Alerus Financial - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Hello, 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 like to turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead.
Katie Lorenson (President and CEO)
Good morning. Thank you, Bailey. Thank you to our research analysts 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 Alerus. This morning, I will provide some commentary on Alerus's 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 Alerus's CFO, Al Villalon, who will discuss our financial performance and results for the quarter. In addition, Karin 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. Alerus 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 strengths 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. Most notably, in our path to transformation is our continued and significant success in adding well-respected and widely sought-after bankers and professionals to our franchise. This momentum in attracting and retaining talent continued to build in the second quarter as we added more experienced mid-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 banking professionals.
In the last six months, we've doubled the size of our treasury management team. The team has hit the ground running as we have 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. Last week, we lifted out a seasoned team of bankers in Minneapolis who will formally launch our private banking franchise. These team members will leverage our One Alerus business model and provide an integrated experience for the clients with wealth, mortgage advice, and products. Along with the continued momentum in talent acquisition, we are balancing our investments by optimizing our infrastructure with urgency. We remain disciplined in our investments. Are focused on talent and 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 whole bank acquisition of Metro Phoenix Bank. Our fundamental strengths include our fortress balance sheet, anchored by strong capital, credit, and reserve levels, and a strategic and fundamental focus on diversification. This diversification is across the enterprise and multifaceted. Alerus's 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 annualized 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 and benefits business, which was again ranked in the top 30 in the country. These durable revenue streams will continue to support capital build and shareholder returns despite the challenging operating environment faced throughout the banking industry.
Diversification goes well beyond our business model, as portfolio diversification remains a critical strategy. Alerus's loan portfolio is diversified by loan type, geography, industry, asset class, loan size, and client. Throughout the second quarter, 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%. Alerus's office exposure to office is limited to 3.9% of loans, none of which are secured by properties located in the central business district. Asset quality remains pristine, with minimal nonperforming loans and a year-to-date net recovery.
Reserves remain robust, with 1.41% of total loans and $6.2 million of the remaining mark on the acquired Metro Phoenix portfolio. The funding side of the balance sheet, our deposit portfolio remains well diversified among markets, products, and clients. Our uninsured deposits are 23.6%, a 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. 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 consumer wealth bank because of our holistic service model and constant collaboration between our wealth management and banking teams. During the second quarter, 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 typical seasonal pattern. We are pleased to report several large and client wins and overall net new accounts to Alerus were $83 million higher than dollars of closed accounts. We consistently monitor our deposit portfolio and do not see any unusual or unexpected activity. However, generally speaking, clients are continuing to draw down and spend their balances versus utilizing their lines of credit. In our fee income business, we saw a rebound in originations in mortgage and market values in retirement and wealth. Strategically, we have engaged in experienced consultants 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 size cash flow business with the passage. With the passage of SECURE 2.0 Act, we believe there's tremendous opportunity to continue to expand our client base and further improve margin and gain market share across the company or the country. From a capital standpoint, we continue to build on our strong capital levels. TCE is 7.72%, and CET is 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 that dividend by 5.6%.
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. Each move we do is purposeful in positioning Alerus to bring expertise and value-added knowledge to our clients in a fast, frictionless, and highly responsive manner. This differentiated approach and a diversified business model is leading to higher levels of client acquisition and client expansion. We are continuing to build tailwinds and synergistic expansion in our wealth management and retirement platforms, and continue to believe the long-term embedded value in these businesses is substantial 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.
Al Villalon (CFO)
Thanks, Katie. I'll start my commentary on page 14 of 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. Net interest income represents now 46.3% 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 continued to provide revenue stability despite interest rate challenges. I'll go into detail about each of our fee income segments in later slides. Turning to page 15, net interest income was $22.2 million in the second quarter.
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 dot plot at the beginning of the year, we continue to expect our net interest margin to compress in the third quarter. 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 decline in construction and consumer loans. For 2023, we continue to expect modest loan growth. 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 of 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. Turning to page 18, you can see a further breakdown in our deposit characteristics. Our synergistic deposits, so 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 was driven mainly by strong organic client growth within our wealth segment. Synergistic deposits sourced from our retirement and wealth businesses now account for 26% of our deposit base. Continued growth in our synergistic deposits shows the strength of our unique and differentiated business model. On this slide, too, you'll see our uninsured deposit exposure.
