Good morning or good afternoon, everyone. 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.
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 theF orward-Looking statements are listed in the earnings release and the company's SEC filings. I'd now like to turn the conference over to Alerus Financial Corporation President and Chief Executive Officer, 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 the better part of the year building the executive leadership team, including our new Chief Financial Officer, Al Villalon, who joins 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's also here with me today in the Twin Cities. In July, we promoted from within 2 Long-T enured 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 historical 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 3 high-performing commercial bankers to the Alerus team. 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 to our company. The power of the Alerus diversified business model, our collaborative One Alerus culture, and our hardworking 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 Alerus 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 a 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 benefits product offerings.
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 base have grown while expenses and the number of employees continue to trend downward.
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 Right-Sizing our infrastructure, 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 deposit and 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 1/4.
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. For the fourth 1/4 of 2022, reported average loans increased 4.3% on a linked 1/4 basis. The increase in core average loans was driven by a 6.4% growth in commercial real estate and commercial construction.
Average deposits declined 1.1% on a linked 1/4 basis as clients continued to put liquidity to work. Due to decline in deposits, we had to increase our Short-Term borrowings over $124 million, a 49% increase to fund continued loan growth and especially with the addition of Metro Phoenix Bank as we continue to expand in Arizona. I will discuss later the impact of these increased borrowings. Turning to page 15. Credit continues to remain very strong.
We had net recoveries of 3 basis points in the fourth 1/4. Our non-performing assets percentage was 10 basis points compared to 17 basis points in the prior 1/4. Our allowance is 1.27% of period end loans, which includes our recent acquisition of Metro Phoenix Bank. We will be transitioning to CECL in 2023. We are currently expecting a $5 million-$7 million day one allowance increase.
This will impact our CET1 capital ratio by 20-25 basis points based on risk-weighted asset levels for the fourth 1/4. Turning to page 16, our core funding mix remains very strong. We saw an increase in our cost of funds due to rising interest rates. Given the further rise in interest rates and a highly competitive deposit environment, we have responded by increasing our deposit rates.
At the end of the third 1/4, our deposit beta was only 3.65%, which is one of the lowest in the industry as we lag deposit pricing through the first 9 months of the year. However, competitive pressures escalated as many banks in our footprint saw their loan to deposit ratio exceed 100%. Due to escalated competition for deposits, we raised pricing several times, which increased our overall deposit beta tenfold to 36%, which is in line with our historical experience.
Despite the competitive pressures and deposits declining slightly, our funding base remains very strong and sticky as our loan to deposit ratio is at 83.8% with no broker deposits. On page 17, our capital base remains very strong as our Common Equity Tier 1 ratio is at 13.4%.
As a frame of reference, the medium Common Equity Tier 1 for the largest financial institutions subjected to the Dodd-Frank stress test was around 8%. On this Slide, you'll also notice that we have over $2 billion in potential liquidity. Given increasing concerns of potential economic uncertainty, we are well-positioned from both a capital and liquidity standpoint.
Turning to page 18, are key revenue metrics. On a reported basis, net interest income declined 4.8% on a linked 1/4 basis. The decline was driven primarily by increased funding costs as deposit pricing rose and as borrowings increased to support loan growth in our Arizona market, as previously discussed. Non-interest income declined 5.5% on a linked 1/4 basis, mainly due to a decrease in mortgage. I will go into detail about our fee income segments in later Slides.
Turning to page 19. Net interest margin was 3.09% in the fourth 1/4, a decrease of 12 basis points from the prior 1/4, which is lower than expected, primarily due to a rise in cost of funds. As you'll see in the last page of our earnings release, we saw our cost of funds rise across the board. Interest-bearing deposit costs increased 284% to 50 basis points.
Money market and savings deposit costs increased 248% to 139 basis points, and Short-Term borrowings increased 59% to 382 basis points. Overall, the cost of our interest-bearing liabilities increased 120% to 145 basis points. We expected our liability costs to rise given our sensitivity, but the magnitude and speed were more dramatic given the competitive environment.
Offsetting this increase, purchase accounting accretion from the Metro deal impacted net interest margin positively by 10 basis points. Turning to page 20, over $1 billion or over 37% of our loans are floating, as you can see at the top left of the Slide. You see, almost all of our variable loans are above their stated floors or have no floors.
