Alerus Financial Corporation Reports Fourth Quarter 2020 Net Income of $10.2 Million

Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $10.2 million for the fourth quarter of 2020, or $0.57 per diluted common share, compared to net income of $17.7 million, or $0.99 per diluted common share, for the third quarter of 2020, and net income of $7.7 million, or $0.43 per diluted common share, for the fourth quarter of 2019.

CEO Comments

Chairman, President, and Chief Executive Officer Randy Newman said, “Alerus continues to be a purpose-driven company, focused on its business model, strategy and culture. In a year filled with so much uncertainty and adversity, our business strategy of serving as trusted advisors to our clients delivered to our shareholders record annual net income of $44.7 million, a 51.2% increase over 2019. In 2020, we continued to execute on our acquisition strategy, and on December 16, 2020, we closed our acquisition of Retirement Planning Services, Inc. (doing business as RPS Plan Administrators and 24HourFlex). This acquisition allowed Alerus to add talent, increase market share in the desirable Rocky Mountain region, and expand products and services to the newly acquired clients as well as existing Alerus clients through our collaborative “One Alerus” business model and culture.

In this challenging environment we also remain committed to managing expenses. Our ability to continue serving clients and the transition of most of our employees to a remote working environment prompted the closure of six of our 23 offices. We are very proud of our company’s performance, ability to focus on long-term growth for our shareholders through our diversified business model, solid financial foundation and strategic focus on serving clients holistically and in their best interests.”

Quarterly Highlights

• Return on average assets of 1.34%, compared to 2.42% for the third quarter of 2020
• Return on average tangible common equity⁽¹⁾ of 15.13%, compared to 26.67% for the third quarter of 2020
• Net interest margin (tax-equivalent)⁽¹⁾ was 3.23%, compared to 3.17% for the third quarter of 2020
• Allowance for loan losses to total loans, excluding Paycheck Protection Program, or PPP, loans, was 2.00%, compared to 1.83% as of September 30, 2020
• Efficiency ratio⁽¹⁾ of 74.44%, compared to 58.42% for the third quarter of 2020
• Noninterest income as a percentage of total revenue was 62.57%, compared to 67.53% for the third quarter of 2020
• Mortgage originations totaled $607.2 million, an 18.7% increase from the third quarter of 2020
• Loans held for investment increased $258.1 million, or 15.0%, from the fourth quarter of 2019
• Deposits increased $600.7 million, or 30.5%, 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											Year ended
		December 31,				September 30,				December 31,			December 31,			December 31,
(dollars and shares in thousands, except per share data)		2020				2020				2019			2020			2019
Performance Ratios
Return on average total assets			1.34		%		2.42		%		1.33	%		1.61	%		1.34	%
Return on average common equity			12.30		%		22.31		%		10.65	%		14.40	%		12.78	%
Return on average tangible common equity (1)			15.13		%		26.67		%		13.78	%		17.74	%		17.46	%
Noninterest income as a % of revenue			62.57		%		67.53		%		61.56	%		64.05	%		60.50	%
Net interest margin (tax-equivalent) (1)			3.23		%		3.17		%		3.45	%		3.22	%		3.65	%
Efficiency ratio (1)			74.44		%		58.42		%		73.68	%		68.40	%		73.22	%
Net charge-offs/(recoveries) to average loans			(0.30	)	%		(0.11	)	%		0.20	%		0.03	%		0.33	%
Dividend payout ratio			26.32		%		15.15		%		34.88	%		23.81	%		29.84	%
Per Common Share
Earnings per common share - basic		$	0.58			$	1.01			$	0.44		$	2.57		$	1.96
Earnings per common share - diluted		$	0.57			$	0.99			$	0.43		$	2.52		$	1.91
Dividends declared per common share		$	0.15			$	0.15			$	0.15		$	0.60		$	0.57
Tangible book value per common share (1)		$	16.00			$	16.31			$	14.08
Average common shares outstanding - basic			17,122				17,121				17,049			17,106			14,736
Average common shares outstanding - diluted			17,450				17,453				17,397			17,438			15,093
Other Data
Retirement and benefit services assets under administration/management		$	34,199,954			$	30,470,645			$	31,904,648
Wealth management assets under administration/management			3,338,594				3,043,173				3,103,056
Mortgage originations			607,166				511,605				261,263		$	1,778,977		$	946,441

