Alerus Financial Corporation Reports Fourth Quarter 2019 Net Income of $7.7 Million

Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $7.7 million for the fourth quarter of 2019, or $0.43 per diluted common share, compared to $7.1 million of net income, or $0.48 per diluted common share, for the third quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, “2019 was one of the most significant and successful years in our company’s history. Most notably, 2019 will be remembered for the achievement of several long-term strategic initiatives, including: raising $62.8 million in capital through our initial public offering and becoming Nasdaq listed; launching “MY ALERUS”, a holistic digital experience designed to help improve clients’ financial lives; and the reorganization of our client facing staff around a holistic, advisor-focused business model. Our team has proven it not only has the ability to adapt and perform in an ever-changing environment, as evidenced by our record net income of $29.5 million in 2019, a 14.2% increase over 2018. Strong year-end financial performance, coupled with improving credit quality and increased capital ratios, gives us tremendous momentum moving forward. We continue to plan for long-term results and are pleased with our accomplishments over the past year. As proud as we are of our financial results, we are even more proud of the non-financial results. We believe we have a very strong foundation to continue progress with our One Alerus growth strategy in serving clients holistically and working in their best interest.”

Quarterly Highlights

  • Return on average assets of 1.33%
  • Return on tangible common equity(1) of 13.78%
  • Noninterest income as a percentage of total revenue was 61.56%
  • Retirement and benefit services noninterest income increased $2.4 million, or 15.4%, compared to the third quarter of 2019
  • Mortgage banking noninterest income decreased $2.1 million, or 25.4%, compared to the third quarter of 2019
  • Mortgage originations totaled $261.3 million, a 16.7% decrease from the third quarter of 2019
  • Net interest margin (tax-equivalent)(1) was 3.45%, compared to 3.69% for the third quarter of 2019
  • Available-for-sale investment securities increased $31.6 million, or 11.3%, from the third quarter of 2019
  • Loans held for sale decreased $19.2 million, or 29.0%, from the third quarter of 2019
  • Loans held for investment increased $35.2 million, or 2.1%, from the third quarter of 2019
  • Deposits increased $138.2 million, or 7.5%, from the third quarter of 2019

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

Selected Financial Data (unaudited)

As of and for the

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

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

2019

2019

2018

2019

2018

Performance Ratios

Return on average total assets

1.33

%

1.29

%

1.10

%

1.34

%

1.21

%

Return on average common equity

10.65

%

12.42

%

12.27

%

12.78

%

13.81

%

Return on average tangible common equity (1)

13.78

%

17.01

%

18.20

%

17.46

%

21.02

%

Noninterest income as a % of revenue

61.56

%

61.29

%

57.59

%

60.50

%

57.73

%

Net interest margin (tax-equivalent) (1)

3.45

%

3.69

%

3.82

%

3.65

%

3.84

%

Efficiency ratio (1)

73.68

%

75.17

%

76.60

%

73.22

%

73.80

%

Net charge-offs/(recoveries) to average loans

0.05

%

(0.01)

%

0.02

%

0.33

%

0.18

%

Dividend payout ratio

34.88

%

29.17

%

32.56

%

29.84

%

28.80

%

Per Common Share

Earnings per common share - basic (2)

$

0.44

$

0.49

$

0.44

$

1.96

$

1.88

Earnings per common share - diluted (2)

$

0.43

$

0.48

$

0.43

$

1.91

$

1.84

Dividends declared per common share

$

0.15

$

0.14

$

0.14

$

0.57

$

0.53

Tangible book value per common share (1)

$

14.08

$

13.77

$

10.68

Average common shares outstanding - basic

17,049

14,274

13,775

14,736

13,763

Average common shares outstanding - diluted

17,397

14,626

14,071

15,093

14,063

Other Data

Retirement and benefit services assets under administration/management

$

31,904,648

$

30,661,226

$

27,812,149

$

31,904,648

$

27,812,149

Wealth management assets under administration/management

3,103,056

2,765,459

2,626,815

3,103,056

2,626,815

Mortgage originations

261,263

313,527

169,767

946,441

779,708

(1)

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

(2)

Earnings per share calculated using the two-class method beginning in the third quarter of 2019.

