ALERUS FINANCIAL CORPORATION REPORTS Third QUARTER 2024 NET INCOME OF $5.2 MILLION Form 8 K

ALERUS FINANCIAL CORPORATION REPORTS

Third QUARTER 2024 NET INCOME OF $5.2 MILLION

MINNEAPOLIS, MN (October 29, 2024) - Alerus Financial Corporation (Nasdaq: ALRS), or the Company, reported net income of $5.2 million for the third quarter of 2024, or $0.26 per diluted common share, compared to net income of $6.2 million, or $0.31 per diluted common share, for the second quarter of 2024, and net income of $9.2 million, or $0.45 per diluted common share, for the third quarter of 2023.

CEO Comments

President and Chief Executive Officer Katie Lorenson said, "Earlier this month we closed on our 26th and largest acquisition in company history. In the transaction, we acquired a strong core deposit base and strategically expanded into the vibrant Rochester and Southern Minnesota markets. Throughout the quarter and ahead of this closing, we continued to make long term investments to support and grow our uniquely diversified business model and revenue streams. We continued to demonstrate our position as an employer of choice, with the addition of a specialized equipment leasing team and key hires to drive growth and efficiencies throughout our organization, especially in our retirement and benefit services segment.

We have continued to see market share gains and growth of our client base both in adding new business and deepening relationships with current clients. This year, our retirement and benefits business has grown over 19%, our wealth management business has grown 18%, and we have grown loans nearly 10% and deposits over 7% in a very challenging and competitive environment.

Credit quality remains a key area of focus. Early identification of problem loans coupled with proactive and decisive actions are part of our credit culture. We continue to closely monitor and proactively downgrade loans where we see potential or emerging weaknesses. Normalization of credit continued during the quarter, as two large relationships drove the increase in nonaccrual loans. Charge-offs to average loans for the quarter were 0.04% and reserves to loans was stable at 1.29%.

We are focused on efficient headcount management, and balancing investments in talent, technology and infrastructure, while remaining committed to a strong balance sheet, capital levels, and improving performance as a bigger and better combined entity.

Thank you to the team members both new and long tenured for your hard work, dedication and invaluable contributions supporting our company, our clients and our communities, and helping us on our journey to achieving new milestones and our return to high-performance and top tier financial results."

Third Quarter Highlights

■

Total loans were $3.0 billion as of September 30, 2024, an increase of $272.8 million, or 9.9%, from December 31, 2023.

■

Total deposits were $3.3 billion as of September 30, 2024, an increase of $227.9 million, or 7.4%, from December 31, 2023; brokered deposits remained at $0.

■

The loan to deposit ratio as of September 30, 2024 was 91.2%, compared to 89.1% as of December 31, 2023.

■

Noninterest income, which represented 55.7% of total revenues, was $28.4 million in the third quarter of 2024, an increase of 3.6% from $27.4 million in the second quarter of 2024.

■

Total assets under administration/management at September 30, 2024 were $45.6 billion, a 4.8% increase from June 30, 2024.

■

Net charge-offs to average loans were 0.04% in the third quarter of 2024, a decrease of 32 basis points from 0.36% in the second quarter of 2024.

■

Tangible book value per common share (non-GAAP) was $16.50 as of September 30, 2024, a 6.7% increase from December 31, 2023.

■

Tangible common equity to tangible assets (non-GAAP) was 8.11% at September 30, 2024, an increase of 85 basis points from 7.26% in the second quarter of 2024.

■

Common equity tier 1 capital to risk weighted assets as of September 30, 2024 was 11.12% and continues to be well above the minimum threshold to be "well capitalized" of 6.50%.

	■	Repaid Bank Term Funding Program ("BTFP") borrowings, resulting in risk-free net interest income of $1.2 million earned during the course of the year to date.
	■	$400.0 million of interest rate swaps matured during the third quarter of 2024, which drove increased liability sensitivity as the Federal Reserve began to cut interest rates. Of the remaining $400.0 million of interest rate swaps, $200.0 million will mature in January 2025.

HMN Financial Acquisition

On October 9, 2024, the Company completed its previously announced acquisition of HMN Financial, Inc. and its subsidiary, Home Federal Savings Bank (together, "HMNF"). The transaction expands the Company's franchise into Rochester, Minnesota and represents the largest bank acquisition in its history. With the addition of HMNF, the Company now has over $5.5 billion in total assets, $3.8 billion in total loans, $4.3 billion in total deposits, and asset under administration and management of approximately $43.6 billion, with 29 locations across the Midwest, as well as Arizona.

