Alerus Financial Corporation

Good morning and welcome to the Alaris Financial Corporation 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, Grant, and good morning, everyone. This is our sixth earning call since our IPO in September 2019. This morning, we intend to discuss our fourth quarter 2020 and year-end financial results and also to give a current impact of the COVID-19 pandemic. Today, I'm joined by our Chief Financial Officer, Katie Lawrenson, our Chief Risk Officer, Karin Taylor, and our Chief Revenue Officer, Ryan Goldberg. As always, we appreciate your interest in our company and invite your questions at the end of our introductory remarks. Let me first begin by recognizing and thanking all of our almost 850 employees at Alaris. Our significant achievements in 2020 were a result of their dedicated efforts and reflect their pride and passion that they have in Alaris. Alaris is a purpose-driven organization with very strong ethics, principles, values, and performance standards, all centered on a guiding principle to do the right thing always and to help our clients and customers achieve their financial goals. During the fourth quarter 2020, we continued to ensure that our employees are safe and that we meet the needs of our clients during this period of uncertainty. Our focus and efforts remain the same in the fourth quarter as they have throughout 2020. Katie and Karin will give more specifics in their reports. I would like to focus on a brief summary of 2020. We, like everyone else, did not anticipate COVID and its impact as we began 2020. It did, it has, and it will continue to have an impact on us going forward. That being said, and despite this disruption and uncertainty, Alaris achieved record financial results for 2020, continued to execute our organic and inorganic growth strategies by proactively meeting the needs of our employees and clients. We successfully completed our 14th fee income acquisition and we continuously continue or continue to build upon our very strong financial foundation as we head into 2021. I'm very pleased to announce that Alaris achieved this record financial performance in 2020 that consisted of record net income totaling $44,675,000, fully diluted earnings per share of $2.52 per share, Return on equity of 1441% and return on tangible capital of 17.74%, respectfully, and an ROA of 1.61% for the year. Our stock price increased significantly throughout 2020 from $22.50 per share on January 1, 2020 to a low of $15.26 on April 1, 2020, reflecting the concern that the industry had for credit quality in the pandemic, and finished at year end at $27.37 a share. Achievements in 2020 included record financial performance, proactively protecting the safety of our employees and meeting the needs of our clients, being named to the Piper Sandler All-Star List for 2020 for small cap financial institutions, being named one of the 85 best banks to work for in 2020 by American Banker, and successfully closing on another fee income acquisition in the Rocky Mountain region of Colorado. At this time, I'll turn it over to Katie Lawrenson and follow up with some concluding remarks at the end of today's presentation. Katie?

Thank you, Randy. Good morning, everyone. Thank you for joining our call today. What an incredible quarter and a year indeed. We are, of course, very proud of our financial results, but even more proud of how we got there and all of our amazing Alaris team members. So I'll briefly walk through some of the highlights for the quarter, and then I'll hand it off to Karin, who will provide an update on credit-related matters, PPP, and provisioning. The trends for the fourth quarter picked up steam right where the third quarter left off and I'll go right into mortgage, which was again a highlight this time with originations blowing right past last quarter's records, surpassing 600 million to end the year at nearly 1.8 billion of originations. I've mentioned it before, but I think it's worthy of noting again that this unprecedented volume would not have been possible without those long-term investments we've made in technology and digital. Although our originations are typically weighted towards the purchase side, the mix shifted as expected in 2020 to a 55% of total originations in the refi space. Purchase volume did remain strong in 2020 and our mortgage loan officers produced on average over $55 million in 2020. Our capital markets and our operations teams shined with continued strong margins and a nearly 90% pull-through rate on mandatory delivery. We ended the year with almost 6,000 clients purchasing or refinancing their home with Alaris. We are grateful and proud of our team members within the division and across the company who helped make these results possible. As the mortgage application volume came down from its record levels, the valuation of the forward pipeline decreased 2.3 million in the quarter, ending the year at a mark-to-market gain just over 8.8 million of the nearly 62 million of mortgage revenue reported. We expect the first quarter volume for 2021 to be higher than usual for a first quarter, but down from the record levels of the fourth quarter volume. Sticking with the fee income theme, which comprised over 64% of total revenue in 2020, retirement revenue finished in line with expectations. Assets in the division jumped up to $34 billion, driven by strong market conditions and the closing of the 24-hour flex RPS transaction in mid-December. From the first conversations with the leaders of RPS, we believe these companies had a strong culture fit and we are seeing the teams integrating well and focusing on client retention and conversion. Wealth management finished the year strong with overall production exceeding our expectations. Certainly impressive given the volatile environment of 2020. On the balance sheet, which ballooned over the $3 billion mark in total assets at the end of the year, We continued to build the investment portfolio, adding another $100 million in the quarter from cash with both short and long-term purchases. But despite these ongoing efforts, the cash levels remained in the $200 million range, consistent with most of 2020. With loans held for sale at historic highs of $122 million and PPP forgiveness continuing, it appears the liquidity levels will be higher and remain longer than we anticipated. From a net interest margin standpoint, the increase on a linked quarter basis was due to the PPP loan forgiveness. On a core basis, the net interest margin dropped to 3.03 from a Q3 core of 3.10. Cost of funds decreased another nine basis points while average deposits grew nearly 5% on a linked quarter basis. Excess cash continues to weigh a heavy burden on the NIM despite these ongoing efforts to reduce the cost of deposits. Last but not least, expenses. Expenses for the quarter did have a few outliers. First and foremost, the compensation rose in conjunction with the increase in mortgage volume and an increase in accruals for total loans originated, not just sold. In addition, one-time adjustments to year-end accruals were made relating to the outstanding financial performance of the company. During the quarter, we also made the decision to exit another four locations, bringing our total office closures for the year to six, six of our, or a quarter over 25% of our physical footprint. The impact to the financials for the Q4 was over $700,000. In the technology and business services line, we included some one-time expenses related to the permanent transition of some of our employees to a home office. In addition, we accelerated a few projects into 2020. Professional services included merger-related expenses for the acquisition we closed during the quarter, And we expect the 2021 expense run rate to normalize in the $40 million per quarter range. As a final point, we are pleased to see our investments in our One Alaris culture, our talent and technology translate into results. Our teams are working with urgency to identify additional opportunities to expand relationships and grow our client base, as well as increase efficiencies and reduce expenses. Although uncertainty remains for 2021, it is clear the enterprise value of our company is strong and resilient to incredible challenges. I will now turn it over to Karin Taylor, our Chief Risk Officer.