Earnings Per Share

Beginning in the third quarter of 2019, the Company has elected to prospectively use the two-class method in calculating earnings per share due to the restricted stock awards and restricted stock units qualifying as participating securities. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings. Average shares of common stock for diluted net income per common share include shares to be issued upon the vesting of restricted stock awards and restricted stock units granted under the Company's share-based compensation plans.

The following table presents the calculation of basic and diluted earnings per share for the periods indicated:

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

(dollars in thousands, except per share data)

2019

2019

2018

2019

2018

Net income

$

7,652

$

7,104

$

6,033

$

29,540

$

25,866

Dividends and undistributed earnings allocated to participating securities

138

154

647

Net income available to common shareholders

$

7,514

$

6,950

$

6,033

$

28,893

$

25,866

Weighted-average common shares outstanding for basic EPS

17,049

14,274

13,775

14,736

13,763

Dilutive effect of stock-based awards

348

352

296

357

300

Weighted-average common shares outstanding for diluted EPS

17,397

14,626

14,071

15,093

14,063

Earnings per common share:

Basic earnings per common share

0.44

0.49

0.44

1.96

1.88

Diluted earnings per common share

0.43

0.48

0.43

1.91

1.84

Results of Operations

Net Interest Income

Net interest income for the fourth quarter of 2019 was $18.5 million, a decrease of $222 thousand, or 1.2%, from $18.7 million for the third quarter of 2019. The decrease was primarily driven by a decrease of $1.2 million in interest income on loans, partially offset by a $342 thousand increase in interest income from interest-bearing deposits with banks, a $198 thousand increase in interest income from investment securities, and a decrease in interest expense of $516 thousand.

Compared to the fourth quarter of 2018, net interest income for the fourth quarter of 2019 decreased $794 thousand. The decrease was due to a $344 thousand decrease in total interest income and a $450 thousand increase in interest expense.

Net Interest Margin (Tax-Equivalent)

Net interest margin (tax-equivalent), a non-GAAP financial measure, for the fourth quarter of 2019 was 3.45%, compared to 3.69% for the third quarter of 2019. The third quarter included $460 thousand of net interest recoveries which increased the third quarter net interest margin by 9 basis points. For the fourth quarter of 2019, the average yield on total loans was 4.79% compared to 5.06% for the third quarter of 2019. For the fourth quarter of 2019, the average cost of interest-bearing liabilities was 1.26% compared to 1.39% for the third quarter of 2019.

Compared to the fourth quarter of 2018, net interest margin for the fourth quarter of 2019 decreased 37 basis points from 3.82%. The decrease in net interest margin from the fourth quarter of 2018 was due to a 33 basis point lower average earning asset yield and a 15 basis point higher average rate on interest-bearing liabilities.

Noninterest Income

Noninterest income for the fourth quarter of 2019 was $29.6 million and unchanged from the third quarter of 2019. We realized increases of $2.4 million in income from retirement and benefit services and $221 thousand in income from wealth management. These increases were partially offset by a $2.1 million decrease in mortgage banking and a $494 thousand decrease in other noninterest income. The increase in retirement and benefit services income was driven primarily by increases of $583 thousand in plan document fees, $498 thousand in record keeping fees, $457 thousand in distribution fees, $299 thousand in revenue sharing, and $267 thousand in transactional trustee fees.

Noninterest income for the fourth quarter of 2019 increased $3.4 million, or 13.1%, from the $26.1 million in the fourth quarter of 2018. The increase was primarily attributable to an increase in mortgage banking revenue of $2.0 million and an increase of $1.2 million in retirement and benefit services income.

Noninterest Expense

Noninterest expense for the fourth quarter of 2019 was $36.4 million, a decrease of $892 thousand, or 2.4% compared to the third quarter of 2019. The decrease was driven by decreases of $1.0 million in compensation expense, $332 in employee taxes and benefits expense, and $186 thousand in professional fees and assessments. The decrease in compensation expense was due to a decrease in mortgage banking commissions, driven by seasonally lower mortgage originations, along with a decrease in accrued annual incentive and bonus payments. The decrease in employee taxes and benefits expense was primarily due to lower health insurance claims. The decrease in professional fees and assessment was primarily due to small bank assessment credits applied against our quarterly FDIC assessments. These decreases were partially offset by increases of $248 thousand in marketing and business development and $136 thousand in mortgage and lending expenses.

