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. Good morning, and welcome to everyone who is joining our call today. Today, I am joined by Karin Taylor, our chief risk officer, and Katie Lawrenson, our current CFO, and as we recently announced, our future president and CEO. In addition to announcing the transition of leadership to Katie in 2022, we also announced the addition of three new corporate directors to our board, Jan Estiff, Jill Schertz, and Mary Zimmer. Alaris' ability to attract and retain talent from the boardroom to the entry-level professional is a key differentiator in our ability to grow and execute our strategic plan. The third quarter was another quarter of impressive financial results. Our diversified business model continues to drive strong financial performance as we ended the third quarter with a return on tangible common equity of over 18%. We generated $57.2 million of revenue through continued momentum in our retirement, wealth management, and mortgage businesses, while net interest income and loan growth, excluding Paycheck Protection Program, or PPP loans, showed incremental improvement with average total earning assets growing 10.6% year over year. Credit quality was better than expected with another net recovery quarter driving a negative provision for the quarter. Tangible book value grew over 7% from a year ago, which includes the intangibles recognized in the December 2020 acquisition of the Denver-based 24-hour flex RPS. During the quarter, we converted 24-hour flex clients to Alars, and we are pleased to see exceptional client retention and growth. We greatly appreciate all of our employees for their continued hard work, remarkable ongoing client engagement and dedication to serving our clients and their ability to help us produce strong returns for our shareholders. I am so proud of the company's historical and current levels of performance. Next April 2022 is the 25th anniversary of the devastating flood and fire in Grand Forks, North Dakota. that created a crisis situation for both the community and for our company. I'm famous for the line that I use when I state that while I'm immensely proud of the financial performance of Alaris, the non-financial achievements of Alaris define and separate us from our competitors and I believe will drive this company to continued outperformance of our peers well into the future. Alaris is a purpose-driven company that performs exceptionally well and is blessed with enormous professional talent that have a strong pride and passion in what we do and how well we focus on client success and satisfaction. Before I turn it over to Katie and Karin, I'd like to just say that over the past several years, Alaris and our board successfully became a public company and significantly improved the leadership of our company. This seamless transition occurred during a pandemic and has not interfered with record earnings the past several years. In 2016, we created the Alaris Leadership Council, which includes our top 20 product, staff, market leaders, in addition to our C-suite executives. As needed, we also successfully recruited and brought in new leadership to supplement our internal talent, and in every case, we were able to attract our number one candidates. In addition, and as I mentioned earlier, we are adding three high quality industry experience corporate directors to our leadership team. And finally, the board decided to name Katie Lawrenson as my successor. I'm very proud of how the board followed the process to identify candidates based upon performance and cultural fit and ultimately chose Katie. No one has contributed more to Alersa's success than Katie over the past several years. I didn't think that we would ever find anyone who mirrored my pride and passion in Alaris, but we have found that person in Katie. The response from advisors, investors, and employees to the announcement of Katie has been overwhelmingly positive and has reinforced the decision of the board. Alaris is making these leadership changes during a position of strength, and Katie has Karn Taylor, Ann McCann, experienced and engaged corporate directors, and a very talented and experienced Alaris Leadership Council to call upon as she builds her team and focuses on executing strategies to keep Alaris successful in the future and to meet the never-ending challenges of our industry. I strongly support the decision of the board, and I couldn't be happier for Katie or for Alaris. I have the greatest confidence in her abilities, and she has my unequivocally support. She is the right person at the right time. I will now turn it over to Katie, currently our Chief Financial Officer and our new Chief Executive Officer on January 1, 2022. Katie?

Well, thank you, Randy, and thank you for your many, many years of leading this exceptional company. I will spend just a couple minutes today touching on the highlights of another excellent quarter of results and the continued momentum that we have building within Alaris today. First, I'll spotlight the incredible efforts of our revenue generating team members. Our business advisors and financial guides continue to put up impressive numbers and pipelines remain strong across all product offerings. I believe we have turned the corner on loan growth, ending the quarter with balances up for the first time this year. The SBA team continues to be a welcomed addition to our company. With our significant commercial base of clients and the expertise and experience of this team, We believe this product offering will continue to help differentiate Alaris and the value we bring to our business clients. The team is integrated so quickly and so well into our organization. We've closed a couple of deals already and we have a solid pipeline and good opportunity flow. Our business model continues to prove out with client expansion opportunities growing and upsell of treasury management and synergistic product sales in our retirement business remaining strong. Within our consumer segment, our wealth management business had another strong quarter, and new revenue for the quarter kept pace with last quarter, both at exceptional levels. We rolled out a wealth management digital account opening, which has not only provided a big efficiency lift for our team members, but has delivered a seamless and simplified process for our clients. Our mortgage units had another great quarter, serving over 1,200 consumer clients. Our business continues to evolve back to our historical mix with purchase volume averaging approximately 67% of the production in the quarter. As expected, we did see the continued unwinding of the value of the hedge this quarter, a revenue headwind of about $1.8 million. We estimate a seasonal drop in volume of about 20% in the fourth quarter and the hedge to unwind an additional $1.7 million. Briefly on the margin, we saw more of the same with stimulus-driven liquidity remaining heightened. Our deposit balances have consistently held at $2.7 billion for the first nine months of 2021, an incredible 48% increase from pre-COVID Q3 2019 ending balances. We did see net interest income, XPPP, increase this quarter, a trend we expect to continue as we've built a billion-dollar investment portfolio and continue to put on loan growth. We've seen some significant deposit balance inflow in October with some big clients, and this could lead to further pressure on the margin. Once we see outflow of these funds, which we expect to be inter-quarter, we would expect to stabilize and in the longer term improve from here as we shift investments into loan growth. Last but not least, expense management. From an expense standpoint, our execution and controlling costs continues, and we delivered another solid quarter of managed expenses. We continue to extract efficiencies in processes, operations, and facility closures while growing our client base and engaging clients in our digital technology investments. All of this while employee satisfaction scores and recognitions continue to distinguish Alaris as an employer of choice. That's a wrap for my remarks. I'll turn it over to Karin for some brief comments on credit and the allowance.