Business Wire | Oct 28, 2020 05:30PM EDT

Alerus Financial Corporation Reports Third Quarter 2020 Net Income of $17.7 Million

Oct. 28, 2020

GRAND FORKS, N.D.--(BUSINESS WIRE)--Oct. 28, 2020--Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $17.7 million for the third quarter of 2020, or $0.99 per diluted common share, compared to net income of $11.5 million, or $0.65 per diluted common share, for the second quarter of 2020, and net income of $7.1 million, or $0.48 per diluted common share, for the third quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, "We are proud to report record quarterly net income of $17.7 million. Despite the uncertain economic environment and ongoing pandemic, our diversified business model demonstrates its value to stockholders as we delivered incredible financial performance throughout 2020. Our "One Alerus" approach to serving clients holistically through advisors and digitally through technology resulted in record levels of mortgage originations and expansions of relationships across our lines of business.

We believe we continue to be agile in our response to the novel coronavirus, or COVID-19 pandemic, by focusing on the health and well-being of our team members and communities, and helping clients during a difficult economic environment. The strength and stability of our balance sheet uniquely positioned our Company to perform well in challenging economic environments. We have a diversified loan portfolio, strong credit quality metrics, and robust levels of loan loss reserves at 1.83% of total loans, excluding Paycheck Protection Program, or PPP, loans. These balance sheet attributes, supported by a diversified business model which generates high levels of revenue despite the low rate environment is proving to be resilient in challenging and uncertain times. These fundamentals paired with the dedication of our team and technology investments are paving our path forward."

Quarterly Highlights

* Return on average assets of 2.42%, compared to 1.68% for the second quarter of 2020 * Return on average tangible common equity(1) of 26.67%, compared to 18.88% for the second quarter of 2020 * Net interest margin (tax-equivalent)(1) was 3.17%, compared to 3.14% for the second quarter of 2020 * Allowance for loan losses to total loans, excluding PPP loans, was 1.83%, compared to 1.62% as of June 30, 2020 * Efficiency ratio(1) of 58.42%, compared to 66.31% for the second quarter of 2020 * Noninterest income as a percentage of total revenue was 67.53%, compared to 65.55% for the second quarter of 2020 * Mortgage originations totaled $511.6 million, an 18.5% increase from the second quarter of 2020 * Loans held for investment increased $337.1 million, or 19.6%, from the fourth quarter of 2019 * Deposits increased $491.1 million, or 24.9%, from the fourth quarter of 2019

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

Selected Financial Data (unaudited)



As of and for the

Three months ended Nine months ended

September 30, June 30, September 30, September September 30, 30,

(dollars andshares inthousands, 2020 2020 2019 2020 2019 except per sharedata)

Performance Ratios

Return onaverage total 2.42 % 1.68 % 1.29 % 1.71 % 1.34 %assets

Return onaverage common 22.31 % 15.30 % 12.42 % 15.17 % 13.74 %equity

Return onaverage tangible 26.67 % 18.88 % 17.01 % 18.70 % 19.24 %common equity(1)

Noninterestincome as a % of 67.53 % 65.55 % 61.29 % 64.58 % 60.14 %revenue

Net interestmargin 3.17 % 3.14 % 3.69 % 3.22 % 3.72 %(tax-equivalent)(1)

Efficiency ratio 58.42 % 66.31 % 75.17 % 66.22 % 73.06 %(1)

Net charge-offs/(recoveries) to (0.11 ) % 0.66 % (0.06 ) % 0.15 % 0.37 %average loans

Dividend payout 15.15 % 23.08 % 29.17 % 23.20 % 28.19 %ratio

Per Common Share

Earnings percommon share - $ 1.01 $ 0.66 $ 0.49 $ 1.98 $ 1.53 basic (2)

Earnings percommon share - $ 0.99 $ 0.65 $ 0.48 $ 1.94 $ 1.49 diluted (2)

Dividendsdeclared per $ 0.15 $ 0.15 $ 0.14 $ 0.45 $ 0.42 common share

Tangible bookvalue per common $ 16.31 $ 15.30 $ 13.77 share (1)

Average commonshares 17,121 17,111 14,274 17,101 13,957 outstanding -basic

Average commonshares 17,453 17,445 14,626 17,435 14,317 outstanding -diluted

Other Data

Retirement andbenefit servicesassets under $ 30,470,645 $ 30,093,095 $ 30,661,226 administration/management

Wealthmanagementassets under 3,043,173 2,957,213 2,765,459 administration/management

Mortgage 511,605 431,638 313,527 $ 1,171,811 $ 685,178 originations

(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.

Results of Operations

Net Interest Income

Net interest income for the third quarter of 2020 was $21.8 million, an increase of $1.7 million, or 8.3%, from $20.1 million for the second quarter of 2020. The increase was primarily driven by a decrease of $875 thousand in interest expense on deposits, an increase of $590 thousand in interest income from loans, and a $207 thousand increase in interest income from investment securities. The decrease in interest expense on deposits was primarily a result of a 25 basis point decrease in the cost of interest-bearing deposits, partially offset by a $119.6 million increase in average interest-bearing deposit balances. The increase in interest income from loans was primarily driven by a $74.3 million increase in average balance of PPP loans offset by a 4 basis point decrease in average yield. Interest and fees recognized on PPP loans totaled $3.2 million in the third quarter, an increase of $1.1 million from the second quarter. The increase in interest income from investment securities was primarily a result of a $74.5 million increase in average balances partially offset by a 21 basis point decrease in the average yield.

Compared to the third quarter of 2019, net interest income for the third quarter of 2020 increased $3.1 million, or 16.5%, primarily due to a $2.4 million decrease in interest expense and a $664 thousand increase in interest income. The decrease in interest expense was primarily due to an 84 basis point decrease in the average rate paid on interest-bearing liabilities. The increase in interest income was primarily due to a $674 thousand increase in interest income from investment securities driven by a $186.1 million increase in average balances partially offset by a 39 basis point decrease in the average yield.

