Q1 2021 Alerus Financial Corp Earnings Call
Yeah.
Good morning, and welcome to the of layers Financial Corporation earnings Conference call.
All participants will be in listen only mode.
Thanks for taking on the conference specialist by pressing the stock the old policy right.
After todays presentation, there will be an opportunity to ask questions. Please note. This is.
It 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.
Cause actual results to differ materially from those in the forward looking statement on listed in the earnings release and the company's SEC filings.
I would now like to turn the conference or the two layers on the whole price chairman, President and CEO and Mr. Randy Neely.
Please go ahead.
Thank you Cameron and good morning, everyone. This morning, we intend to discuss our first quarter 2021, and also the 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 current Taylor, and our Chief shared services officer and the card.
As always we appreciate your interest in our company and we invite your questions at the end of our introductory remarks.
We were pleased to report our record performance of 2020 carried through into the first quarter of 2021.
<unk> 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 joined our team on the first quarter, we continue to focus on adding talent to our organization, especially in the areas that will grow revenue.
Our fee income business lines delivered strong results with mortgage originations exceeding 500 billion part of the quarter retirement on 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 of 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 remained very robust at over 2% of loans excluding P. P. P.
In addition, we saw a modest uptick in commercial line utilization solid loan demand in building pipelines.
In addition to our emphasis on growth. We are also focused on technology investments of 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 the robotics and other automation to improve our efficiency.
And support our ongoing growth initiatives. Furthermore, we recently became one of 66 limited partners and of fund focus on the acceleration of technology per community banks. We believe this is a valued partnership that will allow us to stay abreast of emerging technology trends in the <unk>.
<unk> in the community banking landscape.
Also on the first quarter, we redeemed our previously issued sub debt at a rate of 5.75 per cent and refinance with the bank of North Dakota at a rate of 3.5 per cent.
Our capital levels remained strong and 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 the 15 cents per share of cash dividend payable on the first quarter.
My Records go back to the late Sixty's and showed that of lettuce has always paid a cash dividend.
Since 1987, we have increased our cash dividend every year at an average of 10 per cent 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 as average seven 4% with an average.
<unk> cash dividend payout of 31 per cent.
At our February 2021 board meeting our board approved a three year stock buyback program for the repurchase of up to 770000 shares effectively 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 start 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 hub D 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 per cent 281 per cent 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 of the right way and succeeding with our clients wins in the long run.
But another successful quarter with that let me turn it over to Katie.
Alright, Thank you Randy.
Thank you to all of you who are joining our call. This morning are listening at a later time.
I'll be brief in my comments. This morning has the current results were very strong and generally in line with our expectations.
I do believe the layoffs as one of the few of financial institutions reporting linked quarter growth in noninterest income our 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 on the refi volume at the end of 2020, we anticipated a steady decline in the pipeline during the first quarter of the pipeline did decline some but not to the level, we anticipated and the valuation of the pipeline actually increased slightly as the value of unrelated pricing of mandatory delivery of loans to the secondary market.
<unk> continued to increase.
We are seeing the refi business flow consistent with the market and the valuation of the pipeline declined as the.
We do anticipate the first quarter it could be the high watermark for mortgage revenue as originations decline in the gain on sale margins normalize.
The forward pipeline declines the decreases in the value will act as an additional headwind from the reported mortgage revenue.
As we mentioned in our release and as Randy mentioned earlier during the first quarter. We added two high producing purchase focused originators to our team and it's important to note that our layers of mortgage division and our team has always historically been predominantly focused on highly successful on the purchase side of the mortgage business.
Our typical split the 70% purchase and we did see purchase volume at strong levels for the first quarter. Despite the lack of inventory on the twin cities.
In summary, we expect our mortgage division to continue to shine and deliver higher than peer of 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 in 24 hour Flex acquisition the integration of the teams and the business continues to go really well in all of our team members have done a tremendous job of client retention identifying growth opportunities and seamlessly converting the clients and employees in the.
The network.
Last but not least on the fee income side with wealth management, which grew on the linked quarter and typically that's a seasonal low for us in the first quarter I'm sort.
