Good morning, welcome to the Alerus Financial Corporation Earnings Conference Call. All participants will be in listen-only mode. Should you need 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 release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead. Good morning. Thank you, Bethany, thank you to our investors and our analysts joining our call today. We appreciate your time and interest in Alerus. I know we always have good engagements by our employees listening in, and I want to take this opportunity to thank them for their dedication and their client outreach efforts throughout March following the bank failures. The efforts of our team across the company are instrumental in retaining and acquiring our holistic client relationships. This morning, I will provide some commentary on Alerus's strategic positioning in the current environment, along with some comments on the Q1. Alerus's CFO, Al Villalon, will discuss our financial performance and results for the quarter. Afterwards, Karin Taylor, our Chief Risk Officer, and Jim Collins, our Chief Banking and Revenue Officer, and Barret Lahm, our Treasurer, will join us to answer any questions you may have about the quarter. Let me begin first by highlighting Alerus's strong balance sheet and liquidity in light of the recent market events. As I will describe in more detail, our capital remains strong. Our diverse and relationship-oriented deposit base grew 4% over the quarter. Our sources of liquidity more than cover our uninsured and not collateralized deposits, and our asset quality remains sound. Despite the industry-wide challenging conditions, Alerus is strategically positioned to navigate the current operating environment. Alerus is one of the most uniquely diversified financial institutions in the country, with over 50% of revenue derived from fee income, of which a vast majority of this revenue is recurring and annuitized in nature, with little to no capital allocation. The value of these businesses is significant, especially in the face of rapidly changing interest rate environments. Diversification goes beyond the business model and revenue mix and is a fundamental tenet of our long-term strategies of this company. Alerus is well diversified within its client base in both the deposit and the loan portfolio. I'll start first with the deposit portfolio, which is 98% core deposit relationships, most with long tenured relationships with the company. Insured deposits total are 74% of total deposits. Although we saw migration from non-interest bearing to interest bearing, our overall non-interest bearing balances of 26% remains above peer averages. Overall, our liquidity position remains robust, primarily driven by our highly granular deposit portfolio built to relationships. While we naturally have some large balances, most are part of whole relationships with integrated treasury management solutions and services. Our fee income businesses not only contribute to our relationship focused differentiated business model, but they also are leveraged to provide significant synergies. Most notably, over $750 million or 25% of our deposit portfolio is sourced through our fee income businesses, which helps mitigate funding pressure created by intense deposit competition. These deposits include low cost HSA deposits in addition to retirement and wealth management money markets, which carry index market rates, but minimal acquisition or servicing costs. Growing our core deposit franchise has been a consistent and constant focus for this company and a key component of our One Alerus strategy and initiative. This is evidenced by 68% of our lending relationships having a multi-product relationship with the bank and highlighted by our current loan-to-deposit ratio of 82%, consistent with our long-term average of 78%. The company's loan portfolio is also well diversified by type, by industry, and by market. Our non-owner occupied office exposure is 3.9% of total loans. Alerus has a strong history of outperforming peers during economic downturns with a long-term historical net charge-off ratio of less than 30 basis points. This quarter's net charge-off ratio was 3 basis points. Reserve levels remain robust at 1.41% of allowance for credit losses to total loans. Our credit and risk management teams have completed a review of our office portfolio and conducted bottom-up stress testing on our commercial real estate portfolio. Our diversification strategy has also anchored the company in stable legacy markets while expanding to larger growth markets in Minnesota and Arizona. We will continue to be selective in our growth opportunities and add quality clients, relationships, and credits to our company while supporting our current clients through this cycle. Adding to the company's solid balance sheet, pristine credit quality and ample liquidity are strong capital levels with CET of 13.3% and TCE levels around 7%, even when including unrealized losses on the HTM portfolio. While near-term margin pressure remains a headwind to earnings, we continue to execute on initiatives to fundamentally improve the profitability of this organization. While we are continually evaluating opportunities to reposition the balance sheet, we are also strategically focused on transformational opportunities