Alerus Financial Corporation (ALRS) Q2 2023 Earnings Call Transcript

Alerus Financial Corporation (NASDAQ:ALRS) Q2 2023 Earnings Conference Call July 29, 2023 12:00 PM ET

Company Participants

Katie Lorenson - President, Chief Executive Officer

Alan Villalon - Chief Financial Officer

Karin Taylor - Chief Risk & Operating Officer

Jim Collins - Chief Baking and Revenue Officer

Conference Call Participants

Ben Gerlinger - Hovde

Jeff Rulis - D.A. Davidson

Nathan Race - Piper Sandler

Eric Spector - Raymond James

Damon DelMonte - KBW

Operator

Hello! And welcome to the Alerus Financial Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. 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.

Katie Lorenson

Good morning, and thank you Bailey. Thank you to our research analysts for joining our call this morning, as well as our investors, employers and Directors for taking the time to listen in.

We appreciate your interest and investment in Alerus. This morning I will provide some commentary on Alerus foundational strength in addition to the execution of our strategic evolution to a top-performing commercial wealth bank and a national retirement provider.

Today, I am joined by Alerus’s CFO, Alan Villalon, who will discuss our financial performance and results for the quarter. In addition, Karin Taylor, our Chief Risk and Operating Officer; and Jim Collins, our Chief Baking and Revenue Officer, will join us to answer any questions you may have about the quarter.

Alerus is well positioned to emerge from the current headwind as a clear winner in value creation and returns for our shareholders. We are building off the unique strength of the company's diversified business model, while optimizing our infrastructure to return the company to delivering strong profitability, while continuing to grow a tangible book value.

Well, notably in our path to transformation is our continued and significant success in adding well-respected and widely sought-after bankers and professionals to our franchise. This momentum in attracting and retaining talent continues to build in the second quarter, as we added more experience in market and specialty commercial bankers. These team members join the dozens of professionals we've hired this year and our tendered team of SBA, CRA, and business-baking professionals.

In the last six months, we've doubled the size of our Treasury Management Team, and the team has hit the ground running as we've had early success in deposit wins, critical retention of relationships, and they continue to work closely with our mid-market and specialty commercial banking group.

Last week, we listed out a seasoned team of bankers in Minneapolis, who will formally launch our private banking franchise. These team members will leverage our One Alerus business model and provide an integrated experience for the clients with wealth, mortgage advice and products.

Along with the continued momentum and talent acquisition, we are balancing our investments by optimizing our infrastructure with urgency. We remain disciplined in our investments and our focus on talent and expense management. This was evidenced by our 4% linked quarter decline in non-interest expense. Today, we have reduced our total headcount in the company by 10% year-over-year, which includes the whole bank acquisition of Metro Phoenix Bank.

Our fundamental strengths include our fortress balance sheet anchored by strong capital, credit and reserve levels, and a strategic and fundamental focus on diversification. This diversification is across the enterprise and multi-faceted. Alerus's diversification is highlighted by our best-in-class business model with over 50% of revenues coming from fee income.

Over 90% of those revenues are in new ties and recurring in nature and require minimal capital allocation, along with virtually no balance sheet risk. The majority of these revenues are derived from our National Retirement and Benefits business, which was again ranked in the top 30 in the country. These durable revenue streams will continue to support capital build and shareholder returns despite the challenging operating environment faced throughout the banking industry.

Diversification goes well beyond our business model as the portfolio diversification remains a critical strategy. Alerus's loan portfolio is diversified by loan types, geography, industry, asset class, loan size and client.

Throughout the second quarter, we continue to conduct ongoing stress testing in review of our credit portfolio. Given the current environment, it is worth noting our investor CRE as a percentage of capital is at 173% compared to the regulatory threshold of 300%.

Alerus's exposure to office is limited to 3.9% of loans, none of which are secured by properties located in the central business district. Asset quality remains pristine with minimal non-performing loans and a year-to-date net recovery. Reserve levels remains robust, with 1.41% of total loans and $6.2 million of the remaining mark on the acquired Metro Phoenix portfolio.

On the funding side of the balance sheet, our deposit portfolio remains well diversified among market, products and clients. Our uninsured deposits are 23.6% and a core of our deposits are stored synergistically through our retirement and wealth management areas.

We continue to see good retention of deposit dollars driven by our relationship approach. In our commercial client-base 68% of our deposits are integrated with treasury management offering, with several key wins and retentions during the quarter within the consumer wealth bank, because of our holistic service model and constant collaboration between our wealth management and banking teams.