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

Results of Operations

Net Interest Income

Net interest income for the fourth quarter of 2020 was $23.2 million, an increase of $1.4 million, or 6.4%, from $21.8 million for the third quarter of 2020, and an increase of $4.7 million, or 25.4%, from $18.5 million for the fourth quarter of 2019. The linked quarter increase in net interest income was primarily driven by an increase in interest and loan fees recognized on PPP loans of $3.9 million compared to $3.2 million of interest and fees on PPP loans in the third quarter. During the fourth quarter of 2020 approximately $83.6 million of PPP loans were forgiven or repaid and average interest earning assets increased by $125.0 million, primarily due to an increase of $105.5 million in investment securities and a $32.2 million increase in loans held for sale. The cost of interest-bearing liabilities decreased 12 basis points from the third quarter of 2020.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 3.23% for the fourth quarter of 2020, a 6 basis point increase from 3.17% for the third quarter of 2020, and a 22 basis point decrease from 3.45% in the fourth quarter of 2019. The linked quarter increase was primarily due to the loan fees recognized on forgiven PPP loans, partially offset by lower yields on interest earning assets. The year over year decrease was primarily attributed to the historically low and flat yield curve and a more liquid balance sheet mix which resulted in a 76 basis point decrease in interest earning asset yields and compressed net interest margin.

Noninterest Income

Noninterest income for the fourth quarter of 2020 was $38.7 million, a $6.6 million, or 14.5%, decrease from the third quarter of 2020. The decrease was primarily driven by a $5.5 million decrease in mortgage banking revenue, a $1.4 million decrease in net gains on investment securities, and a $777 thousand decrease in other noninterest income. These decreases were partially offset by increases of $818 thousand in retirement and benefit services revenue and $321 thousand in wealth management revenue. The decrease in mortgage banking revenue was primarily due to an $8.3 million decrease in the change in fair value of secondary market derivatives and a 15 basis point decrease in the gain on sale margin, partially offset by a $95.6 million increase in mortgage originations. The decrease in the fair value of secondary market derivatives was due to a decrease of $251.7 million in the hedged pipeline for the fourth quarter of 2020, as compared to the change during the third quarter of 2020. The decrease in other noninterest income was primarily due to losses on assets of $707 thousand as we closed two branches and terminated leases at four offices during the quarter. The increase in retirement and benefit services revenue was primarily due to seasonally higher ESOP transactional trustee fees, distribution and health and welfare account fees.

Noninterest income for the fourth quarter of 2020 increased $9.1 million, or 30.9%, from $29.6 million in the fourth quarter of 2019. This increase was primarily due to a $10.7 million increase in mortgage banking revenue as mortgage originations increased from $261.3 million in the fourth quarter of 2019 to $607.2 million in the fourth quarter of 2020. The increase was partially offset by a decrease in retirement and benefit services revenue of $1.7 million due to a decline in revenue sharing and plan document fees.

Noninterest Expense

Noninterest expense for the fourth quarter of 2020 was $47.1 million, an increase of $6.9 million, or 17.2%, compared to the third quarter of 2020. The increase was primarily due to increases of $3.8 million in compensation expense, $1.3 million in business services, software and technology expense, $779 thousand in other noninterest expense, and $438 thousand in professional fees and assessments. The increase in compensation expense was primarily due to increased mortgage incentives resulting from increased mortgage originations, increased incentives for retirement and benefit services driven by a seasonal increase in revenue, and an increase in performance bonus expense due to the Company’s record financial performance. Business services, software and technology expense increased following purchases of computer equipment, supplies and allowances for home office equipment as the vast majority of our employees work remotely during the ongoing COVID-19 pandemic. Professional fees and assessments increased due to legal and consulting fees related to the acquisition of Retirement Planning Services, Inc.

