Good morning or good afternoon, everyone 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 turn the conference over to Alerus Financial Corporation, President and CEO, Katie Lorenson. Please go ahead.

Thank you, Emily, and thank you, everyone for joining our call this morning. 2022 was a year of significant transitions in our company as I moved into my current role and spent a better part of the year building the executive leadership team, including our new Chief Financial Officer, Al Villalon, who joined me on the call today along with Karin Taylor, our Chief Risk Officer. In June, we recruited a new chief banking and revenue officer who is also here with me today in the Twin Cities, and in July we promoted from within two long-tenured employees to round out the new executive team of Alerus. I am so proud of the professionals across the company who I get to work with every day as we take Alerus to new heights. Recruiting and retaining talent beyond the executive leadership team is a key strategic initiative we remain committed to as we build our commercial, treasury, and private banking franchise to support our historically strong client growth, scale, and brand we have already established in our wealth management, retirement, and mortgage division. On Monday, we announced another win on the talent side with the addition of three high-performing commercial bankers to the Alerus team. And this week, we also welcomed our new Head of Treasury Management and deposit strategy to our company. Consistent with the rest of the industry, 2022 was full of unpredictable and unprecedented headwinds for our company. The power of the Alerus diversified business model, our collaborative culture, and our hard-working team members continued to focus on what we could control, attracting talent, acquiring new clients, expanding relationships with existing clients, managing expenses, and constantly improving the client experience. The results of these efforts across the company are creating embedded tailwinds for the coming years when the pressure points on the balance sheet and in the markets subside. Specific strategic highlights for 2022 included the acquisition and closing of Metro Phoenix Bank, our largest acquisition in company history and a transformational deal for our Arizona franchise. Another successful lift-out of a team of bankers who exceeded our expectations and closed over $200 million in high-quality loans in 2022, less than a year with Alerus. In 2022, we surpassed the sales milestone with another record year of record levels of new business growth in wealth management and retirement while constantly building on the synergies from the businesses, including synergistic deposit balances reaching nearly $700 million at the end of 2022. We remain committed to exceptional asset quality. In 2022, we continued building on our strong foundation of credit and risk management to support our future growth, including the additions of regional credit officers, additional technology, enhanced administration, and monitoring, robust stress testing and reporting, as well as changes to loan policy. We strategically exited the payroll business, a small and no-margin product, which we replaced with formal referral partnerships with other payroll providers, allowing us to focus on our core retirement and benefit product offering. We've done a good job in managing expenses while thoughtfully improving the processes and the client experience. Despite the inflationary headwinds, we continue to make progress in building efficiencies and scale in our company. The company and the client rates have grown while expenses in the number of employees continue to trend downwards. Looking ahead to 2023, we have put the pieces together, and this team is focused on the fundamentals that drive sustainable long-term outperformance. We remain committed to the work of rightsizing our structure, investing in experienced talent entrenched in our markets, and building our business. We remain committed to exceptional asset quality and are laser-focused on client selection as we grow. We will take the positive lending market share and grow our company through new client acquisitions, expanding and deepening relationships with current clients, and reducing attrition by taking our service levels and the client experience to new heights, all while making the company more efficient and improving long-term shareholder returns. With that, I will now turn it over to Al Villalon, Alerus' CFO, for financial comments on the quarter.

