O n e T e a m . O n e F u t u r e . O n e A l e r u s.
2012 ANNUAL REPORT
alerus Financial is one of the oldest and largest independent
financial services companies in the upper Midwest. We have
been serving in the best interest of individuals, families,
and businesses since 1933.
Company Portfolio
Shareholder Value
▪ earnings per share: $3.87
▪ Dividends per share: $0.94
▪ Book value per share: $27.05
$12.98 Billion Diversified
Financial Services Company
▪ $1.32 billion banking assets
▪ $11.2 billion assets under
management and administration
- Investment management
- Trust and estate services
- Retirement plan services
Customer Base
▪ 36,700 consumers
▪ 7,900 businesses
▪ 2,400 employer-sponsored
retirement plans
Core Strengths
▪ strong balance sheet
▪ Diversified earnings
▪ relationship-orientated
▪ 177,600 employer-sponsored
▪ Commitment to business
expansion opportunities
Grand Forks
▪ 5 full-service banking offices
Core Business Lines
▪ 5 full-service banking offices
retirement plan participants
Franchise Footprint
Market Presence
business model
▪ $460 million brokerage assets
Diversified Revenue Stream
▪ Non-interest income: $79.1 million
▪ Net interest income: $48.3 million
Fargo
Business Banking
Twin Cities
▪ 3 full-service banking offices
▪ 2 residential mortgage offices
▪ 2 wealth management offices
▪ Commercial and commercial
real estate lending
Banking
interest
income
37.91%
▪ agriculture lending
▪ Treasury management
▪ Deposit services
Retirement
plan fees
25.51%
Trust fees
5.42%
Other
6.28%
38%
Net interest
income
Mortgage fees
23.63%
scottsdale
▪ 1 full-service banking office
National Presence
Consumer Banking
▪ 6 remote retirement plan
▪ Deposit products and services
▪ mortgage lending
▪ Consumer lending
▪ Private banking
Desposit fees
1.26%
offices throughout the
united states
▪ Serve customers in 48
states through retirement
plan services
Wealth Management
62%
Non-interest
income
Alerus Team: 558
▪ Retirement administration
▪ Trust and estate services
▪ Asset management
▪ Investments
Top 100 Community Bank Listing
SNL Financial banking experts ranked the top 100 best performing
community banks between $500 million and $5 billion as of
year-end 2012. Their exclusive rankings are based on six core
financial performance metrics that focus on profitability, asset
quality, and growth.
alerus Financial Corporation proudly ranks 36th out of more
than 750 community banks in our peer group ($500 million$5 billion). And of the top 100 community banks listed by SNL
Financial, 32 are publicly traded—Alerus ranked 8th among these
32. This is an outstanding accomplishment for our company.
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ND
Grand Forks
Northwood
Fargo
Twin Cities
AZ
Scottsdale
Dear Shareholders, Customers, and Friends,
I am incredibly proud to lead Alerus Financial. It is an honor to work with such great
people and serve our customers and shareholders. In 2012, we achieved recordbreaking financial performance in every area of our company. Together, we earned an
unprecedented $17.9 million for Alerus Financial Corporation. We increased earnings
per share 61.3% to $3.87, we increased book value per share 13.1% to $27.05, and we
increased cash dividends per share 5.6% to $0.94. These results would be remarkable
in the best of times, but given the ongoing challenges of our national economy and
industry, our performance is that much more rewarding. But, it would be a mistake
to look at these results as a final destination. I am personally and professionally
convinced that the results we have enjoyed in 2012 are just one more step toward
the larger goal of becoming One Alerus, growing our market franchise, and increasing
shareholder value.
While our financial performance in 2012 speaks for itself, the story behind the numbers
is what continues to drive our success. Since 1985, we have remained committed to
executing on two strategic initiatives: to diversify our relationship-driven business
model and composition of earnings, and to grow the Alerus franchise outside of the
Red River Valley. With one strong team all pointed in the same direction in 2012, we
successfully executed a number of projects that support these long-term strategies
and the overall health of our organization.
Financial Highlights
Randy L. Newman
Chairman, President, & CEO
alerus Financial Corporation
O n e T e a m.
O n e F u T u r e.
O n e a l e r u s.
“2012 was a remarkable year
for Alerus. We set our sights
high and achieved virtually
every goal we pursued.
But as proud as we are of
another year of substantial
growth, we are equally proud
to have prepared a bright
future for Alerus; a future
that takes our diversified
financial services and unifies
them to better serve our
shareholders, employees,
communities, and most
importantly, our customers.
Together, we have one future
as One Alerus.”
Record net income of $17.9 million, up 66.9%
Record earnings per share of $3.87, up 61.3%
Record net revenue of $127.4 million, up 30.9%
Record mortgage origination of $1.2 billion, up 81.3%
Record asset management account sales of $97 million
Record assets under management and administration of $11.2 billion, up 14.9%
Record bank balance sheet size of $1.3 billion, up 14.3%
Positive operating leverage (revenue growth of 30.9% exceeded expense growth
of 28.0%)
Return on average assets (ROA) of 1.49%, up 55 basis points
Return on equity (ROE) of 15.32%, up 486 basis points
strategic Highlights
Enjoyed record revenue benefits from Alerus Mortgage—a direct result of our 2009
acquisition of Minnesota-based Residential Mortgage Group. This division of our
company provides a lucrative and diverse revenue stream and includes 85 employees.
Purchased PensionTrend, Inc., a reputable recordkeeper and plan administrator,
and PensionTrend Investment Advisers, LLC, a retirement plan investment advisor.
Combined, this acquisition brought Alerus 170 retirement plans with 13,000 plan
participants, plan assets exceeding $700 million, $6.0+ million in annual revenue,
$44 million in individual investment accounts, and 25 highly qualified employees.
Continued to realize the benefits of our 2009 acquisition of Prosperan Bank in the
Twin Cities. Surpassing all expectations, we have retained and organically grown this
customer base. Additionally, we benefitted from the FDIC loss share agreement.
Expanded our small business segment offering into the Twin Cities. First introduced
in the Red River Valley in 2010, this segment has grown significantly by acquiring a total
of 204 new households, $3 million in new deposits, and $9.5 million in new loans.
Restructured and strategically enhanced our private banking business growth plan by
hiring an experienced private banking team in the Twin Cities. We renamed this highly
specialized business line “Professional Services and Private Banking” and offer it across
all markets.
Expanded our agriculture segment product offering (loans, deposits, trust and investments,
crop insurance, and retirement plans) into the Fargo market with a designated relationship
manager and added marketing resources to support a five-year growth plan.
Entered into a retirement services referral relationship with a bank in Minnesota.
At year-end, we had received 31 retirement plan referrals and $70 million in retirement
plan assets.
Achieved solid credit quality improvement by reducing our overall adjusted nonperforming assets and increasing our coverage ratio for loan losses. At year-end, our
adjusted non-performing assets ratio was .36% compared to our $1–$5 billion national
peer group at 2.17%. And, our loan loss reserve was 672.65% greater than our adjusted
non-performing assets as compared to our $1–$5 billion peer group with 55%.
3
Delivering Shareholder Value
In 2012, as in previous years, we delivered value to our shareholders at a rate that
met—or exceeded—our goals. Our consistent performance over the years speaks to
our ongoing ability to create sustainable growth. Built on a foundation of prudent
management and customer-centric decision making, our approach to banking positions
us well for the future.
Returning capital to shareholders, through both dividends and share repurchases,
remained a central pillar of our efforts to create shareholder value in 2012. Over the
last 30 years we have earned almost $180 million in net income, paying out 29%
of our earnings in cash dividends ($52.8 million), completing $34.1 million in stock
repurchases and retaining the remaining earnings as capital (growing shareholder
equity from $11.9 million in 1980 to $122.9 million as of year-end 2012) to support
the growth of our company. Additionally, we have grown from $126 million in banking
assets and $80 million in trust assets in only one market (Grand Forks) to $1.3 billion
in banking assets in 4 markets (Grand Forks, Fargo, the Twin Cities, and Phoenix/
Scottsdale), and $11.2 billion in wealth management assets under management
and administration. In 2012 we also completed a tender offer to Alerus Financial
Corporation shareholders, allowing our ESOP to purchase 36,129 of repurchased shares
and growing our total ESOP ownership to 9.7% of outstanding shares.
Along the way, we have achieved a 30-year average of a 1.15% Return on Assets and
a 12.24% Return on Shareholder Equity. We have also grown cash dividends per share
from $.055 per share (split adjusted) in 1980 to $0.94 per share at the end of 2012,
an 8.98% annual increase over 32 years.
In 2012, we implemented an investor communications plan with the objective of
making more robust disclosures to existing and potential investors and enhancing the
distribution of information. Beginning with the third quarter of 2012, quarterly financial
disclosures became available on the Internet through OTC, the market on which the
Company’s shares are traded. In addition, existing and potential investors may now
view real-time bid and ask quotes for the company’s stock through the OTC website—
otcmarkets.com. These and other enhancements to investor communications should
allow existing and potential investors more immediate access to information regarding
Alerus and its stock as the information becomes available.
Alerus Financial Corporation - Total Return (%)
ALRS (+137.30%)
SNL U.S. Bank (-31.75%)
S&P 500 (+71.18%)
200
150
100
50
0
-50
-100
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2005
2006
annual rePOrT
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2012
2008
2009
2010
2011
2012
During this time of economic stress
and industry disruption, we have
continued to outperform our
$1-$5 billion national peer group
and deliver above-market returns
to our shareholders. As the graph
illustrates, we have been growing
earnings and dividends per share,
while our company’s total return
(cash dividends per share plus stock
appreciation) outperformed the S&P
total return and the SNL Bank Index
over the past 10 years.
The Future Is Bright
As we look ahead to the next decade, we see significant opportunity for Alerus Financial.
Alerus has a proven track record and a strong financial foundation to build upon. Keeping
the customer at the forefront of all we do, we will pursue future growth with the same
strategic discipline as in the past. We will continue to scrutinize our credit portfolio and
achieve strong asset quality. We will continue to strengthen core operating earnings
and increase shareholder capital by growing deposits and customer households. We
will remain focused on maintaining a diversified earnings model. And we will continue
to seek strategic acquisitions that align with our strengths and future strategies of
our company.
We are also navigating changes in the regulatory landscape. As a bank, we are
accustomed to operating in a highly regulated environment that impacts how we
operate and serve customers. We abide by the rules created by federal bank regulators
to implement bank laws passed by Congress. These bank regulations cover every
aspect of banking including safety, soundness, and consumer protection. The right
regulatory balance is critical to ensuring that banks operate safely but are also allowed
to conduct business and meet their customers’ financial needs. Changes are always
being made in order to find and maintain that balance.
The 2010 Dodd-Frank Wall Street Reform Act was the most comprehensive financial
reform since the Glass-Steagall Act of 1933. The bill alone is 848 pages, which, in
turn, created 5,732 pages of final rules and another 5,286 pages of proposed rules as
of March 3, 2013, with more to come. For every financial institution, Dodd-Frank will
bring new costs and challenges. Fortunately, our size and resources give us the ability
to respond to these regulations quickly and seamlessly while minimizing new costs.
Ultimately, we believe that these regulations will lead to greater industry consolidation
and more change, which will benefit stable banks like Alerus.
It truly is a new era for Alerus—an era of continued performance and opportunity to
build franchise value. And when I pause to reflect on how far we’ve come in light of
many challenges along the way, I couldn’t be more excited or optimistic about our
bright and promising future.
Thank You
Numbers are important to any financial institution. But the most important number at
Alerus is the 558 people who make up our team. We could not have had the success
we achieved in 2012 without them. As One Team, we accomplished our goals and
more. I wish to thank each and every employee that directly or indirectly serves
in the best interest of our customers every day. Their role within our company is
incredibly important. Our board of directors is to be commended for their support
and governance on behalf of you, our shareholders. They have helped position our
company for a successful and exciting future. My personal thanks goes out to our
senior management team for their hard work and commitment to disciplined planning,
maintaining a strict adherence to sound banking principles, supporting and leading
our focus on outstanding customer service, and creating a company culture that both
exemplifies our company’s mission/vision statements and embodies our corporate
values. And, as always, we thank you, our valued shareholders, for your loyalty and
trust in our company.
Mary Jule Erickson, Green Mill
St. Paul, Minnesota
Alerus Financial
Commercial Banking Customer
Green Mill, which started as a soda
fountain in the early 1930s, has
continued as a thriving neighborhood
gathering place ever since. Now
with nearly 30 locations throughout
the Midwest, Green Mill is one of
the most popular neighborhood
restaurants and bars in the
communities it serves. Mary Jule
Erickson serves as president and
CFO of the Green Mill corporate team.
“There are a lot of options out there,
with many banks offering similar
programs, products, and services.
It comes down to the partnership
you have with your bank,” says Mary
Jule. “That’s the reason we’re with
Alerus Financial, a strong partner
with similar values: genuine service
and strong, personal relationships.”
“With our previous bank, we weren’t
getting the service we hoped for.
We were simply a number. It’s the
complete opposite with Alerus.
They’re a great team, and they’re
doing a great job for us.”
