ALRS - Earnings call 3 2023 | Alerus Financial Corporation

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Operator

Hello, everyone, and welcome to the Alerus Financial Corporation Earnings Conference Call. [Operator Instructions] Please also remember that this call is being recorded. This call may include forward-looking statements, and the company's actual results may differ materially from those indicated in the forward-looking statements. Important 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 call over to Alerus Financial Corporation, President and CEO, Katie Lorenson. Please go ahead.

Katie Lorenson

morning. Good and everyone Bruno, today. our you thank you, joining to call Thank appreciate in investment interest We and Alerus. your

Also highly on and ongoing of execution our results me Joining initiatives and today Jim Banking the Karin and discuss This Chief and I Risk continued is Villalon, Revenue Collins, call our and quarter. will Taylor, for Operating our Al who Alerus' will the morning, financial in our on is valued building a the Officer; momentum CFO, Officer. Chief provide franchise. some commentary strategic performance

During of deposit during the the intense the rate quarter, deposit we challenging and overall and balances continue to held feel the environment improved quarter the steady. impacts competition.However, NIM the interest

relationship deposit was portfolio and balances XX% this ratio and loan-to-deposit accounts quarter Notably, As overall commercial, consumer again is building remained all broker portfolio.The as categories open banking accounts. at model loan our quarter I'd continued highly our constant XX%, again and just team clients members and to and at synergistic high-quality evident with also non-interest-bearing modest steady in focus deposit grew the on closed new our surpassed our of we over this added as deposits emphasize selective manageable franchise time. at disciplined remained that during the no clients growth

margin helped the revenue stabilize compression. to headwinds revenue income the diversified fee uniquely by net XX% Our interest of mix caused

fee income balance revenue this approximately sheet within noncyclical and with annuitized reminder, a allocation and is capital As mix, XX% highly minimal recurring risk.

plans opportunity to offering, the we product we the business for products most scaled to this by of have quarter, spun allow and ranked is and These services most trustee and extracting this our the payroll direct this The divestitures business value the and we income. exited continue business.Last is the remain strong highly driver XX The is delivers participants, delivering to retirement fees. majority us top ESOP returns. our where Alerus' with which profitable the solutions we of business. national committed of core resources Specifically, highly and new growth off the year, lines strategic valuable, and growing fee and prioritization on business of growing

Wealth trending As to headwinds such, we million rollovers.Moving $XXX source segment again high highly Several valuable of and core our annual key and expectations. business. [ XX% retention. worth nationally revenues and over Management in AUA. revenue have of despite for client and focused deposits, conditions client services business appear in on with the ] management are on management tracking our wealth recurring Synergies annuitized loss early surpassed are our due of are to a our revenues to [indiscernible] brought revenue exceptionally net higher revenues new our is market wealth Over footprint and again initiatives from business, of connection traction with an as with have geographies level planning retirement which advisory remain high

formal the we lifted team together with a During of and and bankers Management launch quickly. come has the quarter, out integration private Wealth

accountability. support environment. large it retaining of a with throughout referrals dollars consistent revenue-producing challenging contracts Alerus the model our remains inflationary professional prudently We expenses growth year-over-year in assessments retaining of excellence One trend with results wins with business by talent and future company remain a and driven team Alerus produced company and client quarter, in in key holistic through attracting a while in management priority face very employees fees. Expense and key sales produced Our company service increasing One in the wages, remained even by the building balanced pressures again X%, the culture of our nearly second mortgage high-performing banking down but to our of and clients.Our aligned investments commercial

remained directive From and XX% progress optimize accounts sheet of We committed grow with a the it platforms teams. Phoenix losses the levels urgency an Capital with also relationships. TCE in to experienced adds leverage on the continues strong the and X.XX% are during our allowance-to-loan less treasury net not another theme selective verticals loans, efficiencies of of standpoint, production government uninsured year our faster, seamless acquisition. in sales and to CETX services related deposit and dues robust cut and diversification and is loans. This working approximately past headcount deposits loan remains segments clients banking, of the to improve we of expenses, include develop automation experience in throughout building total and and evident medical abilities highly our concentrations Alerus processes to talent and consequently increase and [indiscernible] improving operating than is capacity with to low acquire emphasis of recoveries portfolios, and purposeful low. to not-for-profit, loan of procedures.We and with million nearly CECL a to service at experienced the our our a addition deposit-rich professional our and remain of management quality ongoing Metro franchise with $X.X remain of have non-performing place client quarter X.XX% Our and a arbitrary is and our technology professionals year ago. granular Key effort and XX.X%. planful remain robust balance lending to more team.Credit levels and today C&I and

