Alerus Financial Corporation (NASDAQ:ALRS) Q2 2020 Earnings Conference Call July 29, 2020 10:00 AM ET Company Participants Randy Newman – Chairman, President and Chief Executive Officer Katie Lorenson – Chief Financial Officer Karin Taylor – Chief Risk Officer Conference Call Participants Jeff Rulis – D.A. Davidson William Wallace – Raymond James Bob Shone – Piper Sandler Operator Good morning, and welcome to the Alerus Financial Corporation Second Quarter 2020 Earnings Conference Call. All participants wil ...

PART 1. FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents Alerus Financial Corporation's unaudited consolidated financial statements for Q1 2020 and 2019, covering balance sheets, income, comprehensive income, equity, and cash flows [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$2.51 billion** from **$2.36 billion** at year-end 2019, driven by cash, securities, and loans, with liabilities rising due to a **$150.2 million** deposit increase Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$2,512,078** | **$2,356,878** | | Net Loans | $1,731,258 | $1,697,355 | | Investment Securities, at fair value | $354,149 | $313,158 | | Cash and cash equivalents | $198,489 | $144,006 | | **Total Liabilities** | **$2,218,470** | **$2,071,150** | | Total Deposits | $2,121,514 | $1,971,316 | | **Total Stockholders' Equity** | **$293,608** | **$285,728** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income for Q1 2020 decreased to **$5.4 million** from **$6.4 million** in Q1 2019, primarily due to lower net interest income and higher noninterest expenses Consolidated Income Statement Highlights (Unaudited) | (in thousands, except per share data) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $18,837 | $19,120 | | Provision for loan losses | $2,500 | $2,220 | | Noninterest Income | $27,189 | $25,074 | | Noninterest Expense | $36,726 | $33,514 | | **Net Income** | **$5,363** | **$6,436** | | Diluted earnings per common share | $0.30 | $0.46 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income for Q1 2020 increased to **$10.6 million** from **$8.7 million** in Q1 2019, driven by net income and unrealized gains on securities Comprehensive Income (Unaudited) | (in thousands) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net Income | $5,363 | $6,436 | | Other comprehensive income (loss), net of tax | $5,213 | $2,275 | | **Total comprehensive income** | **$10,576** | **$8,711** | [Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Stockholders' equity increased to **$293.6 million** from **$285.7 million** at year-end 2019, driven by net income and other comprehensive income, partially offset by dividends - Key changes in stockholders' equity for Q1 2020 include: Net income of **$5.4 million**, other comprehensive income of **$5.2 million**, common stock dividends of (**$2.6 million**), and common stock repurchases of (**$0.3 million**)[11](index=11&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash increased by **$54.5 million** in Q1 2020, with **$21.2 million** used in operations and **$71.6 million** in investing, offset by **$147.2 million** from financing activities Cash Flow Summary (Unaudited) | (in thousands) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | ($21,166) | ($1,399) | | Net cash provided (used) by investing activities | ($71,567) | ($14,088) | | Net cash provided (used) by financing activities | $147,216 | $19,684 | | **Net change in cash and cash equivalents** | **$54,483** | **$4,197** | [Notes to Consolidated Financial Statements (Unaudited)](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed disclosures on accounting policies, new standards, and financial statement line items, including COVID-19 impacts, loan details, and PPP participation - The company is an "emerging growth company" under the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards[28](index=28&type=chunk)[29](index=29&type=chunk) - The company expects the COVID-19 pandemic to impact its 2020 operations and financial results, including additional loan loss reserves and costs for emergency preparedness, with the full impact currently unknown[26](index=26&type=chunk) - Subsequent to the quarter end, as of April 21, 2020, the company had assisted over 900 clients in securing approximately **$300 million** of PPP financing, expecting to receive **$8.9 million** in net processing fees[147](index=147&type=chunk) - The company executed a PPPL Facility Agreement with the Federal Reserve Bank of Minneapolis to provide additional liquidity for its PPP lending activities[149](index=149&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2020 financial condition and