Press Release

Alerus Financial Corporation Reports Second Quarter 2020 Net Income of $11.5 Million

Company Release - 7/28/2020 4:00 PM ET

GRAND FORKS, N.D.--(BUSINESS WIRE)-- Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $11.5 million for the second quarter of 2020, or $0.65 per diluted common share, compared to $5.4 million of net income, or $0.30 per diluted common share, for the first quarter of 2020, and net income of $8.3 million, or $0.59 per diluted common share, for the second quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, “We are proud to report record quarterly net income of $11.5 million. This strong financial performance, driven by our diversified business model, included record quarterly mortgage originations of $431.6 million, an increase in deposits of over $481.8 million in the first half of 2020, and steady performance across our wealth management and retirement and benefit divisions. Despite a challenging and uncertain economy, we continue to focus on serving the holistic financial needs of our consumer and business clients, as evidenced by our ability to fund 1,580 Paycheck Protection Program loans totaling approximately $362.7 million or approximately 18% of our loan portfolio.

In light of the ongoing COVID-19 pandemic and recessionary economic environment, we remain focused on credit quality and are analyzing and assessing the potential impacts on our portfolio at a granular level. Great uncertainty remains and although we are not currently observing credit deterioration in our loan portfolio, we are committed to managing our balance sheet for long term success by increasing our provision expense and building reserves.

We believe our diversified business model positions us, long-term, to have a greater impact on clients, allowing us to serve them across a wide range of financial services through a holistic, guidance-focused approach, and a greater impact on shareholders because our significant earnings power will prepare us for potential credit losses and help us weather the uncertain economic environment. True to our history and culture, we remain disciplined in our response to the COVID-19 pandemic, anticipating and recognizing the impact it is having on our clients, employees, and company, and we are committed to operating from a position of strength, to support our clients and communities.”

Quarterly Highlights

  • Return on average assets of 1.68%, compared to 0.89% for the first quarter of 2020
  • Return on average common equity of 15.30%, compared to 7.32% for the first quarter of 2020
  • Return on average tangible common equity(1) of 18.88%, compared to 9.76% for the first quarter of 2020
  • Net interest margin (tax-equivalent)(1) was 3.14%, compared to 3.35% for the first quarter of 2020
  • Noninterest income as a percentage of total revenue was 65.55%, compared to 59.07% for the first quarter of 2020
  • Noninterest income increased $11.0 million, or 40.6%, compared to the first quarter of 2020
  • Mortgage originations totaled $431.6 million, a 88.8% increase from the first quarter of 2020
  • Available-for-sale investment securities increased $83.4 million, or 26.9%, from the fourth quarter of 2019
  • Loans held for sale increased $54.9 million, or 117.2%, from the fourth quarter of 2019
  • Loans held for investment increased $312.9 million, or 18.2%, from the fourth quarter of 2019
  • Deposits increased $481.8 million, or 24.4%, from the fourth 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

 

Six months ended

 

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

 

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

 

2020

 

2020

 

2019

 

2020

 

2019

 

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

 

1.68

%

 

0.89

%

 

1.52

%

 

1.31

%

 

1.36

%

Return on average common equity

 

 

15.30

%

 

7.32

%

 

15.82

%

 

11.35

%

 

14.49

%

Return on average tangible common equity (1)

 

 

18.88

%

 

9.76

%

 

21.94

%

 

14.39

%

 

20.53

%

Noninterest income as a % of revenue

 

 

65.55

%

 

59.07

%

 

62.11

%

 

62.69

%

 

59.54

%

Net interest margin (tax-equivalent) (1)

 

 

3.14

%

 

3.35

%

 

3.62

%

 

3.24

%

 

3.74

%

Efficiency ratio (1)

 

 

66.31

%

 

77.47

%

 

70.74

%

 

71.23

%

 

71.97

%

Net charge-offs/(recoveries) to average loans

 

 

0.66

%

 

(0.14)

%

 

0.74

%

 

0.29

%

 

0.58

%

Dividend payout ratio

 

 

23.08

%

 

50.00

%

 

23.73

%

 

31.58

%

 

26.67

%

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic (2)

 

$

0.66

 

$

0.31

 

