Good day, and welcome to the Alerus Financial Corporation's earnings conference call. [Operator Instructions]. Please note that this event is being recorded. This call may include forward-looking statements and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's SEC filings. I'd now like to turn the conference over to Alerus Financial Corporation Chairman, President and CEO, Randy Newman. Please go ahead.

Thank you, and good morning, everyone. Let me first begin by giving a high-level overview of the fourth quarter as well as some overall comments about 2019. We are pleased to report net income of $7.652 million for the fourth quarter and record net income for Alaris of $29.54 million, an increase of 14.2% over the $25.87 million reported in 2018. Our CFO, Katie Lorenson, will explain our results in more detail later, but there was about a $2 million in nonrecurring income in 2019. If you take that out, our core earnings increased $1.8 million over 2018 or a 7% increase. Year-to-date ROA was 1.34, ROE was 12.78 and ROTCE was 17.46% for 2019. The ROE and ROTC ratios were influenced both by the increase in earnings, but also by the increase in shareholders' equity from the capital raise in September. Dividends per share increased $0.04 per share to $0.57, and EPS on a fully diluted basis increased from $1.84 in 2018 to $1.91 share in 2019. Earnings per share in 2019 was affected by both the increase in earnings and also by the $3.6 million increase in outstanding shares as a result of the IPO. 2019 was a very successful year for Alerus, both with record financial results as well as with the achievement of several key strategic objectives. With disciplined planning and focused execution, we have significantly improved the foundation of Alerus and established great momentum for us as we begin 2020 and a new decade. In 2019, we exercised a sense of urgency as we made improvements in both our credit quality and credit leadership. We successfully completed an IPO that improved our capital ratios and positioned us well to grow both organically and selectively by acquisitions. We became NASDAQ-listed, which improves our shareholder liquidity and…

Thank you, Randy. Good morning, everyone. Thank you for joining our call today. I will spend just a few minutes today providing some additional color on the financial results for the quarter. In summary, we are very pleased with the results of the quarter, and we look forward to seeing the momentum built in the last few months carrying into a strong 2020. I'll start with a few comments about the net interest income and the margin. Net interest income was fairly stable for the quarter. And excluding a recovery for the third quarter, it would've been up slightly. The net interest margin dropped to 3.45% from 3.60% in the third quarter. This decline was primarily due to the elevated liquidity and the deposit growth and to the growth in the commercial real estate portfolio. We did see a decrease in our funding costs, most significantly in our money market accounts, which include our deposit source from our wealth and retirement lines of business. With the continued pressure on our margins, our focus is on building earnings through our diversified business model and continuing to drive revenue through noninterest income. Our mortgage retirement and wealth management divisions all delivered a great quarter of results to end the year. A couple of highlights to note, starting with our retirement benefits line of business. The fourth quarter included approximately $500,000 of planned document fees. This related to a change in law, IRS regulations in late -- the late third quarter of 2019. It should be noted this is onetime in nature. We also recognized nearly $1 million increase in fees from the third quarter, partly due to seasonality but also related to fee schedule changes that we've been implementing throughout 2019. Revenue share stabilized in the third quarter and returned to an…

[Operator Instructions]. The first question comes from Jeff Rulis, D.A. Davidson.

Just a question on the -- Randy, you spoke about -- in the opening comments, kind of focusing externally. Wanted to get an update on the MY ALERUS transition into 2020 and how that translates to either steady or accelerating efficiency. Maybe more specifically, speak to kind of the expense run rate that you'd expect to see over the balance of the year.

These are all -- this is Katie. I will take that question. So again, a couple of things. MY ALERUS is our way of life. It is our culture. But it also involves many things, such as breaking down our silos throughout the company and, within that, optimizing everything we do and focusing on building these clients through expanding relationships, of course, as well as new client development. So it's very, very broad. But specifically, to the expenses, we look to have low single-digit growth in expenses as we look into 2020. I think run rate in the first quarter should be pretty similar to what we saw in the fourth quarter of 2018 -- or 2019, excuse me.

Got it. Okay. And then, I guess, on the margin, if you exclude that interest recovery in the third quarter, still saw some margin pressure. You kind of walked through some of the reasons for that. I guess the -- what perhaps has changed maybe on the margin front and how that translates to the '20 outlook.