Thanks, Katie. I'll begin my commentary on Page 14 of our investor deck available on our website's Investor Relations section. In the fourth quarter of 2022, our average loans rose by 4.3% compared to the previous quarter. This growth in core average loans was largely due to a 6.4% increase in commercial real estate and commercial construction. We saw a 1.1% decline in average deposits on a linked-quarter basis as clients invested their liquidity. As a result of this deposit decline, we raised our short-term borrowings by over $124 million, a 49% increase, to support ongoing loan growth, especially with the addition of Metro Phoenix Bank as we expand in Arizona. I will cover the effects of these increased borrowings later. Moving to Page 15, credit quality remains robust, with net recoveries of three basis points in the fourth quarter. Our nonperforming assets percentage stood at 10 basis points, down from 17 basis points in the previous quarter. Our allowance for loan losses is 1.27% of period-end loans, which includes the recent acquisition of Metro Phoenix Bank. We plan to transition to CECL in 2023 and anticipate a day one allowance increase of $5 million to $7 million. This will affect our CET1 capital ratio by 20 to 25 basis points based on fourth-quarter risk-weighted assets. On Page 16, our core funding mix is solid. We experienced an increase in our cost of funds due to rising interest rates. In response to further rate increases and a competitive deposit landscape, we raised our deposit rates. At the end of the third quarter, our deposit beta was just 3.5%, among the lowest in the industry, as we lagged in deposit pricing for the first nine months of the year. However, competitive pressures grew as several banks in our region had loan-to-deposit ratios exceeding 100%. Due to intensified competition for deposits, we increased pricing several times, which raised our overall deposit beta tenfold to 36%, consistent with our historical experience. Despite slight declines in deposits, our funding base remains strong and stable, with a loan-to-deposit ratio of 83.8% and no broker deposits. On Page 17, I highlight that our capital base is robust, with a common equity Tier 1 ratio of 13.4%. As a comparison, the median common equity Tier 1 ratio for the largest financial institutions subject to the Dodd-Frank stress test was around 8%. You'll also notice here that we hold over $2 billion in potential liquidity, positioning us well amid concerns of economic uncertainty from both capital and liquidity perspectives. On Page 18, regarding our key revenue metrics, net interest income declined by 4.8% on a linked-quarter basis, primarily due to increased funding costs resulting from higher deposit pricing and increased borrowings to support loan growth and our Arizona expansion, as mentioned earlier. Noninterest income fell 5.5% on a linked-quarter basis, mainly due to a decrease in mortgage revenue. I will detail our fee income segments later. On Page 19, our net interest margin was 3.09% in the fourth quarter, down 12 basis points from the prior quarter, which was lower than anticipated due to rising funding costs. As shown in the last page of our earnings release, our cost of funds increased across the board. Interest-bearing deposit costs rose 284% to 50 basis points, while money market and savings deposit costs went up 248% to 139 basis points, and short-term borrowings increased 59% to 382 basis points. Overall, the cost of our interest-bearing liabilities climbed 120% to 145 basis points. We anticipated liability costs to rise given our exposure, but the extent and speed were more pronounced due to the competitive environment. Nevertheless, the purchase accounting accretion from the Metro deal positively impacted the net interest margin by 10 basis points. On Page 20, over $1 billion, or 37% of our loans, are floating rate, as seen in the top left of the slide. Almost all our variable loans are either above their stated floors or have no floors. In the bottom left, you can view a waterfall for our net interest income and margin, illustrating the impact of our liability sensitivity. The net effect of asset and liability rate changes negatively impacted net interest income by 4.7%. As disclosed in our latest 10-Q, we are liability sensitive in the near term. In a scenario with interest rates increasing by 100 to 400 basis points, we expect our net interest income to decline by 10% to 13% over the next 12 months. This means we have about a $12 million headwind embedded in our current balance sheet for 2023. However, due to recent balance sheet strategies and remixes, we expect our net income