Alerus Financial Corporation

Good morning and welcome to the Alaris Financial Corporation earnings conference call. All participants will be in a listen-only mode. If you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. This call may include forward-looking statements and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings released in the company's SEC filings. I would now like to pass the conference over to your host, Allura's Financial Corporation President and CEO, Katie Laurinson. Please go ahead.

Thank you, and good morning, everyone. Thank you for dialing into our call today. Joining me today is Karin Taylor, our Chief Risk Officer, and I'm very proud to introduce Al Villalon, our new CFO who joined our company just about three months ago. Al's background and experience is just what I was looking for as we take Alaris to new heights. We will continue to distinguish ourselves as a uniquely diversified financial services firm via our One Alaris strategy. This strategy sets us apart from others as we deliver higher returns through a highly annuitized revenue mix. This mix will also deliver more consistent returns through longer periods of time and through the ups and downs of business and economic cycles. As I reflect on the first quarter, I am exceptionally proud of our company's ability to attract and retain talent. We are continually raising the bar with our new additions, and Al is just another example of talented professionals who are looking to be part of a special story and a special future. Alaris has positioned itself with a diversified business model and a strong foundation to grow and create tremendous value for our shareholders. It is a unique story in the Midwest, and people want to be part of it. In addition to Al, we also successfully lifted out a five-person commercial construction lending team and have the privilege of additional Twin Cities talent seeking to join our organization. I'll take this opportunity to thank our Alaris team members for another strong quarter of sales and great service to our clients. It was a quarter of volatile markets and historically low housing inventory levels. However, we excelled where we have control. Alaris reported net income of $10.2 million driven by strong annualized loan growth XPPP of 18.7% and supported by a high level of reserves and continued pristine credit quality. I'm proud of the resource and expense management which remained a discipline throughout our company. Our mortgage team members are focused on their realtor relationships and purchase business, which is historically 70 to 80% of our origination volume. We also had numerous examples of how our business model wins. As you can see in our numbers, despite being in a down market, we saw a large increase in our AUM based on strong new production and new assets from sale proceeds of one of our long-term commercial clients. Our model is focused on bringing value and advice to our clients all along their financial journey. It's what sets us apart and what will continue to drive long-term outperformance compared to our peers. With that, I will hand it off to Al to discuss the financial details of the quarter.

Thanks, Katie. I will start my commentary on page 14 on our investor deck, which you can find on our website. For the first quarter of 2022, reported average loans declined 80 basis points on a one-quarter basis. Excluding the impact of PPP, average core loans increased 1.7% on a linked quarter basis. The increase in core average loans was driven by 1.8% growth in C&I, 2.2% growth in commercial real estate, and 1.3% growth in consumer. Within C&I, we saw a pickup in loan production along with an uptick in utilization rates as several clients tapped into their existing lines. C&I utilization increased from 17% to 28% during the quarter. At the end of the first quarter, we had approximately 13.1 million of PPP loans outstanding. Average deposit declined 1.9% on a liquid basis due to seasonal decline in non-interest-bearing deposits. We saw seasonal higher deposits related to synergistic deposits in the fourth quarter of the prior year, but those balances had their typical outflow in the first quarter. Turning to page 15, credit continues to remain very strong. We had net recoveries of three basis points in the first quarter compared to 22 basis points of net recoveries in the prior quarter. Our non-performing assets was 15 basis points compared to nine basis points in the prior quarter. Our allowance is 1.74% of period end loans. As a reminder, we are a non-CECL institution. We are already preparing to implement CECL on January 1st of 2023. We'll have more details on CECL as we closer to implementation date. Turn to page 16. Here are some key revenue metrics. On a reported basis, net interest income declined 4.9% on a linked quarter basis. Excluding the impact of PPP, net interest income increased 2.5%, mainly due to higher interest income from the investment portfolio. Non-interest income declined 12.6% on a linked quarter basis due to lower mortgage banking, retirement, and wealth management revenues. I'll go into detail about those declines in the later slides. Turn to page 17, net interest margin was 2.83% in the first quarter, a decline of one basis point from the prior quarter. Excluding the impact of PPP, our core net interest margin was 2.77%. That's an increase of 15 basis points from the prior quarter. Core net interest margin benefited from higher investment portfolio yields along with higher loan yields from our consumer portfolio, offset by lower yields from our CNI portfolio. During the quarter, the reinvestment rate of our investment portfolio was accretive as new investments were at a higher rate compared to investments that were maturing. On page 18, you'll see that we have $698 million, or 38% of our loans, are flowing, as you can see on the top right of this slide. On the bottom left, you can see a waterfall of our net interest income and net interest margin. A $1.6 million decrease in PPPs negatively impacted both net interest income and margin, offsetting some of the PPP impacts of higher investment portfolio and higher yield from consumer portfolio. On page 19, our core funding mix remains very strong. We saw a small increase in our deposit costs due to rising interest rates. Despite the increase in funding costs, the impact of that interest expense was minimal due to the decline in deposit balances that was discussed earlier. On page 20, I'll provide some highlights of our retirement business. Assets under management and administration declined 3.2%, mainly due to market volatility and partially to net outflows. While AM declined, we did see that the number of participants increased to approximately 445,000 versus 440,000 in the prior quarter. Revenues declined 4.9% from the prior quarter, mainly due to lower asset levels. Turn to page 21, you can see highlights of our wealth management business. Despite the market volatility, assets under management and administration saw an increase due to a new custody deal that was brought in during the quarter. We brought in roughly approximately $800 million in assets under administration near the end of the quarter. Revenues declined 5.5% from the prior quarter, mainly due to higher fees recognized at the year end, time due to lower average assets and due to lower average assets being impacted by challenging markets during the quarter. Turn to page 22. I'll talk about our mortgage business. Mortgage originations declined approximately 48% from the prior quarter due to lower refinancing and purchase activity. The decline in activity is driven by higher interest rates during the quarter as the 30-year mortgage rate recently eclipsed 5%. Additionally, we saw a lack of housing inventory that negatively impacted our volumes during the quarter. We saw record low housing inventory in our main markets. Despite the challenging markets, our current volumes are still 49% higher than the similar time period in 2019. Lastly, turn to page 23, is an overview of our non-just expense. During the quarter, non-just expense declined 7.8%, mainly due to lower incentive compensation related to revenue-related activities. We also saw a decrease in professional fees due to lower M&A expenses in the quarter. Other expenses decreased as a result of lower marketing expenses. We believe this is more of a timing issue and expect marketing to pick up through the course of the year. Now I'll provide some forward-looking guidance. For 2022, we're still expecting average loan growth to be in the mid to high single digits. We expect overall 2022 revenues to be down low to mid-single digits when compared to 2021. The biggest variable in our revenue outlook is our mortgage business, where the lack of inventory has caused unforeseen headwinds for us. Also, the recent market volatility has impacted our retirement and wealth businesses. We now expect expenses to be down low single digits when compared to 2021. And lastly, we expect credit to remain strong. I'll now open it up for Q&A.