In closing, each and every area of our company performed extremely well in 2012—
we attribute this to five key success factors which we invite you to read about in the
following pages of this report. But there is no time to bask in the glow of past results.
We have much work to do if we hope to capitalize on the great assets we have brought
together. Because, only when we create “One Alerus,” will we harness the full power
of our individual efforts into a singular financial organization prepared for the future.
We don’t know what challenges the world will set before us; but we do know that we
will be better together.
We look forward to our future,
Randy L. Newman
Chairman, President, & CEO
Alerus Financial, N.A.
alerus Financial Corporation
5
In 2012, we continued to build on our strengths to
create a foundation for future success. unifying our
teams to work toward common goals, we focused
our efforts and refined our strategies to maximize
the effectiveness of our people, our assets, and our
systems. It wasn’t one person, one department,
one acquisition, or one change that made the year
such a success. It was One Team, One Future,
One alerus.
Five factors played critical roles in bringing our
vision to life: a collaborative culture that brings
out the best in our people, employee engagement
that attracts and retains the best and brightest,
organic growth that takes advantage of our existing
strengths, strategic growth that takes us into new
areas of opportunity, and operational excellence that
keeps Alerus running smoothly in an increasingly
more complex financial services environment.
Together, these five factors helped make 2012 a
successful year for alerus. They also set the stage
for continued success in the future.
Collaborative Culture
To take maximum advantage of multiple acquisitions made over the last few years,
senior management led the organization in an initiative called One Alerus, defined
as “working better together to grow.” Launched in 2011, One Alerus is a cultural
integration project designed to align all employees, departments, and divisions to work
as one collaborative organization to best serve customers and grow our franchise. One
Alerus was executed in many different ways throughout our company in 2012.
One Alerus in Action
We aligned our North Dakota and Minnesota mortgage divisions under one operating
system, one set of “best practices,” and one name: Alerus Mortgage.
We worked hard to leverage customer relationships throughout our diverse business
units to better serve customers and gain a greater share of wallet. Fortunately, the
structure of our relationship management business model fosters cross-selling and
referrals. The key to maximizing “customer sharing” is building trusted personal
relationships within Alerus. Our employees are passionate about the success of their
customers. They resist aligning their customers with anyone they don’t know or
trust. Over the years, we’ve dedicated significant resources to building peer-to-peer
trust and credibility. 2012 was no exception. We will continue to support activities
and training that allow employees to engage and network with each other.
We kicked off an extensive project to build a new website that will house all Alerus
brands and maintain a balance between our consumer and business offerings. The
new website will debut in 2013.
We began work focused on our goal to identify and communicate one strong brand
across all business lines, divisions, and markets. We will be prepared to broadly
communicate our corporate brand in late 2013.
As we grow, maintaining a strong, unified culture will be key to developing and
retaining lifelong customer relationships.
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Human Resources Team (L to R): Jon
Kerzmann (Twin Cities), Noelle King
(Grand Forks), Katie Munion (Fargo),
Teresa Wasvick (Grand Forks), Pam
Jones Borho (Grand Forks)
(L to R): Julie Stewart, Alerus Financial;
Chris Pearsall, Alerus Investment
Advisors; Liz Koehler, Alerus Mortgage;
Jim Luchsinger, Alerus Retirement
Solutions (Twin Cities)
Employee Engagement
With customers at the center of all we do, it’s imperative we provide them with
tenured experts who truly care about their financial well-being. We are proud to
have been successful in attracting, hiring, and retaining top talent. We attribute
our strong employee base to decisions made many years ago and our ability to
competitively adapt to the changing needs of the work force today.
Employee Stock Ownership Plan (ESOP)
Through our Employee Stock Ownership Plan (ESOP), our employees have a vested
interest in the overall performance of the company. Established in 1986, we live
the benefits of having an ESOP every day as employees offer suggestions and
challenges with the long-term prosperity of the company in mind. As of December
31, 2012, Alerus’ ESOP owned 439,384 shares or 9.7% of all the outstanding shares
of alerus stock. Our esOP is the largest single shareholder of alerus Financial stock.
Employee Appreciation
In 2012, we launched an employee appreciation program with the mission to reinforce
employee behaviors that support our mission, vision, and values. It also directly
supports our efforts to encourage teamwork within our organization through the idea
of One Alerus. Alerus’ Employee Appreciation Program consists of five components:
peer-to-peer appreciation notes, anniversary celebration gifts, manager access
to customized recognition gifts, employee appreciation celebrations and events,
and an annual achievement award program which recognizes and rewards individuals
and teams who have stood out as striving for excellence.
By sustaining this program through management training and employee communication,
we will promote employee behaviors that help us achieve our profitability goals and
franchise growth.
Lisa Treise received a 2012 Alerus
Achievement Award in recognition for an
outstanding year. (L to R): David “Chip”
Norris, Kris Compton, Lisa Treise, and
Randy Newman
2012 Alerus Achievement
Award Recipients
Missy Adams
Jon Kerzmann
Cindy
Breidenbach
Kristine Lunde
Mike Compton
nancy
Johnson
Cole Keney
lisa Treise
alerus
mortgage
Closing &
Underwriting
Teams
Employee Feedback
Each year, we survey our employee base to identify organizational strengths and
define areas that would improve organizational effectiveness. Based on our 2012
survey results, employees were most satisfied with the categories of Quality and
Improvement, Service Climate, and Commitment. Employees indicated the service
provided to customers leads the industry and is driven by the clear standards of quality
products and services we offer. The survey also reaffirmed the level of employee
commitment and engagement. Alerus employees not only believe that we are reputable
within the communities we serve, but they are proud of where they work and would
recommend Alerus products and services to others.
Adapting for a Changing Workforce
For the first time ever, we have four distinct generations working at Alerus Financial.
Each generation has its own distinct attitude, behavior, expectation, habit, and
motivation. Our workplace is a diverse one, where people of different ages, backgrounds,
and abilities come together to provide our customers with the best products and
services to help our customers, organization, and economy grow.
At Alerus Financial we intend to be on the cutting edge of adapting to workforce
changes so we can capitalize on the opportunities in front of us. In 2012, we prepared
our leaders and managers for this challenge by providing training and development
in the areas of innovation, leading, and managing. Additionally, Alerus leaders and
managers have access to monthly classroom training sessions and online courses on
a variety of leadership topics to engage, guide, develop, and support them as leaders
of our organization.
Our employees also receive development through our Performance Management
program. This program enhances employee engagement and is designed to measure,
maintain, and improve job performance by identifying opportunities, building on
individual and collaborative strengths, aligning them with available resources and
our strategic goals, and ultimately setting every employee up to succeed. We strive
to manage people in a consistent and measurable way so that everyone’s goals are
aligned, people are held accountable, and everyone is recognized and rewarded fairly.
7
Employer of Choice
In 2012, Alerus Financial was named
to the Top Workplaces, which
recognizes the most progressive
companies in Minnesota based on
employee opinions about company
leadership, communication,
career opportunities, workplace
environment, managerial skills,
pay and benefits. 2012 was the
third year in a row in which Alerus
was been named a Top Workplace.
Alerus Financial “Lives United” as a
proud supporter of United Way.
In 2012, company and employee donations
exceeding $142,400 benefited the United
Way of Grand Forks, East Grand Forks &
Area, United Way of Cass-Clay, and
Greater Twin Cities United Way.
Fargo/West Fargo Sales Team (L to R): Blaine
Anderson, Jessica Hoppe, Mark Naumann, Sandy
Korbel, and Shara Fischer
Recruitment and Retention
Recruitment and retention of key talent to support projected growth is a growing
focus of Alerus’ management and human resources department. U.S. labor experts
project that organizations will face increasing challenges in finding the caliber of
talent required to support business growth for the foreseeable future. With labor
shortages becoming the new normal, we have been proactively improving our position
as an “employer of choice” in the markets we serve. We are committed to providing
a challenging and stimulating work environment, providing training and development
opportunities to key staff, offering competitive compensation and benefits, as well as
developing incentive and reward programs based on achieving results.
Organic Growth
Organic growth has been essential to our long-term success, and it continues to be
the foundation on which we build our business. Our strong organizational structure
combined with ongoing strategic initiatives position us to continue to grow organically.
We consider our priorities carefully as we move forward, maintaining our focus on our
customers in every instance. As we make decisions about how to grow our business,
addressing the needs of customers is, as always, the first consideration.
Built to Grow
Alerus Financial’s organizational structure gives us a fundamental, competitive edge
to attaining organic growth. Three functional areas within our company streamline
responsibilities: sales and service, product development, and operations. Our sales
force focuses on attracting and retaining customers, the product development
employees work to develop and improve our products, and our operations employees
(who are centrally located) keep our processes in order. Our staff is instrumental
in supporting work across the organization. Organized into information technology,
compliance, human resources, risk management, and marketing departments, our
employees focus both on their responsibilities and on ways to collaborate across
the organization. Together, we work as an efficient team to do what’s right for
the customer.
Segmentation
Segmentation continues to play a vital role in achieving organic growth at Alerus.
In 2012, we partnered with a consultant and purchased a market research study
of the Red River Valley to better understand and grow our consumer customer base.
As we’ve experienced with our small business initiative, segmentation facilitates
targeted marketing which is more cost efficient and effective. Segmentation also
helps in better understanding specific customer needs and preferences. We will
continue to build on our segmentation work in 2013.
Business Line Expansions
In 2012, we dedicated resources to building two of our established business lines:
agriculture services and private banking.
The agriculture industry in the Red River Valley is currently experiencing an era
of increased prosperity, which promises to continue over the next ten years. We
identified this segment as one to grow in 2012, targeting both agriculture producers
and agribusinesses. In the Red River Valley specifically, gross farming incomes rose
by approximately 50% from 2006 to 2010, and the number of farms with incomes
greater than $500,000 grew by 307% between 1997 and 2010. As a result of our
history with this segment, we have the infrastructure, experience, and leadership
to successfully grow our agriculture relationships.
Mortgage Giving Back
In 2012, Alerus Mortgage donated more than $291,200
to local organizations through “Refer a friend. Build your
community.” program. Donations included:
Grand Forks Sales Team (L to R): Matt Jacobson,
Cathi Feeley, and Chris Wolf
• $133,600 to Second Harvest Heartland. This translates
to more than 490,000 meals to those in need!
• $119,700 to local schools
• $37,900 to local police and fire departments
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Private banking has been an important business line for Alerus since 2005, but
until last year we didn’t have one person dedicated exclusively to leading our
private banking efforts. In 2012, the right leader became available in the Twin
Cities—Sara Ausman. Ausman recruited an experienced private banking team, all
located in the Twin Cities, and now heads up our Private Banking and Professional
Services division across all markets. Through this division, we are delivering a full
complement of banking and wealth management services to affluent individuals and
businesses. In direct alignment with our relationship management delivery model,
we offer this customer segment unsurpassed expertise, service, and convenience
with one point of contact.
In 2012, we also introduced new products to meet the changing needs of our
customers. Alerus Investment Advisors introduced a new product, the Income Builder,
to all markets. The Income Builder is a diversified investment portfolio specifically
designed to produce a stable income stream for investors desiring minimal risk. Alerus
Agriculture added a highly competitive 30-year fixed rate financing option for land
purchases. And we expanded our indirect lending offering to include car dealerships
in Fargo, ND, and Moorhead, MN.
Customer Loyalty
Customer satisfaction alone is no longer a sufficient measure of an organization’s
effectiveness in keeping and gaining customers. Since the Net Promoter Score
(NPS) measurement strategy was introduced in 2003, more and more organizations
have used one specific question to gage long-term customer loyalty: “Would you
recommend us to your friends and family?” The answer to this question has been
shown to be a more statistically valid assessment of the organizational service
performance than other traditional customer satisfaction surveys.
Twin Cities Professional Services and Private
Banking Team (L to R): Kavanaugh Hill, Sara
Ausman, Laura La Fontaine, and Sarah Kostial
Alerus initiated an ongoing effort to measure customer loyalty with the NPS in 2011.
The NPS is determined by examining the net percentage of customers who would
recommend Alerus to a friend. In 2012, Alerus’ NPS average was 53 percent for
consumers and 50 percent for business customers. While formal standards do not
exist, these scores are significantly higher than the overall banking industry average
of 18 percent in 2011. The loyalty derived from these strong customer relationships
is a key component of Alerus’ brand equity.
Strategic Growth
Alerus continues to look for opportunities to increase shareholder value through
strategic acquisitions that leverage the Company’s capital, expertise, and
infrastructure. In our existing business lines and markets, we are constantly
seeking opportunities to acquire organizations that will enhance our market position
and strengthen our platform for continued organic growth, while maintaining our
revenue diversification. We expect the competition for acquisition opportunities to
continue to increase and as a result, have implemented an acquisition strategy that
focuses on developing long-term and short-term acquisition opportunities, while
maintaining the flexibility to respond to other opportunities that may arise. We also
view acquisitions as an opportunity for innovation, through the identification and
adoption of best practices within our existing business lines and the identification
of new opportunities that allow for even greater growth and diversification.