Noninterest expense for the fourth quarter of 2020 increased $10.7 million, or 29.3%, from $36.4 million in the fourth quarter of 2019. The increase was primarily attributable to increased compensation expense, employee taxes and benefits and mortgage and lending expenses, primarily as a result of the significant increase in mortgage originations. Other increases including business services, software and technology, professional fees and assessments and other noninterest expenses, are consistent with the linked quarter increases noted above.

Financial Condition

Total assets were $3.0 billion as of December 31, 2020, an increase of $656.9 million, or 27.9%, from December 31, 2019. The overall increase in total assets included increases of $282.0 million in available-for-sale investment securities, $258.1 million in loans, $75.6 million in loans held for sale, and $29.0 million in cash and cash equivalents.

Loans

Total loans were $1.98 billion as of December 31, 2020, an increase of $258.1 million, or 15.0%, from December 31, 2019. The increase was primarily due to increases of $212.7 million in commercial and industrial loans and $68.3 million in our commercial real estate loan portfolio, partially offset by a $41.0 million decrease in our consumer loan portfolio. The increase in commercial and industrial loans was due to an increase of $268.4 million in PPP loans, offset by a decrease in commercial lines of credit due to continued low line utilization.

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

		December 31,			September 30,			June 30,			March 31,			December 31,
(dollars in thousands)		2020			2020			2020			2020			2019
Commercial
Commercial and industrial (1)		$	691,858		$	789,036		$	794,204		$	502,637		$	479,144
Real estate construction			44,451			33,169			31,344			25,487			26,378
Commercial real estate			563,007			535,216			519,104			522,106			494,703
Total commercial			1,299,316			1,357,421			1,344,652			1,050,230			1,000,225
Consumer
Residential real estate first mortgage			463,370			469,050			456,737			457,895			457,155
Residential real estate junior lien			143,416			152,487			154,351			170,538			177,373
Other revolving and installment			73,273			79,461			78,457			79,614			86,526
Total consumer			680,059			700,998			689,545			708,047			721,054
Total loans		$	1,979,375		$	2,058,419		$	2,034,197		$	1,758,277		$	1,721,279

(1)	Includes PPP loans of $268.4 million at December 31, 2020, $348.9 million at September 30, 2020 and $347.3 million at June 30, 2020.

Deposits

Total deposits were $2.57 billion as of December 31, 2020, an increase of $600.7 million, or 30.5%, from December 31, 2019. Interest-bearing deposits increased $423.7 million while non-interest bearing deposits increased $177.0 million. Key drivers of the increase in deposits included strong deposit production from new and existing PPP loan clients, inflows from government stimulus programs and higher depositor balances due to the uncertain economic environment and volatile financial markets. The increase in interest-bearing deposits included a $184.0 million increase in synergistic deposits, including health savings account deposits from our retirement and benefit services and wealth management segments, bringing our total sourced deposits outside of our branch footprint to $595.6 million. Commercial transaction deposits increased $289.5 million, or 35.5%, while consumer transaction deposits increased $108.1 million, or 20.2%, since December 31, 2019. Noninterest-bearing deposits as a percentage of total deposits were 29.3% as of December 31, 2020 and 2019, respectively.

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

		December 31,			September 30,			June 30,			March 31,			December 31,
(dollars in thousands)		2020			2020			2020			2020			2019
Noninterest-bearing demand		$	754,716		$	693,450		$	700,892		$	608,559		$	577,704
Interest-bearing
Interest-bearing demand			618,900			590,366			579,840			477,752			458,689
Savings accounts			79,902			78,659			75,973			60,181			55,777
Money market savings			909,137			892,473			892,717			773,652			683,064
Time deposits			209,338			207,422			203,731			201,370			196,082
Total interest-bearing			1,817,277			1,768,920			1,752,261			1,512,955			1,393,612
Total deposits		$	2,571,993		$	2,462,370		$	2,453,153		$	2,121,514		$	1,971,316

