Alerus Financial
Annual Report 2018

Plain-text annual report

2 0 1 8 A n n u a l R e p o r t FOL L OW YOU R DEST I N Y. B Y YO U R S I D E , W H E R E V E R T H E J O U R N E Y TA K E S YO U. WE B ELI EVE THAT WITH I N E ACH AN D EVERY O N E O F U S LI E S A STE ADY PU R SU IT TO G ROW, TO I M PROVE , TO MAKE B ET TER — TO FO LLOW O N E’ S D E STI NY. T he path to each destiny is all your ow n, but most cer tainly, it’s a path filled w ith decisions and challenges all along the way. W hether it’s a business ow ner deciding how to transition their business to the employees who helped build it, or the recent college graduate balancing sav ing for retirement w ith pay ing of f their college debt, the course we char t is of ten filled w ith complex ity and uncer tainty. T he good news: you don’t have to nav igate this financial journey alone. A ler us is here to help. W hatever your path is, A ler us can help you achieve your goals and find your path to financial confidence. Company Portfolio Diversified financial services company $2.2 billion banking assets $4.6 billion assets under management $25.9 billion assets under administration $779.7 million mortgage loans originated Stockholder Return Diluted earnings per common share: $1.84 Dividends per share: $0.53 Stock price range 2018: $19.25 - $26.50 Last trade 2018: $19.25 Last trade 2017: $20.45 Total stockholder return: -3.28%* * Calculated as Last Trade 2018 minus Last Trade 2017 plus dividends per share divided by Last Trade 2017. Diversified Revenue Stream NET REVENUE $17 7.9 million $75.2 MILLION NET INTEREST INCOME $102.7 MILLION NON-INTEREST INCOME Net interest income: 42.3% Retirement and benefits revenue: 35.6% Mortgage banking revenue: 9.9% Wealth management revenue: 8.4% Banking fees: 3.9% Core Strengths CORE BUSINESS LINES Alerus Team Strong balance sheet Diversified earnings Relationship-oriented business model focused on advice Highly skilled professional service employee base Commitment to business expansion opportunities Commitment to leadership development Commitment to technology and innovation Loyal client base Client Base 46,200 consumers 11,175 businesses 6,700 employer-sponsored retirement plans 355,000 employer-sponsored retirement plan participants 44,500 health savings account participants 15,600 flexible spending account/health reimbursement arrangement participants Business Banking • Commercial and commercial real estate lending • Agriculture lending • Treasury management • Deposit services Consumer Banking • Deposit products and services • Consumer lending • Private banking Mortgage • Residential mortgage lending • Purchasing or refinancing 821 employees Market Presence Grand Forks, ND • Five full-service banking and wealth management offices Fargo/West Fargo, ND • Three full-service banking and wealth management offices Twin Cities, MN • Six full-service banking and wealth management offices • Two residential mortgage offices • Residential construction lending • One loan production and deposit • Home equity/second mortgages production office Retirement and Benef its • Retirement plan administration • Retirement plan investment advisory • ESOP fiduciary services Phoenix, AZ • One full-service banking and wealth management office • One loan production office National Presence • Payroll administration services • Three retirement and benefits • HSA/FSA/HRA administration offices in Minnesota • COBRA Wealth Management • Advisory services • Trust and fiduciary services • Investment management • Insurance and health planning • Financial planning • Education planning • Two retirement and benefits offices in Michigan • One retirement and benefits office in New Hampshire • Serve clients in all 50 states through retirement and benefit services 3 T H I S I S T H E D E ST I N Y W E C R E AT E D — A N D W E C A LL I T One Alerus. D E A R S T O C K H O L D E R S , C L I E N T S , A N D F R I E N D S , A S WE LOO K BACK AT TH E PA ST YE AR , WE AR E I N CR ED I B LY PRO U D O F TH E PER FO R MAN CE AN D PRO G R E S S O F O U R CO M PANY. Alerus reached new financial milestones in 2018 as total revenue and net income for the year ending December 31, 2018, were $177.9 million and $25.9 million, respectively. These financial results are commendable; however, they are not by chance. We believe they are the result of disciplined strategic planning by our leadership team, meticulous focus and execution by our employees, and continued success with our clients. Historically, Alerus carefully balances growth, risk, profitability, and strategic investments for the long-term benefit of our stockholders. Never was this more evident than in 2018, a year in which we achieved record breaking financial performance while simultaneously investing in our future. These investments in technology, people, and the overall client experience are all cohesively aligned to ensure we continue to add value to client relationships through proactive financial advice, offer innovative and seamless technology solutions for our clients, and bring together our entire organization to grow in new ways not previously achieved. The One Alerus Story One Alerus is a multi-year strategic plan designed to organically grow our company. It brings together the full power of Alerus in a unified manner unlike any other. Born out of our innovative and collaborative culture, One Alerus lays the strategic foundation for current and future technology investments balanced with the synergistic growth strategies of a diverse financial services