Alerus(ALRS) - 2021 Q2 - Quarterly Report

PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents Alerus Financial Corporation's unaudited consolidated financial statements for the quarter ended June 30, 2021, including balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, recent pronouncements, and specific financial instrument details Consolidated Balance Sheets Consolidated Balance Sheets Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 (Unaudited) | December 31, 2020 (Audited) | |:-----------------------|:--------------------------|:----------------------------| | Assets | | | | Cash and cash equivalents | $ 315,430 | $ 172,962 | | Total assets | $ 3,157,229 | $ 3,013,771 | | Liabilities | | | | Total deposits | $ 2,710,940 | $ 2,571,993 | | Total liabilities | $ 2,812,838 | $ 2,683,608 | | Stockholders' Equity | | | | Total stockholders' equity | $ 344,391 | $ 330,163 | - Total assets increased by $143.5 million (4.8%) from December 31, 2020, to June 30, 2021, primarily driven by increases in investment securities and cash and cash equivalents, partially offset by decreases in loans held for sale and loans held for investment[231] Consolidated Statements of Income Consolidated Statements of Income Data (dollars and shares in thousands, except per share data) | (dollars and shares in thousands, except per share data) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:---------------------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Total interest income | $ 22,584 | $ 23,506 | $ 45,905 | $ 46,612 |\n| Total interest expense | $ 1,444 | $ 3,415 | $ 2,727 | $ 7,684 |\n| Net interest income | $ 21,140 | $ 20,091 | $ 43,178 | $ 38,928 |\n| Provision for loan losses | $ — | $ 3,500 | $ — | $ 6,000 |\n| Total noninterest income | $ 36,748 | $ 38,230 | $ 77,629 | $ 65,419 |\n| Total noninterest expense | $ 42,550 | $ 39,734 | $ 85,592 | $ 76,460 |\n| Net income | $ 11,694 | $ 11,474 | $ 26,909 | $ 16,837 |\n| Basic earnings per common share | $ 0.67 | $ 0.66 | $ 1.54 | $ 0.97 |\n| Diluted earnings per common share | $ 0.66 | $ 0.65 | $ 1.52 | $ 0.95 | - Net income for the three months ended June 30, 2021, increased by $220 thousand to $11.7 million, primarily due to a $1.0 million increase in net interest income and a $3.5 million decrease in provision expense, partially offset by a $1.5 million decrease in noninterest income and a $2.8 million increase in noninterest expense[196] - Net income for the six months ended June 30, 2021, increased by $10.1 million to $26.9 million, driven by a $12.2 million increase in noninterest income, a $4.3 million increase in net interest income, and a $6.0 million decrease in provision expense, partially offset by a $9.1 million increase in noninterest expense[197] Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Net Income | $ 11,694 | $ 11,474 | $ 26,909 | $ 16,837 |\n| Other comprehensive income (loss), net of tax | $ 5,479 | $ 2,622 | $ (8,115) | $ 7,835 |\n| Total comprehensive income | $ 17,173 | $ 14,096 | $ 18,794 | $ 24,672 | Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Changes in Stockholders' Equity Data (dollars in thousands) | (dollars in thousands) | Balance as of December 31, 2020 | Net income | Other comprehensive income (loss) | Common stock repurchased | Common stock dividends | Share‑based compensation expense | Vesting of restricted stock | Balance as of June 30, 2021 | |:-----------------------|:--------------------------------|:-----------|:----------------------------------|:-------------------------|:-----------------------|:---------------------------------|:----------------------------|:----------------------------|\n| Common Stock | $ 17,125 | — | — | (16) | — | 8 | 81 | $ 17,198 |\n| Additional Paid-in Capital | $ 90,237 | — | — | (134) | — | 1,251 | (81) | $ 91,273 |\n| Retained Earnings | $ 212,163 | 26,909 | — | (296) | (5,379) | — | — | $ 233,397 |\n| Accumulated Other Comprehensive Income (Loss) | $ 10,638 | — | (8,115) | — | — | — | — | $ 2,523 |\n| Total | $ 330,163 | 26,909 | (8,115) | (446) | (5,379) | 1,259 | — | $ 344,391 | - Stockholders' equity increased by $14.2 million to $344.4 million as of June 30, 2021, from $330.2 million at December 31, 2020. This increase was primarily due to $26.9 million in net income, partially offset by $5.4 million in dividends and an $8.1 million decrease in accumulated other comprehensive income[268] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Data (dollars in thousands) | (dollars in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:-------------------------------|:-------------------------------|\n| Net cash provided (used) by operating