to we our Alerus the repurchases.As too returned remaining $X industry share continue Alerus shareholders battle some through During has pressures. near-term the will ahead, headwinds, look dividends and to million quarter,

However, we stronger-than-ever a franchise. building are

relationships new adding and client rightsizing prudently ongoing infrastructure are improving profitability We and through optimization.

that, business it over in our is talk we investing products franchise-accretive bring Alerus and directly to creation strategic frictionless, our in Al We and which advice experience, I valued shareholders.And value fast, turn believe into about the our translate while offerings. highly performance. financial Each will manner, responsive will and clients to quarter and delivering with are for to move while expertise or key noncore purposeful exiting positioning lines to in

Alan Villalon

Thanks, Katy. of our posted of XX I'll that on investor part our start the commentary is deck on website. Investor page Relations my

a on our interest declined start On Let's primarily key of into net revenues. I'll represented to fee about driven The X.X% grew go a basis. revenue driven income with ESOP income our basis, the continued ESOP trustee quarter in detail fee XX.X% funding of of by on Net basis. linked income basis, interest Switching our later Services the income linked-quarter each increase on segments by business income; reported in division.Excluding drivers. non-interest within increased impact our linked-quarter income Benefit a XX.X% of trustee was Retirement business, primarily a and the slides. decline non-interest divestiture costs. X.X%

Turning margin Net Impacting XX; interest prior was basis points basis was million was the to deal. page the a accretion interest quarter. net from X interest decrease XX of from Metro the Phoenix third net income points $XX.X of X.XX% quarter. in the about margin

quarter. be commercial our from turn gradually than continue the progressed, real point by our we higher-yielding points basis X.X% index quarter, interest XX On a improvement we real Fed decline by offset we net reported expect continue of basis, to as During monthly third during loan improve margin loans.Let's July, the quarter into to in Total points to the net the with to net the reprice margin quarter repriced the for consumer improve. done reprice our margin that assets we quarter do the portfolio. loans. will quarter.As XX deposits X.XX% was margin grew net our July the basis in a saw about net Fed prior on X interest month to Should anticipate X.X% gradually our estate saw We another interest hike and our and the liabilities interest residential our rates, Based we of interest interest growth based is for the indexed X.XX% September, a low last in net margin to July. driven from earnings in margin raising page since our ended the to October. with estate, in higher remix loans compress do for which the talk after C&I,

see growth multifaceted relationship-based strategy. solutions in clients where Alerus lending, are our strong providing via we continue One to to We

For the remainder of expect growth. to XXXX, loan we modest do continue

clients. a ending our XX% of continue attract on period we X.X% prior deposits quarter. remains basis, to XX; and page the still new to deposits increased very retention high, from total Turning represent Non-interest-bearing deposits.Client

levels of remainder expect year, the the deposit remain to we For stable.

our to a see XX, page further deposit strong you Turning breakdown can of base.

XX.X% synergistic prior time HSA driven deposits. mainly segments. nature. quarter. a HSA gradually account grew within XX% balances growth over deposit, million sourced The businesses our strong Our over funds our client funding to synergistic synergistic increase Synergistic year-over-year is now source a and organic over Retirement of and the now $X.X million, from business deposits of our strong and the X.X% deposits for sticky Wealth the accounts our Wealth base.Within our synergistic due and was grows wealth in quarter. retirement over from Retirement sourced prior grew for deposit, XX% prior year deposit and growth by $XXX.X those HSA low-cost to over its

shows see of can strength you model. our business continued deposits unique synergistic our in the As differentiated growth here, and

sale almost quarter.The years. interest our over during did you'll in X We duration XX% as increase investment securities the rose XX, investment remains our rates held maturity. losses see portfolio XX% versus Currently, available page to Turning our see are for about details of portfolio. of slightly to unrealized

