Business Wire | Jul 28, 2020 04:00PM EDT

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

Jul. 28, 2020

GRAND FORKS, N.D.--(BUSINESS WIRE)--Jul. 28, 2020--Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $11.5 million for the second quarter of 2020, or $0.65 per diluted common share, compared to $5.4 million of net income, or $0.30 per diluted common share, for the first quarter of 2020, and net income of $8.3 million, or $0.59 per diluted common share, for the second quarter of 2019.

CEO Comments

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

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

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

Quarterly Highlights

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

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

Selected Financial Data (unaudited)



As of and for the

Three months ended Six months ended

June 30, March 31, June 30, June 30, June 30,

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

Performance Ratios

Return onaverage total 1.68 % 0.89 % 1.52 % 1.31 % 1.36 %assets

Return onaverage common 15.30 % 7.32 % 15.82 % 11.35 % 14.49 %equity

Return onaverage tangible 18.88 % 9.76 % 21.94 % 14.39 % 20.53 %common equity(1)

Noninterestincome as a % of 65.55 % 59.07 % 62.11 % 62.69 % 59.54 %revenue

Net interestmargin 3.14 % 3.35 % 3.62 % 3.24 % 3.74 %(tax-equivalent)(1)

Efficiency ratio 66.31 % 77.47 % 70.74 % 71.23 % 71.97 %(1)

Net charge-offs/(recoveries) to 0.66 % (0.14) % 0.74 % 0.29 % 0.58 %average loans

Dividend payout 23.08 % 50.00 % 23.73 % 31.58 % 26.67 %ratio

Per Common Share

Earnings percommon share - $ 0.66 $ 0.31 $ 0.60 $ 0.97 $ 1.07 basic (2)

Earnings percommon share - $ 0.65 $ 0.30 $ 0.59 $ 0.95 $ 1.05 diluted (2)

Dividendsdeclared per $ 0.15 $ 0.15 $ 0.14 $ 0.30 $ 0.28 common share

Tangible bookvalue per common $ 15.30 $ 14.55 $ 12.02 share (1)

Average commonshares 17,111 17,070 13,810 17,091 13,796 outstanding -basic

Average commonshares 17,445 17,405 14,100 17,425 14,089 outstanding -diluted

Other Data

Retirement andbenefit servicesassets under $ 30,093,095 $ 27,718,026 $ 30,369,847 administration/management

Wealthmanagementassets under 2,957,213 2,746,052 2,744,438 administration/management

Mortgage 431,638 228,568 246,115 $ 660,206 $ 371,651 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.

Earnings Per Share

Beginning in the third quarter of 2019, the Company elected to prospectively use the two-class method in calculating earnings per share due to the restricted stock awards and restricted stock units qualifying as participating securities. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings. Average shares of common stock for diluted net income per common share include shares to be issued upon the vesting of restricted stock awards and restricted stock units granted under the Company's share-based compensation plans.

The following table presents the calculation of basic and diluted earnings per share for the periods indicated:



Three months ended Six months ended

June 30, March June 30, June 30, June 30, 31,

(dollars in thousands, 2020 2020 2019 2020 2019except per share data)

Net income $ 11,474 $ 5,363 $ 8,348 $ 16,837 $ 14,784

Dividends andundistributed earnings 200 82 - 282 -allocated toparticipating securities

Net income available to $ 11,274 $ 5,281 $ 8,348 $ 16,555 $ 14,784common shareholders

Weighted-average commonshares outstanding for 17,111 17,070 13,810 17,091 13,796basic EPS

Dilutive effect of 334 335 290 334 293stock-based awards

Weighted-average commonshares outstanding for 17,445 17,405 14,100 17,425 14,089diluted EPS

Earnings per common share:

Basic earnings per $ 0.66 $ 0.31 $ 0.60 $ 0.97 $ 1.07common share

Diluted earnings per $ 0.65 $ 0.30 $ 0.59 $ 0.95 $ 1.05common share

Results of Operations

Net Interest Income

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

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

Net Interest Margin (Tax-Equivalent)