Selected Financial Data (unaudited)

		As of and for the
		Three months ended			Nine months ended
		September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)		2024			2024			2023			2024			2023
Performance Ratios
Return on average total assets			0.48	%			0.58	%			0.95	%			0.56	%			0.93	%
Adjusted return on average total assets (1)			0.57	%			0.65	%			0.75	%			0.62	%			0.85	%
Return on average common equity			5.52	%			6.76	%			10.05	%			6.43	%			9.79	%
Return on average tangible common equity (1)			7.83	%			9.40	%			13.51	%			8.98	%			13.27	%
Adjusted return on average tangible common equity (1)			9.04	%			10.30	%			10.97	%			9.80	%			12.27	%
Noninterest income as a % of revenue			55.72	%			53.28	%			58.21	%			54.10	%			54.51	%
Net interest margin (tax-equivalent)			2.23	%			2.39	%			2.27	%			2.31	%			2.50	%
Adjusted net interest margin (tax-equivalent) (1)			2.35	%			2.47	%			2.24	%			2.41	%			2.46	%
Efficiency ratio (1)			80.29	%			72.50	%			73.37	%			77.17	%			73.57	%
Adjusted efficiency ratio (1)			77.71	%			70.80	%			77.03	%			75.50	%			74.58	%
Net charge-offs/(recoveries) to average loans			0.04	%			0.36	%			(0.09	)%			0.14	%			(0.04	)%
Dividend payout ratio			76.92	%			64.52	%			42.22	%			66.29	%			43.08	%
Per Common Share
Earnings per common share - basic		$	0.26			$	0.31			$	0.46			$	0.90			$	1.31
Earnings per common share - diluted		$	0.26			$	0.31			$	0.45			$	0.89			$	1.30
Adjusted earnings per common share - diluted (1)		$	0.31			$	0.34			$	0.36			$	0.98			$	1.19
Dividends declared per common share		$	0.20			$	0.20			$	0.19			$	0.59			$	0.56
Book value per common share		$	19.53			$	18.87			$	17.60
Tangible book value per common share (1)		$	16.50			$	15.77			$	14.32
Average common shares outstanding - basic			19,788				19,777				19,872				19,768				19,977
Average common shares outstanding - diluted			20,075				20,050				20,095				20,037				20,193
Other Data
Retirement and benefit services assets under administration/management		$	41,249,280			$	39,389,533			$	34,552,569
Wealth management assets under administration/management		$	4,397,505			$	4,172,290			$	3,724,091
Mortgage originations		$	82,388			$	109,254			$	109,637			$	245,743			$	298,626

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

Results of Operations

Net Interest Income

Net interest income for the third quarter of 2024 was $22.5 million, a $1.5 million, or 6.1%, decrease from the second quarter of 2024. The decrease was primarily due to a decrease in interest income on lower cash balances, lower purchase accounting accretion from the Metro Phoenix Bank acquisition, and increased interest expense on higher deposit balances. These pressures were partially offset by an increase in interest income on higher average loan balances.

Net interest income increased $2.1 million, or 10.5%, from $20.4 million for the third quarter of 2023. Interest income increased $10.2 million, or 24.2%, from the third quarter of 2023, primarily driven by strong organic loan growth at higher yields, in addition to higher cash balances due to the BTFP. The increase in interest income was partially offset by an $8.0 million, or 37.1%, increase in interest expense, due to both an increase in rates paid on interest-bearing deposits and higher deposit and short-term borrowing balances.

Net interest margin (on a tax-equivalent basis) was 2.23% for the third quarter of 2024, a 16 basis point decrease from 2.39% for the second quarter of 2024, and a 4 basis point decrease from 2.27% for the third quarter of 2023. The decrease in net interest margin (on a tax-equivalent basis) was mainly attributable to less purchase accounting accretion, the impact of nonaccrual loans, and higher cost of funds from growth in average interest-bearing deposit balances. This was partially offset by strong loan growth. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings and purchase accounting accretion, was 2.35% for the third quarter of 2024, an 11 basis point decrease from 2.47% for the second quarter of 2024, and an 11 basis point increase from 2.24% for the third quarter of 2023.

Noninterest Income

Noninterest income for the third quarter of 2024 was $28.4 million, a $1.0 million increase from the second quarter of 2024. The quarter over quarter increase was primarily driven by improvement across all fee-based businesses. Wealth revenues increased $0.3 million during the third quarter of 2024, a 5.1% increase from the second quarter of 2024. Retirement and benefit services revenue increased $0.1 million for the third quarter of 2024, a 0.4% increase from the second quarter of 2024 results. Combined assets under administration/management in wealth and retirement and benefit services increased 4.8% from June 30, 2024. The increase in wealth, retirement and benefit services revenue, and assets under administration/management was primarily due to improved equity and bond markets. Additionally, other noninterest income increased $0.6 million during the third quarter of 2024, a 28.7% increase from the second quarter of 2024, primarily due to a gain on the sale of fixed assets related to the sale of the Shorewood, Minnesota office in the western suburbs of the Twin Cities.

Noninterest income for the third quarter of 2024 decreased by $44 thousand, or 0.2%, from the third quarter of 2023. Wealth revenues increased $1.4 million, or 26.8%, in the third quarter of 2024, due to an increase in assets under administration/management of 5.4% during that same period. Other noninterest income increased $0.8 million, or 46.1% in the third quarter of 2024 compared to the third quarter of 2023, primarily due to a gain on the sale of fixed assets related to the sale of the Shorewood, Minnesota office and increased client swap fees. Offsetting these increases, retirement and benefit services revenue decreased $2.5 million, or 13.2%, from $18.6 million in the third quarter of 2023, driven by the divestiture of the ESOP trustee business in the third quarter of 2023 which resulted in a one-time recognized gain of $2.8 million.

