Good morning and welcome to the Alerus Financial Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note 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 would now like to turn the conference over to Alerus Financial Corporation Chairman, President and CEO, Randy Newman. Please go ahead.

Thank you, Grant and good morning, everyone. This is our sixth earnings call since our IPO in September 2019. This morning, we intend to discuss our fourth quarter 2020 and year-end financial results and also to give a current impact of the COVID-19 pandemic. Today, I'm joined by our Chief Financial Officer, Katie Lorenson; and our Chief Risk Officer, Karin Taylor; and our Chief Revenue Officer, Ryan Goldberg. As always, we appreciate your interest in our company and invite your questions at the end of our introductory remark. Let me first begin by recognizing and thanking all of our almost 850 employees at Alerus are significant achievements in 2020 were a result of their dedicated efforts and reflect their pride and passion that they have in Alerus. Alerus is a purpose driven organization with very strong ethics principles, values, and performance standards, all centered on a guiding principle to do the right thing always and to help our clients and customers achieve their financial goals. During the fourth quarter of 2020, we continued to ensure that our employees are safe, and that we meet the needs of our clients during this period of uncertainty. Our focus and efforts remain the same in the fourth quarter as they have throughout 2020. Katie and Karin will give more specifics in their reports. I would like to focus on a brief summary of 2020. We, like everyone else, did not anticipate COVID and its impact as we began 2020. It did, it has, and it will continue to have an impact on us going forward. That being said and despite this disruption and uncertainty, Alerus achieved record financial results for 2020, continued to execute our organic and inorganic growth strategies by proactively meeting the needs of our employees and clients. We successfully completed…

Thank you, Randy. Good morning everyone. Thank you for joining our call today. What an incredible quarter and a year indeed. We are, of course, very proud of our financial results, but even more proud of how we got there and all of our amazing Alerus team members. So, I'll briefly walk through some of the highlights for the quarter and then I'll hand it off to Karin, who will provide an update on credit related matters, PPP, and provisioning. The trends for the fourth quarter picked up steam right where the third quarter left off and I'll go right into mortgage, which was again a highlight this time with originations blowing right past last quarter's record surpassing $600 million to end the year at nearly $1.8 billion of originations. I've mentioned it before, but I think it's worthy of noting again that this unprecedented volume would not have been possible without those long-term investments we've made in technology and digital. Although our originations are typically weighted towards the purchase side, the mix shifted as expected in 2020 to 55% of total originations in the refi space. Purchase volume did remain strong in 2020 and our mortgage loan officers produced on average over $55 million in 2020. Our capital markets and our operations teams chimed with continued strong margins and a nearly 90% pull through rate on mandatory delivery. We ended the year with almost 6,000 clients purchasing or refinancing their home with Alerus. We are grateful and proud of our team members within the division and across the company who helped make these results possible. As the mortgage application volume came down from its record levels, the valuation of the forward pipeline decreased $2.3 million in the quarter, ending the year at a mark-to-market gain just over $8.8 million…

Thank you, Katie and good morning everyone. First, a brief update on our banking markets. North Dakota and Minnesota both experienced a significant surge in cases through much of November and December. North Dakota remained open for business, while Minnesota increased restrictions on businesses during that time. Those restrictions were lifted earlier this month, Minnesota case numbers decreased. Arizona surge came later and they continue to experience an elevated number of cases. We are serving clients in all markets; virtually, digitally, and in person based on market needs and conditions. Loans increased by $258 million since December of 2019. This is attributable to an increase of $212.7 million in C&I loans, driven by PPP and an increase of $68.3 million in commercial real estate loans. This growth was offset by a decrease in consumer loans of $41 million. Commercial line utilization remained low at the end of the year at 21%. This compares to utilization rate of 34% at year-end 2019. Increased borrower liquidity due to various relief programs including the PPP is contributing to that lower utilization rate. As you know, we successfully executed on the first round of the PPP securing over 1,600 loans for clients totaling $364 million. As of January 25th, we had submitted 763 forgiveness applications to the SBA totaling approx -- totaling approximately $205 million. We had received approval from the SBA for 671 of those applications totaling $115 million. We are accepting applications for round two of the PPP and through January 25th, we had received 212 applications for $26 million. With respect to deferrals, we have granted some type of deferral on about $154 million in balances or 9% of the portfolio. Requests for payment relief remained low during the fourth quarter. Most were one month to grow requests on consumer loans.…

[Operator Instructions] Our first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.