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

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

Noninterest Income

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

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

Noninterest Expense

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

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

Financial Condition

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

Loans

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

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





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

(dollars in 2020 2020 2019 2019 2019thousands)

Commercial

Commercialand $ 794,204 $ 502,637 $ 479,144 $ 485,183 $ 513,120industrial(1)

Real estate 31,344 25,487 26,378 21,674 26,584construction

Commercial 519,104 522,106 494,703 444,600 442,797real estate

Total 1,344,652 1,050,230 1,000,225 951,457 982,501commercial

Consumer

Residentialreal estate 456,737 457,895 457,155 459,763 452,049firstmortgage

Residentialreal estate 154,351 170,538 177,373 182,516 185,209junior lien

Otherrevolving 78,457 79,614 86,526 92,351 93,693andinstallment

Total 689,545 708,047 721,054 734,630 730,951consumer

Total loans $ 2,034,197 $ 1,758,277 $ 1,721,279 $ 1,686,087 $ 1,713,452

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

Deposits

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

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



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

(dollars in 2020 2020 2019 2019 2019thousands)

Noninterest-bearing $ 700,892 $ 608,559 $ 577,704 $ 537,951 $ 506,021demand

Interest-bearing

Interest-bearing 579,840 477,752 458,689 424,249 439,342demand

Savings accounts 75,973 60,181 55,777 55,513 56,163

Money market savings 892,717 773,652 683,064 622,647 568,450

Time deposits 203,731 201,370 196,082 192,753 183,389

Total 1,752,261 1,512,955 1,393,612 1,295,162 1,247,344interest-bearing

Total deposits $ 2,453,153 $ 2,121,514 $ 1,971,316 $ 1,833,113 $ 1,753,365

Asset Quality

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

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



As of and for the three months ended

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

(dollars in thousands) 2020 2020 2019 2019 2019

Nonaccrual loans $ 5,328 $ 6,959 $ 7,379 $ 5,107 $ 4,623

Accruing loans 90+ days - 11 448 45 28 past due

Total nonperforming loans 5,328 6,970 7,827 5,152 4,651

OREO and repossessed 26 209 8 84 381 assets

Total nonperforming $ 5,354 $ 7,179 $ 7,835 $ 5,236 $ 5,032 assets

Net charge-offs/ 3,264 (595) 857 (240) 3,189 (recoveries)

Net charge-offs/(recoveries) to average 0.66 % (0.14) % 0.20 % (0.06) % 0.74 %loans

Nonperforming loans to 0.26 % 0.40 % 0.45 % 0.31 % 0.27 %total loans

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

Allowance for loan losses 1.34 % 1.54 % 1.39 % 1.36 % 1.24 %to total loans

Allowance for loan losses 512 % 388 % 306 % 446 % 457 %to nonperforming loans

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

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

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

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

Capital

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

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



June December June 30, 31, 30,

2020 2019 2019

Capital Ratios^(1)

Alerus Financial Corporation

Common equity tier 1 capital to risk 12.58 % 12.48 % 8.90 %weighted assets

Tier 1 capital to risk weighted assets 12.99 % 12.90 % 9.34 %

Total capital to risk weighted assets 16.70 % 16.73 % 13.14 %

Tier 1 capital to average assets 9.75 % 11.05 % 8.08 %

Tangible common equity / tangible assets ^ 9.25 % 10.38 % 7.69 %(2)



Alerus Financial, N.A.

Common equity tier 1 capital to risk 11.99 % 11.91 % 11.90 %weighted assets

Tier 1 capital to risk weighted assets 11.99 % 11.91 % 11.90 %

Total capital to risk weighted assets 13.24 % 13.15 % 13.04 %

Tier 1 capital to average assets 9.00 % 10.20 % 10.29 %

(1) Capital ratios for the current quarter are to be considered preliminary until the Call Report for Alerus Financial, N.A. is filed.