growth to resume after one year, even if we assume no loan growth. While net interest income will contract in 2023 under a static balance sheet perspective, I anticipate a rebound in 2024. Moving to Page 21, I'll highlight our retirement business. Assets under management increased by 5.1% largely due to higher domestic bond and equity markets in the fourth quarter. Revenues remained stable on a reported basis but increased by 4.6% when excluding one-time restatement fees of $721,000 in the third quarter, aligning with our expectations. On Page 22, highlights for our Wealth Management business show a 6% increase in revenues, exceeding our expectations. Assets under management grew by 4.2% from the prior quarter, driven by improved equity and bond markets alongside strong production. On Page 23, regarding our mortgage business, revenues dropped by $1.6 million from the prior quarter due to lower originations in a challenging environment. Mortgage originations fell approximately 45% from the prior quarter, with total originations of $812 million for 2022 meeting our lowered expectations. Typically, the first and fourth quarters of a calendar year are our weakest for originations because of seasonality. Lastly, on Page 24, I provide an overview of our noninterest expense. In the quarter, noninterest expense decreased by 11.3%, better than our initial expectations of a mid-single-digit decline. Compensation expenses fell mainly due to reduced mortgage compensation from a drop in mortgage originations. Our tech expenses decreased because of timing related to new contracts, a benefit we don't expect to repeat. Our efficiency ratio improved by over 500 basis points to 69.6%, and we achieved positive operating leverage as previously indicated. Before offering guidance, I want to emphasize that due to our near-term liability sensitivity, we face significant headwinds for net interest income in 2023. We are making adjustments to reposition and remix the balance sheet, which will take some time, but the spring I mentioned earlier will take shape in 2024 and beyond. When interest rates stop rising and eventually decline, that coiled spring effect will become even stronger given our current positioning. Now, I'll provide guidance for the first quarter and 2023. For the first quarter, we anticipate that net interest income will decline in the high single digits. We expect further decreases in our net interest margin as the cost of funds rises, driven by the repricing of indexed liabilities. Some of this increased interest expense will be offset by modest loan growth. All segments of fee income will be influenced heavily by the macroeconomic environment. While we have seen strong new business production in both wealth and retirement, revenues will be affected by market conditions. Mortgage revenues will face continued challenges as interest rates remain high, compounded by being in a seasonally weaker quarter for originations. On a reported basis, we expect noninterest expenses to remain stable compared to the fourth quarter. We are actively rightsizing our infrastructure while also bringing in some talent, as Katie mentioned, to support future revenue and deposit growth. We see credit conditions remaining benign in the first quarter. Now, regarding metrics for the full year 2023, as we discussed, net interest income will be challenged due to our liability sensitivity, particularly in the first half of the year. To mitigate some of the anticipated 10% to 13% decline or approximately $12 million pre-tax headwind embedded in our current balance sheet, we expect modest growth in loans and deposits. We also foresee the mortgage business remaining challenging, as the Mortgage Bankers Association projects a purchase index decline of 8% to 9% in 2023. Excluding market impacts, we expect retirement fee income on a reported basis to see a slight decrease as we exit payroll revenues, which previously accounted for $1.4 million. As we work on repositioning, remixing, rightsizing, and adding talent, we remain focused on managing expenses in 2023. This year is when we expect the spring to coil back, but we are confident that with our strategic initiatives, we will see significant progress in 2024 and beyond. Once the challenges of 2023 have been absorbed, we'll strive to return to goals of achieving EPS growth of 10% or more and an ROE of 12% or more. In 2024 and beyond, we anticipate continuous improvement in our efficiency ratio as we concentrate on investing in talent and infrastructure to enhance operational efficiency while providing a high service level for our clients. With that, I’ll now open the floor for Q&A.

