ALRS - Earnings call transcript Q2 2022 | Alerus Financial Corporation

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Operator

Good afternoon and welcome to the Alerus Financial Corporation Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. This call may include forward-looking statements, and the company's actual results may differ materially from these indicated in any forward-looking statements. Important factors that could cause actual results to differ from those indicated in the forward-looking statements are listed in the earnings release and company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. ahead. go Please

Katie Lorenson

morning, our Good thank for you Thank today. everyone, into call dialing you. and

while Joining growth and Minneapolis I in our the Chief as building today the the Bank, added the throughout XXth and Phoenix expansion, new Jim announce July existing lead me Twin on in Officer. talented the advisers we during of Banking On Jim X, Al history. and Risk our that on our bank will client successes and Villalon, and and Officer; acquisition Collins, Chief adding Cities a support Revenue Cities in our leader quarter, our in recent footprint. to Metro company's acquisition our closed CFO. the am client continued bankers seasoned to is proud Twin we Karin in the Taylor, team executive

the one high-growth the commercial We the started Phoenix efficient Metro The Metro Phoenix well-established, Haggard, join are by in a with bank areas highly franchise. presence. fastest-growing Bank Steve is to is pleased country five the years. a Alerus Phoenix-Scottsdale-Mesa and past have strong over of

our increases leadership approval presence one community Arizona Steve Arizona. closing, the now the to our Scottsdale SBA lenders organizations and commitment has and demonstrates the growth This banks With market significantly entire in of market. as President. assumed acquisition combined and our client largest Together, expansion over are the the and in serving Phoenix,

on included $X.XX, related merger which a the $X.XX EPS impact back quarter, to of Looking negative expenses. reported we

but while by client an annualized levels. the year, retirement growth plans as was additions loan to remained at in nearly proven higher grew Year-to-date, are sales basis across for loss base, plan experience our catalyst a on XX% Growth commercial stable to growing retirement new XX.X% continue good division We last our ex than PPP. highlighted business. have products, loans

were which XX in at declines to to underlying the drove And new seasonal experienced produced the in results expanded core points in record a basis excluding which accounts deposits linked We levels public being division outflows increase revenue, operating largely entities. over X revenue despite years. PPP, of quarter $X.XX. our market quarter core of management linked NIM wealth Our midyear worst in

Our originations quickly level rates rose declined year-over-year on than anticipated a X%. mortgage as to basis X% greater mortgage at from originally XX-year a

overbuilt business that While and are never Alerus peak originations $X.X level XXXX, get we we our of culture off units business on to billion of done. infrastructure, across resources coming shared in channeled One an we and

is with purchase While rapidly and has always the our mortgage industry been changing, realtors long-standing to due relationships the in Twin the especially our builders, focus Cities. market on

reposition more in and producers purchase and headwinds One on for in Despite share participants of Alerus our strategy downsize, and the mortgage, in will our market. this pick market competitors we our wealth top-tier present grow the retirement As up plans continue continue to management. to number opportunities we the execute as to

allocation generate remain continue majority uniquely which of client our in of is banking annuitized our from platform. we minimal we positioned as on to relationships deepen continue the recurring large income, our risk. over with We revenues the Today, fee no to within revenue sector our base credit capital XX% and

minimal very loans Our and and continue past classified strong low charge-offs. as credit is negligible loan portfolio of well remains experience levels we dues, diversified to

focus their of Phoenix hard want the dedication I to Bank company. remains our for a X.X% quarter a losses down allowance loans. key non-CECL with bank, as with Expense management X.XX% flat loan a at second addition, the to to the In Metro our employees employees expenses and to nearly all compared and XXXX. work quarter core of stand previous total healthy and we of for thank welcome

XX.XX% in attracting hand supported continue X well well by retaining levels the as to our and common strong product of grow, of quarter. to diverse expand across Alerus Tier financial and momentum Al capital will offering, that, it client growth I opportunities Our has as our Al. shareholders. Take details positioned discuss to to off returns strong deliver the to it talent With away,

Alan Villalon

Thanks, Katie. Investor website. is my I will of of commentary in on deck our XX Page investor posted the part start that our Relations