firm. In its purest form, One Alerus unites five key areas: technology, people, client experience, synergistic growth opportunities, and financial reporting. Technology is essential in our industry — being driven not only by changing client expectations, but also by new and existing competitors, in all business lines. As we establish our technology, we recognize the need to align our investments with specific priorities designed to drive stockholder value. To that end, our careful selection of technology investments is focused on solutions that will help our clients make better financial decisions, help improve the client experience by unifying the digital experience of our diverse product line, and help our employees better serve clients and improve efficiencies. During the past year, our team spent a tremendous amount of time working behind the scenes to implement new technology solutions, which will be introduced to clients in 2019. We believe the groundwork laid during the past year is incredible, especially given our team’s ability to simultaneously perform at unprecedented financial levels. 5 Relationships have always been the cornerstone of our work with clients. Although technology solutions can aid and enhance our relationships with clients, we firmly believe our clients still want to interact with our people. Financial services remains a relationship-driven business; however, it continues to become more and more complex for our clients. We strive to understand our clients’ full financial situation and guide clients in their financial path. As we look to the future, we recognize the need to align our staff with the needs of our clients. By becoming a much more advisory based organization, we intend to have more client intimacy, provide career paths for our employees, and align the talent within our organization with their highest and best use. Client experience is inherently woven throughout every aspect of our company. Whether it’s improving the digital client experience, leveraging technology to help clients make better financial decisions, or reimagining existing processes, our entire leadership team is focused on aligning everything we do around our clients. This is no small undertaking, as it involves numerous initiatives — some of which were introduced in 2018 and many of which our clients will see and feel in 2019. Alerus is a unique organization because of its diverse revenue stream. Our diverse product and services offerings affords us additional growth opportunities as we begin offering our highly complementary, full suite of services to every client. In 2018, we grew $84.5 million in Blueprint IRAs, $73.4 million in money market balances, and $11.2 million in HSAs. These accomplishments require strong divisional collaboration, steadfast execution, and continued focus. As Alerus continues to grow, we maintain the ability to operate like a much smaller company. We are pleased with the progress of these synergistic growth opportunities and look forward to building on this momentum. Finally, the last key area of our strategic growth plan is financial reporting. We know the more data we bring together in the right way, the better our team can leverage this data to make better decisions. We implemented a new financial reporting system in 2018, and continue to enhance this important management tool. Since embarking upon One Alerus several years ago, it is now a new way of life for our organization. We don’t view One Alerus as a one-time project, task, or finish line — it is a continuous initiative that is — and will remain — a vital part of our culture. Our leadership team is passionate, yet accountable. Our employees are engaged and energized. And soon, we believe our clients will experience the spirited beginnings of this great adventure designed to improve their financial lives. Welcoming Our Newest Director We are pleased to welcome Michael S. Mathews to the Alerus Board of Directors. Mr. Mathews brings over 20 years of technology experiences with acumen of the financial industry and expertise in digital transformation, cloud and mobility, cybersecurity, artificial intelligence and machine learning, and application development. He has served as chief information officer of Deluxe Corporation since 2013. In addition to leadership roles with UnitedHealth Group and Merrill Lynch, Mr. Mathews also founded and built his own management consulting business, The Infology Group, Inc., which he later transitioned to key partners. Mr. Mathews’ deep experience in technology innovation will benefit Alerus as we continue to transform our company for long-term growth. 6 Welcoming Our New CRO Please welcome our new chief risk officer, Karin Taylor, who joined Alerus in November. Ms. Taylor brings years of industry experience including a distinct background in risk management, having held numerous leadership roles in risk management at other financial institutions. With a deep background in risk, financial regulations, and compliance, Ms. Taylor embodies the perfect combination of balance — prudently growing the company while concurrently managing the overall risk. Farewell to Two Leaders This past year, we said goodbye to chief development officer Dan Cheever in the planned succession of our CFO role. Dan first joined Alerus in March 2015 as interim chief financial officer, and the interim label was removed in September 2015. Dan’s vision for financial reporting, including divisional reports by banking, mortgage, retirement, and wealth management, as