Michigan Alerus Retirement Solutions
Team (L to R): Denise Schroeder, Lee
Kliebert, and Roberta Angelo
Arizona Sales Team (L to R): Tim
Brunner, Seth Philbin, Rachel Guerrero,
Rob Schwister, and Bill Shaw
9
Operational excellence
Alerus has always operated from a position of strength due to our prudent
management style. True to form, our signifi cant growth over the past few years
inspired senior management to engage the organization in a comprehensive
assessment and analysis of our operating processes, systems, department functions,
and organizational structure. Coined “Project Penny,” this initiative was designed
to transform our organization in matters of efficiency and customer-centricity, to
restore core operating earnings, and to align the growth of the company with existing
strategies. Ultimately, our motivation for change is to ensure that we continue to
competitively and consistently serve in the best interest of our customers.
Project Penny Team (L to R): Tammy Adam,
Daniel Ward, and Kristine Lunde
At the close of 2012, we determined we have completed 433 out of 600 Project
Penny initiatives. We reported significant operational efficiencies and revenue
enhancements. Some of the more significant procedural changes we have made
revolve around improving the customer experience. We’ve shortened the account
opening process, extended our branch cutoff times and balancing processes to
align with the respective hours of the branch, and simplified the loan application
process internally so bankers can instantly share results with their customers upon
approval. And we’re not done. While the core objectives of Project Penny will be
complete in 2013, we’ve decided to make the identification and creation of process
improvements a way of life at Alerus Financial. The innovative ideas and energy our
employees have contributed to making Alerus a more customer-friendly place to do
business have far surpassed our expectations. We will continue to report progress
in this area of our company.
We also made several enhancements to our risk management programs in 2012
and adopted an approach to risk management that requires business lines and staff
managers to take more ownership of risk. While Alerus was able to successfully
navigate the financial crisis, many of our risk management enhancements reflect
the lessons learned by other banking organizations and the industry as a whole.
Alerus is focused on managing risk strategically, seeking ways to effectively
manage risk without sacrificing customer service and value or overall performance.
To accomplish this, our risk professionals are working to help business managers
anticipate, take ownership of, and manage risk. While it is not our intention to turn
business managers into risk experts, we are providing them the tools and resources
necessary to adopt a suitable risk profile for each of their businesses and then
effectively manage their business consistent with that profile, while maximizing
their financial performance.
Aidan Warrington,
Alliance Refuse Trucks
Phoenix, Arizona
Alerus Bank & Trust
Commercial Banking Customer
Alliance Refuse Trucks, founded
in 2003, specializes in selling all
makes and models of top-quality
used and refurbished garbage
trucks. Aidan Warrington serves as
president of the company, which
employs 40 people and is the
largest private rebuilder of garbage
trucks in the united states.
Moving Ahead as One Alerus
Putting together all the factors that made 2012 a successful
year for Alerus, it’s clear the future holds great promise for
stable growth. Changes large and small, together with careful
adherence to the principles that made Alerus the organization
it is today, resulted in a year in which we made great strides
forward in delivering on our promise—to serve in the best
interest of our customers while delivering shareholder value.
Combining the efforts of our people under unified leadership
and a clear strategic plan has created a stronger organization
ready to face the challenges and seize the opportunities the
future holds.
Disgruntled with his relationship—
or lack thereof—with his big bank,
Aidan turned to Alerus Bank &
Trust. He hasn’t looked back. “The
difference between the relationship
we had with our previous bank
and the relationship we have with
Alerus is beyond comprehension.
Our previous bank didn’t know
anything about our business.
Alerus thoroughly knows us and
our business,” Aidan says.
“I’ve been in business for 41 years
all over the world, and Alerus is
the finest bank I’ve worked with
anywhere. I’ve never worked
with a bank as responsive.
They are excellent people, and
their understanding of business
requirements is exemplary.”
10
alerus FInanCIal COrPOr aTIOn
|
annual rePOrT
|
2012
Leadership Team
Market President, Grand Forks
Chris Wolf, CPA
Market President, Fargo
Ann McConn, JD, CFA, CFP®
Market President, Twin Cities
David “Chip” Norris
Market President, Arizona
Rob Schwister
(L to R): Randy L. Newman, James Faircloth, Karl Bollingberg, Kris Compton, Eric Carlson, David Latta,
Jon Hendry, Jay Kim, and John Flesch.
Senior Management Team
Randy L. Newman
Chairman, President &
Chief Executive Officer
32 years with Alerus
David Latta
Executive Vice President,
Business Segment
7 years with Alerus
Kris Compton
Chief Operating Officer
38 years with Alerus
Jon Hendry
Senior Vice President,
Consumer Segment &
Chief Information Officer
29 years with Alerus
Eric Carlson, CFA
Chief Financial Officer
19 years with Alerus
Karl Bollingberg, CFP®
Executive Vice President &
Director of Banking Services
26 years with Alerus
John Flesch
Executive Vice President &
Director of Wealth Management
11 years with Alerus
James Faircloth
Senior Vice President,
Marketing & Human Resources
5 years with Alerus
Jay Kim
Executive Vice President,
General Counsel & Director
of Corporate Development
1 year with Alerus
Enterprise Sales Management
Jon Handy
Deposits
Karna Loyland
Loans
Dan Jacobson
Mortgage Loans
Steve Sherwood
Dan Doeden
Professional Services
and Private Banking
Sara Ausman
Trust & Investments
Doug Carpenter, CPA, CFP®
ESOP Fiduciary Services
Richard Joseph
Retirement Solutions
Brian Overby, CEBS
Retirement Plan Advisory
Services
Lee Kliebert
Alerus Investment Advisors
Sunil Swami
Brokerage Services
Brian Kraft
Financial & Estate Planning
Sandy Korbel, CPA, CFP®
Compliance & Enterprise
Risk Management
Bonnie Upham
(L to R): Randy L. Newman, Karen M. Bohn, A. Bart Holaday, James J. Karley, Harold Gershman,
Sally J. Smith, Lloyd G. Case, and Kevin D. Lemke.
Board of Directors
Randy L. Newman
Chairman, President &
Chief Executive Officer
Alerus Financial, N.A.
alerus Financial Corporation
Grand Forks, ND
A. Bart Holaday
Retired, Managing Director
Brinson Partners & UBS
Asset Management
Colorado Springs, CO
Grand Forks, ND
Karen M. Bohn
President
Galeo Group, LLC
Edina, MN
James J. Karley
President
Johnstown Bean/Cavalier
Bean Companies
North Central Commodities
Gilby, ND
Lloyd G. Case
President & Chief Executive Officer
Forum Communications Company
Fargo, ND
Harold A. Gershman
President
Gershman Enterprises, LLC
Grand Forks, ND
Kevin D. Lemke
President
Virtual Systems, Inc.
Grand Forks, ND
Credit Management
mark nelson
Finance & Accounting
Jerrod Hanson, CPA
Audit Management
Chad Johnson, CPA
Human Resources
Teresa Wasvick, PHR
Marketing & Corporate
Communications
Kara Schumacher
Technology
Tammy Adam
Chris Dunnigan
Roger Schmitz
Sally J. Smith
President & Chief Executive Officer
Buffalo Wild Wings, Inc.
Minneapolis, MN
11
alerus History
1879
Founded as the Bank of Grand Forks, the second bank chartered
in Dakota Territory.
1933
First National Bank in Grand Forks opened its doors in Grand Forks,
north Dakota.
1985
Acquired Northwood State Bank in Northwood, North Dakota.
1987
Acquired West Fargo State Bank in West Fargo, North Dakota.
1991
First National Bank in Grand Forks entered the Fargo market by
purchasing a failed savings and loan, consolidated its banks,
and changed its name to First National Bank North Dakota.
2000
First National Bank North Dakota changed its name to Alerus
Financial to refl ect the evolution from a traditional bank to a
total financial services company.
2003
Purchased Pension Solutions, Inc., a retirement plan services
company located in St. Paul, Minnesota and serving customers
across the country.
2006
Opened a trust and investment office in the Twin Cities;
opened two new branches in Fargo, North Dakota; purchased
Stanton Trust Company in Minneapolis, Minnesota.
2007
Opened a business banking office in Minnetonka, Minnesota;
purchased the retirement record keeping services unit of Acclaim
Benefits, Inc. in Minneapolis; acquired Stanton Investment
Advisors, Inc., a Minneapolis-based investment advisory firm.
2009
Expanded as Alerus Bank & Trust into Phoenix, Arizona, through
the purchase of a bank branch from Meridian Bank Arizona;
purchased the retirement plan practice of Eide Bailly, LLP in
Minneapolis; acquired deposits from BankFirst in Minneapolis;
acquired Prosperan Bank in Oakdale, Maplewood, and Minnetonka,
Minnesota; acquired Residential Mortgage Group in Minnetonka
and Arden Hills, Minnesota.
2011
Acquired selected loans and deposits from BNC National Bank in
Minnesota and Arizona, and a branch of BNC in Scottsdale, Arizona.
2012
Purchased PensionTrend, Inc., and PensionTrend Investment
Advisers, LLC, in Okemos, Michigan.
800.279.3200
|
alerus.com
|
Member FDIC
2012 ANNUAL financial REPORT
Management’s financial Review
About Alerus financial corporation
$17,869
$15,000
(dollars in thousands)
Alerus Financial Corporation (“the Company”) is a diversified
financial services company providing commercial and consumer
banking; residential mortgage; insurance; trust; security brokerage;
investment advisory; and retirement plan administration,
recordkeeping, and advisory products and services. It provides
them through its wholly owned subsidiary, Alerus Financial, N.A.,
and its affiliates Alerus Investment Advisors Corporation and
Alerus Securities Corporation. It has banking offices in North Dakota’s
Red River Valley; Minnesota’s Twin Cities; and Scottsdale, Arizona.
Chart A
Net Income
$20,000
$10,709
$10,000
$9,150
$7,369
$5,873
$5,000
2008
2009
Results of Operation
2010
2011
2012
Chart B
Earnings Per Share
$4.50
Earnings Summary
For the year ended December 31, 2012, the Company reported
net income of $17,869,000, an increase of $7,160,000, or 66.86%,
from the $10,709,000 earned during 2011. Earnings per common
share were $3.87 in 2012, an increase of $1.47, or 61.25%,
from the $2.40 earned during 2011. The trend for net income is
illustrated in chart A, while the trend for earnings per share is
illustrated in chart B. The cash dividend per share was $0.94 in
2012, compared to $0.89 in 2011. The trend in cash dividends
is illustrated in chart c. Return on Average Equity (ROE) is net
income stated as a percentage of the shareholder’s investment
in the Company. The ROE was 15.32% in 2012 compared to
10.87% in 2011 and 6.25% in 2010, as illustrated in chart D.
The average ROE over the past five years is 10.42%. Return on
Average Assets (ROA) is net income stated as a percentage of
average total assets of the Company. As chart E illustrates,
ROA was 1.49% in 2012, compared to 0.95% in 2011, and 0.54%
in 2010. The average ROA over the past five years is 1.02%. The
increases in net income year-over-year was principally the result
of growth in total net revenue, driven by increases in both net
interest income and fee based revenue, and also lower provision
for credit losses. These positive variances were partially offset
by an increase in total noninterest expense.
$3.50
$3.00
$2.09
$2.00
$1.68
$1.50
$1.33
$1.00
$0.50
2008
2009
2010
2011
2012
Chart C
Dividends Per Share
$1.00
$0.94
$0.95
$0.88
$0.90
$0.89
$0.84
$0.85
$0.80
$0.78
$0.75
$0.70
$0.65
$0.60
2008
2009
2010
2011
2012
Chart D
Return on Equity
17.00%
15.32%
15.00%
13.00%
11.00%
10.88%
8.98%
9.00%
7.00%
10.87%
6.25%
5.00%
Acquisitions
2008
On February 1, 2012, the Company acquired all of the outstanding
stock of PensionTrend, Inc, (“PTI”) and certain assets and
liabilities of PensionTrend Investment Advisors, LLC (“PTIA”), with
offices located in Okemos, Troy, and Marquette, Michigan. PTI
was then liquidated into the Company’s subsidiary bank and
both acquisitions were treated as asset purchases for income
tax purposes. The purchased assets and assumed liabilities
were recorded at their respective acquisition date fair values,
and identified intangible assets were recorded at fair value. The
purchase, consisting of 230 retirement plan clients with more than
23,000 plan participants, grew the Company’s wealth management
division by $750 million in retirement and individual asset
A L E RU S F I N A N C I A L C O R P O R AT IO N
$2.40
$2.50
The Company ended 2012 on a high note, reporting both record
net revenue and record net income despite operating in a
challenging environment which included a weak economy and
increased regulatory requirements. During 2012, the Company
focused on strengthening the balance sheet, improving
infrastructure and business processes, and restoring core
operating earnings. During a difficult economic environment,
we continue to benefit from the strategic investments made in
the Company over the past 3-5 years.