Compared to the fourth quarter of 2018, noninterest expense for the fourth quarter of 2019 increased $524 thousand, or 1.5%, from $35.9 million. The increase was primarily attributable to increases in compensation expense, mortgage and lending expense, and business services, software and technology expenses. These increases were partially offset by decreases in professional fees and assessments, occupancy and equipment expenses, and supplies and postage expense.

Financial Condition

Total assets were $2.36 billion as of December 31, 2019, an increase of $177.8 million, or 8.2%, from December 31, 2018. The increase in total assets was due to increases of $103.4 million in cash and cash equivalents, $60.2 million in available-for-sale investment securities, $32.4 million in loans held for sale, and $19.4 million in loans. These increases were partially offset by a $32.0 million decrease in loans held for branch sale. Loans held for branch sale decreased as a result of closing on the sale of our Duluth, Minnesota branches on April 26, 2019.

Loans

Total loans were $1.72 billion as of December 31, 2019, an increase of $19.4 million, or 1.1%, from December 31, 2018. The increase was primarily due to an increase in our commercial real estate loan portfolio, offset by decreases in our commercial and industrial, residential real estate junior lien, and other revolving and installment loan portfolios.

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

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2019

2019

2019

2019

2018

Commercial

Commercial and industrial

$

479,144

$

485,183

$

513,120

$

514,033

$

510,706

Real estate construction

26,378

21,674

26,584

22,188

18,965

Commercial real estate

494,703

444,600

442,797

444,882

439,963

Total commercial

1,000,225

951,457

982,501

981,103

969,634

Consumer

Residential real estate first mortgage

457,155

459,763

452,049

451,401

448,143

Residential real estate junior lien

177,373

182,516

185,209

186,296

188,855

Other revolving and installment

86,526

92,351

93,693

94,992

95,218

Total consumer

721,054

734,630

730,951

732,689

732,216

Total loans

$

1,721,279

$

1,686,087

$

1,713,452

$

1,713,792

$

1,701,850

Deposits

Total deposits were $1.97 billion as of December 31, 2019, an increase of $196.2 million, or 11.1%, from December 31, 2018. The increase was due to an increase of $169.2 million in interest-bearing deposits and an increase of $27.1 million in noninterest-bearing deposits. The increase in interest-bearing deposits was primarily due to a $108.0 million increase in synergistic deposits from our retirement and benefit services and wealth management segments. In addition, health savings account, or HSA, deposits increased $13.6 million, or 12.9%, to $119.7 million as of December 31, 2019 as compared to December 31, 2018. Noninterest-bearing deposits as a percent of total deposits was 29.3% and 31.0% as of December 31, 2019 and 2018, respectively.

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

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2019

2019

2019

2019

2018

Noninterest-bearing demand

$

577,704

$

537,951

$

506,021

$

530,960

$

550,640

Interest-bearing

Interest-bearing demand

458,689

424,249

439,342

440,755

401,078

Savings accounts

55,777

55,513

56,163

57,304

53,971

Money market savings

683,064

622,647

568,450

675,145

598,820

Time deposits

196,082

192,753

183,389

178,106

170,587

Total interest-bearing

1,393,612

1,295,162

1,247,344

1,351,310

1,224,456

Total deposits

$

1,971,316

$

1,833,113

$

1,753,365

$

1,882,270

$

1,775,096

Asset Quality

Total nonperforming assets were $7.8 million as of December 31, 2019, an increase of $668 thousand from December 31, 2018. As of December 31, 2019, the allowance for loan losses was $23.9 million, or 1.39% of total loans, compared to $22.2 million, or 1.30% of total loans, as of December 31, 2018.