well as his outlook for modeling and forecasting added significant value to our company. Katie Lorenson joined Alerus in late 2017, working closely alongside Dan to create a seamless transition of leadership. Next, we extend our sincerest appreciation to our most tenured corporate director, Harold “Hal” Gershman, who will retire in May 2019. Hal joined Alerus as a corporate director in 1989. He’s helped lead our company not only through the best of times, but also the worst of times. Whether it was rebuilding the company after the devastating Grand Forks flood and fire of 1997, to opportunistically growing Alerus through acquisitions shortly after the 2008 financial crisis, he has made significant contributions to our company. Equally matched to his leadership at Alerus is his leadership in the local Grand Forks community, which will continue to live on for years to come. One Principle Remains Throughout our company’s history, we’ve remained true to one guiding client principle. As a trusted financial advisor, we believe it is our fiduciary responsibility to work in our clients’ best interests at every turn. We aspire to do the right thing, every time. This philosophy is the cornerstone of our culture and the foundation of our board of directors. Whether it’s our longest tenured employee or our most recent hire, our operational staff or our client service center team, everyone in our company embodies this promise and continues to hold it dearly. For this, I am truly grateful. Alerus is a special place because of the people who represent it. Thank you to each and every one of you. 2018 was a remarkable year. We sincerely appreciate your investment in our company and look forward to following our destiny together. Randy L. Newman Chairman, President, and Chief Executive Officer Alerus Financial Corporation 7 S H A R E I N O U R D E S T I N Y. A S WE R EFLEC T O N TH E H I STO R I C PER FO R MAN CE O F O U R CO M PANY, WE AR E PLE A S ED WITH TH E G ROW TH R E SU LTS AN D CO NTI N U ED ADVAN CEM ENT O F TH E ALER U S FR AN CH I S E . We believe in prudently managing results over the long run to provide maximum value to our stockholders. This long-term approach has proven its strength in not only providing a return to stockholders, but also developing the company into a high-value, professional services company. Whether growth is in the form of organic, acquisition, or lift out strategies, Alerus demonstrates a high level of performance with our ability to accomplish the blueprint we set forth. We do not view our success by chance, but rather the result of our commitment to long-term planning. These accomplishments are the foundation of a strong leadership team which is further magnified by the Alerus culture — a culture rooted with the Midwestern work ethic and supported by the determination to continuously raise the bar. 8 Asset Growth (IN BILLIONS) Earnings Per Share and Dividends Retirement Assets Diluted Earnings Per Common Share (EPS) $15.5 2014 $17.5 2015 $25.0 2016 $28.2 2017 $25.9 2018 Wealth Management Assets $2.00 $1.75 $1.50 $1.25 $1.00 $1.48 $1.21 $1.00 $1.07 $1.84 2014 2015 2016 2017 2018 Dividends Per Share (DPS) $2.6 2014 $2.7 2015 $3.4 2016 $3.8 2017 $4.6 2018 Banking Assets $0.50 $0.45 $0.40 $0.35 $0.30 $1.5 2014 $1.7 2015 $2.1 2016 $2.1 2017 $2.2 2018 $0.38 $0.42 $0.44 $0.48 $0.53 2014 2015 2016 2017 2018 Stockholder Total Return (% CUMULATIVE) ALRS +28.83% SNL U.S. Financial Services +44.27% S&P 500 +51.65% 200 150 100 50 0 2014 2015 2016 2017 2018 Stockholder Value Year-End Stock Price $25.00 $20.00 $15.00 $10.00 $5.00 $19.75 $18.90 $17.00 $20.45 $19.25 2014 2015 2016 2017 2018 Book Value Per Share $25.00 $20.00 $15.00 $10.00 $5.00 $10.85 $11.67 $12.47 $13.11 $14.30 2014 2015 2016 2017 2018 9 Financial Performance Credit Quality Total nonperforming loans increased $1.1 million or 18.6% from December 31, 2017; nonperforming assets to total loans plus other nonperforming assets equaled 0.41% at year-end 2018 compared to 0.40% at year-end 2017. Allowance for loan losses to nonperforming loans was 318% at year-end 2018, compared to 282% at year-end 2017. Year- Over-Year Results Total loans grew $159.4 million to $1.73 billion from 2017. Total deposits decreased $35.7 million to $1.80 billion from 2017. Total assets under administration decreased $2.37 billion to $25.9 billion from 2017. Total assets under management grew $736.3 million to $4.6 billion from 2017. Reported net income of $25.9 million, up 72.4% from 2017. Diluted earnings per common share increased 71.9% from $1.07 to $1.84 per share. Cash dividends per share increased 10.4% from $0.48 to $0.53 per share. Return on average (ROA) assets of 1.21%, up 46 basis points from 2017. Return on equity (ROE) of 13.76%, up from 8.49% in 2017. Return on tangible common equity (ROTCE) of 20.93%, up from 14.34% in 2017. Efficiency ratio of 73.80%, down from 75.35% in 2017. Company revenue of $177.9 million, up 4.25% from 2017. Business line revenue • Banking division revenue of $82.1 million, up 10.3% from 2017. • Mortgage division revenue of $17.6 million, down 11.3% from 2017. • Retirement and benefits division revenue of $63.3 million, up 1.5% from 2017. • Wealth management division revenue of $14.9 million, up 6.8% from 2017. 