Q3 2020 Alerus Financial Corp Earnings Call
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Financial Corporation.
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It's being recorded.
This call May include forward looking statements.
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Important factors that could cause actual results to differ materially somebody's indicated in the forward looking statements.
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I would now like to turn the call why the change.
Financial Corporation.
I didn't see ours when you marry please go ahead.
Thank you Rachel good morning, everyone. This is our fifth earnings call since our IPO one year ago in September of 2019.
Good morning, we intend to discuss our third quarter 2020 financial results and the current impact to the cold at 19 pandemic today I'm joined by our Chief Financial Officer, Katie Lorenson, Our Chief Risk Officer current Taylor and our Chief revenue Officer, Bryan Goldberg as always we appreciate your interest in our company.
During the third quarter, we continued to ensure that our employees were safe and that we meet the needs of our clients. During this period of uncertainty we remain confident in our ability to continue to navigate the uncertainties of this downturn, while also driving significant value for all of our stakeholders as we navigate.
Through the remainder of 2020 I'm very proud of how our organization has responded to the.
This I'm certain been challenging environment. Our company has accomplished so much in 2020, despite cold at night team, which is a testament to our team and our business Bob I'd like to thank our employees for their extraordinary efforts during these unprecedented times.
For the third quarter 2020, we reported record net income of 17.7 million or 99 cents per share diluted earnings per share while our net interest income remains under pressure from historically low interest rates our fee income businesses continue to produce.
<unk> results are a testament to our high value professional services business model and our diversified financial services company.
It's most notably seen that our mortgage retirement benefits and wealth management divisions, all of which grew from the previous quarter. During the third quarter. We saw several other areas of improvement our capital ratio strengthened at both the bank and the holding company many of our asset quality indicators, including.
Net charge offs improved and our liquidity position remains very strong.
Our prudent historical underwriting and conservative balance sheet.
Buying with the actions, we've taken to innovate and strategically involved.
Evolve our businesses over the last several years has led to our strong operating performance through the pandemic and enabled us to serve and support our clients effectively during these unprecedented times, our third quarter financial results. Further demonstrates this and continues our efforts to build a fortress.
Like balance sheet with preference for fee income over large independent banking revenue.
Given the uncertainty that remains in the economic outlook, we will remain focused on monitoring our borrowers credit situation and we'll continue to make adjustments as new information emerges as I've discussed before we are intensely focused on serving our clients.
Furthermore, we continue our progress in transforming our operations processes and technology. Our continued innovation over the last several years has enabled us to provide support and advice to our clients. During these uncertain times. Our long term philosophy is and has always been to remain relevant with.
Yes.
Evolving the way, we serve our clients as their preferences change and new technologies emerge. It is still early but we're excited about the prospects of being able to reach in support more clients as we grow in doing so we'll continue to drive long term value for our shareholders.
Finally, I'm proud to announce our board of directors approved a 15 cents per share dividend for the third quarter.
Even with the letter since 1981, and Unfortunately My records only go back to a 1969, but this would be over 247th consecutive quarters that we have paid a cash dividend I also know that over the past 40 years. My career, we have paid out approximately 30% of our earning.
And averaged almost a 9% annual increase in the cash dividend to shareholders. This is another example of the value that we have delivered to our shareholders over a very long period of time that concludes my initial remarks, and I'd now like to turn it over to Katie Lorenson, our CFO incurring tailor 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 cold at night team. We look forward to your questions at the end of their initial discussions with that I'll turn it over to Katie.
Alright. Thank you Randy good morning, everyone. Thank you for joining our call today I'll briefly walk through some of the highlights for the quarter and then as Randy mentioned I'll turn it over to Caren to provide an update on credit related matters and provisioning and I called it a response Oh, let's start with mortgage results for the quarter were simply stunning originations exceeded 500 million and.
We surpassed the billion dollar mark for the year. This unprecedented volume would not be possible without the long term investments made by the company in recent years from a technology aspect over 90% of our applications are processed through our digital channels and are printing has been reduced from 200000 pages to 20000 from a talent perspective, the company's investment in moved to mandatory delivery was.
Ordinarily well timed as margins are even higher than expected due to the operational constraints facing the industry our.
Our last team members continued to produce strong purchase volume at levels exceeding 2019, the mix of purchase has moved to less than 50% of the volume in September was our largest month of.