The following table presents selected asset quality data as of and for the periods indicated:

As of and for the three months ended

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2019

2019

2019

2019

2018

Nonaccrual loans

$

7,379

$

5,107

$

4,623

$

8,267

$

6,963

Accruing loans 90+ days past due

448

45

28

Total nonperforming loans

7,827

5,152

4,651

8,267

6,963

OREO and repossessed assets

8

84

381

149

204

Total nonperforming assets

$

7,835

$

5,236

$

5,032

$

8,416

$

7,167

Net charge-offs/(recoveries)

857

(240)

3,189

1,756

367

Net charge-offs/(recoveries) to average loans

0.05

%

(0.01)

%

0.18

%

0.10

%

0.02

%

Nonperforming loans to total loans

0.45

%

0.31

%

0.27

%

0.48

%

0.41

%

Nonperforming assets to total assets

0.33

%

0.23

%

0.23

%

0.38

%

0.33

%

Allowance for loan losses to total loans

1.39

%

1.36

%

1.24

%

1.32

%

1.30

%

Allowance for loan losses to nonperforming loans

306

%

446

%

457

%

274

%

318

%

For the fourth quarter of 2019, we had net charge-offs of $857 thousand, compared to a net recovery of $240 thousand for the third quarter of 2019 and $367 thousand of net charge-offs for the fourth quarter of 2018.

The provision for loan losses for the fourth quarter of 2019 was $1.8 million, an increase of $299 thousand from the third quarter of 2019 and an increase of $267 from the fourth quarter of 2018.

Capital

Total stockholders’ equity was $285.7 million as of December 31, 2019, an increase of $88.8 million from December 31, 2018. The increase in total stockholders’ equity was primarily due to $62.8 million of net proceeds received from the Company’s initial public offering. The tangible book value per common share increased to $14.08 as of December 31, 2019, from $10.68 as of December 31, 2018. Tangible common equity to tangible assets, a non-GAAP financial measure, increased to 10.38% as of December 31, 2019, from 6.91% as of December 31, 2018.

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

December 31,

September 30,

December 31,

2019

2019

2018

Capital Ratios(1)

Alerus Financial Corporation

Common equity tier 1 capital to risk weighted assets

12.48

%

12.38

%

8.43

%

Tier 1 capital to risk weighted assets

12.90

%

12.81

%

8.87

%

Total capital to risk weighted assets

16.73

%

16.67

%

12.86

%

Tier 1 capital to average assets

11.05

%

11.33

%

7.51

%

Tangible common equity / tangible assets (2)

10.38

%

10.76

%

6.91

%

Alerus Financial, N.A.

Common equity tier 1 capital to risk weighted assets

11.91

%

11.84

%

11.39

%

Tier 1 capital to risk weighted assets

11.91

%

11.84

%

11.39

%

Total capital to risk weighted assets

13.15

%

13.06

%

12.62

%

Tier 1 capital to average assets

10.20

%

10.47

%

9.63

%

(1)

Capital ratios for the current quarter are to be considered preliminary until the Call Report for Alerus Financial, N.A. is filed.

(2)

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

Conference Call

The Company will host a conference call at 9:00 a.m. Central Time on Wednesday, January 29, 2020 to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company’s investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation, through its subsidiary Alerus Financial, N.A., offers business and consumer banking products and services, residential mortgage financing, employer-sponsored retirement plan and benefit administration, and wealth management, including trust, brokerage, insurance, and asset management. Alerus Financial banking and wealth management offices are located in Grand Forks and Fargo, ND, the Minneapolis-St. Paul, MN metropolitan area and Scottsdale and Mesa, AZ. Alerus Retirement and Benefits plan administration offices are located in St. Paul and Albert Lea, MN, East Lansing and Troy, MI, and Bedford, NH.