that will return us to our 40-year historical performance levels of a greater than 1.25% ROA and a greater than 12% ROE. This transformation is focused on improving the long-term core organic growth of the organization, including enhancing synergistic opportunities across business lines while consistently generating positive operating leverage. In January, we restructured our banking division and organized our team members to serve clients in their dedicated segments, improving our speed to market and the client experience. During the quarter, we added team members focused on mid-market commercial banking and treasury management. We recently completed an additional right-sizing as revenue headwinds persist. As a result of these moves, expenses have remained well managed despite inflationary pressures. We will continue to see opportunities to improve our efficiency while attracting highly experienced and reputable revenue-producing talent to the company. While we have work to do and the battles in the near term pressure on margins, we continue to build tailwinds in client acquisition and synergistic expansion on our wealth management and retirement platforms. The long-term value embedded in these businesses is substantial and a substantial differentiator in the community bank space from a client and a talent acquisition standpoint, as well as for delivering top-tier shareholder returns. These capital-light businesses will continue to contribute to Alerus's long history of historical cash dividend payouts, currently yielding over 4.5%. Once there's greater visibility on the economic front, potential share repurchases. With that, I will turn it over to Al for financial commentary on the quarter. Thanks, Katie. I'll start my commentary on page 11 O of our investor deck that is posted in the investor relations part of our website. Given all the market uncertainty, this highlight shows how strong and stable Alerus is. We have a high-quality deposit base, superior liquidity, strong capital, and conservative credit. I will go into further details about each of these strengths later in the slide deck. Let's go to page 15 now. First for the Q1 of 2023, reported average loans increased 4.1% on a linked-quarter basis. The increase in core average loans was driven by growth across most commercial and consumer loan categories. Average deposits declined 1% on a linked-quarter basis. Average balances were impacted as clients continued to put liquidity to work early in the quarter, but we did see meaningful core deposit growth in the latter half of the quarter, which I will discuss later. Turning to page 16. Credit continues to remain very strong. We had net charge-off of 3 basis points in the Q1. Our non-performing assets was 5 basis points compared to 10 basis points in the prior quarter. Our allowance for credit losses on loans to total loans is 1.41%, which is a 14 basis point increase from the prior quarter as we transitioned to CECL. In addition, we have a fair value mark of $6.9 million on the Metro Phoenix acquired loans. We incurred a day one adjustment in the allowance for credit losses of $5.9 million and an after-tax adjustment to retained earnings of $4.5 million. $4 million of the adjustment was related to loans, while $1.9 million was related to unfunded commitments. On page 17, we saw our cost of funds increase to 1.71% for the Q1 of 2023. Despite the highly competitive environment for deposits, our interest bearing paid up was 36% at this point in the cycle. On a period-ending basis, our deposits grew 4% from the prior quarter. We saw very solid client retention and deposit inflows from our core commercial and consumer deposit base and from new clients as we continue to expand our presence in existing markets. We continue to not have any broker deposits. As you'll see on the right-hand side of the slide, our deposit base is well diversified. The strength in our unique and differentiated business models shined in the quarter, as synergistic deposits grew 9.6% from the prior quarter to $715 million. Synergistic deposits sourced from our retirement and wealth businesses now account for 25% of our deposit base. On page 18, you'll see further detail of our core deposit franchise. Non-interest-bearing deposits currently account for 29.5% of total deposits. As you'll see on the top right-hand chart, Alerus has typically operated with a higher percentage of non-interest-bearing deposits relative to the banking industry. On the bottom left part of the slide, you'll see that uninsured and not collateralized deposits account for only 25.1% of total deposits, or approximately $800 million. We also have about $800 million of on-balance sheet liquidity, which can cover all the uninsured and not collateralized deposits. In addition to our on-balance sheet liquidity, we have another $1.4 billion of off-balance sheet liquidity. This brings our total liquidity to $2.2 billion. Our total liquidity to uninsured and uncollateralized deposits is 286%. We have substantial liquidity, as you can see, to cover those uninsured and not collateralized deposits. We look forward to the Q2, we do expect our usual seasonal outflow from our public funds. For the remainder of the year, we continue to expect deposit balances to be stable or show modest