activities | $ 84,324 | $ (22,693) |\n| Net cash provided (used) by investing activities | $ (75,354) | $ (387,083) |\n| Net cash provided (used) by financing activities | $ 133,498 | $ 476,207 |\n| Net change in cash and cash equivalents | $ 142,468 | $ 66,431 |\n| Cash and cash equivalents at end of period | $ 315,430 | $ 210,437 | - Cash and cash equivalents increased significantly by $142.5 million for the six months ended June 30, 2021, reaching $315.4 million, compared to a $66.4 million increase in the prior year period. This was primarily driven by strong net cash provided by operating activities ($84.3 million) and financing activities ($133.5 million)[18] Notes to Consolidated Financial Statements NOTE 1 Significant Accounting Policies - Alerus Financial Corporation operates as a diversified financial services company through its subsidiary, Alerus Financial, National Association, offering banking, retirement and benefit services, wealth management, and mortgage solutions[23] - The Company qualifies as an 'emerging growth company' under the JOBS Act, allowing it to take advantage of certain exemptions from reporting requirements and delay the adoption of new accounting standards until they apply to private companies[30][31] - The full impact of the COVID-19 pandemic is currently unknown and cannot be reasonably estimated, although management believes appropriate actions are being taken to mitigate negative impacts[29] NOTE 2 Recent Accounting Pronouncements - The Company adopted ASU 2020-01 (Investments – Equity Securities) and ASU 2020-04 (Reference Rate Reform) as of January 1, 2021, and March 2020 respectively, with no material impact expected on consolidated financial statements[35][36] - The Company plans to delay the adoption of ASU No. 2016-13 (CECL standard) until fiscal years beginning after December 15, 2022, leveraging its emerging growth company status. The impact of CECL is currently not reasonably estimable but will depend on loan portfolio composition, credit quality, and economic conditions[37] NOTE 3 Investment Securities Investment Securities Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Fair Value | December 31, 2020 Fair Value | |:-----------------------|:-------------------------|:-----------------------------|\n| Available-for-sale | $ 651,546 | $ 592,342 |\n| Held-to-maturity | $ 146,316 | $ — |\n| Total investment securities | $ 797,862 | $ 592,342 | - On April 1, 2021, the Company transferred $149.2 million of debt securities (obligations of state and political agencies) from available-for-sale to held-to-maturity to protect capital and reduce volatility in other comprehensive income[46][254] - Gross unrealized losses on available-for-sale securities totaled $6.286 million as of June 30, 2021, primarily in residential agency mortgage-backed securities, but were considered temporary due to interest rate changes and expected recovery[48][49] NOTE 4 Loans and Allowance for Loan Losses Loans and Allowance for Loan Losses Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Total loans outstanding | $ 1,835,312 | $ 1,979,375 |\n| Allowance for loan losses | $ 33,764 | $ 34,246 |\n| Net loans | $ 1,801,548 | $ 1,945,129 | - Total loans outstanding decreased by $144.1 million (7.3%) to $1.84 billion as of June 30, 2021, primarily due to decreases in commercial and industrial loans (including PPP loans) and consumer loan portfolios[232][58] - The allowance for loan losses decreased slightly to $33.8 million as of June 30, 2021, from $34.2 million at December 31, 2020, with no provision for loan losses recorded for the three and six months ended June 30, 2021, due to declining loan balances and strong credit quality indicators[216][250] - As of June 30, 2021, the Company had 584 COVID-19 related loan modifications totaling $154.5 million, with most returning to normal payment status and only 16 loans (totaling $5.95 million) remaining on deferral. These were generally not considered TDRs[83][182] NOTE 5 Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Goodwill | $ 30,201 | $ 30,201 |\n| Other intangible assets | $ 23,680 | $ 25,919 |\n| Total intangible assets | $ 53,881 | $ 56,120 | - Goodwill remained stable at $30.2 million as of June 30, 2021, with no impairment recognized. Other intangible assets decreased to $23.68 million from $25.92 million due to amortization[85][87] NOTE 6 Loan Servicing Loan Servicing Data (dollars in thousands) | (dollars in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:-------------------------------|:-------------------------------|\n| Balance, beginning of period | $ 1,987 | $ 3,845 |\n| Additions | $ 111 | $ 