Alerus Financial Corporation

Good morning and welcome to the Alleris Financial Corporation earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 Allaire's Financial Corporation Chairman, President and CEO, Randy Newman. Please go ahead, sir.

Thank you, Chuck, and good morning, everyone. This is our third earnings call since our IPO in September 2019. This morning we intend to discuss our first quarter 2020 financial results and our response to and the 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. As always, we appreciate your interest in our company. We recently released an updated presentation for investors. This presentation is available on our investor relations website. and will serve as a supplement to today's remarks. I will first highlight our pandemic response and other key points before turning it over to Katie and Karin. After that, we would welcome your questions. Before I begin, I'd like to first acknowledge the incredible challenges we are all facing together. Our hearts and thoughts are with all individuals who have been affected by the Coronavirus pandemic and subsequent economic crisis. Like many of you, we too are experiencing uncertainty as the impact of this pandemic is being felt in our company, our clients, and in the communities where we operate and do business. Although one can never fully prepare for a crisis, you can learn from past experience and apply these lessons moving forward. Our company's past experience with adversity has allowed us to move quickly, respond proactively, and remain agile. This discipline doesn't just happen, it's built over time. Quite frankly, it's been built at Alaris over the last 20 years. Coming out of the devastating flood and fire in 1997, our corporate headquarters and operations center were destroyed, our employees and clients were displaced, businesses were completely shut down, and our Grand Forks community faced the most significant economic challenge of its time. Our company didn't just survive and thrive coming out of this event, We learned from it. We learned the importance of diversification. We learned the importance of a fortress balance sheet. We learned to balance growth, risk, profitability, and infrastructure investments. Most importantly, in the last two decades since the tragic flood and fire, our team learned how to be agile, to be innovative, and to respond on a moment's notice. This discipline resulted in a unique project management structure allowing us to be organized, fluid, and nimble. This tragedy helped us build a culture focused on balancing the multiple needs of employees, clients, our communities, and our shareholders. Again, while no one can fully prepare for the worst, I do believe our past history of going through such a devastating time has made our company stronger and better prepared than others to respond to the current pandemic. We are prepared to stand by our clients We continue to support our employees. We are focused not only on doing the right thing, but also doing it the right way. And we will continue to respond accordingly as the pandemic continues to evolve. Now, more specifically, I'd like to highlight our response to the COVID-19 pandemic and the steps we are taking to ensure the safety of our employees and clients, as well as the support and financial well-being of our clients. Again, our COVID-19 response is also highlighted within the investor presentation recently posted to our investor website. Prior to the pandemic, we had both a business continuity plan and pandemic policy in place. Both of these served as guideposts, allowing us to move swiftly in our response to a rapidly escalating environment. Our BCP team began daily meetings in early March At this time, we activated both our BCP plan and our pandemic policy response protocol. For the past six weeks, we have had daily meetings of the BCP team, the Alaris Leadership Council, and our C-suite. We have also had weekly meetings with our Corporate Board Risk Committee. Each of these checkpoints allowed us to ensure we were quickly responding to the ever-changing environment, all while maintaining a wide viewpoint across our community, our Our company and the reaching impacts of COVID-19. Again, because of our past experience with abrupt disasters, our leadership team and project management discipline were instrumental in our seamless transition to responding to the COVID-19 challenges. The safety of our employees and the establishment of a safe working environment was our first priority. Within one week, we transitioned over 85% of our staff or 660 employees to a fully operational remote working environment. We introduced relief pay for employees who were not able to work full time due to branch closures and or childcare concerns. We also established onsite pay for employees who remained in the office serving clients in drive up locations or who were needed to perform critical tasks onsite. In addition to creating a safe working environment for all of our team, We began weekly all employee calls hosted by our C-suite leadership team and offered mental health wellness webinars. We are pleased to report over 85% of our employees are engaging live with these meetings and webinars. We believe it is important to support our employees and help prioritize their physical, mental, and financial well-being. By supporting, engaging, and taking care of our entire team, They can then continue to take care of and support our clients. Serving our clients and advising them on their financial needs, especially during times of crisis, was our second priority. In mid-March we began proactively reaching out to clients and then ramped up these efforts as the CARES Act was introduced and passed and ultimately impacted several of our business lines. In total, our financial advisors have logged over 7,500 calls in the month following this initial effort. In addition to these proactive calls, we hosted seven client webinars dealing with a host of important financial topics relative specifically to the CARES Act, financial markets, and the Paycheck Protection Program. We have had a long held belief in our organization to serve as a trusted financial advisor. Now more than ever, serving in this capacity and operating as a partner is the best way we can help clients. With the closing of our lobbies, we immediately increased our efforts