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

Conference Call

The Company will host a conference call at 9:00 a.m. Central Time on Wednesday, July 29, 2020, to discuss its financial results. The call can be accessed via telephone at (888) 317-6016. A recording of the call and transcript will be available on the Company's investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

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

Non-GAAP Financial Measures

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

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

Forward-Looking Statements

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

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

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

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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



June 30, December 31,

2020 2019

Assets (Unaudited) (Audited)

Cash and cash equivalents $ 210,437 $ 144,006

Investment securities, at fair value

Available-for-sale 393,727 310,350

Equity - 2,808

Loans held for sale 101,751 46,846

Loans 2,034,197 1,721,279

Allowance for loan losses (27,256) (23,924)

Net loans 2,006,941 1,697,355

Land, premises and equipment, net 20,709 20,629

Operating lease right-of-use assets 8,746 8,343

Accrued interest receivable 7,975 7,551

Bank-owned life insurance 31,959 31,566

Goodwill 27,329 27,329

Other intangible assets 16,411 18,391

Servicing rights 2,891 3,845

Deferred income taxes, net 8,810 7,891

Other assets 37,771 29,968

Total assets $ 2,875,457 $ 2,356,878

Liabilities and Stockholders' Equity

Deposits

Noninterest-bearing $ 700,892 $ 577,704

Interest-bearing 1,752,261 1,393,612

Total deposits 2,453,153 1,971,316

Long-term debt 58,754 58,769

Operating lease liabilities 9,254 8,864

Accrued expenses and other liabilities 48,564 32,201

Total liabilities 2,569,725 2,071,150

Stockholders' equity

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

Common stock, $1 par value, 30,000,000 sharesauthorized: 17,120,466 and 17,049,551 issued and 17,120 17,050outstanding

Additional paid-in capital 89,313 88,650

Retained earnings 189,528 178,092

Accumulated other comprehensive income (loss) 9,771 1,936

Total stockholders' equity 305,732 285,728

Total liabilities and stockholders' equity $ 2,875,457 $ 2,356,878

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

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



Three months ended Six months ended

June 30, March 31, June 30, June 30, June 30,

2020 2020 2019 2020 2019

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

Loans,including $ 21,372 $ 20,542 $ 21,712 $ 41,914 $ 43,285fees

Investment securities

Taxable 1,765 1,759 1,338 3,524 2,647

Exempt fromfederal 239 235 211 474 455income taxes

Other 130 570 217 700 401

Totalinterest 23,506 23,106 23,478 46,612 46,788income

Interest Expense

Deposits 2,558 3,392 3,548 5,950 6,296

Short-term - - 735 - 1,266borrowings

Long-term 857 877 904 1,734 1,815debt

Totalinterest 3,415 4,269 5,187 7,684 9,377expense

Net interest 20,091 18,837 18,291 38,928 37,411income

Provisionfor loan 3,500 2,500 1,797 6,000 4,017losses

Net interestincome afterprovision 16,591 16,337 16,494 32,928 33,394for loanlosses

