Q2 2021 Alerus Financial Corp Earnings Call
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Good morning, and welcome.
To the <unk> Financial Corporation earnings Conference call, all participants will be in a listen only mode share.
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This call.
Welcome cleared forward looking statements and the company's actual results may differ materially from those indicated in any forward looking statements.
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 Companys SEC filings.
I would.
I'd now like to turn the conference over to <unk> Financial Corporation, Chairman, President and CEO Randy Newman. Please go ahead.
Thank you.
Good morning, everyone and thank you for taking the time to join or listen to our call today.
I am very proud to report another quarter of incredible financial results.
And even more proud of our team members and how they continue to focus on serving our clients true holistic advice and unparalleled service our diversified business model built on decades of execution continues to set us apart in both performance and total shareholder returns.
These key attribute of our company have also become a competitive advantage in attracting talent.
During the quarter, we added 1 of the best SBA teams in the country to our talented employee base with our strong commercial base of clients and the expertise and experience of this team we believe.
This product will continue to help differentiate our Lewis and the value we bring to our business clients strategically.
Strategically we are laser focused on organic growth led by our Chief revenue Officer, Brian Goldberg, who is joining us on the call today. The investments we have made in our sales force.
Training and technology, we believe will set us apart and bringing in new clients as well as expanding relationships with our significant client base of more than 18000 business clients and over half a million consumer clients.
During the second quarter production levels on all.
And takes were strong and we continue to see momentum building on our pipelines and pre plates.
Low line utilization higher than historical prepayments and continued extraordinary levels of liquidity have been a sustained headwind.
In addition to growth we're also concentrating.
On the expense management process improvement and driving efficiencies in our organization. We are so impressed with our talented team members across the company who are reinventing how we do business throughout all areas of product lines, finding ways to replace manual processes with robotics automation.
I'll prod and soon artificial intelligence.
These efforts will improve the profitability of our business units and just as important provide a better client experience that allows us to scale effectively as we continue to grow both organically and through acquisitions.
Speaking to acquisition.
Our Colorado transaction continues to go very well from a client and employee integration standpoint results are right in line with our model and the synergies we can extract on our business model are remarkable and are for.
Or just an opportunity to be a player in a very competitive M&A space.
<unk> continued to build on our acquisition pipeline on the fee income and banking side with proactive Polk reach to potential partners as well as exploring opportunities of companies, which are currently looking for a sale or exit in summary, another great quarter and strong shareholder returns.
Our business model, our strategies and our strong foundation of capital and robust allowance levels have laris positioned for continued success.
I'll now turn it over to our Chief revenue Officer, Brian Goldberg.
Thank you very much Randy second quarter continued to build on the successes.
[noise] weeks, our business and financial advisors realized during the first quarter. The team remained focused on proactive client interactions understanding how our laris can assist in building a better financial future for each business and consumer clients and then recommending the most appropriate solutions on an individual.
Individualized basis.
Wealth management revenue increases can be attributed to sales of businesses, which are creating liquidity events for the owners.
Offering additional value added services to retirement plan participants such as for 1 K rollovers.
And remaining.
<unk> focused on having discussions with clients who are seeking more attractive returns in this low interest rate environment.
Looking at retirement services, we have been very pleased with the progress we are making in our group with the acquisition of new plans and expanding the services that our clients are obtained.
And from a laris in the areas of fiduciary administrative and health and welfare solutions.
Looking at lending performance, our new consumer and business loan originations are in line with our internal expert expectations, but the balance sheet benefit has been muted by lower.
Lower than expected line of credit utilization.
And larger prepayments and balance reductions, which can be attributed to the excess liquidity that borrowers have access to currently.
Second quarter loan volume was stronger than what we saw on the first quarter and continues to trend in a positive direction.
The loan pipeline is building it can be attributed to identifying client opportunities with multiple entry points into our expanding on <unk> client base.
We're very pleased with the SBA team that has recently joined <unk> during the second quarter. They are integrated well into the company and the impact of their expertise is already being realized.
With new SBA loan volume being closed.
SBA lending is an exceptional opportunity for us coming out of the PPP process. There is much more awareness of SBA programs and a willingness of borrowers to consider these options where the previous sentiment was not necessarily as favorable in addition.