During the second quarter we experienced seasonal outfalls from our public funds account. This activity was as expected, and we anticipate imposing the second half of the year to follow their typical seasonal patterns.

We are pleased to report several large and acquired wins and overall net new accounts to Alerus for $83 million higher in dollars of close accounts. We consistently monitor our deposit portfolio and do not see any usual or unexpected activities. However, generally speaking, clients are continuing to draw down incentive balances versus utilizing their lines of credit.

In our fee income business, we saw a rebound in originations and mortgage and market values in retirement and wealth. Strategically, we have engaged an experienced consultant as we look to prioritize and maximize the opportunities within our retirement business. This engagement is targeted at efficiency and operational enhancements, which will position us to take our large, nationally scaled business to the next level through organic growth and acquisitions.

We believe we have significant embedded value in this new time cash flow business with the passage. And with the passage of SECURE Act 2.0, we believe there is tremendous opportunity to continue to expand our client base and further improve margins and gain market share across the company, over the country.

From a capital standpoint, we continue to build on our strong capital level, but TCE is 7.72% and CET is 13.3%. During the quarter, we were active in share purchases, and we also continued our long history and paying a dividend and in the second quarter increased that dividend by 5.6%.

While there continues to be near-term pressure on margins, we are prudently managing expenses with urgency across the enterprise. We're having significant success executing on our strategic plan, focused on key talent ads and restructuring. And each move we do is purposeful in positioning Alerus to bring expertise and value added knowledge to our clients in a fast, frictionless and highly responsive manner. The differentiated approach in our diversified business model is leading the higher level of the client acquisition and client expansion.

We are continuing to build tailwinds and synergistic expansion in wealth management retirement platforms, and continue to believe the long-term embedded value in these businesses is substantial, as a differentiator in the Community Bank's space. We are focused on client and talent acquisition and delivering top-tier shareholder returns.

With that, I will turn over to Al for our quarter’s financial performance.

Alan Villalon

Thanks, Katie. I’ll start my commentary on Page 14 of our Investor Deck that is posted in the investor relations part of our website. Let's start on our key revenue drivers.

On a reported basis, net interest income declined 6% on a linked quarter basis. The decline was driven primarily by continued increase in funding costs. Net interest income represents now 46.3% of revenues.

Switching to fee income, non-interest income increased 2.1% on a linked quarter basis, as we saw improvement across all of the income businesses. Fee income continues to provide revenue stability despite interest rate challenges. I'll go into detail about each of our fee income segment in the later slides.

Turning to Page 15, net interest income was $22.2 million in the second quarter. Net interest margin was 2.52%, a decrease of 18 basis points from the prior quarter. A 27 basis point increase in our asset yields was offset with a 46 basis point increase in our rate for our liabilities.

Impacting the net interest margin was about 7 basis points from the Metro Phoenix deal. Based on potentially more Fed hikes, which was not in the Fed dot pause [ph] at the beginning of the year, we continue to expect our net interest margin to compress in a third quarter. The magnitude of compression will be determined by whether the Fed hikes by another 25 basis points from here. When the Fed pauses eventually, we expect earning assets yields to continue to improve with mixed shift and loan re-pricing as our cost of funds stabilize.

Let's turn a Page 16 to talk about a loan portfolio. Total loans grew 1.9% from prior quarter, driven by growth in commercial real estate and residential real estate, offset by a decline in construction and consumer loans. For 2023, we continue to expect modest loan growth.

Turning to Page 17, on a period ending based basis, our deposits declined 5.9% from the prior quarter. As we guided to in the last earnings call, we experienced a seasonal outflow by public funds, which was the main cause of the decline in deposits. Despite the seasonal outflow, clients’ retention remain very high and we continue to attract new clients.

For the remainder of the year, we continue to expect deposit balances to rebound from the second quarter, as we expect the seasonal inflow from public funds in the back half of the year, and continued client wins.

Turning to Page 18, you can see a further breakdown in our deposit characteristics. Our synergistic deposits, for (inaudible) source from our wealth and return businesses grew 27% over the prior year, and 7.5% over the prior of quarter. The strong year-over-your growth in synergistic deposits was driven mainly by strong organic client growth within our wealth segment.