Our liquidity coverage to uninsured and not collateralized deposits now exceeds 300%. Turning to page 19, you'll see details about our investment portfolio. Currently, almost 69% of our securities are available for sale, versus 31% in held to maturity. Within the held to maturity portfolio, approximately 42% are in municipal securities, while the rest are in MBS. We continue to let the investment portfolio run down and remix the balance sheet towards commercial lending relationships that will add higher-yielding loans and treasury management relationships. 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 second quarter and continued client wins.
Participants within retirement have grown 2.5% year to date. Revenues increased 2.6% on a linked-quarter basis, mainly due to higher average assets and organic growth. Our retirement business continues to be a strong source of funding for the bank. Retirement now accounts for over 71% of our synergistic deposits. For the 3rd quarter, excluding any market impact, we expect fee income for our retirement 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 Alerus strategy.
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 $1.2 million, or 59% from the prior quarter, as originations rebounded 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. For the third quarter, 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 fourth 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 through the reduction in headcount, while professional fees increased through a higher FDIC assessments. 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 second quarter.
Our non-performing assets percentage was seven basis points compared to five basis points in the prior quarter. Our allowance for credit loss on loans to total loans remained stable at 1.41%. This overall reserve currently provides over 1,300% coverage to non-performing loans, as you can see on the bottom left. I'll discuss our capital and liquidity on page 25. Our capital remains well above the regulatory minimum, even after share repurchase done during the quarter. On the bottom right, you'll see the breakdown in the sources of the $2 billion in potential liquidity. Overall, we continue to remain well positioned from both a liquidity and capital standpoint to weather any economic uncertainty. To summarize on page 26, we remain committed to making fundamental improvements and improving returns for our stakeholders.
Despite the challenging headwinds from our rapid rising 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 up for Q&A.
Operator (participant)
Thank you. We 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 momentarily to assemble our roster. Our first question today comes from the line of Ben Gerlinger from Hovde. Please go ahead, Ben. Your line is now open.
Ben Gerlinger (Managing Director)
Hey, good morning.
Al Villalon (CFO)
Hey, Ben.
Ben Gerlinger (Managing Director)
Al, in your prepared remarks, you said that non-interest expense should be down about single digits or so %. My back of envelope math says it's 2Q it probably will go up a little bit from here. I was curious, is that more kind of compensation, but you also did talk about investment? I'm just curious if you could, you know, it more granular. Is it technology?
Al Villalon (CFO)
Yeah.
Ben Gerlinger (Managing Director)
How should we think about where that money's going?
Al Villalon (CFO)
Yeah. In the back half of the year, there's going to be some timing there because just in terms of, you know, number one, we have some incentive comp, especially with our mortgage business. That'll be 3Q will be a little bit higher on that side versus 4Q. There also is going to be some, you know, accrual too, when it comes to compensation as we go through the year. There's going to be some timing differences there.
Ben Gerlinger (Managing Director)
Gotcha. Okay. When you think about just the margins in here, deposit flows and non-interest bearing deposits are going to play a big factor. If you're just kind of assuming 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 a material move. When 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, and I don't think anyone's going to hold the speech fire. Do you think it's probably like a six months until you hit the floor and then the repricing inflects to your favor of a margin expansion? I'm just trying to think about the magnitude of which each side is moving.
Al Villalon (CFO)
The way we're thinking about it here is that, you know, we do have about 50% of our deposits that are indexed. And given the recent rate move yesterday, you know, if there's one more in this quarter, both, you know, any rate moves in this quarter will be repriced in October. That basically hits our money market fund. That, that timing will happen in 4Q. With that being said, though, you know, we continue to see a very attractive spread in our loans. As, you know, stuff matures on our back book or, you know, more maturing book, and then we reprice it to higher rates, you know, we're expecting hopefully that, you know, we'll see that margin uplift in the, you know, later half of later month of this year.
