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]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001‑39036 ALERUS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 45‑0375407 (State or other juri ...

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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