<unk> for many businesses rebounding after the worst of the Covid pandemic. This provides a set of solutions that can mitigate certain risk components of a lending application, allowing us to provide more options to make loans on our market.
Through our focus on segmentation and talent identification strategies, we plan to.
To add advisers in lending segments of focus that have expertise with C&I and CRE relationships in the communities. We serve we plan to continue our aggressive approach in adding revenue producing individuals on our market. We have recently seen high quality hires beyond just the SBA team.
But also within our mortgage group wealth management segment and retirement services group.
At this point I'm going to turn the call over to our CFO Katie Lorenson for some additional financial commentary.
Okay.
Thank you Ryan good morning, everyone.
And then just a few minutes this morning, hitting on some highlights of Enel.
They are truly excellent quarter of results.
First and foremost layers as pre tax pre provision results continue to outperform our peers.
And a key differentiator in our performance ratios as notably driven by Polaris is non margin dependent on newer types of earnings which have no credit risk and require significantly less capital allocation.
<unk>.
That's P. P P forgiveness accelerated during the quarter and liquidity levels remained at all time highs.
Our NIM contracted further than expected.
However, the alerts business model on diversified earnings continues to deliver exceptional returns for our shareholders on the fee income side I'll start with the alerts mortgage division, which continues.
So cute in exceptional level originations pull through gain on sale margin had another strong quarter. The revenue results were weighed down by the decline in fair value of the hedge which is what we expected and have guided to over the last several quarters.
We are seeing our business returned to the purchase side historically Refis makeup.
Make up only about 20 to 25 per cent of our origination volume for.
Our second quarter for <unk> was our highest quarter ever of purchase volume and application trends are reflecting a return to that purchase side.
We expect the third quarter volume to remain strong, but trend down from second quarter levels in the fourth quarter volume returning to.
A more typical Q4 production level.
On the retirement health and welfare benefits revenue side it.
It continues to be strong with earnings accretion from our recently completed acquisition, we expect the run rate to settle in around $17.5 million for the rest of the year, assuming that market conditions hold steady.
Wealth management revenue was up 24% on a year over year basis as Ryan mentioned. These impressive results were driven by record levels of new business in production as we have invested in numerous financial advisers over the past for years. We are pleased with our continued success of adding talent to grow and expand solutions in our in our massive consumer clients.
On a base.
Last 1 on leased expense management from an expense standpoint, our execution and controlling costs continued and we delivered another solid quarter of managed expenses, we continue to extract efficiencies and processes operations and facility closures, while growing our client base and engaging our clients and our robust technology investments all.
Flow employee satisfaction scores and recognitions continue to distinguish alerts as an employer of choice.
That I will turn it over to Karen Taylor, our chief risk Officer.
Yeah.
Thank you Katie and good morning, everyone. The second quarter marked progress in moving toward a new normal we have adopted a flexible approach to our work environment.
Allowing many of our employees to work from home long term.
As vaccine became more widely available in the spring we implemented our phased return to office plan reopening our offices in returning those employees, who will work from an onerous office.
We expect all phases of the plan to be complete in September.
As of July 23rd 155 million.
And PPP loans remained on the books comprised of $51 million in for strong loans and $104 million of second round loans.
319 million had been forgiven through that date.
Remaining payment deferrals totaled just under $6 million or 0.3 per cent of outstanding on guaranteed balances either almost.
Early in our wonder for family for St portfolio.
Asset quality metrics remained strong during the second quarter nonperforming assets increased during the quarter due to 2 loans moving to non accrual 1 commercial loan in 1 commercial real estate loans. In addition, other real estate on increased as we took possession of collateral securing our long term work out loans.
And Tyler I would characterize this as normal migration in the portfolio not specifically attributable to the impact of the impact of the pandemic.
We reported a net recovery of 6000 for the quarter no provision was.
Was recorded during the quarter due to strong credit metrics and a decrease in loan balances.
The level of the reserve continues to be driven.
On qualitative adjustments due to economic uncertainty.
The ratio of the allowance to total loans, excluding PPP loan balances was 2.0% to 2% at the end of the quarter and the allowance to nonperforming loans with 485 per cent.