Noninterest Expense

Noninterest expense for the third quarter of 2024 was $42.4 million, a $3.7 million, or 9.5%, increase from the second quarter of 2024. Professional fees and assessments increased $1.9 million, or 79.8%, from the second quarter of 2024, primarily driven by increased merger-related expenses of $1.1 million in connection with the acquisition of HMNF. Compensation expenses increased $0.8 million, or 3.9%, from the second quarter of 2024, primarily driven by experienced talent acquisitions in commercial lending and increased labor costs. Business services, software and technology expense increased $0.3 million, or 6.1%, from the second quarter of 2024, primarily driven by increased data processing expenses and custodian fees. Occupancy and equipment expense increased $0.3 million, or 14.7%, from the second quarter of 2024, primarily driven by increased rent and depreciation expense driven by the opening of the Shoreview, Minnesota office in the northern suburbs of the Twin Cities in July 2024.

Noninterest expense for the third quarter of 2024 increased $5.2 million, or 13.9%, from $37.3 million in the third quarter of 2023. The increase was primarily driven by professional fees and assessments, compensation and employee taxes and benefits. Professional fees and assessments increased primarily due to increased merger-related expenses of $1.7 million in connection with the acquisition of HMNF and an increase in Federal Deposit Insurance Corporation ("FDIC") assessments. Compensation expense increased $2.0 million, or 10.4%, in the third quarter of 2024, primarily due to increased labor costs. Employee taxes and benefits expense increased $0.5 million, or 10.3%, primarily due to increased costs related to group insurance.

Financial Condition

Total assets were $4.1 billion as of September 30, 2024, an increase of $176.9 million, or 4.5%, from December 31, 2023. The increase was primarily due to a $272.8 million increase in loans, partially offset by a decrease of $63.9 million in cash and cash equivalents and a decrease of $35.6 million in investment securities.

Loans

Total loans were $3.0 billion as of September 30, 2024, an increase of $272.8 million, or 9.9%, from December 31, 2023. The increase was primarily driven by a $116.7 million increase in non-owner occupied commercial real estate ("CRE") loans, a $49.6 million increase in construction, land and development CRE loans, a $44.1 million increase in commercial and industrial loans, a $30.3 million increase in multifamily CRE loans and a $24.7 million increase in owner occupied CRE loans, partially offset by $7.4 million and $17.2 million decreases in residential real estate first lien and construction loans, respectively.

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

		September 30,			June 30,			March 30,			December 31,			September 30,
(dollars in thousands)		2024			2024			2024			2023			2023
Commercial
Commercial and industrial		$	606,245			$	591,779			$	575,259			$	562,180			$	547,644
Commercial real estate
Construction, land and development			173,629				161,751				125,966				124,034				97,742
Multifamily			275,377				242,041				260,609				245,103				214,148
Non-owner occupied			686,071				647,776				565,979				569,354				504,827
Owner occupied			296,366				283,356				285,211				271,623				264,458
Total commercial real estate			1,431,443				1,334,924				1,237,765				1,210,114				1,081,175
Agricultural
Land			45,821				41,410				41,149				40,832				41,581
Production			39,436				40,549				36,436				36,141				34,743
Total agricultural			85,257				81,959				77,585				76,973				76,324
Total commercial			2,122,945				2,008,662				1,890,609				1,849,267				1,705,143
Consumer
Residential real estate
First lien			690,451				686,286				703,726				697,900				680,634
Construction			11,808				22,573				18,425				28,979				37,159
HELOC			134,301				126,211				120,501				118,315				116,296
Junior lien			36,445				36,323				36,381				35,819				36,381
Total residential real estate			873,005				871,393				879,033				881,013				870,470
Other consumer			36,393				35,737				29,833				29,303				30,817
Total consumer			909,398				907,130				908,866				910,316				901,287
Total loans		$	3,032,343			$	2,915,792			$	2,799,475			$	2,759,583			$	2,606,430

Deposits

Total deposits were $3.3 billion as of September 30, 2024, an increase of $227.9 million, or 7.4%, from December 31, 2023. Interest-bearing deposits increased $298.5 million, while noninterest-bearing deposits decreased $70.5 million, from December 31, 2023. The increase in total deposits was due to both expanded and new commercial deposit relationships and synergistic deposit growth. Synergistic deposits were $920.6 million as of September 30, 2024, an increase of $69.1 million, or 8.1%, from December 31, 2023. The Company continued to have $0 of brokered deposits as of September 30, 2024.

The following table presents the composition of the Company's deposit portfolio as of the dates indicated:

		September 30,			June 30,			March 30,			December 31,			September 30,
(dollars in thousands)		2024			2024			2024			2023			2023
Noninterest-bearing demand		$	657,547			$	701,428			$	692,500			$	728,082			$	717,990
Interest-bearing
Interest-bearing demand			1,034,694				1,003,585				938,751				840,711				759,812
Savings accounts			75,675				79,747				82,727				82,485				88,341
Money market savings			1,067,187				1,022,470				1,114,262				1,032,771				959,106
Time deposits			488,447				491,345				456,729				411,562				346,935
Total interest-bearing			2,666,003				2,597,147				2,592,469				2,367,529				2,154,194
Total deposits		$	3,323,550			$	3,298,575			$	3,284,969			$	3,095,611			$	2,872,184

Asset Quality

Total nonperforming assets were $48.0 million as of September 30, 2024, an increase of $39.3 million from December 31, 2023. $25.0 million of the increase was primarily driven by one construction, land and development loan moving to nonaccrual status in the second quarter of 2024. During the third quarter of 2024, management elected to make protective advances in order for construction to continue on that project. Management is actively working with the borrower on strategies to complete construction, preserve value and support repayment of the loan. A large residential real estate relationship and one CRE non-owner occupied loan moving to nonaccrual status also contributed $13.6 million to the increase in nonaccrual loans during the third quarter of 2024.

