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Alerus Financial Corporation Reports Third Quarter 2022 Net Income of $9.6 Million

Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $9.6 million for the third quarter of 2022, or $0.47 per diluted common share, compared to net income of $9.3 million, or $0.52 per diluted common share, for the second quarter of 2022, and net income of $13.1 million, or $0.74 per diluted common share, for the third quarter of 2021. Excluding the acquisition of Metro Phoenix Bank, earnings per diluted common share were $0.54 for the third quarter of 2022.

CEO Comments

President and Chief Executive Officer Katie Lorenson said, “We ended the quarter with net income of $9.6 million; this included $1.8 million of merger expenses as we closed and converted the Metro Phoenix Bank acquisition during the quarter. The seamless integration of Metro Phoenix Bank marks a historic milestone as the Company’s twenty-fifth acquisition.

Our financial results were highlighted by strong loan growth during the quarter, driven by the addition of new team members and expansion of existing client relationships. During the last several years we have invested further in our credit talent and infrastructure. We have improved our credit policies and deepened our credit risk management practices in preparation for improved organic loan growth. The Company’s historic net charge-off ratio is 27 basis points, dating back over 25 years. Prudent credit underwriting and client selection continue to remain a key focus as we lend through the uncertainty of the current economic cycle.

We continue to position the Company strategically as the economic environment continues to evolve. We believe our diversified business model, with recurring revenue streams, strong capital levels, liquidity profile, and underwriting culture will continue to differentiate us from the rest of the industry. I know our team will respond to any challenge and I am proud of their constant dedication to serving our clients and communities, and for delivering positive results for our shareholders.”

Quarterly Highlights

  • Return on average total assets of 1.02%, compared to 1.14% for the second quarter of 2022. Excluding merger and acquisition expenses, return on average total assets was 1.17% for the third quarter of 2022
  • Return on average common equity of 10.25%, compared to 11.93% for the second quarter of 2022. Excluding merger and acquisition expenses, return on average common equity was 12.18% for the third quarter of 2022
  • Return on average tangible common equity(1) of 13.89%, compared to 15.25% for the second quarter of 2022. Excluding merger and acquisition expenses, return on average tangible common equity was 15.75% for the third quarter of 2022
  • Net interest margin (tax-equivalent) was 3.21%, compared to 2.98% for the second quarter of 2022. Excluding the acquisition of Metro Phoenix Bank, net interest margin (tax-equivalent) was 3.04% for the third quarter of 2022
  • Allowance for loan losses to total loans was 1.34% compared to 1.80% as of December 2021. Excluding Metro Phoenix Bank, the allowance for loan losses to total loas was 1.51% as of September 2022
  • Noninterest income for the third quarter of 2022 was 48.82% of total revenue, compared to 56.20% for the second quarter of 2022
  • Loans held for investment increased $560.2 million, or 31.9%, since December 31, 2021; Metro Phoenix Bank loans acquired totaled $270.4 million. Excluding the acquisition of Metro Phoenix Bank and Paycheck Protection Program, or PPP, loans, loans held for investment increased $320.5 million, or 18.2%, since December 31, 2021
  • Loan to deposit ratio was 78.3%, compared to 60.2% as of December 31, 2021.
  • Common equity tier 1 capital to risk weighted assets was 13.63%, compared to 14.65% as of December 31, 2021
(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

 

Nine months ended

 

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

 

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

 

2022

 

2022

 

2021

 

2022

 

2021

 

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

 

1.02

%

 

1.14

%

 

1.62

 

%

 

1.13

%

 

1.71

%

Return on average common equity

 

 

10.25

%

 

11.93

%

 

14.68

 

%

 

11.27

%

 

15.61

%

Return on average tangible common equity (1)

 

 

13.89

%

 

15.25

%

 

18.13

 

%

 

14.59

%

 

19.44

%

Noninterest income as a % of revenue

 

 

48.82

%

 

56.20

%

 

63.04

 

%

 

54.08

%

 

63.87

%

Net interest margin (tax-equivalent)

 

 

3.21

%

 

2.98

%

 

2.78

 

%

 

3.02

%

 

2.92

%

Efficiency ratio (1)

 

 

74.76

%

 

74.72

%

 

71.49

 

%

 

73.94

%

 

69.69

%

Net charge-offs/(recoveries) to average loans

 

 

0.07

%

 

0.07

%

 

(0.06

)

%

 

0.04

%

 

0.01

%

Dividend payout ratio

 

 

38.30

%

 

34.62

%

 

21.62

 

%

 

33.33

%

 

20.80

%

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.48

 

$

0.53

 

$

0.75

 

 

$

1.58

 

$

2.29

 

Earnings per common share - diluted

 

$

0.47

 

$

0.52

 

$

0.74

 

 

$

1.56

 

$

2.26

 

Dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.16

 

 

$

0.52

 

$

0.47

 

Book value per common share

 