For average a loans increased on the basis. quarter X.X% of quarter XXXX, reported second linked

seasonal in due our of drawdown the interest-bearing end seasonal decrease the Average increased we loan a quarter by to we continue loans public XX% X.X% in in with due a existing driven during summer a an linked these in basis. approximately the funds increase in utilization of to X.X% outstanding. We increased with quarter, see lines. loans C&I happening XX% X.X% increase PPP consumer. during Within on The fall from the and production, of funds. deposits growth had loans was PPP, a decline rates C&I, the deposits. decrease $X.X typically impact Excluding interest-bearing basis along average core in At X.X% first pickup core average a a utilization tap was on unit The the into their to in to clients uptick a million linked quarter. public quarter an saw declined a in as in usually. deposits C&I growth

We Turning net the points remain in very Credit basis of net of X the compared had continues quarter points to to strong. prior quarter. Page to recoveries X in XX. first charge-offs basis

percentage assets basis points to was basis XX compared in points quarter. nonperforming Our prior the XX

On key X.X% Page quarter basis. interest a income linked While XX decreased allowance some revenue period-end net loans. our on is X.XX% basis, On metrics. a reported of are

increased X.X% higher I slides. basis about impact growth to in detail revenues net interest retirement higher PPP, interest declined Noninterest linked-quarter Excluding lower improved X.X% wealth the of margin. will to and income segments go due loan offset a and mortgage due by management. income net those later into on

the margin first interest of basis Net in XX. prior was X.XX% points increase an Page quarter, to quarter. Turning the from XX

PPP, margin investment higher impact was margin from core from estate of portfolio Excluding Core commercial with the yields lower increase X.XX%, offset our along basis from yields of XX from interest yields points C&I our benefited our net net higher real profile portfolio. the loan prior quarter. an by interest

XX% are Turning million to you see or of floating, as our Page at XX. loans can slide. of $XXX the top the

floors. you are all or their no above As almost variable see, have loans stated floors

deposit interest On the impacted XX, saw mentioned, volumes bottom as net our left, our rates. that net a mix of interest core positively very our our due We to rising increase small results. rate interest On and you remains previously funding can a waterfall strong. see income and margin costs Page in

rise do to our we recent rates, interest deposit the Given in costs anticipate rise now.

is market and currently between declined Aggregate to anticipated. still down XX, to We deposit anticipating business. to the S&P our the I'll due over lower the some highlights XX% provide be in than AUM X%. XX.X% On mainly Bond to XX% on Index previously down retirement we being are volatility Page quarter, beta our which quarter with XX% in

to AUM loans. we prior XXX,XXX in the due of participants approximately the asset see declined While mainly quarter, quarter. did number the Revenues increased decline, from prior lower X.X% XXX,XXX versus

Turning to Page XX.

retirement, wealth at to the a quarter, management AUM quarter, saw production prior in higher and again. revenues decline business. was X.X% Similar of deal won can we increased AUM, strong see advisory our transactional to custody that Despite volatility highlights You mainly revenues. in end market due declined the to from business the for X.X%, new mainly what prior by

volumes inventories low about Turning we housing over in time to are our originations rebounded Page Mortgage challenging XX. record than current as period talk prior quarter approximately higher from markets. business. the main a XXXX. increased in I'll mortgage Despite XX% the XX% for market, similar our

Page overview an is our Lastly, turning noninterest to expense. XX, of

incentive related improvement noninterest to in revenue-related due to X.X%, higher quarter, the mortgage. activities, an compensation increased During mainly expense mainly

also a due quarter. for to saw professional an quarterly commercial increased in We commitments marketing the to seasonal utilization. as pickup result provision we lower in a decreased expenses typical fees pickup. Other unfunded And M&A saw of as a in expenses expenses increase higher due

Now, forward-looking I'll some provide guidance.