112 |\n| Amortization | $ (385) | $ (396) |\n| (Impairment)/Recovery | $ 251 | $ (670) |\n| Balance, end of period | $ 1,964 | $ 2,891 | - The unpaid principal balance of loans serviced for others decreased to $417.5 million as of June 30, 2021, from $445.5 million at December 31, 2020. Servicing rights balance remained relatively stable at $1.964 million[88][89] NOTE 7 Leases Leases Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Operating lease right-of-use assets | $ 4,203 | $ 6,918 |\n| Operating lease liabilities | $ 4,868 | $ 7,861 | - Operating lease right-of-use assets and liabilities decreased significantly from December 31, 2020, to June 30, 2021, reflecting a reduction in lease obligations. The weighted-average remaining lease term for operating leases decreased from 5.8 years to 3.7 years[93][94] Leases Data (dollars in thousands) | (dollars in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:-------------------------------|:-------------------------------|\n| Operating lease cost | $ 988 | $ 1,191 |\n| Net lease cost | $ 1,423 | $ 2,021 | NOTE 8 Deposits Deposits Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Noninterest-bearing | $ 758,820 | $ 754,716 |\n| Interest-bearing | $ 1,952,120 | $ 1,817,277 |\n| Total deposits | $ 2,710,940 | $ 2,571,993 | - Total deposits increased by $138.9 million (5.4%) to $2.71 billion as of June 30, 2021, driven by increases in both interest-bearing ($134.8 million) and noninterest-bearing ($4.1 million) deposits. This was attributed to government stimulus and higher depositor balances due to economic uncertainty[259] - Interest-bearing demand deposits saw a significant increase of $117.1 million, while time deposits decreased by $3.5 million[259] NOTE 9 Long-Term Debt Long-Term Debt Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Carrying Value | December 31, 2020 Carrying Value | |:-----------------------|:-----------------------------|:---------------------------------|\n| Subordinated notes payable | $ 50,000 | $ 49,688 |\n| Junior subordinated debenture (Trust I) | $ 3,470 | $ 3,447 |\n| Junior subordinated debenture (Trust II) | $ 5,203 | $ 5,170 |\n| Finance lease liability | $ 319 | $ 430 |\n| Total long-term debt | $ 58,992 | $ 58,735 | - Total long-term debt increased slightly to $58.99 million as of June 30, 2021. The Company redeemed previously issued subordinated debt with a 5.75% fixed rate and issued new subordinated debt at a lower 3.50% fixed rate in Q1 2021[102][266] NOTE 10 Financial Instruments with Off-Balance Sheet Risk Financial Instruments with Off-Balance Sheet Risk Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Commitments to extend credit | $ 610,448 | $ 611,140 |\n| Standby letters of credit | $ 6,406 | $ 6,510 |\n| Total | $ 616,854 | $ 617,650 | - Off-balance sheet commitments, primarily for extending credit and standby letters of credit, remained stable at approximately $616.85 million as of June 30, 2021. The Company uses the same credit policies for these commitments as for on-balance sheet loans[104][274] NOTE 11 Share-Based Compensation Share-Based Compensation Data (dollars and shares in thousands) | (dollars and shares in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:----------------------------------|:-------------------------------|:-------------------------------|\n| Compensation expense | $ 1,259 | $ 859 | - Share-based compensation expense increased to $1.3 million for the six months ended June 30, 2021, from $859 thousand in the prior year. As of June 30, 2021, $3.6 million of unrecognized compensation expense remains, to be recognized over a weighted-average period of 2.85 years[110] NOTE 12 Income Taxes Income Taxes Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Income tax expense | $ 3,644 | $ 3,613 | $ 8,306 | $ 5,050 |\n| Effective tax rate | 23.7% | 24.0% | 23.5% | 23.1% | - Income tax expense for the six months ended June 30, 2021, increased to $8.3 million from $5.1 million in the prior year, with effective tax rates remaining stable around 23-24%[114][228] NOTE 13 Segment Reporting - The Company operates through four segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage. These segments contribute to a diversified revenue stream, with a majority of overall revenue from noninterest income[115][173] Segment Reporting Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 Net Income before Taxes | Six months ended June 30, 2021 Net Income before Taxes | |:-----------------------|:---------------------------------------------------------|:-------------------------------------------------------|\n| Banking | $ 11,740 | $ 24,058 |\n| Retirement and Benefit