$

17.25

 

$

17.75

 

$

20.53

 

 

 

 

 

 

 

 

Tangible book value per common share (1)

 

$

13.76

 

$

14.93

 

$

17.46

 

 

 

 

 

 

 

 

Average common shares outstanding - basic

 

 

19,987

 

 

17,297

 

 

17,205

 

 

 

18,186

 

 

17,182

 

Average common shares outstanding - diluted

 

 

20,230

 

 

17,532

 

 

17,499

 

 

 

18,431

 

 

17,488

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement and benefit services assets under administration/management

 

$

30,545,694

 

$

31,749,157

 

$

36,202,553

 

 

 

 

 

 

 

 

Wealth management assets under administration/management

 

$

3,435,786

 

$

4,147,763

 

$

3,865,062

 

 

 

 

 

 

 

 

Mortgage originations

 

$

229,901

 

$

269,397

 

$

415,792

 

 

$

686,060

 

$

1,479,243

 

(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 2022 was $28.3 million, a $5.5 million, or 24.3%, increase from the second quarter of 2022. Net interest income increased $7.2 million, or 34.0%, from $21.1 million for the third quarter of 2021. The linked quarter increase was primarily driven by increases of $7.4 million in interest income from loans and a $591 thousand increase in other interest income, partially offset by increases of $1.2 million in interest expense related to short-term borrowings and $1.0 million in interest expense from deposits, the result of a rising interest rate environment and an increase in our short-term borrowings. The increases in loans and deposits were primarily the result of the Metro Phoenix Bank acquisition which included $270.4 million in loans and $353.7 million in deposits. Short-term borrowings increased primarily due to loan growth outpacing deposit growth.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 3.21% for the third quarter of 2022, a 23 basis point increase from 2.98% for the second quarter of 2022, and a 43 basis point increase from 2.78% in the third quarter of 2021. Excluding the acquisition of Metro Phoenix Bank, net interest margin was 3.04% for the third quarter of 2022, a 6 basis point increase from the second quarter of 2022, and a 26 basis point increase from the third quarter of 2021. The quarter over quarter increase was primarily driven by a 45 basis point increase in interest earning asset yields, partially offset by a 35 basis point increase in the rate paid on interest-bearing liabilities, the result of a rising interest rate environment. Additionally, we saw the average balance on interest-earning assets and interest-bearing liabilities increase, primarily due to the loans and deposits acquired from Metro Phoenix Bank.

Noninterest Income

Noninterest income for the third quarter of 2022 was $27.0 million, a $2.2 million, or 7.6%, decrease from the second quarter of 2022. The linked quarter decrease was primarily driven by decreases of $2.3 million in mortgage banking revenue and $696 thousand in wealth management revenue. Partially offsetting these decreases was a $304 thousand increase in retirement and benefit services revenue. The decrease in mortgage banking revenue was primarily driven by a $39.5 million, or 14.7%, decrease in mortgage originations as well as an 82 basis point decrease in the gain on sale margin. Wealth management revenue decreased primarily due to a $712.0 million decrease in assets under management, the result of an overall market value decrease.

Noninterest income for the third quarter of 2022 decreased $9.0 million, or 25.1%, from $36.0 million in the third quarter of 2021. The year over year decrease was primarily driven by decreases of $7.3 million in mortgage banking revenue, $1.4 million in retirement and benefit services revenue and $443 thousand in wealth management revenue. Mortgage banking revenue decreased primarily due to a $185.9 million, or 44.7%, decrease in mortgage originations and a 94 basis point decrease in the gain on sale margin. Retirement and benefit services revenue decreased primarily due to a decrease in asset-based fees from a $5.7 billion decrease in assets under administration/management. Wealth management revenue decreased primarily as a result of a $429.3 million decrease in assets under management, the result of declines in market values.

Noninterest Expense

Noninterest expense for the third quarter of 2022 was $42.8 million, a $2.8 million, or 7.0%, increase compared to the second quarter of 2022. The linked quarter increase was primarily driven by increases of $1.7 million in other noninterest expense and $880 thousand in professional fees and assessments expense. Partially offsetting these increases was a $708 thousand decrease in employee taxes and benefits expense. The increase in other noninterest expense was primarily driven by a $1.3 million increase in the provision for unused commitments. This provision expense was the result of new business generated within our real estate construction loans. Professional fees and assessments expense included $1.8 million in merger related expenses associated with the acquisition of Metro Phoenix Bank, an increase of $998 thousand from the prior quarter. Employee taxes and benefits decreased primarily due to a $328 thousand decrease in health insurance claims from the prior quarter.