Ever in that division.
<unk> for the quarter reached historic levels. The combination of the strong pipeline in the higher margin moves the mark to market on the heads up $6 million in the quarter, bringing the year to date change in fair value of the hedged to a gain of over 11 million of the nearly 45 million of revenue that's reported.
We anticipate fourth quarter volume to remain strong with originations near to your Q3 levels.
However, the application volume declined 12% in September at trend, we do expect to continue with seasonality.
As such we expect the value of the forward pipeline or the hedge to decline in the fourth quarter and into 2021, putting pressure on overall mortgage revenues.
Sticking with the fee income theme, which comprises nearly 65% of total revenue up from 60% a year ago, our retirement revenue rebounded in the third quarter. After exiting the revenue sharing a strategic move to be more consistent with our industry practices. We expect this run rate to be fairly consistent assuming market conditions are stable walkman.
<unk> revenue also improved in the quarter in September was the largest month of the year from a new asset standpoint, as our advisors continued their proactive outreach to clients in the retirement vertical by leveraging our sales force technology investments.
Sticking with the proactive outreach our business advisors continue to cultivate new PTP client expansion efforts again, leveraging our technology to track and report. These leads we're pleased with the results so far including over a third of our 300, plus new PTP clients opening a deposit account Blair.
Onto the balance sheet, which remain full and through the third quarter. We continued to build the investment portfolio from cash both the short and long term purchases cash.
Definitely will then debt at the end of the quarter, but lets turn quickly in October to the $200 million range consistent with what we've seen most of 2020.
Line utilization dipped again in the third quarter to historic lows deposit balances remained robust and we had our highest quarter ever of online account opening.
Notably total deposits sourced outside of our banking geography exceed 600 million at the end of the third quarter.
From a net interest margin standpoint, we did have a slight recovery in the quarter fees and interest income from P.P. loans increased to 3.2 in the quarter excess cash continues to weigh a heavy burden on the NIM. Despite ongoing decreases in our cost of deposits. We expect the margin to script to 3% excluding the impact of TPP.
Last but not least expenses for the quarter, which were in line with expectations compensation roles in conjunction with the increase in mortgage originations a trend. We expect will continue into the fourth quarter. Other notables were the decrease in postage part of our ongoing war on paper to reduce expenses and move to electronic everything throughout our company. In addition, we didn't have a normalized adjusted.
Our provision for off balance sheet commitments compared to the outsized outsized adjustment that we had in the second quarter.
From an expense outlook, we are very pleased with the progress made thus far by our team members. We are focused on productivity and doing more with less leveraging our technology and infrastructure to grow our company without adding incremental expense.
So far we have made the decision not to reopen two of our client facing locations and.
We continue to evaluate additional opportunities to exit some of our non client facing locations, we will likely see some noise in the fourth quarter run rate from an expense standpoint, as we look to finalize some of those decisions as well as transition a portion of our employees to work permanently from their home office.
As a final point, we're pleased to see our investments in our one alere culture, our talented technology translate into results. Our teams are working with urgency to identify additional opportunities to increase efficiencies and reduce expenses.
Although uncertainty remains it is clear the enterprise value of this company is strong and resilient to incredible challenges.
With that I'll turn it over to card.
Thank you Tony and good morning, everyone.
First I'll provide a brief update on our banking market Oh.
North Dakota, and Minnesota has seen recent increases in the number of cases, the covance team.
To date, there have not been changes in business restrictions at the state level in either state over some cities have reduced capacity limits for certain types of businesses, primarily bars and restaurants.
Situation, Arizona show steady improvement over the third quarter.
We continue to serve our clients in all markets by virtual and digital means as well as via the drive through and in person based on market needs that condition.
Well it did increase by 337 million since December of 2019.
The increase is attributable to PPP balances of 349 million an increase in commercial real estate of just over 40 million.
This growth was offset by a decrease in consumer was in commercial line usage over the same period.
The utilization rate on commercializing mean low at the end of the third quarter at just under 24%. This compares to normal seasonal utilization utilization rates of 35% to 40%.
Increased borrowing liquidity due to various relief programs, including the P. P. P is contributing to the lower utilization rate.
We granted over 1600 TPP loans for 363 million.
784 of those loans or about 16 million or $50000 or less and qualify for the S.P. streamline forgiveness process.