Services | $ 7,883 | $ 15,026 |\n| Wealth Management | $ 3,010 | $ 5,661 |\n| Mortgage | $ 2,116 | $ 8,841 |\n| Corporate Administration | $ (9,411) | $ (18,371) |\n| Consolidated | $ 15,338 | $ 35,215 | NOTE 14 Earnings Per Share Earnings Per Share Data (dollars and shares in thousands, except per share data) | (dollars and shares in thousands, except per share data) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:---------------------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Basic earnings per common share | $ 0.67 | $ 0.66 | $ 1.54 | $ 0.97 |\n| Diluted earnings per common share | $ 0.66 | $ 0.65 | $ 1.52 | $ 0.95 | - Basic EPS increased to $0.67 for Q2 2021 from $0.66 for Q2 2020, and diluted EPS increased to $0.66 from $0.65. For the six months, basic EPS rose to $1.54 from $0.97, and diluted EPS to $1.52 from $0.95[125] NOTE 15 Derivative Instruments Derivative Instruments Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Fair Value | December 31, 2020 Fair Value | |:-----------------------|:-------------------------|:-----------------------------|\n| Total asset derivatives | $ 6,679 | $ 13,357 |\n| Total liability derivatives | $ 1,038 | $ 2,911 | - The Company uses interest rate swaps and other derivatives to facilitate client transactions and minimize risk, but these are not designated as hedging instruments. Total asset derivatives decreased to $6.68 million from $13.36 million, and total liability derivatives decreased to $1.04 million from $2.91 million[126][127] Derivative Instruments Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Six months ended June 30, 2021 | |:-----------------------|:---------------------------------|:-------------------------------|\n| Total gain/(loss) from derivative instruments | $ (2,593) | $ (1,510) | NOTE 16 Regulatory Matters - Both Alerus Financial Corporation and its subsidiary Bank met all regulatory capital adequacy requirements as of June 30, 2021, and December 31, 2020, maintaining ratios above the 'well capitalized' standards[131][270][271] Regulatory Matters Data (Consolidated) | Capital Ratios (Consolidated) | June 30, 2021 | December 31, 2020 | |:------------------------------|:--------------|:------------------|\n| Common equity tier 1 capital to risk weighted assets | 14.30% | 12.75% |\n| Tier 1 capital to risk weighted assets | 14.71% | 13.15% |\n| Total capital to risk weighted assets | 18.43% | 16.79% |\n| Tier 1 capital to average assets | 9.62% | 9.24% | NOTE 17 Stock Repurchase Program - The Board of Directors approved a stock repurchase program on February 18, 2021, authorizing the repurchase of up to 770,000 shares over 36 months. No shares were repurchased under this program for the six months ended June 30, 2021[136][186] NOTE 18 Fair Value of Assets and Liabilities - The Company categorizes assets and liabilities measured at fair value into a three-level hierarchy (Level 1, 2, 3) based on the observability of valuation inputs. Most investment securities and derivatives are classified as Level 2, using observable inputs[137][139][145][146] Fair Value of Assets and Liabilities Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Fair Value | December 31, 2020 Fair Value | |:-----------------------|:-------------------------|:-----------------------------|\n| Total available-for-sale investment securities (Level 2) | $ 651,546 | $ 592,342 |\n| Total asset derivatives (Level 2) | $ 6,679 | $ 13,357 |\n| Total liability derivatives (Level 2) | $ 1,038 | $ 2,911 | - Impaired loans, foreclosed assets, and servicing rights are measured at fair value on a nonrecurring basis, typically using appraisals or discounted cash flows with unobservable inputs (Level 3)[147][150][151] NOTE 19 COVID-19 Pandemic Response - The Company participated in the PPP, assisting 2,454 clients with $474.2 million in financing. As of June 30, 2021, $297.7 million of these loans had received forgiveness approval from the SBA[164][183] - Net processing fees of $15.7 million from PPP loans are being deferred and recognized as interest income over the life of the respective loans[164] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Alerus Financial Corporation's financial condition and results of operations for the three and six months ended June 30, 2021, discussing key performance indicators, the impact of COVID-19, and segment-specific financial trends General - The discussion covers financial condition and results of operations for the three and six months ended June 30, 2021 and 2020, emphasizing that annualized interim results may not be indicative of full-year performance[167] Forward-Looking Statements - The report contains