for to On XX% grown equity remix X.X%, We of Participants add On business. decreased that continue mainly portfolio highlights to our End-of-quarter management and markets. approximately businesses. towards mainly on within Retirement and have ] to page, retirement total our commercial higher-yielding business, X% income down trustee about loans the this to XX, I'll of [ year-to-date.Revenues ESOP which sheet the relationships. relationships management on bond over due treasury a start talk I'll fee increased assets our the due accounted and our over some let balance revenues. under basis, page investment run XX% provide divestiture linked-quarter lending will lower

the basis, launch is in basis. on revenues retirement the and and a the On linked X% go-forward point were impact over quarter of right ESOP excluding Retirement this our bottom the of up division. Benefit benefits Services a business slide, quarters million $XX.X for On both right trustee core

deposits. and Like quarter, a for funding any of synergistic businesses fourth XX% our $XX.X can the retirement, for see the assets revenues the slightly quarter fee linked bank basis, Wealth income decreased business. equity impact, X.X% page bond Management you under it XX, up while to to due strong over On wealth from X.X% million.Turning management our excluding go source expect we as to from Retirement from do as a decreased For accounts end-of-quarter markets. f challenged of provides our highlights

For expect the third Wealth quarter, slightly do for well. as excluding to fee any income we be impact, market up business our

Turning prior Mortgage quarter, is to value XX.X% Index MBA prior originations XX, about quarter Mortgage better our receivable hedges business. a originations impacted from revenues I'll from which were results.Mortgage X% page the talk stable, fair than saw Purchase decrease. but as which slightly decreased

we fourth mortgage do weaker expect decrease quarter, originations XX our seasonally enter a for the non-interest quarter we For expense. overview of as business. Page provides an our to over mortgage XX%

expect XXXX the for digits numerous through professional fees inflationary leap mid-single organization. and business. be expenses improving of pressures, year-over-year by divestiture on high our continue our to remained focused reducing expense to to X.X%. expenses [Indiscernible] be to while we infrastructure continue fees increased capacity of During low profitability a trustee expense due progress related rightsizing to Despite quarter, stable ESOP non-interest throughout our the on initiatives. increasing Compensation to on our increased basis.We down continued

Some expense and in will efficiency initiatives. saves reinvested of be revenue production improvements these

recoveries points Turning continues basis to very the in net remain We page quarter. to had credit strong. XX; X of

discuss loans non-performing XX allowance percentage stable to loans on And X.XX%.I'll X and basis basis quarter. to points the was assets for page capital XX. our at Our remained points our total prior liquidity credit in compared on losses

stock outstanding $XX.XX. an During the average price of of at we repurchased quarter, $X.X million

capital the during done well Our after repurchases the minimums share remains above even regulatory quarter.

stress Tier minimum equity Test. XX%, XXX to over common Our largest Stress capital by basis the to which is the the X.X% financial risk-weighted points institutions X Dodd-Frank is required assets over above subjected

capital breakdown liquidity. in the continue right, standpoint potential in you'll for see the and of of fundamental on economic XX, on On the for summarize $X to sources weather -- stakeholders. well-positioned page any billion Overall, uncertainty.To remain both improvement our we the we focused and are returns to improving liquidity making bottom

remain prudently. we returning and strong committed remains capital capital Our to

to be income. margin remain remixing stability from our asset expect Q&A. to fee the as should in I'll improve.With revenues do Should as to pause, it on net as provide business open our improve diversified over XX% environment a that, improve for almost we Fed Our continues asset and challenging come macro up fully of yields earning repricing interest

Operator

[Operator question. Instructions] from Jeff It We comes do Rulis our D.A. first Davidson. have from

Jeff Rulis

-- right. question make quick on -- just margins, this want a on Just I Al, to got sure I the the

about talked down X another basis deposits. to basis You given XX kind points of index leg the points

So I'm with the through QX and 'XX? idea expectations is of -- trying the into to kind meet kind guide about If if just 'XX well could pauses that you on commentary me an of margin? more that of the Fed

Alan Villalon

Jeff. Thanks, Yes.