As of September 30, 2024, the allowance for credit losses on loans was $39.1 million, or 1.29% of total loans, compared to $35.8 million, or 1.30% of total loans, as of December 31, 2023.

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

		As of and for the three months ended
		September 30,			June 30,			March 30,			December 31,			September 30,
(dollars in thousands)		2024			2024			2024			2023			2023
Nonaccrual loans		$	48,026			$	27,618			$	7,345			$	8,596			$	9,007
Accruing loans 90+ days past due			-				-				-				139				-
Total nonperforming loans			48,026				27,618				7,345				8,735				9,007
OREO and repossessed assets			-				-				3				32				3
Total nonperforming assets		$	48,026			$	27,618			$	7,348			$	8,767			$	9,010
Net charge-offs/(recoveries)			316				2,522				58				(238	)			(594	)
Net charge-offs/(recoveries) to average loans			0.04	%			0.36	%			0.01	%			(0.04	)%			(0.09	)%
Nonperforming loans to total loans			1.58	%			0.95	%			0.26	%			0.32	%			0.35	%
Nonperforming assets to total assets			1.18	%			0.63	%			0.17	%			0.22	%			0.23	%
Allowance for credit losses on loans to total loans			1.29	%			1.31	%			1.31	%			1.30	%			1.39	%
Allowance for credit losses on loans to nonperforming loans			82	%			139	%			498	%			410	%			403	%

For the third quarter of 2024, the Company had net charge-offs of $0.3 million, compared to net charge-offs of $2.5 million for the second quarter of 2024 and net recoveries of $0.6 million for the third quarter of 2023. The quarter-over-quarter decrease in net charge-offs was driven by a $2.6 million charge-off of one commercial and industrial loan in the second quarter of 2024.

The Company recorded a provision for credit losses of $1.7 million for the third quarter of 2024, compared to a provision for credit losses of $4.5 million for the second quarter of 2024 and no provision for credit losses for the third quarter of 2023. The provision for credit losses for the third quarter of 2024 was primarily driven by loan growth and an increase in nonaccrual loans.

The unearned fair value adjustments on the acquired Metro Phoenix Bank loan portfolio were $3.8 million as of September 30, 2024, $5.2 million as of December 31, 2023, and $5.5 million as of September 30, 2023.

Capital

Total stockholders' equity was $386.5 million as of September 30, 2024, an increase of $17.4 million from December 31, 2023. This change was primarily driven by an improvement in accumulated other comprehensive loss of $10.2 million and an increase in retained earnings of $6.2 million. Tangible book value per common share (non-GAAP) increased to $16.50 as of September 30, 2024, from $15.46 as of December 31, 2023. Tangible common equity to tangible assets (non-GAAP) increased to 8.11% as of September 30, 2024, from 7.94% as of December 31, 2023. Common equity tier 1 capital to risk weighted assets decreased to 11.12% as of September 30, 2024, from 11.82% as of December 31, 2023.

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

		September 30,			December 31,			September 30,
		2024			2023			2023
Capital Ratios(1)
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets			11.12	%			11.82	%			13.01	%
Tier 1 capital to risk weighted assets			11.38	%			12.10	%			13.30	%
Total capital to risk weighted assets			14.04	%			14.76	%			16.10	%
Tier 1 capital to average assets			9.30	%			10.57	%			11.14	%
Tangible common equity / tangible assets (2)			8.11	%			7.94	%			7.47	%
Alerus Financial, N.A.
Common equity tier 1 capital to risk weighted assets			10.73	%			11.40	%			12.68	%
Tier 1 capital to risk weighted assets			10.73	%			11.40	%			12.68	%
Total capital to risk weighted assets			11.98	%			12.51	%			13.86	%
Tier 1 capital to average assets			8.90	%			9.92	%			10.72	%

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

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

Conference Call

The Company will host a conference call at 11:00 a.m. Central Time on Wednesday, October 30, 2024, to discuss its financial results. Attendees are encouraged to register ahead of time for the call at investors.alerus.com. The call can also be accessed via telephone at +1 (833) 470-1428, using access code 572067. 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 (Nasdaq: ALRS) is a commercial wealth bank and national retirement services provider with corporate offices in Grand Forks, North Dakota, and the Minneapolis-St. Paul, Minnesota metropolitan area. Through its subsidiary, Alerus Financial, National Association, Alerus provides diversified and comprehensive financial solutions to business and consumer clients, including banking, wealth services, and retirement and benefit plans and services. Alerus provides clients with a primary point of contact to help fully understand the unique needs and delivery channel preferences of each client. Clients are provided with competitive products, valuable insight, and sound advice supported by digital solutions designed to meet the clients' needs.

Alerus operates 29 banking and commercial wealth offices, with locations in Grand Forks and Fargo, North Dakota; the Minneapolis-St. Paul, Minnesota metropolitan area; Rochester, Minnesota; the southern Minnesota area; Marshalltown, Iowa; Pewaukee, Wisconsin; and Phoenix and Scottsdale, Arizona. Alerus also operates a commercial wealth office in La Crosse, Wisconsin. Alerus Retirement and Benefit serves advisors, brokers, employers, and plan participants across the United States.

