Q1 2022 Alerus Financial Corp Earnings Call

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Good morning, and welcome to the Alere Financial Corporation earnings Conference call.

All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays 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 release and the Companys S. E. C filings I would now like to pass the conference over to your host alerts Finance Corporation, President and CEO Katie Lorenson. Please go ahead.

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Thank you and good morning, everyone. Thank you for dialing into our call today. Joining me today is Colin Taylor, our chief risk officer, and I'm very proud to introduce Aldo along our new CFO , who joined our company in just about three months ago.

L background and experience is just what I was looking for as we take <unk> to New Heights, we will continue to distinguish ourselves as a uniquely diversified financial services firm via our one <unk> strategy.

Our strategy sets us apart from others as we deliver higher returns through a highly annuit tide's revenue mix.

It's Nick 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 editions and al is just another example, talented professionals who are looking to be part of a special story and a special future.

Alerts has positioned itself with a diversified business model and a strong foundation to grow and create 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 all the 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 leaders team members for another strong quarter of sales and great service to our clients. It was a quarter of volatile markets historically low housing inventory levels. However, we excelled where we have control.

<unk> reported net income of $10 2 million driven by strong annualized loan growth loan growth ex PPP 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 religion of relationships and purchase business, which has 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 with one of our longtime 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'll start my commentary on page 14 on the industry.

For the first quarter.

Two.

Average loans declined 80 basis points on a linked quarter.

Excluding the impact of PPP average loans increased one 7% on a linked quarter basis.

<unk> core average loans was driven by a one 8% growth in C&I, two 2% growth in commercial real estate at 1.3% growth in consumer.

Within C&I, we saw pick up in loan production, along with an uptick in utilization rates several clients tap into Berry.

Just didn't lives.

Utilization increased from 17% to 28% during the quarter.

The first quarter.

$13 1 million or <unk>.

PPP loans extending.

Average deposits declined one 9% on a linked quarter basis due to seasonal decline in noninterest bearing deposits.

Saw seasonal higher deposit you listen synergistic deposits in the fourth quarter of the prior year, but those band balances.

At least this 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 net recoveries in the prior quarter.

Nonperforming assets.

It was 15 basis points compared to 19.

Our allowance at 174% period end loans.

As a reminder, we are non seasonal institution.

Already for Greg.

The first of 2023.

We'll have more details on diesel.

Basically.

Turning to page 16.

Here are some key revenue metrics.

On a reported basis not net interest income declined one 9% on a linked quarter basis exclude.

Excluding the impact of PPP net interest income increased two 5% mainly due to higher interest income from investment fund.

Noninterest income declined 12, 6% on a linked quarter basis due to lower mortgage banking.

Revenues.

I'll go into detail about those declines in later slides.

Turning to page 17, net interest margin was 283% in the first quarter a decline of one basis point from the prior quarter.

Excluding the impact of PPP, our coordinators margin was 277%.

That's an increase of 15 basis points from the prior quarter.

Core net interest margin benefited from higher investment can follow you along with higher loan yields from the consumer for foil all set by lower yields from our C&I.

During the quarter the reinvestment rate of our investments in Florida was accretive new investments with a high rate comparison that were maturing.

Yeah.

On page 18, you'll see that we had $698 million or 38% of our loans are floating as you can see on the right.

On the bottom left you can see a waterflood, where net interest income and net interest margin.

1.6 million decrease in PPP negoti negatively impacted both net interest income and margin.

Offsetting some of the PPP impact our investment portfolio and higher yields 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 cost the impact of net interest expense was minimal due to declining.

It was discussed earlier.

On page 20.

It's a very different business.

Assets under management and administration declined three 2%, mainly due to market volatility and partially to net outflows.

A N decline, we did see that the number of participants increased to approximately 485000 versus 440000 in the prior quarter.

Revenues declined four 9% and.

Quarter, mainly due to lower epic launch.

Yeah.

Turning to page 21, you can see highlighted their wealth management business. Despite the market volatility assets under management and administration increased due to a new part of the deal was brought in during the quarter.

We brought in roughly $800 million in the administration near the end of the quarter.

Revenues declined five 5% to apply for mainly due to higher fees recognized at the year end time due to lower average assets and due to lower average assets impacted by challenging markets during the quarter.

Turning to page 22.

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Mortgage originations declined approximately 48% from the prior quarter.