Noninterest expense for the third quarter of 2022 increased $726 thousand, or 1.7%, from $42.0 million in the third quarter of 2021. The year over year increase in noninterest expense was primarily driven by increases of $1.7 million in other noninterest expense and $1.6 million in professional fees and assessments, partially offset by a $2.1 million decrease in compensation expense. Noninterest expense increased primarily as a result of an $841 thousand increase in the provision for unused commitments, the result of new business generated within our real estate construction loans. Professional fees and assessments increased primarily due to $1.8 million in merger related expenses associated with the acquisition of Metro Phoenix Bank. The year over year decrease in mortgage originations drove the overall decrease in compensation expense as compared to the third quarter of 2021.

Financial Condition

Total assets were $3.7 billion as of September 30, 2022, an increase of $298.6 million, or 8.8%, from December 31, 2021. The overall increase in total assets included an increase of $560.2 million in loans held for investment, partially offset by decreases of $188.1 million in cash and cash equivalents and $150.2 million in investment securities.

Loans

Total loans were $2.3 billion as of September 30, 2022, an increase of $560.2 million, or 31.9%, from December 31, 2021. This increase was primarily due to increases of $270.4 million in loans acquired from Metro Phoenix Bank and $289.8 million in organic loan growth. Excluding loans acquired from Metro Phoenix Bank, the increases in organic loan growth included increases of $119.5 million in residential real estate first mortgages, $91.9 million in commercial real estate loans, and $31.3 million in commercial and industrial loans, also excluding PPP loans, commercial and industrial loans increased $62.0 million.

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

 

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

(dollars in thousands)

 

2022

 

2022

 

2022

 

2021

 

2021

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial (1)

 

$

564,655

 

$

484,426

 

$

467,449

 

$

436,761

 

$

506,599

Real estate construction

 

 

89,215

 

 

48,870

 

 

41,604

 

 

40,619

 

 

37,751

Commercial real estate

 

 

819,068

 

 

599,737

 

 

602,158

 

 

598,893

 

 

573,518

Total commercial

 

 

1,472,938

 

 

1,133,033

 

 

1,111,211

 

 

1,076,273

 

 

1,117,868

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate first mortgage

 

 

649,818

 

 

568,571

 

 

522,489

 

 

510,716

 

 

501,339

Residential real estate junior lien

 

 

143,681

 

 

135,255

 

 

130,604

 

 

125,668

 

 

130,243

Other revolving and installment

 

 

51,794

 

 

53,384

 

 

53,738

 

 

45,363

 

 

50,936

Total consumer

 

 

845,293

 

 

757,210

 

 

706,831

 

 

681,747

 

 

682,518

Total loans

 

$

2,318,231

 

$

1,890,243

 

$

1,818,042

 

$

1,758,020

 

$

1,800,386

______________
(1)

Includes PPP loans of $2.9 million at September 30, 2022, $6.9 million at June 30, 2022, $13.1 million at March 31, 2022, $33.6 million at December 31, 2021 and $103.5 million at September 30, 2021.

Deposits

Total deposits were $3.0 billion as of September 30, 2022, an increase of $41.3 million, or 1.4%, from December 31, 2021. Interest-bearing deposits increased $74.9 million, while noninterest-bearing deposits decreased $33.6 million in the third quarter of 2022. The increase in total deposits was primarily due to $353.7 million of deposits acquired from Metro Phoenix Bank. Excluding deposits acquired from Metro Phoenix Bank, deposits decreased $312.4 million, or 10.7%. The decrease was primarily driven by decreases of $129.8 million in noninterest-bearing deposits, $80.0 million in interest-bearing demand deposits, and $59.3 million in time deposits. Noninterest-bearing deposits decreased primarily due to a decrease in synergistic deposits. The decrease in interest-bearing demand deposits was the result of seasonally lower balances in public unit deposits. Time deposits decreased due to clients shifting balances to more liquid accounts. Synergistic deposits, which include deposits from our retirement and benefit services and wealth management segments as well as HSA deposits, decreased $35.5 million from December 31, 2021 primarily due to year-end seasonally higher temporary balances from retirement plan terminations.

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

 

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

(dollars in thousands)

 

2022

 

2022

 

2022

 

2021

 

2021

Noninterest-bearing demand

 

$

905,228

 

$

764,808

 

$

831,558

 

$

938,840

 

$

797,062

Interest-bearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

653,216

 

 

642,641

 

 

760,321

 

 

714,669

 

 

673,916

Savings accounts

 

 

101,820

 

 

97,227

 

 

99,299

 

 

96,825

 

 

92,632

Money market savings

 

 

1,079,520

 

 

914,423

 

 

976,905

 

 

937,305

 

 

924,678

Time deposits

 

 

222,027

 

 

200,451

 

 

224,184

 

 

232,912

 

 

224,800

Total interest-bearing

 

 

2,056,583

 

 

1,854,742

 

 

2,060,709

 

 

1,981,711

 

 

1,916,026

Total deposits

 

$

2,961,811

 

$

2,619,550

 

$

2,892,267

 

$

2,920,551

 

$

2,713,088

Asset Quality

Total nonperforming assets were $6.2 million as of September 30, 2022, an increase of $3.1 million, or 101.4%, from December 31, 2021, primarily due to a residential real estate first mortgage client that is being individually evaluated for impairment. As of September 30, 2022, the allowance for loan losses was $31.0 million, or 1.34% of total loans, compared to $31.6 million, or 1.80% of total loans, as of December 31, 2021. Excluding Metro Phoenix Bank, the allowance for loan losses to total loans was 1.51% as of September 30, 2022.

