Alerus Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Alaris Financial Corporation Earnings Conference Call. All participants will be in listen only mode. 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.

Operator

Important factors that could cause actual results to differ materially from those indicated in the forward looking statements I would now like to turn the conference over to Alaris Financial Corporation President and CEO, Katie Lorentzon. Please go ahead.

Speaker 1

Good morning, and thank you, Bailey. Thank you to our research analysts Thank you for joining our call this morning as well as our investors, employees and directors for taking the time to listen in. We appreciate your interest and investment in Alaris. This morning, I will provide some commentary on Alaris' foundational strength in addition to the execution of our strategic evolution to a top performing commercial wealth bank and a national retirement provider. Today, I am joined by Alaris' CFO, Al Villewan, who will discuss our financial performance and results for the quarter.

Speaker 1

In addition, Karen Taylor, our Chief Risk and Operating Officer and Jim Collins, our Chief Banking and Revenue Officer will join us to answer any questions you may have about the quarter. Alaris is well positioned to emerge from the current headwinds as a clear winner in value creation and returns for our shareholders. We are building off the unique strength of the company's diversified business model, while optimizing our infrastructure to return the company to delivering strong profitability, while continuing to grow tangible book value. We're fortifying our path to transformation is our continued and significant success in adding well respected and widely sought after bankers and This momentum in attracting and retaining talent continued to build in the 2nd quarter as we added more experienced big market and specialty commercial bankers. These team members joined the dozens of professionals we've hired this year and our tenured team of SBA, CRE and Business In the last 6 months, we've doubled the size of our treasury management team and the team has hit the ground running as we've had early success in deposit wins, Critical retention of relationships and they continue to work closely with our mid market and specialty commercial banking group.

Speaker 1

Last week, we listed out a seasoned team of bankers in Minneapolis, who will formally launch our private banking franchise. These team members will leverage our OneAlyrics business model and provide an integrated our infrastructure with urgency. We remain disciplined in our investments and are focused on talent on expense management. This was evidenced by our 4% linked quarter decline in non interest expense. Today, we have reduced our total headcount in the company by 10% year over year, which includes the holding acquisition of Metro Phoenix Bank.

Speaker 1

Our fundamental strengths include our fortress balance sheet, anchored by strong capital, This diversification is across the enterprise and multifaceted. Valeris' diversification is highlighted by our best in class business model with over 50% of revenues coming from fee income. Over 90% of those revenues are annuitized and recurring in nature and require minimal capital allocation, along with virtually no balance sheet risk. The majority of these revenues are derived from our National Retirement Benefits business, which was again ranked in the top 30 in the country. These durable revenue streams will continue to support capital build and shareable returns despite the challenging operating environment faced throughout the baking industry.

Speaker 1

Diversification goes well beyond our business model and portfolio diversification remains a critical strategy. Valera's loan portfolio is diversified by loan type, Geography, industry, asset class, loan size and client. Throughout the Q2, we continued to conduct ongoing stress testing and review of our credit portfolio. Given the current environment, it is worth noting our investor CRE as a percentage of capital is at 173% compared to the regulatory threshold of 300%. Alaris' exposure to office is limited to 3.9% of loans, none of which are secured by properties located in the Central Business District.

Speaker 1

Asset quality remains pristine with minimal non performing loans and a year to date net recovery. Reserves remain robust 1.41 percent of total loans and $6,200,000 of the remaining mark on the acquired Metro Phoenix portfolio. On the funding side of the balance sheet, our deposit portfolio remains well diversified among markets, products and clients. Our uninsured deposits are 23.6% and quarter of our deposits are sourced synergistically through our retirement and wealth management areas. We continue to see good retention of deposit dollars, driven by our relationship approach.

Speaker 1

In our commercial client base, 68% of our deposits are integrated with treasury management offerings. We had several key wins and retentions during the quarter within the because of our holistic service model and constant collaboration between our wealth management and banking team. During the Q2, we experienced seasonal outflows from our public funds accounts. This activity was as expected and we anticipate inflows in the second half of the year to follow their We are pleased to report several large and quiet wins and overall net new accounts to Alaris were $83,000,000 higher than dollars of closed accounts. We consistently monitor our deposit portfolio and do not see any unusual or unexpected activity.