comment X. we on on Bank, First, Metro I'll July the the on closed which Phoenix acquisition

the balances. loans. XX, They $XX of June cash, million Metro had $XX.X of of As of had million following investments $XXX.X and million

of are for purchase or do the not a tangible result the for common million anticipate million we as We Metro, issued on a material stock equity of $XXX.X capital We shares After purchase assuming a of million of $XX.X X.XX Metro. our of transaction. consideration deposits. ratios the total impact of

high the digits single guidance we Now, loan the a I'll for to basis, linked-quarter average stand-alone expecting growth third quarter. basis. in be provide on On a are

we to beta quarter. expansion deposit Metro, interest Metro, to For but loan book. expect that XX%. between rising linked we a grow expect we expansion, as of we loan interest Again, rates. on -- interest growth quarter from will some basis given net double-digit rising be XX% limited currently as costs margin Overall, in are in anticipate the XX% expect prior we're we the a expecting income excess to With be deposit expecting

overall be expect due to single under overall seasonality. be pressure we continued low fee to We mainly driven expect originations digits, down income decline as to by

up to expect expecting stand-alone costs. to Given be basis, flattish. mid-single a quarter no the to well be we're On up be market merger-related mainly growth, as second and expenses we to similar digits, due return

net remain And charge-offs Excluding to credit mid-single we be lastly, With strong base increase open With we Q&A. digits. Metro expenses that, to Metro, costs, core to be those continue expect expense below to levels. merger-related to I'll expect and up our it expect to now expect core flattish. by historic we

Operator

from The Group. the Instructions] line with Gerlinger first Ben question Hovde [Operator comes of

Ben Gerlinger

And can Yankees? I after put Q&A rumor somewhat, -- [indiscernible] start this, for first a or the of been and I lot the Offset think off speculation. [indiscernible]. the tone, did we bit Al, throughout of pitch, this somber but anything hopefully, a hate cheer little to to further you of you there's on And

Alan Villalon

-- I support Cities the am been I roots I I've general, cheer in Twin are the for a New long in baseball I love. but in time. question my York, baseball for but there. I appreciate general, from

off whoever of. win game, I'll So that support

Ben Gerlinger

cheer think that when is of the they're for today, segments But anyway, a the the hold it Yes, so obviously, about market the within different company guys will going market be whatever different as Yankee. and of course, forces. you you

think better have you core about it there to So overall. or internal the put opportunity investment, Alerus When the to forward with you that be would would a it investment technology next stronger that business that used revenue. any should broader allow you incremental the for that, higher coming to to degree dollar? and within that priorities reinvest next one And bank where segment, up gives priority decade? have set an anything rates Is

Alan Villalon

for I that Katie, one think sure. take

Katie Lorenson

in our for many catalyst I the banking Sure. referenced of opening Good question. my components being the commercial And comments, company.

are commercial we Jim And so and is much on where board, focus in in bringing. to and leader focusing a it on at laser banking. bring us clients, Obviously, the we That franchise the fee proven success. where who most a give and growing expand on to our opportunity we're very income on high is we of grower as value Collins very level does the because

Ben Gerlinger

you. Got

Okay.

a of a if bit bit of here. circle a that I'm it's lead So a squaring into broader kind relationship,

So from mean, Or Is anything i.e. doesn't a is to improve forward. of going compensation change much -- mortgage, that move? opportunity -- overall, kind I the profitability? of and perspective of can kind an mortgage doesn't from question upon you next stems kind of dependent kind then from franchise follow-up much, don't expense that rates with out change structural throughout that overall change it my there more Is really much. shouldn't could the within really that, expenses there if any trim bigger assuming picture

Katie Lorenson

Absolutely. Yes.

Alan Villalon

could one. take that Go ahead. I

Katie Lorenson

Sorry. Go ahead, Al.

Alan Villalon

Yes.

here I've over for board been he and days, XX things, Jim months. So been up on here about now been six a have sinking and and for about various I has on little

that structure, some that see else inflationary with pressures -- the we right also, of dealing kind rightsize what kind of an with opportunity everybody inflationary are to too, there's we expenses, at look we're now dealing those dealing environment some is too. As of but we are that do is

the day allow the well term expenses keep trying we as potential for But keep opportunity build inflationary to grow and is as us a right trying this is trying to see for runway that now investment going probably of in now. environment what to that's we're that and what of there's for Alerus is this story, work comment and to long that? grow, I here to on now, not is high going our to do Katie short understanding going everybody investment us every but going and much and there's anything to goal help well. required that right on you long to and of term. term, this growth we're support flattish us to very kind investments for because that growth for -- as so So is, that's the has here Jim though the as some kind growth structure we're much we're that to make as I make want that we're to for as build long kind so -- of for working to us the the look add to And term, Katie, of just