As of October 22nd we had submitted 79 application to the FDA for forgiveness totaling 51.7 million.
To date, we have received approval for forgiveness from yesterday and just one small loan.
Request for payment really tapered off during the third quarter.
We have granted 552 deferrals the total outstanding balance of 151 million. This represents about 9% of the portfolio.
As of September Thirtyth 27 of those loans totaling 16.9 million in balances have been granted the second Oh, yes.
The school is comprised primarily of 12.6 million of residential real estate loans as well as one commercial real estate relationship with my children.
56 loans totaling 12 million remain in the first deferral period.
Oh outstanding balances of loans on deferral as of the end of the third quarter represented about 1.7% about sales and guaranteed loan balances.
All remaining loans have returned to normal payment status.
For her question, yes, let's let's let's take questions first thing.
Thanks.
I'll now begin the question and answer session.
Good question you May Press Star then one touch time fine if you were using a speakerphone. Please pick up your handset before pressing the keys.
To make sure. Your question. Please press Star then two.
The first question comes from Jeff Rulis from D.A. Davidson.
Please go ahead.
Thanks, Good morning all.
Just trying to gauge R&D expense hi, the.
The expense line Katie we got your comments on some of the near term I just wanted to take a step back I think a pretty strong spike in revenue this quarter without a big increase in costs I think thats okay.
A product of prior investment I'm sure but.
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It is is that sustainable in 21, he kind of holding moderate expense growth.
Toward our there's a few expenditures coming up in the next year and I. We got your Fourq you comments that Theres a couple some noisy items, but bigger picture you could frame up 21, how that how what your expectations are for expenses. Thanks.
Yes, absolutely thanks, Jeff.
From a 21 perspective.
We are and we don't anticipate any ramp up in any any expense line item from a compensation standpoint, with the outlook of mortgage likely decreasing in terms of originations into 2021.
Do you expect to actually see a decrease in overall compensation and so as as I look at the line items outside of compensation.
The run rate in the third quarter should.
Should be pretty consistent moving forward.
And we'll have a little bit more color again next quarter in regards to some of the some of the changes that we look to make decisions, we like to finalize in the fourth quarter that will impact of course 2021 run rate.
Okay. Thanks, and just to follow on that the mortgage we can we can kind of make our projections. There. It's a lighter year is there a there are range bound expectation for this line. Obviously three Q is a huge number but I'm trying to get a sense for you started the year.
That's a big range, so just trying to kind of get a full year expectation.
Neared it from the expense side Jeff.
No in the mortgage revenue line.
So the mortgage revenue line. The MB is predicting that originations will decline 20.
29% from 2020 to 2021, we we think we can do better than that what is I think very critical to note as I mentioned, we really do have the mark.
Mark to market unrealized gain on the hedge of $11 million right now in the revenue line item, we believe that that will run offs closer to zero over the next five quarters.
So that's a factor to take into play as as we look at mortgage revenue.
The margins of course has been elevated you know we think we think they return closer to.
Somewhere in the 275 to 80 range for us into 2021, and so those factors those.
Those factors, we believe we'll we'll both impact the revenue for this particular business line pretty.
Pretty significantly into 2021, no potentially cutting it in half.
Got it.
Okay.
And maybe one last one perhaps for Randy.
Just on capital management I.
With fig kind of ideal.
Priorities would be sort of funding organic growth than the M&A, maybe dividends and lastly buyback but.
I guess the environment may not bring that or allow for that ideally I guess, maybe your ideal deployment versus the the reality or what if you could frame up what.
Your capital plan would be thanks.
Feature.
Our first priority was to create a fortress like balance sheet make sure that we were well prepared to handle anything that.
Came up with colder than any credit related issues and I think that has been our focus up to this time.
Obviously, we're now in a position to really to begin to continue to look to the future and capital deployment and all of the things that you mentioned or certainly alternatives for us to consider.
But we would like to focus obviously on organic growth and looking for acquisitions, primarily on the fee income side to both support the model that we have built.
And then.
I guess, the near term use of a of a.
A buyback is certainly well down the line of what you'd prioritize.
At this time, yes.
Great I'll step back thank you.
Thank you. Your next question comes from Mason right from Piper Sandbar. Please go ahead.
Yes, hi, everyone. Good morning.
Good morning Nate.
I wanted to start on credit maybe car and.
Little bit of an increase in special.