forward-looking statements regarding future performance, financial condition, and strategies, which are subject to inherent uncertainties, risks, and changes in circumstances that could cause actual results to differ materially[168][169] - Key risk factors include managing credit risk, new accounting standards (like CECL), business and economic conditions, concentrations in the loan portfolio, nonperforming assets, and the impact of the COVID-19 pandemic[169][170] Overview - Alerus Financial Corporation is a diversified financial services company offering banking, retirement and benefit services, wealth management, and mortgage solutions, with a business model that generates a majority of revenue from noninterest income[172][173] Critical Accounting Policies - The Company's consolidated financial statements are prepared in accordance with GAAP, requiring management to make estimates and judgments that affect reported amounts. There have been no significant changes in critical accounting policies since December 31, 2020[174] - As an emerging growth company, Alerus has elected to use the extended transition period for complying with new or revised accounting standards[175] Recent Developments - The COVID-19 pandemic has not adversely impacted the Company's financial condition or results of operations as of June 30, 2021, despite ongoing economic uncertainty and varying regional responses[178][179] - The Company adopted a hybrid work environment, offered payment deferrals for customers, and participated in the SBA's PPP, facilitating $474.2 million in loans and processing $297.7 million in forgiveness applications[181][182][183] - The Board of Directors declared a quarterly cash dividend of $0.16 per common share for Q2 2021 and Q3 2021, and approved a stock repurchase program for up to 770,000 shares, though no shares were repurchased under the program by June 30, 2021[185][186] Operating Results Overview Operating Results Overview Data | Performance Ratios | June 30, 2021 | June 30, 2020 | |:-------------------|:--------------|:--------------|\n| Return on average total assets | 1.50% | 1.68% |\n| Return on average common equity | 13.82% | 15.30% |\n| Noninterest income as a % of revenue | 63.48% | 65.55% |\n| Net interest margin (taxable-equivalent basis) | 2.88% | 3.14% |\n| Efficiency ratio | 71.46% | 66.31% |\n| Basic earnings per common share | $0.67 | $0.66 |\n| Diluted earnings per common share | $0.66 | $0.65 |\n| Dividends declared per common share | $0.16 | $0.15 | Operating Results Overview Data (in thousands) | Other Data (in thousands) | June 30, 2021 | June 30, 2020 | |:--------------------------|:--------------|:--------------|\n| Retirement and benefit services assets under administration/management | $36,964,961 | $30,093,095 |\n| Wealth management assets under administration/management | $3,538,959 | $2,957,213 |\n| Mortgage originations | $1,063,451 | $660,206 | Discussion and Analysis of Results of Operations Net Income - Net income for Q2 2021 increased slightly to $11.7 million ($0.66 diluted EPS) from $11.5 million ($0.65 diluted EPS) in Q2 2020, driven by higher net interest income and lower provision for loan losses, partially offset by decreased noninterest income and increased noninterest expense[196] - Net income for the six months ended June 30, 2021, significantly increased to $26.9 million ($1.52 diluted EPS) from $16.8 million ($0.95 diluted EPS) in the prior year, primarily due to higher noninterest income, increased net interest income, and a decrease in provision expense[197] Net Interest Income Net Interest Income Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Net interest income | $ 21,140 | $ 20,091 | $ 43,178 | $ 38,928 |\n| Net interest margin (FTE basis) | 2.88% | 3.14% | 3.00% | 3.24% | - Net interest income increased by $1.0 million (QoQ) and $4.3 million (YoY) due to a decrease in interest expense, primarily from lower deposit interest rates and long-term debt refinancing, partially offset by decreased interest income from loans[199][200] - Net interest margin (FTE basis) decreased to 2.88% for Q2 2021 from 3.14% for Q2 2020, and to 3.00% for the six months from 3.24% in the prior year, mainly due to a lower average earning asset yield and a shift to a more liquid balance sheet mix[203][204] Provision for Loan Losses Provision for Loan Losses Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Provision for loan losses | $ — | $ 3,500 | $ — | $ 6,000 | - No provision for loan losses was recorded for the three and six months ended June 30, 2021, representing a $3.5 million and $6.0 million decrease, respectively, compared to the prior