Speaker 1

However, generally speaking, clients are continuing to draw down in vendor balances versus utilizing their lines of credit. In our fee income business, we saw a rebound in originations in mortgage and market value in retirement and wealth. Strategically, we have engaged an experienced consultant as we look to prioritize and maximize the opportunities within our retirement business. This engagement is targeted at efficiency and operational enhancement, which will position us to take our large Nationally scaled business to the next level through organic growth and acquisitions. We believe we have significant embedded value in this new sized cash flow business with the passage And with the passage of Secure Act 2.0, we believe there's tremendous opportunity to continue to expand our client base and further improve margins and gain market share across From a capital standpoint, we continue to build on our strong capital level.

Speaker 1

So TCE is 7.7 2 and CET at 13.3. During the quarter, we were active in share repurchases and we also continued our long history of paying a dividend and in the second quarter increased While there continues to be near term pressure on margins, we are prudently managing expenses with urgency across the enterprise. We're having significant success executing on our strategic plan, focused on key talent adds and restructuring. And each move we do is purposeful in positioning the layers With expertise and value added knowledge to our clients in a fast, frictionless and highly responsive manner. This differentiated approach diversified business model, including the higher levels of client acquisition and client expansion.

Speaker 1

We are continuing to build tailwinds and synergistic As a differentiator in the Community Bank space, we are focused on client and talent acquisition and delivering top tier shareholder returns. With that, I will turn it over to Al to talk about our financial performance.

Speaker 2

Thanks, Katie. I'll start my commentary on Page 14 Our investor deck that is posted in the Investor Relations part of our website. Let's start on our key revenue drivers. On a reported basis, Net interest income declined 6% on a linked quarter basis. The decline was driven primarily by continued increase in funding costs.

Speaker 2

Net interest income represents now 46.3 percent of revenues. Switching to fee income, non interest income increased 2.1% on a linked quarter basis as we saw improvement across all our fee income businesses. Fee income continues to provide revenue stability despite the necessary challenges. I'll go into detail about each of our fee income segments in later slides. Turning to Page 15.

Speaker 2

Net interest income was $22,200,000 In the Q2, net interest margin was 2.52%, a decrease of 18 basis points from the prior quarter. A 27 basis point increase in our asset yields was offset with a 46 basis point increase in our rates for our liabilities. Impacting the net interest margin was about 7 basis points of accretion from the Metro Phoenix deal. Based on potential more Fed hikes, which was not in the Fed pause at the beginning of the year. We continue to expect our net interest margin to compress in the Q3.

Speaker 2

The magnitude of compression will be determined by whether the Fed hikes by another 25 basis points from here. When the Fed pauses eventually, we expect earning asset yields to continue to improve with mix shift And loan repricing as our cost of funds stabilize. Let's turn to Page 16 to talk about our loan portfolio. Total loans grew 1.9% from prior quarter, driven by growth in commercial real estate and residential real estate, offset by a decline in construction and consumer loans. For 2023, we continue to expect modest loan growth.

Speaker 2

Turning to Page 17. On a period ending basis, our deposits declined 5.9% from the prior quarter. As we guided to in the last earnings call, We experienced a seasonal outflow by public funds, which was the main cause of the decline in deposits. Despite the seasonal outflow, Client retention remains very high and we continue to attract new clients. For the remainder of the year, we continue to expect deposit balances to rebound from the second quarter as we expect a seasonal inflow from public funds in the back half of the year and continued client wins.

Speaker 2

Turning to Page 18, You can see a further breakdown in our deposit characteristics. Our synergistic deposits for those funds sourced from our wealth and retirement businesses Grew 27% over the prior year and 7.5% over the prior quarter. The strong year over year growth in synergistic deposits This was driven mainly by strong organic client growth within our Wealth segment. Synergistic deposits sourced from our current and wealth businesses now account for 26% Continued growth in our synergistic deposits shows the strength of our unique and differentiated business model. On this Slide 2, you'll see our uninsured deposit exposure.

