Alerus Financial Corporation

Good morning and welcome to the Alerus 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 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, Anne McCann. 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 into 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 24-hour flex 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 remain 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 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 sub-debt at a rate of 5.75% and refinanced with the Bank of North Dakota at a rate of 3.5%. Our capital levels remain strong. We believe we have top-tier capital return potential with our proven ability to execute accretive M&A, our history of strong dividend yields, and our newly approved stock buyback plan. We believe our ability to execute a diversified business model in tandem with our strong financial foundation will maximize stockholder value long-term. We also approved a $0.15 per share cash dividend payable in the first quarter. My records go back to the late 60s and show that Alerus has always paid a cash dividend, but since 1987, we have increased our cash dividend every year at an average of 10% per year for the past 35 years, with an average annual cash dividend payout of 30%. When measured over 10 years, our annual increase in cash dividends has averaged 7.4% with an average cash dividend payout of 31%. At our February 2021 board meeting, our board approved a three-year stock buyback program for the repurchase of up to 770,000 shares effective immediately. Repurchases, if and when made, would be in the open market and based upon market conditions. In addition, I'd like to mention that last quarter we announced that we had been named to the Piper Sandler All-Star List and also to the American Banker 85 Best Banks to Work For. This quarter, we are proud to announce that we were named to the inaugural PubD High Performers List and to the Raymond James Community Bankers Cup for 2020. Finally, we are most proud of our annual employee satisfaction survey, where our overall satisfaction score increased from 76% to 81%, an increase of five points, a significant improvement during a very challenging year. These recognitions are valuable to us because we continue to focus our success with our employees, our clients, the communities we serve, and driving long-term growth for our shareholders. We know our ability to continue to focus on driving growth the right way and succeeding with our clients wins in the long run, evident by another successful quarter. With that, let me turn it over to Katie.

All right. Thank you, Randy. 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 refi 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 in related pricing and mandatory delivery of loans to the secondary market continued to increase. We are seeing the refi business slow, consistent with the market, and the valuation of the pipeline decline. As such, we do anticipate the first quarter to be the high watermark for mortgage revenue, as originations decline and the gain on sale margins normalize. As the forward pipeline declines, the decreases in its value will act as an additional headwind to the reported mortgage revenue. As we mentioned in our release, and Randy mentioned earlier, during the first two quarters, we added two high-producing, purchase-focused originators to our team. And it's important to note that our Laris Mortgage Division and our team have always historically been predominantly focused and highly successful on the purchase side of the mortgage business. Our typical split is 70% purchase and we did see purchase volume at strong levels for the first quarter despite the lack of inventory in the Twin Cities. In summary, we expect our mortgage division to continue to shine and deliver higher than pure origination levels and revenue despite the pullback on the refi business. We're also pleased to report the retirement revenue growth with a full quarter of revenue from our recent RPS and 24-hour flex acquisition. The integration of the teams and the business continues to go really well and all of our team members have done a tremendous job of client retention, identifying growth opportunities and seamlessly converting the clients and employees into the Alerus network. Last but not least on the fee income side was wealth management, which grew on the length quarter and typically that's a seasonal low for us in the first quarter. So shout out to our Alerus advisors who delivered really strong production and revenue growth of 23% on a year over year basis. As I say on every call, we believe our diversified business model and revenue has never been more valuable in the backdrop of the environment. In that regard, I'll turn it over to brief commentary on the margin and the related outlook based on what we know today. During the quarter, we recognized approximately 3 million of PPP interest income and revenue. And we have approximately 6 million of PPP deferred loan fees and interest remaining to be recognized. We continue to move the cash into the investment portfolio, which ended the quarter at nearly $800 million. Despite the increase, cash levels remained at $200 million, as deposits continued to grow due to government stimulus, success in the commercial acquisition side, and PPP forgiveness. Our total cost of deposits is at a record low, 16 basis points, and the net interest margin continues to be heavily impacted by the huge amount of liquidity on our balance sheet. We anticipate moving further from our scratching to get to 3% and could see that 2.8 core margin in the future. Lastly, touching on expenses, generally pleased with our expense management. You'll see our occupancy rate dropped 70% in the linked quarter, which is the result of our office closures that we announced last year. Compensation dropped primarily due to mortgage incentives decreasing from $7.9 million to $6.7 million for the quarter. and we expect to see compensation decreasing in correlation with those mortgage volumes declining.