Alerus Financial Corporation (NASDAQ:ALRS) Q1 2021 Earnings Conference Call April 29, 2021 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 Nate Race – Piper Sandler William Wallace – Raymond James Operator Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. [Operator instructions] Please note tha ...

Financial Performance - As of December 31, 2020, Alerus Financial Corporation had total assets of $3.0 billion, total loans of $2.0 billion, and total deposits of $2.6 billion[21]. - The company reported $1.8 billion in mortgage originations for the year ended December 31, 2020[21]. - Noninterest income accounted for approximately 64.1% of total revenue for the year ended December 31, 2020, highlighting the company's reliance on fee-based services[177]. - The retirement and benefit services division experienced outflows of $6.8 billion in 2020, partially offset by inflows of $4.8 billion, indicating significant client turnover and market volatility[177]. - The company's 10 largest client relationships contributed approximately 11.6% of revenue in the retirement and benefit services business, emphasizing the risk of revenue loss if any major client terminates their relationship[193]. Assets and Loans - Core deposits totaled $2.5 billion, representing 97.5% of total deposits as of December 31, 2020[32]. - The company had mortgage loans held for sale amounting to $122.4 million as of December 31, 2020[36]. - Retirement and benefit services assets under administration/management totaled $25.0 billion as of December 31, 2020, representing approximately 76.0% of total retirement and benefit services assets[44]. - Approximately 61.3% of the total loan portfolio consisted of loans with real estate as a primary or secondary component of collateral, making the repayment highly dependent on real estate market conditions[152]. - Nonperforming loans totaled $5.1 million, or 0.26% of the total loan portfolio, as of December 31, 2020, which could negatively impact net interest income[162]. Capital and Regulatory Compliance - The Company and the Bank are subject to the Basel III Rule, which requires a minimum Common Equity Tier 1 Capital ratio of 4.5% of total risk-weighted assets[71]. - As of December 31, 2020, the Bank was well-capitalized, meeting all regulatory capital requirements and maintaining a capital conservation buffer of 2.5%[77]. - The Basel III Rule increased the required minimum capital ratios, with a total capital requirement of 8% of risk-weighted assets[71]. - The Company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more to be considered well-capitalized[76]. - The Federal Reserve requires bank holding companies to be well-capitalized and well-managed to effect interstate mergers or acquisitions[83]. Risk Management - The Bank's ability to manage credit risk is critical, with potential adverse effects on financial condition if credit risk is not effectively managed[139]. - The Bank is subject to the Community Reinvestment Act (CRA), which requires it to meet the credit needs of the entire community, including low- and moderate-income neighborhoods[121]. - The Bank's operational risk includes potential cybersecurity incidents and the effectiveness of its information security controls[134]. - The company is susceptible to fraudulent activity and cybersecurity-related incidents, which could result in financial losses and damage to reputation[200]. - Adverse economic conditions in the company's market areas could materially affect business, financial condition, and growth prospects[147]. Business Strategy and Growth - Alerus Financial Corporation's business model generates a majority of revenue from noninterest income, primarily from retirement and benefit services, wealth management, and mortgage segments[22]. - The "One Alerus" initiative aims to provide a cohesive client experience and enhance technology investments[25]. - The company plans to pursue organic growth by increasing loans, deposits, AUM, and AUA, but faces risks related to execution and market conditions[181]. - The company intends to expand through acquisitions of banks and financial services companies, but may encounter challenges in identifying suitable targets and securing regulatory approvals[182]. - The success of the company's growth strategies is contingent upon maintaining sufficient regulatory capital levels and favorable economic conditions in primary market areas[181]. Employee and Workforce - The company employs a total of 851 employees, with 794 being full-time and 57 part-time[46]. - The company has a diverse workforce, with 561 female employees and 290 male employees[46]. - The company’s compensation programs are designed to align employee compensation with company performance, including base salary and performance bonuses[51]. Market Presence - The company targets businesses with sales between $2.0 million and $100.0 million, focusing on specific high-priority industries[24]. - As of December 31, 2020, 93.5% of the loans in the loan portfolio were made to borrowers in North Dakota, Minnesota, and Arizona, indicating a high concentration risk in these states[148]. - The Twin Cities MSA had total deposits of $218.0 billion as of June 30, 2020, ranking as the 14th largest metropolitan statistical area in the U.S.[40]. - The Phoenix MSA had total deposits of $134.8 billion as of June 30, 2020, ranking as the 21st largest metropolitan statistical area in the U.S.[43].