10 Maintained Strong Capital Ratios, Year-End 2018 Common equity tier 1 ratio of 8.43%. Tier 1 capital ratio of 8.87%. Total risk-based capital ratio of 12.86%. Tier 1 leverage ratio of 7.51%. Client Enhancements Introduced updated and modernized statements to clients with banking or retirement accounts. Unified our two banking and retirement call centers into one client service center, allowing us to holistically work with clients across all products and services. Updated our system to allow for real-time fraud detection, while also introducing text message alerts for potentially fraudulent transactions — simplifying the process in which clients can confirm or deny fraudulent activity on their account. Added electronic signature, allowing for continued improvement as we reimagine processes and the manner in which clients interact with us by electronically signing various documentation. Company Developments Centralized our operations staff across the divisional product lines under common leadership to capitalize on operational synergies and create unified service level agreements. Opened a new loan production office in Mesa, Ariz., supported by the addition of new staff in business development to further grow our Phoenix market share. Remodeled our office in Scottsdale, Ariz., expanded our office in Minnetonka, Minn., and entered into an agreement with a developer to rebuild our Express office in Grand Forks, N.D., as part of an economic revitalization project designed to repurpose the existing land on and around our Express office into commercial and residential space. Dissolved the separate subsidiary, Alerus Securities, as we transitioned broker-dealers services to Infinex Investments, Inc. and Pershing, LLC, allowing our team more time to focus on client needs and personalized service instead of regulatory and compliance functions. Invested in our employees by raising our hourly minimum wage to $15 per hour, reflecting our long- term approach to employee retention and recruitment. Announced our plans to exit the Duluth, Minn., market in April 2019 by selling our deposits and assets to another local financial institution committed to the long-term advancement of Duluth. 11 F I N D YO U R PAT H T O F I N A N C I A L CO N F I DE N C E . A S TECH N O LO GY ADVAN CE S AN D CLI ENT E XPEC TATI O N S CHAN G E , WE M U ST R E S PO N D I N A MAN N ER CO N S I STENT WITH O U R B U S I N E S S STR ATEGY AN D CLI ENT- FOCU S ED CU LTU R E . At our core, A ler us has a relationship-oriented business model driven by an adv isor focus. We believe in prov iding great technology to aid the client experience, but also recognize the impor tant value of a personal relationship. Serving clients holistically with proactive advice and ease of doing business Alerus is in the midst of a multi-year transformation designed to enhance the value we provide to clients by realigning our staff around business and consumer clients. Complementing the reorganization and development of staff is a robust technology roadmap designed to help clients in seamless and engaging ways. Clients want to do business with companies that are not only easy to work with, but also provide enjoyable digital experiences. These technology solutions have never been more critical to an organization’s success — including ours. By collaborating with critical technology partners, we’ve built a robust roadmap designed to make it easier for clients to both interact with us and make better financial decisions. Throughout the past year, we made tremendous progress in advancing the technology solutions within our roadmap, which will be introduced to clients throughout 2019. While clients may choose to only interact with us through technology, we recognize a growing need to amplify our guidance-based approach through our people. Staff resources are finite, so we must manage our employees to their best and highest use of time and talents. By aligning our teams around business clients or consumer clients, Alerus is focused on shifting our workforce to serve clients into the future, rather than continuing to operate as the status quo. The focused execution of this transformative initiative requires immense planning and preparation. By taking the time last year to ensure we do it right, we’re positioning Alerus for the future and in turn — better serving clients holistically with the full offering of our diverse products and services. Proactively guiding clients through a shared philosophy Personal financial stress is a common challenge facing many individual clients and business organizations today. There is an increasing amount of research behind consumers’ increased debt levels, decreased savings levels, and growing financial stress. This stress follows employees to work creating decreased productivity, more sick days, and fewer on-time retirements. By focusing our team on this segment of our clients, we strive to provide clients with peace of mind by helping guide them in their path towards financial confidence. In turn, we’re not only helping individual clients but also offering a unique employee benefit for our business clients. 