So the shout out to wear layer of advisers to deliver really strong production and revenue growth of 23% on the year over year basis.
As I say on every call. We believe our diversified business model and revenue has never been more valuable on the backdrop of the environment.
In that regard I'll turn it over the brief commentary on the margin and the related outlook based on what we know today.
During the quarter, we recognized approximately $3 million of P. P. P interest income and revenue.
And we have approximately $6 million of P. P P 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.
The increased cash levels remained at 200 million as deposits continued to grow with you. The government stimulus success in the commercial acquisition side N. P. P. P forgiveness.
Our total cost of deposits is that of record low 16 basis points and the net interest margin continues to be heavily impacted by the huge amounts of liquidity on our balance sheet. We.
We anticipate moving further from our scratching to get to 3%.
And could see that two of two eight mm core margin in the future.
Lastly, touching on expenses are generally pleased with our expense management, you'll see our occupancy rate dropped 70% of the linked quarter, which of the results of our office closures that we announced last year Comping.
The compensation drop primarily due to mortgage incentive decreasing from seven 9 million to $6 7 million for the quarter and.
And we expect to see compensation decreasing in correlation with those mortgage volume is declining.
There were really no outliers or nonrecurring items of note from the other line items.
And I'll end with just the high level comment on Piggy bank to rent piggy back to Randy the opening remarks.
First off I want to say, thank you to our alerts team members most of whom are shareholders and many of whom are or will be listening to this call. You. All just continued to do amazing work in serving our clients and growing our business.
Although we face the industry headwinds like so many financial institutions, we continue to prove that our business model diversified revenue and team members, who are full of passion and driven by purpose to serve our clients the library of Exceptionals adults.
We believe we will continue to execute and deliver above average returns compared to our peers. Despite the Hudson headwinds, we and all the financial institution space.
And with that I'll turn it over to current Taylor, our chief risk Officer.
Thank you Katie and good morning, everyone I will begin with a quick update on our banking market.
With the vaccine rollout and the continued lifting of the business restrictions activity is picking up in all of our markets.
We are making progress on expanding the reopening of our lobbies across their footprint, while also continuing to serve clients virtually and digitally.
Well it has decreased by $42 million during the first quarter due to decreases in the C&I and consumer portfolios.
The P P forgiveness outpaced that the around PPP production and while the commercial line utilization picked up slightly to just under 23%. It remains low compared to historical utilization, which is typically closer to 35 per cent.
The decrease from the consumer portfolio was due to the mortgage refinance activity paying down home equity loans on line as well as run off in the indirect portfolio. Following our decision to exit that business line.
As of April 21st we had processed almost 2400 PPP applications for 478 million.
That includes 802nd round applications for $111 million.
We continue to work with our clients on the P. P. T per getting this process and the S. P hit the proved over 1100 of our applications totaling $199 million.
With respect to deferrals, we granted some type of deferral on about $154 million in balances or nine per cent of the portfolio.
Requests for payment relief were very limited during the quarter and as of March 31st approximately $8 4 million in loan balances remained on deferral or about 0.5 per cent of outstanding on guaranteed loan balances.
767000 deferred balances were in the initial deferral period, and the $7 6 million of deferred balances and an additional deferral period are concentrated in our one to four family residential portfolio.
Our credit metrics remain strong during the quarter nonperforming.
Nonperforming loans to total loans remained low at 25 basis points or 28 basis points, excluding PPP loans.
Well, it's downgraded or moved to non accrual during the quarter remained at very manageable levels on our best characterized as all of them migration of the portfolio.
We recorded net charge offs of 488000 during the quarter. This was primarily the result of a write down on the commercial real estate property that was stressed prior to the onset of the pandemic.
No provision was recorded during the quarter due to strong credit metrics and the decrease in loan balances the level of the reserve continues to be driven by qualitative adjustments due to the economic uncertainty.
As Randy mentioned the ratio of the allowance to total on guaranteed loan balances was 2.01% at the end of the first quarter and the allowance to nonperforming loans increased to 710 per cent.
Our credit continues to perform better than we had expected it would last spring where some uncertainty remains about future performance with all of the stimulus comes to an end.