Financial Data and Key Metrics Changes - Alerus achieved record net income of $44.675 million for 2020, with fully diluted earnings per share of $2.52, return on equity of 14.41%, return on tangible capital of 17.74%, and return on assets of 1.61% [7] - The stock price increased from $22.50 per share at the beginning of 2020 to $27.37 per share at year-end, despite a low of $15.26 on April 1, 2020 [7] Business Line Data and Key Metrics Changes - Mortgage originations surpassed $600 million in Q4 2020, totaling nearly $1.8 billion for the year, with a shift to 55% in refinancing [9][10] - Fee income comprised over 64% of total revenue in 2020, with retirement revenue aligning with expectations and assets in the division reaching $34 billion [11] - Wealth management production exceeded expectations despite market volatility [12] Market Data and Key Metrics Changes - Loans increased by $258 million since December 2019, driven by a $212.7 million increase in commercial and industrial loans due to PPP [16] - Commercial line utilization remained low at 21% at year-end, down from 34% at the end of 2019 [17] Company Strategy and Development Direction - Alerus continues to focus on organic and inorganic growth strategies, successfully completing its 14th fee income acquisition [6] - The company emphasizes a strong culture and technology investments to enhance client service and operational efficiency [15] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the ongoing impact of COVID-19 but expressed confidence in the company's resilience and ability to navigate uncertainties [20] - Expectations for loan growth in 2021 are cautious due to high liquidity levels and borrower hesitancy [20] Other Important Information - The company recorded net recoveries of $1.5 million in Q4, with a decrease in provision expense to $1.4 million [19] - Alerus plans to normalize expenses in 2021 to around $40 million per quarter [14] Q&A Session Summary Question: Outlook for mortgage unit and fee income - Management expects a 30% decline in mortgage origination in Q1 2021 compared to record levels in Q4 2020, with pipeline valuation expected to unwind [24][25] Question: Capital management priorities - The board is focused on capital management, including reviewing dividend strategies and potential acquisitions [27] Question: Core margin outlook excluding PPP - Core net interest margin is projected to drop below 3% due to excess liquidity and lack of loan growth [32] Question: Mortgage gain on sale expectations - Anticipated margins are expected to return to pre-COVID levels of around 2.7% [35] Question: Participation in second round of PPP - Early indications suggest most applications received are for second draw loans, with steady application pace [41][42]

COVID-19 Response and Relief Programs - Alerus helped over 1,632 new and existing clients secure approximately $364 million in Paycheck Protection Program (PPP) funding relief[10, 14] - As of December 31, 2020, $836 million of PPP loans were forgiven or repaid[15] - Payment deferrals, maturity extensions, and payment modifications were offered to consumer, residential real estate (serviced and non-serviced), commercial real estate, and commercial & industrial loan groups[12, 13] Financial Performance and Capital Strength - For the year ended December 31, 2020, net income was $44675 thousand, or $252 earnings per common share – diluted[26] - The return on average tangible common equity was 1774% for the year ended December 31, 2020[26] - As of December 31, 2020, core deposits totaled $26 billion, representing 975% of total deposits[29] - Tangible Common Equity/Tangible Assets was 104%[16] - Total liquidity as of December 31, 2020, was approximately $1940909 thousand, including cash and cash equivalents of $172962 thousand and unencumbered securities of $431513 thousand[16] Asset Quality and Loan Portfolio - As of December 31, 2020, Nonperforming Assets (NPAs) / Assets was 017%[17] - Reserves / NPLs was 678% and Reserves / Loans was 173%[19] - The loan portfolio is well-diversified by total commitment, including unfunded commitments[22] - The company's residential real estate portfolio has an average FICO score of 754 for serviced loans and 779 for non-serviced loans[69] Business Segment Revenue Mix - Wealth Management accounted for 8% of revenue[42] - Market Sensitive Revenue accounted for 42%[46]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-39036 ALERUS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 45-0375407 (State or other jurisdiction of incorporation ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-39036 ALERUS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 45-0375407 (State or other jurisdiction of incorporation or ( ...

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)