Katie Lorenson

us infrastructure to Yes, couple focus five past efficient of as It's things. the in well key years technologies the Yes. more on us a on I as a three for on to add. been grow. be to bringing developing been allow credit would that has

opportunity operating Jim's past infrastructure to in scale you growth see it. forward we that right catalyst by ability, with behind recent our our talent, and real what been as than overhead adding to we've And without bringing a is successes support higher think the and leadership is impressive. credit going the our under level And can on so at

Ben Gerlinger

would talent, or you a lender banks be or would any incremental Got could full any is sneak guys all-encompassing hunt on class of lending were that know can that on a bank is or type And there you. if that I of one in. kind you any bit team banker or next list? I think team for are top that you much of don't kind about the of acquisition kind a would high-caliber any a write I core for think the to helpful. hire is more of think but bankers, who but a don't If the gateway of characteristic? necessarily be relationship. of of lending today, just know geography the banking if or incremental to the That's the I anything be script bank

Katie Lorenson

Absolutely. Sure,

opportunities wide So done businesses one number at continue talent scale management, gives great we could and or that at and bring so regards base that C&I we to bankers, here highest strong look to mid-market, Cities. acquisitions, bank funnel to But certainly, that got full Twin continue be our as the we the do to pretty keep treasury we've look In think in top acquisitions, we our of us relationships. which client add just opportunity a we've that expand or of a to priorities. highest

Operator

the from of D.A. Jeff comes question next line The Rulis with Davidson.

Jeff Rulis

I there's some deposit for the want other deposit a some for you've flows. And do sense maybe on deposit you clearly also part spoke that see retention. inflows, to, the industry. changing think I some you seen on behavior Question but just that We're kind is to seeing seasonality. public confidence want think check I the the I of that disrupted guys mentioned of quarter-to-date, but -- there's and get in outflows to you pandemic the seasonality, those Yes, as

of confidence well as are and chasing as on as your activity some take rate seeing you kind just kind of well? seasonality So

Alan Villalon

being about on them actually a Thanks today us a and been to a it out for on summer, from over did funds in for features, then the used, pretty funds in fall. the it's back that has call -- that funds they've public a public in see the couple XQ, to because talking been and of much just the question, again building last paid we're those tried a several the there again the summer of and that's start just from approach, go coming seasonality they We lot those true and a, starting years, public in Jeff. slight because the study the and deposits pickup are

going watching there feel we're is comfortable about seasonality very we're watching and that that. with happened, we So to closely. But hike the just especially closely though, be right, you're very that just some behavior it Fed

on that So is definitely radar. our

Jeff Rulis

fund of you mix quarter-over-quarter? piece chasing any way that do Or of that of some public deposit raise? -- there the customers you of movement, you've the seen other that are kind change is Outside regular seeing

Alan Villalon

I No, there base deposit that's lag a customer been really And now. would be to to actually lot have sticky impressive right our We of been environment rising that that's our the how rate hasn't haven't. movement been out why there. I is I we're a up, able mean in -- thing And our been right deposit below what now. Jeff. is -- it's expecting costs said our when still We've pick like it's this. anticipated beta here

see surprise sticky how been for I've pleasant I us a six for say, should for here been is. -- our because how to base only it's months, So me, customer

Jeff Rulis

it. big to could what could back now us and Got occurs the circle the carved the of But -- out want tackled of the conversion some I that structural timing know cost saves you remind and be you efficiency-type kind questions. on of timing? maybe think that Phoenix, targeted picture I Metro on expenses. the with you where of

Alan Villalon

Yes.

conversion conversion. quarter late -- part of we're [indiscernible] this year in sometime sorry, of third in third later targeting this we third in -- so quarter, So the a I'm quarter

minus We little bit. that it's disclosed, in little range, still going there anticipating originally say, be be that to the -- might are I'd bit we've just just but saves a plus cost or a

Jeff Rulis

housekeeping deal. change, I -- rate but update marks related tangible goodwill book Okay. And if the book on impact? any Any lastly, tangible had. given the at we've then or basically movement those dilution, adjustment sort goodwill of of kind maybe or are to just announcement, on know don't

Alan Villalon

no we tangible our impact and a in don't that's recently, that just why I'd highlighted anticipate material put guidance to not in to or that still those got common there's just say equity really And capital ratio. I the we that. Actually, change Yes. that

So just those got marks we in.

