Alerus Financial Corporation

Good morning and welcome to the Alaris Financial Corporation second quarter 2020 earnings conference call. All participants will be in 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 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 Alaris Financial Corporation Chairman, President and CEO, Randy Newman. Please go ahead.

Thank you and good morning everyone. This is our fourth earnings call since our IPO in September 2019. This morning we intend to discuss our second quarter 2020 financial results and the current impact of the COVID-19 pandemic. I might also mention that we've updated our investor presentation for our second quarter performance and you can access that on our website. 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. In today's call, I will first highlight our record setting earnings for the quarter and other key points before turning it over to Katie and Karin. After that, we would welcome your questions. Our financial performance in the second quarter mirrors what other banks with diversified business models are reporting. Significant balance sheet growth as a result of almost 360 million of PPP loans, weaker net interest margins and record mortgage revenue growth. All of this resulted in Alaris reporting a record quarter with net income of $11.5 million. Although the pandemic has been incredibly disruptive, we are blessed with very talented, loyal and committed professional employees who are driven to providing exceptional client service. Despite the challenges of moving to a remote work environment and the impact of COVID on personal lives, our employees worked above and beyond to deliver record-setting mortgage production of $431 million to over 2,200 clients. Additionally, our banking division made $1,600 million PPP loans providing over 360 million of funding which also included loans to 370 new banking clients. We also introduced the first of several virtual webinars in the second quarter to provide guidance and help clients with their financial issues in a number of different areas. At our last earnings call, I recalled our past experience in dealing with disasters. These learned experiences have enabled us to move quickly and adapt to changing work conditions, proactively respond to increased clients' requests and inquiries, and never lose sight of managing our company for the long term. Despite volatile and uncertain economic conditions, our company accomplished record-setting production and earnings. Our leadership team is steady and disciplined in our approach. Now more than ever, I am proud to state that our company's focus remains the same. Number one, ensure the safety and well-being of our employees. Serve and meet the financial needs of our clients during these unusual economic times. And third, maintain a fortress balance sheet of strong reserve coverage of our credit portfolio, strong core operating earnings from our diversified business model, and maintain robust capital levels. The investments that we have made in technology and people, together with our focus on a one hilarious organic growth strategy, have served our company well during the current pandemic. During these challenging times, they have enabled us to meet and exceed the needs of our clients, made more difficult with changing work conditions and record client production. We have seen significant increases in the use of technology that provides digital delivery and client interactions with our trained professionals. In my 40-year career with Alaris, and as far back as my records show, Alaris has performed at an average of a 120 ROA, a 12% ROE, and has increased the cash dividend an average of nearly 9% per year. We continue to believe that our high-value professional services business model and our 60-40 fee income to traditional bank margin income diversification will allow us to outperform our peers and justifies a premium market valuation. We did not anticipate this quarter at our last earnings call, but we are very, very pleased with our financial results. They are an indication of the strength, resiliency and the consistency of the Alaris business model and leadership team. and while we are optimistic of our ability to meet the challenges of the future, we do anticipate a slower and uncertain economic recovery. Despite these concerns, we believe we are well prepared for these challenges and that Alaris is well positioned to meet these challenges and needs of our clients while performing better than our peers. That concludes my initial remarks and now I'd like to turn it over to Katie Lorenson, our CFO, and Karin Taylor, our Chief Risk Officer, to more specifically discuss our financial performance, our credit quality, and more of our company's response to the challenges of the COVID-19. We look forward to your questions at the end of their initial discussions. Katie?

Thank you, Randy. Good morning, everyone. Thank you for joining our call today. As Randy noted, the second quarter produced an incredible $11.5 million of net income and year-to-date total asset growth of 22%. We are very pleased to see our investments in our one hilarious culture, our talent, and our technology translate into results. Although the uncertainty remains, it is clear the franchise value of our company is strong and resilient to incredible challenges. This morning, I'll briefly walk through some of the highlights for the quarter, and then I'll turn it over to Karin, who will give an update on credit-related matters as well as provisioning. During the second quarter, we saw truly tremendous changes to our balance sheet. First, our loan balances increased over 300 million or 18%. The increase included, of course, the PPP loans, which equated to approximately 20% of our total loans. We experienced decreases in our C&I portfolio outside of those PPP loans due to extraordinarily low levels of utilization in our lines of credit. We also experienced, of course, a headwind in the residential portfolio due to the level of refis and lower-lying utilization in our HELOCs. On the funding side, we continued to see incredible inflows from many different sources. We had some really nice commercial new business generation. Our synergistic deposits continued to build, and we also saw cash reserves continue to build within our client base. We've made approximately $200 million of the proceeds from the PPP loans came in and is still sitting in our deposit base. This dynamic has weighed heavily on our net interest margin, which moved down 21 basis points in the linked quarter. The highlight of the quarter outside of the level of PPP loans was certainly the record volume of mortgage origination. This was made possible through those previously mentioned investments in technology and talent. The transition to mandatory was timely as margins have exceeded expectations and a healthy pipeline heading into the third quarter put the unrealized gain on mandatory at $5 million for the year. Based on record months of applications, we expect the volume to remain above prior year production. However, it is important to note as the forward commitments decline, the unrealized gain will likely decrease from the Q2 level. Moving on to the Retirement Benefits and Payroll Division, we did see a revenue decline on a linked quarter and year-over-year basis. The decline was primarily related to the impact of the decline in the average daily balance of assets and the final adjustment to eliminate revenue sharing and replace those fees with transparent, explicit fees in our clients' plans. To be specific, in the second quarter, we finalized the fee schedule changes and made an accrual adjustment to exit the fee income line item. This adjustment caused a $1.2 million decrease on a linked quarter basis with the remainder of the difference due to asset-based fees. While the average daily balances did drag during the quarter, the market did rebound and inflows topped outflows, pushing the total assets in the division past the $30 billion mark at the end of the quarter. The on-balance sheet contribution of this division continues to gain significance with over $450 million of deposits sourced at market rates with little overhead costs. While retirement and wealth management growth can certainly be challenging in times like this, Our one hilarious approach in our business model provides opportunities to engage with our massive client base and provide advice to those looking for help navigating these uncertain times. In the second quarter, we launched an initiative focused on connecting our sales force of advisors and guides with individual participants in this virtual environment. In the first couple of weeks, the results have already generated a couple dozen opportunities and over 1 million in new wealth management assets. From an expense standpoint, the increase in the quarter was driven entirely by mortgage incentive compensation, Other noteworthy items included the increase in our provision for unfunded commitments, a direct correlation to our decline in line utilization, which accounts for over $800,000 of the increase in the linked quarter expenses. In addition, we had another $300,000 of write downs on our mortgage servicing assets. Despite these increases in non-operational expenses, our efficiency ratio is improving and we continue to focus on managing expenses, operational efficiency with urgency. Nearly all expense categories were down and expenses on a linked quarter absent these items would have tracked down about 2% despite nearly half a million of COVID-related expenses in the quarter. Expense management is top of mind for our leadership team as we continue to manage the company during this challenging environment. We are proud of our record performance achieved during this quarter, but we also recognize the economic uncertainty and headwinds that lie ahead. Karin, I'll turn it over to you.