Non-GAAP Financial Measures

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

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

Forward-Looking Statements

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

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

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

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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

December 31,

December 31,

2019

2018

Assets

(Unaudited)

(Audited)

Cash and cash equivalents

$

144,006

$

40,651

Investment securities, at fair value

Trading

1,539

Available-for-sale

310,350

250,174

Equity

2,808

3,165

Loans held for sale

46,846

14,486

Loans held for branch sale

32,031

Loans

1,721,279

1,701,850

Allowance for loan losses

(23,924)

(22,174)

Net loans

1,697,355

1,679,676

Land, premises and equipment, net

20,629

21,743

Operating lease right-of-use assets

8,343

Accrued interest receivable

7,551

7,645

Bank-owned life insurance

31,566

30,763

Goodwill

27,329

27,329

Other intangible assets

18,391

22,473

Servicing rights

3,845

4,623

Deferred income taxes, net

7,891

10,085

Other assets

29,968

32,687

Total assets

$

2,356,878

$

2,179,070

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing

$

577,704

$

550,640

Interest-bearing

1,393,612

1,224,456

Total deposits

1,971,316

1,775,096

Deposits held for sale

24,197

Short-term borrowings

93,460

Long-term debt

58,769

58,824

Operating lease liabilities

8,864

Accrued expenses and other liabilities

32,201

30,539

Total liabilities

2,071,150

1,982,116

Commitments and contingent liabilities ESOP-owned shares

34,494

Stockholders’ equity

Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding

Common stock, $1 par value, 30,000,000 shares authorized: 17,049,551 and 13,775,327 issued and outstanding

17,050

13,775

Additional paid-in capital

88,650

27,743

Retained earnings

178,092

159,037

Accumulated other comprehensive income (loss)

1,936

(3,601)

Total stockholders’ equity

285,728

196,954

Less ESOP-owned shares

(34,494)

Total stockholders’ equity net of ESOP-owned shares

285,728

162,460

Total liabilities and stockholders’ equity

$

2,356,878

$

2,179,070

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

2019

2019

2018

2019

2018

Interest Income

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Audited)

Loans, including fees

$

20,659

$

21,886

$

21,565

$

85,830

$

81,159

Investment securities

Taxable

1,555

1,374

1,195

5,576

4,670

Exempt from federal income taxes

180

163

307

798

1,234

Other

493

202

164

1,096

639

Total interest income

22,887

23,625

23,231

93,300

87,702

Interest Expense

Deposits

3,532

3,506

2,510

13,334

6,991

Short-term borrowings

539

565

1,805

1,896

Long-term debt

896

899

903

3,610

3,591

Total interest expense

4,428

4,944

3,978

18,749

12,478

Net interest income

18,459

18,681

19,253

74,551

75,224

Provision for loan losses

1,797

1,498

1,530

7,312

8,610

Net interest income after provision for loan losses

16,662

17,183

17,723

67,239

66,614

Noninterest Income

Retirement and benefit services

17,669

15,307

16,443

63,811

63,316

Wealth management

4,117

3,896

3,952

15,502

14,900

Mortgage banking

6,066

8,135

4,079

25,805

17,630

Service charges on deposit accounts

451

447

475

1,772

1,808

Net gains (losses) on investment securities

48

(34)

357

85

Other

1,253

1,747

1,226

6,947

5,010

Total noninterest income

29,556

29,580

26,141

114,194

102,749

Noninterest Expense

Compensation

19,021

20,041

18,497

74,018

69,403

Employee taxes and benefits

4,268

4,600

4,260

19,456

17,866

Occupancy and equipment expense

2,665

2,700

2,871

10,751

11,086

Business services, software and technology expense

4,337

4,224

4,058

16,381

14,525

Intangible amortization expense

990

990

1,050

4,081

4,638

Professional fees and assessments

865

1,051

1,364

4,011

5,098

Marketing and business development

1,138

890

1,020

3,162

3,459

Supplies and postage

695

631

835

2,722

2,737

Travel

452

435

486

1,787

1,738

Mortgage and lending expenses

887

751

556

2,853

2,153

Other

1,117

1,014

914

3,315

3,622

Total noninterest expense

36,435

37,327

35,911

142,537

136,325

Income before income taxes

9,783

9,436

7,953

38,896

33,038

Income tax expense

2,131

2,332

1,920

9,356

7,172

Net income

$

7,652

$

7,104

$

6,033

$

29,540

$

25,866

Per Common Share Data

Earnings per common share

$

0.44

$

0.49

$

0.44

$

1.96

$

1.88

Diluted earnings per common share

$

0.43

$

0.48

$

0.43

$

1.91

$

1.84

Dividends declared per common share

$

0.15

$

0.14

$

0.14

$

0.57

$

0.53

Average common shares outstanding

17,049

14,274

13,775

14,736

13,763

Diluted average common shares outstanding

17,397

14,626

14,071

15,093

14,063

Alerus Financial Corporation and Subsidiaries

Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures (unaudited)