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

 

 

As of and for the three months ended

 

 

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2022

 

2022

 

2022

 

2021

 

2021

 

Nonaccrual loans

 

$

4,303

 

$

4,370

 

$

4,069

 

 

$

2,076

 

 

$

6,229

 

 

Accruing loans 90+ days past due

 

 

1,000

 

 

 

 

146

 

 

 

121

 

 

 

 

 

Total nonperforming loans

 

 

5,303

 

 

4,370

 

 

4,215

 

 

 

2,197

 

 

 

6,229

 

 

OREO and repossessed assets

 

 

904

 

 

860

 

 

865

 

 

 

885

 

 

 

862

 

 

Total nonperforming assets

 

$

6,207

 

$

5,230

 

$

5,080

 

 

$

3,082

 

 

$

7,091

 

 

Net charge-offs/(recoveries)

 

 

405

 

 

340

 

 

(141

)

 

 

(1,006

)

 

 

(302

)

 

Net charge-offs/(recoveries) to average loans

 

 

0.07

%

 

0.07

%

 

(0.03

)

%

 

(0.22

)

%

 

(0.06

)

%

Nonperforming loans to total loans

 

 

0.23

%

 

0.23

%

 

0.23

 

%

 

0.12

 

%

 

0.35

 

%

Nonperforming assets to total assets

 

 

0.17

%

 

0.16

%

 

0.15

 

%

 

0.09

 

%

 

0.22

 

%

Allowance for loan losses to total loans

 

 

1.34

%

 

1.66

%

 

1.74

 

%

 

1.80

 

%

 

1.78

 

%

Allowance for loan losses to nonperforming loans

 

 

584

%

 

718

%

 

752

 

%

 

1,437

 

%

 

515

 

%

For the third quarter of 2022, we had net charge-offs of $405 thousand compared to net charge-offs of $340 thousand for the second quarter of 2022 and $302 thousand of net recoveries for the third quarter of 2021.

There was no provision expense recorded for the three months ended September 30, 2022, no change compared to the three months ended June 30, 2022, and a $2.0 million increase as compared to the three months ended September 30, 2021. Although management saw increases in overall loan volume, based on the reduction of previous adjustments for pandemic related qualitative factors, management concluded no need for additional provision.

Capital

Total stockholders’ equity was $344.8 million as of September 30, 2022, a decrease of $14.6 million, or 4.1%, from December 31, 2021. The decrease in stockholders’ equity was primarily due to a $98.7 million decrease in accumulated other comprehensive loss, due to rising interest rates, which resulted in a lower fair value of our available-for-sale investment securities, partially offset by a $61.8 million increase in additional paid-in capital as a result of the Metro Phoenix Bank acquisition. Tangible book value per common share, a non-GAAP financial measure, decreased to $13.76 as of September 30, 2022, from $17.87 as of December 31, 2021. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 7.59% as of September 30, 2022, from 9.21% as of December 31, 2021. Common equity tier 1 capital to risk weighted assets decreased to 13.63% as of September 30, 2022, from 14.65% as of December 31, 2021.

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

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2022

 

2021

 

2021

 

Capital Ratios(1)

 

 

 

 

 

 

 

Alerus Financial Corporation Consolidated

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

13.63

%

14.65

%

14.52

%

Tier 1 capital to risk weighted assets

 

13.94

%

15.06

%

14.93

%

Total capital to risk weighted assets

 

16.84

%

18.64

%

18.58

%

Tier 1 capital to average assets

 

10.82

%

9.79

%

9.88

%

Tangible common equity / tangible assets (2)

 

7.59

%

9.21

%

9.62

%

 

 

 

 

 

 

 

 

Alerus Financial, N.A.

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

13.01

%

13.87

%

13.77

%

Tier 1 capital to risk weighted assets

 

13.01

%

13.87

%

13.77

%

Total capital to risk weighted assets

 

14.11

%

15.12

%

15.03

%

Tier 1 capital to average assets

 

11.12

%

9.01

%

9.11

%

(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 11:00 a.m. Central Time on Thursday, October 27, 2022, to discuss its financial results. The call can be accessed via telephone at (844) 200-6205, using access code 769396. 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 with corporate offices in Grand Forks, North Dakota, and the Minneapolis-St. Paul, Minnesota metropolitan area. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to business and consumer clients through four distinct business segments—banking, retirement and benefit services, wealth management, and mortgage. Alerus provides clients with a primary point of contact to help fully understand the unique needs and delivery channel preferences of each client. Clients are provided with competitive products, valuable insight and sound advice supported by digital solutions designed to meet the clients’ needs. Alerus has banking, mortgage, and wealth management offices in Grand Forks and Fargo, North Dakota, the Minneapolis-St. Paul, Minnesota metropolitan area, and Phoenix, Scottsdale, and Mesa Arizona. Alerus Retirement and Benefits plan administration hubs are located in Minnesota, Michigan, and Colorado.