12  FO R E V E RY P E R S O N , A P L A N . FO R E V E RY J O U R N E Y, A PAT H . FO R E V E RY ST E P, A PA R T N E R . Wherever you are in life, we’ll meet you there. O U R F U N DA M E N TA L B E LI E F S . T H E FO U N DAT I O N O F O U R CO R E P R I N C I P LE S R E F LEC T S A CO M M I T M E N T TO O U R C LI E N T S A N D E AC H OT H E R . D O T H E R I G H T T H I N G . People do business with people they trust. C H E R I S H P EO P LE . Take care of your co-workers so everyone can take care of clients. S E RV E W I T H PA S S I O N . Foster a culture of service. R E S P EC T E V E RYO N E . Mutual respect is an important building block of good teamwork. E M P OW E R W I T H K N OW LE D G E . Knowledge drives confidence and positive action. E M B R AC E C H A N G E . Success is never final. FAC E S O F DE DI C AT IO N . EVERY TH I N G WE D O B EG I N S AN D EN DS WITH O U R EM PLOYEE S . AN D J U ST A S CLI ENT E XPEC TATI O N S AN D E XPER I EN CE S AR E CHAN G I N G , SO AR E TH OS E O F O U R TE AM . We recognize the close link between our ongoing successful financial performance with our strength to attract, retain, and engage our employees. Commitment to being an “Employer of Choice” Our ability to bring new, high performing talent to our organization is equally matched with our approach to not only retain employees, but also maximize their full potential. This “Employer of Choice” mentality begins with our leadership team and cascades throughout the organization as key initiatives are put in motion to further engage employees. Following the Tax Cuts and Jobs Act signed in late 2017, we increased our minimum wage for all employees to $15 per hour in early 2018. True to form, we’ve established a history of disciplined planning and thinking about the long-term — in everything we do. By utilizing a portion of the decreased tax liability to increase our hourly minimum rate, we were able to retain valuable employees critical to the success of our business, as well as recruit new staff. As our organization transforms to remain relevant long-term, we know communication is critical at every level. It is why we bring external experiences like blogging, likes, and internet search to our employees through a dynamic, web based intranet and mobile app. We’ve also utilized technology to hold quarterly calls streamed to every employee, and recorded videos to share key messages. We pair technology-aided communication with in- person all-employee meetings and conferences with key teams. It is a well-orchestrated plan designed to engage employees at multiple touchpoints throughout the year, from various company leaders. In 2018, we reorganized our training and development team under common leadership within human resources. As we look ahead to the future needs of our organization in transforming to meet client needs, we recognize the need to holistically train our employees across all products and solutions, technologies, and value added services. Additionally, our training team is nimble in its approach, as resources can shift in response to internal or external factors. We’ve already realized positive momentum with our employees simply by establishing a central team of trainers who share a vision for continuous improvement and growth. Paramount engagement with our team Over the past year, we were able to align numerous organizational structures, implement new employee technology, and continue to transform our company all while achieving high employee engagement survey results. This survey covers a broad spectrum of employee engagement metrics surrounding work environment, management and team dynamics, work engagement, benefits and compensation, and career development. We are very proud of this accomplishment as our organization continues to adapt for even greater success. Cultures are not built overnight. They are built day by day, year after year. Alerus’ culture is unique to us and treasured amongst our team. Alerus employees work hard, don’t take shortcuts, and focus on the client. Our employees align their personal values with our company values. And everyone works together to carry out the company’s vision. It’s a consistency built over many years, and a steady force that continues to propel Alerus forward. 15 O N E A L E RU S F O R E V E R YO N E . O PER ATI O NAL EFFEC TIVEN E S S I S N OT O N LY AB O UT EFFI CI EN CY; IT M U ST AL SO I N CLU D E SCAL AB LE PROCE S S E S D E S I G N ED ARO U N D O U R CLI ENTS . In 2018, we centralized our product operations teams under common leadership to capitalize on operational sy nergies and create unified ser v ice level agreements. A lthough we are in the beginning stages of a unified operations team, we are already making significant progress to realign our staf f, reimagine processes, and improve ef ficiency. A COLLABORATIVE ENVIRONMENT Throughout our diverse product set, there are natural connections of familiar processes and methods. Whether it’s incorporating best practices from one area into another or shifting resources as workload demands change, our operational area is focused on breaking down silos and working together to help each other be successful. The collaborative and empowered spirit within our operations team is transforming how we work — and how we support clients. As our operations team designs forward-thinking, scalable processes, they continually build momentum at an accelerated pace. Two achievements from the past year are working with a single statement vendor and streamlining our product offering. Throughout every area of our company, we provide client account statements; however, our approach and our client experience were not consistent. We made tremendous progress towards this goal in 2018 by selecting our statement partner and moving retirement account statements and deposit account statements to our new partner. The end result culminated with a better client experience, a consistent process, and a favorable cost savings as the full purchasing power of the entire organization was leveraged across all product statements. STREAMLINING FOR EFFICIENCY AND GROWTH Over the last decade, Alerus has successfully completed