Speaker 2

Our liquidity coverage to uninsured and not collateralized deposits now exceeds 300%. Turning to Page 19, you will see details about Umbrella's portfolio. Currently, almost 69% of our securities are available for sale versus 31% in healthy maturity. Within the healthy maturity portfolio, Approximately 42% are in Unifinable Securities, while the rest are in MBS. We continue to let the investment flow run down and remix the balance sheet towards commercial lending relationships We will add higher yielding loans and treasury management relationships.

Speaker 2

On Page 20, I'll start talking about our fee income businesses. On this page, I'll provide some highlights on our Retirement business, which accounts for approximately 32% of our total revenues. End of quarter assets under management and administration increased 4.9% due to higher domestic equity markets in the 2nd quarter and continued client wins. Participants within retirement have grown 2.5% year to date. Menus increased 2.6% on a linked quarter basis, mainly due to Our retirement business continues to be a strong source of funding for the bank.

Speaker 2

Retirement now accounts for over 71% of our synergistic deposits. For the Q3, excluding any market impact, We expect fee income for our return business to be up slightly. Turning to Page 21, you can see highlights of our Wealth Management business. On a linked quarter basis, revenues increased 4.9%, while our end of quarter assets under management and administration increased 5%. We continue to see strong client acquisition in our geographic markets and from retirement rollovers in our national and established markets as we execute on our One Alair strategy.

Speaker 2

Like retirement, wealth provides a strong source of funding for the bank as it now accounts for over 28% of our synergistic deposits. Excluding any market impact, we also expect the income here for our Wealth business to be up slightly. Turning to Page 26, I'll talk about our mortgage business. Mortgage revenues increased Over $1,200,000 or 69 percent from the prior quarter as originations rebound from a seasonally low quarter. Mortgage originations increased over 43% from the prior quarter, which was slightly better than the MBA purchase index, which saw a 39% increase.

Speaker 2

For the Q3, we expect mortgage originations to remain stable versus the MBA purchase index forecast of 1% growth, as inventories of homes for sale remain low in the Twin Cities. However, we continue to expect a seasonal decline in originations in the 4th quarter. Page 23 provides an overview of our non interest expense. During the quarter, non interest expense decreased 4% as we remain committed to improving our profitability. Compensation expense decreased Due to a reduction in headcount, while professional fees increased due to higher FDIC assessments.

Speaker 2

Despite inflationary pressures, We do expect expenses to be now down low to mid single digits for 2023 on a year over year basis. We continue to be focused on improving our profitability By reducing expenses and increasing our capacity throughout our organization, we recently made continued progress in rightsizing our expense infrastructure through numerous initiatives. Some of these expenses will be reinvested into efficiency improvement and revenue production initiatives. Turning to Page 24, credit continues to remain very strong. We had net recoveries of 7 basis points in the 2nd quarter.

Speaker 2

Our non performing assets percentage was 7 basis points compared to 5 basis points in the prior quarter. Our allowance for credit losses on loans to total loans remained stable at 1.41 The forward reserve currently provides over 1300% coverage to non performing loans, as you can see on the bottom left. I'll discuss our capital liquidity on Page 25. Our capital remains well above regulatory millions even after share repurchase is done during the quarter. Under the bottom right, you'll see the breakdown in the sources of the $2,000,000,000 in potential liquidity.

Speaker 2

Overall, we continue to remain well positioned from both the liquidity and capital standpoint to lead up any economic uncertainty. To summarize on Page 26, we remain committed to making fundamental improvement and improving returns for our stakeholders. Despite the challenging headwinds from our rapid rise in interest rates, our fee income businesses continue to provide stability to our revenues and continue to be a strong source of funding. Our capital remains strong, and we remain committed to returning capital prudently. With that, I'll now open it up for Q and A.