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 and financial performance. 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: interest rate risks associated with our business, including the effects of recent and anticipated rate increases by the Federal Reserve; 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, including rising rates of inflation; 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 from non-banks such as credit unions and Fintech companies; our ability to successfully manage liquidity risk, especially in light of recent excess liquidity at the Bank; 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; fluctuations in the values of the securities held in our securities portfolio, including as a result of rising interest rates; governmental monetary, trade and fiscal policies; severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic, the negative effects of the ongoing COVID-19 pandemic, including its effects on the economic environment, our clients, and our operations, including due to supply chain disruptions, as well as any changes to federal, state, or local government laws, regulations, or orders in response to the pandemic; acts of war or terrorism, including the Russian invasion of Ukraine, or other adverse external events; any material weaknesses in our internal control over financial reporting; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative rates; changes to U.S. or state tax laws, regulations and guidance, including the new 1.0% excise tax on stock buybacks by publicly traded companies; talent and labor shortages and employee turnover; possible federal mask and vaccine mandates; 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 in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2022

 

2021

Assets

 

(Unaudited)

 

(Audited)

Cash and cash equivalents

 

$

54,167

 

 

$

242,311

 

Investment securities

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

729,110

 

 

 

853,649

 

Held-to-maturity, at carrying value

 

 

326,410

 

 

 

352,061

 

Fed funds sold

 

 

14,124

 

 

 

 

Loans held for sale

 

 

26,129

 

 

 

46,490

 

Loans

 

 

2,318,231

 

 

 

1,758,020

 

Allowance for loan losses

 

 

(30,968

)

 

 

(31,572

)

Net loans

 

 

2,287,263

 

 

 

1,726,448

 

Land, premises and equipment, net

 

 

17,067

 

 

 

18,370

 

Operating lease right-of-use assets

 

 

3,481

 

 

 

3,727

 

Accrued interest receivable

 

 

11,256

 

 

 

8,537

 

Bank-owned life insurance

 

 

33,777

 

 

 

33,156

 

Goodwill

 

 

46,060

 

 

 

31,490

 

Other intangible assets

 

 

23,779

 

 

 

20,250

 

Servicing rights

 

 

2,780

 

 

 

1,880

 

Deferred income taxes, net

 

 

45,889

 

 

 

11,614

 

Other assets

 

 

69,961

 

 

 

42,708

 

Total assets

 

$

3,691,253

 

 

$

3,392,691

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

Noninterest-bearing

 

$

905,228

 

 

$

938,840

 

Interest-bearing

 

 

2,056,583

 

 

 

1,981,711

 

Total deposits

 

 

2,961,811

 

 

 

2,920,551

 

Short-term borrowings

 

 

253,830

 

 

 

 

Long-term debt

 

 

58,836

 

 

 

58,933

 

Operating lease liabilities

 

 

3,802

 

 

 

4,275

 

Accrued expenses and other liabilities

 

 

68,135

 

 

 

49,529

 

Total liabilities

 

 

3,346,414

 

 

 

3,033,288

 

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: 19,987,274 and 17,212,588 issued and outstanding

 

 

19,987

 

 

 

17,213

 

Additional paid-in capital

 

 

154,629

 

 

 

92,878

 

Retained earnings

 

 

273,132

 

 

 

253,567

 

Accumulated other comprehensive income (loss)

 

 

(102,909

)

 

 

(4,255

)

Total stockholders’ equity

 

 

344,839

 

 

 

359,403

 

Total liabilities and stockholders’ equity

 

$

3,691,253

 

 

$

3,392,691

 

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

 

 

2022

 

2022

 

2021

 

2022

 

2021

Interest Income

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

Loans, including fees

 

$

25,379

 

$

17,988

 

$

18,888

 

 

$

60,659

 

$

58,779

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

5,939

 

 

6,068

 

 

3,249

 

 

 

17,447

 

 

8,547

 

Exempt from federal income taxes

 

 

209

 

 

213

 

 

225

 

 

 

638

 

 

694

 

Other

 

 

748

 

 

157

 

 

185

 

 

 

1,021

 

 

432

 

Total interest income

 

 

32,275

 

 

24,426

 

 

22,547

 

 

 

79,765

 

 

68,452

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,852

 

 

813

 

 

880

 

 

 

3,494

 

 

2,781

 

Short-term borrowings

 

 

1,516

 

 

278

 

 

 

 

 

1,794

 