Net Interest Margin (Tax-Equivalent)

Net interest margin (tax-equivalent), a non-GAAP financial measure, increased to 3.17% for the third quarter of 2020, compared with 3.14% for the second quarter of 2020. The increase in net interest margin was primarily due to a 26 basis point decrease in the average rate on total interest-bearing liabilities partially offset by a 14 basis point decrease in the average earning asset yield. The decrease in the average rate on total interest-bearing liabilities was primarily due to a 35 basis point decrease in the average rate on money market and savings deposits and a 32 basis point decrease in the average rate on time deposits. The decrease in average earning asset yield was due to the continued low interest rate environment and a change in balance sheet mix.

Compared to the third quarter of 2019, net interest margin (tax-equivalent) for the third quarter of 2020 decreased 52 basis points from 3.69%. This decrease was the combined result of sustained lower interest rates and balance sheet mix. The average yield on interest earning assets decreased 112 basis points on an average balance increase of $727.6 million, or 36.1%. The average rate paid on interest-bearing liabilities decreased 84 basis points on an average balance increase of $407.9 million, or 29.0%.

Noninterest Income

Noninterest income for the third quarter of 2020 was $45.3 million, a $7.0 million, or 18.4%, increase from the second quarter of 2020. The increase was primarily driven by a $4.7 million increase in mortgage banking revenue, a $1.4 million increase in retirement and benefit services revenue, and a $374 thousand increase in wealth management revenue. The increase in mortgage banking revenue was primarily due to an $80.0 million increase in mortgage originations along with a 38 basis point increase in the gain on sale margin. The increase in retirement and benefit services revenue was primarily due to a $712 thousand increase in asset based revenue as a result of an increase in the average balance of assets under administration/management. In addition, the second quarter of 2020 included a downward adjustment to revenue sharing of $660 thousand.

Noninterest income for the third quarter of 2020 increased $15.7 million, or 53.0%, from $29.6 million in the third quarter of 2019. Mortgage banking revenue increased $14.1 million as mortgage originations increased from $313.5 million in the third quarter of 2019 to $511.6 million in the third quarter of 2020, and the gain on sale margin increased 75 basis points. In addition, the unrealized gain from the change in fair value of secondary market derivatives increased $5.2 million. Gains on investment securities were $1.4 million during the third quarter of 2020, compared to $48 thousand during the third quarter of 2019.

Noninterest Expense

Noninterest expense for the third quarter of 2020 was $40.2 million, an increase of $480 thousand, or 1.2%, compared to the second quarter of 2020. The increase was due to increases of $1.5 million in compensation expense, $380 thousand in marketing and business development expense and $286 thousand in employee taxes and benefits, partially offset by decreases of $968 thousand in other noninterest expense and $428 thousand in supplies and postage expenses. The increase in compensation expense was primarily driven by an increase in mortgage originations. Marketing and business development expense increased due to seasonally higher advertising expenses. Other noninterest expense decreased primarily due to a $990 thousand decrease in the provision for unused commitments. Supplies and postage expenses decreased due to the transition from paper statements to E-statements for the retirement and benefit services segment.

Compared to the third quarter of 2019, noninterest expense for the third quarter of 2020 increased $2.9 million, or 7.7%, from $37.3 million. The increase was attributable to increases of $2.7 million in compensation expense, $480 thousand in mortgage and lending expense, and $433 thousand in employee taxes and benefits, partially offset by decreases of $409 thousand in travel expense and $384 thousand in supplies and postage expense. The increases in compensation expense and mortgage and lending expense were primarily the result of higher mortgage originations.

Financial Condition

Total assets were $2.9 billion as of September 30, 2020, an increase of $541.9 million, or 23.0%, from December 31, 2019. The increase in total assets included increases of $337.1 million in loans, $185.1 million in available-for-sale investment securities, $64.5 million in loans held for sale, and $15.3 million in other assets.

Loans

Total loans were $2.06 billion as of September 30, 2020, an increase of $337.1 million, or 19.6%, from December 31, 2019. The increase was primarily due to increases of $309.9 million in commercial and industrial loans and $40.5 million in our commercial real estate loan portfolio, partially offset by a $20.1 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $348.9 million in net PPP loans, offset by a 7.64% decrease in operating line utilization, or a $64.6 million decrease in funded balances.

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

(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.

Results of Operations

Net Interest Income

Net interest income for the third quarter of 2020 was $21.8 million, an increase of $1.7 million, or 8.3%, from $20.1 million for the second quarter of 2020. The increase was primarily driven by a decrease of $875 thousand in interest expense on deposits, an increase of $590 thousand in interest income from loans, and a $207 thousand increase in interest income from investment securities. The decrease in interest expense on deposits was primarily a result of a 25 basis point decrease in the cost of interest-bearing deposits, partially offset by a $119.6 million increase in average interest-bearing deposit balances. The increase in interest income from loans was primarily driven by a $74.3 million increase in average balance of PPP loans offset by a 4 basis point decrease in average yield. Interest and fees recognized on PPP loans totaled $3.2 million in the third quarter, an increase of $1.1 million from the second quarter. The increase in interest income from investment securities was primarily a result of a $74.5 million increase in average balances partially offset by a 21 basis point decrease in the average yield.

Compared to the third quarter of 2019, net interest income for the third quarter of 2020 increased $3.1 million, or 16.5%, primarily due to a $2.4 million decrease in interest expense and a $664 thousand increase in interest income. The decrease in interest expense was primarily due to an 84 basis point decrease in the average rate paid on interest-bearing liabilities. The increase in interest income was primarily due to a $674 thousand increase in interest income from investment securities driven by a $186.1 million increase in average balances partially offset by a 39 basis point decrease in the average yield.

Net Interest Margin (Tax-Equivalent)

Net interest margin (tax-equivalent), a non-GAAP financial measure, increased to 3.17% for the third quarter of 2020, compared with 3.14% for the second quarter of 2020. The increase in net interest margin was primarily due to a 26 basis point decrease in the average rate on total interest-bearing liabilities partially offset by a 14 basis point decrease in the average earning asset yield. The decrease in the average rate on total interest-bearing liabilities was primarily due to a 35 basis point decrease in the average rate on money market and savings deposits and a 32 basis point decrease in the average rate on time deposits. The decrease in average earning asset yield was due to the continued low interest rate environment and a change in balance sheet mix.