On the bottom left, you can see a waterfall for our net interest income and net interest margin. You'll see that impact of our liability sensitivity in the waterfall table. The net effect of asset and liability rate changes negatively impacted net interest income by 4.7%. We disclosed in our latest 10-Q, we are liability sensitive in the near term.
In a +300 to 400 basis point scenario, we would expect our net interest income to be down 10%-13% in the upcoming 12 months. Taking it a step further, that means we have approximately a $12 million headwind embedded in our current balance sheet for 2023. However, due to recent balance sheet strategies and remixing, we should see our net income growth resume after 1 year, even when assuming no loan growth.
While net interest income will contract in 2023 under a static balance sheet basis, I expect this coiled spring in net interest income to bounce back in 2024. On page 21, I'll provide some highlights on our retirement business. AUM increased 5.1%, due mainly to higher domestic bond and equity markets in the fourth 1/4.
Revenues were stable on a reported basis, up 4.6% if you exclude one-time restatement fees of $721,000 in the third 1/4. This increase was in line with our expectations. Turning to page 22, you can see highlights for our wealth management business. Revenues increased here by 6%, which was better than our expectations.
AUM increased 4.2% from the prior 1/4, mainly due to improved equity and bond markets again, and also strong production. Turning to page 23, I'll talk about our mortgage business. Mortgage revenues declined $1.6 million from the prior 1/4 due to lower originations as the environment remained challenged.
Mortgage originations decreased approximately 45% from the prior 1/4, while originations of $812 million for 2022 came in in line with our lowered expectations. As a reminder, the first 1/4 and fourth quarters of a calendar year are typically the weakest quarters for originations for us due to seasonality. Turning to page 24 is an overview of our non-interest expense.
During the 1/4, non-interest expense decreased 11.3%, which was better than our original expectations of a mid-single-digit decline. Compensation expense declined mainly due to lower mortgage compensation from a decrease in mortgage originations. Our tech expense declined due to timing of new contracts, we do not expect that benefit to occur again.
Our efficiency ratio improved over 500 basis points to 69.6%, and we achieved a positive operating leverage that was previously guided to. Before I provide guidance, I want to highlight again that due to our near-term liability sensitivity, we have some strong headwinds in 2023 for net interest income. We are making changes to reposition and remix the balance sheet.
That will take some time, but the coiled spring that I referred to earlier will take shape in 2024 and beyond. When interest rates eventually stop rising and actually decline, that coiled spring will only become more powerful given our current positioning. I'll provide some guidance for the first 1/4 and for 2023. For the first 1/4, we expect the following. We expect net interest income to be down high single digits.
Our net interest margin should decline further as we expect a cost of funds increase led by the repricing of our index liabilities. Some of the increased interest expense will be offset by modest loan growth. On the fee income side, all segments will be heavily influenced by the macroeconomic landscape. While new business production has been strong in both wealth and retirement, revenues will be influenced by market conditions.
Mortgage revenues will continue to be challenged as interest rates remain high, and we are in a seasonally weaker 1/4 for originations. On a reported basis, we expect non-interest expenses to be stable relative to the fourth 1/4. We have begun rightsizing our infrastructure while also adding some talent that Katie referred to help drive future revenue growth and deposit growth. We expect credit to remain benign in the first 1/4.
Now I will comment on some metrics for the full year 2023. As discussed previously, net interest income will be challenged due to our liability sensitivity, where most of the challenge will come in the first 1/2 of the year. To offset some of the 10%-13% decline or approximately $12 million pre-tax headwind embedded in our current balance sheet, we expect some modest loan growth and deposit growth.
We continue to expect the mortgage business to be challenged as the Mortgage Bankers Association purchase index is forecast to be down 8%-9% in 2023. Excluding market impact, we do expect retirement fee income on a reported basis to be down a little due to exiting of payroll, which had reported revenues of $1.4 million.
As we reposition, remix, right-size, and add talent, we are focused on controlling expenses in 2023. 2023 will be a year where that spring coils back, we remain confident that we will, with all the strategic initiatives being put into place during the year, that we will spring forward noticeably in 2024 and beyond. As that coiled spring jumps forward after the challenges have been absorbed in 2023, we will return to our strategic goals of achieving EPS growth of 10% or more and a 12% of an, and a ROE of 12% or more.