a dozen acquisitions. As we’ve grown, we’ve realized the need to streamline product structure in order to further scale our business and better serve clients. This past year, we simplified our consumer deposit product portfolio from seven products to three products. Backed by a deep understanding of the competitive landscape and a keen focus on client retention, our team reduced the number of deposit product offerings without significant attrition in the overall portfolio. Furthermore, we are in the midst of a multi-year project to reduce the number of fee structures within our retirement services. We made significant progress throughout 2018 to align our retirement services fee structure to industry best practices and benchmarks, allowing a modernized approach to retirement fees while continuing to maintain clients. As our operations team forges ahead, we further harness efficiencies. As our platforms and processes become even more connected, our design and delivery require an innovative approach, and our ecosystem must center on the client. We are committed to reinventing our operational area to strengthen our infrastructure and advance the agile approach of a broader team. 16 T H R O U G H T H E T I M E LY A N D ACC U R AT E D E LI V E RY O F F I N A N C I A L S O LU T I O N S , O U R O P E R AT I O N S ’ M I S S I O N I S TO P R OV I D E E F F I C I E N T P R O C E S S E S I N A N E M P OW E R E D A N D CO LL A B O R AT I V E E N V I R O N M E N T where employees are empowered with knowledge and innovation. W E S E E T H E C H A LLE N G E S . W E S E E T H E O P P O R T U N I T I E S . We’re focused on our strategy. WE VIEW ALERUS AS A DIVERSE TAPESTRY WOVEN TOG ETH ER TH ROUG H STEADY PERSEVER ANCE AN D DIRECTION . WH EN WE LOOK BACK AT OU R HISTORY, WE ARE VERY PROU D OF OU R ACCOM PLISH M ENTS . WH EN WE LOOK AH EAD, WE ’RE INSPIRE D FOR OU R FUTU RE . 2018 certainly was highlighted by our financial performance; however, even more satisfying were the nonfinancial accomplishments of our team, which we believe will benefit the organization for years to come. Through a shared single vision to help clients make better financial decisions, we’re renewing our role in clients’ lives and creating new meaning. Anchored by a collaborative leadership team, our company is pivoting many interconnected pieces to create long-term stockholder value. Nothing we do is because of chance. We plan for the challenges that lie ahead and are energized by the opportunities. We are a thriving organization pursuing continued prosperity. 19 A L E R U S L E A D E R S H I P. S EN I O R E XECUTIVE TE AM Randy L . Newman Chairman, President, and Chief Executive Officer Katie Lorenson Executive Vice President and Chief Financial Officer Kris Compton Executive Vice President and Chief Strategy Officer 38 years with Alerus 2 years with Alerus 44 years with Alerus Ann McConn Executive Vice President and Chief Business Officer Karin Taylor Executive Vice President and Chief Risk Officer 17 years with Alerus Joined Alerus in 2018 ALERUS LEADERSHIP COUNCIL Maria Biessener Duncan Director of Operations Joined Alerus in 2018 Lori Day Director of Mortgage 2 years with Alerus Scott Fenske Ex Officio General Counsel and Corporate Secretary 3 years with Alerus Jon Hendry Chief Information Officer 35 years with Alerus Travis Ingebrigtson Director of Finance 4 years with Alerus Chad Johnson, CPA Ex Officio Director of Internal Audit 16 years with Alerus Missy Keney Director of Marketing and Client Experience 14 years with Alerus Karna Loyland Director of Deposits 20 years with Alerus Chip Norris Group President, Director of Sales and Service 12 years with Alerus Brian Overby President of Retirement and Benefits 24 years with Alerus Brian Schumacher Director of Wealth Management 8 years with Alerus Teresa Wasvick Director of Human Resources 28 years with Alerus Board of Directors Randy L. Newman Grand Forks, ND Chairman, President, and Chief Executive Officer, Alerus Financial, N.A., Alerus Financial Corporation Karen M. Bohn Edina, MN President, Galeo Group, LLC Former Chief Administrative Officer, Piper Jaffray Companies Former Chief Executive Officer, Piper Trust Company Lloyd G. Case Fargo, ND Past President and CEO of Forum Communications Company Board of Directors, Forum Communications Daniel E. Coughlin Chicago, IL Former Managing Director and Co-Head of Financial Services, Raymond James & Associates Former Chairman and CEO, Howe Barnes Hoefer & Arnett Harold A. Gershman Grand Forks, ND President, Gershman Enterprises, LLC President, Happy Harry’s Bottle Shops MARKET PRESIDENTS Chris Wolf, CPA, Grand Forks 9 years with Alerus Dan Doeden, Fargo 15 years with Alerus Sara Ausman, Twin Cities 7 years with Alerus Rob Schwister, Phoenix 9 years with Alerus Kevin D. Lemke Grand Forks, ND President, Virtual Systems, Inc. Michael S. Mathews Minneapolis, MN Chief Information Officer, Deluxe Corporation Former SVP, Technology and Enterprise Programs, UnitedHealth Group Former Global Head/Director, Global Technology, Operations and Six Sigma, Merrill Lynch Sally Smith Minneapolis, MN Retired President and Chief Executive Officer, Buffalo Wild Wings, Inc. Galen G. Vetter Minneapolis, MN Former Global Chief Financial Officer, Franklin Templeton Investments Former Partner-in-Charge, Upper Midwest Region, McGladrey Twin Cities Advisory Board Hillary Feder Hillary’s Larry Gamst Franklin Partners, Inc. Julie Gilbert The Julie Gilbert Group Larry Lautt Great West Ventures, LLC Lisa Meyer Marketing and Management Executive Dennis Monroe Monroe Moxness Berg PA James Nichols James L. Nichols CPA, LLC Julie Tanaka Compendium Capital Group Compendium Business Strategies, LLC 21 s 0 7 8 1 e h T s 0 3 9 1 e h T s 0 8 9 1 e h T 1879 Founded as the Bank of Grand Forks, one of the first chartered in the Dakota Territory. 