Compared to the third quarter of 2019, net interest margin (tax-equivalent) for the third quarter of 2020 decreased 52 basis points from 3.69%. This decrease was the combined result of sustained lower interest rates and balance sheet mix. The average yield on interest earning assets decreased 112 basis points on an average balance increase of $727.6 million, or 36.1%. The average rate paid on interest-bearing liabilities decreased 84 basis points on an average balance increase of $407.9 million, or 29.0%.

Noninterest Income

Noninterest income for the third quarter of 2020 was $45.3 million, a $7.0 million, or 18.4%, increase from the second quarter of 2020. The increase was primarily driven by a $4.7 million increase in mortgage banking revenue, a $1.4 million increase in retirement and benefit services revenue, and a $374 thousand increase in wealth management revenue. The increase in mortgage banking revenue was primarily due to an $80.0 million increase in mortgage originations along with a 38 basis point increase in the gain on sale margin. The increase in retirement and benefit services revenue was primarily due to a $712 thousand increase in asset based revenue as a result of an increase in the average balance of assets under administration/management. In addition, the second quarter of 2020 included a downward adjustment to revenue sharing of $660 thousand.

Noninterest income for the third quarter of 2020 increased $15.7 million, or 53.0%, from $29.6 million in the third quarter of 2019. Mortgage banking revenue increased $14.1 million as mortgage originations increased from $313.5 million in the third quarter of 2019 to $511.6 million in the third quarter of 2020, and the gain on sale margin increased 75 basis points. In addition, the unrealized gain from the change in fair value of secondary market derivatives increased $5.2 million. Gains on investment securities were $1.4 million during the third quarter of 2020, compared to $48 thousand during the third quarter of 2019.

Noninterest Expense

Noninterest expense for the third quarter of 2020 was $40.2 million, an increase of $480 thousand, or 1.2%, compared to the second quarter of 2020. The increase was due to increases of $1.5 million in compensation expense, $380 thousand in marketing and business development expense and $286 thousand in employee taxes and benefits, partially offset by decreases of $968 thousand in other noninterest expense and $428 thousand in supplies and postage expenses. The increase in compensation expense was primarily driven by an increase in mortgage originations. Marketing and business development expense increased due to seasonally higher advertising expenses. Other noninterest expense decreased primarily due to a $990 thousand decrease in the provision for unused commitments. Supplies and postage expenses decreased due to the transition from paper statements to E-statements for the retirement and benefit services segment.

Compared to the third quarter of 2019, noninterest expense for the third quarter of 2020 increased $2.9 million, or 7.7%, from $37.3 million. The increase was attributable to increases of $2.7 million in compensation expense, $480 thousand in mortgage and lending expense, and $433 thousand in employee taxes and benefits, partially offset by decreases of $409 thousand in travel expense and $384 thousand in supplies and postage expense. The increases in compensation expense and mortgage and lending expense were primarily the result of higher mortgage originations.

Financial Condition

Total assets were $2.9 billion as of September 30, 2020, an increase of $541.9 million, or 23.0%, from December 31, 2019. The increase in total assets included increases of $337.1 million in loans, $185.1 million in available-for-sale investment securities, $64.5 million in loans held for sale, and $15.3 million in other assets.

Loans

Total loans were $2.06 billion as of September 30, 2020, an increase of $337.1 million, or 19.6%, from December 31, 2019. The increase was primarily due to increases of $309.9 million in commercial and industrial loans and $40.5 million in our commercial real estate loan portfolio, partially offset by a $20.1 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $348.9 million in net PPP loans, offset by a 7.64% decrease in operating line utilization, or a $64.6 million decrease in funded balances.

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





September June 30, March 31, December September 30, 31, 30,

(dollars in 2020 2020 2020 2019 2019thousands)

Commercial

Commercialand $ 789,036 $ 794,204 $ 502,637 $ 479,144 $ 485,183industrial(1)

Real estate 33,169 31,344 25,487 26,378 21,674construction

Commercial 535,216 519,104 522,106 494,703 444,600real estate

Total 1,357,421 1,344,652 1,050,230 1,000,225 951,457commercial

Consumer

Residentialreal estate 469,050 456,737 457,895 457,155 459,763firstmortgage

Residentialreal estate 152,487 154,351 170,538 177,373 182,516junior lien

Otherrevolving 79,461 78,457 79,614 86,526 92,351andinstallment

Total 700,998 689,545 708,047 721,054 734,630consumer

Total loans $ 2,058,419 $ 2,034,197 $ 1,758,277 $ 1,721,279 $ 1,686,087

(1)

Includes PPP loans of $348.9 million at September 30, 2020 and $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.46 billion as of September 30, 2020, an increase of $491.1 million, or 24.9%, from December 31, 2019. Interest-bearing deposits increased $375.3 million while non-interest bearing deposits increased $115.7 million. Key drivers of the increase in deposits included deposits from new and existing PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and financial markets. The increase in interest-bearing deposits included a $128.8 million increase in synergistic deposits from our retirement and benefit services and wealth management segments. In addition, health savings account deposits were $131.5 million as of September 30, 2020, an increase of $11.8 million, or 9.9%, from December 31, 2019. Commercial transaction deposits increased $292.6 million, or 35.9%, while consumer transaction deposits increased $43.3 million, or 8.1%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 28.2% and 29.3% as of September 30, 2020 and December 31, 2019, respectively.

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

(1) Includes PPP loans of $348.9 million at September 30, 2020 and $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.46 billion as of September 30, 2020, an increase of $491.1 million, or 24.9%, from December 31, 2019. Interest-bearing deposits increased $375.3 million while non-interest bearing deposits increased $115.7 million. Key drivers of the increase in deposits included deposits from new and existing PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and financial markets. The increase in interest-bearing deposits included a $128.8 million increase in synergistic deposits from our retirement and benefit services and wealth management segments. In addition, health savings account deposits were $131.5 million as of September 30, 2020, an increase of $11.8 million, or 9.9%, from December 31, 2019. Commercial transaction deposits increased $292.6 million, or 35.9%, while consumer transaction deposits increased $43.3 million, or 8.1%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 28.2% and 29.3% as of September 30, 2020 and December 31, 2019, respectively.