2
$3.87
$4.00
|
ANNUAL F INANCI AL R EP ORT
2009
2010
2011
2012
Chart E
Return on Assets
1.70%
1.49%
1.50%
1.30%
1.27%
1.10%
0.95%
0.87%
0.90%
0.70%
0.54%
0.50%
2008
|
2 012
2009
2010
2011
2012
management accounts. As part of the transaction, the Company
allocated $7,040,482 to an identified customer intangible.
Book Value Per Share
$29.00
$27.05
$27.00
Net interest income
$25.00
$23.92
Net interest income is a major source of earnings for the Company.
Net interest income is calculated as the difference between
interest income (which includes yield-related loan fees)
and interest expense. Net interest income, on a taxableequivalent basis, expressed as a percentage of average total
earning assets, is referred to as the net interest margin, which
represents the average net effective yield on earning assets. The
net interest margin is determined by many variables including the
volume, yield, and mix of earning assets and interest-bearing liabilities; the level of non-performing
assets; the level of non-interest bearing liabilities; the general level of interest rates; and the slope
of the yield curve.
$23.00
$22.01
$21.00
$19.00
$20.20
$18.88
$17.00
$15.00
2008
2009
2010
2011
2012
Net interest income on a taxable-equivalent basis was $47,708,000 in 2012, an increase of $7,103,000,
or 17.49%, from the $40,605,000 reported in 2011. During 2012, estimated cash flows on purchased
loans were adjusted to reflect new information obtained during the measurement period (as defined
by ASC Topic 805). The Company reclassified $28,083,000 from the non-accretable loan balance to the
accretable loan balance for purchased non-impaired loans. The reclassification was primarily the result
TABLE 1 - SELEcTED fiNANciAL DATA
For years ended December 31 (dollars in thousands except per share data)
RESULTS Of OPERATiONS
Interest income
Interest expense
Net interest income
Taxable equivalent adjustment
Taxable equivalent net interest income
Non-interest income
Net revenue
Non-interest expense
Provision for loan losses
Net income
Net income applicable to shareholders
PER SHARE
Earnings per common share
Common dividends declared
Book value per common share
Weighted average common shares
AVERAGE BALANcES
Interest-bearing deposits with banks
Federal funds sold
Investment securities
Loans held for sale
Loans - excluding covered assets
Covered assets
Total interest-bearing assets
Total assets
Non-interest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Other borrowed funds
Shareholders' equity
RATiOS
Return on average assets
Return on average common equity
Net interest margin
Efficiency ratio
Dividend payout ratio
Average shareholders' equity to average
total assets
$
$
$
$
2012
52,852
4,586
48,266
461
48,727
79,115
127,842
98,229
833
17,869
17,530
$
$
$
3.87
0.94
27.05
4,530,445
$
42,121
2,675
262,030
51,548
680,749
37,901
1,077,024
1,197,807
195,939
807,910
1,003,849
19,203
21,817
$ 136,624
$
$
2011
47,381
6,821
40,560
539
41,099
56,784
97,883
76,740
4,418
10,709
10,636
$
$
$
2.40
0.89
23.92
4,439,850
$
59,423
553
272,431
26,447
606,259
52,685
1,017,798
1,128,835
162,106
820,434
982,540
9,406
22,449
$ 105,930
$
2010
45,983
10,785
35,198
525
35,723
53,101
88,824
72,649
6,820
5,873
5,873
$
$
$
2009
38,893
11,196
27,697
442
28,139
42,375
70,514
51,751
7,185
7,369
7,369
$
$
$
2008
40,670
14,206
26,464
422
26,886
37,394
64,280
47,062
2,844
9,150
9,150
5 Year
compound
Growth Rate
3.18%
-26.07%
14.59%
-0.34%
14.37%
19.43%
17.35%
19.75%
-2.80%
11.52%
11.09%
1.33
0.88
22.01
4,405,864
$
1.68
0.84
20.20
4,377,517
$
2.09
0.78
18.88
4,385,685
10.59%
5.77%
7.64%
0.49%
38,561
1,238
261,415
35,106
547,599
68,995
952,914
1,079,425
126,513
803,779
930,292
1,679
41,249
$
93,947
$
261
18,905
151,931
4,880
537,590
13,354
726,921
849,307
117,029
606,140
723,169
137
34,117
82,052
$
168
5,915
104,846
1,470
535,647
648,046
723,041
104,090
467,427
571,517
27,234
31,965
84,101
107.12%
-24.61%
19.03%
108.80%
5.27%
0.00%
10.64%
10.83%
14.94%
10.25%
11.08%
-0.78%
16.24%
11.46%
$
$
1.49%
15.32%
4.52%
77.11%
24.29%
0.95%
10.87%
4.04%
78.83%
37.08%
0.54%
6.25%
3.75%
82.28%
66.17%
0.87%
8.98%
3.87%
73.85%
50.00%
1.27%
10.88%
4.15%
73.70%
37.32%
11.41%
9.38%
8.70%
9.66%
11.63%
3
of increased cash flow estimates resulting from improved loss expectations. The amount of accretable
yield associated with the change in estimate was $4,200,000, while total accretable yield for 2012 was
$5,666,000 compared to $2,019,000 in 2011. As of December 31, 2012 and 2011, net loans include
unaccreted accretable yield of $3,772,000 and $1,377,000, respectively, on acquired loans.
Average interest bearing assets were $1,077,024,000 in 2012, an increase of $59,226,000, or 5.82%,
from the $1,017,798,000 reported in 2011. The primary driver of the increase in earning assets was an
increase in loans, which was offset by a decrease in the investment portfolio. Average deposits were
$1,003,849,000 and $982,540,000, and funded 83.81% and 87.04% of the Company’s average
total assets in 2012 and 2011, respectively. Chart F illustrates net interest income on a tax equivalent
basis for the past five years.
For 2012, the net interest margin was 4.52%, compared with 4.04% in 2011. In 2012, the Company
realized 0.24% of earning asset expansion and experienced a 0.26% reduction in the cost of funding.
The Company realized accelerated interest accretion on the covered loan portfolio of $5,666,000 in
2012, compared to $2,019,000 in 2011. Acceleration of interest accretion occurs when actual cash flows
are different than estimated cash flows (as defined by ASC Topic 805). The effect on net interest margin
associated with the acceleration of interest accretion was 0.53% in 2012, compared to 0.20% in 2011.
The Company positions the balance sheet to be interest rate neutral to slightly liability sensitive,
defined as allowing liabilities on the balance sheet to reprice faster than the assets to take
advantage of a normally upward sloping yield curve. Financial institutions will feel additional
pressure on net interest margin the longer short-term rates remain at lower levels since there
is limited opportunity to reprice deposits and fixed rate loans mature or renew at lower rates.
The Company actively implements risk management strategies as detailed in the Interest Rate
Risk discussion to minimize the effects of interest rate volatility. Chart G illustrates net interest
margin for the past five years.
TABLE 2 - AVERAGE BALANCE SHEETS AND AVERAGE RATES
For years ended December 31 (dollars in thousands)
Average
Balance
ASSETS
Interest-bearing deposits with
$
42,121
banks
Federal funds sold
2,675
Investment securities (a)
262,030
Loans held for sale
51,548
Loans - excluding covered assets
Commercial and financial (a)
234,126
Agricultural
42,078
Real estate
364,411
Consumer loans
40,134
Total loans - excluding
680,749
covered assets
Covered assets
37,901
Total Earning Assets
$1,077,024
Cash and due from banks
32,429
Loan loss reserve
(14,611)
Goodwill and other intangibles
16,795
Bank premises and equipment
21,908
Other
64,262
Total Assets
$1,197,807
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings, NOW, and money
$ 556,282
market deposits
Time deposits
251,628
Short-term borrowings
19,203
Other borrowed funds
21,817
Total Interest-Bearing
Liabilities
$ 848,930
Non-interest-bearing deposits
195,939
Other liabilities
16,314
Shareholders' equity
136,624
Total Liabilities and
Shareholders' Equity
$1,197,807
Net Interest Margin/Income
Interest Rate Spread
2012
Average
Rate
Interest
0.24%
$
100
$
Average
Balance
2011
Average
Rate
59,423
0.26%
Interest
$
154
$
2010
Average
Rate
38,561
0.24%
Interest
$
93
0.11%
3.03%
3.07%
3
7,937
1,581
553
272,431
26,447
0.18%
3.26%
4.07%
1
8,884
1,076
1,238
261,415
35,106
0.14%
3.20%
4.42%
2
8,367
1,553
5.18%
5.00%
5.45%
5.19%
12,121
2,105
19,866
2,083
210,851
41,670
325,633
28,105
5.27%
5.70%
5.46%
5.35%
11,120
2,375
17,782
1,505
187,058
33,333
303,293
23,915
5.39%
5.80%
5.02%
5.62%
10,079
1,934
15,234
1,345
5.31%
36,175
606,259
5.41%
32,782
547,599
5.22%
28,592
19.83%
4.95%
$
7,517
53,313
52,685
$1,017,798
34,326
(10,665)
12,213
22,763
52,400
$1,128,835
9.53%
4.71%
5,023
$ 47,920
68,995
$ 952,914
53,466
(11,209)
15,025
19,233
49,996
$1,079,425
11.45%
4.88%
7,901
$ 46,508
0.24%
$
1,344
$ 548,362
0.41%
$
$
503,143
0.71%
2,530
65
647
272,072
9,406
22,449
1.41%
0.41%
3.17%
3,845
39
712
300,636
1,679
41,249
1.97%
2.81%
3.09%
5,910
47
1,274
$ 852,289
162,106
8,510
105,930
0.80%
$ 6,821
$ 846,707
126,513
12,258
93,947
1.27%
$ 10,785
4.04%
3.91%
$ 41,099
3.75%
3.61%
$ 35,723
1.01%
0.34%
2.97%
0.54%
$
4,586
4.52%
4.41%
$
48,727
$1,128,835
2,225
$1,079,425
(a) Taxable equivalent adjustment was calculated utilizing a marginal federal income tax rate of 35.5 percent.
4
Average
Balance
A L E RU S F I N A N C I A L C O R P O R AT IO N
|
ANNUAL F INANCI AL R EP ORT
|
2 012
$
3,554
Chart F
Net Interest Income
$53,000
$48,727
$48,000
(dollars in thousands)
Table 2 provides detailed information as to average balances,
interest income and expense, and rates earned and paid by
major balance sheet categories for the years 2010 through
2012. Table 3 provides an analysis of the change in net interest
income that is attributable to changes in volume of interestearning assets or interest-bearing liabilities, and to changes in
rates earned and paid.
covered Asset and Related fDic Loss Share
Indemnification Asset
$43,000
$35,723
$33,000
$28,000
$23,000
Assets subject to loss sharing agreements with the FDIC are
labeled “covered” on the balance sheet and include certain
loans, securities, and other assets. The fair value of the
reimbursement the Company expected to receive from the
FDIC under those agreements was recorded in the FDIC loss
share indemnification asset at the date of acquisition on the
Consolidated Balance Sheets. The fair value of the FDIC loss
share indemnification asset is estimated using a discounted cash
flow methodology. The discount rate used in this calculation is
determined using a risk-free yield curve plus a premium reflecting
the uncertainty related to the timing of cash flows.
$41,099
$38,000
$26,886
$28,139
2008
2009
2010
2011
2012
Chart G
Net Interest Margin
4.75%
4.52%
4.50%
4.25%
4.15%
4.04%
4.00%
3.87%
3.75%
3.75%
3.50%
Management makes various assumptions and judgments about
the collectability of acquired loan portfolios, including the
creditworthiness of borrowers and the value of the real estate
and other assets serving as collateral for the repayment of secured loans. In an FDIC-assisted
transaction, we record a loss share indemnification asset that we consider adequate to absorb
future losses which may occur in the acquired loan portfolio. In determining the size of the loss
share indemnification asset, we analyze the loan portfolio based on historical loss experience,
volume and classification of loans, volume and trends in delinquencies and nonaccruals, local
economic conditions, and other pertinent information. If our assumptions are incorrect, our actual
losses could be higher than estimated and increased loan loss reserves may be needed to respond
to different economic conditions or adverse developments in the acquired loan portfolio. Any increase
in future loan losses could have a negative effect on our operating results. However, in the event
expected losses from the covered portfolio were to increase more than originally expected, the
related increase in loan loss reserves would be largely offset by higher than expected indemnity
payments from the FDIC. The loss share agreement will expire on November 6, 2014.