Operator

Thank you. We will now begin the question and answer session. Our first question today comes from the line of Ben Gurlinger from Hovde. Please go ahead, Ben. Your line is now open.

Speaker 3

Good morning. Good morning, Ben.

Speaker 4

Al, in your prepared remarks,

Speaker 5

you said that noninterest expense should be down about single digits or so So my back of our board map says there's 2Q recovery in Florida, probably goes up a little

Speaker 1

bit from here. I I was

Speaker 5

curious, is that kind of competition, but you also did talk about investment. I was curious if you can give us one granular. Is it Yes. How should we think about where that money is going?

Speaker 2

Yes. So in the back half of the year, there is going to be some timing there because just in terms of Number 1, we have some intensive comp, especially with our mortgage business. So that will be 3Q will be a little bit higher on that side versus 4Q. And And there's also going to be some accruals too when it comes to compensation, when it comes as we go through the year. So there's going to be some timing differences there.

Speaker 5

Got you. Okay. And then when you think about just the margins in here, Depos closed and non interest bearing deposits were going to play a big factor. Could you just kind of assume the terminal rate is where we're at? I think that's A fairly safe assumption, maybe we'll get another quarter here, but I don't think we're going to see any material move.

Speaker 5

Can you just think about the cadence Of the repricing on both the left and the right hand of the balance sheet. I know it's early. I don't think it's going to hold the future fire, but

Speaker 2

you think it's probably like a 6 months until

Speaker 5

you hit And then the repricing inflects to your favor of a margin expansion. We're just trying to think about the magnitude of which each

Speaker 2

Yes. So the way we're thinking about it here is that we do have about 50% of our deposits that are indexed. And given the recent rate move yesterday, if there's one more in this quarter, both any rate move in this quarter will be repriced in October. That basically hits our money market funds. So that time will happen in 4Q.

Speaker 2

But with that being said, Bill, we continue to see a very attractive spreads in our loans. So as stuff matures on our back book, our more maturing book, and then we reprice it to higher rates, we're expecting hopefully that We'll see that margin uplift in the later month of this year.

Speaker 5

Got you. And then finally, just kind of big picture, Katie or Jim, whatever else to say, when you think of just the banking environment today, It seems like the Minneapolis market is a bit more competitive than one would guess relative to some of the other Midwest areas, I think partially that's due to the amount of banks or the number of banks in the area, especially the small and private ones. When you think about just lending in areas for growth, are there any risk adjusted returns that have become more appealing because some banks have pulled out? Like, are there any pockets of the loan categories that are areas that are a little bit more appealing now that some competitors have

Speaker 6

Yes, thanks for the question. I would say it this way. We're focused on some very specific verticals, not only because some banks are retracting on offering credit, But also because they're more generally, you can get a better spread and they come with a lot more deposits. And so some of the verticals we're going after, I. E, Government nonprofit or professional services would be an area where we can get a lot of deposits and loans versus just going after Regular mid market C and I, which is predominantly heavy loans, a smaller amount of deposit.

Speaker 6

So from a Competition standpoint, all banks are kind

Speaker 2

of looking at that, but because a number

Speaker 6

of banks have the balance sheet in a weird position and are just not lending as much, We're finding a lot more activity and a lot more success in those specific areas. Does that help with your question?

Operator

Yes, that's helpful. Thank you. I'll sit back to you. Thank you. The next question today comes from the line of Jeff Lewis from D.

Operator

A. Davidson. Please go ahead, Jeff. Your line is now open.

Speaker 7

Thanks. Good morning. Checking in on the loan growth conversation, Al, I think you mentioned Kind of for the full year, maybe low to mid single digit. I didn't know if I caught that, but I guess being that we're up 3% or 4% year to date, does that suggest kind of back half of the year pretty muted or flattish?

Speaker 2

Yes. So the low to mid single digits is on the expense side, but on the loan growth side, I basically comment on modest. The thing we're seeing right now is that there's as interest rates have risen here, we're just seeing a bit of a bit of slowing demand for Loans at the interest rate level. So hence, there's been a little bit of slowing demand from our clients and just appetite for it. So that's why we're still trying We'll really see the pipeline out there and what we think it can be done, so hence why the modest comment.