You mentioned in the quarter in substandard imagine those maybe you can find the commercial real estate credit or remain on deferral. So just any commentary on those upticks and just how we should be thinking about additional reserve builds into the fourth quarter you guys. Obviously continue to provide.
A pretty substantial level here in the third quarter and it seems like you know with deferrals training. The way. They are you know there may be less than.
We need going forward, but there is still.
Got a high degree of uncertainty out there.
So just curious.
Any thoughts along those lines.
Sure. Thanks, Matt This is Karen.
You know, we did have an increase particularly in a special mention and the actual increase when excluding those TTP balances that are part of the special mention relationship with about <unk> million from quarter to quarter three.
You know I would generally characterize the increases it's fairly normal migration. There was one relationship in there that has some cobot impact.
But as business has returned to more normal levels. The companys taken some proactive actions and we expect that to to improved and so.
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And really they were across different.
Different industries.
Some with commercial commercial real estate related.
Sounds good operating lines as well so no real patterns there.
With regard to reserving.
In our provisioning has continued to be driven primarily.
By two factors related to the economic uncertainty.
And we would expect that to continue in the fourth quarter, but you know as we look forward we've.
We've spent 2020 really prudently building a robust reserve and so absent significant deterioration in credit I think the pace of that build maybe less as we get into 2021.
Yes.
Okay. That's helpful.
Loan growth was a nice positive in the quarter as well.
PPP. So just curious kind of where you guys are seeing opportunities as it related to some of those new clients that you guys have onboarded as part of that program or just.
Just any thoughts on how we should be thinking about overall loan balances ex PGP into the fourth quarter into 21 as well.
Sure you know some of that increase has been a result of new opportunities.
You know there continues there continue to be some really good opportunities out there. There's a lot of competition for those obviously, but there are companies that are doing very well through this crisis and so we've seen some nice commercial opportunities. We still continue to see some nice commercial real estate opportunities that are structured in a way that we're comfortable moving forward with.
Sales.
And so I think we'll continue to see those but we do have significant headwinds on lithium has liquidity our borrowers hawk.
As we've mentioned before we expect.
That most of our loans will be fully forgiven.
And and we do have borrowers that are generally conservative and maybe I'm, putting off some capital expenditures and things until there's a little bit more clarity around that kind.
Okay got it that's great to hear.
If I could just ask one more clarifying question for the fourth quarter I apologize its.
Short term oriented, but key mortgage it sounds like you're supposed to come down in the fourth quarter.
Is it expected to be higher than what we saw the second quarter and I imagine the comp increase that we saw in the third quarter is mainly tied to the increase in production. So just curious how we should kind of thinking about those two components within the revenue line and also overall expenses in the fourth quarter.
Sure so.
So from a from a from a revenue standpoint, we think originations will hold but.
But we do anticipate some pressure on on revenue just as the value again, a badge forward hedge.
Decreases.
And so that'll be an offset.
To the revenue component on the expense side for mortgage for the fourth quarter I would anticipate to the compensation to go up or the variable expenses related to that in both the mortgage lending expense as well as the compensation to go up I'm, probably a million and a half.
As our competition level, they're cured and so as our producers hit that highest tier along with their origination volume we will see an increase in the expense line item.
Okay. That's great I appreciate all the color ill step back thank you.
Thanks.
Once again, if you wish to ask a question. Please press Star then one bite feeling today and now.
Your next question is from William Wallace from Raymond James. Please go ahead.
Thank you good morning all.
Morning, Katy.
Just.
Since you just were on top of the mortgages did you say that the the hedge gain was 6 million in the third quarter.
It was 6 million in third quarter, so year to date, we're sitting at about 11 million.
Yep, Okay, and you and you anticipate given all that back.
Over the course of next year.
We do.
With typical seasonality and we would then we would anticipate that.
Okay Tom.
And then you just said.
Expense up about one and a half million in the fourth quarter, but the.
The expense.
Line I think I heard earlier, you think maybe you can kind of hold the line to third quarter next.
Next year as calm as variable compensation will come down and okay.
Okay, Yes, Sir.
And then on your prepared remarks, you you mentioned.
I missed the where do you said you said something on the net interest margin Q3 percent excluding noise from TPP is that it is that was that guidance for the fourth quarter or where do you think the margin trends over the coming quarters.