2008
2009
2010
2011
2012
TABLE 3 - VOLUME/RATE VARiANcE ANALYSiS
(dollars in thousands)
Increase (decrease) in:
Interest income:
Interest-bearing deposits with banks
Federal funds sold
Investment securities
Loans held for sale
Loans - excluding covered assets
Commercial and financial
Agricultural
Real estate
Consumer loans
Total loans excluding covered assets
Covered assets
Total interest income
Interest expense:
Savings, NOW, and money market deposits
Time deposits
Short term borrowings
Other borrowed funds
Total interest Expense
Net Variance
change from 2011 to 2012
Volume
Rate
$
change from 2010 to 2011
Volume
Rate
Total
Total
(45)
4
(339)
1,021
1,227
23
2,118
644
4,012
(1,410)
$ 3,244
$
(9)
(2)
(608)
(516)
(226)
(293)
(34)
(66)
(619)
3,904
$ 2,149
$
(54)
2
(947)
505
1,001
(207)
2,084
578
3,393
2,494
$ 5,393
$
51
(1)
353
(383)
1,282
484
1,122
236
3,123
(1,868)
$ 1,275
$
10
0
165
(94)
(241)
(43)
1,426
(76)
1,067
(1,010)
$
137
$
$
$
$
$
319
(562)
217
(581)
(605)
$ (1,648)
(1,503)
(225)
19
(3,359)
$ (1,329)
(2,065)
(8)
(562)
(3,964)
$ 1,880
$ 3,496
$ 5,376
32
(289)
41
(20)
(236)
$ 3,480
(913)
(1,026)
(15)
(45)
(1,999)
$ 4,148
(881)
(1,315)
26
(65)
(2,235)
$ 7,628
61
(1)
517
(477)
1,041
441
2,548
160
4,190
(2,878)
$ 1,412
5
In general, FDIC loss share agreements cover 80% of certain losses relating to loans acquired
from the FDIC in failed bank acquisitions. Loss share agreements do not, however, cover all
loan losses that might be incurred. Additionally, the loss sharing agreements have limited terms;
therefore, any charge-offs of related losses that we experience after the term of the loss
sharing agreements will not be reimbursed by the FDIC and will negatively impact our results
of operation. The loss sharing agreements also impose standard requirements on us which must
be satisfied in order to retain loss share protection. The FDIC has the right to refuse or delay
payment for loan losses if the loss sharing agreements are not managed in accordance with their terms.
A change in estimate affected the cash flows on covered loans and the corresponding FDIC
indemnification asset. During the quarter ended December 31, 2012, the Company impaired the FDIC
indemnification asset by $5.1 million. The reason for the impairment was a change in estimate of the
cash flows expected to be received from the FDIC.
Provision for Loan Losses
Annual fluctuations in the provision for loan losses result from management’s regular assessment of
the adequacy of the allowance for loan losses and are maintained at a level considered appropriate
by management for probable and estimable incurred losses. The provision for loan losses for 2012
was $833,333, a decrease of $3,584,667, from $4,418,000 during 2011. This amount of provision
was utilized to support growing loan volumes and to maintain the ratio of allowance for loan losses
to end-of-year loans. The ratio of allowance for loan losses to end-of-year non-covered loans was
2.05% for 2012, compared to 2.05% for 2011. Average loans excluding covered assets were
$680,749,000 in 2012, an increase of $74,490,000, or 12.29%, from the $606,259,000 reported
in 2011. The decrease in provision for loan losses illustrates stabilizing credit quality. The Company
continues to take prudent risk management initiatives by allocating $833,000 to the provision for
loan losses even though net recoveries were received in the amount of $1,422,000 during 2012,
compared to charge offs of $433,000 during 2011. The amount of provision to be taken in future
periods will depend on management’s assessment of the adequacy of the allowance for loan losses
in relation to the loss experience of the entire loan portfolio.
Non-Interest Income
The Company continues to expand non-interest income associated with the Company’s banking
and wealth management divisions. Management is working to increase the contribution of
non-interest income to operating results by increasing the delivery of financial products and
services. The Company’s primary sources of non-interest income consist of trust services,
retirement plan services and recordkeeping, service charges on deposit accounts, loan fees,
and mortgage originations.
Non-interest income is a significant source of revenue for the Company, representing 61.88%
of taxable equivalent net revenue in 2012, compared with 58.52% in 2011. Non-interest income
was $80,134,000 in 2012, a $22,856,000, or 39.90%, increase from the $57,278,000 reported
in 2011. The large increase in non-interest income was due to the recovery in the equity
markets increasing the assets under management and administration, and a low interest rate
environment that was conducive to mortgage originations.
Wealth management income, which is the Company’s largest source of non-interest income, was
$42,835,000 in 2012, a $7,734,000, or 22.03%, increase from the $35,101,000 reported in 2011.
The Company earns trust, investment, and individual retirement account fees from managing
and administering assets, including mutual funds, corporate trusts, personal trusts, retirement
plan accounts, and separately managed accounts. At December 31, 2011, these assets totaled
$11.20 billion, up $2.45 billion from $8.75 billion at December 31, 2011. Trust, investment, and
recordkeeping fees are primarily based on a tiered scale relative to the market value of the assets
under management or administration. These fees increased to $40,643,000 in 2012, a $7,497,000,
or 22.62%, increase from the $33,146,000 reported in 2011. Trust, investment, and recordkeeping
income benefited from the acquisition of PTI and PTIA on February 1, 2012, which added $750 million
to assets under management and administration. The Company receives commissions and other fees
for providing services to full service brokerage customers and insurance services from its indirect
subsidiaries, Alerus Securities Corporation and Alerus Financial Insurance Services Corporation. These
fees were $2,192,000 in 2012, a $237,000, or 12.12%, increase from the $1,955,000 reported in 2011.
Service charges on deposit accounts were $1,626,000 in 2012, a $29,000, or 1.75%, decrease from
the $1,655,000 reported in 2011. The decrease in deposit service charges was associated with new
6
A L E RU S F I N A N C I A L C O R P O R AT IO N
|
ANNUAL F INANCI AL R EP ORT
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2 012
TABLE 4 - NON-iNTEREST iNcOME
For years ended December 31 (dollars in thousands)
Wealth management income:
Retirement plans
Property management
Trusts, agencies, wills, estates, and other
Brokerage commissions
Insurance commissions
Investment advisory fees
Total Wealth Management income
Service charges on deposit accounts
Mortgage origination and loan servicing fees
Investment security gains (losses)
Other non-interest income
Total Non-interest income
2012
$
2010
% increase/
Decrease
2012/2011
% increase/
Decrease
2011/2010
27.70%
-100.00%
7.82%
11.19%
21.59%
26.49%
22.03%
7.78%
-40.61%
11.52%
-3.05%
-83.93%
-12.71%
3.43%
1,940
18,073
(2,782)
1,935
-1.75%
97.26%
-2,072.73%
-8.19%
-14.67%
-12.88%
-99.60%
147.42%
$ 53,101
39.90%
7.87%
2011
32,484
6,908
1,978
214
1,251
$ 42,835
25,437
313
6,407
1,779
176
989
$ 35,101
23,601
527
5,745
1,835
1,095
1,133
$ 33,935
$
$
$
1,626
31,061
217
4,395
$ 80,134
$
1,655
15,746
(11)
4,787
$ 57,278
$
provisions of the Electronic Funds Transfer Act (Federal Regulation E), which limits financial institutions
from providing overdraft protection on debit card transactions without consumers’ consent.
This is a valuable benefit to our consumers that we are unable to provide without their permission
under the new regulations. The decline in overdraft income has been mitigated by the aggressive
customer acquisition strategy implemented in 2011 and 2012, as well as a continued effort to sell our
commercial services product suite which includes Remote Deposit, Positive Pay, Business Online, and
ACH services. Remote Deposit allows business owners to convert paper checks into electronic images
that can then be deposited online. Charges collected on deposit accounts are typically reclassified to
loan interest income when the fee collected is associated with an overdraft balance.
Mortgage origination and loan servicing fees were $32,080,000 in 2012, a $15,840,000, or 97.54%,
increase from the $16,240,000 reported in 2011. The Company’s mortgage group originated
$1.2 billion in mortgage volume and produced $30,830,000 in non-interest income in 2012. The
collection of prepayment premiums on fixed rate loans contributed to the increase in mortgage
origination and loan servicing fees. Loan prepayments were $507,000, a $389,000, or 329.66%,
increase from the $118,000 collected in 2011.
Security gains were $217,000 in 2012, a $228,000, or 2,073%, increase from the $11,000 loss
reported in 2011. The security gains in 2012 were the result of a corporate bond being called at a
gain and the sale of an additional corporate bond to minimize exposure to Europe. Other non-interest
income was $3,376,000 in 2012, a $917,000, or 21.36%, decrease from the $4,293,000 reported
in 2011. During 2011, there was non-recurring income associated with the sale of our Property
Management Division which provided a gain prior to the write-off of the intangible of $1,403,000.
Table 4 provides a summary of changes in non-interest income for the past three years.
Non-interest Expense
Total non-interest expense was $98,229,000 in 2012, a $21,489,000, or 28.00%, increase from
the $76,740,000 reported in 2011. The large increase in non–interest expense was associated
with the following items:
1. The Acquisition of PTI/PTIA - $3,300,000.
2. The Amortization of the PTI/PTIA identified intangible - $1,205,000.
3. The direct production mortgage expenses based on increased volumes - $1,648,000.
4. The direct incentive compensation expense paid for mortgage
origination based on increased volumes.
5. The impairment of the FDIC indemnification asset - $5,121,000.
Chart H
Efficiency Ratio
85.00%
The Company’s efficiency ratio, defined as the percent of expense
to total income, decreased to 77.11% in 2012, compared to
78.83% in 2011. chart H illustrates the trend in the efficiency
ratio over the last five years. While control of non-interest
expense is a top priority of management, the higher-thanaverage efficiency ratio is partially due to the Company’s goal of
generating 50% of total revenue from non-interest income sources.
82.28%
82.50%
80.00%
78.83%
77.11%
77.50%
75.00%
73.70%
73.85%
2008
2009
72.50%
70.00%
2010
2011
2012
7
The efficiency ratio for a business comprised solely of net interest margin income is dramatically lower
than a business comprised solely of asset management income and mortgage origination income;
however, the income generated from asset management has higher risk-adjusted returns since the
Company is required to allocate significant amounts of regulatory capital to traditional banking assets
as well as a credit reserve. Given continued net interest margin pressure in the banking industry
today and a competitive market environment, management is seeking to develop a diversified revenue
stream that will be less sensitive to extreme interest rate movements. This diversification will create a
higher efficiency ratio when compared to local peers without a similar revenue mix. Management will
continue to balance short-term earnings with the long-term competitive development of its resources
such as people, facilities, products, and computer systems.
Salary and employee benefit costs are the largest component of total expense for the Company.
Salary and employee benefit costs represented 60.44% of total expenses in 2012, compared
to 58.85% in 2011, and 60.79% in 2010. Salary and employee benefit costs were $59,374,000
in 2012, a $14,210,000, or 31.46%, increase from the $45,164,000 reported in 2011. The large
increase in salary and employee benefit costs were partially due to increased mortgage based
incentive compensation due to higher levels of production.
Occupancy expense was $4,189,000 in 2012, a $77,000, or 1.87%, increase from the $4,112,000
reported in 2011.
The increase in occupancy expense was due to adding two locations associated with the
acquisition of PTI/PTIA during February 2012. The Company conducted an entire facility review
during 2012 in preparation for a number of leased facilities coming due in the upcoming year.
The Company will be looking to consolidate unnecessary customer space in an effort to create
a more welcoming environment.
Furniture and equipment expense was $4,147,000 in 2012, a $449,000, or 12.14%, increase from the
$3,698,000 reported in 2011. The increase in furniture and equipment expense was associated with
upgrading systems and infrastructure to enhance processes to position the Company for growth.
FDIC Insurance expense was $893,000 in 2012, a $371,000, or 29.35%, decrease from the $1,264,000
reported in 2011. FDIC Insurance premiums were elevated during the financial crisis of 2008, and
we have seen 468 financial institutions fail since then. The FDIC changed the assessment base from a
total deposit approach to a tangible asset approach resulting in lower premiums for the Company.
Professional fee expense was $1,894,000 in 2012, a $996,000, or 34.46%, decrease from the
$2,890,000 reported in 2011. Professional fees were elevated during 2011 due to an engagement
with a consulting company to improve business processes and strengthen infrastructure. The total
cost of the engagement was $802,000.
Correspondent and other service fee expense was $5,668,000 in 2012, a $345,000, or 6.48%, increase
from the $5,323,000 reported in 2011. The increase in expense was associated with ATM and other
service contracts.
Table 5 provides a summary of changes in non-interest expenses for the past three years.
TABLE 5 - NON-INTEREST EXPENSE
For years ended December 31 (dollars in thousands)
Salaries
Employee benefits
Occupancy expense
Furniture and equipment expense
Marketing, business development, and public relations
Supplies, telephone, and postage
FDIC insurance
Professional fees (legal, audit, and consulting)
Correspondent and other service fees
Other non-interest expenses
2012
$ 49,072
10,302
4,189
4,147
3,052
3,148
893
1,894
5,668
$ 15,864
2011
$ 36,359
8,805
4,112
3,698
2,649
2,810
1,264
2,890
5,323
$ 8,830
2010
$ 36,066
8,095
3,959
3,297
2,908
2,905
1,764
2,086
3,423
$ 8,145
% Increase/
Decrease
2012/2011
34.97%
17.00%
1.87%
12.14%
15.21%
12.03%
-29.35%
-34.46%
6.48%
79.66%
Total Non-Interest Expenses
$ 98,229
$ 76,740
$ 72,649
28.00%
8
A L E RU S F I N A N C I A L C O R P O R AT IO N
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ANNUAL F INANCI AL R EP ORT
|
2 012
% Increase/
Decrease
2011/2010
0.81%
8.77%
3.87%
12.16%
-8.91%
-3.27%
-28.35%
38.55%
55.52%
8.41%
5.63%
Other non-interest expense was $15,864,000 in 2012, a $7,034,000, or 79.66%, increase from
the $8,830,000 reported in 2011. The increase in other non-interest expense is the result of
higher mortgage origination expenses due to the increased volume of originations, the additional
intangible amortization associated with the acquisition of PTI/PTIA, and the $5,100,000
impairment of the FDIC indemnification asset associated with a change in estimated cash fl ows
expected to be received from the FDIC as described above on the section titled “Covered Asset
and Related FDIC Loss Share Indemnification Asset.”