Thank you. Good morning.

Good morning Jeff.

Appreciate the comments on expenses kind of tracking back towards that low $40 million range. Simple -- in the fee income side, I -- a big piece of that is the mortgage unit, any thoughts on the outlook for the -- I mean, you mentioned expectations for production in the first quarter, but kind of net revenues there and/or just absolute fee income? I imagine it's a tough quarter or a tough year to replicate, but any thoughts on the fee income side?

Sure. Morning, Jeff. Thank you for the question. So, on the mortgage side, as I mentioned, we do expect the first quarter to be relatively high compared to prior year certainly, and likely the peak quarter for the year. And so we are estimating an overall decline in origination by around 30%, which is consistent with the industry. The other component of that is related to, of course, that pipeline valuation, which ended the year at a positive almost $9 million, which we also expect to unwind during the year. So, that should give you a little color on mortgage in regards to the revenue there. The other components, maybe speak specifically to the retirement side. There we expect from a legacy business standpoint, probably fairly flat, maybe incremental core growth in the lower one to two percentage, then of course, with the addition of the acquisition and the RPS-24HourFlex team, overall, we should see this should add about 8% or so to total revenues in the retirement division, bringing us up to a run rate that's probably closer to this $17 million, $17.5 million for the year.

Great. And pretty steady on the wealth management, we'd kind of back into that. That's good colors. Thanks. Maybe one for Randy just kind of checking in on the capital plan and your priorities of I imagine funding kind of organic activities, number one, but you did close on RPS and this pipeline of other opportunities and/or kind of what you could do -- do you look at dividend or other on the capital side?

All of what you mentioned there. First of all, we're very, very pleased with the acquisition that we were successfully able to close on. It was a very, very good fit, both from a business perspective, as well as cultural fit to our company that will really come down as a very good acquisition for Alerus. Where the Board really turns its attention to now is really to having gone through the IPO and everything and with the both the earnings and the buildup of capital is -- capital management is something that we continue to discuss on a quarterly basis with our corporate Board and all of the things you mentioned, just to review the dividend strategy, which I'll make a remark -- and I'll save my remarks to the end of the meeting. And also as well as you know, just putting things in place from a good governance manner to discuss and make sure that we're managing that capital properly going forward.

Okay. Thanks. I'll step back.

Our next question will come from Nathan Rice with Piper Sandler. Please go ahead.

Yes. Hi, everyone. Good morning.

Morning, Nate.

Perhaps just continuing on that capital deployment discussion. Be curious, just to get an update, just in terms of how discussions are going with additional potential B&S partners. You guys seem in flux of opportunities post-RPS or is it pretty much a similar state of affairs from what we discussed last quarter?

Katie, do you want to?

This is Katie -- yes, absolutely. I would say it's fairly consistent with what's -- with what we've been seeing in the pipeline since last quarter.

Okay. Got it. And then just on the core margin outlook ex-PPP, any thoughts Katie and just how that kind of projects from here, I believe you kind of said it was around 3.03% for the quarter. I know a lot of depend on kind of excess liquidity levels and how that trends over the course of this year. But just any thoughts just but kind of a flattish loan growth outlook for the first part of this year as Karin alluded to how we've been trying to think about the core NIM ex-PPP?

Yes, I think my -- the guidance I've been giving was that scraping for 3%, and we're there. And it seems like our liquidity position actually continues to increase. So, I think ex-PPP, there's a good possibility without loan growth, or without seeing that loan utilization pick up that we will drop below 3% into the 2.90% potentially as low as 2.80%, if it really takes a long time this year to see any demand on the loan side. So, I do think a sub-3% is going to be a reality before we know it, unfortunately.

Okay. If I could just ask one last one. Mortgage banks revenue, I think you talked about it being down 30% or so or at least expectations for down 30% or so in 2021, which is kind of in line with the industry expectations. Does that include the drop off that we may see in the unrealized -- or the gain that was in 2020?