$

0.60

 

$

0.97

 

$

1.07

 

Earnings per common share - diluted (2)

 

$

0.65

 

$

0.30

 

$

0.59

 

$

0.95

 

$

1.05

 

Dividends declared per common share

 

$

0.15

 

$

0.15

 

$

0.14

 

$

0.30

 

$

0.28

 

Tangible book value per common share (1)

 

$

15.30

 

$

14.55

 

$

12.02

 

 

 

 

 

 

 

Average common shares outstanding - basic

 

 

17,111

 

 

17,070

 

 

13,810

 

 

17,091

 

 

13,796

 

Average common shares outstanding - diluted

 

 

17,445

 

 

17,405

 

 

14,100

 

 

17,425

 

 

14,089

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement and benefit services assets under administration/management

 

$

30,093,095

 

$

27,718,026

 

$

30,369,847

 

 

 

 

 

 

 

Wealth management assets under administration/management

 

 

2,957,213

 

 

2,746,052

 

 

2,744,438

 

 

 

 

 

 

 

Mortgage originations

 

 

431,638

 

 

228,568

 

 

246,115

 

$

660,206

 

$

371,651

 

(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 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

 

Six months ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

(dollars in thousands, except per share data)

 

2020

 

2020

 

2019

 

2020

 

2019

Net income

 

$

11,474

 

$

5,363

 

$

8,348

 

$

16,837

 

$

14,784

Dividends and undistributed earnings allocated to participating securities

 

 

200

 

 

82

 

 

 

 

282

 

 

Net income available to common shareholders

 

$

11,274

 

$

5,281

 

$

8,348

 

$

16,555

 

$

14,784

Weighted-average common shares outstanding for basic EPS

 

 

17,111

 

 

17,070

 

 

13,810

 

 

17,091

 

 

13,796

Dilutive effect of stock-based awards

 

 

334

 

 

335

 

 

290

 

 

334

 

 

293

Weighted-average common shares outstanding for diluted EPS

 

 

17,445

 

 

17,405

 

 

14,100

 

 

17,425

 

 

14,089

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.66

 

$

0.31

 

$

0.60

 

$

0.97

 

$

1.07

Diluted earnings per common share

 

$

0.65

 

$

0.30

 

$

0.59

 

$

0.95

 

$

1.05

Results of Operations

Net Interest Income

Net interest income for the second quarter of 2020 was $20.1 million, an increase of $1.3 million, or 6.7%, from $18.8 million for the first quarter of 2020. The increase was primarily driven by an increase of $830 thousand in interest income from loans and a decrease of $834 thousand in interest expense on deposits, partially offset by a decrease of $440 thousand in other interest income. The increase in interest income from loans was primarily driven by interest and fees recognized on Paycheck Protection Program, or PPP, loans in the amount of $2.0 million, partially offset by a 48 basis point decrease in the average yield on total loans. The decrease in interest expense on deposits was primarily a result of a 30 basis point decrease in the cost of deposits as a result of a reduction in the federal funds rate, partially offset by a $174.7 million increase in average deposit balances. The decrease in other interest income was due to a 1.08% decrease in the average yield on interest-bearing deposits with banks.

Compared to the second quarter of 2019, net interest income for the second quarter of 2020 increased $1.8 million due to a $1.8 million decrease in interest expense. The decrease in interest expense was primarily due to a 60 basis point decrease in the average rate paid on interest-bearing liabilities and a direct result of the reduction of the federal funds rate.

Net Interest Margin (Tax-Equivalent)

Net interest margin (tax-equivalent), a non-GAAP financial measure, for the second quarter of 2020 was 3.14%, compared to 3.35% for the first quarter of 2020. The net interest margin excluding PPP loans would have been 3.16% for the second quarter of 2020. The decrease in net interest margin was primarily due to a 43 basis point lower average earning asset yield partially offset by a 32 basis point decrease in the average rate on total interest-bearing liabilities. The decrease in average earning asset yield was primarily due to a 1.08% decrease in the average yield earned on interest-bearing deposits with banks along with a 48 basis point decrease in the average yield on total loans. The decline in loan yield was primarily due to PPP loan balances which averaged $273.8 million during the quarter with a yield of 3.01%. Commercial and industrial loans, excluding PPP loans, averaged $466.0 million with a yield of 4.78%, a decrease of 48 basis points since the first quarter. The decrease in the average rate on total interest-bearing liabilities was primarily due to a 37 basis point decrease in the average rate on money market and savings deposits and a 29 basis point decrease in the average rate on time deposits.