Our first question today comes from Jeff Rulis with D.A. Davidson.

Katie, you mentioned that the number of hires you've made over the past year has been substantial. I'm curious if you anticipate that the hiring pace will decrease in '23 as growth slows and positions are filled. Additionally, I would like to know how this might impact expense growth in '23, and I think that may be a question for Al.

Sure. Thanks, Jeff. In regard to the talent additions, we will continue to bring in professionals with expertise in our markets. We will manage that level of investment as we reassess and redistribute talent throughout the company in terms of support. Al can provide insight on the expenses, but that’s how we view the talent additions. As for growth, I will pass that along to...

Thanks, Kate. This is Jim Collins. I will say that as we look at that talent that Katie just talked about, we're looking at focused talent and specialized verticals to bring that value add to our customer base. We will consistently look for adding that talent in all of our markets, but we're going to be a little picky, right? We're going to make sure we're adding the right team to us. We will offset that expense with expense saves or repositioning of different expenses already in the bank, but the intent is to harvest talent during this time when we can.

Jeff, it's Al. Regarding noninterest expenses, we are focused on continuously improving our infrastructure. This year, we aim to achieve some expense savings, and we expect reported noninterest expenses to decline slightly compared to the previous year; however, much of this will depend on when those savings are realized. Additionally, our efforts to bring in new talent will be a crucial element in this process.

Yes. I know you mentioned that Q4 might be somewhat lower, but when considering an overall figure close to $1.59 for the full year, is that a reasonable expectation, or should we expect something a bit different, especially if we bring in some new hires?

Yes. When I look at like the 158.8-ish, we're looking for that to be down year-over-year from that level. Correct.

Okay. Al, while I have you, I'm curious about the margin and where it might bottom out. It seems like there will be additional pressure in Q1, and you mentioned that it might rebound afterward. I'm trying to understand where you believe it will stabilize.

Yes, that's a great question, Jeff. I mentioned that we expect the impact to be felt in the first half of the year, primarily in the first quarter, with a bit more in the second quarter. We anticipate a rebound after that. However, the exact timing will depend on the interest rate environment. I believe we will experience the most significant effects in the first half, especially the first quarter, with a slight decrease in the second quarter, and then likely starting to recover in the second half of the year. The timing will be influenced by developments in the midpoint of the year based on what happens with the interest rate curve.

Appreciate it. One last one, just on if it was modest, but I wanted to look at the nonaccrual drop anything specific there? Was that just miscellaneous, or was there one large loan that came back on accrual?

We had a couple of payoffs, Jeff. This is Karen.

Okay. So just a handful of those. I appreciate it. Thanks.

The next question comes from Nathan Race with Piper Sandler. Please go ahead, Nathan.

Yes. Thank you. Good morning, everyone. Thank you for taking the questions. Just wanted to drill down into the outlook for this year. I appreciate your comments on the decline in the first quarter. I guess just kind of thinking further out, if we just get two more Fed hikes in the first half of this year, do you see kind of flattish growth after a presumable trough in the second quarter? Or are you guys thinking about just NII growth prospects in the back of the year on a pickup after being somewhat seasonally soft in the first quarter?

Yes. The timing of our guidance has already been addressed in response to the previous question regarding our margin. I believe our net interest income will follow a similar trend, although it will also be affected by the talent additions we've made and the loan growth from our existing team. Currently, much of that liability sensitivity will be observed in the first half of the year, impacting net interest income, but this will gradually ease as the year progresses. By the end of the first six months, I expect the concerns regarding liability sensitivity to diminish, leading to more favorable conditions for us in the latter half of the year.

Okay. Great. And then just within that context, curious how you guys think about the overall balance sheet from here. With some of the deposit runoff that we saw over the course of last year, do you think that's largely brought us to a point of stability and we can anticipate a more stable average earning asset base relative to the level in 4Q?

Nate, that's a question that will depend on how the year progresses because currently, the deposit environment is very competitive. We have added talent and are very optimistic and excited about our treasury management side. We are bringing experienced capabilities to our market. I will pass it over to Jim now. As we develop our treasury management and HLA capabilities, we believe we can gain market share due to the high level of experience we are bringing in. Now, I'll turn it over to Jim.

Thanks, Al. I want to emphasize that Al is correct; it's going to be challenging to predict what will happen with our current deposits. Many of our commercial clients are opting to use their deposits rather than incur debt. We're actively expanding our team and recruiting experts from different sectors, including repositioning one of our commercial executives to enhance our professional services. We plan to concentrate more on our commercial deposit-focused bankers and our wholesale deposit group. Additionally, we acquired the HOA group in Arizona last year and are exploring ways to leverage that to increase our deposits. We're also enhancing our private banking division, which generates a substantial amount of deposits. It's a complex question to answer, but I believe we are taking the right steps to strengthen our deposit base.

And Nate, just to clarify one last thing here in terms of our NII, if you think about the cadence here, hopefully, it troughed somewhere midyear, but we do expect our NII to start growing again in the back half of the year, especially in the fourth quarter. And I would say the same thing about our margin as well.