Asset Quality

Total nonperforming assets were $5.1 million as of December 31, 2020, a decrease of $2.7 million, or 34.4%, from December 31, 2019. As of December 31, 2020, the allowance for loan losses was $34.2 million, or 1.73% 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 61 basis points to 2.00% as of December 31, 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
		December 31,				September 30,				June 30,			March 31,				December 31,
(dollars in thousands)		2020				2020				2020			2020				2019
Nonaccrual loans		$	5,050			$	4,795			$	5,328		$	6,959			$	7,379
Accruing loans 90+ days past due			30				—				—			11				448
Total nonperforming loans			5,080				4,795				5,328			6,970				7,827
OREO and repossessed assets			63				10				26			209				8
Total nonperforming assets		$	5,143			$	4,805			$	5,354		$	7,179			$	7,835
Net charge-offs/(recoveries)			(1,509	)			(581	)			3,264			(595	)			857
Net charge-offs/(recoveries) to average loans			(0.30	)	%		(0.11	)	%		0.66	%		(0.14	)	%		0.20	%
Nonperforming loans to total loans			0.26		%		0.23		%		0.26	%		0.40		%		0.45	%
Nonperforming assets to total assets			0.17		%		0.17		%		0.19	%		0.29		%		0.33	%
Allowance for loan losses to total loans			1.73		%		1.52		%		1.34	%		1.54		%		1.39	%
Allowance for loan losses to nonperforming loans			674		%		654		%		512	%		388		%		306	%

For the fourth quarter of 2020, we had net recoveries of $1.5 million compared to net recoveries of $581 thousand for the third quarter of 2020 and $857 thousand of net charge-offs for the fourth quarter of 2019. The net recoveries for the fourth quarter of 2020 were primarily due to a $2.6 million recovery from one commercial client that was previously charged off during the second quarter of 2019.

The provision for loan losses for the fourth quarter of 2020 was $1.4 million, a decrease of $2.1 million, or 60.0%, from the third quarter of 2020 and a decrease of $397 thousand from the fourth quarter of 2019. The decrease in provision expense was primarily due to the net recoveries during the quarter. We have increased allocations of reserves during the year for the economic uncertainties related to COVID-19, which increased the allowance for loan losses balance by $10.3 million to $34.2 million at December 31, 2020, a 43.1% increase from December 31, 2019.

The ratio of nonperforming loans to total loans at December 31, 2020 was 0.26%, and if PPP loans were excluded, this ratio would have been 0.30%. Nonperforming assets as a percentage of total assets was 0.17% at December 31, 2020. Excluding PPP loans, nonperforming assets as a percentage of total assets would have been 0.19% at December 31, 2020.

During 2020, we had entered into principal and interest deferrals on 577 loans, representing $153.6 million in principal balances, since the beginning of the pandemic. Of those loans, 18 loans with a total outstanding principal balance of $8.4 million have been granted second deferrals, 21 loans with a total outstanding principal balance of $3.7 million remain on the first deferral and the remaining loans have been returned to 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 $330.2 million as of December 31, 2020, an increase of $44.4 million from December 31, 2019. The tangible book value per common share, a non-GAAP financial measure, increased to $16.00 as of December 31, 2020, from $14.08 as of December 31, 2019. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.27% as of December 31, 2020, from 10.38% as of December 31, 2019. The tangible common equity to tangible assets ratio, excluding PPP loans, was 10.19% as of December 31, 2020.

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

		December 31,			September 30,			December 31,
		2020			2020			2019
Capital Ratios(1)
Alerus Financial Corporation
Common equity tier 1 capital to risk weighted assets			12.75	%		13.08	%		12.48	%
Tier 1 capital to risk weighted assets			13.15	%		13.48	%		12.90	%
Total capital to risk weighted assets			16.79	%		17.13	%		16.73	%
Tier 1 capital to average assets			9.24	%		9.76	%		11.05	%
Tangible common equity / tangible assets (2)			9.27	%		9.78	%		10.38	%
Alerus Financial, N.A.
Common equity tier 1 capital to risk weighted assets			12.10	%		12.47	%		11.91	%
Tier 1 capital to risk weighted assets			12.10	%		12.47	%		11.91	%
Total capital to risk weighted assets			13.36	%		13.72	%		13.15	%
Tier 1 capital to average assets			8.50	%		9.03	%		10.20	%

(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, January 28, 2021, to discuss its financial results. The call can be accessed via telephone at [phone]. A recording of the call and transcript will be available on the Company’s investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation 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, MN, East Lansing, MI, and Littleton, CO.