Compared to the second quarter of 2019, net interest margin (tax-equivalent) for the second quarter of 2020 decreased 48 basis points from 3.62%. The decrease in net interest margin from the second quarter of 2019 was due to a 96 basis point lower average earning asset yield and a $338.6 million increase in the average balance of interest-bearing deposits. In addition, the average yield on loans fell from 4.99% in the second quarter of 2019 to 4.24% in the second quarter of 2020 and the average rate on total interest-bearing liabilities decreased 60 basis points to 0.81% in the second quarter of 2020.

Noninterest Income

Noninterest income for the second quarter of 2020 was $38.2 million, an $11.0 million, or 40.6%, increase from the first quarter of 2020. The increase was primarily due to a $12.5 million increase in mortgage banking revenue along with a $1.3 million increase in gains on investment securities partially offset by a decrease of $2.5 million in retirement and benefit services revenue. The increase in mortgage banking revenue was primarily due to a $203.1 million increase in mortgage originations and an increase in the unrealized gain on secondary market derivatives of $6.9 million due to an increase in volume and the stabilization of the mortgage backed securities market in the second quarter. The decrease in retirement and benefit services revenue was primarily due to a $1.8 million decrease in asset based revenue as a result of a decline in the average balance of assets under administration/management and the final adjustments to eliminate revenue sharing.

Noninterest income for the second quarter of 2020 increased $8.2 million, or 27.5%, from the $30.0 million in the second quarter of 2019. Mortgage banking revenue increased $10.5 million as mortgage originations increased from $246.1 million in the second quarter of 2019 to $431.6 million in the second quarter of 2020 and the unrealized gain on secondary market derivatives increased from $0.4 million to $6.0 million. Retirement and benefit services revenue decreased $2.1 million primarily due to decreases in asset based fees as a result of a decrease the average balance of assets under administration/management and the finalized transition away from revenue sharing. Gains on investment securities revenue increased $1.1 million due to sales in the portfolio during the second quarter of 2020. Other noninterest income decreased $1.4 million in the second quarter of 2020 due to a $1.5 million gain on sale of a branch in 2019.

Noninterest Expense

Noninterest expense for the second quarter of 2020 was $39.7 million, an increase of $3.0 million, or 8.2%, compared to the first quarter of 2020. The increase was due to increases of $2.5 million in compensation expense, $926 thousand in other noninterest expense, partially offset by decreases of $561 thousand in employee taxes and benefits and $210 thousand in travel expenses. The increase in compensation expense was primarily driven by an increase in mortgage originations. Other noninterest expense increased primarily due to an increase of $820 thousand in the provision for unused commitments as lines of credit utilization decreased 9.2%.

Compared to the second quarter of 2019, noninterest expense for the second quarter of 2020 increased $4.5 million, or 12.7%, from $35.3 million. The increase was attributable to increases of $3.1 million in compensation expenses, $1.1 million in other noninterest expense, partially offset by decreases of $413 thousand in employee taxes and benefits and $347 in travel expenses. The increase in compensation expense was primarily the result of higher mortgage originations. The increase in other noninterest expense was due to an increase of $1.0 million in the provision for unused commitments due to a decrease in line of credit utilization from 43.2% to 31.3%. Mortgage and lending expenses increased due to an increase in origination volume and an impairment of mortgage servicing right assets of $265 thousand.

Financial Condition

Total assets were $2.9 billion as of June 30, 2020, an increase of $518.6 million, or 22.0%, from December 31, 2019. The increase in total assets was primarily due to increases of $312.9 million in loans, $83.4 million in available-for-sale investment securities, $66.4 million in cash and cash equivalents, $54.9 million in loans held for sale, and $7.8 million in other assets.