from expect we X from points improve exit expect do So basis for to to October QX, December. do basis but of XX to basically rate about points compression, margin our we

go we Fed Go net another in there. do we expect ahead. hike XXXX margin even XXXX, now. we're there's anticipating So And a interest as if throughout Fed into right improvement hike

Jeff Rulis

If hike, that's have Sorry. not margin. do net we for a better the

Alan Villalon

another And basis Correct. we that points anticipating hike. to of was [indiscernible] the plus what XX Correct. I based are clarify is on Fed Fed going

Jeff Rulis

came where on just legacy credit wanted nonaccruals what the is? more the to loans those of added. a kind how Just the the was of that little detail type kind get relationship of On where side, from

Karin Taylor

in of our this And it's this of The experiencing I Yeah, issue. issues is we indicative credit. are is not Jeff, -- credit the normalization. broader It's a Sure. market. it's Karin. credit part just a say commercial It's to of that's what credit. expect in a would unique Arizona terms

Jeff Rulis

one was increase? So credit in the centered really it was then

Karin Taylor

The in Yes. credit. entire one is increase

Jeff Rulis

Okay, got one. it. I guess last just one

like seems we head on little quarter. that we appetite of stand the you where out environment, and and balancing But a as this as buyback into the capital pickup that Just QX? do sort look

Alan Villalon

have is make sure at. that is look in -- we the are payback typically because price place, what we buyback So of Jeff, the watching but we our within years three want to we within

Operator

from James. Our Raymond Feaster next question comes David from

David Feaster

initiatives is you place on just I'm it's trending core the deposit seeing, expected to that Maybe trends deposit you're perspective some curious the footprint? drive stable. And incredibly I see starting of But you're competitive. how term? then the CDs I'm or deposits to trending core near able deposit And about and that appreciate are from whether some are the out and just cost? your across growth. obviously, mix of costs improve to be you're just in how your be to gap balances the are funding core just dynamics just curious think deposit side and how going the stop putting

Katie Lorenson

it This into standpoint, Sure. is attracting an I'll the we're that is start. talent all initiative Katie. organization. the about From

invest deposit-rich I as -- team. and to well bankers mentioned focused verticals in mid-market build so our And continuing management as treasury earlier, C&I the bankers on as

as the mix book. standpoint, certainly retention. wins has the will been relationships. that CD majority multiple to From And is as in business seeing I an we increase are well the say the that so of key a

And business. core be so continue to client

our dollars. We your increases the fund, also do dollars seeing company, Does but a positive. are which We're retain are staying we wealth with Al, believe have? answer money that management able key is you the question? to in market

Alan Villalon

to like is the think quarter, in our new terms of hikes in quarter. the I deposits month any that typically index reprice if prior of about just pricing, way there's in would David a the Yeah it first

much pressure all the those. year. repricing was So lift.That We're And our market XX% have we in more but not of terms only those money at seeing on are of bit October loaded hit about broad-based of in indexed, kind you'll front-end see okay? the deposits of a will from beginning specifically, little of

our So we've deposit stabilize beta seen point. at this

are focused something why great prepared of at constantly to a relationship/low-cost this a be outside when basis and think again, points for funding because a this on margin the a XX for would But index comments, I we they carry So little is really here to points. looking the us, those where only liabilities. new source and get were just XX can HSAs from strategy about in we it at cost us, there standpoint point, two that's of we basis highlighted on especially bit

David Feaster

ultimately, a done in remix think Yeah. growing job about then a I sense. asset And throughout of the costs yields new expansion? repricing do into earning pace next play curious, higher. do -- pace you ton the of think loan appreciate how the maybe expanding the of there? curious, the job And you schedule and you to other That we're I'm expansion of great doing -- Obviously, how but following loans. guys kind just just the going quarter, deposit makes defending and on are be repricing how the side up have and touching that of pace on about I'm does guys right? I XXXX. a on of of the then mean kind margin much because guidance improved. you just the are great maybe coin,

how curious about think that. Just you

Alan Villalon

Yes. take David, can one I that Al. this on. is

think of interest the of the I our margin. kind kind way two parts there's net terms In I of about mean, of it, expansion,

should now liquidity. us -- in investment somewhere off XXXX, in like X.X% but right in that of provide a XXXX the portfolio mid-Xs later early a is yielding roll X-year that of some have now we first duration, of granted if you those securities about with a that it investments in The was part okay? do in that book is And and came about there that, came 'XX, source think -- So range.