Speaker 7

Okay. And I guess, How is payoffs, trends as well? I mean, is that a net sort of a benefit to the net if that churn is Slower or are you seeing pretty consistent payoff activity as well?

Speaker 2

Yes. We're seeing just consistent payoff activity. I mean, there's Nothing really jumping out of us right now. Okay. Got

Speaker 7

it. Circling back to capital, You had the buyback going this quarter, you've hiked the dividend, you're regular well above regulatory minimums on capital. Just again checking in on, it sounds like the appetite for the buyback is ongoing. And Katie, if there's any Conversation about M and A, whether that be bank or within a product line, anything to touch on there?

Speaker 1

Okay. So in regards to capitalized debt, priorities remain The same, so very much focused on maintaining strong capital levels, maintaining a strong balance sheet And then organic growth, which includes the lift outs and the continuous lift outs of talent, as well as returning capital to shareholders We have the dividend and repurchase where the numbers make sense where it pencils out. And on the M and A front, Same sentiment as Q1, I would say, in regards to continuing to have conversations and continuing to expand the awareness across The country in terms of our history of acquisitions and our reputation for strong execution in acquisitions, particularly in the fee income space.

Speaker 2

Got it. And one last one, if I could.

Speaker 7

A little creep up in the non performers. I guess maybe not much to tell there, but any segments or What point that you're a little more cautious on that you can detail?

Speaker 1

Sure, Jeff. This is Karen. We're not seeing a pattern in terms of any deterioration. I think We're beginning maybe to see just a little bit of the mobilization. The credits that are experiencing stress seem to be pretty Specific and not indicative of any particular pattern, but I do think we're still at historically strong credit metrics, but would expect over time that we'll begin to see some of that online.

Speaker 3

Okay. Thank you.

Speaker 2

Thanks, Jeff.

Operator

Thank you. The next question today comes from the line of Nathan Race from Piper Sandler. Please go ahead, Nathan. Your line is now open.

Speaker 4

Yes. Hi, everyone. Good morning. Hi, Nathan. Katie, going back to your comments earlier around the engagement of consultants and look at the retirement Just curious, as you look out longer term, is the opportunity or impetus behind this engagement more on kind of the revenue growth side of things?

Speaker 4

Or Maybe some expense synergies that you're looking to perhaps harvest down the road. Would love to just get any color on kind of the expectations with that engagement going forward.

Speaker 1

Sure. Absolutely. It's both on the revenue side as well as on the efficiency and just optimizing Our infrastructure within that division, so really as we look at the opportunities that existed prior to the passage of TRx 2.0, it was already significant in the retirement space in terms of the number of new plans and the number of new participants. The passage of TRx 2.0 just takes that to the next level. And so our engagement is very much targeted at positioning us To continue to take market share and to continue to be highly successful in growing new plans and participants given The amount of opportunity that's out there.

Speaker 1

So it's really twofold and will allow us to take on more new plans faster, as well as grow with those plans and that opportunity.

Speaker 4

Okay, great. And then it sounds like you're having good sales Momentum on the retirements platform lately, is there any way to kind of parse out how much of the AUA growth in 2Q was driven by New client wins versus just the appreciation in equity markets?

Speaker 2

Hey, Nate, thanks for that question. If you look at our revenues typically on the retirement side, about a third of it, the way I think about it is market sensitive, You can attribute the rest of it to the organic.

Speaker 4

Okay, great. And now That's the same case on the wealth side of things as well?

Speaker 6

The wealth is going to

Speaker 2

be a little bit higher there, But I would say though, Wealth has been really doing great for us because we have seen a lot of organic client wins there. As I did note in my commentary, we did see some synergistic deposit growth that really came from our wealth side. So that would be growth in the synergistic deposits because I'd say majority of that growth came from wealth.