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



September June 30, March 31, December September 30, 31, 30,

(dollars in 2020 2020 2020 2019 2019thousands)

Noninterest-bearing $ 693,450 $ 700,892 $ 608,559 $ 577,704 $ 537,951demand

Interest-bearing

Interest-bearing 590,366 579,840 477,752 458,689 424,249demand

Savings accounts 78,659 75,973 60,181 55,777 55,513

Money market savings 892,473 892,717 773,652 683,064 622,647

Time deposits 207,422 203,731 201,370 196,082 192,753

Total 1,768,920 1,752,261 1,512,955 1,393,612 1,295,162interest-bearing

Total deposits $ 2,462,370 $ 2,453,153 $ 2,121,514 $ 1,971,316 $ 1,833,113

Asset Quality

Total nonperforming assets were $5.0 million as of September 30, 2020, a decrease of $3.0 million, or 38.7%, from December 31, 2019. As of September 30, 2020, the allowance for loan losses was $31.3 million, or 1.52% of total loans, compared to $23.9 million, or 1.39% of total loans, as of December 31, 2019. Excluding PPP loans, the ratio of allowance for loan losses to total loans increased 44 basis points to 1.83% as of September 30, 2020, compared to 1.39% as of December 31, 2019.

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



As of and for the three months ended

September June March 31, December September 30, 30, 31, 30,

(dollars in 2020 2020 2020 2019 2019 thousands)

Nonaccrual loans $ 4,795 $ 5,328 $ 6,959 $ 7,379 $ 5,107

Accruing loans 90+ - - 11 448 45 days past due

Total nonperforming 4,795 5,328 6,970 7,827 5,152 loans

OREO and repossessed 10 26 209 8 84 assets

Total nonperforming $ 4,805 $ 5,354 $ 7,179 $ 7,835 $ 5,236 assets

Net charge-offs/ (581 ) 3,264 (595 ) 857 (240 ) (recoveries)

Net charge-offs/(recoveries) to (0.11 ) % 0.66 % (0.14 ) % 0.20 % (0.06 ) %average loans

Nonperforming loans 0.23 % 0.26 % 0.40 % 0.45 % 0.31 %to total loans

Nonperforming assets 0.17 % 0.19 % 0.29 % 0.33 % 0.23 %to total assets

Allowance for loanlosses to total 1.52 % 1.34 % 1.54 % 1.39 % 1.36 %loans

Allowance for loanlosses to 654 % 512 % 388 % 306 % 446 %nonperforming loans

For the third quarter of 2020, we had net recoveries of $581 thousand compared to net charge-offs of $3.3 million for the second quarter of 2020 and $240 thousand of net recoveries for the third quarter of 2019.

The provision for loan losses for the third quarter of 2020 was $3.5 million, which was the same amount as the second quarter of 2020 and an increase of $2.0 million from the third quarter of 2019. The increase in provision expense was due to allocations of reserves for the economic uncertainties related to COVID-19, which increased the allowance for loan losses balance by $7.4 million to $31.3 million at September 30, 2020, a 31.0% increase from December 31, 2019.

The ratio of nonperforming loans to total loans at September 30, 2020 was 0.23%, and if PPP loans were excluded, this ratio would have been 0.28%. Nonperforming assets as a percentage of total assets was 0.17% at September 30, 2020. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.19% at September 30, 2020.

As of September 30, 2020, we had entered into principal and interest deferrals of 552 loans representing $151.4 million in principal balances, since the beginning of the pandemic. Of those loans, 27 loans with a total outstanding principal balance of $16.9 million, have been granted second deferrals, 56 loans with a total outstanding principal balance of $12.0 million remain on the first deferral and the remaining loans have been returned to a normal payment status. All of these loan modifications were accounted for in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, or have been evaluated under existing accounting policies, and are not considered troubled debt restructurings.

Capital

Total stockholders' equity was $322.0 million as of September 30, 2020, an increase of $36.3 million from December 31, 2019. The tangible book value per common share increased to $16.31 as of September 30, 2020, from $14.08 as of December 31, 2019. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.78% as of September 30, 2020, from 10.38% as of December 31, 2019. Tangible common equity to tangible assets would have been 11.14% as of September 30, 2020, if PPP loans were excluded.

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



September December September 30, 31, 30,

2020 2019 2019

Capital Ratios^(1)

Alerus Financial Corporation

Common equity tier 1 capital to risk 13.08 % 12.48 % 12.38 %weighted assets

Tier 1 capital to risk weighted assets 13.48 % 12.90 % 12.81 %

Total capital to risk weighted assets 17.13 % 16.73 % 16.67 %

Tier 1 capital to average assets 9.76 % 11.05 % 11.33 %

Tangible common equity / tangible 9.78 % 10.38 % 10.76 %assets ^(2)



Alerus Financial, N.A.

Common equity tier 1 capital to risk 12.47 % 11.91 % 11.84 %weighted assets

Tier 1 capital to risk weighted assets 12.47 % 11.91 % 11.84 %

Total capital to risk weighted assets 13.72 % 13.15 % 13.06 %

Tier 1 capital to average assets 9.03 % 10.20 % 10.47 %

(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 Thursday, October 29, 2020, to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company's investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, ND. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to businesses and consumers through four distinct business segments-banking, retirement and benefit services, wealth management, and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology. Alerus Financial banking and wealth management offices are located in Grand Forks and Fargo, ND, the Minneapolis-St. Paul, MN metropolitan area and Scottsdale and Mesa, AZ. Alerus Retirement and Benefits plan administration offices are located in St. Paul and Albert Lea, MN, East Lansing and Troy, MI, and Bedford, NH.