As Ryan noted low line utilization and prepayments due to high levels of liquidity.
Ben but you need to be headwinds to loan growth.
As of June 30th.
Utilization on our CNI lines with under 20 per cent compared to 23% at March 31, and our historical seasonal utilization rate normally in the mid to high 30% range.
That concludes our prepared comments, we'll open it up for discussion and questions.
<unk> with closing comments from Randy to follow.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
At this time.
We will pause momentarily to assemble the roster.
Your first question comes from Jeff for list of D. A Davidson. Please go ahead.
Good morning.
Sure. Good morning question on the.
Loan growth side.
Well a couple of things I wanted to check in on the.
<unk>.
Our portfolio how much.
The size of that and you know.
What's left to kind of runoff.
Sure. Jeff. This is current we've got about 37 million left in that portfolio.
And we've been seeing about $6 million to $7 million a quarter run off on that.
Got it okay.
Karen or for Brian you talked about the SBA team and I guess just sort.
For the inflection point, if we continue to see that indirect book.
On our strategy on the portfolio just wanted to check in on inflection you got some.
Yes.
SBA.
It's a team there and just thinking about kind of the balance of the year, what what net growth could look like.
Absent PPP.
Brian do you want to take that.
Sure. Thank you, Jeff So what I would tell you at the at the start as we have some some expectations as we as we go forward with our with our SBA team. They are off to a I would say a faster start than we expected I think this is attributed to the quality of the group that we have brought in they are working hard.
To establish the foundation within hilarious for for this particular program, we're seeing really a bra.
Rod based set of of loan opportunities that have have come into our team for evaluation, they're already starting to close business.
We're optimistic about what the rest of the year.
Look like and believe that this will just be the catalysts as we move into the next couple of years.
And so the overall portfolio I know that you said payoff activity is tough to peg, but in terms of the net balance of loans.
Got it.
If you look at our net growth position in the second half given.
Doing well.
There is a variety of different things that we have options to.
Paul in terms of levers for us to to achieve some of the growth, but our expectation is in the low single digits for growth when you look at it.
All of our lending asset classes on an aggregate basis, we're not exactly sure where each of the line items will play out at this point in time some of that is going to be opportunistic some of it is going to be environmentally driven but that's what our expectation is at this point isn't that that low single digits for the for the rest of year on that's what we're aspiring.
Based on the different initiatives and activities that I mentioned in my earlier comments.
Thanks, Ryan and Katy I, just wanted to kind of back into the mortgage banking a bit I'm surprised gain on sale.
Is increasing and your volumes remained pretty strong.
During 2 it's a pretty significant I know you'd indicated some of the MSR adjustments, but the net.
Line could you remind me, what what kind of where.
You've guided to on that.
I heard your comments about Q3, Q4 kind of volumes coming in but the net number.
On.
Hum.
Any any guide there I kind of maybe lost track versus the previous quarters.
Yeah, that's no problem. Thanks, Geoff for the question.
So so you know from an origination standpoint, you know I think I think we'll go under under 400 for the third quarter, but.
It's probably in the upper upper 3 hundreds.
We do expect the gain on sale margins.
On to drop this was probably a high level high level watermark for us.
We do have probably a round.
2 to 3 million of hedge to unwind them for the rest.
Of the year, and so I would consider that and the headwinds on also.
Is that per quarter or just remaining until April in total okay. Okay. So that's a significant I mean relative to that.
You took this quarter.
Good a minimized quite a bit.
<unk> so the net figure may be.
You can hold that up pretty well from.
Reading that correctly.
Yeah, we I mean in regards to what we will see you know, we obviously took them had a significant headwind in the revenue.
This quarter, but with the drop in originations plus that continued headwind.
We'll see the mortgage revenue drop.
Probably around.
8.8 million or so will settle in there we think.
Okay.
8 to 9 million index.
Okay. Thank you.
As a reminder, if you have a question please press star 1.
Next question comes from Nathan race of Piper Sandler. Please go ahead.
Yep.
Hi, everyone. Good morning.
Good morning, good morning, Nate.