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

December 31,

September 30,

December 31,

2019

2019

2018

Tangible Common Equity to Tangible Assets

Total common stockholders’ equity

$

285,728

$

281,403

$

196,954

Less: Goodwill

27,329

27,329

27,329

Less: Other intangible assets

18,391

19,382

22,473

Tangible common equity (a)

240,008

234,692

147,152

Total assets

2,356,878

2,228,311

2,179,070

Less: Goodwill

27,329

27,329

27,329

Less: Other intangible assets

18,391

19,382

22,473

Tangible assets (b)

2,311,158

2,181,600

2,129,268

Tangible common equity to tangible assets (a)/(b)

10.38

%

10.76

%

6.91

%

Tangible Book Value Per Common Share

Total common stockholders’ equity

$

285,728

$

281,403

$

196,954

Less: Goodwill

27,329

27,329

27,329

Less: Other intangible assets

18,391

19,382

22,473

Tangible common equity (c)

240,008

234,692

147,152

Total common shares issued and outstanding (d)

17,050

17,049

13,775

Tangible book value per common share (c)/(d)

$

14.08

$

13.77

$

10.68

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

2019

2019

2018

2019

2018

Return on Average Tangible Common Equity

Net income

$

7,652

$

7,104

$

6,033

$

29,540

$

25,866

Add: Intangible amortization expense (net of tax)

782

782

830

3,224

3,664

Net income, excluding intangible amortization (e)

8,434

7,886

6,863

32,764

29,530

Average total equity

285,017

226,931

195,085

231,084

187,341

Less: Average goodwill

27,329

27,329

27,329

27,329

27,329

Less: Average other intangible assets (net of tax)

14,912

15,697

18,156

16,101

19,522

Average tangible common equity (f)

242,776

183,905

149,600

187,654

140,490

Return on average tangible common equity (e)/(f)

13.78

%

17.01

%

18.20

%

17.46

%

21.02

%

Net Interest Margin (tax-equivalent)

Net interest income

$

18,459

$

18,681

$

19,253

$

74,551

$

75,224

Tax-equivalent adjustment

89

81

114

347

462

Tax-equivalent net interest income (g)

18,548

18,762

19,367

74,898

75,686

Average earnings assets (h)

2,135,682

2,017,198

2,013,764

2,052,758

1,970,004

Net interest margin (tax-equivalent) (g)/(h)

3.45

%

3.69

%

3.82

%

3.65

%

3.84

%

Efficiency Ratio

Noninterest expense

$

36,435

$

37,327

$

35,911

$

142,537

$

136,325

Less: Intangible amortization expense

990

990

1,050

4,081

4,638

Adjusted noninterest expense (i)

35,445

36,337

34,861

138,456

131,687

Net interest income

18,459

18,681

19,253

74,551

75,224

Noninterest income

29,556

29,580

26,141

114,194

102,749

Tax-equivalent adjustment

89

81

114

347

462

Total tax-equivalent revenue (j)

48,104

48,342

45,508

189,092

178,435

Efficiency ratio (i)/(j)

73.68

%

75.17

%

76.60

%

73.22

%

73.80

%

Alerus Financial Corporation and Subsidiaries

Analysis of Average Balances, Yields, and Rates (unaudited)

(dollars in thousands)

Three months ended

Year ended

December 31, 2019

September 30, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Average

Average

Average

Average

Average

Average

Yield/

Average

Yield/

Average

Yield/

Average

Yield/

Average

Yield/

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Interest Earning Assets

Interest-bearing deposits with banks

$

100,058

1.69

%

$

12,998

2.53

%

$

9,605

1.90

%

$

34,876

1.88

%

$

8,336

1.99

%

Investment securities (1)

