Alerus Financial Corporation Reports Third Quarter 2019 Net Income of $7.1 Million

Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $7.1 million for the third quarter of 2019, or $0.48 per diluted common share, compared to $8.3 million of net income, or $0.59 per diluted common share, for the second quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, “Financial results were as expected for the third quarter of 2019. Year-to-date net income for the first nine months of 2019 was up $2.1 million, or 10.4%, compared to 2018 despite a challenging interest rate environment; further exhibiting the value of our diversified business model. The Company accomplished two significant milestones this past quarter, both of which are key in positioning the Company for long-term success. First, we completed our initial public offering (IPO) and began trading on Nasdaq in mid-September. The initial public offering was one of the most important decisions the Company has ever made. The IPO raised $62.8 million, increasing our capital, strengthening our balance sheet and giving us a strong foundation to execute our strategic plan.

In September, we also introduced a new digital experience designed to guide clients in improving their finances. This reimagined digital experience, called MY ALERUS, brings together all consumer products within our Company to create a dashboard for our clients’ whole financial life. MY ALERUS helps clients dig deeper into their finances through a series of financial fitness workouts to help clients calculate their financial wellness score and see how they’re doing with respect to their finances, robust account aggregation technology to link in outside financial accounts, and a seamless yet quick way to open deposit accounts online. Alerus has been strategically building this digital solution as part of our multi-year, organic growth strategic plan called One Alerus. We believe the new technology paired with our skilled advisor team will not only bring new value to our clients, but also add long-term value for our stockholders.”

Quarterly Highlights

• Return on average assets of 1.29%
• Return on tangible common equity of 17.01% (1)
• Noninterest income as a percentage of total revenue was 61.29%
• Mortgage banking noninterest income increased $1.1 million or 15.6% over the second quarter of 2019
• Mortgage originations totaled $313.5 million, a 27.4% increase from the second quarter of 2019
• Net interest margin (tax-equivalent) was 3.69% compared to 3.62% for the second quarter of 2019 (1)
• Loans held for investment decreased $27.4 million, or 1.6%, from the second quarter of 2019
• Deposits increased $79.7 million, or 4.5%, from the second quarter of 2019
• Short-term borrowings decreased $141.4 million from the second quarter of 2019

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

Results of Operations

Net Interest Income

Net interest income for the third quarter of 2019 was $18.7 million, an increase of $390 thousand, or 2.1%, from $18.3 million for the second quarter of 2019. The increase was primarily driven by a decrease of $195 thousand in interest expense on short-term borrowings and an increase of $174 thousand in interest income on loans.

Compared to the third quarter of 2018, net interest income for the third quarter of 2019 was relatively unchanged with a modest decrease of $248 thousand.

Net Interest Margin

Net interest margin for the third quarter of 2019 was 3.69%, compared to 3.62% for the second quarter of 2019. The increase of 7 basis points was primarily a result of $460 thousand of net interest recoveries during the third quarter. For the third quarter of 2019, the average yield on total loans was 5.06% compared to 4.99% for the second quarter of 2019. For the third quarter of 2019, the cost of interest-bearing liabilities was 1.39% compared to 1.41% for the second quarter of 2019.

Compared to the third quarter of 2018, net interest margin for the third quarter of 2019 decreased 11 basis points from 3.80%. The decrease in net interest margin from the third quarter of 2018 was primarily due to the impact of higher average deposit costs.

Noninterest Income

Noninterest income for the third quarter of 2019 was $29.6 million, a decrease of $404 thousand from $30.0 million for the second quarter of 2019. The decrease was primarily due to a $936 thousand decrease in other noninterest income and a $469 thousand decrease in retirement and benefit services revenue partially offset by an increase in mortgage banking revenue of $1.1 million. The decrease in other noninterest income was due to a $1.5 million gain recognized on the sale of our Duluth branch during the second quarter of 2019, offset by a $542 thousand gain on the sale of our Express branch recognized during the third quarter of 2019. The decrease in retirement and benefit services revenue was primarily due to a decrease in revenue sharing income.