growth. Turning to page 19. Our capital base remains very strong as our Common Equity Tier 1 ratio is at 13.6%. In comparison, our Common Equity Tier 1 ratio is 550 basis points higher than 8%, the median for the largest financial institutions subjected to the Dodd-Frank stress test. Our current tangible equity to tangible asset ratio is 7.6%. While only 31% of our securities are held to maturity, if we mark these securities to market-to-market, our tangible equity ratio would still be around 7%. You'll see the breakdown in the sources of our $2.2 billion in potential liquidity. Overall, we continue to remain well-positioned from both a liquidity and capital standpoint to weather economic uncertainty. We currently have 770,000 share repurchase authorization in place. We will repurchase stock when market uncertainty subsides. Page 20 shows some key revenue metrics. On a reported basis, net interest income declined 12.3% on a linked-quarter basis. The decline was driven primarily by continued increase in funding costs. Non-interest income declined 1% on a linked-quarter basis, mainly due to continued headwinds in mortgage. I will go into detail about our fee income segments in later slides. Our fee income was 51.6% of total revenues. Our high fee income mix is a big differentiator, especially as over 90% of this income is recurring and annuitized in nature. Our strength continues to be providing holistic financial solutions to our clients. Turning to page 21. Net interest margin was 2.7% in the Q1, a decrease of 39 basis points from the prior quarter. A 29 basis point increase in our earning asset yields was offset with a 78 point increase in our interest-bearing liabilities. Based on the latest Fed dot plots, we continue to expect our net interest margin to compress at a more modest pace in the Q2. Earning asset yields will continue to improve with net shift and loan repricing while our cost of funds is stabilizing. Turning to page 22. Over $1 billion or almost 41% of our loans are floating, as you can see at the top left of the slide. As you see, almost all of our variable loans are above their stated floors or have no floors. For 2023, we continue to expect modest loan growth. Turning to page 23, you will see details about our investment portfolio. Currently, 69% of our securities are available for sale versus 31% in held to maturity. Within the held to maturity portfolio, 42% are in municipal securities, while the rest are in MBS. As we restructure and transform our banking division, we are strategically focused on growing commercial relationships, which will add higher yielding and variable-rate loans with a positive treasury management relationships. We'll continue to let investment portfolio run down from approximately 28% of earning assets to a long-term target of 15%-20% of total earning assets. Today, our investment portfolio has an effective duration slightly over 5 years. As we right-size our investment portfolio, we plan on maintaining a duration around three years. On page 24, I'll provide some highlights on our retirement business. End of quarter assets under management increased 4% due to higher domestic bond and equity markets in the Q1 and continued client wins. Revenues declined on a linked-quarter basis, mainly due to lower average assets during the quarter and transaction fees that are seasonally higher in the Q4. Our retirement business accounts for almost 70% of our synergistic deposits. For the Q2, excluding any market impact, we expect fee income from retirement business to be up slightly. Turning to page 25, you can see highlights of our wealth management business. Revenues decreased 1%, while end of quarter assets under management increased 2.6%. We continue to see strong client acquisition in our geographical markets and retirement rollovers in our national and established markets as we execute on our One Alerus strategy. We continue to retain deposit dollars with our synergistic wealth money market offering, which represents 30% of our synergistic deposits. For the Q2, excluding any market impact, we expect fee income from our wealth business to be up slightly. Turning to page 26, I will talk about our mortgage business. Mortgage revenues declined $454,000 from the prior quarter due to lower originations as the macro and local environment remain challenged. Mortgage originations decreased approximately 38% from the prior quarter as the Q1 is typically slow. Inventory of homes available for sale continue to remain at a very low 1.5 months supply versus a typical level of three to four months in the Twin Cities. We do expect a pickup in the mortgage business in the Q2. However, the increase in volume may be more muted than the MBA forecast of a 36% increase in the purchase volume due to low supply of homes for sale in the Twin Cities. Page 27 provides an overview of our non-interest expense. During the quarter, non-interest expense decreased 30 basis points from the prior quarter, which was in line with original expectations of expenses being stable. Compensation expense increased due to seasonality, but also due to a one-time expense of $900,000 related to talent acquisition and severance expense. Despite inflationary pressures, we do expect expenses to be down low single digits for 2023 on a