Speaker 4

Got it. That's great to hear. And then just on Funding, it looks like the short term borrowing came up in the quarter. Any thoughts on how we should think about the wholesale funding levels going forward? And just kind of how you guys kind of look at loan growth, would you tell your expectations are for more modest growth in 3Q and 4Q?

Speaker 2

Yes. We're continuing to utilize overnight borrowings to fund loan growth right now. We're It's just deposits right now. We have a seasonal outflow come out. So we'd love to have more deposits come in the door, and we're focused on that.

Speaker 2

We're also letting the investment fully mature and roll that over and remix that into loans. But if we have to continue to use overnight borrowing to

Speaker 4

Okay. And can you remind us how much cash flow is coming out of the securities book each quarter?

Speaker 2

So the way I think about it is that we have about our investment portfolio has about A duration of about 5 to 6 years. So you'd say it's maybe like 20% of our full is going off on a yearly basis. The The quarterly is going to be a little bit lumpy here and there, but I would just look at it as a yearly basis. I mean, you can just take an average of that for the quarter, so

Speaker 4

Okay, great. And then just going back to some of the earlier comments around kind of deposit growth expectations. I appreciate a lot of the decline The Q2 was tied to public fund clients, but just kind of overall see any kind of deposit growth expectations and When we may see non interest levels flatten out?

Speaker 2

That's a difficult one to predict right now given where the risk free rate in the short term is north of 5, and there's just everybody Parking money into this high rate accounts right now. So I think there's going to be still more pressure to come on noninterest bearing because that is being experienced not just by us but the whole industry. So I think we're not going to see that pressure subside in the near term until these rates get start coming down significantly. But on the deposit side, though, we're still expecting our public funds to come back in back half of this year. And hopefully, we can that We'll still see some growth from here.

Speaker 2

But I think from the 2nd quarter levels, we'll probably see some growth from where we are from 2nd quarter levels.

Speaker 4

Got it. And then are you guys seeing any easing in kind of deposit pricing pressures across the company We've heard from some other banks that it's moderating to some degree more recently. Is that the case with you guys?

Speaker 2

Yes. We've seen some moderation there. But the one thing we've noticed In our footprint, we've definitely seen an uptick in the more banks where the loan to deposit ratio has exceeded over 100% And that's putting more pressure on loan growth for them. So they're trying to meet that by pricing up deposits more. But I would say though that there's definitely more Deposit beta in the Q1 than there was in the Q2, so we're seeing that definitely moderate.

Speaker 4

Got you. And just maybe one last one for Karim. Is there a tail to the recoveries that we I've seen periodically over the last several quarters now or do you think that's kind of largely run its course?

Speaker 1

I think the larger recoveries, Nate, have kind of run their course. We continue to get some monthly payments on some things, but I would expect that level to increase in coming quarters.

Speaker 4

Okay, great. I

Operator

The next question today comes from the line of Erik Spector from Raymond James. Please go ahead, Erik. Your line is now open.

Speaker 8

Hey, everybody. This is Eric on the line for David Skeaster. I appreciate you guys taking the questions. Both of my questions have already Been asked and answered. But just curious

Speaker 5

with the loan growth in

Speaker 8

the quarter and obviously the outflows of public funds, The loan to deposit ratio ticked up quite a bit to almost like 89%. Just curious where you're comfortable with that going forward?

Speaker 2

Yes. I mean, we definitely target a ratio of probably a little bit south of 100%. Ideally, it would be 90% to 95%. But we also understand that there's a lot of liquidity coming out of the system that might gravitate a little bit higher in that range.

Speaker 8

Yes. Okay. Yes, makes sense. And then just if you could provide some more color just on the mortgage market, you did a little bit in the prepared remarks, but Just kind of how volumes are trending early in the Q3 and how you think about portfolio versus gain on sale and how margins

Speaker 2

Yes. So margins are pretty stable there. I'd say they're really similar in the Q3 as they do in the second. And I'd say volumes too, our outlook is Similar in the Q3, but then again, when that smoke comes in Minnesota, we're going to see a downtick in the 4th quarter. And the snow sometimes comes early, unfortunately, in Minnesota.