In 2024 and beyond, we expect continuous improvement in our efficiency ratio as we are laser focused on investing in talent and infrastructure to make us more efficient in the way we operate while continuing to offer a high level of service for our clients. I will now open it up for Q&A.
We will now begin the question and answer session. To ask a question, you may press Star, then 1 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 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Jeff Rulis with D.A. Davidson. Please go ahead, Jeff.
Thanks. Good morning.
Yeah.
Katie, you alluded to, you know, the number of hires that you've made in the last year have been significant. Trying to get a sense for if growth slows in 2023 and as roles have been filled, is the hiring pace slow down? I guess as that, the second question to that is how that translates to the expense growth in 2023. Maybe a question for Al on the second one. Thanks.
Sure. Thanks, Jeff. In regards to the talent adds, we will continue to add professionals with expertise in our markets. We will balance that level of investment as we work through and reposition talents throughout the company in regards to the support side. You know, from a Al can give guidance in regards to the expenses, but that's how we look at the talent additions. In regards to growth, I will hand that off to...
Thanks, Katie. This is Jim Collins. I will say that, you know, 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 gonna be a little picky, right? We're gonna 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. The intent is to harvest talent during this time when we can.
Hey, Jeff, it's Al. On the Non-Interest expense side, you know, we are, as I alluded to in our call, laser focused on continuous improvement on our infrastructure. We are looking on trying to achieve some expense saves this year, and we're looking to have that reported non-interest expense to be down slightly on a Year-Over-Year basis. A lot of that will be determined on the timing of those expense saves. As we also too are trying to add talent too, that's going to be also too as well.
Yeah. I know that you kind of alluded to some Q4 maybe incrementally lower, but do we look at kind of full year close to $159? You're down slightly. Is that a good number to think about for the full year, something inside of that number, absent maybe getting, you know, opportunistic hires in there?
Yeah. When I look at the, like the $158.8-ish, we're looking for that to be down year-over-year-
Okay
from that level. Correct.
Okay. Okay. Then Al, while I got you, the margin, just thinking about where that may trough, sounds like further pressure in Q1, and you talked about the, you know, the coiled spring thereafter, trying to get a read on where you think that bellies out.
That's a good question there, Jeff. You know, I said it's going to be in the first 1/2. I'd say a good brunt of it will be felt in the first 1/4, a little bit more in the second 1/4, and then we're hoping to rebound from there. Again, a lot of the timing is gonna come from the interest rate environment. You know, you know, I feel comfortable saying that, you know, in the first 1/2 of the year and maybe the first 1/4 will feel the brunt of it and then a little bit less on the second 1/4 and then probably starting to rebound in the second 1/2 of the year. Again, timing will be, you know, determined in the midpoint of the year based on what the curve does.
Appreciate it. It was modest, but wanted to look at the non-accrual drop. Anything of specific there? Was that just a miscellaneous or was there one large loan that came back on accrual?
We had a couple payoffs, Jeff. This is Karin.
Okay. Just to cancel those. I appreciate it. Thanks.
Thanks, Jeff.
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 NI outlook for this year. Al, I appreciate your comments around visit decline in the first 1/4. I guess just kind of thinking further out, if we just get, you know, 2 more Fed rate hikes in the first 1/2 of this year, do you see kind of flattish NI growth after a presumably trough in the second 1/4? How are you guys gonna think about just NI growth prospects in the back 1/2 of the year? It's gonna be kind of loan growth picks up after being somewhat seasonally soft in the first 1/4.
Yeah. Jeff Rulis, sorry, Nate, this is the timing of the, you know, we kind of gave the guidance already on the previous question in terms of our margin. I'd say our NI is gonna follow somewhat a similar cadence too. A lot of that though too will be influenced by the talent adds we've had and also the loan growth we're doing from our, you know, our current team.
You know, I would say right now, you know, a good portion of that sensitivity, liability sensitivity will be felt in the first 1/2 of the year, which will impact that NII, and then kind of gradually dissipate as we get through the year.
You know, as we get through the first 6 months, you know, I think you'll see those storm clouds on that liability sensitivity kind of starting to dissipate and then start turning to you know, more bluebird skies, I would say, for us in the back 1/2 of the year.
Okay, great. Then just within that context, I'm curious how you guys just kind of think about the overall balance sheet trajectory from here. you know, with some of the deposit runoff that we saw, over the course of last year, do you think that's largely run its course at this point and we can participate in a more kind of stable, average earning asset base relative to the level in 4Q?