Ben Gerlinger (Managing Director)
Gotcha. Finally, just kind of big picture here, Katie or Jim, whoever wants to take it. 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 it'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? Are any pockets of the loan categories that are areas that are a little bit more appealing now that some competitors have stepped away or getting priced out?
Jim Collins (Chief Banking and Revenue Officer)
Yeah, 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. 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&I, which is predominantly heavy loans and a smaller amount of deposits. From a competition standpoint, all banks are kind of looking at that, but because a number of banks have their 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?
Ben Gerlinger (Managing Director)
Yeah, that's helpful. Thank you. Much appreciate.
Operator (participant)
Thank you. The next question today comes from the line of Jeff Rulis from D.A. Davidson. Please go ahead, Jeff. Your line is now open.
Jeff Rulis (Managing Director)
Thanks. Good morning. Checking in on the loan growth conversation, Al. I think you mentioned, kind of for the full year, you know, maybe, I don't know, 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?
Al Villalon (CFO)
Yeah. The low to mid single digits was on the expense side, but on the loan growth side, I basically commented on modest. You know, the thing we're seeing right now is that, you know, there's, you know, as interest rates have risen here, we're just seeing a little bit of slowing demand for loans at these interest rate levels. Hence, you know, there's been a little bit of slowing demand from our clients and just appetite for it. That's why, you know, we're still trying to, you know, really see the pipeline out there and what we think it can be done, hence why the modest comment.
Jeff Rulis (Managing Director)
Okay. I guess how are 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?
Al Villalon (CFO)
Yes, we're seeing just consistent payoff activity. I mean, there's nothing really jumping out at us right now.
Jeff Rulis (Managing Director)
Okay. Got it. Circling back to capital, you know, you had the buyback going this quarter. You've hiked the dividends. You're you know, well above regulatory minimums on capital. Just again, checking in on, sounds like the appetite for the buyback is ongoing. Katie, if there's any conversation about M&A, whether that be, you know, bank or within a product line, anything to touch on there?
Katie Lorenson (President and CEO)
Sure. In regards to capital, I'd say priorities remain the same. Very much focused on maintaining strong capital levels, maintaining a strong balance sheet, and organic growth, which includes the lift-out and the continuous lift-out of talent, as well as returning capital to shareholders via the dividend and repurchase where, when, where the numbers make sense, where it pencils out. On the M&A front, same sentiment as first quarter, I would say, in regards to continuing to have conversations, 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.
Jeff Rulis (Managing Director)
Got it. One last one, if I could. You know, the little creep up in the nonperformers, you know, I guess maybe not much to tell there, but any segments or footprint that you're a little more cautious on that, that you could detail?
Katie Lorenson (President and CEO)
Sure, Jeff, this is Karin. you know, we're not seeing a, a pattern in terms of any deterioration. I think we're beginning maybe to see just a little bit of stabilization. you know, the, the credits that, are experiencing stress seem to be pretty specific and not indicative of, any particular pattern. I do think, you know, we're still at historically strong credit metrics, but would expect over time that we'll begin to see some of that normalize.
Jeff Rulis (Managing Director)
Okay, thank you.
Al Villalon (CFO)
Thanks, Jeff.
Operator (participant)
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.
Nathan Race (Managing Director)
Yeah. Hi, everyone. Good morning. Hope you're doing well.
Al Villalon (CFO)
Hey, Nate.
Nathan Race (Managing Director)
Katie, going back to your comments earlier around the engagement of consultants to look at the retirement platform. Just curious, you know, as you look out longer term, is the opportunity or impetus behind this engagement more on kind of the revenue growth side of things, or are there 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.
Katie Lorenson (President and CEO)
Sure, absolutely. It's both on the revenue side as well as on the efficiency and just optimizing our infrastructure within that division. As we look at the opportunity that existed prior to the passage of SECURE 2.0 Act, 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 SECURE 2.0 Act just takes that to the next level. 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.
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.
Nathan Race (Managing Director)
Okay, great. 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?
Al Villalon (CFO)
Hey, Nate, that's 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, then you can attribute the rest of it to be organic.
Nathan Race (Managing Director)
Okay, great. I think it's, you know, is that the same case on the wealth side of things as well?