Non-GAAP Financial Measures

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

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

Forward-Looking Statements

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

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients, and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in response to the pandemic; our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the implementation of the new Current Expected Credit Loss Standard; business and economic conditions generally and in the financial services industry, nationally and within our market areas; the overall health of the local and national real estate market; concentrations within our loan portfolio; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid technological change in the financial services industry; increased competition in the financial services industry; our ability to successfully manage liquidity risk; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; potential impairment to the goodwill we recorded in connection with our past acquisitions; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; interest rate risks associated with our business; fluctuations in the values of the securities held in our securities portfolio; governmental monetary, trade and fiscal policies; severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic, acts of war or terrorism or other adverse external events; any material weaknesses in our internal control over financial reporting; 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; 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.

(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 Thursday, October 29, 2020, to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company's investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, ND. Through its subsidiary, Alerus Financial, N.A., Alerus provides innovative and comprehensive financial solutions to businesses and consumers through four distinct business segments-banking, retirement and benefit services, wealth management, and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology. Alerus Financial banking and wealth management offices are located in Grand Forks and Fargo, ND, the Minneapolis-St. Paul, MN metropolitan area and Scottsdale and Mesa, AZ. Alerus Retirement and Benefits plan administration offices are located in St. Paul and Albert Lea, MN, East Lansing and Troy, MI, and Bedford, NH.

Non-GAAP Financial Measures

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

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

Forward-Looking Statements

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

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: the effects of the COVID-19 pandemic, including its effects on the economic environment, our clients, and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in response to the pandemic; our ability to successfully manage credit risk and maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the implementation of the new Current Expected Credit Loss Standard; business and economic conditions generally and in the financial services industry, nationally and within our market areas; the overall health of the local and national real estate market; concentrations within our loan portfolio; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid technological change in the financial services industry; increased competition in the financial services industry; our ability to successfully manage liquidity risk; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; potential impairment to the goodwill we recorded in connection with our past acquisitions; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; interest rate risks associated with our business; fluctuations in the values of the securities held in our securities portfolio; governmental monetary, trade and fiscal policies; severe weather, natural disasters, widespread disease or pandemics, such as the COVID-19 global pandemic, acts of war or terrorism or other adverse external events; any material weaknesses in our internal control over financial reporting; 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; our success at managing the risks involved in the foregoing items; and any other risks described in the "Risk Factors" sections of the reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

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

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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



September 30, December 31,

2020 2019

Assets (Unaudited) (Audited)

Cash and cash equivalents $ 95,751 $ 144,006

Investment securities, at fair value

Available-for-sale 495,414 310,350

Equity - 2,808

Loans held for sale 111,311 46,846

Loans 2,058,419 1,721,279

Allowance for loan losses (31,337 ) (23,924 )

Net loans 2,027,082 1,697,355

Land, premises and equipment, net 20,493 20,629

Operating lease right-of-use assets 8,168 8,343

Accrued interest receivable 9,199 7,551

Bank-owned life insurance 32,161 31,566

Goodwill 27,329 27,329

Other intangible assets 15,421 18,391

Servicing rights 2,579 3,845

Deferred income taxes, net 8,628 7,891

Other assets 45,273 29,968

Total assets $ 2,898,809 $ 2,356,878

Liabilities and Stockholders' Equity

Deposits

Noninterest-bearing $ 693,450 $ 577,704

Interest-bearing 1,768,920 1,393,612

Total deposits 2,462,370 1,971,316

Long-term debt 58,745 58,769

Operating lease liabilities 8,671 8,864

Accrued expenses and other liabilities 47,020 32,201

Total liabilities 2,576,806 2,071,150

Stockholders' equity

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

Common stock, $1 par value, 30,000,000 sharesauthorized: 17,121,863 and 17,049,551 issued 17,122 17,050 and outstanding

Additional paid-in capital 89,757 88,650

Retained earnings 204,581 178,092

Accumulated other comprehensive income (loss) 10,543 1,936

Total stockholders' equity 322,003 285,728

Total liabilities and stockholders' equity $ 2,898,809 $ 2,356,878

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,

2020

2020

2019

2020

2019

Interest Income

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Loans, including fees

$

21,962

$

21,372

$

21,886

$

63,876

$

65,171

Investment securities

Taxable

1,973

1,765

1,374

5,497

4,021

Exempt from federal income taxes

238

239

163

712

618

Other

116

130

202

816

603

Total interest income

24,289

23,506

23,625

70,901

70,413

Interest Expense

Deposits

1,683

2,558

3,506

7,633

9,802

Short-term borrowings

-

-

539

-

1,805

Long-term debt

841

857

899

2,575

2,714

Total interest expense

2,524

3,415

4,944

10,208

14,321

Net interest income

21,765

20,091

18,681

60,693

56,092

Provision for loan losses

3,500

3,500

1,498

9,500

5,515

Net interest income after provision for loan losses

18,265

16,591

17,183

51,193

50,577

Noninterest Income

Retirement and benefit services

15,104

13,710

15,307

45,034

46,142

Wealth management

4,486

4,112

3,896

12,644

11,385

Mortgage banking

22,269

17,546

8,135

44,860

19,739

Service charges on deposit accounts

355

297

447

1,075

1,321

Net gains (losses) on investment securities

1,428

1,294

48

2,722

357

Other

1,614

1,271

1,747

4,340

5,694

Total noninterest income

45,256

38,230

29,580

110,675

84,638

Noninterest Expense

Compensation

22,740

21,213

20,041

62,684

54,997

Employee taxes and benefits

5,033

4,747

4,600

15,088

15,188

Occupancy and equipment expense

2,768

2,869

2,700

8,392

8,086

Business services, software and technology expense

4,420

4,520

4,224

13,384

12,044

Intangible amortization expense

990

991

990

2,971

3,091

Professional fees and assessments

1,031

1,160

1,051

3,231

3,146

Marketing and business development

929

549

890

2,088

2,024

Supplies and postage

247

675

631

1,625

2,027

Travel

26

51

435

338

1,335

Mortgage and lending expenses

1,231

1,192

751

3,466

1,966

Other

799

1,767

1,014

3,407

2,198

Total noninterest expense

40,214

39,734

37,327

116,674

106,102

Income before income taxes

23,307

15,087

9,436

45,194

29,113

Income tax expense

5,648

3,613

2,332

10,698

7,225

Net income

$

17,659

$

11,474

$

7,104

$

34,496

$

21,888

Per Common Share Data

Earnings per common share

$

1.01

$

0.66

$

0.49

$

1.98

$

1.53

Diluted earnings per common share

$

0.99

$

0.65

$

0.48

$

1.94

$

1.49

Dividends declared per common share

$

0.15

$

0.15

$

0.14

$

0.45

$

0.42

Average common shares outstanding

17,121

17,111

14,274

17,101

13,957

Diluted average common shares outstanding

17,453

17,445

14,626

17,435

14,317

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 June 30, September September September 30, 30, 30, 30,