remixing go-forward funding So basis. on that's a going into to loans that mature.We're

commercial quoting about our a resident as book, in life ex when commercial there book our X-year residential and loans, too, has also, also Now ex look at you well.

loans lower of of well higher-yielding those well. as were that those until products at pre-pandemic, So they'll off, remixing be were yields done us kind done kind as loans some as for come of that loans

those are of floating XX% as also So aware two are about well adjustable. component is third But that to be loans components. the of our or then

David Feaster

Okay.

then me. Okay. Perfect. for And just last one

great done guys You managing have a expenses. job

the to ESOP those I guess, you plans the to about maybe talked the was on decision the that hoping sell remarks. elaborate You first, in I capital maybe business that and in redirect could prepared resources.

going time or investments expansion segment maybe forward? Just how about right others bit pull opportunistic think more that. are back? you a geographic curious hiring how additional Is be and starting with the now maybe about Just while you to think to

Katie Lorenson

This the is of business, is business. Yes. Absolutely, very the now Katie. specifically ESOP ESOP overall again, In it a time. to business and regard the piece was small trustee the

retained of portion. that business, small and but a trustee very we the the administration So recordkeeping business ESOP

continue And are leaders for to served so their suited product grow to we that our took we business in X.X better in lines that where previous the and redirecting that about resources so invested significant, business we've with it and in. over the ability come that to -- opportunity those to core grow line, all that then in Secure scale investments our in Act is the consultant especially talked calls.And on to very the

are invest We in to continuing talent.

line, to project experience. our make streamline, prioritization terms internal the to a investing resources of day, for are better the course, We of client of and end in at again, that improve processes into in business

that in $XX executive an million executive on revenue. business. addition, In and retirement tremendous we who's are to total on an business growth Alerus million time primary when focused experienced The responsibility in XXX% last was had investing $X the from was we the

would the facet So be other in the of line. business investments that this

Operator

question from Piper Race next Our Instructions] from Nathan [Operator is Sandler.

Nathan Race

think is environment. next growth this little with down going is Al. NII higher under like year. like a for you of potential margin for XX%, how doing a here And well. for come question get longer high growth about maybe XX% interest about of everyone think kind on tracking fourth curious NII guidance you to that the year environment. It is to and Looks your sounds quarter. hope curious A the further But how I the in just down rate just thoughts

Alan Villalon

mean, Nate. what to it lot to from do Thanks, be trough mean, Yes. we net we of looking we're NII are I to looking on so that just outlook basis, growth, right closer are think year, next but is now I interest But [indiscernible] a drive a we the at some stable, loan a that. for too. margin NIM our up

head into So those of things thinking XXXX. kind we are we're kind of about as

Nathan Race

Got help year. some loan funding of cash starting in it some that how curious flow just that? you stability growth, growth And be terms about hopefully, have coming some sounds will out, like after can this there you. And future year deposit

year some do level see to how growth of increases opportunity So could the funding hopefully levels wholesale kind think you about hopefully of kind growth greater you you of reduce potentially or an just support that deposit unwind [indiscernible] to funding next as NII XXXX? in

Alan Villalon

Yeah, deposits to my we is love deposits to what love its is just to to see -- music we'd And years coming king. door, days. -- definitely would these deposits more

in planning So XXXX are on we and system, relationships. right is given those deposits in to gathering out trying a tremendous focused well. is look help talent, bringing especially the But deposit coming deposit into we've very liquidity is amount figure with question what out on of to The the is much brought how us our activities. our that management to of side as now as control in we treasury

Nathan Race

that with sale? resources the to thinking the two the have platform question in then rate ESOP fee kind you. led all how from on retirement capture opportunity the picture Obviously, unit to to markets place of the Got third particularly year, the guys if challenging next of kind headwind those the about into wealth, some more in revenue wealth grow trustee sense. put we increase market lines quarter. allocate And and retirement of retirement in you Makes you initiatives a guys But management you are lines. as a was the get bigger valuations of going forward equity income to stable more kind and just the