year periods. This reflects declining loan balances and strong credit quality indicators[216] Noninterest Income Noninterest Income Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Retirement and benefit services | $ 17,871 | $ 13,710 | $ 35,126 | $ 29,930 |\n| Wealth management | $ 5,138 | $ 4,112 | $ 10,124 | $ 8,158 |\n| Mortgage banking | $ 12,287 | $ 17,546 | $ 29,419 | $ 22,591 |\n| Total noninterest income | $ 36,748 | $ 38,230 | $ 77,629 | $ 65,419 | - Total noninterest income decreased by $1.5 million (3.9%) for Q2 2021, primarily due to a $5.3 million decrease in mortgage banking revenue and $1.3 million in net gains on investment securities, partially offset by increases in retirement and benefit services and wealth management revenue[219] - For the six months ended June 30, 2021, total noninterest income increased by $12.2 million (18.7%), driven by higher mortgage banking revenue ($6.8 million), retirement and benefit services revenue ($5.2 million), and wealth management revenue ($2.0 million)[220] Noninterest Expense Noninterest Expense Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Compensation | $ 24,309 | $ 21,213 | $ 48,007 | $ 39,944 |\n| Employee taxes and benefits | $ 5,572 | $ 4,747 | $ 11,385 | $ 10,055 |\n| Total noninterest expense | $ 42,550 | $ 39,734 | $ 85,592 | $ 76,460 | - Total noninterest expense increased by $2.8 million (7.1%) for Q2 2021 and $9.1 million (11.9%) for the six months ended June 30, 2021, primarily due to increases in compensation and employee benefits related to higher mortgage originations[224][225] - Occupancy and equipment expense decreased due to facility lease terminations, and other noninterest expense decreased due to a reduction in the provision for unfunded commitments[224][225] Income Tax Expense Income Tax Expense Data (dollars in thousands) | (dollars in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | |:-----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\n| Income tax expense | $ 3,644 | $ 3,613 | $ 8,306 | $ 5,050 |\n| Effective tax rate | 23.7% | 24.0% | 23.5% | 23.1% | - Income tax expense for Q2 2021 was $3.6 million on $15.3 million of pre-tax income (23.7% effective rate), comparable to Q2 2020. For the six months, it was $8.3 million on $35.2 million of pre-tax income (23.5% effective rate), up from $5.1 million in the prior year[227][228] Financial Condition Overview - Total assets increased by $143.5 million (4.8%) to $3.2 billion as of June 30, 2021, compared to December 31, 2020. This growth was primarily driven by increases in investment securities and cash and cash equivalents, partially offset by decreases in loans held for sale and loans held for investment[231] Loans Loans Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Balance | December 31, 2020 Balance | |:-----------------------|:----------------------|:--------------------------|\n| Commercial and industrial (including PPP) | $ 572,734 | $ 691,858 |\n| Commercial real estate | $ 567,987 | $ 563,007 |\n| Residential real estate first mortgage | $ 470,822 | $ 463,370 |\n| Total loans outstanding | $ 1,835,312 | $ 1,979,375 | - Total loans outstanding decreased by $144.1 million (7.3%) to $1.84 billion as of June 30, 2021, primarily due to a $119.1 million decrease in commercial and industrial loans (including PPP loans) and a $22.0 million decrease in consumer loans[232][234] - As of June 30, 2021, 63.1% of the loan portfolio bore interest at fixed rates and 36.9% at floating rates[238] Asset Quality Asset Quality Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 | December 31, 2020 | |:-----------------------|:--------------|:------------------|\n| Total criticized loans | $ 40,276 | $ 56,671 |\n| Criticized loans as a percent of total loans | 2.19% | 2.86% |\n| Total nonperforming loans | $ 6,960 | $ 5,080 |\n| Nonperforming loans to total loans | 0.38% | 0.26% |\n| Allowance for loan losses to nonperforming loans | 485% | 674% | - Criticized loans decreased to $40.3 million (2.19% of total loans) as of June 30, 2021, from $56.7 million (2.86%) at December 31, 2020, indicating an improvement in credit quality[243] - Nonperforming loans increased to $6.96 million (0.38% of total loans) from $5.08 million (0.26%), while the allowance for loan losses to nonperforming loans decreased to 485% from 674%[244] Loans Held for Sale - Loans held for sale decreased by $55.6 million to $66.9 million as of June 30, 2021, compared to December 31, 2020, primarily due to a decrease in mortgage originations[253] Investment Securities Investment Securities Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Fair Value | December 31, 2020 Fair