operations, highlighting COVID-19 impacts, decreased net income, noninterest income growth, and increased loan loss allowance [Recent Developments](index=43&type=section&id=Recent%20Developments) This section details the significant impact of COVID-19 on operations, outlining policy responses like the CARES Act and the company's active participation in the PPP - The company anticipates significant adverse impacts on its business from COVID-19, particularly affecting borrowers in retail, restaurant, and hospitality industries, and expects decreases in assets under administration/management and mortgage originations[169](index=169&type=chunk) - Company response to COVID-19 includes offering payment deferrals for up to 90 days for consumer, small business, and commercial customers[171](index=171&type=chunk) - As of April 21, 2020, the company had assisted over 900 borrowers in receiving approval for approximately **$300 million** in PPP loans[173](index=173&type=chunk) [Operating Results Overview](index=49&type=section&id=Operating%20Results%20Overview) Q1 2020 performance shows a decline in profitability ratios, with return on average assets at **0.89%** and noninterest income contributing **59.07%** of revenue Key Performance Ratios | Performance Ratios | March 31, 2020 | Dec 31, 2019 | March 31, 2019 | | :--- | :--- | :--- | :--- | | Return on average total assets | 0.89% | 1.33% | 1.20% | | Return on average tangible common equity (non-GAAP) | 9.76% | 13.78% | 18.99% | | Net interest margin (taxable-equivalent basis) (non-GAAP) | 3.35% | 3.45% | 3.86% | | Efficiency ratio (non-GAAP) | 77.47% | 73.68% | 73.30% | | Tangible book value per common share (non-GAAP) | $14.55 | $14.08 | $11.25 | [Discussion and Analysis of Results of Operations](index=52&type=section&id=Discussion%20and%20Analysis%20of%20Results%20of%20Operations) Net income decreased to **$5.4 million** in Q1 2020, primarily due to higher noninterest expense and increased loan loss provision, partially offset by noninterest income growth - Net interest income decreased by **$283 thousand** year-over-year to **$18.8 million**, as a 31 basis point reduction in loan yields outweighed the benefit of lower borrowing costs, compressing net interest margin (FTE) to **3.35%** from **3.86%** in Q1 2019[188](index=188&type=chunk)[189](index=189&type=chunk) - The provision for loan losses increased by **$280 thousand** to **$2.5 million**, primarily due to allocations for economic uncertainties related to COVID-19[198](index=198&type=chunk) - Noninterest income grew **8.4%** to **$27.2 million**, led by a **$1.2 million** increase in retirement and benefit services revenue and a **$476 thousand** increase in mortgage banking revenue[202](index=202&type=chunk) - Noninterest expense rose **9.6%** to **$36.7 million**, driven by higher compensation related to mortgage originations and increased technology spending for the 'One Alerus' initiative[205](index=205&type=chunk) [Financial Condition](index=57&type=section&id=Financial%20Condition) Total assets grew to **$2.5 billion**, with total loans increasing to **$1.76 billion** and the allowance for loan losses rising to **$27.0 million** due to COVID-19 impacts Loan Portfolio Composition | (in thousands) | March 31, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Commercial | $1,050,230 | $1,000,225 | +5.0% | | Consumer | $708,047 | $721,054 | -1.8% | | **Total Loans** | **$1,758,277** | **$1,721,279** | **+2.1%** | - Nonperforming loans to total loans decreased to **0.40%** at March 31, 2020, from **0.45%** at December 31, 2019[221](index=221&type=chunk) - The allowance for loan losses to total loans increased to **1.54%** from **1.39%** at year-end 2019, primarily due to increased provision for economic uncertainties from COVID-19[224](index=224&type=chunk) - Stockholders' equity increased by **$7.9 million** to **$293.6 million**, driven by net income and an increase in accumulated other comprehensive income[241](index=241&type=chunk) [Liquidity](index=66&type=section&id=Liquidity) The company maintained strong liquidity, with on-balance sheet liquidity increasing to **$364.3 million** and significant additional funding available from FHLB and unsecured lines - On-balance sheet liquidity, including cash and unencumbered securities, stood at **$364.3 million** at the end of Q1 2020[252](index=252&type=chunk) - The company has access to significant off-balance sheet liquidity, including **$573.3 million** in borrowing capacity from the FHLB and **$102.0 million** in unsecured lines of credit[253](index=253&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=68&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk, showing