Statement of financial condition
Overview
Total assets of the Company were $1,322,095,000 at December
31, 2012, a $165,486,000, or 14.31%, increase from the
$1,156,609,000 reported at December 31, 2011. Total
average assets of the Company were $1,197,807,000 in 2012,
a $68,972,000, or 6.11%, increase from the $1,128,835,000
reported in 2011. chart i illustrates average total assets for the
past five years. Average earning assets were $1,077,024,000
in 2012, an increase of $59,226,000, or 5.82%, from the
$1,017,798,000 reported in 2011. Average earning assets
represent 89.92% of average total assets in 2012, compared
to 90.16% in 2011. The increase in average earning assets of
$59,226,000, or 5.82%, was primarily driven by an increase in
loans excluding covered assets and mortgage loans held for sale, and by the amortization of the
investment portfolio. Average interest bearing liabilities represented 78.82% of average earning
assets in 2012, compared to 83.74% in 2011.
Chart I
Average Total Assets
$1,300,000
$1,197,807
$1,200,000
$1,128,835
$1,079,425
$1,100,000
$1,000,000
$900,000
$849,307
$800,000
$723,041
$700,000
$600,000
$500,000
2008
2009
2010
2011
2012
Securities
The Company uses its investment securities portfolio for several purposes. It serves as a vehicle
to manage interest rate risk and prepayment risk, generates interest income from the investment of
excess funds depending on loan demand, and provides liquidity as it is used as collateral for public
deposits and wholesale funding sources. While it is the Company’s intent to hold its investment
securities to maturity, the Company may take actions to sell before maturity in response to
structural changes in interest rate risks and to meet liquidity requirements.
At December 31, 2012, investment securities, both available for sale and held to maturity, totaled
$263,659,000, compared with $277,862,000 at December 31, 2011. The $14,203,000 yearover-year decrease was associated with $67,223,000 in purchases, $2,512,000 in sales, and the
continued monthly amortization of our agency backed mortgage portfolio. Investing in this interest
rate environment can be challenging as interest rate risk is balanced with extension risk.
The weighted average yield of the investment portfolio was 3.04% at December 31, 2012, compared
with 3.33% at December 31, 2011. The decrease in weighted average yield was associated with
unscheduled prepayments on the agency backed mortgage portfolio and reinvestments made under
a lower interest rate environment. At December 31, 2012, the available for sale portfolio included a
$7,643,000 net unrealized gain, compared with a net unrealized gain of $5,956,000 at December 31, 2011.
The Company periodically evaluates available for sale securities for other than temporary impairment.
There is uncertainty concerning the effect of the mortgage crisis and the eventual impact on
mortgage collateral being held in private label mortgage-backed securities. At December 31, 2012,
the Company held $6,758,000 of private labeled mortgage related securities with a current market
value gain of $233,000. A detailed analysis is performed quarterly to determine if any security
is other than temporarily impaired by analyzing constant default rates, prepayment speeds, and loss
severities. Based on the evaluation for the year ending December 31, 2012, there were no securities
that illustrated other than temporary impairment.
Loans
Total loans were $770,778,000 at December 31, 2012, a $97,347,000, or 14.46%, increase from
the $673,431,000 reported at December 31, 2011. Average loans were $718,650,000 in 2012,
a $59,706,000, or 9.06%, increase from the $658,944,000 reported in 2011. The increase in
average loans was driven by strong organic growth across all geographic locations and partial
9
offset by a reduction in loans covered by the FDIC loss share agreement. Total non-covered
loans were $738,086,000 at December 31, 2012, an $112,705,000, or 18.02%, increase from the
$625,381,000 reported at December 31, 2011. The loan/deposit ratio increased to 69.08% at
December 31, 2012, compared to 68.36% at December 31, 2011, as the Company utilized cash
flow from the investment portfolio to fund loan growth.
The Company periodically sells loans to a participation network to manage concentration risk
and reduce credit exposure. The sold loan portfolio was $399,385,000 on December 31, 2012,
a $56,755,000, or 16.56%, increase from the $342,630,000 reported at December 31, 2011.
The Company originated and sold $116,600,000 of real estate mortgages to Fannie Mae during 2012
and retained the servicing asset. The Company also held $77,432,000 of loans for sale at December
31, 2012, a $28,522,000, or 58.32%, increase from the $48,910,000 reported at December 31, 2011.
Loans held for sale are all single family residential mortgage loans that will be sold to the secondary
market. The Company’s loan mix, excluding covered loans, illustrated growth in the commercial and
financial and consumer asset classes and a decrease in the real estate asset class during 2012. Table
6A provides a summary of changes in loans, excluding covered loans, for the past five years. The
covered loan mix is heavily weighted in commercial real estate, which comprises $30,998,000, or
94.82%, of the $32,692,000 portfolio. Table 6B provides a summary of the loan mix on covered loans.
Deposits
Core deposits provide the Company’s major source of funds from individuals, businesses, and local
government units. Core deposits consist of all local non-interest bearing deposits, interest-bearing
savings and checking accounts, and time deposits of less than $100,000. Core deposits funded
74.91% and 74.94% of total assets at December 31, 2012 and 2011, respectively.
Total deposits were $1,115,750,000 at December 31, 2012, a $130,640,000, or 13.26%, increase
from the $985,110,000 reported at December 31, 2011. Average deposits were $1,003,849,000 in
2012, a $21,309,000, or 2.17%, increase compared with the $982,540,000 reported in 2011.
Non-interest bearing deposits were $267,208,000 at December 31, 2012, a $78,578,000, or 41.66%,
increase from the $188,630,000 reported at December 31, 2011. Average non-interest bearing
deposits were $195,939,000 in 2012, a $33,833,000, or 20.87%, increase compared with $162,106,000
in 2011. The increase in non-interest bearing deposits was primarily attributable to seasonal public
fund transactional accommodations, existing customers holding more liquidity, and a dedicated effort
to increase our small business customer segment.
Interest-bearing savings deposits totaled $595,252,000 at December 31, 2012, a $59,243,000,
or 11.05%, increase from the $536,009,000 reported at December 31, 2011. Average interestbearing savings deposits were $556,282,000 in 2012, a $7,920,000, or 1.44%, increase compared with
$548,363,000 in 2011. Interest-bearing time deposits were $253,290,000 at December 31, 2012,
a $7,181,000, or 2.76%, decrease from the $260,471,000 reported at December 31, 2011. Average
interest-bearing time deposits were $251,628,000 in 2012, a $20,444,000, or 7.51%, decrease
TABLE 6A - LOANS EXCLUDING COVERED ASSETS BY TYPE
As of December 31 (dollars in thousands)
2012
Commercial and financial
$ 260,518
Agricultural
46,607
Real estate
381,672
Consumer loans
49,289
Total Loans
$ 738,086
PERCENT OF LOANS BY TYPE
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans
Sold loans:
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Sold Loans
10
35.30%
6.31%
51.71%
6.68%
100.00%
$
57,146
5,049
332,590
4,600
$ 399,385
A L E RU S F I N A N C I A L C O R P O R AT IO N
|
2011
$ 209,406
44,328
336,874
34,773
$ 625,381
2010
$ 185,645
48,073
278,542
23,420
$ 535,681
2009
$ 163,524
44,806
294,441
23,555
$ 526,326
2008
$ 177,246
37,139
310,866
23,202
$548,453
33.48%
7.09%
53.87%
5.56%
100.00%
34.66%
8.97%
52.00%
4.37%
100.00%
31.07%
8.51%
55.94%
4.48%
100.00%
32.32%
6.77%
56.68%
4.23%
100.00%
$
57,446
285,184
$ 342,630
$
54,294
267,076
$ 321,370
ANNUAL F INANCI AL R EP ORT
|
$
51,516
208,100
$ 259,616
2 012
$ 73,227
215
110,364
$183,806
TABLE 6B - COVERED LOANS BY TYPE
As of December 31 (dollars in thousands)
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Covered Loans
PERCENT OF LOANS BY TYPE
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans
$
$
2012
1,457
64
30,998
173
32,692
$
$
2011
3,379
74
44,318
279
48,050
$
$
2010
5,246
85
56,455
392
62,179
$
$
2009
13,336
259
72,636
770
87,001
4.46%
0.20%
94.82%
0.53%
100.00%
7.03%
0.15%
92.23%
0.58%
100.00%
8.44%
0.14%
90.79%
0.63%
100.00%
15.33%
0.30%
83.49%
0.89%
100.00%
2012
$ 267,208
2011
$ 188,630
2010
$ 156,844
2009
$ 130,442
2008
$ 116,189
$ 20,168
188,995
386,089
125,363
127,927
$1,115,750
$ 20,427
138,579
377,003
118,397
142,074
$985,110
$ 14,033
136,392
363,169
116,068
164,275
$950,780
$ 12,173
137,075
346,041
128,337
192,031
$946,099
$
23.95%
19.15%
16.50%
13.79%
18.38%
1.81%
16.94%
34.60%
11.24%
11.47%
100.00%
2.07%
14.07%
38.27%
12.02%
14.42%
100.00%
1.48%
14.35%
38.20%
12.21%
17.28%
100.00%
1.29%
14.49%
36.58%
13.56%
20.30%
100.00%
1.54%
18.77%
26.46%
13.89%
20.96%
100.00%
TABLE 7 - DEPOSITS BY TYPE
As of December 31 (dollars in thousands)
Non-interest-bearing deposits
Interest-bearing deposits:
Saving accounts
NOW accounts
Money market deposit accounts
Time deposits $100,000 and over
Time deposits less than $100,000
Total Deposits
PERCENT OF DEPOSITS BY TYPE
Non-interest-bearing deposits
Interest-bearing deposits:
Saving accounts
NOW accounts
Money market deposit accounts
Time deposits $100,000 and over
Time deposits less than $100,000
Total Deposits
9,741
118,688
167,291
87,847
132,520
$632,276
compared with $272,072,000 reported in 2011. Time certificates of deposits are largely viewed as
purchased funds and are managed to levels deemed appropriate given alternative funding sources.
Table 7 provides a summary of changes in deposits for the past six years.
Other Borrowed Funds
The Company utilizes both short-term and long-term borrowings to fund growth of earning assets
in excess of deposit growth. Other borrowed funds, as of December 31, 2012, totaled $21,755,000, a
$116,000, or 0.53%, decrease from the $21,871,000 reported at December 31, 2011. Other borrowed
funds consists of one Federal Home Loan Bank advance totaling $20,000,000, and obligations under
a capital lease associated with the lease agreement on the Corporate Center office located in Grand
Forks, North Dakota, of $1,755,000.
Capital Resources
The Company is committed to managing capital for maximum shareholder benefit and maintaining
strong protection for depositors and creditors. The Company continually assesses its business
risk and capital position. The Company also manages its capital to exceed regulatory capital
requirements for well-capitalized bank holding companies. To achieve these capital goals, the
Company employs a variety of capital management tools including dividends and common
share repurchases. Total common shareholders’ equity was $122,894,000 at December 31, 2012,
a $15,644,000, or 14.59%, increase from the $107,250,000 reported at December 31, 2011. The
increase is the result of current year’s earnings less dividend payments to shareholders, common
stock repurchases, and the market value change in the investment portfolio.
The Company applied for and received approval for $20,000,000 in Small Business Lending Funds
(SBLF) at an initial interest rate of 1%. The Company is committed to small business lending and
is proud to contribute to the nation’s recovery. The Company views the SBLF as an intermediate
source of capital and plans to repay these funds within the next 3 years.
11
TABLE 8A - NON-PERFORMING ASSETS EXCLUDING COVERED ASSETS
As of December 31 (dollars in thousands)
2012
2011
Non-accrual Loans
Commercial and financial
$
941
$ 2,620
Agricultural
69
Real estate
854
3,395
Consumer loans
354
Total Non-Accrual Loans
$ 2,149
$ 6,084
$
1,738
4,956
$ 6,694
$
1,769
9,105
$ 10,874
3,161
2,302
4
$ 5,467
Foreclosed assets
Other real estate owned
Total Non-Performing Assets
4,780
$ 11,474
$
6
1,927
$ 12,807
$
26
26
16
27
43
$
Loans past due 90 days or more
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans Past Due 90 Days or More
Percentage of non-performing loans to loans
Percentage of non-performing assets to assets
Percentage of allowance for loan losses
to non-performing loans
$
19
2,603
$ 4,771
20
2,866
$ 8,970
$
$
$
95
1
96
0.29%
0.36%
672.65%
$
$
332
87
419
0.97%
0.78%
197.23%
2010
$
1.25%
1.02%
131.56%
2009
$
2.07%
1.14%
101.25%
2008
$
146
1,207
$ 6,820
$
71
16
87
1.00%
0.90%
140.67%
The Company paid dividends of $0.94 during 2012, representing a $0.05, or 5.62%, increase over
the $0.89 paid during 2011. The Company’s dividend policy is influenced by the belief that most
shareholders are interested in long-term performance as well as current yield. The current dividend
yield is considered reasonable given the Company’s present cash flow position, level of earnings, and
the strength of its capital.