year-over-year basis. We continue to be focused on improving our profitability by reducing expenses and increasing capacity throughout our organization. We recently made continued progress in right-sizing our expense infrastructure through numerous initiatives. Some of these expense saves will be reinvested in efficiency improvement and revenue production initiatives. To summarize on page 28, we remain well-positioned from both a liquidity and capital standpoint. We have ample liquidity to weather economic volatility, and capital ratios remain very solid. Even if you factor in the unrealized losses from our held to maturity investments as our tangible common equity ratio would still be around 7%. Credit remains strong. Lastly, we continue to see growth in our core existing deposit base and with new customers as people value the holistic approach of our professionals and business value provides. With that, I will now open it up for Q&A. We will now begin the question and answer session. To ask a question, press star then one on your touch-tone phone. If you're 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 momentarily to assemble our roster. Our first question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead. Thanks, sir. wanted to check in on the margin. Al, I continue to recall your coiled spring commentary. just I guess first question would be, do you have a March net interest margin average? Then, you know, I guess as we look at Q2, I think you talked about some compression, but the balance of the year and timing in terms of the sensitivity, just update from where you left us off, Al, in the prior quarter. Thanks for the question, Jeff. For end of March, our net interest margin was around 2.59%. Going for the Q2, we do think there'll be a little bit of compression from there, but I would say that the worst is behind us. You know, we're probably thinking that with our 60% of our deposits being indexed with the last Fed, you know, predicted Fed, we're at hike of about 25 basis points. That will price our money market index deposits in July. From there on forward, our assets should reprice higher. The coiled spring is in effect still. Okay. Appreciate it. More of a housekeeping, you know, pretty good detail on the expenses and fee income. I guess in the, let's see. The fee income side, there was that BOLI benefit. Is that about $1 million in the quarter? I guess could we effectively back that out going forward? Yes. You can back that out. Okay. Yeah. If it's about $1 million, give or take. Yeah, $1.2 million. Okay. Got it. Be back. Then last one. Maybe Katie, just like looking at the credit statistics, I mean, they're phenomenal and I know this is work you've done years prior in terms of addressing some choppier credit figures and now certainly in a great spot and you talked about your exposures going forward. Just wanted to check back in on credit. I know that, you know, we're all sort of girded for maybe tougher economic times, but your thoughts on credit overall from your perspective, how you're positioned? Hi, Jeff. This is Katie. I'll take that question. you know, we've obviously benefited as the rest of the industry has over the last couple of years and had historically low asset quality issues. you know, we expect, we continue to expect that credit will normalize over time and that we'll return to more historical metrics. That said, with the work that we've done on our portfolio, we believe we're really well positioned to withstand a downturn. I would add, thank you, Karen, I would add from a talent standpoint and from the risk management and the credit team infrastructure standpoint, that's what we've been working on for the past four years is building that team to take the organic growth and move upmarket on the lending side and the credit side. I believe in all facets we are well positioned to do so with the right clients. I guess on a related front then, Katie on we heard your comments about maybe guarded on a buyback or on hold. Capital priorities and thoughts on, you know, fee income acquisition or anything else, you know, should we also consider that things are on hold for right now or what is the update there? Sure. We are clearly in a very strong capital position. We have a long history of paying a strong dividend. So that is also a priority for us. When it comes to buybacks, you know, the environment is uncertain right now, but we will absolutely move forward if the financial metrics make sense. We do see continued opportunities on the commercial banking side in terms of taking market share, again, growing with the right companies and the right people even in this environment. On the acquisition side in the retirement space, we're actually seeing more opportunities and we're seeing less competition, as some of the PE firms and their cost of capital has increased significantly. Still very active in that space, but remaining very disciplined in our pricing. Okay. I'll step back. Thanks. Thanks, Jeff. Thanks, Jeff. Thank you. Our next question comes from the line of Eric Spector with Raymond James. Please go ahead. Hey, this is Eric. I'm on the line for David Feaster. I appreciate you guys taking the question. You guys talked about it a little bit in the prepared remarks, it was nice to see the