Nate, we're gonna have to see how the year goes because right now the deposit environment is very competitive. I mean, we've added talent right now, and where we're very positive about right now and very excited about is down in the treasury management side. We're bringing, you know, very experienced capabilities on our footprint.
Maybe I'll switch it here to Jim in a second. As we, you know, as we build out that treasury management and also our HOA capabilities, you know, we think we can take market share out there because, you know, they're bringing in a level of experience that is very, you know, high for us and I'll switch it over to Jim here.
Well, thanks, Al. I'd make the comment that Al's right. The deposits, it's gonna be hard to see what happens to our current deposits. We have a lot of commercial customers that are just gonna use their deposits instead of taking on debt. We are building out and continue to build out our team and bringing in experts in other verticals, such as repositioning one of our commercial executives into building out professional services, right?
We'll have more focus on commercial deposit-focused bankers/wholesale, deposit group. We have the HOA group that we acquired in Arizona, middle of last year and looking at ways to leverage that to garnish more deposits. Of course, building out and enhancing our private banking group, which harvests a lot of deposits.
It's a hard question to answer, but I think we're doing all the right things in order to build up our deposit base.
Nate, just to kind of clarify one last thing here in terms of, you know, our NII. You know, if you think about the cadence here, you know, hopefully, you know, it troughs somewhere mid-year, but we do expect our NII to start growing again in the back 1/2 of the year, especially in fourth 1/4.
Mm-hmm.
I'd say the same thing about our margin as well.
In the back 1/2 of this year, does that contemplate just the Fed on pause? Do you actually see some NII growth lift potential for Fed cuts rates just given the index deposits repricing lower maybe quicker than loans?
Yes.
are repricing lower? Okay.
Yes.
Okay, great.
Definitely.
Okay. Helpful. Then maybe just turning to fee income outside of mortgage. You know, we'd love to get your guys' updated thoughts and just kind of expectations for 2023 in terms of just overall kind of wealth management, R&BS growth, assuming, you know, equity markets kind of stabilize and we don't see much more valuation pressures from here.
You know, with some of the initiatives that you guys are undertaking in terms of driving more durable, kind of less market sensitivity within those business. Are you guys expecting some growth in those segments 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.
I'm just gonna also piggyback off of that too. You know, we did see record production in both our wealth and retirement business in 2022. We expect, you know, that, you know, those tailwinds from, you know, all the strong efforts from the teams in those segments to continue forward into 2023 as well.
Okay, great. Maybe one last one for Katie. Would be curious to kind of get your updated thoughts on the acquisition landscape going forward. I'm asking if you're less interested with whole bank deals to some degree because at this point, and maybe there's more of a focus on retirement, you know, platform augmentations this year. Just kind of any thoughts on what you're seeing in the acquisition landscape in those 2 arenas.
Sure. Yeah. Retirement benefits, fee income acquisition's always a high priority for us. Consistently building the pipelines, ne2rking, building relationships, across those landscapes. On the banking side, we're obviously having great success in lifting out talent. That's where we're focused. Working on building partnerships and relationships, across that ne2rk also.
Okay, great. I'm sorry, if I could just ask one more just on kind of reserve outlook from here. I appreciate the guide in terms of the CECL impact in the first 1/4. Perhaps asking that, is it fair to expect, you know, provisioning to be pretty negligible just given your still fairly robust reserve level as a percentage of loans and obviously a great coverage on NPL as well? Just any kind of thoughts on reserves, apart from just the CECL impact in the first 1/4 from here?
Sure, Nate. This is Karin. Yeah, 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. Certainly we don't see anything early in the year that would cause me to think we're gonna have volatility outside of those macroeconomic factors.
Okay, great. Is there anything of note that there would be increase in criticized loans in the 1/4, Karin?
Yeah. You know, 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.
Great. I appreciate all the color and you guys taking the questions.
Thanks, Nate.
Thanks, Nate.
Before we take our next question, as a reminder, if you have a question, please press star then one on your telephone keypads now. Our next question comes from Eric Grubelich, who is a private investor. Eric, please go ahead.