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, adjusted tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, pre-provision net revenue, adjusted noninterest income, adjusted noninterest expense, adjusted pre-provision net revenue, adjusted efficiency ratio, adjusted net income, adjusted return on average assets, adjusted return on average tangible common equity, net interest margin (tax-equivalent), adjusted net interest margin (tax-equivalent), and adjusted earnings per common share - diluted. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy and financial performance. Reconciliations of non-GAAP disclosures used in this press release to the comparable GAAP measures are provided in the accompanying tables. Management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.

These non-GAAP financial measures should not be considered in isolation or as a substitute for total stockholders' equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates 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 the Company makes 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 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 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 forward-looking statements include, among others, the following: interest rate risk, including the effects of changes in interest rates; our ability to successfully manage credit risk and maintain an adequate level of allowance for credit losses; new or revised accounting standards; business and economic conditions generally and in the financial services industry, nationally and within our market areas, including the level and impact of inflation and possible recession; the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in recent bank failures; our ability to raise additional capital to implement our business plan; the overall health of the local and national real estate market; concentrations within our loan portfolio; the concentration of large loans to certain borrowers; our ability to successfully manage credit risk; the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies, including the integration of HMNF which the Company acquired in the fourth quarter of 2024; 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 or our third-party vendors' information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools; 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, including from non-banks such as credit unions, Fintech companies and digital asset service providers; our ability to successfully manage liquidity risk, including our need to access higher cost sources of funds such as fed funds purchased and short-term borrowings; the concentration of large deposits from certain clients, including those who have balances above current FDIC insurance limits; 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 the Company may become subject; potential impairment to the goodwill the Company recorded in connection with our past acquisitions, including the acquisitions of Metro Phoenix Bank and HMNF; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes, including in response to recent bank failures; fluctuations in the values of the securities held in our securities portfolio, including as a result of changes in interest rates; governmental monetary, trade and fiscal policies; risks related to climate change and the negative impact it may have on our customers and their businesses; severe weather, natural disasters, widespread disease or pandemics; acts of war or terrorism, including the ongoing conflict in the Middle East and the Russian invasion of Ukraine, or other adverse external events; any material weaknesses in our internal control over financial reporting; changes to U.S. or state tax laws, regulations and guidance; potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election; talent and labor shortages and employee turnover; 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. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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

		September 30,			December 31,
		2024			2023
Assets		(Unaudited)
Cash and cash equivalents		$	65,975			$	129,893
Investment securities
Trading, at fair value			2,708				-
Available-for-sale, at fair value			466,003				486,736
Held-to-maturity, at amortized cost (with an allowance for credit losses on investments of $137 and $151, respectively)			281,913				299,515
Loans held for sale			13,487				11,497
Loans			3,032,343				2,759,583
Allowance for credit losses on loans			(39,142	)			(35,843	)
Net loans			2,993,201				2,723,740
Land, premises and equipment, net			18,790				17,940
Operating lease right-of-use assets			9,268				5,436
Accrued interest receivable			16,469				15,700
Bank-owned life insurance			35,793				33,236
Goodwill			46,783				46,783
Other intangible assets			13,186				17,158
Servicing rights			1,874				2,052
Deferred income taxes, net			33,054				34,595
Other assets			86,136				83,432
Total assets		$	4,084,640			$	3,907,713
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing		$	657,547			$	728,082
Interest-bearing			2,666,003				2,367,529
Total deposits			3,323,550				3,095,611
Short-term borrowings			244,700				314,170
Long-term debt			59,041				58,956
Operating lease liabilities			9,643				5,751
Accrued expenses and other liabilities			61,220				64,098
Total liabilities			3,698,154				3,538,586
Stockholders' equity
Preferred stock, $1 par value, 2,000,000 shares authorized: 0 issued and outstanding			-				-
Common stock, $1 par value, 30,000,000 shares authorized: 19,790,005 and 19,734,077 issued and outstanding			19,790				19,734
Additional paid-in capital			151,257				150,343
Retained earnings			278,863				272,705
Accumulated other comprehensive loss			(63,424	)			(73,655	)
Total stockholders' equity			386,486				369,127
Total liabilities and stockholders' equity		$	4,084,640			$	3,907,713