Noninterest Income

Retirementand benefit 13,710 16,220 15,776 29,930 30,835services

Wealth 4,112 4,046 3,878 8,158 7,489management

Mortgage 17,546 5,045 7,035 22,591 11,604banking

Servicecharges on 297 423 430 720 874depositaccounts

Net gains(losses) on 1,294 - 182 1,294 309investmentsecurities

Other 1,271 1,455 2,683 2,726 3,947

Totalnoninterest 38,230 27,189 29,984 65,419 55,058income

Noninterest Expense

Compensation 21,213 18,731 18,143 39,944 34,956

Employeetaxes and 4,747 5,308 5,160 10,055 10,588benefits

Occupancyand 2,869 2,755 2,641 5,624 5,386equipmentexpense

Businessservices,software and 4,520 4,444 4,022 8,964 7,820technologyexpense

Intangibleamortization 991 990 1,050 1,981 2,101expense

Professionalfees and 1,160 1,040 1,029 2,200 2,095assessments

Marketingand business 549 610 707 1,159 1,134development

Supplies and 675 703 663 1,378 1,396postage

Travel 51 261 398 312 900

Mortgage andlending 1,192 1,043 769 2,235 1,215expenses

Other 1,767 841 679 2,608 1,184

Totalnoninterest 39,734 36,726 35,261 76,460 68,775expense

Incomebefore 15,087 6,800 11,217 21,887 19,677income taxes

Income tax 3,613 1,437 2,869 5,050 4,893expense

Net income $ 11,474 $ 5,363 $ 8,348 $ 16,837 $ 14,784

Per Common Share Data

Earnings per $ 0.66 $ 0.31 $ 0.60 $ 0.97 $ 1.07common share

Dilutedearnings per $ 0.65 $ 0.30 $ 0.59 $ 0.95 $ 1.05common share

Dividendsdeclared per $ 0.15 $ 0.15 $ 0.14 $ 0.30 $ 0.28common share

Averagecommon 17,111 17,070 13,810 17,091 13,796sharesoutstanding

Dilutedaveragecommon 17,445 17,405 14,100 17,425 14,089sharesoutstanding

Alerus Financial Corporation and Subsidiaries

Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures(unaudited)

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



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

2020 2020 2019 2019

Tangible CommonEquity to Tangible Assets

Total common $ 305,732 $ 293,608 $ 285,728 $ 213,765 stockholders' equity

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

Less: Other 16,411 17,401 18,391 20,372 intangible assets

Tangible common 261,992 248,878 240,008 166,064 equity (a)

Total assets 2,875,457 2,512,078 2,356,878 2,207,129

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

Less: Other 16,411 17,401 18,391 20,372 intangible assets

Tangible assets (b) 2,831,717 2,467,348 2,311,158 2,159,428

Tangible commonequity to tangible 9.25 % 10.09 % 10.38 % 7.69 %assets (a)/(b)

Tangible Book Value Per Common Share

Total common $ 305,732 $ 293,608 $ 285,728 $ 213,765 stockholders' equity

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

Less: Other 16,411 17,401 18,391 20,372 intangible assets

Tangible common 261,992 248,878 240,008 166,064 equity (c)

Total common sharesissued and 17,120 17,106 17,050 13,816 outstanding (d)

Tangible book valueper common share (c)/ $ 15.30 $ 14.55 $ 14.08 $ 12.02 (d)



Three months ended Six months ended

June 30, March 31, June 30, June 30, June 30,

2020 2020 2019 2020 2019

Return onAverage Tangible Common Equity

Net income $ 11,474 $ 5,363 $ 8,348 $ 16,837 $ 14,784

Add: Intangibleamortization 783 782 830 1,565 1,660 expense (net oftax)

Net income,excluding 12,257 6,145 9,178 18,402 16,444 intangibleamortization (e)

Average total 301,719 294,727 211,653 298,221 205,785 equity

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

Less: Averageother intangible 13,345 14,128 16,498 13,737 16,912 assets (net oftax)

Average tangiblecommon equity 261,045 253,270 167,826 257,155 161,544 (f)

Return onaverage tangible 18.88 % 9.76 % 21.94 % 14.39 % 20.53 %common equity(e)/(f)

Net InterestMargin (tax-equivalent)

Net interest $ 20,091 $ 18,837 $ 18,291 $ 38,928 $ 37,411 income

Tax-equivalent 109 100 84 209 176 adjustment

Tax-equivalentnet interest 20,200 18,937 18,375 39,137 37,587 income (g)

Average earning 2,584,037 2,271,004 2,037,604 2,427,519 2,028,685 assets (h)

Net interestmargin 3.14 % 3.35 % 3.62 % 3.24 % 3.74 %(tax-equivalent)(g)/(h)

Efficiency Ratio

Noninterest $ 39,734 $ 36,726 $ 35,261 $ 76,460 $ 68,775 expense

Less: Intangibleamortization 991 990 1,050 1,981 2,101 expense

Adjustednoninterest 38,743 35,736 34,211 74,479 66,674 expense (i)

Net interest 20,091 18,837 18,291 38,928 37,411 income

Noninterest 38,230 27,189 29,984 65,419 55,058 income

Tax-equivalent 109 100 84 209 176 adjustment

Totaltax-equivalent 58,430 46,126 48,359 104,556 92,645 revenue (j)

Efficiency ratio 66.31 % 77.47 % 70.74 % 71.23 % 71.97 %(i)/(j)

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)