Value | |:-----------------------|:-------------------------|:-----------------------------|\n| Total available-for-sale investment securities | $ 651,546 | $ 592,342 |\n| Total held-to-maturity investment securities | $ 146,316 | $ — |\n| Total investment securities | $ 797,862 | $ 592,342 | - Total investment securities increased by $205.5 million (34.7%) to $797.9 million as of June 30, 2021. This includes $146.3 million in held-to-maturity securities, a new category resulting from a transfer from available-for-sale in Q2 2021 to reduce volatility[254][257] Deposits Deposits Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Balance | December 31, 2020 Balance | |:-----------------------|:----------------------|:--------------------------|\n| Noninterest-bearing demand | $ 758,820 | $ 754,716 |\n| Interest-bearing demand | $ 736,043 | $ 618,900 |\n| Money market and savings | $ 1,010,268 | $ 989,039 |\n| Time deposits | $ 205,809 | $ 209,338 |\n| Total deposits | $ 2,710,940 | $ 2,571,993 | - Total deposits increased by $138.9 million (5.4%) to $2.71 billion as of June 30, 2021, with interest-bearing deposits increasing by $134.8 million and noninterest-bearing deposits by $4.1 million. This growth was influenced by government stimulus and depositor behavior in an uncertain economic environment[259] - Synergistic deposits from retirement and benefit services and wealth management segments decreased by $44.0 million, while commercial transaction deposits increased by $113.9 million and consumer transaction deposits by $75.8 million[259][261] Borrowings Borrowings Data (dollars in thousands) | (dollars in thousands) | June 30, 2021 Balance | December 31, 2020 Balance | |:-----------------------|:----------------------|:--------------------------|\n| Subordinated notes | $ 50,000 | $ 49,688 |\n| Junior subordinated debentures | $ 8,673 | $ 8,617 |\n| Finance lease liability | $ 319 | $ 430 |\n| Total borrowed funds | $ 58,992 | $ 58,735 | - Total borrowed funds remained stable at $58.99 million as of June 30, 2021. The Company refinanced its subordinated debt in Q1 2021, securing a new fixed rate of 3.50% compared to the previous 5.75%[266] Capital Resources - Stockholders' equity increased by $14.2 million to $344.4 million as of June 30, 2021, driven by net income, partially offset by dividends and a decrease in accumulated other comprehensive income[268] - Tangible common equity to tangible assets, a non-GAAP measure, increased to 9.36% at June 30, 2021, from 9.27% at December 31, 2020. Excluding PPP loans, this ratio would have been 9.89%[268] - The Company and the Bank consistently maintained regulatory capital ratios above the 'well capitalized' standards, meeting all capital adequacy requirements[270][271] Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations and Off-Balance Sheet Arrangements Data (dollars in thousands) | (dollars in thousands) | Total Contractual Obligations | |:-----------------------|:------------------------------|\n| Operating lease obligations | $ 5,455 |\n| Time deposits | $ 205,809 |\n| Subordinated notes payable | $ 50,000 |\n| Junior subordinated debenture (Trust I) | $ 3,470 |\n| Junior subordinated debenture (Trust II) | $ 5,203 |\n| Finance lease liability | $ 335 |\n| Total contractual obligations | $ 270,272 | - Total contractual obligations were $270.27 million as of June 30, 2021, primarily consisting of time deposits and long-term debt. Off-balance sheet arrangements, such as commitments to extend credit and standby letters of credit, totaled $616.85 million[273][276] Liquidity - On-balance sheet liquidity significantly increased to $870.5 million as of June 30, 2021, from $511.1 million at December 31, 2020, including cash, federal funds, and unencumbered securities[278] - The Company had an eligible borrowing capacity of up to $645.6 million from the FHLB and $102.0 million through unsecured lines of credit with other banks, ensuring adequate resources to fund commitments[280] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's exposure to market risk, primarily interest rate risk, and the strategies employed by the Asset and Liability Committee (ALCO) to manage it. It also covers operational, compliance, and strategic/reputation risks Interest Rate Risk - The Company actively manages interest rate risk, which arises from mismatches in the timing of interest rate changes impacting assets and liabilities. The ALCO monitors risk measures and policy limits[283][284] - Interest rate risk is measured using net interest income simulation models and economic value of equity sensitivity analysis, forecasting impacts under various interest