Al Villalon (CFO)
The wealth is going to be a little bit higher there. I would say, though, you know, wealth has been really doing great for us because we, we have seen a lot of organic client wins there. You know, as I did note in my commentary, they, you know, we did see some synergistic deposit growth that really came from our wealth side. That was a big, you know, growth in the synergistic deposits. I'd say majority of that growth came from wealth.
Nathan Race (Managing Director)
Got it. That's great to hear. 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 plan to-?
Al Villalon (CFO)
Yeah.
Nathan Race (Managing Director)
loan growth, which is how your expectations are for more modest growth in 3, 2, and 4Q?
Al Villalon (CFO)
Yeah. We're continuing to utilize, you know, overnight borrowings to fund loan growth right now. We're, you know, it's just deposits right now. We had that seasonal outflow come out, we'd love to have more deposits come in the door, and we're focused on that. You know, we're also letting the investment portfolio mature and roll that over and remix that into loans. You know, if we have to continue to use overnight borrowings to fund loans, we'll probably do so. We still have a lot of capacity there.
Nathan Race (Managing Director)
Okay, thanks. Can you remind us how much cash flow you have from the securities book each quarter?
Al Villalon (CFO)
The way I think about it is that, you know, we have about our investment portfolio has about a duration of about five to six years. You'd say maybe like 20% of our portfolio is rolling off on a yearly basis. The quarterly is going to be a little bit lumpy here and there, but I would just look at it as like a yearly basis. You can just take an average of that for the quarter.
Nathan Race (Managing Director)
Okay, great. Just going back to some of the earlier comments around kind of deposit growth expectations. I appreciate, you know, a lot of the decline in the second quarter was tied to public fund clients. Just kind of overall, any kind of deposit growth expectations and, you know, when we may see non-interest levels, you know, flatten out?
Al Villalon (CFO)
I mean, that's a difficult one to predict right now, given I mean, the risk-free rate in the short term is more than five, and there's just, you know, everybody's, you know, parking money into, you know, this, you know, high-rate accounts right now. I think there's going to be still more pressure to come on non-interest bearing, because that is being experienced not just by us, but across the whole industry. I think we're not going to see that pressure subside in the near term until these rates get, you know, start coming down significantly. On the deposit side, though, you know, we're still expecting, you know, our public funds to come back in, you know, back in the back half of this year. Hopefully, we can, you know, that we'll still see some growth from here.
You know, I think from second quarter levels, we'll probably see some growth from at least where we are from second quarter levels.
Nathan Race (Managing Director)
Okay. Got it. Are you guys seeing any easing in kind of deposit pricing pressures across the company footprint these days? We've heard from some other banks that it's moderating to some degree more recently. Is that the case with you guys?
Al Villalon (CFO)
Yeah, we're seeing some moderation there. You know, the one thing we've noticed, too, in our, you know, footprint, we've definitely seen an uptick in the more banks where the loan-to-deposit ratio has exceeded over 100%, that's putting more pressure on loan growth for them. You know, they're trying to meet that by, you know, pricing up deposits more. I would say, though, that there's definitely more deposit beta in the first quarter than there was in the second quarter. We're seeing that definitely moderate.
Nathan Race (Managing Director)
Gotcha. Just maybe one last one for Karin. Is there a tail to the recoveries that we have seen, you know, periodically over the last several quarters now, or do you think that's kind of largely run its course?
Karin Taylor (Chief Risk Officer)
You know, 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 decrease in coming quarters.
Nathan Race (Managing Director)
Okay, great. I appreciate you guys, taking all the questions and all the follow-ups. Great quarter.
Al Villalon (CFO)
Okay. Thanks, Nate.
Operator (participant)
Thank you. The next question today comes from the line of Eric Spector from Raymond James. Please go ahead, Eric. Your line is now open.
Eric Spector (Research Associate)
Hey, everybody, this is Eric on the line for David Feaster. Appreciate you guys taking the questions. Most of my questions.
Al Villalon (CFO)
Hey.