Alan Villalon

Katie. ahead, Go

Katie Lorenson

Okay.

top to we in regards a divisions. in So help From both business lines, revenue to core clients, those growth, of add both markets certainly client spot sweet just really stable, capacity line are as well continue within improving improving business will new I momentum our new initiatives efficiencies in and business. margins really opening speak continue as markets. The our additional to to bring about up business on within standpoint to and target the that

we success. So some initiatives early have seeing where we're

I call, are success. early the think it's a Al, in little With early still you, that, of to but in some definitely to place it too processes I putting right bit I'll of to and turn guidance. really grow seeing over think terms this indications

Alan Villalon

Yeah.

launch So which are about next there for only $XX.X in just mean, about. the because year, probably market sensitive. We'll as retirement we the XX% our of think million see talked I is gradual lease there we revenues about point improvement

the [indiscernible] So area. to is continue growth of see and it in really rest growth and participants, we would that plans which

anything that on there And Jim, to you add there? pretty side. then want we're optimistic on is So

James Collins

that this going our really to of important core team just the that synergies private we to Collins. client think, I teams will reiterate said what add those really the oncoming from are growth expectation building, is of our and Nate, staff due is Jim is was new I Katie existing to the see going growth. banking -- and that just I was

help can instituted XXX(k) aggressive more a much rollovers. we've that recruiting harvest for of the addition, out advisers entry-level those In plan lower

year. additional So growth I we'll what next that's think see

Nathan Race

partners for one Katie. less one things Curious maybe looking if you're helpful. you're entities today in perspective more potential of also Got to or side expand space. kind what light other to on competitive on maybe just from seeing what with seeing it. a And are in from acquisitions potential discussions your perspective pricing you're a that of last the and retirement of that in optimistic Very relative

Katie Lorenson

a sit in lines. business standpoint very all our of I well-positioned we think from competitive

coming direction a I itself in unique story of has us. more our looking tell in reputation. And strong partner of to volume is in having very think terms got calls of and and to really a our potentially company with that interest

trending for disciplined the be to as acquisitions. direction lift-out, future is at talent I we'll momentum opportunistic right we would say So continue But and very opportunities. look the those prudent in strategic,

Operator

comes DelMonte next Our question Damon from KBW. from

Matthew Renck

Renck Damon is is but this from everybody and KBW questions a been have DelMonte. asked hope follow-up. This filling my in well. is I for doing Most Matt of answered,

is that grow Just IRA around new think some million, could in where do number, context initiatives? $XXX to that put as a roller just you XXXX to follow-up, you the the with

Katie Lorenson

Sure.

in way. And our -- a to that differentiator have then with pool we continuing at attracting of context, are for then X% very today to initiatives an high-touch about really as build capture side opportunity, talent these our reach and a proactive are Jim reactive the around the mostly way out Just talent referenced, we because rate very on that's the and been has a to timely opportunity. individuals company and this

capture anticipate that rate to X% see continuing we increasing. of So

Matthew Renck

Okay.

could to you than it XX% So reach gradual is XX% do potentially that? like or it think more

Katie Lorenson

that. gradual it I little a than time, it would say be more takes will so

Operator

We currently have no further questions.

to hand closing like back I Lorenson you. So to Over remarks. to for would Katie

Katie Lorenson

profitability, the book history I our you long call everyone fee the business will questions. strong just and on strong and laser-focused diversified well We returns growth return of our our with talent top-tier for everyone, today. unique our diversified strength company our again, to our to key our to business to investments model, to day. comment our delivering a which, and shareholders. balance our about Have clients professionals. as the and in tangible continues Thank to income attract thank while differentiate lines Thank joining remain talented as great analysts value and Perfect. company infrastructure investments, you, end and our optimizing of a again retain investors, and our ability you, to sheet,

Operator

joining. Ladies today's and call. for you gentlemen, this Thank concludes

your disconnect now may You lines.

Alerus Financial (ALRS) 26 Oct 232023 Q3 Earnings call transcript