asset sensitivity where a **+100 bps** rate shock increases net interest income by **1.0%**, while a **-100 bps** shock decreases EVE by **38.6%** Net Interest Income (NII) Sensitivity Analysis (Next 12 Months) | Rate Shock | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | +300 bps | +5.2% | +4.2% | | +100 bps | +1.0% | +1.5% | | -100 bps | -1.2% | -5.4% | Economic Value of Equity (EVE) Sensitivity Analysis | Rate Shock | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | +300 bps | +11.9% | +11.4% | | +100 bps | +7.5% | +6.1% | | -100 bps | -38.6% | -23.2% | [Item 4. Controls and Procedures](index=70&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - The President and CEO and the CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[271](index=271&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter[272](index=272&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=70&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no material pending legal proceedings beyond ordinary routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business[273](index=273&type=chunk) [Item 1A. Risk Factors](index=72&type=section&id=Item%201A.%20Risk%20Factors) This section highlights new risks from the COVID-19 pandemic, including adverse customer impacts and increased loan defaults, and risks associated with PPP participation - The COVID-19 pandemic could adversely impact customers, particularly in the retail, restaurant, and hospitality industries, impairing their ability to meet obligations and potentially leading to a recession[274](index=274&type=chunk)[276](index=276&type=chunk) - The economic impact from COVID-19 is expected to be severe and could result in significant losses in the loan portfolio, materially impacting earnings and capital[279](index=279&type=chunk) - Participation in the SBA's Paycheck Protection Program (PPP) exposes the company to risks of litigation from customers regarding loan processing and the risk that the SBA may not fund all loan guarantees[279](index=279&type=chunk)[280](index=280&type=chunk)[283](index=283&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities and no material change in the use of IPO proceeds, which were used to pay down short-term borrowings - There were no unregistered sales of equity securities in the period[284](index=284&type=chunk) - Net proceeds from the 2019 IPO have been used by the Bank to pay down short-term borrowings, consistent with the plan described in the prospectus[285](index=285&type=chunk) [Item 3. Defaults Upon Senior Securities](index=74&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities - None[286](index=286&type=chunk) [Item 4. Mine Safety Disclosures](index=75&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[287](index=287&type=chunk) [Item 5. Other Information](index=75&type=section&id=Item%205.%20Other%20Information) The company reports no other information for this item - None[287](index=287&type=chunk) [Item 6. Exhibits](index=76&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications under Rule 13(a)-14(a) and Section 906 of the Sarbanes-Oxley Act, as well as XBRL Instance Documents[289](index=289&type=chunk)

Financial Data and Key Metrics Changes - The company reported a total capital ratio exceeding 10% at the end of Q1 2020, with an allowance to total loan ratio of 1.54% and a nonperforming assets to assets ratio of 0.29% [20][26] - The loan-to-deposit ratio was just under 83% with a solid loan growth of 2% for the quarter [28] - The net interest margin (NIM) dropped by 10 basis points, primarily due to changes in earning asset mix and lower asset yields [31] Business Line Data and Key Metrics Changes - The mortgage division achieved record-breaking total originations of over $229 million, representing an 82% year-over-year increase [32] - The retirement and benefits segment saw assets under administration decline to $27 billion from nearly $32 billion at the end of 2019, with a 21% decrease in assets with asset-based fees [34] - Wealth management revenue experienced a year-over-year increase of nearly 12%, despite a linked-quarter decline due to market conditions [35] Market Data and Key Metrics Changes - The company reported a significant increase in digital engagement, with banking client digital logins rising by 76% in mid-March [12] - The company has diversified its revenue streams, with close to 60% of revenue coming from fee-based areas of professional services, positioning it well against market fluctuations [18][19] Company Strategy and Development Direction - The company emphasized a conservative balance sheet and a diversified business model, which