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 [phone]. 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.”

 

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