1933 First National Bank in Grand Forks opened its doors in Grand Forks, North Dakota. 198 5 Acquired Northwood State Bank in Northwood, North Dakota. 1986 Created Employee Stock Ownership Plan for our employees. 1987 Entered the Fargo market by purchasing West Fargo State Bank in West Fargo, North Dakota. 1989 Purchased Dakota Bank in Grand Forks, North Dakota. s 0 9 9 1 e h T s 0 0 0 2 e h T 1991 First National Bank in Grand Forks purchased the North Dakota branches of First Federal Savings & Loan in Fargo, North Dakota, and changed its name to First National Bank North Dakota. 1997 Historic flood and fire devastated Grand Forks and First National Bank North Dakota’s buildings. 2 0 0 0 First National Bank North Dakota changed its name to Alerus Financial to reflect the evolution from a traditional bank to a diversified financial services company. 2 0 02 Acquired a branch of BNC National Bank in Fargo, North Dakota. 2 0 03 Purchased Pension Solutions, Inc., a retirement plan services company located in St. Paul, Minnesota. 222222 . d t n c s 0 0 0 2 e h T 2 0 06 Opened a trust and investment office in the Twin Cities; purchased Stanton Trust Company in Minneapolis, Minnesota. 2 0 07 Opened a business banking office in Minnetonka, Minnesota; purchased the retirement recordkeeping services unit of Acclaim Benefits, Inc. in Minneapolis, Minnesota; acquired Stanton Investment Advisors, Inc., a Minneapolis-based investment advisory firm. 2 0 09 Expanded into Phoenix, Arizona; purchased the retirement plan practice of Eide Bailly, LLP in Minneapolis, Minnesota; acquired deposits from BankFirst in Minneapolis, Minnesota; acquired Prosperan Bank in Oakdale, Maplewood, and Minnetonka, Minnesota; acquired Residential Mortgage Group in Minnetonka and Arden Hills, Minnesota. 2 011 Acquired a branch in Arizona and selected loans and deposits in Minnesota and Arizona from BNC National Bank in Scottsdale, Arizona. 2 012 Purchased PensionTrend Inc. and PensionTrend Investment Advisers, LLC, in Okemos, Michigan. 2 013 Purchased Tegrit Administrators, LLC. 2 014 Purchased Private Bank Minnesota in Minneapolis, Minnesota; purchased Retirement Alliance, Inc., in Manchester, New Hampshire. 2 015 Purchased Interactive Retirement Systems, LTD, in Bloomington, Minnesota. 2 016 Purchased Beacon Bank in Shorewood, Excelsior, Eden Prairie, and Duluth, Minnesota; purchased Alliance Benefit Group North Central States, Inc., in Albert Lea and Eden Prairie, Minnesota. 2 018 Opened a loan production office in Mesa, Arizona. 232323 SELECTED FINANCIAL DATA (dollars and shares in thousands, except per share data) Income Statement Data Interest income Interest expense Net interest income Provision for loan losses Net interest income, after provision for loan losses Noninterest income Other noninterest expense Income before income taxes Income tax expense Net income Per Common Share As of and for the years ended December 31 2018 2017 2016 2015 2014 $ 87,702 $ 75,637 $ 69,942 $ 56,328 $ 54,394 12,478 75,224 8,610 66,614 102,749 136,325 33,038 7,172 7,967 67,670 3,280 64,390 103,045 134,920 32,515 17,514 7,002 62,940 3,060 59,880 105,089 143,792 21,177 7,141 3,458 52,870 4,200 48,670 93,105 3,316 51,078 (400) 51,478 78,306 118,134 100,115 23,641 6,631 29,669 8,964 $ 25,866 $ 15,001 $ 14,036 $ 17,010 $ 20,705 Earnings per common share $ Diluted earnings per common share Dividends declared per common share Average common shares outstanding Diluted average common shares outstanding Performance Ratios Net interest margin (taxable-equivalent basis) Return on average total assets Return on average common equity Return on average tangible common equity Noninterest income as a % of revenue 1.88 1.84 0.53 13,763 14,063 3.86% 1.21% 13.76% 20.93% 57.58% 73.80% $ $ 1.10 1.07 0.48 $ 1.04 1.00 0.44 13,653 14,007 13,495 14,000 3.76% 0.75% 8.49% 14.34% 60.05% 75.35% 3.63% 0.73% 8.29% 15.40% 62.32% 81.11% $ 1.26 1.21 0.42 13,413 13,947 3.81% 1.12% 10.51% 13.73% 63.52% 77.69% 1.55 1.48 0.38 13,290 13,877 3.97% 1.45% 14.26% 17.42% 60.46% 73.84% Noninterest-bearing deposits 528,552 488,295 443,453 327,654 278,005 Efficiency ratio Average Balances Loans Investment securities Earnings assets Assets Deposits Short-term borrowings Long-term debt Stockholders' equity Period End Balances Loans Allowance for loan losses Investment securities Assets Deposits Long-term debt Total stockholders' equity Capital Ratios Common equity tier 1 Tier 1 capital Total capital Tier 1 leverage Tangible common equity / tangible assets $ 1,677,885 $ 1,475,042 $ 1,345,209 $ 1,124,601 $ 994,047 255,247 286,313 279,992 183,103 258,705 1,960,723 1,824,287 1,750,105 1,399,587 1,299,646 2,131,110 2,001,347 1,934,195 1,533,397 1,424,331 1,766,951 1,664,022 1,666,791 1,295,987 1,191,846 86,851 58,813 72,445 58,803 5,059 65,102 12,599 23,480 29,007 21,562 187,927 176,778 168,742 180,931 164,203 $ 1,733,881 $ 1,574,474 $ 1,366,952 $ 1,126,921 $ 1,095,458 (22,174) 254,878 (16,564) 274,411 (15,615) 278,911 (14,688) 192,343 (17,063) 206,101 2,179,070 2,136,081 2,050,045 1,744,324 1,487,290 1,799,293 1,834,962 1,785,209 1,458,021 1,262,168 58,824 196,954 58,819 179,594 58,813 168,251 70,744 182,282 21,494 170,644 8.43% 8.87% 12.86% 7.51% 