Operator

with comes next of The Sandler. question Nathan from line the Piper Race

Nathan Race

and sales revenue in But of Yes. an just update I natural longer [indiscernible]. assuming think kind to rate growth assets benefit how participants management to from you I appreciate XQ. the term, clients as in of kind thinking How when that guys stabilize attrition within return retirement onboard kind those guys future of you organically just the just wealth into how increased after your opportunity and guidance efforts for have to kind here? XQ, with in and are terms plan get add with also about and guys the services translates given you love the of equity to of markets capture

Alan Villalon

want take that do Katie, want do you or you take to one one? that to

Katie Lorenson

So can fill comments, question. the I'll opening sales in have than plan we for seeing as you you we thank as In start and higher retirement, mentioned Al. reduced of of regards level to attrition. are I in, my levels previous as well new then Nate, in years a

are plans a those of on not many asset participant plans, the per plan, based, many so And of are per them new base.

on a new And fee those income I of participation well plans naturally as as the fees so our on we've got plan the asset-based believe, grow, in the the basis. And plan market couple as tailwinds, certainly increases. increases at

So then commercial and growth of that's expansion. catalyst the one client

retirement client commercial we to system the getting can And clients is typical with feeder something being that services half relationship we as focused and about significant past. the nearing place that the the plan we and and on we've So develops, more rollovers been of something proactive the the is a in to transition chance of. always base, grow good retirement the always they're we at business just individuals about end But with been than And retirement clients certainly, or our a planning where talk that those time. And our has base, ever that XX% plan the We've been to a engaging success to to in getting It doesn't year two, on time, much participant us. management thinking over it come are that rate commercial are also as the up get is business financial past that capturing again, need they're a basis. day reactive X. with or banking over potentially our wealth about in absolutely course more offer.

in opportunity that that of significant so our out opportunities income is division And the within rest the future. fee building for

Alan Villalon

Yes.

us I Rob is our and to great that And think our overlap only commercial get that done add job and He's The clients. he's of with really deeper really for retirement client leader story great kind a I of Katie really business, in in expansion that stepped overview. gave there. thing in terms synergies a the identified Woytassek. that could penetration in opportunities to

future. targeted expansion we've initial that commercial going some some So already seen strategy, probably and continue for and us, executing opportunities we're in for that he's success to on foreseeable

Nathan Race

also just to going of what of forward, if source kind it. change I'm shift of terms added. clients imagine sensitivity the in correctly? kind And kind initially this guys the being in I revenue Katie mix reduces Got going of back of hearing you that said market

Katie Lorenson

is not Most does. of the new business It all to asset base. tied Right.

Some components services, administrative it, would be participant would more tied of tend per and custody, per plan recordkeeping be advisory a the to fees. fees be just to and and that course, trust of

Nathan Race

about just Phoenix switch would do assets in just of sheet $X.X you fair to going of and third kind or And kind about just of you asset overall think stabilizes of the asset-sensitive and forward? support and kind the of kind here? expect just base billion It balance in turn then, of nature in the flow sheet? kind great. forward? how earning are flows the sounds around With are how Or given your gears of going deposit kind think of Or balance to overall I balance thinking so Metro from expansion think kind adding level dynamics. margin kind here? you kind deposit of guys Is that pricing do of overall guys could compete Okay, like here $XXX kind you million about sheet on how if of guys earning going it from quarter, roughly guys

Alan Villalon

This sheet mean, on I in strong really Nate. the highlighted Yes. that, as -- digits -- quarter a lower high are Metro, And really now, Thanks and we thinking stand-alone there, seeing I about think on expecting for about we the just our range single we're are growth. book right mean, double-digit we is balance down But excited linked loan to there. on basis, as a grow the opportunity to Steve there talking we're that that basis. well. Haggard in I

right with preference loan Tier X a Our is growth now XX.XX% Tier X capital. capital, common

have loan of and We lot keep a to dry loan to that like growth we'd powder support supporting growth.

