Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. 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 would now like to turn the conference over to Alerus Financial Corporation Chairman, President, and CEO, Mr. Randy Newman. Please go ahead.

Thank you, Cameron, and good morning, everyone. This morning, we intend to discuss our first-quarter 2021 and also to give a current update on the impact of the COVID-19 pandemic. Today, I’m joined by our Chief Financial Officer, Katie Lorenson; our Chief Risk Officer, Karin Taylor; and our Chief Shared Services Officer, Ann McConn. As always, we appreciate your interest in our company, and we invite your questions at the end of our introductory remarks. We are pleased to report our record performance of 2020 carried through end of the first quarter of 2021. Alerus continues to be well positioned for growth with our diversified business model, large and growing client base, and our holistic advisor-focused approach to serving clients. We started 2021 with several hiring initiatives, and we’re pleased to have two of the top mortgage producers in the Twin Cities region join our team in the first quarter. We continue to focus on adding talent to our organization, especially in areas that will grow revenue. Our fee income business lines delivered strong results, with mortgage originations exceeding $500 million for the quarter. Retirement and benefits revenue increased over 8% as the integration of our recent acquisition of RPS/24HourFlex continues to go as planned. Wealth management revenue grew during the quarter almost 4% as our advisors remain focused on proactive outreach to our clients and our local footprint and nationwide. During the quarter, we continued to see stable credit quality, strengthening local economies, and low levels of loan deferrals. Our reserve levels remained very robust at over 2% of loans, excluding PPP. In addition, we saw a modest uptick in commercial line utilization, solid loan demand, and building pipelines. In addition to our emphasis on growth, we are also focused on technology investments, a journey which started in 2017. Over the last several years, we have invested in new technology for both our business and consumer clients, and now, we continue to develop robotics and other automation processes to improve our efficiency and support our ongoing growth initiatives. Furthermore, we recently became one of 66 limited partners in a fund focused on the acceleration of technology for community banks. We believe this is a valued partnership that will allow us to stay abreast of emerging technology trends in the community banking landscape. Also, in the first quarter, we redeemed our previously issued subordinated debt at a rate of 5.75% and refinanced with the Bank of North Dakota at a rate of 3.5%.

All right. Thank you, Randy, and thank you to all of you who are joining our call this morning or listening at a later time. I’ll be brief in my comments this morning as the quarter results were very strong and generally in line with our expectations. I do believe Alerus is one of the few financial institutions reporting linked quarter growth in non-interest income or fee income. So I will start there with my prepared remarks. As Randy mentioned, mortgage had another strong quarter and, in fact, a historic record for first quarter volume. This is also our highest quarter ever of refinance volume. At the end of 2020, we anticipated a steady decline in the pipeline during the first quarter. The pipeline did decline some, but not to the level we anticipated. And the valuation of the pipeline actually increased slightly as the value and related pricing and mandatory delivery of loans to the secondary market continued to increase.

Thank you, Katie, and good morning, everyone. I will begin with a quick update on our banking market. With the vaccine rollout and the continued lifting of business restrictions, activity is picking up in all of our markets. We are making progress in expanding the reopening of our lobbies across our footprint, while also continuing to serve clients virtually and digitally. Loans decreased by $42 million during the first quarter due to decreases in the commercial and consumer portfolios. PPP forgiveness outpaced second round PPP production, and while commercial line utilization picked up slightly to just under 23%, it remains low compared to historical utilization, which is typically closer to 35%. The decrease in the consumer portfolio was due to mortgage refinance activity paying down home equity loans and lines, as well as runoff in the indirect portfolio following our decision to exit that business line.

Thank you. Your first question comes from Jeff Rulis from D.A. Davidson. Please go ahead.

Good morning.

Good morning, Jeff.

On just some line item detail. Katie, I think I got a pretty clear read on the mortgage if we kind of back out the MSR and the outlook there. I heard you on the high watermark and the push and pull, but how about the retirement and benefit and then the wealth management lines? I would imagine the sequential retirement and benefits with RPS was a bit of a one-off. But do you expect growth from here as well as the – what do you see in the wealth management? Thanks.

Sure. Run rates in regards to both moving forward, again, strong production on the wealth management side exceeded our expectations. I think we were in excess of $100 million of production this quarter. Last year, we were at $300 million for the year. So I’d expect to see, assuming stability in markets, pretty consistent results for that line item. And I would guide to the same on the wealth – on the retirement side.

Okay. Great. And then if I can just follow-on with the expense side. Is that a pretty sustainable drop? You talked about some hires and continued to look for talent when it comes. And I’m sure you’ll be opportunistic but wanted to kind of see about this $43 million run rate, any expectations for expenses through the year?

Based on where I would guide to today, again, I think that we’ll be pretty consistent in this line item also, with the exception, of course, of the incentive compensation dropping on the mortgage side of originations.

Got you. Okay, and maybe just the last one and more big picture. I noticed the synergistic deposits down in the quarter, really, rare times from a liquidity standpoint. Maybe just big picture, kind of what are you seeing on – I mean, I imagine that’s still a focus. But also, you’ve got a ton of liquidity, so anything to touch on in terms of your funding base?