Three months ended Six months ended

June 30, 2020 March 31, 2020 June 30, 2019 June 30, 2020 June 30, 2019

Average 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 $ 153,197 0.16 % $ 163,351 1.24 % $ 14,476 2.24 % $ 158,274 0.72 % $ 12,865 2.35 %deposits with banks

Investment 369,247 2.25 % 337,160 2.45 % 255,502 2.52 % 353,203 2.35 % 255,060 2.55 %securities (1)

Loans held for sale 69,606 2.69 % 33,138 3.08 % 33,078 3.40 % 51,372 2.81 % 23,079 3.37 %

Loans

Commercial:

Commercial and 739,816 4.12 % 479,291 5.26 % 485,645 5.53 % 609,553 4.57 % 485,533 5.53 %industrial

Real estate 31,660 4.48 % 26,723 5.03 % 32,985 5.70 % 29,191 4.73 % 32,079 5.69 %construction

Commercial real 513,497 4.31 % 508,164 4.61 % 480,429 4.93 % 510,831 4.46 % 480,135 4.93 %estate

Total commercial 1,284,973 4.21 % 1,014,178 4.93 % 999,059 5.25 % 1,149,575 4.53 % 997,747 5.24 %

Consumer

Residential realestate first 459,789 4.09 % 460,726 4.10 % 444,280 4.17 % 460,258 4.10 % 447,006 4.25 %mortgage

Residential real 163,345 4.79 % 173,436 5.17 % 187,054 5.77 % 168,390 4.98 % 188,076 5.81 %estate junior lien

Other revolving and 77,921 4.56 % 83,253 4.69 % 93,687 4.62 % 80,587 4.63 % 95,044 4.60 %installment

Total consumer 701,055 4.31 % 717,415 4.43 % 725,021 4.64 % 709,235 4.37 % 730,126 4.70 %

Total loans (1) 1,986,028 4.24 % 1,731,593 4.72 % 1,724,080 4.99 % 1,858,810 4.47 % 1,727,873 5.01 %

Federal Reserve/FHLB 5,959 4.59 % 5,762 4.75 % 10,468 5.21 % 5,860 4.67 % 9,808 5.18 %stock

Total interest 2,584,037 3.68 % 2,271,004 4.11 % 2,037,604 4.64 % 2,427,519 3.88 % 2,028,685 4.67 %earning assets

Noninterest earning 156,293 148,661 163,191 152,476 161,761 assets

Total assets $ 2,740,330 $ 2,419,665 $ 2,200,795 $ 2,579,995 $ 2,190,446

Interest-Bearing Liabilities

Interest-bearing $ 534,733 0.30 % $ 459,028 0.46 % $ 425,260 0.46 % $ 496,880 0.38 % $ 422,309 0.43 %demand deposits

Money market and 900,812 0.67 % 803,838 1.04 % 694,474 1.36 % 852,325 0.85 % 689,508 1.19 %savings deposits

Time deposits 201,147 1.30 % 199,088 1.59 % 178,401 1.59 % 200,117 1.44 % 181,990 1.49 %

Short-term 321 - % - - % 115,892 2.54 % 161 - % 99,702 2.56 %borrowings

Long-term debt 58,747 5.87 % 58,755 6.00 % 58,808 6.17 % 58,751 5.94 % 58,810 6.23 %

Totalinterest-bearing 1,695,760 0.81 % 1,520,709 1.13 % 1,472,835 1.41 % 1,608,234 0.96 % 1,452,319 1.30 %liabilities

Noninterest-BearingLiabilities and Stockholders' Equity

Noninterest-bearing 692,500 564,307 478,868 628,404 494,136 deposits

Othernoninterest-bearing 50,351 39,922 37,439 45,136 38,206 liabilities

Stockholders' equity 301,719 294,727 211,653 298,221 205,785

Total liabilitiesand stockholders' $ 2,740,330 $ 2,419,665 $ 2,200,795 $ 2,579,995 $ 2,190,446 equity

Net interest rate 2.87 % 2.98 % 3.23 % 2.92 % 3.37 %spread

Net interest margin, 3.14 % 3.35 % 3.62 % 3.24 % 3.74 %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/20200728005851/en/

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