a going on putting we're to that bit. as with we're deposits from loan side, to portfolio well we're there of growth now we're the letting balance to, help to come right though, So -- of investment and to little But an mature support the that loan help and a stuff growth support continue and funding sheet kind have expecting that remixing some just standpoint. from

Nathan Race

Yes. Okay.

of year the ongoing earning sheet, strong so the margin just growth asset kind in balance with mix given fair in quarter. of is $X.XX it asset And optimization nature of the the quarter sensitive of the given third And quarter, loan year? remaining perhaps of to the just kind third even and respectively, $X.XX both and north get this of expect to of kind fourth north

Alan Villalon

pricing for right that say to to Metro deposit our given definitely XX much on in say really frequent on uplift is pretty question thing right Yes, that, to one it's so are we're going discussions function I of, kind though, growth to of us the It's pretty in as do with want an now. there's because probably an having now we to board, in the we going to are NIM for especially say, margins output I The NIM, their basis rates. XX us, that But where points. hard us, we coming raise rapid tune than could pinpoint. is because that be on always don't it, monitor expecting but -- the higher

a it at to and rise I'm just margin that's year-to-date companies, and what that just look up we're given deposit question that what for watching tempering margin rates. help previously us now. our If about PPP you have in they us, asked -- right stripping little thing definitely But one Jeff a a lot the their for lot again, performance now well. of going for we so you're have bit dynamic There's higher have they as -- both is

Nathan Race

if case could Makes ask been large. quarter. sense. remained a historically. Credit And you. the By I the one Got nonissue guys and for just you that kind second more. has in always of And

added as of SBA So as Twin of higher fairly risk reward. that the in picking at about up then guys at team just in that generally, thinking guess, kind an believe kind I you well. the you asset looked guys are class Cities And recently. I team And SBA Phoenix looked has -- higher

loans? your just impacting continue all, days, if guys commercial that's to of the kind your if rate SBA small at of underwriting and conventional curious businesses intact given just production, portfolio these is shift, relative to I'm kind guess if pressures I to all plans of approach how you So still kind

Alan Villalon

you to that? want do Karin, take

Karin Taylor

SBA of at look relationship I the we're a continue to secondary looking environment, potential we'll also from grow those to this but certainly market. think to in on sell perspective, some the

I both changing us standards. open don't our see think to approaches. underwriting I we're

guarantee with place a the I affords protection. us think that got certainly in standards and of we've strong level

Nathan Race

Okay, great.

more sorry, perhaps Katie. for one And

the and what opportunities. get of in additional services you're you terms on for deals bank update there? Just touched seeing retirement whole maybe an benefit space in to curious But acquisition

Katie Lorenson

Yes.

two, in in finding these within sell three, We to positioning sources the who our businesses and across continue one, regards country increase to partnering business, with the them to four are years. advisers

us helped that levels a pipeline conversations. grow so into higher and volume And of and get our

with think so fees. activity. I continues -- be those allocated of the very and and that to competition retirement just of we're value to which And business of in has that's capital speaks annuitized the the There the to space, that to lack pleased fees be the

even like a what a where so because unit. we're more, at business that got And from value like clearly, pipeline conversation tremendous there's we from and we standpoint, within we've

Operator

[Operator I remarks. question-and-answer over for Lorenson This back to turn concludes like the closing session. Instructions] Katie would conference our to

Katie Lorenson

for Perfect. you We I'll our And you call regarding few great facing for morning. Thank clearly, comments thank joining a is you. our you, close industry this just for questions. with headwinds. some everyone, thank We the listening. thank

all Our of we our client level we're within we have diversified seeing business, of and the and our and engagement our products well outperformed, across pipeline our future remain because for company in positioned very leaders for momentum has high model success business expansion building historically and our is special. team new the

very to be differentiate where we foundation and on to have steady we we are. focused So we go value long-term the and and working best us, and the out for invest retain talent as well to our We ourselves strong interest remain together our deliver market again, company allowing is grow top and are our the proud as and shareholders. that as recruit to serving of clients

great thank and you our and we shareholders clients day, a to We for your continued investment. every of everyone. each for and our members interest we our in So, for thank our thank value bringing day, team company. their Have all support

Operator

today's concluded. you The conference call attending now has for presentation. Thank

You may now disconnect.

Alerus Financial (ALRS) 31 Jul 222022 Q2 Earnings call transcript