Loans

Total loans were $2.03 billion as of June 30, 2020, an increase of $312.9 million, or 18.2%, from December 31, 2019. The increase was primarily due to increases of $315.1 million in commercial and industrial loans and $24.4 million in our commercial real estate loan portfolio, partially offset by a $31.5 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $347.3 million in net PPP loans, offset by a decrease of $25.3 million due to a 7.86% decrease in operating line utilization.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

June 30,

(dollars in thousands)

 

2020

 

2020

 

2019

 

2019

 

2019

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial (1)

 

$

794,204

 

$

502,637

 

$

479,144

 

$

485,183

 

$

513,120

Real estate construction

 

 

31,344

 

 

25,487

 

 

26,378

 

 

21,674

 

 

26,584

Commercial real estate

 

 

519,104

 

 

522,106

 

 

494,703

 

 

444,600

 

 

442,797

Total commercial

 

 

1,344,652

 

 

1,050,230

 

 

1,000,225

 

 

951,457

 

 

982,501

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate first mortgage

 

 

456,737

 

 

457,895

 

 

457,155

 

 

459,763

 

 

452,049

Residential real estate junior lien

 

 

154,351

 

 

170,538

 

 

177,373

 

 

182,516

 

 

185,209

Other revolving and installment

 

 

78,457

 

 

79,614

 

 

86,526

 

 

92,351

 

 

93,693

Total consumer

 

 

689,545

 

 

708,047

 

 

721,054

 

 

734,630

 

 

730,951

Total loans

 

$

2,034,197

 

$

1,758,277

 

$

1,721,279

 

$

1,686,087

 

$

1,713,452

(1)

Includes PPP loans of $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.45 billion as of June 30, 2020, an increase of $481.8 million, or 24.4%, from December 31, 2019. The increase was comprised of an increase of $358.6 million in interest-bearing deposits and an increase of $123.2 million in noninterest-bearing deposits. Key drivers of the increase in deposits included deposits from PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain financial markets. The increase in interest-bearing deposits included an $89.7 million increase in synergistic deposits from our retirement and benefit services and wealth management segments. In addition, health savings account, or HSA, deposits were $128.6 million as of June 30, 2020, an increase of $8.8 million, or 7.4%, from December 31, 2019. Commercial transaction deposits increased $311.3 million, or 38.8%, while consumer transaction deposits increased $40.5 million, or 7.6%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 28.6% and 29.3% as of June 30, 2020 and December 31, 2019, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

June 30,

(dollars in thousands)

 

2020

 

2020

 

2019

 

2019

 

2019

Noninterest-bearing demand

 

$

700,892

 

$

608,559

 

$

577,704

 

$

537,951

 

$

506,021

Interest-bearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

579,840

 

 

477,752

 

 

458,689

 

 

424,249

 

 

439,342

Savings accounts

 

 

75,973

 

 

60,181

 

 

55,777

 

 

55,513

 

 

56,163

Money market savings

 

 

892,717

 

 

773,652

 

 

683,064

 

 

622,647

 

 

568,450

Time deposits

 

 

203,731

 

 

201,370

 

 

196,082

 

 

192,753

 

 

183,389

Total interest-bearing

 

 

1,752,261

 

 

1,512,955

 

 

1,393,612

 

 

1,295,162

 

 

1,247,344

Total deposits

 

$

2,453,153

 

$

2,121,514

 

$

1,971,316

 

$

1,833,113

 

$

1,753,365

Asset Quality

Total nonperforming assets were $5.4 million as of June 30, 2020, a decrease of $2.5 million, or 31.7%, from December 31, 2019. As of June 30, 2020, the allowance for loan losses was $27.3 million, or 1.34% of total loans, compared to $23.9 million, or 1.39% of total loans, as of December 31, 2019. Excluding PPP loans, the ratio of allowance for loan losses to total loans increased 23 basis points to 1.62% as of June 30, 2020, compared to 1.39% as of December 31, 2019.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended

 

 

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

(dollars in thousands)

 

2020

 

2020

 

2019

 

2019

 

2019

 

Nonaccrual loans

 

$

5,328

 

$

6,959

 

$

7,379

 

$

5,107

 

$

4,623

 

Accruing loans 90+ days past due

 

 

 

 

11

 