And in the back half of this year, does that contemplate just a bit on pause? Do you actually see some growth lift potential as the Fed tests rates just given the indexed deposits repricing lower? Maybe quicker than loans are pricing lower?

Yes. Yes. Definitely.

Okay. Helpful. And then maybe just turning to the income outside of mortgage. I would love to get your guys' updated thoughts on just kind of expectations for 2023 in terms of overall growth for wealth management and RBMS revenue growth, assuming equity markets kind of stabilize and we don't see much more valuation pressures from here with some of the initiatives that you guys are taking in terms of driving more durable and less market-sensitive businesses. Are you guys expecting growth in that segment this year, again, assuming more stable equity markets this year?

I'll take that one, Nathan. Yes. The simple answer is yes. If everything stabilizes going forward with the additional focus that we've done with line of business in that group, along with our current product set and our long-standing initiatives that we have put in place with the wealth group, we plan for additional growth. We did see record production in both our wealth and retirement business in 2022, and we expect those tailwinds from all the strong efforts from the teams in those segments to continue forward into 2023 as well.

Okay. Great. And then maybe one last one for Katie. I would be curious to kind of get your updated thoughts on the acquisition landscape going forward. I mean your lessons to bank deals to some extent and maybe there's more of a focus on impairment platform augmentation, or just kind of any thoughts on what you're seeing in the landscape in those arenas.

Sure. Yes. So retirement benefits, fee income acquisition is always a high priority for us, consistently building the pipeline, networking, building relationships across those landscapes. On the banking side, we're obviously having great success in lifting out talent. And so that's where we're focused. But working on building partnerships and relationships across that network also.

Sure. I apologize, but may I ask one more question regarding the reserve outlook going forward? I appreciate the guidance about the CECL impact in the first quarter, but aside from that, can we expect provisions to be quite minimal, considering you still maintain a strong reserve level relative to loans and have excellent coverage on non-performing loans as well? I would appreciate any insights on the reserves beyond the first quarter impact.

Sure, Nate. This is Karen. Yes, I think that characterization is accurate. Of course, with the switch to CECL, what's happening in the macro environment matters now that we're somewhat forecast-dependent. But certainly, we don't see anything early in the year that would cause me to think we're going to have volatility outside of those macroeconomic factors.

Okay. Great. And is there anything of note that there will be an increase in criticized loans in the quarter?

Yes. That increase was the result of a downgrade of one commercial relationship. That client is experiencing some stress, which we believe to be temporary, and we are working with them as they improve their results in 2023.

Our next question comes from Eric Grubelich of Private Investor.

I have a few things to clarify. You described 2023 as possibly a write-off, suggesting that not much positive will happen this year. Regarding the margin, are you indicating that the margin, which is currently at 3.09%, will decrease significantly? Will it drop below 3%? Also, I understood you to say that the net interest income in dollars will be lower in 2023 compared to 2022. Is that correct?

Yes. On our earnings call, we mentioned that based on a static balance sheet, there is a $12 million headwind. If you consider that on a static balance sheet basis, you can likely determine the impact on the margin.

Okay. Is that $12 million headwind related to increased deposit pricing? What does the $12 million refer to?

The $12 million is based on our ALM modeling disclosed on Page 62 of our 10-Q. In a scenario with a 300 to 400 basis point shift, it decreases our net interest income, primarily due to the repricing of our liabilities, mainly our money market and interest-bearing deposits. Additionally, our increased borrowings to support loan growth in the Arizona market have also contributed to this.

You seem to have a preference for several banks. The core deposits didn’t meet expectations given the significant rate increase offered to customers in the last quarter. When I review your money market, which makes up a large portion of your deposits, will that number reach 2% next quarter? I'm trying to understand the practical implications of the $12 million mentioned in the 10-Q. Can you discuss what's occurring in your market? Who has been influencing the deposit situation that has created challenges for you? Please also share your expectations for the future deposit costs.