 

 

Long-term debt

 

 

591

 

 

559

 

 

535

 

 

 

1,712

 

 

1,361

 

Total interest expense

 

 

3,959

 

 

1,650

 

 

1,415

 

 

 

7,000

 

 

4,142

 

Net interest income

 

 

28,316

 

 

22,776

 

 

21,132

 

 

 

72,765

 

 

64,310

 

Provision for loan losses

 

 

 

 

 

 

(2,000

)

 

 

 

 

(2,000

)

Net interest income after provision for loan losses

 

 

28,316

 

 

22,776

 

 

23,132

 

 

 

72,765

 

 

66,310

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement and benefit services

 

 

16,597

 

 

16,293

 

 

18,031

 

 

 

50,536

 

 

53,157

 

Wealth management

 

 

4,852

 

 

5,548

 

 

5,295

 

 

 

15,726

 

 

15,419

 

Mortgage banking

 

 

3,782

 

 

6,038

 

 

11,116

 

 

 

14,751

 

 

40,535

 

Service charges on deposit accounts

 

 

377

 

 

412

 

 

357

 

 

 

1,152

 

 

1,025

 

Net gains (losses) on investment securities

 

 

 

 

 

 

11

 

 

 

 

 

125

 

Other

 

 

1,402

 

 

935

 

 

1,230

 

 

 

3,541

 

 

3,408

 

Total noninterest income

 

 

27,010

 

 

29,226

 

 

36,040

 

 

 

85,706

 

 

113,669

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

21,168

 

 

21,248

 

 

23,291

 

 

 

61,467

 

 

71,298

 

Employee taxes and benefits

 

 

5,079

 

 

5,787

 

 

5,058

 

 

 

17,028

 

 

16,443

 

Occupancy and equipment expense

 

 

1,926

 

 

1,737

 

 

2,063

 

 

 

5,713

 

 

6,212

 

Business services, software and technology expense

 

 

5,373

 

 

4,785

 

 

5,332

 

 

 

15,082

 

 

15,266

 

Intangible amortization expense

 

 

1,324

 

 

1,053

 

 

1,088

 

 

 

3,430

 

 

3,327

 

Professional fees and assessments

 

 

3,126

 

 

2,246

 

 

1,503

 

 

 

6,913

 

 

4,484

 

Marketing and business development

 

 

890

 

 

814

 

 

865

 

 

 

2,304

 

 

2,310

 

Supplies and postage

 

 

588

 

 

572

 

 

549

 

 

 

1,806

 

 

1,583

 

Travel

 

 

291

 

 

356

 

 

174

 

 

 

826

 

 

236

 

Mortgage and lending expenses

 

 

409

 

 

482

 

 

1,231

 

 

 

1,577

 

 

3,762

 

Other

 

 

2,593

 

 

904

 

 

887

 

 

 

4,676

 

 

2,712

 

Total noninterest expense

 

 

42,767

 

 

39,984

 

 

42,041

 

 

 

120,822

 

 

127,633

 

Income before income taxes

 

 

12,559

 

 

12,018

 

 

17,131

 

 

 

37,649

 

 

52,346

 

Income tax expense

 

 

2,940

 

 

2,725

 

 

4,064

 

 

 

8,553

 

 

12,370

 

Net income

 

$

9,619

 

$

9,293

 

$

13,067

 

 

$

29,096

 

$

39,976

 

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

0.48

 

$

0.53

 

$

0.75

 

 

$

1.58

 

$

2.29

 

Diluted earnings per common share

 

$

0.47

 

$

0.52

 

$

0.74

 

 

$

1.56

 

$

2.26

 

Dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.16

 

 

$

0.52

 

$

0.47

 

Average common shares outstanding

 

 

19,987

 

 

17,297

 

 

17,205

 

 

 

18,186

 

 

17,182

 

Diluted average common shares outstanding

 

 

20,230

 

 

17,532

 

 

17,499

 

 

 

18,431

 

 

17,488

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

June 30,

December 31,

September 30,

 

 

2022

2022

2021

2021

Tangible Common Equity to Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common stockholders’ equity

 

$

344,839

 

$

307,158

 

$

359,403

 

$

353,195

 

Less: Goodwill

 

 

46,060

 

 

31,337

 

 

31,490

 

 

30,201

 

Less: Other intangible assets

 

 

23,779

 

 

17,511

 

 

20,250

 

 

22,593

 

Tangible common equity (a)

 

 

275,000

 

 

258,310

 

 

307,663

 

 

300,401

 

Total assets

 

 

3,691,253

 

 

3,295,065

 

 

3,392,691

 

 

3,175,169

 

Less: Goodwill

 

 

46,060

 

 

31,337

 

 

31,490

 

 

30,201

 

Less: Other intangible assets

 

 

23,779

 

 

17,511

 

 

20,250

 

 

22,593

 

Tangible assets (b)

 

 