296,773

2.38

%

257,561

2.43

%

252,030

2.49

%

266,204

2.47

%

255,247

2.44

%

Loans held for sale

51,766

3.01

%

45,794

3.11

%

16,402

3.58

%

36,035

3.16

%

19,255

3.15

%

Loans

Commercial:

Commercial and industrial

473,489

5.30

%

494,081

5.48

%

524,492

5.39

%

500,652

5.45

%

517,347

5.16

%

Real estate construction

23,901

5.20

%

25,137

5.56

%

23,462

5.28

%

23,625

5.45

%

24,263

5.41

%

Commercial real estate

460,457

4.71

%

439,751

5.29

%

441,594

4.97

%

448,869

4.95

%

441,307

4.80

%

Total commercial

957,847

5.01

%

958,969

5.40

%

989,548

5.20

%

973,146

5.22

%

982,917

5.00

%

Consumer

Residential real estate first mortgage

454,854

4.15

%

454,971

4.18

%

452,531

4.16

%

455,635

4.23

%

415,219

4.16

%

Residential real estate junior lien

179,714

5.29

%

184,124

5.63

%

189,326

5.53

%

184,972

5.63

%

190,838

5.40

%

Other revolving and installment

88,896

4.69

%

93,478

4.74

%

95,119

4.58

%

93,226

4.65

%

88,911

4.42

%

Total consumer

723,464

4.50

%

732,573

4.61

%

736,976

4.56

%

733,833

4.64

%

694,968

4.53

%

Total loans (1)

1,681,311

4.79

%

1,691,542

5.06

%

1,726,524

4.93

%

1,706,979

4.97

%

1,677,885

4.81

%

Federal Reserve/FHLB stock

5,774

4.67

%

9,303

5.07

%

9,203

5.09

%

8,664

5.08

%

9,281

5.10

%

Total interest earning assets

2,135,682

4.27

%

2,017,198

4.66

%

2,013,764

4.60

%

2,052,758

4.56

%

1,970,004

4.48

%

Noninterest earning assets

153,838

159,664

156,773

159,235

159,402

Total assets

$

2,289,520

$

2,176,862

$

2,170,537

$

2,211,993

$

2,129,406

Interest-Bearing Liabilities

Interest-bearing demand deposits

$

442,945

0.52

%

$

424,896

0.49

%

$

404,548

0.33

%

$

428,162

0.47

%

$

405,512

0.25

%

Money market and savings deposits

698,533

1.19

%

649,190

1.32

%

647,828

0.86

%

681,621

1.22

%

626,041

0.63

%

Time deposits

195,963

1.72

%

187,023

1.74

%

227,374

1.36

%

186,781

1.62

%

206,846

0.97

%

Short-term borrowings

%

87,201

2.46

%

84,920

2.64

%

71,421

2.53

%

86,851

2.18

%

Long-term debt

58,760

6.05

%

58,776

6.07

%

58,814

6.09

%

58,789

6.14

%

58,813

6.11

%

Total interest-bearing liabilities

1,396,201

1.26

%

1,407,086

1.39

%

1,423,484

1.11

%

1,426,774

1.31

%

1,384,063

0.90

%

Noninterest-Bearing Liabilities and Stockholders' Equity

Noninterest-bearing deposits

559,363

502,108

521,264

512,586

528,552

Other noninterest-bearing liabilities

48,939

40,737

30,704

41,549

29,450

Stockholders’ equity

285,017

226,931

195,085

231,084

187,341

Total liabilities and stockholders’ equity

$

2,289,520

$

2,176,862

$

2,170,537

$

2,211,993

$

2,129,406

Net interest rate spread

3.01

%

3.27

%

3.49

%

3.25

%

3.58

%

Net interest margin, tax-equivalent (2)

3.45

%

3.69

%

3.82

%

3.65

%

3.84

%

_______________________________

(1)

Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.

(2)

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

Contacts:

Katie A. Lorenson, Chief Financial Officer
952.417.3725 (Office)

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