Sure, I'll begin. Thank you for the question. Our core deposit franchise is exceptionally strong, characterized by long-lasting relationships and significant balances, which gives us pricing power. We are committed to retaining our core deposit clients, having focused on building this franchise for decades. Regarding the money markets, a portion of those deposits relates to our synergistic deposits, which are indexed and reprice quarterly. In terms of the total cost of funds for those deposits, they incur servicing costs but have no acquisition costs. So, while the rate may be high, the overall cost of those deposits remains relatively low. Al, would you like to add anything?

Yes. I want to point out that when we discuss the sources of pressure, it's important to note that within our community bank network, around 30 banks have loan-to-deposit ratios exceeding 100 percent. This indicates that these banks are seeking liquidity, which puts pressure on our deposit base since our loan-to-deposit ratio is still well below 100 percent. This competition is contributing to the pressure we are experiencing.

Okay. So let me ask a question, if I went on your website or walked into a branch right now, what would I be offered on a money market deposit account rate wise?

Right now, you've been given the market rate right now, and that would be roughly around 85 basis points.

Okay. But you're showing $139 in the average for the quarter? So how can that be...

Yes. But those are synergistic deposits that do not come out at the branch level. So they're coming from our retirement services side.

Okay. Okay. So that's where you're having to pay up more for the deposits. Yes. Do you expect the NIB, the noninterest-bearing to you expect to continue to lose volume there? You made that comment about some of your commercial customers are drawing down their own liquidity as opposed to taking loans. Do you see more of a dent on that coming?

I think that generally is a trend in the fourth quarter for all commercial clients as they're paying dividends or getting money out of the entities. I think it's safe to say line utilization is a big question mark on what will happen in the rest of this year. It has crept up towards the end of last year. But we have seen a lot of customers instead of taking a term note for a piece of equipment just using cash. So I think it could come down a little bit, but I don't think that's enough at this point to be impactful.

Okay. Let me just switch gears for a second. The mortgage banking business, obviously, unless something drastic happens in rates, it's not going to come back online anytime soon. The way you're operating that business now given where the revenue volume is it fair to say it is breakeven? Or are you losing money on it at all?

We are making money in that business.

You are. Okay. That's good. And then last thing on the expense side, you talk about cuts and things like that. But if this revenue environment stays subdued for you or there's maybe more of a surprise with the margin, the model is what the model is, but the rubber hits the road with what your competitors do, right? You can't control that. To what extent do you see your comp line coming down at the operating level and at the executive management level this year?

From an expense standpoint, we're doing the right things. We just completed a restructure. We eliminated several positions in the company. But we're thoughtful, right? This company has been built for the long term, and we are going to be opportunistic in adding talent where we can while thoughtfully repositioning the support to ensure that talent has even more capacity in the company.

How far along are you in the plan to streamline further? Are you just starting, or have you mostly completed it? I understand there was significant turnover with Metro Phoenix that you needed to manage to turn positive. But I assume you are referring more to the core bank outside of the issues related to the Metro Phoenix acquisition. Is this a new phase for you, or do you feel like you are halfway through?

We have taken a new step recently. The first step involved restructuring the team to establish a clear framework for our go-to-market strategy. As we onboard experienced producers in their respective verticals, we have realigned and dedicated support resources for these team members. This reorganization aims to enhance our speed to market, improve the client experience, and increase the overall capacity of our team.

Okay. And then just one last thing. The stock had a premium valuation on it for quite some time. That premium has come off quite a bit. And again, this is sort of like a financial metric, but is there anything you would consider on the stock buyback side if the stock stays weaker or not repurchasing shares?

We do have a current authorization out there, but we've been also watching making sure our capital levels are adequate because we also are aware that the investor base and stakeholders out there are very closely watching TCE.

Yes, I would just add that all the steps we are taking are fundamentally what build and create value. Our balance sheet is positioned well, and we are taking the right actions, and I expect we will return to that valuation.