3,621,414

 

 

3,246,217

 

 

3,340,951

 

 

3,122,375

 

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

 

 

7.59

%

 

7.96

%

 

9.21

%

 

9.62

%

Tangible Book Value Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common stockholders’ equity

 

$

344,839

 

$

307,158

 

$

359,403

 

$

353,195

 

Less: Goodwill

 

 

46,060

 

 

31,337

 

 

31,490

 

 

30,201

 

Less: Other intangible assets

 

 

23,779

 

 

17,511

 

 

20,250

 

 

22,593

 

Tangible common equity (c)

 

 

275,000

 

 

258,310

 

 

307,663

 

 

300,401

 

Total common shares issued and outstanding (d)

 

 

19,987

 

 

17,306

 

 

17,213

 

 

17,208

 

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

 

$

13.76

 

$

14.93

 

$

17.87

 

$

17.46

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

June 30,

September 30,

September 30,

September 30,

 

 

2022

2022

2021

2022

2021

Return on Average Tangible Common Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,619

 

$

9,293

 

$

13,067

 

$

29,096

 

$

39,976

 

Add: Intangible amortization expense (net of tax)

 

 

1,046

 

 

832

 

 

860

 

 

2,710

 

 

2,628

 

Net income, excluding intangible amortization (e)

 

 

10,665

 

 

10,125

 

 

13,927

 

 

31,806

 

 

42,604

 

Average total equity

 

 

372,274

 

 

312,515

 

 

353,196

 

 

345,192

 

 

342,344

 

Less: Average goodwill

 

 

48,141

 

 

31,488

 

 

30,201

 

 

37,101

 

 

30,201

 

Less: Average other intangible assets (net of tax)

 

 

19,466

 

 

14,737

 

 

18,272

 

 

16,605

 

 

19,124

 

Average tangible common equity (f)

 

 

304,667

 

 

266,290

 

 

304,723

 

 

291,486

 

 

293,019

 

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

 

 

13.89

%

 

15.25

%

 

18.13

%

 

14.59

%

 

19.44

%

Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

$

42,767

 

$

39,984

 

$

42,041

 

$

120,822

 

$

127,633

 

Less: Intangible amortization expense

 

 

1,324

 

 

1,053

 

 

1,088

 

 

3,430

 

 

3,327

 

Adjusted noninterest expense (g)

 

 

41,443

 

 

38,931

 

 

40,953

 

 

117,392

 

 

124,306

 

Net interest income

 

 

28,316

 

 

22,776

 

 

21,132

 

 

72,765

 

 

64,310

 

Noninterest income

 

 

27,010

 

 

29,226

 

 

36,040

 

 

85,706

 

 

113,669

 

Tax-equivalent adjustment

 

 

112

 

 

100

 

 

115

 

 

306

 

 

392

 

Total tax-equivalent revenue (h)

 

 

55,438

 

 

52,102

 

 

57,287

 

 

158,777

 

 

178,371

 

Efficiency ratio (g)/(h)

 

 

74.76

%

 

74.72

%

 

71.49

%

 

73.94

%

 

69.69

%

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

 

September 30, 2022

 

September 30, 2021

 

 

 

 

 

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

 

$

72,157

 

2.02

%

 

$

28,920

 

0.39

%

 

$

281,768

 

0.16

%

 

$

68,811

 

0.86

%

 

$

219,636

 

0.14

%

Investment securities (1)

 

 

1,116,458

 

2.20

%

 

 

1,164,625

 

2.18

%

 

 

869,421

 

1.61

%

 

 

1,165,414

 

2.09

%

 

 

778,307

 

1.62

%

Fed funds sold

 

 

21,893

 

2.37

%

 

 

 

%

 

 

 

%

 

 

7,378

 

2.37

%

 

 

 

%

Loans held for sale

 

 

27,032

 

4.14

%

 

 

31,878

 

3.15

%

 

 

57,233

 

2.40

%

 

 

27,864

 

3.31

%

 

 

70,218

 

2.25

%

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

566,987

 

5.41

%

 

 

463,215

 

4.38

%

 

 

544,811

 

4.95

%

 

 

488,771

 

4.87

%

 

 

615,310

 

4.73

%

Real estate construction

 

 

70,545

 

5.60

%

 

 

44,627

 

4.04

%

 

 

37,743

 

3.99

%

 

 

52,212

 

4.71

%

 

 

41,812

 

4.17

%

Commercial real estate

 

 

807,505

 

4.07

%

 

 

601,765

 

3.80

%

 

 

567,696

 

3.67

%

 

 

670,854

 

3.86

%

 

 

565,861

 

3.72

%

Total commercial

 

 

1,445,037

 

4.67

%

 

 

1,109,607

 

4.05

%

 

 

1,150,250

 

4.29

%

 

 

1,211,837

 

4.30

%

 

 

1,222,983

 

4.24

%

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate first mortgage

 

 