The Company is committed to providing existing shareholders liquidity for their equity investment. The
Company successfully completed the purchase of 36,319 shares (0.8%) of its common stock through
a tender offer to all shareholders. Pursuant to the terms of the tender offer, the final price was $31.14,
resulting in an aggregate purchase price of $1,125,057. As provided in the tender offer, the Company
assigned the right to purchase the tendered shares to the Company’s Employee Stock Ownership Plan
(ESOP). As a result, the Company was able to provide an opportunity for shareholders to sell their
shares without reducing its total capital or number of outstanding shares, preserving capital to support
the Company’s operations and strategic objectives.
Banking industry regulators define minimum capital requirements for banks and holding companies.
The Company’s Tier 1 and total risk-based capital ratios as of December 31, 2012, amounted to
13.02% and 14.27%, respectively, well above the requirements to be considered well capitalized
of 6.00% for Tier 1 and 10.00% for total risk based capital. This compares to Tier 1 and total riskbased capital ratios of 13.67% and 14.93% at December 31, 2011. Regulatory authorities also have
established a minimum leverage ratio of 5.00%, which is defined as Tier 1 capital to average assets.
The Company’s leverage ratio was 10.05% in 2012, compared to 9.87% in 2011.
Risk Analysis
Asset Quality Risk
Management believes its ability to identify and assess risk and return characteristics of the Company’s
loan portfolio is critical for profitability and growth. It is in the best interest of shareholders, regional
communities, customers, and the Company to follow a credit policy that carefully balances risk and
return tradeoffs, and ensures that potential credit problems are closely monitored. The Company’s
strategy for credit risk management includes well-defined, centralized credit policies; uniform
underwriting criteria; and ongoing risk monitoring and review processes for all commercial and
consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry,
and customer level; regular credit examinations; and management reviews of loans experiencing
deterioration of credit quality. The Company strives to identify potential problem loans early, take
necessary charge-offs promptly, and maintain adequate reserve levels for probable loan losses
inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits
and continually assesses the adequacy of the allowance for possible loan loss. The Company utilizes
an internal lending division, Special Credit Services, to develop and implement strategies for the
management of individual non-performing loans.
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TABLE 8B - NON-PERFORMING COVERED ASSETS
As of December 31 (dollars in thousands)
2012
Non-accrual Loans
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Non-Accrual Loans
$
$
Foreclosed assets
Other real estate owned
2011
380
8
3,746
4,134
$
$
7,439
Total Non-Performing Covered Assets *
Loans past due 90 days or more
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans Past Due 90 Days or More
$
11,573
$
541
541
$
459
6,083
6,542
2010
$
$
271
11,021
11,292
9,050
$
15,592
-
2009
$
836
5,270
6,106
$
7,638
$
18,930
$
377
377
$
85
3,224
$
9,415
$
92
92
$
*Exposure on Covered Assets is limited to 20% on the first $66 million and 5% thereafter.
TABLE 9 - SUMMARY OF LOAN LOSS EXPERIENCE
As of December 31 (dollars in thousands)
2012
$ 680,749
2011
$606,259
2010
$ 547,599
2009
$ 537,590
2008
$ 535,647
$ 12,826
$
8,841
$ 11,053
$
$
(440)
(22)
(1,191)
(409)
$(2,062)
(739)
(7)
(321)
(199)
$(1,266)
(2,592)
(14)
(7,256)
(82)
$(9,944)
(1,975)
(1,963)
(131)
$(4,069)
(896)
(229)
(332)
$(1,457)
$
230
1
3,084
189
$ 3,504
$
$
$
$
Net charge-offs
Provision charged to earnings
$
$
Balance at end of year
$ 15,101
$ 12,826
0.09%
0.05%
-0.52%
0.55%
-0.21%
2.05%
Average loans excluding covered assets
Allowance for loan losses:
Balance at beginning of year
Charge-offs:
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Charge-Offs
Recoveries:
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Recoveries
Ratio of net charge-offs to average loans:
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans
Ratio of allowance for loan losses to end
of year non-covered loans
1,442
833
$
371
13
318
131
833
(433)
4,418
$
684
12
163
53
912
$
7,813
51
6
67
124
$
6,252
66
5
26
77
174
$ (9,032)
6,820
$ (3,945)
7,185
$ (1,283)
2,844
$
8,841
$ 11,053
$
0.17%
-0.01%
0.00%
0.24%
0.07%
1.02%
0.01%
2.34%
0.12%
1.65%
1.09%
-0.02%
0.64%
0.27%
0.73%
0.45%
-0.02%
0.07%
1.30%
0.24%
2.05%
1.65%
2.10%
1.42%
7,813
The allowance for credit losses provides coverage for probable and estimable losses inherent in
the Company’s loan portfolio. Management evaluates the allowance each quarter to determine if
it is adequate to cover inherent losses. The evaluation of each element and the overall allowance
is based on a continuing assessment of problem loans and related off-balance sheet items, recent
loss experience, and other factors including regulatory guidance and economic conditions.
The assets acquired from the acquisition of Prosperan Bank from the FDIC included non-performing
loans and other loans with characteristics indicative of high-credit risk including a substantial portion
of interest only, homebuilder, and other construction financing. Because these loans are covered under
loss share agreements with the FDIC, the Company’s financial exposure to losses from these assets is
substantially reduced. To the extent actual losses exceed the Company’s estimates at acquisition, the
Company’s financial risk would only be its share of those losses under the loss share agreement.
13
At December 31, 2012, non-performing assets excluding covered assets were $4,771,000, compared
to $8,970,000 in 2011, and $11,474,000 in 2010. Non-performing assets excluding covered assets
represented 0.36% of total loans and other non-performing assets in 2012, compared to 0.78%
in 2011, and 1.02% in 2010. Table 8A provides a summary of the non-performing history for the
past five years. At December 31, 2012, non-performing covered assets were $11,573,000. Table 8B
provides a summary of the non-performing loans on covered assets.
At December 31, 2012, the allowance for loan losses was $15,101,000, or 2.05% of total loans
excluding covered assets, compared with $12,826,000, or 2.05%, at December 31, 2011, and
$8,841,000, or 1.65%, at December 31, 2010. The provision for loan losses was $833,000 in 2012,
$4,418,000 in 2011, and $6,820,000 in 2010. Net recoveries in 2012 were $1,442,000, or 0.21% of
average total loans excluding cover assets, compared with net charge-offs of $433,000, or 0.07%, in
2011, and net charge-offs of $9,032,000, or 1.65%, in 2010. The Company considers the allowance
for loan losses of $15,101,000 adequate to cover losses inherent in loans, commitments to extend
credit, and standby letters of credit at December 31, 2012. Table 9 provides a summary of the loan
loss experience for the past five years.
Liquidity Risk
The Asset/Liability Committee (“ALCO”) establishes policies, as well as analyzes and manages
the Company’s liquidity to ensure adequate funds are always available at reasonable rates to
meet normal operating requirements in addition to unexpected customer demands for funds,
such as high levels of deposit withdrawals or loan demand, in a timely and cost effective
manner. Liquidity needs are provided for on both the asset and liability side of the balance sheet.
Asset liquidity is provided by regular maturities of loans and maintaining relatively short-term,
marketable investments and federal funds. As of December 31, 2012, the Company had short-term
investments in federal funds of $80,229,000 and $72,188,000 of un-pledged, available-for-sale
securities. Liability liquidity is provided through short-term federal fund borrowings and borrowing
capacity at the Federal Home Loan Bank. As of December 31, 2012, the Company had $79,000,000
of unsecured lines of credit for federal funds that may be drawn as needed and borrowing capacity
at the Federal Home Loan Bank of $122,046,000.
Interest Rate Risk
The Company’s major market risk exposure is changing interest rates. To minimize the volatility of net
interest income and exposure to economic loss, the Company manages its exposure to interest rate
risk through asset/liability management activities within the guidelines established by ALCO.
Interest rate risk can be broken down into four components which are as follows: 1) repricing risk
results from the difference in the timing of rate changes and the timing of cash flows that occur
in the pricing and maturity of the bank’s assets and liabilities, 2) basis risk occurs when market
rates for different financial instruments, or the indices used to price assets and liabilities change at
different times or by different amounts, 3) option risk occurs when customers have the right to alter
the level and/or timing of the cash flows of an asset or a liability, and 4) term structure risk occurs
from variations in the movement of interest rates across maturity spectrums. Interest rate risk is
managed within an overall asset/liability framework for the Company. The Company positions the
balance sheet to be interest rate neutral to slightly liability sensitive, defined as allowing liabilities on
the balance sheet to reprice faster than the assets. The Company chooses to manage the balance
sheet to be slightly liability sensitive to take advantage of a normally upward sloping yield curve.
The Company employs a sensitivity analysis in the form of a net interest income simulation to help
quantify the existing interest rate risk embedded in the Company’s balance sheet and to help identify
ways to minimize the risk. The monthly analysis incorporates substantially all of the Company’s assets
and liabilities and off balance sheet instruments, together with forecasted changes in the balance
sheet and assumptions that reflect the current interest rate environment. The simulation model is
used to measure the impact on net interest income, relative to a base case scenario, of interest rates
increasing or decreasing 100, 200, and 300 basis points over the next twelve months. The simulation
run at December 31, 2012, illustrates a negative 3.95% change in net interest income for a 100 basis
point decline in interest rates, and a negative 0.74% change in net interest income for a 100 basis
point rise in interest rates. The base case interest rates for the simulation included the prime rate at
3.25% and the federal funds rate at 0.25%.
The Company has successfully implemented interest rate floors in a substantial number of underlying
loan contracts at rates above market indications. These interest rate floors have preserved net interest
rate margin in the current environment but will cause slight interest rate compression when interest
rates begin to rise since these loans will not reprice until the floor rate is surpassed.
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The Company utilizes derivative instruments for purposes such as asset liability management. These
transactions involve both credit and market risk. The principal objective in utilizing derivatives
is the management of interest rate related risk. Derivatives such as interest rate swaps, basis
swaps, or interest rate options may be utilized as part of the Company’s Asset Liability Management
process. Derivatives are used to modify maturities of assets and liabilities in the management of the
gap position, reduce basis risk, provide price protection, and to offset option related risks in certain
products. The Company currently has two outstanding derivative positions.
First, the Company entered into two separate interest rate swap transactions on December 19,
2008, that are mirror images of each other. The first swap was entered into with a customer of the
Company to convert a variable rate interest rate exposure to a fixed rate. The second transaction
was entered into with Wells Fargo Bank to convert our fixed rate exposure to a variable rate. The
notional value of both swap transactions is $762,000. The market value change of these swaps at
December 31, 2012, was $0.
Second, the Company entered into a $100 million cap corridor strategy on May 14, 2010. The cap
corridor consists of the purchase of $100 million cap with a strike rate of 4.00% and the sale of $100
million cap with a strike rate of 4.90%. The cap corridor was designed to alleviate spread compression
on our variable rate loan portfolio within the money floors when interest rates begin to rise. The
premium paid for the cap corridor was $1,190,000.