team hire in the quarter. I'm just curious how you think about hiring near term. Obviously, expense controls and focus. Is now a time to be greedy and maybe pick off some talent? Just curious if you have any thoughts on the hiring front and maybe what you think is attracting folks to Alerus. Eric, Jim Collins. I'll take that one. This is definitely the time that we're gonna continue to look for more talent. As we see banks that tend to have to buy brokered CDs and tend to reduce their accrued compensation, that gives us the opportunity to go after talent in the marketplace. As talent gets nervous and then we're well-positioned, we're definitely in all of our markets going after top-tier talent. Okay. What do you think's attracting folks to Alerus? What's your guys' competitive advantage? Well. Do you have any thoughts on that end? Certainly. Yeah, certainly our markets. We are in fantastic markets. The infrastructure that's been built in this organization the past five years puts us in a great position with the balance sheet. We already have great employee base now, and we're poised for a lot of growth. Being in a situation to accelerate that growth by just adding talent, I think is what's encouraging most people to talk to us. Obviously, our values and our culture is fantastic, one of the reasons I came here. Really it's the fact that we're poised to really grow this organization in a very thoughtful and profitable way. That's what energizes top producers, and that's why they're interested in talking to us. Got it. I appreciate the color. Just kind of going off that, just curious if you have any thoughts on the loan growth side of things and where you're seeing strong risk-adjusted returns and how new yield loan yields are trending so far this quarter. Just kind of general color on your loan growth outlook going forward. Certainly, the pipelines are a little soft for everybody. As I said earlier, I mean, this is our opportunity to take talent and market share from other banks. You know, we're pricing 6.75%-7.5%. That's kind of the market right now in most of our markets. Again, I think with where we're positioned and as we pick off talent, we'll have good loan growth to our budget. I certainly won't be gunning for double-digit loan growth in this economic times. We certainly will build a team that will perform that later in later years. Got it. Appreciate you guys taking the question. Congrats on a good quarter. Step back. Thank you, Eric. Thank you. Our next question comes from the line of Nathan Race with Piper Sandler. Please go ahead. Yes. Hi, everyone. I appreciate you taking the question. Maybe on balance sheet dynamics, it sounds like you guys have a pretty strong pipeline of deposit gathering across both the Synergistic Deposit Platform and also kind of in full term within the Twin Cities. I'm just curious, you know, with that, you know, pretty solid deposit growth outlook, particularly relative to years, is there an opportunity to wholesale borrowings that were added to the balance sheet over the back half of last year? Nate, on terms of the borrowings, I mean, we are trying to work those down right now, because, you know, we're borrowing at FHLB overnight. We're trying to deal with some of the core deposit growth we're seeing. You know, we'd like to pay those down, but also try to maintain some ample cash levels just in case there's any liquidity needs in the short term. Okay. Got it. Then just kind of thinking about the drivers for loan growth and just kind of the profitability of the loan growth that you guys have generated recently, just given the incrementally higher cost of funds. Looked like a lot of the growth in the 1st quarter was commercial real estate driven. So just curious if, you know, there's going to be a mix of changes in terms of kind of the type of growth that you guys are willing to add to the portfolio going forward, just given kind of the incrementally higher cost of deposits and wholesale funding these days? I will tell you our major focus is mid-market, lower mid-market C&I. We're aggressively hiring and going after in that niche, so more lines of credit, equipment term debt. That's really where we see our focus, and hopefully that will yield some of that growth later on this year and going forward. That's certainly our focus. There will still be some CRE growth for sure. We have a great team, and we're in great markets, and we have the opportunity of seeing some of the nicest deals in the markets. We will have continued CRE growth. Again, the focus will be mid-market C&I. Okay, great. Jim, just how does that C&I pipeline stack up, you know, coming up out of the Q1? I know a lot of these team additions were pretty recent, but just kind of any thoughts on just kind of overall C&I growth expectations over the course of this year and just, you know, how we should just generally be thinking about the overall rate of loan growth for Q3 through and Q4? Sure. Obviously we just went to line of business, you know, just under three months ago and then added some solid mid-market players right in that same timeframe. C&I is a little bit longer life cycle Into a banking organization. We will continue to add talent in that space. Those pipelines will generally start growing. Again, you have some issues