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,
		2024			2024			2023			2024			2023
Interest Income		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Loans, including fees		$	42,593			$	41,663			$	34,986			$	123,551			$	99,187
Investment securities
Taxable			4,596				4,845				6,146				14,008				18,222
Exempt from federal income taxes			169				170				182				512				558
Other			4,854				6,344				724				16,200				2,221
Total interest income			52,212				53,022				42,038				154,271				120,188
Interest Expense
Deposits			22,285				21,284				14,436				63,721				36,218
Short-term borrowings			6,706				7,053				6,528				19,748				15,684
Long-term debt			679				684				679				2,041				1,999
Total interest expense			29,670				29,021				21,643				85,510				53,901
Net interest income			22,542				24,001				20,395				68,761				66,287
Provision for credit losses			1,661				4,489				-				6,150				550
Net interest income after provision for credit losses			20,881				19,512				20,395				62,611				65,737
Noninterest Income
Retirement and benefit services			16,144				16,078				18,605				47,876				49,977
Wealth management			6,684				6,360				5,271				19,161				15,915
Mortgage banking			2,573				2,554				2,510				6,796				7,132
Service charges on deposit accounts			488				456				328				1,333				940
Other			2,474				1,923				1,693				5,891				5,475
Total noninterest income			28,363				27,371				28,407				81,057				79,439
Noninterest Expense
Compensation			21,058				20,265				19,071				60,655				57,076
Employee taxes and benefits			5,400				5,134				4,895				16,722				15,472
Occupancy and equipment expense			2,082				1,815				1,883				5,803				5,619
Business services, software and technology expense			4,879				4,599				4,774				14,823				15,367
Intangible amortization expense			1,324				1,324				1,324				3,972				3,972
Professional fees and assessments			4,267				2,373				1,716				8,633				4,397
Marketing and business development			764				651				750				2,200				2,139
Supplies and postage			422				370				410				1,321				1,275
Travel			330				332				322				954				876
Mortgage and lending expenses			684				467				689				1,592				1,401
Other			1,237				1,422				1,426				3,543				3,909
Total noninterest expense			42,447				38,752				37,260				120,218				111,503
Income before income tax expense			6,797				8,131				11,542				23,450				33,673
Income tax expense			1,590				1,923				2,381				5,604				7,222
Net income		$	5,207			$	6,208			$	9,161			$	17,846			$	26,451
Per Common Share Data
Earnings per common share		$	0.26			$	0.31			$	0.46			$	0.90			$	1.31
Diluted earnings per common share		$	0.26			$	0.31			$	0.45			$	0.89			$	1.30
Dividends declared per common share		$	0.20			$	0.20			$	0.19			$	0.59			$	0.56
Average common shares outstanding			19,788				19,777				19,872				19,768				19,977
Diluted average common shares outstanding			20,075				20,050				20,095				20,037				20,193

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,
		2024			2024			2023			2023
Tangible Common Equity to Tangible Assets
Total common stockholders' equity		$	386,486			$	373,226			$	369,127			$	349,402
Less: Goodwill			46,783				46,783				46,783				46,783
Less: Other intangible assets			13,186				14,510				17,158				18,482
Tangible common equity (a)			326,517				311,933				305,186				284,137
Total assets			4,084,640				4,358,623				3,907,713				3,869,138
Less: Goodwill			46,783				46,783				46,783				46,783
Less: Other intangible assets			13,186				14,510				17,158				18,482
Tangible assets (b)			4,024,671				4,297,330				3,843,772				3,803,873
Tangible common equity to tangible assets (a)/(b)			8.11	%			7.26	%			7.94	%			7.47	%
Adjusted Tangible Common Equity to Tangible Assets
Tangible assets (b)		$	4,024,671			$	4,297,330			$	3,843,772			$	3,803,873
Less: Cash proceeds from BTFP			-				355,000				-				-
Adjusted tangible assets (c)			4,024,671				3,942,330				3,843,772				3,803,873
Adjusted tangible common equity to tangible assets (a)/(c)			8.11	%			7.91	%			7.94	%			7.47	%
Tangible Book Value Per Common Share
Total common stockholders' equity		$	386,486			$	373,226			$	369,127			$	349,402
Less: Goodwill			46,783				46,783				46,783				46,783
Less: Other intangible assets			13,186				14,510				17,158				18,482
Tangible common equity (d)			326,517				311,933				305,186				284,137
Total common shares issued and outstanding (e)			19,790				19,778				19,734				19,848
Tangible book value per common share (d)/(e)		$	16.50			$	15.77			$	15.46			$	14.32

		Three months ended			Nine months ended
		September 30,			June 30,			September 30,			September 30,			September 30,
		2024			2024			2023			2024			2023
Return on Average Tangible Common Equity
Net income		$	5,207			$	6,208			$	9,161			$	17,846			$	26,451
Add: Intangible amortization expense (net of tax) (1)			1,046				1,046				1,046				3,138				3,138
Net income, excluding intangible amortization (f)			6,253				7,254				10,207				20,984				29,589
Average total equity			375,229				369,217				361,735				370,758				361,260
Less: Average goodwill			46,783				46,783				46,882				46,783				47,018
Less: Average other intangible assets (net of tax) (1)			10,933				11,969				15,109				11,969				16,149
Average tangible common equity (g)			317,513				310,465				299,744				312,006				298,093
Return on average tangible common equity (f)/(g)			7.83	%			9.40	%			13.51	%			8.98	%			13.27	%
Efficiency Ratio
Noninterest expense		$	42,447			$	38,752			$	37,260			$	120,218			$	111,503
Less: Intangible amortization expense			1,324				1,324				1,324				3,972				3,972
Adjusted noninterest expense (h)			41,123				37,428				35,936				116,246				107,531
Net interest income			22,542				24,001				20,395				68,761				66,287
Noninterest income			28,363				27,371				28,407				81,057				79,439
Tax-equivalent adjustment			314				255				180				816				444
Total tax-equivalent revenue (i)			51,219				51,627				48,982				150,634				146,170
Efficiency ratio (h)/(i)			80.29	%			72.50	%			73.37	%			77.17	%			73.57	%

(1)	Items calculated after-tax utilizing a marginal income tax rate of 21.0%.