 

448

 

 

45

 

 

28

 

Total nonperforming loans

 

 

5,328

 

 

6,970

 

 

7,827

 

 

5,152

 

 

4,651

 

OREO and repossessed assets

 

 

26

 

 

209

 

 

8

 

 

84

 

 

381

 

Total nonperforming assets

 

$

5,354

 

$

7,179

 

$

7,835

 

$

5,236

 

$

5,032

 

Net charge-offs/(recoveries)

 

 

3,264

 

 

(595)

 

 

857

 

 

(240)

 

 

3,189

 

Net charge-offs/(recoveries) to average loans

 

 

0.66

%

 

(0.14)

%

 

0.20

%

 

(0.06)

%

 

0.74

%

Nonperforming loans to total loans

 

 

0.26

%

 

0.40

%

 

0.45

%

 

0.31

%

 

0.27

%

Nonperforming assets to total assets

 

 

0.19

%

 

0.29

%

 

0.33

%

 

0.23

%

 

0.23

%

Allowance for loan losses to total loans

 

 

1.34

%

 

1.54

%

 

1.39

%

 

1.36

%

 

1.24

%

Allowance for loan losses to nonperforming loans

 

 

512

%

 

388

%

 

306

%

 

446

%

 

457

%

For the second quarter of 2020, we had net charge-offs of $3.3 million compared to net recoveries of $595 thousand for the first quarter of 2020 and $3.2 million of net charge-offs for the second quarter of 2019. For the three months ended June 30, 2020, the ratio of net charge-offs to average total loans was 0.66%, and if PPP loans were excluded, the ratio was 11 basis points higher at 0.77%. The increase in charge-offs for the second quarter of 2020 was mostly attributable to the charge-off of two commercial and industrial loan relationships that were previously on nonaccrual. Management does not believe that these charge-offs were a result of economic uncertainties in the current environment.

The provision for loan losses for the second quarter of 2020 was $3.5 million, an increase of $1.0 million from the first quarter of 2020 and an increase of $1.7 million from the second quarter of 2019. The increase in provision expense was due to allocations of reserves for the economic uncertainties related to the novel coronavirus, or COVID-19, which increased the allowance for loan losses balance by $3.3 million to $27.3 million, a 13.9% increase from December 31, 2019.

The ratio of nonperforming loans to total loans at June 30, 2020 was 0.26%, and if PPP loans were excluded, this ratio would have been 0.32%. Nonperforming assets as a percentage of total assets was 0.19% at June 30, 2020. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.21% at June 30, 2020.

As of June 30, 2020, we had entered into principal and interest deferrals on 515 loans with outstanding balances of $148.5 million. All of these loan modifications are being accounted for in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, or have been evaluated under existing accounting policies and are not considered troubled debt restructurings.

Capital

Total stockholders’ equity was $305.7 million as of June 30, 2020, an increase of $20.0 million from December 31, 2019. The tangible book value per common share increased to $15.30 as of June 30, 2020, from $14.08 as of December 31, 2019. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.25% as of June 30, 2020, from 10.38% as of December 31, 2019. Tangible common equity to tangible assets would have been 10.55% as of June 30, 2020, if PPP loans were excluded.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2020

 

2019

 

2019

 

Capital Ratios(1)

 

 

 

 

 

 

 

 

 

 

Alerus Financial Corporation

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

12.58

%

 

12.48

%

 

8.90

%

Tier 1 capital to risk weighted assets

 

 

12.99

%

 

12.90

%

 

9.34

%

Total capital to risk weighted assets

 

 

16.70

%

 

16.73

%

 

13.14

%

Tier 1 capital to average assets

 

 

9.75

%

 

11.05

%

 

8.08

%

Tangible common equity / tangible assets (2)

 

 

9.25

%

 

10.38

%

 

7.69

%

 

 

 

 

 

 

 

 

 

 

 

Alerus Financial, N.A.