Regulatory Changes
The current regulatory environment for financial institutions entails significant potential increases
in compliance requirements and associated costs, including those related to consumer credit, with
a focus on mortgage lending. Federal and state banking regulators also possess broad powers to take
TABLE 10 - CONSOLIDATED AVERAGE BALANCE SHEET
As of December 31 (dollars in thousands)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Investment securities:
Taxable
Exempt from federal tax
Total Investment Securities
Loans held for sale
Loans - excluding covered assets
Commercial and financial
Agricultural
Real estate
Consumer loans
Total Loans
Allowance for loan losses
Net Loans - excluding covered assets
Covered loans
Bank premises and equipment
Goodwill and other intangibles
FDIC indemnification asset
Interest receivable and other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing deposits
Savings, NOW, and money market deposits
Time deposits
Total Deposits
Federal funds purchased and other short-term borrowings
Other borrowed funds
Other liabilities
Total Liabilities
Prefered stock and related surplus
Common stock and surplus
Retained earnings
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
$
2012
32,429
42,121
2,675
$
$
$
2011
34,326
59,423
553
242,121
19,909
$ 262,030
254,668
17,763
$ 272,431
$
51,548
$
$
234,126
42,078
364,411
40,134
$ 680,749
(14,611)
666,138
37,901
21,908
16,795
9,295
54,967
$ 1,197,807
$
195,939
556,282
251,628
$1,003,849
19,203
21,817
16,314
$ 1,061,183
20,000
23,509
93,115
136,624
$ 1,197,807
$
$
$
$
$
$
$
2008
19,689
168
5,915
$
$
131,450
20,481
151,931
26,447
$
35,106
$
4,880
$
$
210,851
41,670
325,633
28,105
$ 606,259
(10,665)
595,594
52,685
22,763
12,213
12,583
39,817
$ 1,128,835
$
187,058
33,333
303,293
23,915
$ 547,599
(11,209)
536,390
68,995
19,233
15,025
23,011
26,985
$ 1,079,425
$
175,917
32,420
305,298
23,955
$ 537,590
(8,954)
528,636
13,354
14,226
14,817
4,741
29,202
$ 849,307
$
182,593
32,399
301,029
19,626
$ 535,647
(6,988)
528,659
14,737
13,054
34,503
$ 723,041
$
$
$
$
126,513
503,143
300,636
$ 930,292
1,679
41,249
12,258
$ 985,478
19,585
74,362
93,947
$ 1,079,425
$
2009
68,354
261
18,905
241,819
19,596
261,415
162,106
548,362
272,072
$ 982,540
9,406
22,449
8,510
$ 1,022,905
7,419
20,973
77,538
105,930
$ 1,128,835
$
2010
53,466
38,561
1,238
117,029
357,537
248,603
$ 723,169
137
34,117
9,832
$ 767,255
18,485
63,567
82,052
$ 849,307
$
85,267
19,579
$ 104,846
1,470
104,090
256,111
211,316
$ 571,517
27,234
31,965
8,224
$ 638,940
17,753
66,348
84,101
$ 723,041
15
TABLE 11 - CONSOLIDATED STATEMENT OF INCOME
For years ended December 31 (dollars in thousands except per share data)
INTEREST INCOME
Deposits with banks
Investment securities:
Taxable
Exempt from federal income taxes
Total Investment Securities
Federal funds sold
Loans held for sale
Loans and leases, including fees
Total Interest Income
$
2012
100
$
2011
154
2010
93
$
$
2009
1
$
2008
5
$
6,853
699
$ 7,552
3
1,581
43,616
$ 52,852
$
7,754
700
$ 8,454
1
1,076
37,696
$ 47,381
$
7,155
782
$ 7,937
2
1,553
36,398
$ 45,983
$
5,438
793
$ 6,231
137
226
32,298
$ 38,893
4,797
772
$ 5,569
137
70
34,889
$ 40,670
$
3,874
65
647
$ 4,586
48,266
833
$ 47,433
$
6,070
39
712
$ 6,821
40,560
4,418
$ 36,142
$
9,464
47
1,274
$ 10,785
35,198
6,820
$ 28,378
$
9,962
16
1,218
$ 11,196
27,697
7,185
$ 20,512
$ 12,178
691
1,337
$ 14,206
26,464
2,844
$ 23,620
NON-INTEREST INCOME
Wealth Management income
Services charges on deposit accounts
Mortgage origination and loan servicing fees
Other
Investment security gains (losses)
Total Non-Interest Income
$ 42,835
1,626
31,061
3,376
217
$ 79,115
$ 35,101
1,655
15,746
4,293
(11)
$ 56,784
$ 33,935
1,940
18,073
1,935
(2,782)
$ 53,101
$ 30,991
2,098
1,507
8,528
(749)
$ 42,375
$ 29,251
2,107
857
6,190
(1,011)
$ 37,394
NON-INTEREST EXPENSE
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Other
Total Non-Interest Expense
Income before income taxes and exraordinary items
Applicable income taxes
Net Income
Net income applicable to common shareholders
$ 59,374
4,189
4,147
30,519
$ 98,229
28,319
10,450
$ 17,869
$ 17,530
$ 45,164
4,112
3,698
23,766
$ 76,740
16,186
5,477
$ 10,709
$ 10,636
$ 44,161
3,959
3,297
21,231
$ 72,649
8,830
2,958
$ 5,873
$ 5,873
$ 30,935
3,331
2,688
14,797
$ 51,751
11,136
3,767
$ 7,369
$ 7,369
$ 29,251
3,195
2,405
12,211
$ 47,062
13,952
4,802
$ 9,150
$ 9,150
INTEREST EXPENSE
Deposits
Federal funds purchased and other short-term borrowings
Other borrowed funds
Total Interest Expense
Net interest income
Provision for loan losses
Net Interest Income After Provision for Loan Losses
$
supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital
requirements, higher insurance premiums, and limitations on the Company’s activities that could have
a material adverse effect on the Company’s business and profitability.
On July 21, 2010, the President of the United States Barack Obama signed into law the Dodd-Frank
Act. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the
financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit
insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits,
and changes among the bank regulatory agencies. Many of these provisions are subject to further
study, rule-making, and the direction of regulatory bodies, such as the Financial Stability Oversight
Counsel, which will regulate the systematic risk of the financial system. The Company cannot predict
the effect that compliance with the Dodd-Frank Act or implementing regulations will have on the
Company’s businesses or its ability to pursue future business opportunities. Additional regulations
resulting from the Dodd-Frank Act may materially adversely affect the Company’s business, financial
condition, or results of operation.
Eric Carlson, CFA
Chief Financial Officer
Alerus Financial Corporation
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Report of Independent Auditor
We have audited the accompanying consolidated balance sheet of Alerus Financial Corporation
and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2012. We also have audited management’s assertion, included in the accompanying
Management’s Assessment of Internal Control Over Financial Reporting that Alerus Financial
Corporation and Subsidiaries maintained effective internal control over financial reporting, including
controls over the preparation of regulatory financial statements in accordance with the instructions
for the Federal Financial Institutions Examination Council Instructions for Consolidated Reports
of Condition and Income, as of December 31, 2012, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Alerus Financial Corporation and Subsidiaries’ management is responsible for
these financial statements, for maintaining effective internal control over financial reporting, and for its
assertion of the effectiveness of internal control over financial reporting, included in the accompanying
Management Assessment of Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these financial statements and an opinion on Alerus Financial Corporation and
Subsidiaries’ internal control over financial reporting based on our audits.
We conducted our audit of the financial statements in accordance with auditing standards generally
accepted in the United States of America and our audit of internal control over financial reporting
in accordance with attestation standards established by the American Institute of Certified Public
Accountants. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audit
of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
Our audit of management’s assertion of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
An entity’s internal control over financial reporting is a process effected by those charged with
governance, management, and other personnel designed to provide reasonable assurance regarding
the preparation of reliable financial statements in accordance with accounting principles generally
accepted in the United States of America. Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA), our audit of Alerus Financial Corporation and Subsidiaries’
internal control over financial reporting included controls over the preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America, and
with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of
Condition and Income. An entity’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statement
in accordance with accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the entity are being made only in accordance with authorizations
of management and those charged with governance; and (3) provide reasonable assurance
regarding prevention, or timely detection and correction of unauthorized acquisition, use, or
disposition of the entity’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent, or detect
and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
17
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Alerus Financial Corporation and Subsidiaries as of December 31, 2012 and 2011,
and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2012, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, management’s assertion that Alerus Financial Corporation and
Subsidiaries maintained effective internal control over financial reporting as of December 31, 2012,
is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Brady, Martz & Associates, P.C.
Grand Forks, North Dakota
February 28, 2013
Forward-Looking Statements
The following information appears in accordance with the Private Securities Litigation Reform Act of 1995:
This annual report contains forward-looking statements about Alerus Financial Corporation.
Statements that are not historical or current facts, including statements about beliefs and
expectations, are forward-looking statements and are based on the information available to, and
assumptions and estimates made by, management as of the date made. These forward-looking
statements cover, among other things, anticipated future revenue and expenses and the future plans
and prospects of Alerus Financial Corporation. Forward-looking statements involve inherent risks
and uncertainties, and important factors could cause actual results to differ materially from those
anticipated. Global and domestic economies could fail to recover from the recent economic downturn
or could experience another severe contraction, which could adversely affect Alerus Financial
Corporation’s revenues and the values of its assets and liabilities. Global financial markets could
experience a recurrence of significant turbulence, which could reduce the availability of funding to
certain financial institutions and lead to a tightening of credit, a reduction of business activity, and
increased market volatility. Continued stress in the commercial real estate markets, as well as a
delay or failure of recovery in the residential real estate markets, could cause additional credit losses
and deterioration in asset values. In addition, Alerus Financial Corporation’s business and financial
performance is likely to be negatively impacted by effects of recently enacted and future legislation
and regulation. Alerus Financial Corporation’s results could also be adversely affected by continued
deterioration in general business and economic conditions; changes in interest rates; deterioration
in the credit quality of its loan portfolios or in the value of the collateral securing those loans;
deterioration in the value of securities held in its investment securities portfolio; legal and regulatory
developments; increased competition from both banks and non-banks; changes in customer
behavior and preferences; effects of mergers and acquisitions and related integration; effects of
critical accounting policies and judgments; and management’s ability to effectively manage credit
risk, residual value risk, market risk, operational risk, interest rate risk, and liquidity risk.
Forward-looking statements speak only as of the date they are made, and Alerus Financial Corporation
undertakes no obligation to update them in light of new information or future events.
18
A L E RU S F I N A N C I A L C O R P O R AT IO N
|
ANNUAL F INANCI AL R EP ORT
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2 012
SUMMARY CONSOLIDATED BALANCE SHEET
As of December 31 (dollars in thousands)
ASSETS
Cash and deposits with banks
Investments and federal funds sold
Loans held for sale
Net loans and leases - non-covered
Covered loans and leases
Covered other assets
FDIC indemnification asset
Bank premises, equipment, and other assets
Total Assets
2012
123,679
263,659
77,432
722,985
32,692
7,439
2,229
91,980
$1,322,095
2011
58,894
278,112
48,910
612,554
48,050
9,050
11,255
89,794
$1,156,609
2010
141,094
246,004
35,789
526,840
62,179
7,638
14,297
85,899
$ 1,119,739
2009
94,947
299,153
3,569
514,326
87,701
3,309
31,397
92,444
$1,126,846
2008
24,935
125,689
2,454
540,640
67,288
$ 761,006
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Federal funds/repo agreements
Other borrowed funds
Interest payable and other liabilities
Total Liabilities
$ 1,115,750
12,603
21,755
29,093
$ 1,179,201
$
985,110
6,194
21,871
16,184
$1,029,359
$
950,780
358
32,261
39,350
$1,022,750
$
946,099
2,582
42,497
47,326
$1,038,504
$
632,276
32,724
13,521
$ 678,521
$
$
19,750
74,863
2,377
$ 96,989
$ 1,119,739
18,782
72,897
(3,337)
$ 88,342
$1,126,846
18,023
69,928
(5,466)
$ 82,485
$ 761,006
Preferred stock and surplus
Common stock and capital surplus
Retained earnings
Accumulated other comprehensive income
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
20,000
24,167
93,874
4,853
$ 142,894
$1,322,095
$
20,000
22,258
81,210
3,782
$ 127,250
$1,156,609
$
$
$
SUMMARY CONSOLIDATED INCOME STATEMENT
For years ended December 31 (dollars in thousands)
Interest Income and Expenses
Interest income
Interest expense
Provision for loan losses
Net Interest Income After Provision for Loan Losses
Other operating income and expense
Wealth Management income
Other income
Other Non-Interest Income
$
$
$
$
Salaries and employee benefits
Occupancy and equipment expense
Other expenses
Other Operating Expenses
$
Income before taxes and extraordinary items
Income taxes
Net Income
Net income applicable to common shareholders
$
$
$
$
2012
52,852
4,586
833
47,433
$
$
42,835
36,280
79,115
$
59,374
8,336
30,519
98,229
$
28,319
10,450
17,869
17,530
$
$
$
$
$
2011
47,381
6,821
4,418
36,142
35,101
21,683
56,784
45,164
7,811
23,765
76,740
16,186
5,477
10,709
10,636
$
2010
45,983
10,785
6,820
28,378
$
$
$33,935
19,166
53,101
$
$
44,161
7,256
21,231
72,648
$
$
$
$8,831
2,958
5,873
5,873
$
$
$
$
$
$
$
$
2009
38,893
11,196
7,185
20,512
$
$
30,991
11,384
42,375
$
30,935
6,019
14,797
51,751
$
11,136
3,767
7,369
7,369
$
$
$
$
$
2008
40,670
14,206
2,844
23,620
33,596
3,798
37,394
29,251
5,600
12,211
47,062
13,952
4,802
9,150
9,150
SUMMARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
As of December 31 (dollars in thousands)
Balance at January 1
Net income for the year
Cash dividends declared
Increase from stock plans and other adjustments
Repurchase of stock
Comprehensive income
Balance at December 31
2012
127,250
17,869
(4,605)
1,308
0
1,072
$ 142,894
$
$
$
2011
96,989
10,709
(4,035)
22,532
(350)
1,405
127,250
$
$
2010
88,342
5,873
(3,882)
982
(41)
5,714
96,989
$
$
2009
82,485
7,369
(3,679)
827
(789)
2,129
88,342
$
$
2008
82,289
9,150
(3,419)
857
(1,836)
(4,556)
82,485
19
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