Q3 2021 Alerus Financial Corp Earnings Call
Good morning, and welcome to the <unk> 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.
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 <unk> Financial Corporation, Chairman, President and CEO Randy Newman. Please go ahead.
Thank you.
And welcome to everyone, who is joining our call today.
Today, I am joined by car and tailor, our chief risk Officer, and Katie Lorenson, our current CFO and as we recently announced our future President and CEO. In addition to announcing the transition of leadership to Katie and 'twenty 'twenty. Two we also announced the addition of three new corporate directors to our board.
Janice Stipp gel shirts and married Zimmer.
<unk> 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 a P. P. P 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 Tam.
Tangible book value grew over 7% from a year ago, which includes the intangibles recognized in the December 2020 acquisition of the Denver base 24 hour Flex Rps.
During the quarter, we converted 24 hour flex clients to alert 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'm 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 say.
But while I'm immensely proud of the financial performance of alerts the nonfinancial achievements of alerts defined and separate us from our competitors and I believe will drive this company to continued outperformance of our peers well into the future.
Soliris is a purpose driven company that performs exceptionally well and is blessed with enormous professional talent that have a strong pride and passion and what we do and how well we focus on client success and satisfaction.
Before I turn it over to Katie and Karen.
Like to just say that over the past several years, our laris and our board successfully became a public company and significantly improve the leadership of our company. This seamless transition occurred during a pandemic and has not interfered with our with record earnings for the past several years.
In 2016, we created the alerts leadership Council, which includes our top 20 products 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.
Track, our number one cabinet.
In addition, and as I mentioned earlier, we are adding three high quality industry experienced corporate corrector to our leadership team and finally, the board decided to named Katie Lorenson as my successor.
I'm very proud of how the board follow the process to identify candidates based upon performance and cultural fit and ultimately chose Katie.
No. One has contributed more to alert us to success and Katie over the past several years I didn't think that we would ever find anyone who mirrored my pride and passion and the layers, but we have found that person and Katie the response from advisors investors and employees to the announcement Katie has been.
Mainly positive and has reinforced the decision of the board.
<unk> is making these leadership changes during a position of strength and Katie has current Taylor and Mccann experienced and engaged corporate directors and a very talented and experienced leadership council to call. Upon as she builds her team and focus on executing strategies to keep alert successful.
In the future and to meet the never ending challenges of our industry.
I strongly support the decision of the board and I couldnt be happier for Katie or $4 I have the greatest confidence in her abilities and she is my unequivocally support she is the right person at the right time I want to I'll turn it over to Katie currently our Chief Financial Officer, and our new age.
Chief Executive Officer on January one 2022 Katie.
Well, thank you Randy and thank you for your money.
Many years of leading this exceptional company.
I will spend just a couple of minutes today touching on the highlights.
Another excellent quarter of results and the continued momentum that we have building within hilarious today.
First I'll spotlight the incredible efforts of our revenue generating team members, our business advisors and financial guys continue to put up impressive numbers and pipelines remained strong across all product offerings.
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 awareness and the value we bring to our business clients.
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 them Treasury management synergistic products 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.
Wealth management digital account opening which has not only provided a big efficiency left for our team members, but it's delivered a seamless and simplified process for our clients.
Our mortgage unit had another great quarter, serving over 1200 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 ex PPP increased this quarter a trend. We expect to continue has 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. This and this could lead to further pressure on the margin. Once we see outflows. These funds, we expect that to be which we expect to be intra quarter, we would expect to stabilize and in the longer term improve from here as we shifted 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 managing expenses, we continue to extract efficiencies and processes operations and facility closures, while growing our client base and engaging clients and our digital technology investments.
All of this while employee satisfaction scores and recognitions continue to distinguish soliris as an employer of choice.
That's a wrap for my remarks, I'll turn it over to Karen for some brief comments on credits and the allowance.
Thank you Katie and good morning, everyone.
Our COVID-19 related lending programs continue to wind down during the quarter.
October 25th we'd receive forgiveness on approximately 396 million or 83% of our PPP loans.
Just 19 million of first round loans remain on the books.
The remaining loan balances are deferrals totaled $3 4 million comprised primarily of eight residential real estate loan.
Asset quality remained strong during the quarter nonperforming assets to total assets were 23 basis points, excluding PPP loans.