has allowed it to enter the current crisis with strong core operating earnings and credit quality [17][18] - Alerus plans to focus on employee safety and client service while maintaining a strong balance sheet, with intentions to pursue strategic opportunities when the timing is right [24][75] - The company has invested in technology to enhance client interactions and operational efficiency, which has proven beneficial during the pandemic [14][15] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the uncertainty caused by the COVID-19 pandemic but expressed confidence in the company's ability to navigate through the crisis due to its strong foundation [24][75] - The leadership team highlighted the importance of maintaining a fortress balance sheet and core operating earnings to protect and enhance shareholder value [20][24] Other Important Information - The company has proactively reached out to clients, logging over 7,500 calls in response to the pandemic and hosting client webinars on financial topics [12][11] - Alerus has taken over 900 applications and funded over $300 million in loans through the SBA PPP program [13] Q&A Session Summary Question: What is the total exposure to most at-risk portfolios, particularly in hospitality or retail? - Management identified approximately $162 million in exposure to high-risk segments, including accommodation, food service, and retail [40] Question: How do you view the fee income contribution for the year? - Management expressed uncertainty regarding fee income due to market conditions but noted strong performance in mortgage applications [42][44] Question: What is the impact of PPP loans on margin going forward? - Management indicated that PPP loans would have a significant impact on margin, with expectations of stabilization and potential increase in 2020 [50] Question: Can you provide details on the breakdown of PPP loans between new and existing clients? - Approximately $40 million of the $300 million in PPP loans were to existing clients without prior lending relationships, with a focus on existing clients during the first round [54] Question: How does the shutdown impact the retirement and benefits business? - Management noted that while there is a solid pipeline, many clients have paused new business, which could strain future growth [70]

PART I [Business Overview](index=5&type=section&id=Item%201.%20Business) Alerus Financial Corporation is a diversified financial services company with $2.4 billion in assets and $35.0 billion managed/administered as of December 31, 2019, primarily generating noninterest income from its four core segments Key Financial Metrics | Metric | Value (as of Dec 31, 2019) | | :--- | :--- | | Total Assets | $2.4 billion | | Total Loans | $1.7 billion | | Total Deposits | $2.0 billion | | Stockholders' Equity | $285.7 million | | Assets Under Administration (AUA) | $28.9 billion | | Assets Under Management (AUM) | $6.1 billion | | Mortgage Originations (FY 2019) | $946.4 million | - The company generates a majority of its revenue from noninterest income, primarily driven by its retirement and benefit services, wealth management, and mortgage business segments[13](index=13&type=chunk) - Alerus operates under a "One Alerus" initiative, a high-tech, high-touch approach that integrates all product offerings through a primary advisor and a unified client portal called "My Alerus"[16](index=16&type=chunk)[19](index=19&type=chunk) [Company Overview and Products](index=5&type=section&id=Company%20Overview%20and%20Products) - The company's business is structured into four distinct segments: banking, retirement and benefit services, wealth management, and mortgage[9](index=9&type=chunk) - The banking segment offers a broad range of lending products and sources funds primarily through core deposits, which represented **97.7% of total deposits** as of December 31, 2019[20](index=20&type=chunk)[22](index=22&type=chunk) - The retirement and benefit services business is a national operation offering plan administration, ESOP fiduciary services, payroll, and HSA administration[24](index=24&type=chunk)[25](index=25&type=chunk) - The mortgage segment originated **$946.4 million in loans** in 2019, primarily in the Minneapolis-St. Paul MSA, for its own portfolio and secondary market sales[27](index=27&type=chunk)[28](index=28&type=chunk) [Market Areas and Competition](index=12&type=section&id=Market%20Areas%20and%20Competition) - Primary banking markets include North Dakota, the Twin Cities MSA in Minnesota, and the Phoenix MSA in Arizona, strategically expanded for geographic diversification[29](index=29&type=chunk) - A "National Market" manages