624,826

 

3.54

%

 

 

543,023

 

3.29

%

 

 

487,699

 

3.32

%

 

 

561,261

 

3.45

%

 

 

468,395

 

3.53

%

Residential real estate junior lien

 

 

140,664

 

5.41

%

 

 

132,082

 

4.64

%

 

 

129,239

 

4.57

%

 

 

132,968

 

4.86

%

 

 

132,145

 

4.67

%

Other revolving and installment

 

 

51,834

 

4.98

%

 

 

53,919

 

4.40

%

 

 

53,683

 

4.45

%

 

 

52,150

 

4.59

%

 

 

60,785

 

4.37

%

Total consumer

 

 

817,324

 

3.96

%

 

 

729,024

 

3.62

%

 

 

670,621

 

3.65

%

 

 

746,379

 

3.78

%

 

 

661,325

 

3.84

%

Total loans (1)

 

 

2,262,361

 

4.41

%

 

 

1,838,631

 

3.88

%

 

 

1,820,871

 

4.05

%

 

 

1,958,216

 

4.10

%

 

 

1,884,308

 

4.10

%

Federal Reserve/FHLB stock

 

 

18,449

 

5.35

%

 

 

10,564

 

4.90

%

 

 

6,505

 

4.33

%

 

 

11,877

 

5.04

%

 

 

6,273

 

4.37

%

Total interest earning assets

 

 

3,518,350

 

3.65

%

 

 

3,074,618

 

3.20

%

 

 

3,035,798

 

2.96

%

 

 

3,239,560

 

3.30

%

 

 

2,958,742

 

3.11

%

Noninterest earning assets

 

 

224,804

 

 

 

 

 

184,037

 

 

 

 

 

155,079

 

 

 

 

 

191,652

 

 

 

 

 

161,077

 

 

 

Total assets

 

$

3,743,154

 

 

 

 

$

3,258,655

 

 

 

 

$

3,190,877

 

 

 

 

$

3,431,212

 

 

 

 

$

3,119,819

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

659,696

 

0.13

%

 

$

703,365

 

0.12

%

 

$

692,873

 

0.14

%

 

$

692,310

 

0.12

%

 

$

678,015

 

0.15

%

Money market and savings deposits

 

 

1,180,576

 

0.40

%

 

 

1,041,898

 

0.14

%

 

 

1,009,564

 

0.14

%

 

 

1,089,137

 

0.24

%

 

 

1,018,347

 

0.15

%

Time deposits

 

 

234,459

 

0.74

%

 

 

211,787

 

0.43

%

 

 

217,756

 

0.50

%

 

 

224,603

 

0.54

%

 

 

212,297

 

0.57

%

Fed funds purchased

 

 

84,149

 

3.71

%

 

 

81,506

 

1.18

%

 

 

10

 

%

 

 

55,527

 

2.47

%

 

 

3

 

%

Short-term borrowings

 

 

168,750

 

1.71

%

 

 

9,615

 

1.59

%

 

 

 

%

 

 

60,073

 

1.71

%

 

 

 

%

Long-term debt

 

 

58,843

 

3.98

%

 

 

58,876

 

3.81

%

 

 

58,968

 

3.60

%

 

 

58,875

 

3.89

%

 

 

48,002

 

3.79

%

Total interest-bearing liabilities

 

 

2,386,473

 

0.66

%

 

 

2,107,047

 

0.31

%

 

 

1,979,171

 

0.28

%

 

 

2,180,525

 

0.43

%

 

 

1,956,664

 

0.28

%

Noninterest-Bearing Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

920,340

 

 

 

 

 

783,367

 

 

 

 

 

799,854

 

 

 

 

 

845,375

 

 

 

 

 

762,685

 

 

 

Other noninterest-bearing liabilities

 

 

64,067

 

 

 

 

 

55,726

 

 

 

 

 

58,656

 

 

 

 

 

60,120

 

 

 

 

 

58,126

 

 

 

Stockholders’ equity

 

 

372,274

 

 

 

 

 

312,515

 

 

 

 

 

353,196

 

 

 

 

 

345,192

 

 

 

 

 

342,344

 

 

 

Total liabilities and stockholders’ equity

 

$

3,743,154

 

 

 

 

$

3,258,655

 

 

 

 

$

3,190,877

 

 

 

 

$

3,431,212

 

 

 

 

$

3,119,819

 

 

 

Net interest income (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

2.99

%

 

 

 

 

2.89

%

 

 

 

 

2.68

%

 

 

 

 

2.87

%

 

 

 

 

2.83

%

Net interest margin, tax-equivalent (1)

 

 

 

 

3.21

%

 

 

 

 

2.98

%

 

 

 

 

2.78

%

 

 

 

 

3.02

%

 

 

 

 

2.92

%

______________
(1)

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

 

Contacts

Alan A. Villalon, Chief Financial Officer

952.417.3733 (Office)

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