It does not. So, the kind of core revenue, we would expect to decline that much. And then in addition, we would expect to see the headwinds of the hedge on top of that decline.

Okay, got it. I appreciate all the color. Thanks everyone.

Thank you.

Our next question will come from William Wallace with Raymond James. Please go ahead.

Thank you. Good morning. Just following on that last question, what are your thoughts on the mortgage -- the gain on sale for the year?

Yes, good question. We are anticipating at this point that the margins will return back to the kind of pre-COVID levels. So, 2.7% levels.

Okay. Thank you. And then on the net interest margin, just following up on that line of questioning, so we can understand that with all the liquidity that continues to come into the bank balance sheets that's going to add NIM pressures, but maybe helping us think about NII dollar growth exclusive of PPP fees, any thoughts on how NII dollars might grow? In other words, are you are you planning on deploying liquidity into the bond portfolio to kind of supplement flattish loan growth, et cetera, to help drive NII growth?

Yes, we certainly are -- I think the headwinds will probably continue to still be too strong from that standpoint. But that's the goal is to at least maintain levels of NII where we were last year ex the PPP. Of course, we made a lot of ground -- made up a lot of ground on the expense side of things last year, which will be more difficult to do this year in regards to our ability to continue to lower our cost of funds. But yes, that's our objective, that's our goal is to focus on, at least, maintaining that level or growing it whichever levers we can.

Okay. And if we were to assume that liquidity were not to continue to build, would that prior guidance around the 3% core NIM hold today?

That assumes that the liquidity we're seeing the liquidity we've got, yes, sticks around. And so a continued build would probably further deteriorate that, though I don't anticipate that happening at this point.

Okay. Thanks. And then in prepared remarks, I believe, it was stated that the applications so far for round two of PPP were $26 million received. I'm just curious if you could give us thoughts on where you think your ultimate level of participation in round two or three, whatever you want to call, it might shake out?

Sure Wally, this is Karin.

Hi Karin.

It's really early for us to tell where it will shake out. We think that most of the applications we've received so far are for second draw applications. We've not seen significant new applications for first draws.

Okay. And has the pace of applications already started to slow or has it remained kind of, obviously, below the first round, but steady?

Yes. I mean it's been steady. And we'll get another update here as we get to the end of the week. But we had -- we certainly had strong applications right at the start.

That $26 million, where was that up through what day?

That was through Monday of this week. And I should clarify too those are applications received. So, they're not necessarily approved by SBA. They're at different stages of approval.

Yes, okay. Okay, that's all I had. I will step out and let somebody else ask questions. Thank you for your time.

Thanks Wally.

[Operator Instructions] There being no further questions at this time, this will conclude our question-and-answer session. I'd like to turn the conference back over to Randy Newman for any closing remarks.

All right, thank you. Let me first extend our appreciation everyone who joined our call this morning. Thank you for listening and Jeff, Nate and Wally, thank you for your questions. Alerus has a long history of consistently outperforming our peers and we believe providing extraordinary value to our shareholders. This is driven by our high value professional services business model, our diversified balance sheet and loan portfolio, and our non-margin dependent revenue lines of business that we believe deliver greater risk adjusted returns than our peers. I'd like to mention two long-term highlights of our very strong operating performance. My records go back to the late 1960s and show that Alerus has always paid a cash dividend. But since 1987, we have increased our cash dividend every year for the last 34 years at an average of 10% per year. At the end of 2020, over the past 10 years, Alerus has achieved a 337% total shareholder return, which is just shy of a 16% annual return for our shareholders. This compares, for example, to 165% total shareholder return for the SNL all-bank index into the 150% total shareholder return from the SNL small cap bank index. We remain confident in our ability to continue to navigate the uncertainties of this downturn, while also continuing to drive value for all of our stakeholders. As we navigate through the remainder of 2021, I am very proud of how our organization has responded to this uncertain and challenging environment. Our company has accomplished so much despite COVID-19, which is a testament to our team, our leaders at all levels and our business model. I'd like to again thank all of our employees for their extraordinary efforts during these unprecedented times and for all of your continued support and interest in Alerus. Thanks to all of you for joining today's call.

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