Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. This call may include forward-looking statements and the company's actual results may differ materially from those indicated in any forward-looking statements. 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 pass the conference over to your host, Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead.

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

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

We’ll now begin the question-and-answer session. The first question is from the line of Jeff Rulis with D.A. Davidson. You may proceed.

Thanks. Good morning. Just a question on the loan growth side of things, a bit of a breakout, I guess, if you could kind of talk about any geographic strength. I know you've rattled through sort of the segment detail, but just wanted to get a sense for a pretty big start to the year and the sustainability of that. Thanks.

Hey, Jeff, it’s Al. Thanks for the question. We're seeing pretty much broad-based economic activity in our loan portfolio. Particularly, especially in our Twin Cities markets, we saw some very good growth there too. But I would say too again, it's pretty broad-based thus far across all markets and across the portfolios, especially both the consumer, C&I, and commercial real estate.

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?

Yes. The one thing I would highlight on our pipelines is that we recently implemented Salesforce. It's been a big product, a big innovation for us. And as I look at our pipelines right now, they're very good. We recently just looked or are looking at the data coming in there and we're encouraged by what we're seeing.

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

Yes.

Okay, thanks. And, Al, I had some - I apologize. I had some audio issues on the call right when you were delivering the fee income outlook. Do you mind just quickly rattling through each of those expectations?

Yes. Actually, so, Jeff, what I did there is that we talked about overall revenue. And what I said on the call was that we expect overall revenues to be down low to mid-single digits. And the biggest thing that we're seeing right now is that in the mortgage business, we're seeing some challenges there because of low inventory in our main markets. That's something we didn't foresee, but we're hoping there'll be a seasonal pickup there due to just the winter conditions and just low inventory. Hopefully, we expect inventory to pick back up. And then on our retirement wealth business, what I commented on is that we expect some market volatility to impact that right now. So, we didn't expect the quarter to be as volatile as it was with our initial outlook.

Okay, great. And last one if I could, just checking in a bit on the Metro Phoenix on potential deal timing, is that looking like a May or June? 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 mean, I can comment briefly on - go ahead, Katie.

Sorry about that. I'll take that one. In regards to Metro performance, it was in line with theirs and our expectations, both in terms of net income as well as balance sheet growth. So, it's 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 so, it's 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.

Yes. Hi, everyone. Good morning. I wanted to drill a little bit more. I think last quarter, we were thinking about retirement benefit services revenue flat year-over-year, curious if that's still the case. And it sounds like you guys had a nice wealth management client win in the quarter that drove a nice increase in AUM levels. And 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 the hedge gains that you guys had coming through mortgage last year?

Yep. Hey, Nate, I just want to make sure, we actually guided to low to mid-single digits, not mid to high, so just make sure you got that down correctly. So, it's low to mid.

Yes, got it.

And then, yes, so the biggest thing when we think about our retirement business right now, so in the fourth quarter, we did have some fees that are not annual in nature that impacted. So, that's a decline. And also, we had the volatility in the markets which impacted our asset level. So, that's going to be - we're just facing a little bit of headwind right now. So, on our outlook for the retirement business, I'd say that we're trying to keep revenues as fine as we can right now, but there might be a little bit of challenge, 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 run rate over the course of this year? I imagine we'll see an increase in Q2, Q3 through the mortgage volumes to similarly pick up. But just any thoughts on just the overall run rate excluding deals in Arizona?

Yep. So, right. So, when it comes to the mortgage business right now, we actually had a little bit of a challenging quarter given the low inventory. We're expecting that to pick up in Q2 and for the rest of the year. So, we do have some leverage there in terms of as revenues pick up for us in that segment, there'll be a little bit of higher expenses because we have more production coming through, but we also, we’re trying to do the best we can to manage that environment right now. And you saw that the compensation did drop off in Q1. We looked at - 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 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 going forward. Is the plan to just grow into the unallocated access reserves that exist still?

I'm always ...

Good morning, Nate. This is - thanks, Al. Good morning, Nate. Yes, we expect similar to previous quarters that increases 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 reserved there. But as we have loan growth, we could see some provisioning later in the year.

Understood. And does that loan growth outlook, does that contemplate additional increases in line utilization? We've seen nice increases recently, but still low pre-pandemic levels. So, just trying to understand how much of the opportunity in terms of outsider loan growth potential exists with line utilization continuing to increase?

Do you want me to take that, Al?

Yes. Go ahead, Karin.

Okay. Yes, Nate, I think, looking at our available balances and where our utilization rate has been historically pre-pandemic, I would say there's 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 in TC with the AOCI swing in the quarter, but you guys are still operating with ample capital levels, stock buyback like most of your peers over the last few months. So, just curious just to get an update in terms of the buyback appetite presently and just kind of what you’re seeing in terms of acquisition options, as well as JV.

Thank you. So, our share repurchase plan is suspended, of course, until we close on the Metro deal. We do have it in place, but our priority continues to be balance sheet growth, loan growth, as well as on the fee income side. I would reiterate my comments from the prior quarter regarding our focus on building our pipeline, as well as building our sources for those key income deals.

Okay, great. And then I apologize 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're on board?

Yes, Nate, this is Karin again. There are no non-competes or non-solicits, and 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. I appreciate all the color and you guys taking the questions. Congrats on a great quarter. Thanks.

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, and thank you again, everyone, for 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 this company, again, has historically outperformed, and we remain well positioned for future success because of our business model. We continue to see momentum in building our pipelines and our new business and client expansion, as well as a high level of engagement within our team and within our markets and our brand. We have consistency of purpose that is embraced and 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, serve in the best interest of our clients, and deliver long-term value to our shareholders. We thank our shareholders for their investment and 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.