Thank you. I have a few things for you. First thing is I want a little bit of clarification. You know, you're kind of describing 2023 as maybe a bit of a write-off. You know, nothing great's gonna happen. It's, it's all a year out from now. With the margin, were you saying that So let's just focus on where you are at the end of the 1/4 at 309, okay? Is your margin going to trend much lower from here? Is it gonna break 3%? Are your dollars of NII... I thought you said the dollars of NII are gonna be lower in 2023 than 2022. Did I understand that correctly?
Yeah. What we gave on the call, we said that, you know, looking at a static balance sheet right now, embedded in that is a $12 million headwind. If you take that into on a static balance sheet basis, you could probably calculate out the pressure on the margin there.
Okay. That $12 million headwind is increased deposit pricing. What's the $12 million?
The $12 million is based on our, if you look at our ALM modeling that's disclosed on page 62 of our 10-Q, you'll see that, you know, up 300-400 basis point scenario, it does in-decrease our NII mainly due to repricing of our liabilities, which is gonna be mainly our money markets and interest-bearing deposits. Also too, what's impacting that now because of our increased borrowings to support our increased loan growth and our Arizona market, we have also increased borrowings too.
You obviously like a number of banks, the core deposits were not exactly as maybe core deposit as everybody thought, given the, you know, big increase in the rate that you provided customers at least in the last 1/4. You know, when I'm looking at your, you know, your money market, primarily that's the big chunk of it at the end of the day, is there much more? I mean, is that number going to be hitting 2% next 1/4? I'm just trying to understand. I understand the $12 million you're pointing to the 10-Q. That's fine. You know, there's a practical side of what really happens. Maybe you can talk a little bit about what is in your market.
You know, who's been jamming the deposit side that's caused this kind of a headache, you know, for you? Maybe you could talk a little bit about that and where you expect those deposit costs to go.
Sure. I'll start. Thank you for the question. In regards to our core deposit franchise, exceptionally strong. Now, they are long tenured relationships, and they are also significant balances. They absolutely have pricing, some pricing power. We are not going to lose core deposit clients. We've been very focused on building our core deposit franchise for decades.
In regards to the money markets, certainly a portion of those relates to our synergistic deposits. They are indexed. They do reprice quarterly. As in regards to the total cost of funds for those, they have no servicing costs, of course, and they have no acquisition costs. Overall, although the rate is high, the total all-in cost of those deposits is fairly low. Al, do you wanna?
Yeah. I'd just like to say, when you ask about where is it coming from, the pressure, I'd like to just highlight that when you look at community banks within our footprint, we have approximately 30 banks that have loan to deposit ratios in excess of 100+%. That's where the pricing pressure is coming from. As those banks need liquidity, you know, and our deposit ratio, loan to deposit ratio remains well below 100%, you know, they're coming after our deposit base as well. That's where the pressure's been coming from.
Okay. 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'd be given the market rate right now, and that'd be roughly around 85 basis points.
Okay. You're showing 139 in the average for the 1/4.
Yeah. A portion of those-
How can that be?
is synergistic.
Yeah. Those are synergistic deposits that do not come in at the branch level, so they're coming from our retirement services side.
Okay. That's where you're having to pay up more for the deposits.
Sold at index.
Okay. Do you expect the NIB, you know, the non-interest bearing to, do you expect to continue to lose volume there? I know you made that comment about some of your commercial customers are drawing down, you know, 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 1/4 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 creeped up towards the end of last year. We have seen a lot of customers, instead of taking a term note for a piece of equipment, just using cash. I think it could come down a little bit, but I don't think that's enough at this point that's gonna 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 gonna 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 break even, or are you losing money on it all in?
We are making money in that business, Eric.
You are? Okay. That's good.
Yes.
Last thing. On the expense side, you talk about cuts and things like that. If this revenue environment stays subdued for you or there's maybe more of a surprise with the margin, you know the model is what the model is, but the rubber hits the road with what your competitors do, right? You can't control that. You know, to what extent do you see your comp line coming down at the, you know, the operating level and at the executive management level this year?
You know, from an expense standpoint, we're doing the right things. We just completed a restructure. We eliminated several positions in the company and we're thoughtful, right? This company is run for the long term. We are going to be opportunistic in adding talent where we can, while thoughtfully repositioning the support to make sure that talent has even more capacity in the company.
Katie, how much, or I guess, how far are you through that sort of plan to streamline more? Maybe it's, I that's my own word, not yours.