Refinancing and purchase activity the decline that can't use driven by higher interest rates during the quarter as a 30 year mortgage rate recently eclipsed 5%.

Additionally, we saw a lack of housing inventory negatively impacted volumes during the quarter. We saw record low housing inventory in our main markets. Despite the challenging markets. Our current volumes are still 29% higher than the somewhat securities in 2019.

Lastly, turning to page 23 is an overview of our noninterest expense during the quarter noninterest expense declined seven 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 more marketing expenses. We this is more of a timing issue and it's big markets pick up through the course of the year.

Now I'll provide some forward looking guidance.

For 2022, you'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.

Biggest variable in our revenue because our mortgage business with a lack of inventory as Paul unforeseen headwinds for US also the recent market volatility has impacted our retirement businesses.

We now expect expenses to be down low single digits when compared to 2021.

Lastly, we expect spreads remained strong.

I will now open up for Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause mom.

Entirely to assemble our roster.

The first question is from the line of Jeff <unk> with D. A Davidson you May proceed.

Thanks, Good morning.

Just a question on the on.

On the loan growth side of things.

A bit of a break out I guess, if you could kind of talk about any geographic strength I know you you rattled through sort of the segment detail, but just wanted to get a sense for a.

A pretty big start to the year end and the sustainability of that.

<unk>.

Hey, Jeff It's al. Thanks for the question, we're seeing pretty much broad based economic activity in our loan portfolio.

Well, particularly especially once it is market and saw some very good growth there too, but I would say to that.

Its pretty much broad based across all markets and it wasn't the portfolio, especially box consumer.

<unk> and CRE.

And the pipelines I mean, typically you put on this level of growth does that sort of draw down and you've got to rebuild that.

Maybe just speak to the pipeline as you entered the quarter and as you exited.

Yeah. The one thing I'd like to highlight our pipeline as you know we recently implemented Salesforce, there's been a big.

Product our big.

Innovation for us and as I looked at our pipelines right now.

Very good no. We recently just looking at the data coming in there and we're encouraged by what we're seeing.

Okay. So our pipelines are as good as they were entering the quarter as you are entering Q2.

Yes.

Okay, Thanks, and Al I had some I apologize I had some audio issues on our call right. When you were delivering the AR.

The fee income outlook do you mind, just quickly rattling through the each of those expectations.

Yeah actually Jeff what I did there was that we talked about overall revenues and I, what I said on the call. We said, we expect overall revenues to be down low to mid single digits and the biggest thing that we're seeing right now in our mortgage business.

We're seeing some challenges there because of low.

Inventory in our main markets that's.

That's something we didn't foresee, but we're hoping that it'll be a seasonal pick up there because just given what your conditions and just woven tour opening we expect inventory to pick back up and then are we talking about more purchases, but I commented on it.

The market volatility impact that right now so weeks no. We didnt expect it won't be as volatile as it was when it came to a neutral outlook.

Okay, Great and last one if I could just to just checking in a bit on the metro Phoenix on potential.

Potential deal timing is that looking like Oh.

May or June and then and then if you could kind of.

Maybe update just how they did in Q1 in terms of a growth standpoint or is it pretty much at announcement those balances will be.

Kind of as expected.

Again at announcement.

Through close.

Yep.

I'll comment briefly on go ahead.

Got it.

Sorry about that I'll take that one in regards to metro performance. It it was in line with theirs and our expectations. Both in terms of our net income as well as balance sheet growth and.

And so a good strong start to their first quarter.

In regards to timing we have no reason to believe that it won't close in the second quarter, but we are going through the regulatory process and sell out of our control in that regard.

Okay. Thanks, I'll step back.

Thank you.

The next question comes from the line of Nathan race with Piper Sandler You May proceed.

Yeah, Hi, everyone. Good morning.

Wanted to drill into the morning Nate.

A little bit more.

The last order thing about retirement benefit services revenue flat year over year curious if thats. The case then it sounds like you guys had a nice wealth management client win in the quarter drove a nice increase in AUM levels.

So I'm just trying to kind of put the pieces together to get to that kind of low single digit I'm sorry mid to high single digit decline in overall fees this quarter and does it also contemplate.

Kind of a hedge gain.

That you guys had come in through our mortgage last year.

Yeah, Hey, Nick.

I just want to make sure you know, we actually guided to low to mid single digits mid to high. So just to make sure you got that down correctly took low to mid <unk>.