Eric Spector (Research Associate)
been asked and answered. Just curious, with the loan growth in the quarter and, obviously the outflows of public funds, the loan-to-deposit ratio ticked up quite a bit to almost make it 89%. Just curious where you're comfortable with that going forward?
Al Villalon (CFO)
Yeah. I mean, we definitely want to target a ratio of probably, a little bit south of, 100%. Ideally, it'd be 90%-95%. You know, we know also understand that there's a lot of liquidity coming out of the system that might gravitate a little bit higher in that range.
Eric Spector (Research Associate)
Yeah. Okay. Yeah, makes sense. Makes sense. 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 third quarter and how you think about portfolio versus gain on sale and how margins are trending.
Al Villalon (CFO)
Yeah. Margins are pretty stable there. I'd say they're maybe similar in the third quarter as they do in the second. I'd say volumes, too, you know, our outlook is probably similar in the, in the third quarter. Again, you know, when that snow comes in Minnesota, we're going to see a downtick in the fourth quarter. The snow sometimes comes early, unfortunately, in Minnesota.
Eric Spector (Research Associate)
Yeah. Makes sense. Just how are new yield, loan yields trending, in CRE and other segments? You've been able to push rate and what is the competition for new loans then?
Jim Collins (Chief Banking and Revenue Officer)
I would say that, in general, they're pushing up a little bit. You know, there's more and more banks are pulling out or slowing down, which is allowing other banks that are currently in the market to have a little bit better pricing. 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.
Eric Spector (Research Associate)
Great. All right. That's it for me. Thank you, and congrats on a good quarter.
Al Villalon (CFO)
Thank you.
Operator (participant)
Thank you. The next question today comes from the line of Damon DelMonte from KBW. Damon, please go ahead. Your line is now open.
Damon DelMonte (Managing Director)
Hey, good morning, everybody. Hope everybody's doing well today.
Al Villalon (CFO)
Hey, Damon.
Damon DelMonte (Managing Director)
Hey, Al, just want to start off with a question for you, actually, on the margin.
Al Villalon (CFO)
Mm-hmm.
Damon DelMonte (Managing Director)
I think you noted that there was about 7 basis points of accretable yield this quarter from the-
Al Villalon (CFO)
Right
Damon DelMonte (Managing Director)
from the recent transaction. Should we just kind of model a similar level going forward? I thought first quarter was a little bit lower than that.
Al Villalon (CFO)
Yeah. Yeah, the way I would think about it is that, you know, we previously guided to about margin accretion around 2-4 basis points from the Metro Phoenix Bank acquisition. The difference this quarter, you know, we had about, you know, 3 or 4 basis points coming in from a loan payoff in the quarter, which is typically, you know, sometimes you see in these deals.
Damon DelMonte (Managing Director)
Got it. Okay. More like 2-4 basis points before that. Okay, that makes sense.
Al Villalon (CFO)
Yeah.
Damon DelMonte (Managing Director)
you know-
Al Villalon (CFO)
Correct
Damon DelMonte (Managing Director)
-kind of with regards to the direction of the margin here, you know, it, it seems like it's still going to trend lower. Did you, 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?
Al Villalon (CFO)
Yeah, that's what I commented on. Actually, I think it's going to rebound. You know, previously, we thought this quarter was going to be the quarter where we saw the rebound. Given the Feds, you know, one to two more Fed hikes that came down the pipe, you know, 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, you know, more the fourth quarter.
Damon DelMonte (Managing Director)
Okay. Then can you just remind us kind of how you're going to be positioned if the Fed were to cut rates in 2024? Given your positioning.
Al Villalon (CFO)
Yeah
Damon DelMonte (Managing Director)
Would you see immediate benefit to the margin?
Al Villalon (CFO)
Yeah. you know, in our ALM modeling, you'll see that typically when rates go down 100 basis points, you know, I'd say somewhere in the high single digits, we see improvement in NII. But that's on an annualized basis. you know, the big thing there is just still maintaining, you know, loan discipline pricing on the, on the, the asset side, but then also, you know, addressing our deposit side and being able to cut rate there. That's where a lot of sensitivity plays into our favor.