2020 2020 2019 2020 2019

Interest (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)Income

Loans,including $ 21,962 $ 21,372 $ 21,886 $ 63,876 $ 65,171fees

Investment securities

Taxable 1,973 1,765 1,374 5,497 4,021

Exempt fromfederal 238 239 163 712 618income taxes

Other 116 130 202 816 603

Totalinterest 24,289 23,506 23,625 70,901 70,413income

Interest Expense

Deposits 1,683 2,558 3,506 7,633 9,802

Short-term - - 539 - 1,805borrowings

Long-term 841 857 899 2,575 2,714debt

Totalinterest 2,524 3,415 4,944 10,208 14,321expense

Net interest 21,765 20,091 18,681 60,693 56,092income

Provisionfor loan 3,500 3,500 1,498 9,500 5,515losses

Net interestincome afterprovision 18,265 16,591 17,183 51,193 50,577for loanlosses

Noninterest Income

Retirementand benefit 15,104 13,710 15,307 45,034 46,142services

Wealth 4,486 4,112 3,896 12,644 11,385management

Mortgage 22,269 17,546 8,135 44,860 19,739banking

Servicecharges on 355 297 447 1,075 1,321depositaccounts

Net gains(losses) on 1,428 1,294 48 2,722 357investmentsecurities

Other 1,614 1,271 1,747 4,340 5,694

Totalnoninterest 45,256 38,230 29,580 110,675 84,638income

Noninterest Expense

Compensation 22,740 21,213 20,041 62,684 54,997

Employeetaxes and 5,033 4,747 4,600 15,088 15,188benefits

Occupancyand 2,768 2,869 2,700 8,392 8,086equipmentexpense

Businessservices,software and 4,420 4,520 4,224 13,384 12,044technologyexpense

Intangibleamortization 990 991 990 2,971 3,091expense

Professionalfees and 1,031 1,160 1,051 3,231 3,146assessments

Marketingand business 929 549 890 2,088 2,024development

Supplies and 247 675 631 1,625 2,027postage

Travel 26 51 435 338 1,335

Mortgage andlending 1,231 1,192 751 3,466 1,966expenses

Other 799 1,767 1,014 3,407 2,198

Totalnoninterest 40,214 39,734 37,327 116,674 106,102expense

Incomebefore 23,307 15,087 9,436 45,194 29,113income taxes

Income tax 5,648 3,613 2,332 10,698 7,225expense

Net income $ 17,659 $ 11,474 $ 7,104 $ 34,496 $ 21,888

Per Common Share Data

Earnings per $ 1.01 $ 0.66 $ 0.49 $ 1.98 $ 1.53common share

Dilutedearnings per $ 0.99 $ 0.65 $ 0.48 $ 1.94 $ 1.49common share

Dividendsdeclared per $ 0.15 $ 0.15 $ 0.14 $ 0.45 $ 0.42common share

Averagecommon 17,121 17,111 14,274 17,101 13,957sharesoutstanding

Dilutedaveragecommon 17,453 17,445 14,626 17,435 14,317sharesoutstanding

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,

2020

2020

2019

2019

Tangible Common Equity to Tangible Assets

Total common stockholders' equity

$

322,003

$

305,732

$

285,728

$

281,403

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible common equity (a)

279,253

261,992

240,008

234,692

Total assets

2,898,809

2,875,457

2,356,878

2,228,311

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible assets (b)

2,856,059

2,831,717

2,311,158

2,181,600

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

9.78

%

9.25

%

10.38

%

10.76

%

Tangible Book Value Per Common Share

Total common stockholders' equity

$

322,003

$

305,732

$

285,728

$

281,403

Less: Goodwill

27,329

27,329

27,329

27,329

Less: Other intangible assets

15,421

16,411

18,391

19,382

Tangible common equity (c)

279,253

261,992

240,008

234,692

Total common shares issued and outstanding (d)

17,122

17,120

17,050

17,049

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

$

16.31

$

15.30

$

14.08

$

13.77

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,

2020 2020 2019 2019

Tangible CommonEquity to Tangible Assets

Total commonstockholders' $ 322,003 $ 305,732 $ 285,728 $ 281,403 equity

Less: Goodwill 27,329 27,329 27,329 27,329

Less: Otherintangible 15,421 16,411 18,391 19,382 assets

Tangible common 279,253 261,992 240,008 234,692 equity (a)

Total assets 2,898,809 2,875,457 2,356,878 2,228,311

Less: Goodwill 27,329 27,329 27,329 27,329

Less: Otherintangible 15,421 16,411 18,391 19,382 assets

Tangible assets 2,856,059 2,831,717 2,311,158 2,181,600 (b)

Tangible commonequity to 9.78 % 9.25 % 10.38 % 10.76 %tangible assets (a)/(b)

Tangible BookValue Per Common Share

Total commonstockholders' $ 322,003 $ 305,732 $ 285,728 $ 281,403 equity

Less: Goodwill 27,329 27,329 27,329 27,329

Less: Otherintangible 15,421 16,411 18,391 19,382 assets

Tangible common 279,253 261,992 240,008 234,692 equity (c)

Total commonshares issued 17,122 17,120 17,050 17,049 and outstanding (d)

Tangible bookvalue per $ 16.31 $ 15.30 $ 14.08 $ 13.77 common share (c)/(d)