retirement and benefit services clients outside core banking areas, accounting for **$23.6 billion in AUA** and **$463.5 million in deposits** at year-end 2019[35](index=35&type=chunk) - Alerus faces intense competition from a wide range of financial institutions, including large national and regional banks, non-bank companies, and online providers[36](index=36&type=chunk) [Supervision and Regulation](index=14&type=section&id=Supervision%20and%20Regulation) - The company and its bank subsidiary are extensively regulated by federal and state agencies, primarily the Federal Reserve and the Office of the Comptroller of the Currency (OCC)[37](index=37&type=chunk) - Subject to Basel III capital framework, the Bank was considered "well-capitalized" under OCC regulations as of December 31, 2019[47](index=47&type=chunk)[55](index=55&type=chunk) - As a bank holding company with financial holding company status, Alerus is regulated by the Federal Reserve under the Bank Holding Company Act of 1956 (BHCA)[58](index=58&type=chunk) - The Bank's ability to pay dividends to the parent company, a primary source of funds, is subject to limitations under the National Bank Act and OCC oversight[77](index=77&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant credit, operational, liquidity, legal, and market risks, including loan portfolio concentration, reliance on noninterest income, cybersecurity threats, regulatory compliance burdens, and interest rate fluctuations [Credit Risks](index=33&type=section&id=Credit%20Risks) - Diligent management of credit risk is crucial, as failure to maintain prudent underwriting standards could lead to loan defaults and increased allowance for loan losses[100](index=100&type=chunk)[101](index=101&type=chunk) - A significant portion of the loan portfolio (**67.1%** at year-end 2019) consists of real estate loans, exposing the company to risks from declines in real estate values and liquidity[111](index=111&type=chunk) - The upcoming Current Expected Credit Loss (CECL) accounting standard, effective January 1, 2023, is expected to increase the allowance for loan losses and may introduce more volatility[106](index=106&type=chunk)[107](index=107&type=chunk) - The loan portfolio is geographically concentrated, with **95.7% of loans** made to borrowers in North Dakota, Minnesota, and Arizona, making the company susceptible to regional economic downturns[109](index=109&type=chunk) [Operational, Strategic and Reputational Risks](index=42&type=section&id=Operational%2C%20Strategic%20and%20Reputational%20Risks) - Noninterest income represented **60.5% of total revenue** in 2019, making the company vulnerable to market conditions that could reduce assets under administration/management and associated fee income[131](index=131&type=chunk) - The retirement and benefit services business experiences significant annual outflows (**$5.4 billion in 2019**) due to client turnover and M&A activity, requiring active acquisitions to maintain and grow AUA/AUM[131](index=131&type=chunk)[144](index=144&type=chunk) - The company is susceptible to fraudulent activity and cybersecurity incidents, and its dependence on third-party technology vendors for core systems presents operational risks[152](index=152&type=chunk)[157](index=157&type=chunk) - The business is highly dependent on its executive management team and key personnel; the loss of these individuals could harm strategic implementation and client relationships[168](index=168&type=chunk)[169](index=169&type=chunk) [Liquidity and Funding Risks](index=65&type=section&id=Liquidity%20and%20Funding%20Risks) - Liquidity is essential, and an inability to raise funds through deposits, borrowings, or asset sales could negatively affect operations, with client deposits being the primary source[215](index=215&type=chunk)[216](index=216&type=chunk) - A high concentration of large depositors exists, with the **10 largest relationships accounting for 9.2% of total deposits** as of December 31, 2019, posing a liquidity risk if these funds are withdrawn[222](index=222&type=chunk) - The parent company's liquidity is largely dependent on dividends from the Bank, which are subject to regulatory limitations[223](index=223&type=chunk) [Legal, Accounting and Compliance Risks](index=69&type=section&id=Legal%2C%20Accounting%20and%20Compliance%20Risks) - The extensively regulated banking industry means failure to comply with laws from agencies like the Federal Reserve and OCC could result in sanctions, fines, or reputational damage[252](index=252&type=chunk) - As a public company, Alerus is subject to Exchange Act and Sarbanes-Oxley reporting requirements, increasing