Damon DelMonte (Managing Director)
Got it. Okay. Just one last question on the provision outlook. You know, with the prospect that loan growth would probably slow a bit here in the second half and just continue just strong, you know, underlying credit trends and limited, you know, visibility on any NPL formation, do you think you're going to be needing to book a reserve, any meaningful reserve in the next couple of quarters?
Karin Taylor (Chief Risk Officer)
Hi, Damon, this is Karin. you know, it's really going to depend.
Damon DelMonte (Managing Director)
Hi, Karin.
Karin Taylor (Chief Risk Officer)
Hi, there. I think it's going to depend really on what happens with the macro environment and the related forecast. To your point, loan growth, if we see that moderate here in the second half, you know.
That certainly would probably be a driver to not have significant provisioning.
Damon DelMonte (Managing Director)
Got it. Okay. That's helpful. Thank you very much.
Jim Collins (Chief Banking and Revenue Officer)
Thanks, Damon.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star followed by one. Our next question today is a follow-up question from Ben Gerlinger from Hovde. Please go ahead, Ben. Your line is now open.
Ben Gerlinger (Managing Director)
Thanks.
Jim Collins (Chief Banking and Revenue Officer)
Welcome back, Ben.
Ben Gerlinger (Managing Director)
Yes, thanks. I figured I was gonna ask this in kind of a follow-up call, it would probably add some shareholder value. Katie, you took this role about a year and a half 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.
Again, with rates moving up 550 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 whether the new relationships are core, rather than potentially just saying they're core and could shop once rates get lower?
Katie Lorenson (President and CEO)
Thanks, Ben, for the question. I think your analysis is spot on in terms of where we are focused and the reasons 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, positioning ourselves to focus very much on specific segments. We can really be responsive fast and bring value to those client relationships. That absolutely grows relationships. That is not transactional business. I think the way that you can view the success going forward is seeing the commercial wealth bank growth.
Full relationships, both on the lending, the deposits, 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 gonna follow their banker that they've been doing work with and relationships with over a long period of time. Does that answer your question, Ben?
Ben Gerlinger (Managing Director)
Yeah. Just kind of following off that, it seems like the people you have, the culture is intact, and in fact, you've 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 for deepening any relationships?
Jim Collins (Chief Banking and Revenue Officer)
I can handle that one. Yeah, we've already started to build out the verticals. We're probably not gonna expand to any more additional ones, but we will be adding additional talent in those verticals as we continue to have success. We're not gonna overstaff, but we're certainly gonna keep the talent pool ready to add staff as we start winning in various segments all over the place.
Ben Gerlinger (Managing Director)
I assume that's a continuous plan. It's not like a 12 or 18 months, correct?
Jim Collins (Chief Banking and Revenue Officer)
Yep. No, that's continuous. I think as we continue our growth, you know, we'll, we'll be strategic on those verticals and those hires. Like I kind of commented earlier, some of those verticals are key to deposit gathering as well as loans, and they are key to synergistic private banking wealth. I'm specifically talking about the kind of the mid-market verticals. We'll find a lot of success. To your original question about those, those relationships are core, and they become core not only in commercial C&I, but in private banking, in wealth, and in private mortgage. That's where you can see those, that growth going all over those areas. You can see that that clearly is a core growth.
Ben Gerlinger (Managing Director)
That's helpful, Collins. Thank you.
Jim Collins (Chief Banking and Revenue Officer)
You're welcome.
Katie Lorenson (President and CEO)
Thanks, Ben.
Operator (participant)
Thank you. As a final reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting. This concludes our question and answer session. I would like to turn the conference back over to Katie Lorenson for any closing remarks.
Katie Lorenson (President and CEO)
Thank you. I thank you to everyone for joining our call this morning. Thank you for listening. Thank you for the questions. Our unique and highly diversified business model is a substantial differentiator in driving long-term value for our shareholders, serving our clients, as well as attracting and retaining top talent. We thank you, our shareholders and our clients, for the trust that you put in us and to our team members for your service mindset and client focus. You're helping us to evolve Alerus into a top-performing commercial wealth bank and national retirement benefits provider. In the long term, delivering top-tier shareholder returns and performance. Thank you, everyone. Have a great day.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now dis-.