Three months ended

Nine months ended

September 30,

June 30,

September 30,

September 30,

September 30,

2020

2020

2019

2020

2019

Return on Average Tangible Common Equity

Net income

$

17,659

$

11,474

$

7,104

$

34,496

$

21,888

Add: Intangible amortization expense (net of tax)

782

783

782

2,347

2,442

Net income, excluding intangible amortization (e)

18,441

12,257

7,886

36,843

24,330

Average total equity

314,921

301,719

226,931

303,825

212,911

Less: Average goodwill

27,329

27,329

27,329

27,329

27,329

Less: Average other intangible assets (net of tax)

12,565

13,345

15,697

13,343

16,502

Average tangible common equity (f)

275,027

261,045

183,905

263,153

169,080

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

26.67

%

18.88

%

17.01

%

18.70

%

19.24

%

Net Interest Margin (tax-equivalent)

Net interest income

$

21,765

$

20,091

$

18,681

$

60,693

$

56,092

Tax-equivalent adjustment

116

109

81

325

257

Tax-equivalent net interest income (g)

21,881

20,200

18,762

61,018

56,349

Average earning assets (h)

2,744,758

2,584,037

2,017,198

2,534,038

2,024,814

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

3.17

%

3.14

%

3.69

%

3.22

%

3.72

%

Efficiency Ratio

Noninterest expense

$

40,214

$

39,734

$

37,327

$

116,674

$

106,102

Less: Intangible amortization expense

990

991

990

2,971

3,091

Adjusted noninterest expense (i)

39,224

38,743

36,337

113,703

103,011

Net interest income

21,765

20,091

18,681

60,693

56,092

Noninterest income

45,256

38,230

29,580

110,675

84,638

Tax-equivalent adjustment

116

109

81

325

257

Total tax-equivalent revenue (j)

67,137

58,430

48,342

171,693

140,987

Efficiency ratio (i)/(j)

58.42

%

66.31

%

75.17

%

66.22

%

73.06

%



Three months ended Nine months ended

September 30, June 30, September 30, September 30, September 30,

2020 2020 2019 2020 2019

Return onAverage Tangible Common Equity

Net income $ 17,659 $ 11,474 $ 7,104 $ 34,496 $ 21,888

Add: Intangibleamortization 782 783 782 2,347 2,442 expense (net of tax)

Net income,excluding 18,441 12,257 7,886 36,843 24,330 intangible amortization (e)

Average total 314,921 301,719 226,931 303,825 212,911 equity

Less: Average 27,329 27,329 27,329 27,329 27,329 goodwill

Less: Averageother intangible 12,565 13,345 15,697 13,343 16,502 assets (net of tax)

Average tangiblecommon equity 275,027 261,045 183,905 263,153 169,080 (f)

Return onaverage tangible 26.67 % 18.88 % 17.01 % 18.70 % 19.24 %common equity (e)/(f)

Net InterestMargin (tax-equivalent)

Net interest $ 21,765 $ 20,091 $ 18,681 $ 60,693 $ 56,092 income

Tax-equivalent 116 109 81 325 257 adjustment

Tax-equivalentnet interest 21,881 20,200 18,762 61,018 56,349 income (g)

Average earning 2,744,758 2,584,037 2,017,198 2,534,038 2,024,814 assets (h)

Net interestmargin 3.17 % 3.14 % 3.69 % 3.22 % 3.72 %(tax-equivalent) (g)/(h)

Efficiency Ratio

Noninterest $ 40,214 $ 39,734 $ 37,327 $ 116,674 $ 106,102 expense

Less: Intangibleamortization 990 991 990 2,971 3,091 expense

Adjustednoninterest 39,224 38,743 36,337 113,703 103,011 expense (i)

Net interest 21,765 20,091 18,681 60,693 56,092 income

Noninterest 45,256 38,230 29,580 110,675 84,638 income

Tax-equivalent 116 109 81 325 257 adjustment

Totaltax-equivalent 67,137 58,430 48,342 171,693 140,987 revenue (j)

Efficiency ratio 58.42 % 66.31 % 75.17 % 66.22 % 73.06 %(i)/(j)

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

Three months ended

Nine months ended

September 30, 2020

June 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

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

$

169,770

0.12

%

$

153,197

0.16

%

$

12,998

2.53

%

$

162,134

0.51

%

$

12,910

2.39

%

Investment securities (1)

443,705

2.04

%

369,247

2.25

%

257,561

2.43

%

383,591

2.23

%

255,903

2.51

%

Loans held for sale

90,634

2.44

%

69,606

2.69

%

45,794

3.11

%

64,555

2.64

%

30,734

3.24

%

Loans

Commercial:

Commercial and industrial

782,853

4.34

%

739,816

4.12

%

494,081

5.48

%

667,742

4.48

%

509,806

5.50

%

Real estate construction

32,747

4.47

%

31,660

4.48

%

25,137

5.56

%

30,385

4.64

%

23,532

5.54

%

Commercial real estate

525,514

4.02

%

513,497

4.31

%

439,751

5.29

%

515,761

4.31

%

444,964

5.04

%

Total commercial

1,341,114

4.22

%

1,284,973

4.21

%

958,969

5.40

%

1,213,888

4.41

%

978,302

5.29

%

Consumer

Residential real estate first mortgage

460,995

3.96

%

459,789

4.09

%

454,971

4.18

%

460,505

4.05

%

455,898

4.25

%

Residential real estate junior lien

153,326

4.54

%

163,345

4.79

%

184,124

5.63

%

163,332

4.84

%

186,744

5.75

%

Other revolving and installment

79,343

4.50

%

77,921

4.56

%

93,478

4.74

%

80,169

4.58

%

94,685

4.64

%

Total consumer

693,664

4.15

%

701,055

4.31

%

732,573

4.61

%

704,006

4.30

%

737,327

4.68

%

Total loans (1)