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)

		Three months ended			Nine months ended
		September 30,			June 30,			September 30,			September 30,			September 30,
		2024			2024			2023			2024			2023
Pre-Provision Net Revenue
Net interest income		$	22,542			$	24,001			$	20,395			$	68,761			$	66,287
Add: Noninterest income			28,363				27,371				28,407				81,057				79,439
Less: Noninterest expense			42,447				38,752				37,260				120,218				111,503
Pre-provision net revenue		$	8,458			$	12,620			$	11,542			$	29,600			$	34,223
Adjusted Noninterest Income
Noninterest income		$	28,363			$	27,371			$	28,407			$	81,057			$	79,439
Less: Adjusted noninterest income items
BOLI mortality proceeds (non-taxable)			-				-				-				-				1,196
Gain on sale of ESOP trustee business			-				-				2,775				-				2,775
Net gain on sale of premises and equipment			476				-				-				476				-
Total adjusted noninterest income items (j)			476				-				2,775				476				3,971
Adjusted noninterest income (k)		$	27,887			$	27,371			$	25,632			$	80,581			$	75,468
Adjusted Noninterest Expense
Noninterest expense		$	42,447			$	38,752			$	37,260			$	120,218			$	111,503
Less: Adjusted noninterest expense items
HMNF merger- and acquisition-related expenses			1,661				563				-				2,251				-
Severance and signing bonus expense			31				315				343				626				1,475
Total adjusted noninterest expense items (l)			1,692				878				343				2,877				1,475
Adjusted noninterest expense (m)		$	40,755			$	37,874			$	36,917			$	117,341			$	110,028
Adjusted Pre-Provision Net Revenue
Net interest income		$	22,542			$	24,001			$	20,395			$	68,761			$	66,287
Add: Adjusted noninterest income (k)			27,887				27,371				25,632				80,581				75,468
Less: Adjusted noninterest expense (m)			40,755				37,874				36,917				117,341				110,028
Adjusted pre-provision net revenue		$	9,674			$	13,498			$	9,110			$	32,001			$	31,727
Adjusted Efficiency Ratio
Adjusted noninterest expense (m)		$	40,755			$	37,874			$	36,917			$	117,341			$	110,028
Less: Intangible amortization expense			1,324				1,324				1,324				3,972				3,972
Adjusted noninterest expense for efficiency ratio (n)			39,431				36,550				35,593				113,369				106,056
Tax-equivalent revenue
Net interest income			22,542				24,001				20,395				68,761				66,287
Add: Adjusted noninterest income (k)			27,887				27,371				25,632				80,581				75,468
Add: Tax-equivalent adjustment			314				255				180				816				444
Total tax-equivalent revenue (o)			50,743				51,627				46,207				150,158				142,199
Adjusted efficiency ratio (n)/(o)			77.71	%			70.80	%			77.03	%			75.50	%			74.58	%
Adjusted Net Income
Net income		$	5,207			$	6,208			$	9,161			$	17,846			$	26,451
Less: Adjusted noninterest income items (net of tax) (1) (j)			376				-				2,192				376				3,388
Add: Adjusted noninterest expense items (net of tax) (1) (l)			1,337				694				271				2,273				1,165
Adjusted net income (p)		$	6,168			$	6,902			$	7,240			$	19,743			$	24,228
Adjusted Return on Average Assets
Average total assets (q)		$	4,298,080			$	4,297,294			$	3,821,601			$	4,245,181			$	3,799,645
Adjusted return on average assets (p)/(q)			0.57	%			0.65	%			0.75	%			0.62	%			0.85	%
Adjusted Return on Average Tangible Common Equity
Adjusted net income (p)		$	6,168			$	6,902			$	7,240			$	19,743			$	24,228
Add: Intangible amortization expense (net of tax) (1)			1,046				1,046				1,046				3,138				3,138
Adjusted net income, excluding intangible amortization (r)			7,214				7,948				8,286				22,881				27,366
Average total equity			375,229				369,217				361,735				370,758				361,260
Less: Average goodwill			46,783				46,783				46,882				46,783				47,018
Less: Average other intangible assets (net of tax)			10,933				11,969				15,109				11,969				16,149
Average tangible common equity (s)			317,513				310,465				299,744				312,006				298,093
Return on average tangible common equity (r)/(s)			9.04	%			10.30	%			10.97	%			9.80	%			12.27	%

(1)	Items calculated after-tax utilizing a marginal income tax rate of 21.0%.

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)

		Three months ended			Nine months ended
		September 30,			June 30,			September 30,			September 30,			September 30,
		2024			2024			2023			2024			2023
Adjusted Net Interest Margin (Tax-Equivalent)
Net interest income		$	22,542			$	24,001			$	20,395			$	68,761			$	66,287
Less: BTFP cash interest income			4,113				4,766				-				12,494				-
Add: BTFP interest expense			3,717				4,307				-				11,291				-
Less: Purchase accounting net accretion			152				985				294				1,429				969
Net interest income excluding BTFP impact			21,994				22,557				20,101				66,129				65,318
Add: Tax equivalent adjustment for loans and securities			314				255				180				816				444
Adjusted net interest income (t)		$	22,308			$	22,812			$	20,281			$	66,945			$	65,762
Interest earning assets			4,077,716				4,075,003				3,591,478				4,024,942				3,574,675
Less: Average cash proceeds balance from BTFP			303,043				355,000				-				309,051				-
Add: Change in unearned purchase accounting discount			152				985				294				1,429				969
Adjusted interest earning assets (u)		$	3,774,825			$	3,720,988			$	3,591,772			$	3,717,320			$	3,575,644
Adjusted net interest margin (tax-equivalent) (t)/(u)			2.35	%			2.47	%			2.24	%			2.41	%			2.46	%
Adjusted Earnings Per Common Share - Diluted
Adjusted net income (p)		$	6,168			$	6,902			$	7,240			$	19,743			$	24,228
Less: Dividends and undistributed earnings allocated to participating securities			24				38				67				102				186
Net income available to common stockholders (v)			6,144				6,864				7,173				19,641				24,042
Weighted-average common shares outstanding for diluted earnings per share (w)			20,075				20,050				20,095				20,037				20,193
Adjusted earnings per common share - diluted (v)/(w)		$	0.31			$	0.34			$	0.36			$	0.98			$	1.19