Both and so scraping for three is all I'm, excluding the PTP for the for next quarter as well as the the on reporters and again, that's assuming these cash levels continue where they're at.
Okay, and we had some hope at the end of the quarter that they were going to stay stay off but it's it's quickly ramp back up so if we can get the liquidity put to put.
But to work that's the assumption is that the Nemo will drag down to that 3%.
And then sort of stabilize sounds like you get a quick you think tickets are quick.
Exactly.
Okay, and then I guess, we're going on it is really hard to stabilize at three [laughter], Okay I understood.
Understood.
And then on the P.P.T. side I think you said one loan has been forgiven, what's the what how's the kind of cadence of forgiveness applications that you're sending to the Sps.
Yeah. Wally this is a this is current we.
We spent.
Initially 79 applications that was through October 20 seconds, and we're continuing to submit them.
Actually some of the initial applications, we submitted were for larger alone.
And we believe that based on what we're hearing with regard to what's being forgiven. We believe as we submit to more of our smaller loan sales will probably be forgiven more quickly that seems to be the approach that he is taking.
Okay and are you are you all ramping up start submitting the smaller ones are you waiting to see if Congress does anything to make it easier for everybody.
No once once they indicated that the 50000 dollar loans are less had the streamline process. We have started ramping up both application.
Okay, great. Thanks, and then Randy just bigger picture I'm curious if.
The uncertainty in the current environment has changed the the.
The cadence or or conversations or or conversations with bankers are companies just around any potential M&A of Sci Fi business lines or is it just is hard to come by now as it was before or harder.
Well again, our focus is primarily on the fee income business for for several reasons and you know what we're beginning to see is that are there are some deal flow out there and so I think we're in a certainly a position given the you know how we manage the company throughout 2020, putting nurse.
Sales in this position to once again begin to engage in some of those conversations.
Steve do you think that this environment changes that the appetite at the other demands from other buyers in other words could the pricing be improving based on anything you've seen.
Or is that you know I, yes.
Well I think there's a consolidation going on in that line of business as well for several reasons and I I think given the low rate environment that Oh I wouldn't be surprised if there are more competitors out there who are looking to perhaps you build the business model that alere spent many many.
The years building.
I think our scale and our experience in that gives us an advantage in certainly executing or whatever but I wouldn't be surprised at their price me you don't go up on some of those opportunities.
Okay. Okay. Okay. Thanks, I'll step out and see if anybody else has a question.
Thank you once again, if you wish to ask a question. Please press Star then one on your telephone keypad.
There are no further questions at stage that does conclude our question and answer session I would like to turn the conference back over to abandon leaving the enterprise and whatnot.
Okay. Thank you, let me close with some remarks by first extending our appreciation to everyone who joined our call. This morning. Thank you for listening and asking questions I'd.
I'd like to continue to state that a leveraged as a company focused on balance and diversification.
And I think we've done a very good job over the years of balancing growth risk and profitability, we manage for the long term benefit of all of our stakeholders and no doubt the timely investments we've made in technology over the last several years are helping us achieve even more success in todays unprecedented environment.
We also believe strongly in diversification and have a long history of a diversified business model diversification of revenue streams diversification of market geographies diversification across industries and a very strong diversified balance sheet. Our diversified model is proving to be a key ingredient to our incredible.
Success this year.
The performance of our company over the past nine months has been extremely strong 2019 was a record year for layers. When we earned 29 and a half million.
Year to date 2020, we have already earned 34 and a half million dollars. So 2020 will go down as a record and historic year for Alaris as we navigate through these challenging times, we have built a fortress like balance sheet that we will continue to reinforce until the environment improves more certain.
We have a steady focus on client needs investing in technology and the way we served to meet the evolving expectations and needs of our clients. Most recently, we have been recognized by several sources for our risk return performance that includes being named to the prestigious Piper Sandler small cap also.
Our class of 2020 yesterday, we were named in the American banker top 85, best banks to work for in 2020.
And while we are very proud of our past successes and performance we are even more optimistic about our future.
And lastly, we are a very resilient company. Our culture is built to do the right thing embraced change and serve with passion. These beliefs have never shown stronger than they do today within each and every one of our employees.
I'm very and incredibly proud of our performance this year, but I'm, even more proud of how we do it as a company.
And again, thank you for joining todays call.
Thank you. The conference has now concluded. Thank you for the call todays presentation you may now disconnect.
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