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)
		December 31,				December 31,
		2020				2019
Assets		(Unaudited)				(Audited)
Cash and cash equivalents		$	172,962			$	144,006
Investment securities, at fair value
Available-for-sale			592,342				310,350
Equity			—				2,808
Loans held for sale			122,440				46,846
Loans			1,979,375				1,721,279
Allowance for loan losses			(34,246	)			(23,924	)
Net loans			1,945,129				1,697,355
Land, premises and equipment, net			20,289				20,629
Operating lease right-of-use assets			6,918				8,343
Accrued interest receivable			9,662				7,551
Bank-owned life insurance			32,363				31,566
Goodwill			30,201				27,329
Other intangible assets			25,919				18,391
Servicing rights			1,987				3,845
Deferred income taxes, net			9,409				7,891
Other assets			44,150				29,968
Total assets		$	3,013,771			$	2,356,878
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing		$	754,716			$	577,704
Interest-bearing			1,817,277				1,393,612
Total deposits			2,571,993				1,971,316
Long-term debt			58,735				58,769
Operating lease liabilities			7,861				8,864
Accrued expenses and other liabilities			45,019				32,201
Total liabilities			2,683,608				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 shares authorized: 17,125,270 and 17,049,551 issued and outstanding			17,125				17,050
Additional paid-in capital			90,237				88,650
Retained earnings			212,163				178,092
Accumulated other comprehensive income (loss)			10,638				1,936
Total stockholders’ equity			330,163				285,728
Total liabilities and stockholders’ equity		$	3,013,771			$	2,356,878

Alerus Financial Corporation and Subsidiaries Consolidated Statements of Income (dollars and shares in thousands, except per share data)
		Three months ended									Year ended
		December 31,			September 30,			December 31,			December 31,			December 31,
		2020			2020			2019			2020			2019
Interest Income		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
Loans, including fees		$	22,549		$	21,962		$	20,659		$	86,425		$	85,830
Investment securities
Taxable			2,301			1,973			1,555			7,798			5,576
Exempt from federal income taxes			237			238			180			949			798
Other			114			116			493			930			1,096
Total interest income			25,201			24,289			22,887			96,102			93,300
Interest Expense
Deposits			1,210			1,683			3,532			8,843			13,334
Short-term borrowings			—			—			—			—			1,805
Long-term debt			838			841			896			3,413			3,610
Total interest expense			2,048			2,524			4,428			12,256			18,749
Net interest income			23,153			21,765			18,459			83,846			74,551
Provision for loan losses			1,400			3,500			1,797			10,900			7,312
Net interest income after provision for loan losses			21,753			18,265			16,662			72,946			67,239
Noninterest Income
Retirement and benefit services			15,922			15,104			17,669			60,956			63,811
Wealth management			4,807			4,486			4,117			17,451			15,502
Mortgage banking			16,781			22,269			6,066			61,641			25,805
Service charges on deposit accounts			334			355			451			1,409			1,772
Net gains (losses) on investment securities			15			1,428			—			2,737			357
Other			837			1,614			1,253			5,177			6,947
Total noninterest income			38,696			45,256			29,556			149,371			114,194
Noninterest Expense
Compensation			26,522			22,740			19,021			89,206			74,018
Employee taxes and benefits			4,962			5,033			4,268			20,050			19,456
Occupancy and equipment expense			2,681			2,768			2,665			11,073			10,751
Business services, software and technology expense			5,740			4,420			4,337			19,124			16,381
Intangible amortization expense			990			990			990			3,961			4,081
Professional fees and assessments			1,469			1,031			865			4,700			4,011
Marketing and business development			1,045			929			1,138			3,133			3,162
Supplies and postage			544			247			695			2,169			2,722
Travel			21			26			452			359			1,787
Mortgage and lending expenses			1,573			1,231			887			5,039			2,853
Other			1,578			799			1,117			4,985			3,315
Total noninterest expense			47,125			40,214			36,435			163,799			142,537
Income before income taxes			13,324			23,307			9,783			58,518			38,896
Income tax expense			3,144			5,648			2,131			13,843			9,356
Net income		$	10,180		$	17,659		$	7,652		$	44,675		$	29,540
Per Common Share Data
Earnings per common share		$	0.58		$	1.01		$	0.44		$	2.57		$	1.96
Diluted earnings per common share		$	0.57		$	0.99		$	0.43		$	2.52		$	1.91
Dividends declared per common share		$	0.15		$	0.15		$	0.15		$	0.60		$	0.57
Average common shares outstanding			17,122			17,121			17,049			17,106			14,736
Diluted average common shares outstanding			17,450			17,453			17,397			17,438			15,093