to encourage clients to interact with us digitally and take advantage of the technology applications we have invested in over the past couple of years. We saw this engagement spike in mid-March as banking client digital logins increased 76% coinciding with the first economic impact payments. We engage clients with our financial wellness technology and financial workouts continue to increase this past month. Next, we move quickly with the SBA PPP program and have taken over 900 applications and funded over $300 million of loans for borrowers, including both existing and new clients. Finally, we have offered various loan payment modifications and waived early CD withdrawal penalties. We continue to work one-on-one with clients whose financial situations have been adversely impacted by the coronavirus and stand ready to support our clients from a position of strength. Over the past several years, our company has invested in several technologies to ensure we can continue to meet client needs and remain relevant. Because this foundational work was already complete, we were able to leverage these investments during our COVID-19 response. Prior to COVID-19, over half of our team had laptops, meaning they could already work remotely. Additionally, we transitioned Citrix's license to non-laptop users to quickly ensure a fully operational remote workforce. Both of these investments for our employees allowed us to move 85% of our staff to work from home within one week. Several years ago, we invested in Salesforce as our company's CRM system. We leverage this technology to proactively measure our reach to clients, adjust our clients' communication strategy, and closely monitor the PPP program. In addition to these investments in technology, for our employees. We've also invested in technology for our clients. This includes the MyAlaris, a financial wellness digital hub designed to help clients make better financial decisions. We also recently launched an integrated online and mobile banking experience, user-friendly online account opening, robust business banking digital applications, a new Alaris.com website, leading marketing automation software and secure virtual meeting technology. Each of these applications has made it easier for our clients to interact with us and allowed us to remain fully operational in serving clients even while our lobbies remain closed. Because of these timely infrastructure investments, we are able to respond proactively to inform and meet our clients' financial needs. As mentioned earlier, our past experiences have greatly influenced our strategic decisions. Since 1997, we have diversified into new growth markets, added new fee-based services, invested in our infrastructure, technology and client applications, and added key leadership where needed. Our guiding principles, our constancy of purpose, and the consistency of our leadership has resulted in a shared direction and philosophy to balance growth, return, risk, and infrastructure investments. When we compare ourselves to the SNL public company peer groups, we believe that we have a higher risk-adjusted return. Our last five-year financial performance have outperformed the average of the SNL peer groups with less balance sheet risk and less dependency on margin income. Our conservative balance sheet philosophy has served us well in the past 20 years of crisis management by allowing us to enter these times of crisis with strong core operating earnings, strong credit quality, and with a strong capital position that not only allows us to meet challenge, but to preserve, protect, and enhance shareholder value by taking advantage of strategic opportunities when they present themselves. After 9-11 in 2003, we bought Pension Solutions, a $400 million retirement plan administration company that has grown into $30 billion of assets under administration at the end of 2019 and expanded into other synergistic fee-based services such as payroll, FSA, and HSA. In 2009, we did not need to take TARP, and because of our conservative operating philosophies and strong foundation, we were able to take advantage of strategic opportunities by expanding into mortgage banking, the Twin Cities and Phoenix Scottsdale marketplaces. We believe we are entering into this economic crisis with a similar strong foundation ready to take advantage of strategic opportunities when the timing is right. This strong foundation of the LARIS includes a diversified professional services business model. Our diverse business model is not primarily dependent upon interest income which in today's low rate environment gives us an annuity stream of consistent core operating earnings. Alaris has close to 60% of its revenue coming from fee-based areas of professional services. The level of non-interest revenue we generate through retirement and benefits, mortgage and wealth management is rare amongst our competitors. This diverse revenue stream better positions our company to continue to perform at high levels. With our past experiences, we learned to not have all of our eggs in one basket. During the agricultural challenges of the 80s, we had well over a 25% concentration in the cyclical agricultural community industry. Today, we have about 3% in egg and virtually nothing in oil and gas. And just like our revenue is dispersed across different products, our revenue is also dispersed across different markets. Strategically, we expanded into growth markets that allow us to grow organically and enhance shareholder value expectations. We are very fortunate to have passionate, loyal, professional, and committed employees. The Alaris culture emphasizes doing the right thing, serving clients with advice and guidance, and being an employer of choice. Professional employees want to work for a reputable company that does the right thing for its employees. its clients and its communities. Alaris is that company. As mentioned, we have strong and diversified core operating earnings. Our strong and consistent earnings allow us to continue to honor our commitment to our shareholders by maintaining our 15 cent per share quarterly cash dividend. As mentioned, we have a strong diversified balance sheet. Our credit quality, credit metrics, and capital ratios are very strong heading into the heart of COVID-19. At the end of the first quarter, our non-performing assets to