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

11.99

%

 

11.91

%

 

11.90

%

Tier 1 capital to risk weighted assets

 

 

11.99

%

 

11.91

%

 

11.90

%

Total capital to risk weighted assets

 

 

13.24

%

 

13.15

%

 

13.04

%

Tier 1 capital to average assets

 

 

9.00

%

 

10.20

%

 

10.29

%

(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, July 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 is a diversified financial services company headquartered in Grand Forks, ND. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to businesses and consumers through four distinct business segments—banking, retirement and benefit services, wealth management, and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology. 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: the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients, and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in response to the pandemic; our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the implementation of the new Current Expected Credit Loss Standard; business and economic conditions generally and in the financial services industry, nationally and within our market areas; the overall health of the local and national real estate market; concentrations within our loan portfolio; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid technological change in the financial services industry; increased competition in the financial services industry; our ability to successfully manage liquidity risk; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; potential impairment to the goodwill we recorded in connection with our past acquisitions; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; interest rate risks associated with our business; fluctuations in the values of the securities held in our securities portfolio; governmental monetary, trade and fiscal policies; severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic, acts of war or terrorism or other adverse external events; any material weaknesses in our internal control over financial reporting; our success at managing the risks involved in the foregoing items; and any other risks described in the “Risk Factors” sections of the reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

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

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2020

 

2019

Assets

 

(Unaudited)

 

(Audited)

Cash and cash equivalents

 

$

210,437

 

$

144,006

Investment securities, at fair value

 

 

 

 

 

 

Available-for-sale

 

 

393,727

 

 

310,350

Equity

 

 

 

 

2,808

Loans held for sale

 

 

101,751

 

 

46,846

Loans

 

 

2,034,197

 

 

1,721,279

Allowance for loan losses

 

 

(27,256)

 

 

(23,924)

Net loans

 

 

2,006,941

 

 

1,697,355

Land, premises and equipment, net

 

 

20,709

 

 

20,629

Operating lease right-of-use assets

 

 

8,746

 

 

8,343

Accrued interest receivable

 

 

7,975

 

 

7,551

Bank-owned life insurance

 

 

31,959

 

 

31,566

Goodwill

 

 

27,329

 

 

27,329

Other intangible assets

 

 

16,411

 

 

18,391

Servicing rights

 

 

2,891

 

 

3,845

Deferred income taxes, net

 

 

8,810

 

 

7,891

Other assets

 

 

37,771

 

 

29,968

Total assets

 

$

2,875,457

 

$

2,356,878

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

Noninterest-bearing

 

$

700,892

 

$

577,704

Interest-bearing

 

 

1,752,261

 

 

1,393,612

Total deposits

 

 

2,453,153

 

 

1,971,316

Long-term debt

 

 

58,754

 

 

58,769

Operating lease liabilities

 

 

9,254

 

 

8,864

Accrued expenses and other liabilities

 

 

48,564

 

 

32,201

Total liabilities

 

 

2,569,725

 

 

2,071,150

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: 17,120,466 and 17,049,551 issued and outstanding

 

 

17,120

 

 

17,050

Additional paid-in capital

 

 

89,313

 

 

88,650

Retained earnings

 

 

189,528

 

 

178,092

Accumulated other comprehensive income (loss)

 

 

9,771

 

 

1,936

Total stockholders’ equity

 

 

305,732

 

 

285,728

Total liabilities and stockholders’ equity

 

$

2,875,457

 

$

2,356,878

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

 

 

2020

 

2020

 

2019

 

2020

 

2019

Interest Income

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

Loans, including fees

 

$

21,372

 

$

20,542

 

$

21,712

 

$

41,914

 

$

43,285

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,765

 

 

1,759

 

 

1,338

 

 

3,524

 

 

2,647

Exempt from federal income taxes

 

 

239

 

 

235

 

 

211

 

 

474

 

 

455

Other

 

 

130

 

 

570

 

 

217

 

 

700

 

 

401

Total interest income

 

 

23,506

 

 

23,106

 

 

23,478

 

 

46,612

 

 

46,788

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,558

 

 

3,392

 

 

3,548

 

 

5,950

 

 

6,296

Short-term borrowings

 

 

 

 

 

 

735

 

 

 

 

1,266

Long-term debt

 

 

857

 

 

877

 

 

904

 

 

1,734

 

 

1,815

Total interest expense

 

 

3,415

 

 

4,269

 

 

5,187

 

 

7,684

 