Alerus Financial Corporation and Subsidiaries Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures (unaudited) (dollars and shares in thousands, except per share data)
		December 31,			September 30,			December 31,
		2020			2020			2019
Tangible Common Equity to Tangible Assets
Total common stockholders’ equity		$	330,163		$	322,003		$	285,728
Less: Goodwill			30,201			27,329			27,329
Less: Other intangible assets			25,919			15,421			18,391
Tangible common equity (a)			274,043			279,253			240,008
Total assets			3,013,771			2,898,809			2,356,878
Less: Goodwill			30,201			27,329			27,329
Less: Other intangible assets			25,919			15,421			18,391
Tangible assets (b)			2,957,651			2,856,059			2,311,158
Tangible common equity to tangible assets (a)/(b)			9.27	%		9.78	%		10.38	%
Tangible Book Value Per Common Share
Total common stockholders’ equity		$	330,163		$	322,003		$	285,728
Less: Goodwill			30,201			27,329			27,329
Less: Other intangible assets			25,919			15,421			18,391
Tangible common equity (c)			274,043			279,253			240,008
Total common shares issued and outstanding (d)			17,125			17,122			17,050
Tangible book value per common share (c)/(d)		$	16.00		$	16.31		$	14.08

		Three months ended									Year ended
		December 31,			September 30,			December 31,			December 31,			December 31,
		2020			2020			2019			2020			2019
Return on Average Tangible Common Equity
Net income		$	10,180		$	17,659		$	7,652		$	44,675		$	29,540
Add: Intangible amortization expense (net of tax)			782			782			782			3,129			3,224
Net income, excluding intangible amortization (e)			10,962			18,441			8,434			47,804			32,764
Average total equity			329,210			314,921			285,017			310,208			231,084
Less: Average goodwill			27,766			27,329			27,329			27,439			27,329
Less: Average other intangible assets (net of tax)			13,206			12,565			14,912			13,309			16,101
Average tangible common equity (f)			288,238			275,027			242,776			269,460			187,654
Return on average tangible common equity (e)/(f)			15.13	%		26.67	%		13.78	%		17.74	%		17.46	%
Net Interest Margin (tax-equivalent)
Net interest income		$	23,153		$	21,765		$	18,459		$	83,846		$	74,551
Tax-equivalent adjustment			131			116			89			455			347
Tax-equivalent net interest income (g)			23,284			21,881			18,548			84,301			74,898
Average earning assets (h)			2,869,767			2,744,758			2,135,682			2,618,427			2,052,758
Net interest margin (tax-equivalent) (g)/(h)			3.23	%		3.17	%		3.45	%		3.22	%		3.65	%
Efficiency Ratio
Noninterest expense		$	47,125		$	40,214		$	36,435		$	163,799		$	142,537
Less: Intangible amortization expense			990			990			990			3,961			4,081
Adjusted noninterest expense (i)			46,135			39,224			35,445			159,838			138,456
Net interest income			23,153			21,765			18,459			83,846			74,551
Noninterest income			38,696			45,256			29,556			149,371			114,194
Tax-equivalent adjustment			131			116			89			455			347
Total tax-equivalent revenue (j)			61,980			67,137			48,104			233,672			189,092
Efficiency ratio (i)/(j)			74.44	%		58.42	%		73.68	%		68.40	%		73.22	%