Compared to the third quarter of 2018, noninterest income increased $3.3 million, or 12.7%, from $26.3 million. The increase was primarily attributable to an increase in mortgage banking revenue of $2.8 million and a $542 thousand gain on the sale of our Express branch. The increase in mortgage banking revenue was due to increased mortgage originations and the transition to mandatory delivery of mortgage loans to the secondary market during the first quarter of 2019.

Noninterest Expense

Noninterest expense for the third quarter of 2019 was $37.3 million, an increase of $2.1 million, or 5.9% compared to the second quarter of 2019. Compensation expense increased $1.9 million due to an increase in mortgage banking commissions, driven by seasonally higher mortgage originations, along with an increase due to annual merit increases that were effective July 1. In addition, business services, software and technology expense increased $202 thousand related to our One Alerus initiative, and a $335 thousand increase in other expenses primarily related to a seasonal increase in the provision for unfunded commitments. These increases were partially offset by a decrease of $560 thousand in employee benefit expense primarily due to a decrease in health insurance claims incurred on our self-insured health plans.

Compared to the third quarter of 2018, noninterest expense for the third quarter of 2019 increased $3.0 million, or 8.7%, from $34.3 million. The increase was primarily attributable to a combined increase in compensation and employee benefit expense of $2.5 million due to additional investments in talent and annual merit increases.

Financial Condition

Total assets were $2.23 billion as of September 30, 2019, an increase of $49.2 million, or 2.3%, from December 31, 2018. The increase in total assets was due to increases of $28.5 million in available-for-sale investment securities, $51.5 million in loans held for sale, and $20.5 million in cash and cash equivalents. These increases were partially offset by a $32.0 million decrease in loans held for branch sale and a $15.8 million decrease in loans. Loans held for branch sale decreased as a result of closing on the sale of our Duluth, MN branches on April 26, 2019.

Loans

Total loans were $1.69 billion as of September 30, 2019, a decrease of $15.8 million, or 0.9%, from December 31, 2018. The decrease was primarily due to a decrease in our commercial and industrial loan portfolio primarily due to lower seasonal credit line utilization and our ability to exit $21.4 million of criticized credits.

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

Deposits

Total deposits were $1.83 billion as of September 30, 2019, an increase of $58.0 million, or 3.3%, from December 31, 2018. The increase was due to an increase of $70.7 million in interest-bearing deposits offset by a decrease of $12.7 million in noninterest-bearing deposits. The increase in interest-bearing deposits was primarily due to a $79.1 million increase in synergistic deposits from our retirement and benefit services and wealth management segments and a $11.1 million increase in HSA deposits partially offset by a decrease in public unit deposits of $14.7 million. Noninterest-bearing deposits represented 29.3% of total deposits as of September 30, 2019.

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

Asset Quality

Total nonperforming assets were $5.2 million as of September 30, 2019, a decrease of $1.9 million from December 31, 2018. As of September 30, 2019, the allowance for loan losses was $23.0 million, or 1.36% of total loans, compared to $22.2 million, or 1.30%, as of December 31, 2018.

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

For the third quarter of 2019, we had a net recovery of $240 thousand, compared to $3.2 million of net charge-offs for the second quarter of 2019 and $387 thousand of net charge-offs for the third quarter of 2018.

The provision for loan losses for the third quarter of 2019 was $1.5 million, a decrease of $299 thousand from the second quarter of 2019 and relatively unchanged from the third quarter of 2018.

Capital

Total stockholders’ equity was $281.4 million as of September 30, 2019, an increase of $84.4 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 $13.77 as of September 30, 2019, from $10.68 as of December 31, 2018. Tangible common equity to tangible assets increased to 10.76% as of September 30, 2019, from 6.91% as of December 31, 2018.

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

Conference Call

The Company will host a conference call at 8:30 a.m. Central Time on Friday, October 25, 2019 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 earnings 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 and 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; 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.