It’s a good question. The decline in synergistic deposits was driven mostly, as we saw some of the retirement money market cash that flowed in during the times of volatility in 2020, being redeployed into the markets in that particular synergistic deposit. And so that was really the driver of that decline. And overall, on a funding basis, as I mentioned, we’ve had some really nice wins on the commercial acquisition side of deposits, and we’ll continue to do – we’ll continue to build both core deposits. Even despite the levels of liquidity, we know that we’ll be able to put it to work eventually.

Thanks, Katie. I’ll step back.

Thank you. Your next question is from Nate Race from Piper Sandler. Please go ahead.

Hi, everyone. Good morning.

Good morning, Nate. Good morning.

Katie, you were talking about on that discussion around the margin outlook. I think you alluded to, ex-PPP, the market kind of trending into the 2.80 range over the next few quarters or two. Does that just contemplate some redeployment of excess liquidity in the securities book that you guys have been doing lately, along with – I’d be curious to get your kind of timing expectations for pickup in loan growth. I’m not sure if you guys are expecting kind of flat growth here in 2Q and a pickup maybe in the low single-digit range in the back half of this year, but any additional color within that context.

Yes, yes. So I think from a margin outlook, when I think we’ve guided to the 2.80 last quarter and we just haven’t seen much change. And so my guidance is until we see some of this liquidity move out, because no matter how much we continue to build the investment portfolio, the cash just seems to replenish itself. And so I think the NIM bottom, which we thought was maybe going to be Q2, is probably now modestly later than anticipated in maybe the 3Q, 4Q. In regards to loan growth, I think we’ll continue to be challenged in the second quarter. We saw little uptick in line utilization. But at this point, we think mid-single-digit growth starts to come in that third and fourth quarter.

Okay. Great. And maybe changing gears a little bit, just kind of thinking about the credit cost outlook. All of your asset quality metrics continue to improve. And I think the outlook remains fairly benign, particularly just based on where deferral stand at the end of the quarter, any sense in terms of kind of where you guys see the reserve tracking to maybe as a percentage of loans, ex-PPP over the next few quarters?

Yes. This is Karin. Our provisioning this year is going to be driven by loan growth and/or credit deterioration. So if we don’t see deterioration at this point, we’ll see what happens as some of the stimulus comes to an end, how that performance looks, and as you know, we are still on the accrued loss model. And much of our reserve is due to qualitative adjustments for economic factors. And so, I think we’d want to see a little more sustained economic improvement and continued performance of the portfolio as that stimulus and before we would start to release reserves.

Okay. So kind of a perhaps a stable outlook over the near term. I appreciate that, Karin. That’s all I had for now. I will step back. I appreciate the color. Thank you, everyone.

Thanks, Nate.

Thank you. Your next question comes from William Wallace at Raymond James. Please go ahead.

Thank you. Good morning, all. I’d like to circle back on NIM, so understanding that the liquidity just kind of doesn’t seem to end. Maybe help us think about what your guidance means from just an NII dollar basis. Do you think that we see growth there? Or does continued potential kind of pipeline weakness in the loan portfolio and pricing pressures drive declines – continued declines ex-PPP?

I think it’s going to be tough to hold ex-PPP without some substantial loan growth here. So I think that we will see some decreases probably characterized in much like we saw in the first quarter ex-PPP on the net interest income side.

Okay. Great. And Katie, I don’t know if it was my cell-phone or what, but when you were talking about your expectations on the fee income line for wealth and retirements business, did you say continued growth or stabilization at current levels? I apologize, sounds like you were saying growth.

Well, I apologize. So thank you for the follow-up question. Based on what we see today, I would say those line items will be stable from the level of Q1 revenue.

Okay. And then along the same lines, within those two businesses, I’m just curious, I don’t know, Randy, if this is for you, but – or Katie, are there – are you seeing additional opportunities for potential acquisitions within either of those fee businesses?

I’ll take that one. Yes, we are. We continue to explore opportunities, and we continue to be proactive in our outreach too. So we’re seeing more opportunities come to us, but we’re also continuing to build that pipeline of kind of proactive outreach and establishing some relationships with some potential partners out there.

Okay. Great. I’ll stop there. Thank you.

Thanks.

Thank you. Your next question is a follow-up question from Nate Race. Please go ahead.

I apologize. My follow-up question is answered. Thank you.

No problem. Thanks, Nate.

That concludes our question-and-answer session. I’ll now hand back to Mr. Newman for closing remarks.

Okay. Thank you. Thank you to everyone who joined our call this morning. Thanks for listening and also asking questions. 2020 financial performance was record-setting, and the first quarter continued this pace. We know our company and the industry at large is facing headwinds that will catch up and impact our future performance. For so many years, this is why we have focused on diversification. We believe diversification creates long-term value for our shareholders and have a long history of building a strong and growing diversified business model. This includes diversification of revenue streams, diversification of market geographies, and diversification across industries. Although our industry is still facing economic uncertainty, we believe our business model stands the test of time and will continue to deliver for long-term shareholder value. We have a very talented leadership team who is focused on growth, success with our clients, and engaging all employees. We continue to retain and attract top talent, and we continue to execute on growing our company both organically and through strategic acquisitions. Most importantly, we do it the right way. Doing the right thing and always acting in your best interest are cornerstones of our culture and how we operate. We are very proud of what our team accomplished in the first quarter, and we thank you for your continued support and interest in our company. Again, thank you for joining today’s call.

Ladies and gentlemen, that concludes our conference call today. Thank you for participating. You may disconnect your line.