Speaker 8

Okay. Makes sense. And then just how are new yield loan yields Ending CRE and other segments, have you been able to push rate and what's the competition for new loans there?

Speaker 6

I would say that in general, they're pushing up a little bit. There's more and more banks sort of pulling out or slowing down, which is allowing The banks that are currently in the market have a little bit better pricing. So I think that has probably happened in the last month and a half and probably will continue a little bit as More and more banks are still just tightening the screws down on production.

Speaker 8

Great. All right. That's it for me. Thank you and congrats on a good quarter.

Speaker 2

Thank you.

Operator

Thank you. The next question today comes from the line of Damon Delmon from KBW. Damon, please go ahead. Your line is now open.

Speaker 3

Hey, good morning everybody. Hope everybody is doing well today. Just wanted to start off with

Speaker 4

I just want to

Speaker 3

start off with a question for you actually on the margin. I think you noted that there was about 7 basis points of accretable yield this quarter from the On the recent transaction, so should we just kind of model a similar level going forward? I think I thought Q1 was a little bit lower than that.

Speaker 2

Yes. So the way I would think about it is that we previously guided to about margin accretion around 2 to 4 basis points from the Metro Phoenix Bank acquisition. So the difference this quarter, we had about 3 or 4 basis points coming in from a Loan payoff in the quarter, which is typically sometimes you see in these deals.

Speaker 5

Got it. Okay. So More like 2

Speaker 3

or 4 basis points before that, if that makes sense. And then kind of with regards to The direction of the margin here, it seems like it's still going to trend lower. And did you say in your Answer to one of your other questions that you think by the end, like the last couple of months of this year, you could see the monthly margin like stabilizing?

Speaker 2

Yes, that's what we're that's what I commented on. Actually, I think it's going to rebound. So previously, we thought this quarter was going to be the quarter where we saw the rebound. Given the Fed's 1 to 2 more Fed hikes that came down the pipe, I'm calling it quite a little bit of a rain delay right now on that rebound. We'll see that kind of happen in the more of the Q4.

Speaker 3

Okay. And then can you just remind us kind of how you're going to be

Speaker 2

positioned if Ben, will you

Speaker 3

cut rate in 2024 given your position, will you see immediate benefits in the margin?

Speaker 2

Yes. So in our ALM modeling, you'll see that typically when rates go down 100 basis I'd say somewhere in the high single digit, we see improvement in NII. So and that's on an annualized basis. The big thing there is still maintaining loan discipline pricing on the asset side, but then also addressing our Deposit side and being able to cut rate there. So that's where our licensing sensitivity plays into our favor.

Speaker 3

Got it. Okay. And then just one last question on the provision outlook. With the prospect that loan growth would probably slow a bit here in You think you're going to be needing to book a reserve, any meaningful reserve in the next couple of quarters?

Speaker 1

Hi, Damon. This is Karen. It's really going to depend I think on what happens with the Hi, there. Hi, there. I think it's going to depend really on what happens with the macro environment and The related forecast and then to your point, loan growth, if we see that moderate here in the second half, That certainly would probably be a driver to not have significant provisioning.

Speaker 3

Got it. Okay. That's helpful. Thank you very much.

Speaker 2

Thanks, Damon.

Operator

Thank Our next question today comes It's a follow-up question from Ben Gurlinger from Hovde. Please go ahead Ben. Your line is now open.

Speaker 2

Thanks. Welcome back, man.

Speaker 4

I figured

Speaker 5

I wasn't going to ask this in kind of a follow-up call, but I did probably add So Kate, you took this role about 1.5 years ago. I feel like the biggest and main task was enhancing the core bank, more specifically the deposit franchise. I mean the fee income opportunities you guys had in front of you are Pretty phenomenal, especially relative to the bank you had. The hires you've made and the people that you've put in place over the past year and a half seem to have done a good job. But then again, with rates moving up 5 50 basis points over the course of the past couple of years, Are there any key performance indicators that we should be looking at to really assess what if these new relationships are Core rather than potentially just saying they're core and could shop once rates get lower.