We continue to monitor the portfolio of closely and believe our strong balance sheet credit culture diverse loan portfolio and geographic footprint positions us very well to address the continued economic impact of the pandemic.
We expect loan growth will continue to be challenged through the second quarter, given the high levels of liquidity on the part of borrowers. However on our markets are reporting increasing activity. We expect pipelines to continue to strengthen as we approach the second half of the year of their business advisors are seeing more opportunities and his efforts that have been focused on P. P. P can be redirected to more new.
The business development.
This concludes our prepared comments and we will now open it up for questions.
Yeah.
Thank you.
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At this time, we will pause momentarily to simple a roster of the question.
Income from J D.
D. A davidson. Please go ahead.
Hi, good morning.
Oh on the.
That's a simple line item detail.
The.
Yeah.
Katy I think I got a pretty clear read on the on the mortgage if we.
Kind of back out the MSR of the outlook there heard you on the high watermark in the push and pull.
But how about the retirement had benefit and then the wealth management lines I would imagine the sequential retirement of benefits.
With the Rps was was a bit of a one on but do you expect growth from here as well as the what do you see on the wealth management.
Sure.
Okay.
Run rates in regards to both moving forward.
Again, the strong production on the wealth management side.
He did our expectations I think we are in excess of 100 million of production. This quarter of last year. We were at 300 million for the year. So I'd expect to see you know assuming stability of the market's pretty consistent.
Pretty consistent results for that line on that.
And I would guide to the same on the wealth on the retirement side.
Okay.
Great and then.
If I could just follow on with the expense side.
Is that of pretty sustainable drop on you talked about some some hires and continue to look for per talent. When it comes and I'm sure you'll be opportunistic but wanted to kind of see about this.
The $43 million.
The run rate.
Any expectations for expenses through the year.
Yeah.
Based on where I would guide to today I again, I I think that.
It will be pretty consistent in this line item also with the with the exception of of course of the incentive comp dropping on the mortgage side with the originations.
Got you okay.
And maybe just the last one on more big picture I noticed the the <unk>.
Or just the.
Deposits.
All of them down in the quarter really.
The charge from a liquidity standpoint.
Just big picture kind of what are you seeing on I mean, I imagine that's still a focus but also you've got a ton of liquidity. So.
Anything to touch on in terms of your funding base.
Yeah.
That's a good question the the decline in synergistic deposits was driven mostly as we saw some of the retirement money market cash that flowed in during the times of volatility in 2000 22020 being redeployed them.
Into the into the markets in that particular synergistic the positive so that was really the driver of that decline.
Decline in overall on the funding basis as I mentioned, we've had some on some really nice wins on the commercial acquisition side of deposits and we'll continue to do well continue to build both core deposits even despite the levels of liquidity, we know that we'll be able to put it to work eventually.
Thanks, Katie most of it back.
Thanks.
Good day.
The nice from part of sandbox.
Please go ahead.
Hi, everyone. Good morning.
Good morning, Dan Good morning.
Can you just told me the bulb on that discussion around the margin outlook I think you alluded to X P. P. P. The margin kind of trending into the QAD range over the next few quarters or two does that contemplate.
Some redeployment of excess liquidity of the Securities book of you guys have been doing lately.
On with I'd be curious to get your your kind of timing expectations for a pickup in loan growth I'm not sure. If you guys of expected kind of flat growth. Your tucuman of picked up even in the low single digit range on the back half of this year, but.
Any additional color within that context.
Yes, yes.
So you know I think from a margin outlook. When I you know I think we guided to the 280 last quarter end and we just haven't seen much change and so.
My guidance is until we see some of this liquidity move out because no matter how much we continue to build the investment portfolio of the cash that seems to replenish itself and so.
Thank the.
I think the NIM bought of which we thought was maybe going to be Q2 is probably now modestly later than anticipated and maybe the three Q4 Q in regards to loan growth.
I think it will continue to be challenged in the second quarter, we saw little little uptick in line utilization, but at this point, we think you know.
Mid single digit growth starts to come in that's on third and fourth quarter.
Okay great.
