Alerus Financial Corporation

Thank you. Good morning and welcome to all listening to our call today. Here in the Twin Cities, I am joined by Karin Taylor, our Chief Risk Officer, and it is my privilege to have this time today to speak to you in my last days as CFO and for the first time as President and CEO of Alaris. Today, I will cover the tremendous results of 2021 made possible by and because of our Alaris team members, our diversified business model, and our longstanding approach to serving clients with an advice-based holistic approach. In 2021, we continue to grow our client base and expand relationships with current clients. Alaris delivered record net income to shareholders, exceeded production goals, all while being recognized internally and externally as a top workplace. The hard work of our team members throughout the company and their perseverance to provide an exceptional client experience continues to drive strong shareholder returns, culminating in an ROTC of 18.89% for the year. Our performance is anchored in our diversified business model and fee income for the year was 63% of total revenue. Maintaining our exceptional levels of fee income continues to be a high priority for our company. Our mortgage team was again a significant contributor to our results in 2021. As a reminder, the $48.5 million of the reported mortgage revenue includes the offset of the hedge unwind of $8.5 million. I'm proud of our team who surpassed the record of volume in 2020. and finished the year over $1.8 billion of origination. In addition, we maintain margins and pull through due to our continued industry leading execution. Alaris has invested in technology and our team members and clients have embraced the option with 91% of the over 5,500 clients served through digital channels. You've heard me say this before, Alaris is a special company and our mortgage division is special in itself. We've had a high level of repeat business with clients, and most of our volume has historically been focused on purchase business. We have an exceptional reputation and a great team. Although the industry statistics are again projecting a 30% decrease in volume in 2022, Alaris is a company that outperforms. We believe we can push to keep our decline closer to 20% in volume in 2022. A decline, but still outperforming the industry. In our retirement and benefits division, we surpassed revenue of $71 million and the client base of Alaris, many of whom see us as their primary source of information for retirement readiness, surpassed 440,000 participants. Our retirement and HSA business is also a significant source of deposits and these balances grew 73 million to total 669 million. This year's revenue included approximately two and a half million of document restatement fees. As we've discussed on previous calls, these are recurring but not annual fees. We will look to replace those fees with new revenue generation and anticipate holding revenue at 2021 levels. Our wealth management team members brought peace of mind through advice and planning to more clients than ever, with $527 million of new production and assets under management, including four consecutive months of new production greater than $50 million. Here, too, Alaris technology investments shine, with a few clicks, Distribution rollovers are invested, managed, and a team member is proactively reaching out to understand goals or help establish a plan. We rolled out this digital option in late Q3 and ended the year with 360 accounts open. We have exceptional momentum in this area and have been successful in recruiting experienced talent. Although the market could be a headwind, we look to continue to grow revenue at nearly the same pace in 2022 as we did in 2021. The banking and commercial units of Alaris had another strong year. Our team members have done a great job in serving our commercial clients. In total, Allaris closed 2,500 PPP loans, over 20% of our portfolio, through the program. That puts Allaris in the top quartile in the country. In 2021, we continued to expand relationships with the new clients we acquired because of PPP. Overall loan growth was as expected for the fourth quarter, while loan production for the year reached new levels. We continue to feel the headwind of historical loan utilization and several significant payoffs. We grew our deposit base by 14% in 2021, which included $450 million in new account balances as team members continue to excel in expanding commercial relationships and treasury management. From a balance sheet perspective, we opted to invest excess liquidity and pull earnings into equity. We more than doubled the size of our investment portfolio. And although this has been a drag on net interest margin, the move resulted in year-over-year earnings on the portfolio increasing by $5 million. Karin will cover credit quality, but it is worth repeating that although we released reserves in Q4, our allowance continues to remain at a robust level, and we look to grow into this balance throughout 2022 and beyond. While we exceeded expectations in revenue, expenses for the quarter were in line. Our team members' execution and controlling costs continues, and we delivered another solid quarter of managed expenses. We continue to extract efficiencies and processes, operations, and facilities closures, while growing our client base and engaging clients in our digital offerings. Looking ahead into 2022, we are looking to continue our execution and cost controls and excluding the metro transaction projecting flat expenses. We certainly acknowledge and are feeling the wage pressure in current positions as well as in new hires. During 2021, we converted and integrated our Denver fee income acquisition with nearly 100% client retention. We lifted out a highly sought after and nationally recognized SBA team. This team engaged immediately and production has exceeded expectations. We also announced our 25th acquisition of a high-performing, high-growth commercial-focused bank in the robust Phoenix, Arizona market. Our strong earnings and the rebuild of capital through amortization of the purchase price for acquisitions drove a growth intangible bust by 12% in 2021. Organic growth remains a priority in addition to our constant focus on building pipelines of acquisition targets and partners in the fee income space. I'll now turn it over to Karin and then we will open it up for questions.

Thank you, Katie, and good morning everyone. Our pandemic related programs continue to wind down over the past quarter. As of January 19th, PPP loan balances forgiven totaled $443 million, or about 93% of that portfolio, leaving approximately $25 million in balances on the books. $3.3 million in loans remain on deferral, primarily in the residential real estate portfolio. Credit metrics continue to improve. Over the fourth quarter, as several long-term workouts were resolved, resulting in a decrease in non-performing loans to total loans to 12 basis points. down from 35 basis points at the end of the third quarter. In addition, we recorded net recoveries for the quarter of $1 million. As a result, we released $1.5 million in reserves in the fourth quarter, bringing our allowance to total loans, excluding PPP loans, to 1.83%. Our team remained agile and resilient over the past quarter. Despite increased illness and exposures as the Omicron variant surged through our markets, our teams remained focused on serving clients. Commercial line utilization dropped to 17%, its lowest point in five years. While excess liquidity in the system remains challenging, loan production met expectations for the quarter and loans net of PPP increased by 27 million or 1.62% on the length quarter. The increase was driven by growth in the commercial real estate and residential real estate first mortgage portfolios. Market demand for both CNI and CRE loans continues to improve across our footprint. Our business advisors remain focused on building their pipelines and momentum is strong early in the first quarter. That concludes our prepared remarks and we'll open it up for questions.

Thank you. We will now begin the question and answer session. To take a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Okay, our first question comes from Jeff Rulis from DA Davidson. Jeff, please go ahead.