And then yes. So the biggest thing when you think about return visits right now so you know in the fourth quarter, we did have some you'll.

You'll see that are not annual nature that impacted so that's that's a decline.

So we.

We had the volatility of the markets.

Asset level, so that's gonna be well just keep it a little bit Edwin there right now so and our outlook for our retirement business I would say that.

We're trying to keep revenues as far as we can right now, but there might be a little bit challenged given the markets where they are right now.

Okay, Great and just kind of in light of your mortgage volume expectations. This quarter just directionally in terms of expenses, how should we kind of think about that.

That run rate over the course of this year imagine, we'll see an increase in <unk> mortgage volumes, presumably pick up but just kind of any thoughts on just the overall run rate.

Excluding.

The film.

And Arizona, Yeah, it's all of them right.

So then when it comes to the mortgage business right now.

We actually had a little bit of a challenging quarter given the low inventory.

Right.

We're expecting that to pick up in <unk> and the rest of the year. So we do have some leverage there in terms of as revenues pick up for us and that the net segment there'll be little bit higher expenses, because we have more production coming through but we also.

We're trying to do the best we can manage that environment right now.

And you saw the competition did drop with some <unk>.

As you know we had a negative impact from the revenue decline.

Got it okay, great and then maybe just turning to kind of the outlook for the reserve I mean, you guys are still operating with a very robust.

Robust reserve level. These days it sounds like you guys are expecting mid to high single digit loan growth going forward. So just curious in terms of any need to provide for that growth from our borders of classes to just grow into kind of the unallocated excess reserves that exist.

Yep.

Sure.

Thanks Al Good morning, Nate.

Yeah. We you know we expect similar to the previous quarters that increases.

It will be driven by loan growth.

And a large portion of our reserve at this point is due to qualitative factors.

Obviously, we will.

Continue to watch the environment in terms of how we need to be reserve there.

But as we have loan growth, we could see supervision and later in the year.

Understood.

Is that loan growth outlook does that.

Contemplate additional increases in line utilization, we've seen nice increases recently, but still below pre pandemic levels. So just trying to understand how much of a opportunity in terms of upside or loan growth potential exists.

Line utilization continuing to increase.

You want me to take that out.

Yes.

Okay. Okay.

Yeah, I mean, I think if you know looking at our available balances and where are.

Utilization rate has been historically pre pandemic.

I would say there is upside in the $20 million to $30 million range.

Okay.

Maybe just one last one on capital you guys had a little bit of a decline.

T T with the OCI in the quarter, but you guys have sold operating with ample capital levels stock pulled back like most of your peers of last few months. So just curious to get an update in terms of the buyback appetite presently and just kind of what youre seeing in terms of acquisition opportunities as well Katie.

Thank you.

So our share repurchase plan is it is concerned of course until we close on the Metro deal. We do have in place, but our priority continues to be balance sheet growth loan growth.

As well as on the fee income side and I would reiterate my comments from the prior quarter in regards to them. Our focus is on building our pipeline.

As well as building our sources.

For adults fee income deal.

Okay great.

Guys, if I could just ask one more on the commercial real estate team that you guys added in the twin cities are there any non competes or non solicits in place or do you expect those guys to kind of hit the ground running now that they are onboard.

Yes, Nathan this current again, there are no noncompete turn out until with it.

We're already seeing.

A high degree of activity from the team. So we expect that they'll be building their pipeline through the rest of 2022.

Got it.

Appreciate all the color and you guys, taking the questions congrats on a great.

Great quarter. Thanks.

Okay. Thank you.

Thank you.

Again, if you have a question. Please press Star then one.

This concludes our question and answer session I would like to turn the conference back over to Katie Lorenson for any closing remarks.

Thank you and thank you again to everyone joining our call. This morning. Thank you for listening and asking questions. Our industry is facing headwinds our company has some of our own but the company again has historically outperformed and we remain well positioned for future success because of our vehicles.

We continue to see momentum in building, our pipelines and our new business and client expansion as well as the high level of engagement within our team and within our markets and our brand.

We have a constancy of purpose that is embraced magnified by our leadership team and we remain focused on working together to grow the steady and strong foundation is allowing us to retain and recruit top talent.

Serving the best interest of our clients and deliver long term value to our shareholders. We thank our shareholders for their investment in all of our team members for doing great work every day. We thank you for your continued support and interest in our company.

Have a great day everyone.

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

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