 

9,377

Net interest income

 

 

20,091

 

 

18,837

 

 

18,291

 

 

38,928

 

 

37,411

Provision for loan losses

 

 

3,500

 

 

2,500

 

 

1,797

 

 

6,000

 

 

4,017

Net interest income after provision for loan losses

 

 

16,591

 

 

16,337

 

 

16,494

 

 

32,928

 

 

33,394

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement and benefit services

 

 

13,710

 

 

16,220

 

 

15,776

 

 

29,930

 

 

30,835

Wealth management

 

 

4,112

 

 

4,046

 

 

3,878

 

 

8,158

 

 

7,489

Mortgage banking

 

 

17,546

 

 

5,045

 

 

7,035

 

 

22,591

 

 

11,604

Service charges on deposit accounts

 

 

297

 

 

423

 

 

430

 

 

720

 

 

874

Net gains (losses) on investment securities

 

 

1,294

 

 

 

 

182

 

 

1,294

 

 

309

Other

 

 

1,271

 

 

1,455

 

 

2,683

 

 

2,726

 

 

3,947

Total noninterest income

 

 

38,230

 

 

27,189

 

 

29,984

 

 

65,419

 

 

55,058

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

21,213

 

 

18,731

 

 

18,143

 

 

39,944

 

 

34,956

Employee taxes and benefits

 

 

4,747

 

 

5,308

 

 

5,160

 

 

10,055

 

 

10,588

Occupancy and equipment expense

 

 

2,869

 

 

2,755

 

 

2,641

 

 

5,624

 

 

5,386

Business services, software and technology expense

 

 

4,520

 

 

4,444

 

 

4,022

 

 

8,964

 

 

7,820

Intangible amortization expense

 

 

991

 

 

990

 

 

1,050

 

 

1,981

 

 

2,101

Professional fees and assessments

 

 

1,160

 

 

1,040

 

 

1,029

 

 

2,200

 

 

2,095

Marketing and business development

 

 

549

 

 

610

 

 

707

 

 

1,159

 

 

1,134

Supplies and postage

 

 

675

 

 

703

 

 

663

 

 

1,378

 

 

1,396

Travel

 

 

51

 

 

261

 

 

398

 

 

312

 

 

900

Mortgage and lending expenses

 

 

1,192

 

 

1,043

 

 

769

 

 

2,235

 

 

1,215

Other

 

 

1,767

 

 

841

 

 

679

 

 

2,608

 

 

1,184

Total noninterest expense

 

 

39,734

 

 

36,726

 

 

35,261

 

 

76,460

 

 

68,775

Income before income taxes

 

 

15,087

 

 

6,800

 

 

11,217

 

 

21,887

 

 

19,677

Income tax expense

 

 

3,613

 

 

1,437

 

 

2,869

 

 

5,050

 

 

4,893

Net income

 

$

11,474

 

$

5,363

 

$

8,348

 

$

16,837

 

$

14,784

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

0.66

 

$

0.31

 

$

0.60

 

$

0.97

 

$

1.07

Diluted earnings per common share

 

$

0.65

 

$

0.30

 

$

0.59

 

$

0.95

 

$

1.05

Dividends declared per common share

 

$

0.15

 

$

0.15

 

$

0.14

 

$

0.30

 

$

0.28

Average common shares outstanding

 

 

17,111

 

 

17,070

 

 

13,810

 

 

17,091

 

 

13,796

Diluted average common shares outstanding

 

 

17,445

 

 

17,405

 

 

14,100

 

 

17,425

 

 

14,089

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

December 31,

 

June 30,

 

 

 

2020

 

2020

 

2019

 

2019

 

Tangible Common Equity to Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common stockholders’ equity

 

$

305,732

 

$

293,608

 

$

285,728

 

$

213,765

 

Less: Goodwill

 

 

27,329

 

 

27,329

 

 

27,329

 

 

27,329

 

Less: Other intangible assets

 

 

16,411

 

 

17,401

 

 

18,391

 

 

20,372

 

Tangible common equity (a)

 

 

261,992

 

 

248,878

 

 

240,008

 

 

166,064

 

Total assets

 

 

2,875,457

 

 