(1)	Items calculated after-tax utilizing a marginal income tax rate of 21.0%.

Alerus Financial Corporation and Subsidiaries

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

(dollars in thousands)

		Three months ended			Nine months ended
		September 30, 2024			June 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
						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		$	326,350				5.47	%		$	448,245				5.38	%		$	29,450				3.09	%		$	375,365				5.39	%		$	35,892				3.45	%
Investment securities (1)			749,062				2.55				756,413				2.69				971,913				2.60				760,219				2.58				1,004,436				2.52
Loans held for sale			15,795				3.20				16,473				8.91				16,518				5.55				13,768				6.01				13,822				5.29
Loans
Commercial and industrial			593,685				7.26				578,544				7.39				523,263				6.61				578,839				7.21				524,083				6.54
CRE − Construction, land and development			184,611				5.68				126,744				8.01				88,450				8.52				146,454				7.03				93,098				7.46
CRE − Multifamily			242,558				5.62				243,076				5.52				209,020				5.17				245,372				5.57				171,043				5.15
CRE − Non-owner occupied			663,539				5.88				617,338				5.90				491,948				5.34				615,320				5.85				492,098				5.15
CRE − Owner occupied			289,963				5.41				283,754				5.47				256,983				5.22				284,315				5.41				253,460				5.03
Agricultural − Land			42,162				4.93				40,932				4.72				40,685				4.85				41,138				4.80				39,417				4.77
Agricultural − Production			40,964				6.84				38,004				6.69				32,386				6.68				38,110				6.65				29,377				6.42
RRE − First lien			689,382				3.98				694,866				4.07				681,610				3.83				695,313				4.02				667,041				3.75
RRE − Construction			16,792				3.86				21,225				5.38				33,264				5.14				19,847				4.89				33,693				4.99
RRE − HELOC			130,705				8.00				123,233				8.30				118,965				8.24				124,321				8.19				118,630				7.97
RRE − Junior lien			36,818				5.74				36,181				6.60				35,974				5.89				36,276				6.23				35,034				5.70
Other consumer			37,768				6.76				33,335				6.67				32,288				6.11				33,329				6.64				38,148				5.99
Total loans (1)			2,968,947				5.73				2,837,232				5.88				2,544,836				5.44				2,858,634				5.78				2,495,122				5.30
Federal Reserve/FHLB stock			17,562				8.25				16,640				8.53				28,761				6.83				16,956				8.30				25,403				6.81
Total interest earning assets			4,077,716				5.12				4,075,003				5.26				3,591,478				4.66				4,024,942				5.15				3,574,675				4.51
Noninterest earning assets			220,364								222,291								230,123								220,239								224,970
Total assets		$	4,298,080							$	4,297,294							$	3,821,601							$	4,245,181							$	3,799,645
Interest-Bearing Liabilities
Interest-bearing demand deposits		$	1,003,595				2.31	%		$	959,119				2.24	%		$	751,455				1.34	%		$	944,143				2.18	%		$	757,995				1.16	%
Money market and savings deposits			1,146,896				3.82				1,147,525				3.79				1,073,297				3.20				1,160,391				3.79				1,127,630				2.72
Time deposits			485,533				4.46				458,125				4.50				327,264				3.94				458,545				4.47				276,797				3.26
Fed funds purchased and BTFP			327,543				4.97				366,186				4.90				312,121				5.50				325,455				4.95				320,861				5.23
FHLB short-term advances			200,000				5.20				200,000				5.21				173,913				5.02				200,000				5.13				84,982				4.92
Long-term debt			59,027				4.58				58,999				4.66				58,914				4.57				58,999				4.62				58,886				4.54
Total interest-bearing liabilities			3,222,594				3.66				3,189,954				3.66				2,696,964				3.18				3,147,533				3.63				2,627,151				2.74
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits			628,114								665,930								692,742								656,553								743,253
Other noninterest-bearing liabilities			72,143								72,193								70,160								70,337								67,981
Stockholders' equity			375,229								369,217								361,735								370,758								361,260
Total liabilities and stockholders' equity		$	4,298,080							$	4,297,294							$	3,821,601							$	4,245,181							$	3,799,645
Net interest income (1)
Net interest rate spread							1.46	%							1.60	%							1.48	%							1.52	%							1.77	%
Net interest margin, tax-equivalent (1)							2.23	%							2.39	%							2.27	%							2.31	%							2.50	%

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