We recorded net recoveries of 302000 for the quarter.
This is the fourth quarter out of the last five in which we recorded a net recovery.
That combined with continued strong credit metrics and improving economic conditions in all of our markets resulted in a reserve release of 2 million during the quarter.
As of 930 of the ratio of the allowance to total loans with $1 eight 9%, excluding PPP loans and the ratio of the allowance to nonperforming loans was 515 per cent.
That concludes our prepared comments, we will now open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one 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 two we will pause momentarily to assemble our roster.
The first question will come from Nathan race of Piper Sandler. Please go ahead.
Yeah, Hi, everyone. Good morning.
Good morning, Nate good morning.
Maybe just to start off on just kind of the overall balance sheet growth expectations.
Guys like most others in the industry as you know had a lot of our deposit inflows over the last several quarters, but I suppose I could argue that you know some of your deposit.
Rather it is a function more so of what you guys are doing across the what our labor strategy. So just curious you know as we kind of look out to next year and into the fourth quarter as well, how we should kind of think about just your overall balance sheet growing from here do you expect any deposit outflows or should we kind of assume kind of low single digit growth in Europe.
The asset base and that of loans as well.
The question Nate I I believe that that is a.
A sound assumption in that regard we are not at this point anticipating significant.
Declines in the deposit base and what we do believe will flow out we will replace with continued growth on the Treasury management side, and then synergistic deposits.
Great that's very helpful.
And then I appreciate your thoughts on the declining.
Mortgage volumes expected for the third quarter.
How should we kind of think about the also.
Potential.
Compression your gain on sale margin I think has held up relatively well.
Indicating the slide deck, where you're seeing the pressure accelerated thus far in the fourth quarter.
How should we kind of be thinking about that component of the.
Mortgage banking revenue line.
Line near term.
Yes.
We we do expect to see those margins compressed.
From we have held very well, obviously, but we would expect them to to settle in.
Somewhere between $2 80, and and three.
Okay, Great very helpful and maybe just last one on fees wealth management and retirement benefits services revenue continue to increase in the quarter.
Perhaps a little bit of both kind of what we were expecting.
Expecting and perhaps what you've maybe got it you, particularly on the Rps line last quarter. How are you kind of thinking about the trajectory of that.
Those business lines into the fourth quarter in 2022 as well.
It's a good question, but we did have some accelerated doctors statement fees in the quarter, which we disclosed in the earnings release, and so that that helped pull the numbers up a little bit for the quarter I would expect for the fourth quarter to be similar to where.
We ended up this quarter.
And the run rates.
For 2022.
We will have we will have with this well and 2021 was about $2 million of document restatements revenue and that's recurring revenue, but not on an annual basis, so that'll be a bit of a headwind for us into 2022.
As as we think about it.
If the you know assuming the market is at historical levels, we would expect revenue for the year to look fairly consistent with where where we land in 2021.
Okay got it and I think you mentioned also in the release around expenses.
Some perhaps one time costs in the quarter around some.
Investments in automated processing and integration was that a significant dollar amount in the quarter and kind of.
What do those investments, perhaps generally in terms of additional efficiency improvement or cost saves as well over the near to intermediate term.
Yeah, those expenses relate to them.
Pulling in some consultants to help with some of with our our technical technology investments and so it's really just a shift in expenses from 'twenty to 'twenty two to 2021.
Okay, Great I will step back from that one congrats again Katie on the promotion.
Everyone.
Yes.
The next question is from Jeff ruling of D. A Davidson. Please go ahead.
Good morning.
A question on the loan growth outlook.
I just wanted to.
In terms of the.
Payoffs are you seeing anything.
At higher in the quarter.
And maybe even expectations for the coming year.
We did have a couple of significant payoffs this quarter.
25 million in one of our markets.
For the fourth quarter loan growth, we would expect it to look similar to the third quarter.
But with the pipelines and the momentum that we're seeing building, where you would expect to return to mid to upper single digits of growth next year.
Gotcha.
And.
Katie I may have missed the spread income.
Comment in terms of management of investment Securities did did did you say that you think NII can cause.
Stay up here or what was that expectation, yes, we do expect that NII will continue without PPP will continue to grow.
On a quarterly and annual basis.
Got it okay.
And last one.
Just on the M&A landscape and maybe even other capital plans, it's been a bit since the last transaction.