In 2023. Are you right at the beginning of doing it? Are you mostly through it? I realize with Metro Phoenix, you know, there was a lot of churn there and things you had to get through, you know, to the positive. You know, I assume you're talking more about the core, the core bank, you know, outside of what happened with Metro Phoenix, the acquisition. Is this sort of a new step or, you know, are you 1/2way through it, you think?
You know, a new step. A first step was here just a couple of weeks ago. It really was restructuring the team to formalize the structure around our go-to-market strategy.
Right.
Experienced producers in their verticals, we, you know, we realign the support side, and dedicate support side to those team members, so that our speed to market can improve, as well as the client experience and again, just the overall capacity, of those team members.
Okay. Just one last thing. You know, this stock had a premium valuation on it for quite some time. That premium's come off quite a bit. And I, 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 weak here or not? You know, repurchase shares.
We do have a current authorization out there, but we've been very also watching, making sure our capital levels are adequate because we, you know, we also are aware that the investor base and stakeholders out there are very closely watching TCE.
Yeah. I would just add.
Right. That's true.
I mean, all the steps we're taking are what fundamentally builds value and creates value. Our balance sheet is in the position it's in, but we're doing the right things and taking the right steps. I expect we'll return to that valuation.
Okay. Okay, thanks very much.
Thank you, Eric.
Our next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead, Nathan.
You bet.
Yeah, thanks for taking the follow-up. Just going back to that last question, around valuation. I mean, the stock is, you know, down close to one 1/2 of tangible book, with where it's trading today. How are you guys thinking about buyback, you know, within the context of what Al described in terms of how your capital ratios are well above peers, and so forth today?
Right. Nate, you know, we do have an authorization out there. We are watching closely because we wanna make sure that we manage, you know, that authorization to make sure that, you know, we don't also put us in a TCE position that people will be concerned about us. We're carefully watching. You know, our stock is very cheap right now, and I'd love to be active in the market. Also too, you know, with the acquisitions we've done on the retirement side, you know, we also have to make sure that our TCE, you know, doesn't cause concern as well.
Right. Understood. Can you just remind us in terms of how much of your deposit base is affected 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. Just one housekeeping question on the tax rates going forward?
Yes. I mean, our tax rate has been on the, you know, the lower side. We're expecting somewhere in the low 20s still. I think that's, you know, pretty fair to go forward.
Okay, great. Thank you for taking the follow-ups.
Okay. Thanks, Nate.
Thanks, Nate.
Our next question comes from Ben Gerlinger with Hovde Group. Please go ahead, Ben.
Hey, Ben.
Hey, guys. quite a bit of fire and brimstone in the tenor today. I get the modeling question, and I try to bring a little bit of levity to here, but I'm just kind of thinking this.
Thank you.
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. Do 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.
Yep.
being a bank because that's a lead for all of your kind of flywheel type businesses across fee income. I get that fee income's kind of a market that gives you the results, i.e. mortgage and retirement to some degree. When you just think bigger picture, a lot of the marquee hires have been in the bank, and that's clearly the focus. 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 2 or 3 steps here in turning the ship around.
Yeah, sure. I'll take that. Strategically, as we've talked about, our wealth management, our retirement, our mortgage division has historically had strong performance. Within our banking division, we know that scale is important and moving up market is important. We're in great markets. What we bring in terms of an opportunity for talented producers really resonates.
They see an opportunity to be part of a very special growth story and do more with their client base. We have had great success in building the expertise within the banking franchise so far. We intend to keep going. I do anticipate that you will see our mix of revenue start to trend towards the banking and side.
we will always be focused on have being a diversified company with high levels of fee income.
Okay. Fair enough. Then being that your fee income strategies are more diversified than your branch footprint, I guess you could say, by you, like, kind of the Denver area. When you think loan production, do you think there's LPO opportunities that don't necessarily carry the overall cost of a branch ne2rk extension?
Yes. Definitely a strategy we're looking into and could see us deploying that strategy in the future.
Okay. Sounds good. I appreciate the time.
Thanks, Ben.
Thanks, Ben.
Again, if you have a question, please press star then one now. This concludes our question and answer session. I'd like to turn the conference back over to Katie Lorenson for any closing remarks.
Before we go to closing remarks, I just wanna provide one answer that Nate asked on the call. About 15% of our total deposit base is directly indexed to Short-Term money market rates. 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 powerhouse of professionals and experienced bankers and producers we are bringing into the company will be catalyst 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 you 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.