Maybe changing gears, a little bit of just kind of thinking about the credit cost all of them all of your asset quality.
Metrics continue to improve and you know I think the outlook remains fairly benign, particularly just based on where deferral stand at the end of the quarter.
In terms of kind of where you guys you of the reserve tracking to maybe as a percentage of loans ex Cta over the next few quarters.
Yeah. You know are of this is current.
Our provisioning this year is going to be driven by loan growth. The <unk> credit deterioration. So yeah, we don't see deterioration at this point, we will see what happens on some of the stimulus comes to an end you know how that performance looks.
You know on.
And as you know we are still on the incurred loss model.
And much of our reserve. This is due to on qualitative adjustments for economic factors and so you know I think we'd want to see a little more sustained economic improvement and continued performance of the portfolio is that stimulus and the problems it start to release reserves.
Okay, so kind of as perhaps the stable outlook over the near term I appreciate the car.
<unk>.
That's all I had for now I will step back I appreciate the color. Thank you everyone.
Thanks, Dave.
Thank you a reminder, that if you do wish to ask the question you can register the pressing Star then one on the Sun.
The next question.
Pardon me. Your next question comes from the most at Raymond James. Please go ahead.
Thank you good morning all.
I'd like to circle back on <unk>.
So understanding that debt the liquidity just the kind of doesn't seem too and maybe help us think about what your guidance means.
It means from just the NII dollar basis do you think debt.
We see growth there or does continued potential of kind of pipeline of weakness from the loan portfolio and pricing pressures drive declines.
Continued declines X P P T.
Mhm.
You know I I think it's gonna be tough to hold on.
X P P P without without some of the substantial loan growth here.
So I I think the you know I think the ball.
We will see some decreases.
Yeah, probably characterize them much like we saw on the first quarter ex PPP on.
The net net interest income side.
Okay, Great and Katie I don't know if it was myself on or what but when when you were talking about your expectations on the fee income on for wealth and.
The retirement business did you say.
The continued continued growth or stabilization of that kind of low sorry, I apologize it sounds like you were saying growth.
Oh, well I apologize so thank you for the follow up question I I you know based on.
What we see today I I would say those line items will be stable.
On.
From the level of Q1 revenue.
Okay.
And then along the same lines within those two businesses I'm just curious on the Randy If this is for you but on.
All of our ore Kt are there are you seeing additional opportunities for potential acquisitions within either of those fee businesses.
Well I'll take that one yes. We are we you know we continue to we continue to explore opportunities and we continue to be proactive in our outreach to so we're seeing we're seeing more opportunities come to us, but we're also continuing to build that pipeline of of <unk>.
On a proactive outreach and establishing some relationships with some potential partners out there.
Okay, Great I'll stop there. Thank you.
Thanks, Mike.
Thank you. Your next question is the polo the follow up question from Nathan Rice. Please go ahead.
I apologize my follow up question is answered thank you.
No problem. Thanks Nate.
Yeah.
Bleed out question and answer session of the Miss.
The Newman for closing remarks.
Okay. Thank you and thank you to everyone who joined our call. This morning.
Thanks for listening and also asking the questions 2020 financial performance was record setting the first quarter continued the space, we know our company and the industry at large is facing headwinds that will catch up and impact on future performance for so many years. This is why we are focused on diversification.
We believe the diversification great long term value for our shareholders and have a long history of building a strong and growing diversified business model. This includes the diversification of revenue streams diversification of markets geographies and debt.
Versification across industries.
All of our industry is still facing economic uncertainty, we believe our business model stands the test of the time and we will continue to the deliberate for long term shareholder value.
We have a very talented leadership team who is focused on growth success with our clients and engaging all employees, we continue to retain and attract top talent and we continue to execute on growing our company, both organically and through strategic acquisitions.
Most importantly, we do it the right way do the right thing and always in your best interest are cornerstones to our culture and how we operate we were very proud of the water team accomplished in the first quarter and we thank you for your continued support and interest in our company again, Thank you for joining.
The call.
Ladies and gentlemen that concludes our conference for today. Thank you for participating you may now disconnect your lines.
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