And just interested in those discussions and thoughts about.
You know where you stand on being opportunistic on on any anything that's out there strategically.
Yes, yes, we we like where we're at today in regards to the.
The stage of the conversations that we're having them and we continue to focus on building those pipelines and and really through various sources that we've touched upon before.
But but really establishing relationships wherever you know wherever it makes sense then across.
Across business units as well as across geographies.
Yeah.
Got it.
Randy all the best in retirement, you've been great Ambassador and certainly looking forward to Katie's leadership. So thank you.
Thank you thanks, Jeff.
Yeah.
The next question comes from William Wallace of Raymond James. Please go ahead.
Yeah, Hi, I was hoping to maybe circle back on the expense commentary it.
It sounded like you were suggesting that you pulled forward some expenses in the quarter.
We've we've been hearing a lot about wage inflation and pressures on the expense base, maybe maybe not being so transitory I'm just kind of curious if you could help us think about where where do you think a run rate expense might might be going into next year, and then what kind of inflation you might you might anticipate.
On the base relative to the to the.
Commentary that you've pulled some expense forward.
Right.
It's a good question.
A big piece of our expense run rate is variable with our mortgage volume, which we do expect it to trend down next year we.
If you apply the industry what the industry is saying about what's going to happen next year with purchase and refi volumes out that would pull down our business about 30%. We absolutely believe we will do much better than the industry, but that that certainly impacts our expense side and so.
We do expect compensation related to mortgages to trend down, but we believe that that won't hit the bottom line is we continue to invest in our current talent as well as recruiting new.
Tell us in the revenue producing side of the of the business and so our outlook today from an expense them from an expense side is probably within the $42 million or so run rate on average.
Or take a couple of million on either side, depending on what happens with mortgage and unforeseen items.
So that $42 million run rate is.
That contemplates that your variable compensation related to mortgage will be will be declining.
But they cannot buy 30%.
Right.
Okay.
And then.
Okay.
I misunderstood or misheard, what you were talking about on the fee on the fee income side, what are you suggesting that investments.
Like for example in the SBA platform and then what Youre seeing in plenty of business et cetera, you you think will offset any.
These pressures.
What I would say is that.
We believe our mortgage business will do better than the industry.
And we don't anticipate the headwinds that we have in mortgage this year in regards to the hedge unwinding, which you know we think it will probably be about an $8 million year to date headwind in mortgage that that is not something that we will be having to deal with next year.
And we expect continued growth in wealth and so as we look at just net revenue am I believe that we will we will be able to stay pretty close to where we were this year.
Okay.
And then on our net interest margin understanding that obviously liquidity is pressuring the reported and can you just talk about.
What pressures youre seeing on loan pricing and whether or not you feel like if if we were to just keep liquidity flat and not worry you know not worrying about that.
Improving or continuing to pressure NIM, what would you think kind of a core NIM trajectory would be do you think you've got <unk>.
Stability in pricing or do you think we still have pressures on the pricing side from the loan portfolio that will be a pressure.
Yeah.
Yeah.
No I think we've played it we've got some stability Oh go ahead Carl.
Yeah, I was I was just going to say that.
You know, we we continue to see pressure certainly on pricing.
But you know it has been fairly stable all their corner.
Okay.
Okay. That's all I had I really appreciate your time and I'll Echo all the other sentiment Katie it's a exciting working with you and Randy.
Hope you I hope you are able to enjoy your free time.
Thanks Wally.
And this concludes our question and answer session I would now like to turn the conference back over to Randy Newman for any closing remarks.
Alright, Thank you to everyone for joining our call. This morning. Thank you for listening and also asking questions.
Our performance through the first nine months continues to position us well for future success, our diversified business model and significant client base continues to create opportunities to grow.
Perform our peers, we are a purpose driven organization, which differentiates our ability to attract and retain our talented professionals. We have made significant investments in sales training and technology, which has led to a high level of engagement within our team is driving.
<unk> and new business across all product lines.
We remain focused on our culture, our communities and our clients. We are very pleased with our performance year to date.
Thank all of you and all of our shareholders for their investments and our team members, who work daily to positively impact our clients' financial potential. We thank you for your continued support and interest in our company.
And again, thank you for joining and listening to todays call.
The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
[music].
Okay.