assets ratio equaled 0.29%. Our reserve to loans equaled 1.54%. And our coverage ratio of reserves to non-performing assets equaled 388%. We also reported a net recovery of $565,000 in the first quarter. In addition to our strong credit quality metrics and in response to our philosophy of conservative credit discipline, in the past two years, we have reviewed and rewrote our credit policy, strengthened our underwriting staff, and added a new chief risk officer and new chief credit officer. We pride ourselves on our relationships with our regulators and our financial and legal advisors. We have strong diversified leadership that includes our C-suites, a 21-person Alaris Leadership Council and a strong and engaged corporate board. Alaris has a very diverse, engaged, and professional leadership team. Our collaborative and professional leadership culture is a source of strength for Alaris and results in high engagement, strong leadership development, great pride, passion, and high personal responsibility and accountability and ownership for not only what we do, but more importantly, how we perform, serve clients, and conduct ourselves. Alaris has always developed strong internal leadership talent, evidenced by the fact that over half of our Alaris Leadership Council has been with the company over double-digit years. But we don't just develop talent internally and promote from within. We also recognize the benefit of attracting top talent from other organizations. Because of our sound business model, unique diversification of revenue, and collaborative culture, we're able to attract top talent. The combination of newer and existing leaders enhances our consistency, foundation, and culture. We are a better leadership team and company because of this blended perspective. Everyone on our leadership team is highly engaged and contributing greatly to our company during these challenging times. Finally, let me mention again our history of past financial acquisition and disaster achievement and successes. We believe our past financial performance results speak for themselves. We believe in operating from a source of strength. We believe we are headed into this next economic downturn in better earnings and balance sheet strength than most of our peers. We believe we will engage our professional staff serve and meet our clients needs and protect and enhance shareholder value. Our focus today is on our employees and our clients in maintaining our strong foundation that has been built. We believe this will result in organic growth opportunities and position us to consider strategic growth opportunities at the right time and when they present themselves. I'll now turn it over to our CFO, Katie Lorenson, to discuss our first quarter financial results in more detail.

Thank you, Randy. Good morning, everyone, and thank you for joining our call today. I spent a few minutes today providing some additional color on the financial results for the first quarter. In summary, we were very pleased with the results of the quarter. Obviously, given the incredible uncertainty of the duration of the health crisis, it is difficult to speak with confidence about forward-looking earnings or expectations. Let me start first with what we believe is the most important attribute of a financial institution today, safety and soundness on our balance sheet. As Randy mentioned previously, we entered this crisis from a significant position of strength due to our recent capital raise. Our TCE at the end of the first quarter exceeded 10% and our allowance to total loan ratio was 1.54%, with allowance coverage nearly four times the amount of our non-performing loans at March 31st. Our liquidity position was further strengthened in the first quarter as we added $150 million of core deposits, a 7.6% linked quarter growth rate. Approximately half of this growth came from our retirement and wealth division and represents sticky and stable funding with quarterly repricing going forward. The other half of this growth was driven by new business and increases in commercial balances. Generally speaking, all consumer deposit products and health savings accounts ended the first quarter up from year end. We generally see deposits decreasing in the second quarter due to public fund seasonality. However, because of our strong liquidity position in the first quarter, we were limited in our bidding for public funds. This has left us in a better position from an interest expense standpoint, and furthermore, we should see less seasonal fluctuation in the second quarter as we are generally holding only operating accounts from most public entities. Our loan-to-deposit ratio at March 31st was just under 83%, as loan growth for the quarter was a solid 2%. D&I loans grew 6%, and CRE loans grew 5%, which was offset by declines in the consumer and residential real estate portfolios. The first round of PPP loans in April will add approximately $300 million to the balance sheet, while nearly $200 million of the initial disbursements went into Alaris deposit accounts. We are closely monitoring our line of credit usage for our commercial borrowers, Usage was 38% on March 31st compared with 39% a year ago. Usage of lines in our HELOC portfolio continued to decline and fell to 45% at the end of the first quarter. We continue to see typical line usage into April and it remains consistent with seasonal trends. Of note, line utilization has historically peaked in the second quarter in the lower 40% range. We are providing payment relief, as Randy mentioned, to both business and consumer clients. as well as following the Fannie Mae guidelines for residential mortgages. Karin Taylor, our Chief Risk Officer, is on the line and will speak to the volumes and numbers during the Q&A session. Turning to our investment portfolio, over the course of the past year, we have worked to continue to reduce our asset sensitivity. This includes increasing the investment portfolio from 250 to 350 million today. The investment portfolio has been slowly restructured to add duration and yield We purchased approximately $44 million in the first quarter prior to the Fed's actions. Duration has been increased to over four years from three while building in yield. We plan to continue to reinvest but have moved toward high-quality taxable unis and 15-year mortgage-backed securities.