rate scenarios[287][288][289][290] Interest Rate Risk Data | Estimated Impact on Net Interest Income | June 30, 2021 Following 12 months | June 30, 2021 Following 24 months | |:----------------------------------------|:----------------------------------|:----------------------------------|\n| +400 basis points | 6.3% | 5.9% |\n| +100 basis points | 1.2% | -4.9% |\n| -100 basis points | -7.1% | -21.0% | Interest Rate Risk Data | Change in Economic Value of Equity | June 30, 2021 | |:-----------------------------------|:--------------|\n| +400 basis points | -7.1% |\n| +100 basis points | 1.8% |\n| -100 basis points | -36.7% | Operational Risk - Operational risk encompasses losses from human behavior, failed internal systems/controls, and external influences. Management continuously strengthens internal controls, enterprise risk management, and employee awareness to mitigate this risk[294] Compliance Risk - Compliance risk is the potential for regulatory sanctions or financial loss due to non-compliance with banking rules and regulations, including anti-money laundering, privacy, and fair lending[295] Strategic and/or Reputation Risk - Strategic and/or reputation risk involves potential losses from impaired reputation, failure to execute business plans, or missed opportunities. Mitigation efforts include initiatives to better understand and report on risks related to new products and business initiatives[296] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - As of June 30, 2021, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in ensuring timely and accurate reporting of information required by the Exchange Act[297] Changes in Internal Control over Financial Reporting - There have been no material changes in the Company's internal control over financial reporting during the fiscal quarter ended June 30, 2021[298][299] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section confirms the absence of material pending legal proceedings against the Company or its subsidiaries - There are no material pending legal proceedings against Alerus Financial Corporation or its subsidiaries, other than ordinary routine litigation incidental to the business[301] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - No material changes have occurred to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 12, 2021[302] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on equity security transactions, including issuer repurchases and the use of proceeds from registered securities Unregistered Sales of Equity Securities - There were no unregistered sales of equity securities during the period[302] Issuer Repurchases of Equity Securities Issuer Repurchases of Equity Securities Data | (dollars in thousands, except per share data) | Total Number of Shares Purchased | |:----------------------------------------------|:---------------------------------|\n| April | — |\n| May | — |\n| June | — |\n| Total | — | - No shares were repurchased under the publicly announced stock repurchase program during the second quarter of 2021. The program authorizes the repurchase of up to 770,000 shares over 36 months[303] Use of Proceeds from Registered Securities - The Company sold 2,860,000 shares in its initial public offering on September 17, 2019, with an additional 429,000 shares sold to cover overallotments. The net proceeds have been maintained on deposit with the Bank and used to pay down short-term borrowings[304][305] Item 3. Defaults Upon Senior Securities This section confirms that there have been no defaults upon senior securities - There were no defaults upon senior securities[306] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to Alerus Financial Corporation[306] Item 5. Other Information This section indicates that there is no other information to report - No other information is reported in this section[306] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and iXBRL documents Exhibits Data | Exhibit No. | Description | |:------------|:------------|\n| 31.1 | Chief Executive Officer's Certifications required by Rule 13(a)-14(a) – filed herewith |\n| 31.2 | Chief Financial Officer's Certifications required by Rule 13(a)-14(a) – filed herewith |\n| 32.1 | Chief Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith |\n| 32.2 | Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith |\n| 101.INS | iXBRL Instance Document |\n| 104 | Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibits 101) | Signatures This section contains the required signatures for the Form 10-Q filing - The report is duly signed on behalf of Alerus Financial Corporation by Randy L. Newman, dated August 5, 2021[309][310]