2,034,778

4.20

%

1,986,028

4.24

%

1,691,542

5.06

%

1,917,894

4.37

%

1,715,629

5.03

%

Federal Reserve/FHLB stock

5,871

4.40

%

5,959

4.59

%

9,303

5.07

%

5,864

4.58

%

9,638

5.16

%

Total interest earning assets

2,744,758

3.54

%

2,584,037

3.68

%

2,017,198

4.66

%

2,534,038

3.75

%

2,024,814

4.67

%

Noninterest earning assets

163,386

156,293

159,664

156,144

161,054

Total assets

$

2,908,144

$

2,740,330

$

2,176,862

$

2,690,182

$

2,185,868

Interest-Bearing Liabilities

Interest-bearing demand deposits

$

589,633

0.27

%

$

534,733

0.30

%

$

424,896

0.49

%

$

528,024

0.34

%

$

423,181

0.45

%

Money market and savings deposits

961,669

0.32

%

900,812

0.67

%

649,190

1.32

%

889,039

0.66

%

675,921

1.23

%

Time deposits

204,969

0.98

%

201,147

1.30

%

187,023

1.74

%

201,747

1.29

%

183,686

1.58

%

Short-term borrowings

-

-

%

321

-

%

87,201

2.46

%

107

-

%

95,489

2.53

%

Long-term debt

58,739

5.70

%

58,747

5.87

%

58,776

6.07

%

58,747

5.85

%

58,798

6.17

%

Total interest-bearing liabilities

1,815,010

0.55

%

1,695,760

0.81

%

1,407,086

1.39

%

1,677,664

0.81

%

1,437,075

1.33

%

Noninterest-Bearing Liabilities and Stockholders' Equity

Noninterest-bearing deposits

698,594

692,500

502,108

651,971

496,822

Other noninterest-bearing liabilities

79,619

50,351

40,737

56,722

39,060

Stockholders' equity

314,921

301,719

226,931

303,825

212,911

Total liabilities and stockholders' equity

$

2,908,144

$

2,740,330

$

2,176,862

$

2,690,182

$

2,185,868

Net interest rate spread

2.99

%

2.87

%

3.27

%

2.94

%

3.34

%

Net interest margin, tax-equivalent (2)

3.17

%

3.14

%

3.69

%

3.22

%

3.72

%

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)



Three months ended Nine months ended

September 30, 2020 June 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

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 $ 169,770 0.12 % $ 153,197 0.16 % $ 12,998 2.53 % $ 162,134 0.51 % $ 12,910 2.39 %deposits with banks

Investment 443,705 2.04 % 369,247 2.25 % 257,561 2.43 % 383,591 2.23 % 255,903 2.51 %securities (1)

Loans held for sale 90,634 2.44 % 69,606 2.69 % 45,794 3.11 % 64,555 2.64 % 30,734 3.24 %

Loans

Commercial:

Commercial and 782,853 4.34 % 739,816 4.12 % 494,081 5.48 % 667,742 4.48 % 509,806 5.50 %industrial

Real estate 32,747 4.47 % 31,660 4.48 % 25,137 5.56 % 30,385 4.64 % 23,532 5.54 %construction

Commercial real 525,514 4.02 % 513,497 4.31 % 439,751 5.29 % 515,761 4.31 % 444,964 5.04 %estate

Total commercial 1,341,114 4.22 % 1,284,973 4.21 % 958,969 5.40 % 1,213,888 4.41 % 978,302 5.29 %

Consumer

Residential realestate first 460,995 3.96 % 459,789 4.09 % 454,971 4.18 % 460,505 4.05 % 455,898 4.25 %mortgage

Residential real 153,326 4.54 % 163,345 4.79 % 184,124 5.63 % 163,332 4.84 % 186,744 5.75 %estate junior lien

Other revolving and 79,343 4.50 % 77,921 4.56 % 93,478 4.74 % 80,169 4.58 % 94,685 4.64 %installment

Total consumer 693,664 4.15 % 701,055 4.31 % 732,573 4.61 % 704,006 4.30 % 737,327 4.68 %

Total loans (1) 2,034,778 4.20 % 1,986,028 4.24 % 1,691,542 5.06 % 1,917,894 4.37 % 1,715,629 5.03 %

Federal Reserve/ 5,871 4.40 % 5,959 4.59 % 9,303 5.07 % 5,864 4.58 % 9,638 5.16 %FHLB stock

Total interest 2,744,758 3.54 % 2,584,037 3.68 % 2,017,198 4.66 % 2,534,038 3.75 % 2,024,814 4.67 %earning assets

Noninterest earning 163,386 156,293 159,664 156,144 161,054 assets

Total assets $ 2,908,144 $ 2,740,330 $ 2,176,862 $ 2,690,182 $ 2,185,868

Interest-Bearing Liabilities

Interest-bearing $ 589,633 0.27 % $ 534,733 0.30 % $ 424,896 0.49 % $ 528,024 0.34 % $ 423,181 0.45 %demand deposits

Money market and 961,669 0.32 % 900,812 0.67 % 649,190 1.32 % 889,039 0.66 % 675,921 1.23 %savings deposits

Time deposits 204,969 0.98 % 201,147 1.30 % 187,023 1.74 % 201,747 1.29 % 183,686 1.58 %

Short-term - - % 321 - % 87,201 2.46 % 107 - % 95,489 2.53 %borrowings

Long-term debt 58,739 5.70 % 58,747 5.87 % 58,776 6.07 % 58,747 5.85 % 58,798 6.17 %

Totalinterest-bearing 1,815,010 0.55 % 1,695,760 0.81 % 1,407,086 1.39 % 1,677,664 0.81 % 1,437,075 1.33 %liabilities

Noninterest-BearingLiabilities and Stockholders'Equity

Noninterest-bearing 698,594 692,500 502,108 651,971 496,822 deposits

Othernoninterest-bearing 79,619 50,351 40,737 56,722 39,060 liabilities

Stockholders' 314,921 301,719 226,931 303,825 212,911 equity

Total liabilitiesand stockholders' $ 2,908,144 $ 2,740,330 $ 2,176,862 $ 2,690,182 $ 2,185,868 equity

Net interest rate 2.99 % 2.87 % 3.27 % 2.94 % 3.34 %spread

Net interestmargin, 3.17 % 3.14 % 3.69 % 3.22 % 3.72 %tax-equivalent (2)

(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."

View source version on businesswire.com: https://www.businesswire.com/news/home/20201028006234/en/

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