This is Katie, again. Good question. And we do expect to see further compression into Q1 down to around the 3.40% level and really just a result of continued growth in that -- in the deposit portfolio and liquidity and taking some time to put that into the bond portfolio as well as the loan portfolio. So we do expect it to stabilize, assuming no rate changes subsequent -- or in 2020. But the mix is certainly having an impact on some of that compression.

[Operator Instructions]. This concludes our question-and-answer session. I now like to turn the conference back over to Randy Newman. Excuse me, there has -- two questions just came in. One moment, please. Next question comes from Daniel Cardenas from Raymond James.

Maybe if you could provide just kind of a quick update on the M&A front, what's the environment looking like right now and, again, just a reminder of the focus primarily on the retirement and benefit side. Or are you having a renewed interest on the traditional bank side?

Well, we're fortunate. We are looking and we have sourced a number of opportunities that we are looking at, consistent with what we put in the S-1. We like the split we have. We would like to maintain that. And right now, we have been showing some banking and/or branch opportunities. And we have been able to look at a couple of what we call fee income acquisitions primarily, again, or solely in the retirement and benefit areas.

Great. And then on the loan side, really kind of better-than-expected loan growth this quarter. Do you feel that kind of robbed a little bit from Q1 '20? And what's your outlook for overall loan growth in 2020?

Sure, Dan. This is Karin. No, I don't think it necessarily rob from first quarter. We have a fairly solid pipeline. Overall, for 2020, we are still expecting mid-single-digit growth.

Our next question comes from Nathan Race, Piper Sandler.

I apologize I got on a little late. But I was just curious if there was any color provided on the retirement and benefit services fee income and just the growth outlook for 2020. Obviously, a nice increase sequentially in the fourth quarter. So just curious how we should think about the run rate kind of trajecting over the course of this year.

Yes. Great question. This is Katie Lorenson. So the outlook for '20, I would say -- we think it's flat. So it'll actually be down, excluding the onetime $500,000 that we recognized in the fourth quarter. There is some seasonality in the numbers, so we would expect to be in the mid-15 for the first quarter because there is -- there will be less going-forward seasonality, but there will be -- there will always be, because of the ESOP transactions, et cetera, some lumpiness and weighting towards the fourth quarter.

Got you. And Katie, you mentioned there was $500,000 of elevated fees in the fourth quarter, if I caught that right.

That's correct. Yes.

Okay. Great. And just pulling back to credit quality, I'm not sure if it was touched on. But [indiscernible] quarter. I'm just curious if you can provide any color on what drove that and just an overall outlook for provisioning in 2020 as well.

Sure. The increase in nonperforming was due to one commercial real estate loan. It's actually a credit -- has been serviced by our special credit services department for some time. It does continue to pay. However, with some updated information late in the fourth quarter, we did choose to move it to nonaccrual. In general, credit quality has improved, and we believe that it will be fairly stable through the year. In terms of provisioning, we expect it to come down from 2019, probably in the mid-$5 million range.

Okay. That's very helpful. And then I guess just going back to overall balance sheet expectations. I appreciate the commentary on kind of mid-single-digit loan growth. Is the expectation that just given all the synergies that you guys are seeing with One Alerus, that your expectations that deposit growth could exceed loans in 2020?

It's a good question. I think as we look at it, we look for the increases to be fairly aligned. We did capitalize on some significant opportunities in 2019, and we believe there will be a couple more of those as far as the pools of deposits in 2020. But it certainly won't be at the pace that we saw within 2019. That being said, what we've seen from our markets and the growth in the commercial deposits is also really -- in the fourth quarter, was also very impressive. So we do anticipate that, that will help make up some of the ground from the national market not growing at as robust of a pace. So I would put deposit growth in that mid- to upper-single digit range, also.

[Operator Instructions]. This concludes the question-and-answer session. Now I'd like to turn the conference back over to Mr. Randy Newman for any closing remarks.

Thank you. Let me extend our appreciation to everyone who joined our call this morning. Thank you for listening, and thank you for your questions. As you heard in our discussion, 2019 was a very good year for Alerus, both in terms of our solid financial performance and also in terms of achieving strategic nonfinancial initiatives. We balanced long-term strategic technology investments while simultaneously achieving record performance. This is not by chance. We have a long history of planning, backed by an engaged team of employees who continuously perform at high levels. 2019 was transformative in so many ways, and our foundation has never been stronger. With key client technologies in place, an organized team focused on serving our consumer or business clients, continued progress of synergistic growth opportunities and a strong capital position, we have great momentum entering the next decade. Thank you again for joining today's call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.