2,512,078

 

 

2,356,878

 

 

2,207,129

 

Less: Goodwill

 

 

27,329

 

 

27,329

 

 

27,329

 

 

27,329

 

Less: Other intangible assets

 

 

16,411

 

 

17,401

 

 

18,391

 

 

20,372

 

Tangible assets (b)

 

 

2,831,717

 

 

2,467,348

 

 

2,311,158

 

 

2,159,428

 

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

 

 

9.25

%

 

10.09

%

 

10.38

%

 

7.69

%

Tangible Book Value Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common stockholders’ equity

 

$

305,732

 

$

293,608

 

$

285,728

 

$

213,765

 

Less: Goodwill

 

 

27,329

 

 

27,329

 

 

27,329

 

 

27,329

 

Less: Other intangible assets

 

 

16,411

 

 

17,401

 

 

18,391

 

 

20,372

 

Tangible common equity (c)

 

 

261,992

 

 

248,878

 

 

240,008

 

 

166,064

 

Total common shares issued and outstanding (d)

 

 

17,120

 

 

17,106

 

 

17,050

 

 

13,816

 

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

 

$

15.30

 

$

14.55

 

$

14.08

 

$

12.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2020

 

2020

 

2019

 

2020

 

2019

 

Return on Average Tangible Common Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,474

 

$

5,363

 

$

8,348

 

$

16,837

 

$

14,784

 

Add: Intangible amortization expense (net of tax)

 

 

783

 

 

782

 

 

830

 

 

1,565

 

 

1,660

 

Net income, excluding intangible amortization (e)

 

 

12,257

 

 

6,145

 

 

9,178

 

 

18,402

 

 

16,444

 

Average total equity

 

 

301,719

 

 

294,727

 

 

211,653

 

 

298,221

 

 

205,785

 

Less: Average goodwill

 

 

27,329

 

 

27,329

 

 

27,329

 

 

27,329

 

 

27,329

 

Less: Average other intangible assets (net of tax)

 

 

13,345

 

 

14,128

 

 

16,498

 

 

13,737

 

 

16,912

 

Average tangible common equity (f)

 

 

261,045

 

 

253,270

 

 

167,826

 

 

257,155

 

 

161,544

 

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

 

 

18.88

%

 

9.76

%

 

21.94

%

 

14.39

%

 

20.53

%

Net Interest Margin (tax-equivalent)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

20,091

 

$

18,837

 

$

18,291

 

$

38,928

 

$

37,411

 

Tax-equivalent adjustment

 

 

109

 

 

100

 

 

84

 

 

209

 

 

176

 

Tax-equivalent net interest income (g)

 

 

20,200

 

 

18,937

 

 

18,375

 

 

39,137

 

 

37,587

 

Average earning assets (h)

 

 

2,584,037

 

 

2,271,004

 

 

2,037,604

 

 

2,427,519

 

 

2,028,685

 

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

 

 

3.14

%

 

3.35

%

 

3.62

%

 

3.24

%

 

3.74

%

Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

$

39,734

 

$

36,726

 

$

35,261

 

$

76,460

 

$

68,775

 

Less: Intangible amortization expense

 

 

991

 

 

990

 

 

1,050

 

 

1,981

 

 

2,101

 

Adjusted noninterest expense (i)

 

 

38,743

 

 

35,736

 

 

34,211

 

 

74,479

 

 

66,674

 

Net interest income

 

 

20,091

 

 

18,837

 

 

18,291

 

 

38,928

 

 

37,411

 

Noninterest income

 

 

38,230

 

 

27,189

 

 

29,984

 

 

65,419

 

 

55,058

 

Tax-equivalent adjustment

 

 

109

 

 

100

 

 

84

 

 

209

 

 

176

 

Total tax-equivalent revenue (j)

 

 

58,430

 

 

46,126

 

 

48,359

 

 

104,556

 

 

92,645

 

Efficiency ratio (i)/(j)

 

 

66.31

%

 

77.47

%

 

70.74

%

 

71.23

%

 

71.97

%

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

June 30, 2020

 

March 31, 2020

 

June 30, 2019

 

June 30, 2020

 

June 30, 2019

 

 

 

 

 

Average