Maybe hoping to get some color on the outlook for our BNS revenue going forward I imagine some of the market strength that we saw in the second quarter contributed to the solid sequential growth in net your line and <unk>.
So just curious if you can kind of parse out how much of that growth was really.
For that.
Appreciation on the markets versus just kind of ongoing organic growth from that line and kind of the outlook.
Organic growth within our BNS over the back half of 2021.
Yeah.
Yeah. Good question Nate you know, we think revenue there probably settles in around 17 and.
On a half million from a run rate basis.
Based on you know, what what we see today, and where where the market is today.
And then on a go forward basis.
We look to grow that that revenue in the low single digits.
Okay perfect.
Very helpful and along the lines and thinking about our BNS going forward I believe we saw some announcements during the last few.
Months.
Around some other acquisitions other entities have done in that space. So would love to hear your kind of updated thoughts on what you guys are seeing as it relates to.
Deals within that segment going forward.
And and so forth.
Okay.
Yes, absolutely. This is Katie I'll take that 1 and then you know I mentioned in my opening comments the competition.
For fee income acquisitions continues.
Future continues to be elevated on but are you know what what the laris in our organization and the synergies that we're able to extract we believe that and we know that we can be very competitive in the M&A space and so we continue on.
To to see more opportunities from a reactive.
Basis says just awareness of the company and our capital that's available to deploy them becomes more widespread as well as our proactive outreach efforts continue to intensify with with some urgency around our team because of the competition the competitive nature and the number of players that are.
Tempted to enter the space are built scale.
Got it understood makes.
Makes sense just a couple of housekeeping questions. If I could just thinking about the overall.
And she says moving forward.
Inflows continued in the quarter on imagine that's a function for just the.
Macro factors that play.
Are you guys.
In Q2.
Execute on some 1 of theirs.
Synergy deposit growth so just expectations for just the overall balance sheet size and if we should expect some continued growth with those strategies continuing to play out and even as the P. P. P forgiveness process from Susan.
These data as you know some clients.
Liquidity levels.
Come down.
Hmm.
Right from a balance sheet perspective, I mean, I think we're continuously.
[laughter] continuously surprised at the level of liquidity that.
Kraft maintains am I you know, we'll continue to put more into the investment portfolio and book that up to $1 billion mm from a deposit balance side.
We are seeing some outflows as we did last quarter with our retirement money markets, but we are also on.
On a low watermark for some of our public funds, which we don't we don't have very much of them. So I I.
I don't believe we'll see any liquidity or at least we're not expecting any liquidity outflow at this time.
Okay got it and then just 1 last 1 on I apologize.
<unk> has already touched on this but.
The other expense line was lower by about half a quarter over quarter anything to speak of there and just thoughts on just the overall operating expense run rate in the back half of 'twenty 'twenty 1.
Yes, I think that there's been some noise in that number and.
Both quarters, and so I think that's more of an 8 to $900000 run rates on them.
Going forward.
In a typical quarter.
And from an expense standpoint, with the mortgage origination.
Origination volume declining.
We would expect to drop another million of expenses down in the third quarter and then.
You're going to potentially another million dollars in the fourth quarter from that.
Okay. That's.
That's very helpful. I appreciate all the color thanks, everyone.
No problem.
As a reminder, if you have a question please press star 1.
This concludes.
A question and answer session I would like to turn the conference back over to Randy Newman for closing remarks.
Thank you and thanks for everyone for joining our call. This morning. Thank you for listening and asking questions are financial performance in 2020 was record setting the first and second quarters.
Those are quite 2021 have continued this space.
Although the industry is facing headwinds our company, which has historically outperformed our peers remains well positioned for future success because of our diversified business model.
We continue to see momentum building on our pipelines for new business from client expansion.
Orders of all products they make.
High level of engagement within our team we have a constancy of purpose that has embraced and magnified by our leadership team and we remain focused on working together to grow the company.
This steady and strong foundation is allowing us to retain and recruit top talent.
On the crowded in the best interest of our clients and deliver long term value for our shareholders. We are very pleased with our performance year to date and thank all of our shareholders for their investment in our team members, who work daily to positively impact our clients' financial potential. We thank you for your continued support.
<unk> and interest in our company and again, thank you for joining or listening to today's call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.