Alerus Financial Corporation and Subsidiaries Analysis of Average Balances, Yields, and Rates (unaudited) (dollars in thousands)
		Three months ended																		Year ended
		December 31, 2020						September 30, 2020						December 31, 2019						December 31, 2020						December 31, 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		$	164,052		0.12	%		$	169,770		0.12	%		$	100,058		1.69	%		$	162,616		0.41	%		$	34,876		1.88	%
Investment securities (1)			549,198		1.88	%			443,705		2.04	%			296,773		2.38	%			425,219		2.12	%			266,204		2.47	%
Loans held for sale			122,820		2.18	%			90,634		2.44	%			51,766		3.01	%			79,201		2.46	%			36,035		3.16	%
Loans
Commercial:
Commercial and industrial			745,415		4.91	%			782,853		4.34	%			473,489		5.30	%			687,266		4.60	%			500,652		5.45	%
Real estate construction			40,009		4.31	%			32,747		4.47	%			23,901		5.20	%			32,804		4.54	%			23,625		5.45	%
Commercial real estate			545,432		3.82	%			525,514		4.02	%			460,457		4.71	%			523,219		4.18	%			448,869		4.95	%
Total commercial			1,330,856		4.45	%			1,341,114		4.22	%			957,847		5.01	%			1,243,289		4.42	%			973,146		5.22	%
Consumer
Residential real estate first mortgage			471,125		3.73	%			460,995		3.96	%			454,854		4.15	%			463,174		3.97	%			455,635		4.23	%
Residential real estate junior lien			149,456		4.72	%			153,326		4.54	%			179,714		5.29	%			159,844		4.81	%			184,972		5.63	%
Other revolving and installment			76,466		4.53	%			79,343		4.50	%			88,896		4.69	%			79,238		4.57	%			93,226		4.65	%
Total consumer			697,047		4.03	%			693,664		4.15	%			723,464		4.50	%			702,256		4.23	%			733,833		4.64	%
Total loans (1)			2,027,903		4.30	%			2,034,778		4.20	%			1,681,311		4.79	%			1,945,545		4.35	%			1,706,979		4.97	%
Federal Reserve/FHLB stock			5,794		4.46	%			5,871		4.40	%			5,774		4.67	%			5,846		4.55	%			8,664		5.08	%
Total interest earning assets			2,869,767		3.51	%			2,744,758		3.54	%			2,135,682		4.27	%			2,618,427		3.69	%			2,052,758		4.56	%
Noninterest earning assets			158,417						163,386						153,838						156,713						159,235
Total assets		$	3,028,184					$	2,908,144					$	2,289,520					$	2,775,140					$	2,211,993
Interest-Bearing Liabilities
Interest-bearing demand deposits		$	622,854		0.19	%		$	589,633		0.27	%		$	442,945		0.52	%		$	551,861		0.29	%		$	428,162		0.47	%
Money market and savings deposits			1,012,497		0.20	%			961,669		0.32	%			698,533		1.19	%			920,072		0.53	%			681,621		1.22	%
Time deposits			208,378		0.79	%			204,969		0.98	%			195,963		1.72	%			203,413		1.16	%			186,781		1.62	%
Short-term borrowings			—		—	%			—		—	%			—		—	%			80		—	%			71,421		2.53	%
Long-term debt			58,726		5.68	%			58,739		5.70	%			58,760		6.05	%			58,742		5.81	%			58,789		6.14	%
Total interest-bearing liabilities			1,902,455		0.43	%			1,815,010		0.55	%			1,396,201		1.26	%			1,734,168		0.71	%			1,426,774		1.31	%
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits			738,319						698,594						559,363						673,676						512,586
Other noninterest-bearing liabilities			58,200						79,619						48,939						57,088						41,549
Stockholders’ equity			329,210						314,921						285,017						310,208						231,084
Total liabilities and stockholders’ equity		$	3,028,184					$	2,908,144					$	2,289,520					$	2,775,140					$	2,211,993
Net interest rate spread					3.08	%					2.99	%					3.01	%					2.98	%					3.25	%
Net interest margin, tax-equivalent (2)					3.23	%					3.17	%					3.45	%					3.22	%					3.65	%

(1)	Taxable-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.
(2)	Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

 

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