legal and financial compliance costs[239](index=239&type=chunk) - As an "emerging growth company," Alerus uses an extended transition period for new accounting standards, potentially making its financial statements not directly comparable to other public companies[284](index=284&type=chunk)[545](index=545&type=chunk) - The Federal Reserve's "source of strength" doctrine may require the parent company to commit capital resources to support the Bank, potentially when resources are limited[275](index=275&type=chunk) [Market and Interest Rate Risks](index=88&type=section&id=Market%20and%20Interest%20Rate%20Risks) - The company's earnings are subject to interest rate risk, as net interest income depends on the spread between interest earned on assets and interest paid on liabilities[299](index=299&type=chunk) - The securities portfolio, valued at **$313.2 million (13.3% of total assets)** at year-end 2019, is subject to market value fluctuations, particularly with rising interest rates[301](index=301&type=chunk) - The company's common stock is relatively thinly traded, which could lead to price volatility and make it difficult for investors to buy or sell shares without impacting the market price[304](index=304&type=chunk) [Unresolved Staff Comments](index=92&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - None[310](index=310&type=chunk) [Properties](index=92&type=section&id=Item%202.%20Properties) The company's corporate headquarters are in Grand Forks, North Dakota, operating a network of owned and leased properties for banking and specialized retirement and benefit services across multiple states - The corporate headquarters is located at 401 Demers Avenue, Grand Forks, North Dakota 58201[311](index=311&type=chunk) - The company operates a mix of owned and leased properties across its market areas, including full-service banking offices and specialized offices for its retirement and benefit services segment[312](index=312&type=chunk)[314](index=314&type=chunk) [Legal Proceedings](index=93&type=section&id=Item%203.%20Legal%20Proceedings) The company and its subsidiaries are not party to any material pending legal proceedings beyond routine litigation incidental to its business - The Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business[315](index=315&type=chunk) [Mine Safety Disclosures](index=93&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[316](index=316&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=94&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock began trading on Nasdaq (ALRS) on September 13, 2019, post-IPO, with a policy of quarterly dividends subject to discretion and regulation, and IPO proceeds used to reduce short-term borrowings - The company's common stock began trading on the Nasdaq Stock Market under the symbol "ALRS" on **September 13, 2019**, previously quoted on the OTCQX Marketplace[317](index=317&type=chunk) - The company intends to maintain or increase its quarterly dividend, subject to board discretion, financial condition, and regulatory restrictions from the DGCL and the Federal Reserve[322](index=322&type=chunk)[323](index=323&type=chunk)[325](index=325&type=chunk) - On September 17 and 25, 2019, the company sold a total of **3,289,000 shares** of common stock in its initial public offering, with net proceeds held at the Bank to pay down short-term borrowings[327](index=327&type=chunk)[329](index=329&type=chunk) [Selected Financial Data](index=98&type=section&id=Item%206.%20Selected%20Financial%20Data) Selected financial data for the five years ended December 31, 2019, shows consistent growth in assets, loans, and deposits, with net income reaching **$29.5 million** in 2019, driven by noninterest income, and key ratios like ROAA and ROAE demonstrating variability Consolidated Statements of Income Data (in thousands) | (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net Income** | $29,540 | $25,866 | $15,001 | $14,036 | $17,010 | | **Total Assets** | $2,356,878 | $2,179,070 | $2,136,081 | $2,050,045 | $1,744,324 | | **Total Loans** | $1,721,279 | $1,701,850 | $1,574,474 | $1,366,952 | $1,126,921 | | **Total Deposits** | $1,971,316 | $1,775,096 | $1,834,962 | $1,785,209 | $1,458,021 | | **Total Stockholders' Equity** | $285,728 | $196,954 | $179,594 | $168,251 | $182,282 | Key Performance Ratios | Ratio | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | **Return on average total assets (ROAA)** | 1.34% | 1.21% | 0.75% | | **Return on average common equity (ROAE)** | 12.78% | 13.81% | 8.49% | | **Noninterest income as a % of revenue** | 60.50% | 57.73% | 60.36% | | **Efficiency ratio** | 73.22% | 73.80% | 