non-GAAP financial measure, excluding PPP loans, was 9.66% as of March 31, 2021.

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

(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, April 29, 2021, to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company’s investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, ND. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to business and consumer clients through four distinct business segments—banking, retirement and benefit services, wealth management, and mortgage. Alerus provides clients with a primary point of contact to help fully understand the unique needs and delivery channel preferences of each client. Clients are provided with competitive products, valuable insight and sound advice supported by digital solutions designed to meet the clients’ needs. Alerus Financial banking and wealth management offices are located in Grand Forks and Fargo, ND, the Minneapolis-St. Paul, MN metropolitan area, and Scottsdale and Mesa, AZ. Alerus Retirement and Benefits plan administration offices are located in St. Paul, MN, East Lansing, MI, and Littleton, CO.

Non-GAAP Financial Measures

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

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

Forward-Looking Statements

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

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

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

(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.”

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