Our next question is a follow-up from Nathan Race with Piper Sandler.

Just to make a last question around valuation. I mean the stock is down plus the 1.5 and book with where it's trading today. How are you guys thinking about buyback within the context of what I'll describe in terms of how your capital ratios are relative to both peers and so forth today?

Right. So, Nate. We do have an authorization out there. We are watching closely because we want to make sure that we manage that authorization to make sure that we don't also put us in a TCE position that people will be concerned about us. So we're carefully watching. But our stock is very cheap right now, and I'd love to be active in the market. But also, too, with the acquisitions we've done on the retirement side, we also have to make sure that our TCE doesn't cause concern as well.

Right. Understood. And then can you just remind us in terms of how much of your deposit base is indexed to short-term rates? I don't think that's something we've talked a lot about in the past.

Nate, let me get back to you offline on that one. I just want to make sure I got the exact numbers for you on that one.

Okay. Great. And then just one housekeeping question on the tax rate going forward.

Yes. Our tax rate has been on the lower side, we're expecting somewhere in the low 20s still. I think that's pretty fair to go forward.

Our next question comes from Ben Gerlinger with Hovde Group.

Quite a bit of fire in the roomstone in the tenor today. I get the modeling question, and I try to bring a little bit of levity to hear, but I'm just kind of thinking just I don't know, 10,000 or 100,000 foot view with the recent hires, which all have pretty solid pedigrees. And if you look at what you guys have done on the core bank, it seems like growth is solid or should be solid. You should not really have a credit risk. If you think philosophically, you could ever see spread revenue above fee income in terms of revenue generation. I think longer term, you guys have a charter clearly, and you're focusing on being a bank because of the lead for all your kind of flywheel type businesses across the income. Can I get the fee income kind of a market that gives you the results, i.e., mortgage and retirement to some degree. But when you just think bigger picture, a lot of the marquee hires have been in the bank, and that's clearly the focus. But is that just because that's the lowest-hanging fruit? Or is that the easiest change? I'm just trying to figure out for the next two or three steps here to turn the ship around.

Yes, I'll address that. Strategically, as we've previously mentioned, our wealth management, retirement, and mortgage divisions have historically performed well. Within our Banking division, we recognize the importance of scale and moving upmarket. We are in strong markets, and the opportunities we offer for talented producers resonate well. They see a chance to be part of a significant growth story and to enhance their client relationships. We've had great success in developing expertise within our banking franchise and plan to continue this trajectory. I expect that our revenue mix will start leaning more towards banking, but we will always maintain our commitment to being a diversified company with substantial fee income.

Okay. Fair enough. And then being that your fee income strategies are more diversified than your branch footprint, I guess, you could say about like the Denver area. When you think on production? Do you think there's LPO opportunities that don't necessarily carry the overall cost of a branch network extension?

Yes. So definitely a strategy we're looking into and could see us deploying that strategy in the future.

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

Before we go to closing remarks, I just want to provide one answer that Nate adds on the call. About 15% of our total deposit base is directly indexed to short-term money market rates. So with that, I'd like to turn it over now to Katie.

All right. Thank you, Al. Thank you for joining the call today. Thank you for the questions. 2023 is a pivotal year for Alerus. The work we are doing this year will set the stage for Alerus to return to high-performing return ratios in 2024 and beyond. Our enviable diversified business model with industry-leading recurring fee income, strong core deposit franchise with access to synergistic deposits, robust reserves, and regulatory capital, and historically strong asset quality position our company well for attracting and retaining talent and growing our client base. We are committed to constant improvement throughout our company and expect to see continuous improvement in our efficiency ratio and return metrics. As the balance sheet headwinds subside in 2024 and beyond, we believe the work we are doing on the fundamentals and the power health of professionals of experienced bankers and producers we are bringing into the company will be catalysts for the long-term value we are creating for our shareholders. I want to thank our Alerus team members for all they do, and thank all of our shareholders for your investment in our company. Thank you all for joining our call today.

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