75.36% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=101&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2019, net income increased **14.2% to $29.5 million**, primarily driven by a surge in mortgage banking revenue and noninterest income, with total assets growing to **$2.4 billion** and the allowance for loan losses reaching **$23.9 million** [Results of Operations](index=107&type=section&id=Results%20of%20Operations) Key Financial Performance (2019 vs 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | **Net Income** | $29.5M | $25.9M | +14.2% | | **Diluted EPS** | $1.91 | $1.84 | +3.8% | | **ROAA** | 1.34% | 1.21% | +13 bps | | **Net Interest Income** | $74.6M | $75.2M | -0.9% | | **Noninterest Income** | $114.2M | $102.7M | +11.1% | | **Noninterest Expense** | $142.5M | $136.3M | +4.6% | - The increase in 2019 net income was primarily driven by an **$8.2 million (46.4%) increase** in mortgage banking revenue, resulting from higher mortgage originations (**$946.4 million in 2019** vs. $779.7 million in 2018)[385](index=385&type=chunk)[386](index=386&type=chunk) - Net interest margin decreased by **19 basis points to 3.65%** in 2019 from 3.84% in 2018, primarily due to a **41 basis point increase** in the average rate paid on interest-bearing liabilities[374](index=374&type=chunk) - The provision for loan losses decreased to **$7.3 million** in 2019 from $8.6 million in 2018, attributed to improved credit quality and a decrease in criticized loan balances[381](index=381&type=chunk) [Segment Reporting](index=114&type=section&id=Segment%20Reporting) Segment Income Before Taxes (in millions) | Segment (Income before taxes) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | **Banking** | $33.4M | $33.6M | -0.7% | | **Retirement & Benefit Services** | $28.4M | $26.9M | +5.6% | | **Wealth Management** | $8.3M | $8.1M | +2.1% | | **Mortgage** | $5.2M | $1.3M | +300% | - The Mortgage segment's income surged due to a **21.4% increase in originations** and a transition to mandatory delivery of mortgages into the secondary market[418](index=418&type=chunk) - Retirement and Benefit Services AUA & AUM increased by **$4.1 billion to $31.9 billion** at year-end 2019, primarily driven by a **$4.5 billion positive market impact**[407](index=407&type=chunk) [Financial Condition](index=119&type=section&id=Financial%20Condition) - Total assets increased by **$177.8 million to $2.4 billion** at year-end 2019, driven by increases in cash, investment securities, and loans[420](index=420&type=chunk) Key Balance Sheet Items (in billions/millions) | Balance Sheet Item | Dec 31, 2019 | Dec 31, 2018 | Change | | :--- | :--- | :--- | :--- | | **Total Loans** | $1.72B | $1.70B | +1.1% | | **Allowance for Loan Losses** | $23.9M | $22.2M | +7.7% | | **Total Deposits** | $1.97B | $1.78B | +11.1% | | **Total Stockholders' Equity** | $285.7M | $197.0M | +45.0% | - The allowance for loan losses to total loans ratio increased to **1.39%** from 1.30% in the prior year, while nonperforming loans to total loans remained low at **0.45%**[467](index=467&type=chunk) - Total stockholders' equity increased significantly by **$88.7 million**, primarily due to **$62.8 million** in net proceeds from the initial public offering and **$29.5 million** in net income[484](index=484&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=139&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed by ALCO, with the balance sheet being asset-sensitive as of December 31, 2019, projecting a **1.5% increase in net interest income** for a 100 basis point rate hike - The company's primary market risk is interest rate risk, managed by the Asset and Liability Committee (ALCO) to control the exposure of net interest income to rate fluctuations[503](index=503&type=chunk)[504](index=504&type=chunk) Estimated Impact on Net Interest Income from Interest Rate Changes | Interest Rate Change | Estimated Impact on Net Interest Income (Next 12 Months) | | :--- | :--- | | +200 basis points | +2.9% | | +100 basis points | +1.5% | | -100 basis points | -5.4% | - As of December 31, 2019, the company's balance sheet is considered asset sensitive, indicating that net interest income is expected to benefit from a rising interest rate environment[510](index=510&type=chunk) [Financial Statements and Supplementary Data](index=142&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for the three years ended December 31, 2019, with an unqualified opinion from CliftonLarsonAllen LLP, including detailed notes on accounting policies, segment information, regulatory matters, and the potential impact of COVID-19 - The independent registered public accounting firm, CliftonLarsonAllen