6.91% 7.83% 8.29% 12.17% 7.07% 6.01% 7.74% 8.23% 12.29% 6.85% 5.44% 10.92% 12.33% 17.01% 10.85% 8.18% N/A 11.76% 13.02% 10.07% 8.65% 9.49 25.7% Tangible common equity per common share $ 10.68 $ 9.14 $ 7.99 $ 10.50 $ Dividend payout ratio 28.8% 44.8% 44.0% 34.7% 24 CONSOLIDATED BAL ANCE SHEETS At December 31, (dollars in thousands, except share and per share amounts) Assets Cash and cash equivalents Interest-bearing deposits Cash and due from banks Investment securities Trading Available-for-sale Equity, at fair value Loans held for sale Loans Less allowance for loan losses Net loans Land, premises and equipment, net Accrued interest receivable Bank-owned life insurance Goodwill Other intangible assets Servicing rights Deferred income taxes Other assets Total assets Liabilities and Stockholders’ Equity Deposits Noninterest-bearing transaction Interest-bearing transaction Time deposits Total deposits Short-term borrowings Long-term debt Accrued expenses and other liabilities Total liabilities Stockholders’ equity Common stock, $1 par value, 30,000,000 shares authorized; 13,775,327 and 13,669,066 issued and outstanding Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total stockholders’ equity Total liabilities and stockholders’ equity 2018 $ 34,909 $ 5,742 40,651 1,539 250,174 3,165 14,486 1,733,881 (22,174) 1,711,707 21,743 7,645 30,763 27,329 22,473 4,623 10,085 32,687 2017 Restated 40,336 81,662 121,998 1,945 267,021 5,445 17,938 1,574,474 (16,564) 1,557,910 21,229 6,817 29,959 27,329 27,111 4,686 9,213 37,480 $ 2,179,070 $ 2,136,081 $ 563,130 $ 619,333 1,061,709 174,454 1,799,293 93,460 58,824 30,539 1,011,368 204,261 1,834,962 30,000 58,819 32,706 1,982,116 1,956,487 13,775 27,743 159,037 (3,601) 196,954 13,699 26,040 140,986 (1,131) 179,594 $ 2,179,070 $ 2,136,081 25 CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, (dollars and shares in thousands, except per share data) Interest Income Loans, including fees Investment securities Taxable Exempt from federal income taxes Other Total interest income Interest Expense Deposits Short-term borrowings Long-term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest Income Retirement and benefit services Wealth management Mortgage banking Service charges on deposit accounts Net gain (losses) on investment securities Other Total noninterest income Noninterest Expense Compensation Employee benefits Occupancy and equipment expense Business services, software and technology expense Intangible amortization expense Professional fees and assessments Marketing and business development Supplies and postage Travel Mortgage and lending expenses Other Total noninterest expense Income before income taxes Income tax expense Net income Less preferred stock dividends Net income applicable to common stock Earnings per common share Diluted earnings per common share Dividends declared per common share Average common shares outstanding Diluted average common shares outstanding 2018 2017 Restated 2016 Restated $ 81,159 $ 68,799 $ 63,644 4,670 1,234 639 87,702 6,991 1,896 3,591 12,478 75,224 8,610 66,614 63,316 14,900 17,630 1,808 85 5,010 102,749 69,403 17,866 11,086 14,525 4,638 5,098 3,459 2,737 1,738 2,153 3,622 136,325 33,038 7,172 25,866 - 25,866 1.88 1.84 0.53 13,763 14,063 $ $ $ $ 4,773 1,356 709 75,637 3,520 942 3,505 7,967 67,670 3,280 64,390 62,390 13,953 19,882 1,854 (13) 4,979 103,045 67,576 16,490 10,892 12,976 5,623 6,158 3,271 2,609 1,530 2,235 5,560 134,920 32,515 17,514 15,001 - 15,001 1.10 1.07 0.48 13,653 14,007 $ $ $ $ 4,584 1,089 625 69,942 3,385 11 3,606 7,002 62,940 3,060 59,880 57,804 12,640 26,528 1,916 (24) 6,225 105,089 70,359 15,888 11,736 14,510 7,005 6,301 3,237 2,930 1,721 2,439 7,666 143,792 21,177 7,141 14,036 25 14,011 1.04 1.00 0.44 13,495 14,000 $ $ $ $ 26 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (dollars and shares in thousands, except per share data) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Restated Accumulated Other Comprehensive Income (Loss) Total Balance December 31, 2015 $ 20 $ 13,434 $ 42,617 $ 125,162 $ 1,049 $ 182,282 Net income Other comprehensive income (loss) Common stock repurchased Preferred stock dividends Common stock dividends Stock-based compensation expense Vesting of restricted stock Preferred stock redeemed Balance December 31, 2016 Net income Other comprehensive income (loss) Common stock repurchased Common stock issued Common stock dividends Stock-based compensation expense Vesting of restricted stock Balance December 31, 2017 Net income Adjustment for adoption of ASU 2016-01 Other comprehensive income (loss) Common stock repurchased Common stock dividends Stock-based compensation expense Vesting of restricted stock Balance December 31, 2018 $ - - - - - - - (20) - - - - - - - - - - - - - - - - - - - (18) - - 20 98 - 13,534 - - (16) 64 - 17 100 - - (102) - - 1,445 (98) (19,980) 23,882 - - (47) 1,384 - 921 (100) 14,036 - (237) (25) (6,163) - - - 132,773 15,001 172 (231) - (6,729) - - - (2,987) - - - - - - (1,938) - 807 - - - - - 14,036 (2,987) (357) (25) (6,163) 1,465 - (20,000) 168,251 15,001 979 (294) 1,448 (6,729) 938 - 13,699 26,040 140,986 (1,131) 179,594 - - - (15) - 11 80 - - - (53) - 1,836 (80) 25,866 (71) - (288) (7,456) - - - 71 (2,541) - - - - 25,866 - (2,541) (356) (7,456) 1,847 - $ 13,775 $ 27,743 $ 159,037 $ (3,601) $ 196,954 27 BANKING :: MORTGAGE :: RETIREMENT :: WEALTH MANAGEMENT MEMBER FDIC :: ©2019 ALERUS FINANCIAL CORPOR ATION :: 800. 279.3200 :: ALERUS .COM 

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