with obviously rates with non-solicitations that nobody will break. Just overall time to engage with those customers. Certainly we will generally see the pipeline getting heavier as the year flows and then into 2024. Okay, great. If I could just ask, just in terms of, you know, some of the success you guys are having in terms of going over some of your retirement clients onto the wealth platform. I know this is more of a longer story component to the Alerus story, but has there been any, you know, recent changes in terms of the capture rate, in terms of, you know, onboarding clients from retirement, from the retirement platform into wealth more recently? Hi, Nate. I'll take that one. This is Katie. I would say the business has been pretty consistent. Again, our focus on any approach to a client is what's best for them and what aligns with their goals and how can we help them be most successful with those goals. It's an opportunity at times with clients, but at other times, they may wanna move in, for instance, to transition to the money markets like we saw this quarter. Consistent outreach, great engagement with the client base. The results are in various components of the company's divisions. Okay, got it. Just another question, just going back to deposits. You know, obviously, non-interest bearing was down in the quarter, and it's, you know, come down from around 30% deposits closer to 20% over the last year. Any thoughts on just if we're nearing a trough there or still seeing, you know, clients, you know, move into higher cost products or higher products, I should say? Perhaps kind of what inning are we in terms of, you know, some additional attrition and just the proportion of that deposit bucket? This is Barret. I can take this one. We did see non-interest bearing deposits decrease from a little under 30% - 26% in the quarter. As I believe we have in the investor presentation, we remain at higher levels than the industry. I think if you look at maybe what the risk is, I think that puts it into context. I think we expect to stay above industry. Okay. If I could just ask one more on just kind of the reserve trajectory and just, generally maybe for Karen. I don't think the criticized class side trends were disclosed in the slide deck. Perhaps any update there and just kind of how you're thinking about the reserve or ACL trajectory, I should say, from here. The criticized classified combined remained about the same quarter-over-quarter. In terms of the trajectory of the reserve, you know, it's really gonna depend on loan growth and the economic forecast that we're using within the methodology. Okay, great. Appreciate you guys taking all the questions and all the color. Awesome. Thanks, Nate. Thank you. Our next question comes from the line of Damon DelMonte with KBW. Please go ahead. Hey, good morning, everyone. Thanks for taking my questions. Wanted to start off with expenses. Al, you know, if you exclude the severance and the talent acquisition costs, I think that puts operating expenses somewhere around $37 million. Can you just talk a little bit about your outlook over the coming quarters? You know, are there some opportunities to maybe reduce some of the expense base, or kinda how do you see that playing out? Yeah, Damon, we still have, we're still looking at initiatives. We just had enacted some here in the past month. You know, there's definitely more wood to chop there when it comes to expenses. You know, there's gonna be a little, like, volatility from quarter to quarter, but we do expect it to be down overall, single digits for the year. Okay. All right. Going off of last year's was like, what, 158, 159? Yes. Yes. Correct. Okay. Using that as a starting point. Okay. That's helpful. Thanks. With respect to the margin, and I apologize if I missed this in the release, but what was the accretable yield included in the margin this quarter? Yeah. It was about 2 basis points for Metro. 2 basis points. Okay. Is that something we should model going forward? I know it's kind of tough to do, but is that kind of what your schedule looks like? Yeah, I'd say that's about right. Great. You kind of touched on this with the loan growth outlook. You know, you said it appears that, you know, kind of modest growth from this point forward. Should we kind of factor in kind of low single digits on a quarterly basis after, you know, this quarter's stronger start? Yeah, I'd say low single digits is fine. That's the comment around modest. Okay. All right, great. That's all that I had. Everything else was asked and answered. Thanks a lot. Thanks, Damon. Thank you. 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. Thank you everyone listening in and for the questions. I'll close with Alerus is a resilient company with a fundamentally differentiated business model and a strong foundation. We will continue to take a long-term view and will be protective of credit, capital, and our culture as we consider growth and work with urgency to continue to implement efficiency enhancing opportunities. We thank you, our shareholders and our clients for the trust that you put in us and our team members for your constant efforts in taking Alerus to height. Thank you, have a good day, everyone. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.