LLP, issued an unqualified opinion on the consolidated financial statements[519](index=519&type=chunk) - The company adopted the new lease accounting standard (ASU 2016-02) on **January 1, 2019**, recognizing operating lease right-of-use assets of **$8.3 million** and operating lease liabilities of **$8.9 million**[598](index=598&type=chunk)[524](index=524&type=chunk) - Subsequent to year-end, the company noted the COVID-19 pandemic and significant declines in equity markets, stating the full impact is unknown but may affect 2020 operations, including potential increases in loan loss reserves[771](index=771&type=chunk)[772](index=772&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=209&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[774](index=774&type=chunk) [Controls and Procedures](index=209&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal controls reported, and no management assessment of internal control over financial reporting included as permitted for newly public companies - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of **December 31, 2019**[775](index=775&type=chunk) - The report does not include a management assessment of internal control over financial reporting, as allowed by a transition period for newly public companies[776](index=776&type=chunk) [Other Information](index=209&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[778](index=778&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=209&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2020 annual meeting of shareholders - Information required by this item is incorporated by reference from the Company's Proxy Statement for the 2020 annual meeting of shareholders[779](index=779&type=chunk) [Executive Compensation](index=209&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the company's definitive proxy statement for the 2020 annual meeting of shareholders - Information required by this item is incorporated by reference from the Company's Proxy Statement for the 2020 annual meeting of shareholders[780](index=780&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=210&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section details the company's equity compensation plans, showing **347,211 securities** to be issued from outstanding awards and **1,100,000 available** for future issuance under shareholder-approved plans as of December 31, 2019 Equity Compensation Plan Information (as of December 31, 2019) | Plan Category | Securities to be Issued | Securities Available for Future Issuance | | :--- | :--- | :--- | | **Equity compensation plans approved by shareholders** | 347,211 | 1,100,000 | | **Equity compensation plans not approved by shareholders** | 0 | 0 | | **Total** | **347,211** | **1,100,000** | [Certain Relationships and Related Transactions, and Director Independence](index=210&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2020 annual meeting of shareholders - Information required by this item is incorporated by reference from the Company's Proxy Statement for the 2020 annual meeting of shareholders[783](index=783&type=chunk) [Principal Accounting Fees and Services](index=210&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2020 annual meeting of shareholders - Information required by this item is incorporated by reference from the Company's Proxy Statement for the 2020 annual meeting of shareholders[784](index=784&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=211&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements from Item 8 and exhibits filed with the Form 10-K, including corporate governance documents, capital stock descriptions, executive compensation agreements, and CEO/CFO certifications, with all financial statement schedules omitted - The consolidated financial statements are located in Item 8 of the report[786](index=786&type=chunk) - All financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes[786](index=786&type=chunk) [Form 10-K Summary](index=213&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no Form 10-K summary for this item - None[789](index=789&type=chunk)

Alerus Financial Corp (NASDAQ:ALRS) Q4 2019 Earnings Conference Call January 29, 2020 10:00 AM ET Company Participants Randy Newman - Chairman, President & CEO Katie Lorenson - EVP & CFO Karin Taylor - EVP & Chief Risk Officer Conference Call Participants Jeffrey Rulis - D.A. Davidson & Co. Daniel Cardenas - Raymond James & Associates, Inc. Nathan Race - Piper Sandler & Co. Operator Good day, and welcome to the Alerus Financial Corporation's earnings conference call. [Operator Instructions]. Please note tha ...

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