Speaker 1

Thanks, Ben, for the question. And I think your analysis is spot on in terms of Where we are focused and the reason why. Building our commercial wealth bank is a strong priority. If you look historically, From an organic growth standpoint, we believe we've got tremendous opportunity even in this environment, very much focused on client selection And bringing over experienced bankers as well as professionals to support those and then positioning ourselves to focus very much on on specific segments, so we can really be responsive fast and bring value to our client relationships. And that absolutely grows relationship.

Speaker 1

That is not transactional business. And I think the way that you can view the success going forward is seeing the commercial wealth bank Well, full relationships, both on the lending, the deposit, the private banking, the wealth side, That will become evident and we're already seeing those early successes. Certainly in this rate environment, the opportunities will Be coming from those loans and credits that are coming to a maturity, and they're looking for a refinance, and they're going to follow their banker that they've been doing We'll take a moment to listen over a long period of time. Does that answer your question, Ben?

Speaker 5

Yes. Just kind of following off, it seems like the people you have, the cultures is intact and in fact, they're probably upgraded in terms of the personnel. Are there any verticals you could see additional hires in or any potential to add on that you might not already have or deepening in your relationships?

Speaker 8

I can handle that

Speaker 6

one. Yes, we've already started to build out the verticals. We're probably not going to expand to any more additional ones, but we will be adding additional talent in those verticals as we continue to have success. So we're not going to overstaff, but we're certainly going to keep the talent pool ready to add staff as we Start winning in various segments all over the place.

Speaker 5

I assume after Continuous plan is not like a 12 or 18 month, correct?

Speaker 6

Yes. No, that's continuous. I think as we continue our growth, We'll be strategic on those verticals and those hires. But like I kind of commented earlier, some of those verticals Our key to deposit gathering as well as loans, and they are key to synergistic private banking wealth, and I'm specifically talking about the kind of the mid market verticals. We'll find a lot of success.

Speaker 6

And to your original question about those relationships are core, and they become core not only in commercial C and I, But in private banking, in wealth and in private mortgage. So that's where you can see those growth Going all over those areas, you can see that, that clearly is a core growth.

Speaker 5

That's helpful, Karen. Thank you.

Speaker 1

Thanks, Ben.

Operator

Thank you. There are no additional questions waiting. So this concludes our question and answer session. I would like to turn the conference back over to Katie Lorentzon for any closing remarks.

Speaker 1

Thank you, and thank you to everyone for joining our call this Thank you for listening and thank you for the questions. Our unique and highly diversified business model is a substantial differentiator in driving long term value for our shareholders, Client Focus are helping us to evolve Alaris into a top performing commercial wealth base and national retirement benefits provider And in the long term, delivering top tier shareholder returns and performance. Thank you, everyone, and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Alaris is accelerating its transformation into a top-tier commercial wealth bank and national retirement benefits provider, adding experienced bankers, doubling its treasury management team, launching a private banking franchise in Minneapolis, cutting non-interest expense by 4% Q/Q and reducing headcount by 10% YoY.
  • Net interest income declined 6% sequentially and net interest margin compressed to 2.52% (down 18 bps) due to higher funding costs, though management expects margin stabilization by year-end as funding costs normalize.
  • Over 50% of revenues now come from recurring, minimal-capital fee income, with fee income up 2.1% Q/Q, retirement AUA up 4.9%, and synergistic deposits rising 27% YoY, highlighting the strength of its diversified model.
  • Asset quality remains pristine with nonperforming assets at 7 bps, net recoveries year-to-date, robust reserves of 1.41% of loans, investor CRE at 173% of capital and limited office exposure after ongoing stress testing.
  • Capital and liquidity are well‐positioned with TCE at 7.72%, CET1 at 13.3%, an LCR above 300%, $2 billion of potential liquidity, and continued share repurchases alongside a raised dividend.
AI Generated. May Contain Errors.
Earnings Conference Call
Alerus Financial Q2 2023
00:00 / 00:00