Synergistic deposits sourced from our current wealth businesses now account for 26% of our deposit base. Continued growth in our synergistic deposits shows the strength of a unique and differentiated business model. On this slide too, you'll see our uninsured deposit exposure. Our liquidity coverage to uninsured and not collateralized deposits now exceeds 300%.

Turning to Page 19, you'll see details about our investment portfolio. Currently, almost 69% of our securities are available for sale versus 31% in health maturity. Within the held-to-maturity portfolio, approximately 42% are in municipal securities, while the rest are in MBS. We continue to let the investment portfolio run down and remix the balance sheet towards commercial lending relationships, so we'll add higher yielding loans and treasury management relationships.

On Page 20, I'll start talking about our fee income businesses. On this page, I'll provide some highlights on our retirement business, which accounts for approximately 32% of our total revenues. In a quarter, asset under management and administration increase 4.9% due to higher domestic equity markets in the second quarter and continued client wins. Participants within retirement have grown 2.5% year-to-date.

Revenues increased 2.6% on a linked quarter basis, mainly due to higher average assets and organic growth. Our retirement business continues to be a strong source of funding for the bank. Retirement now accounts for over 71% of our synergistic deposits. For the third quarter, excluding any market impact, we expect fee income for our retirement business to be up slightly.

Turning to page 21, you can see highlights of our wealth management business. On a linked quarter basis, revenues increase 4.9%, while our end of quarter asset under management and administration increased 5%. We continue to see strong client acquisition in our geographic markets and from retirement rollovers in our national and established markets as we execute on our One Alerus strategy.

Life retirement will provide the strong source of funding for the bank as it now accounts for over 28% of our synergistic deposits. For excluding any market impact, we also expect fee income here for our wealth business to be up slightly.

Turning to Page 26, I'll talk about our mortgage business. Mortgage revenues increased over $1.2 million or 69% from the prior quarter as originations rebounded from a seasonally low quarter. Mortgage originations increase over 43% from the prior quarter, which was slightly better than the MBA purchase index which saw a 39% increase.

For the third quarter, we expect mortgage originations remain stable versus the MBA purchase index forecast of 1% growth as inventories of homes for sales remain low in the Twin Cities. However, we continue to expect the season decline originations in the fourth quarter.

Page 23 provides an overview of our non-interest expense. During the quarter non-interest expense decreased 4% as we remain committed to improving our profitability. Compensation expense decreased due to reduction in headcount, while professional fees increase due to higher FDIC assessments.

Despite inflationary pressures, we do expect expenses be now down low to mid-single digits for 2023 on a year-over-year basis. We continue to be focused on improving our profitability by reducing expenses and increasing our capacity throughout our organization. We recently may continue to progress on right sizing our expense infrastructure through numerous initiatives. Some of these expenses will be reinvested into efficiency improvement and revenue production initiatives.

Turning to Page 24, credit continues to remain very strong. We had net recovery of 7 basis points in the second quarter. Our non-performing assets percentage with 7 basis points compared to 5 basis points in the prior quarter. Our allowance for credit losses on loans to total loans remains stable at 1.41%. This over reserve currently provides over 1,300% coverage to non-performing loans as you can see on the bottom left.

I'll discuss our capital and liquidity in Page 25. Our capital remains well above regulatory loans, even after share repurchase is done during the quarter. On the bottom right, you'll see the breakdown in the sources of the $2 billion in potential liquidity. Overall, we continue to remain well-positioned from both the liquidity and capital standpoint to weather any economic uncertainty.

To summarize on Page 26, we remain committed to making fundamental improvement and improving the returns for our stakeholders. Despite the challenging headwinds from our rapid rise in interest rates, our fee income businesses continue to provide stability to our revenues and continue to be a strong source of funding. Our capital remains strong and we remain committed to returning capital prudently.

With that, I will now open up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question today comes from the line of Ben Gerlinger from Hovde. Please go ahead, Ben. Your line is now open.

Ben Gerlinger

Hey! Good morning,

Katie Lorenson

Hey Ben.

Ben Gerlinger

In your prepared remarks, you said that non-interest expense should be down about single digits or so percentage. So my back [inaudible] math says that 2Q is probably the slowest, probably goes up a little bit from here.

I was curious, is that more kind of compensation? But you also did talk about investment. I'm just curious if you can give it more granular. Is it technology? How should we think about where the money is going?

Alan Villalon

Yeah, so in the back half of the year, it's going to be some timing there, because it’s just in terms of number one, we have some incentive comp, especially on mortgage business. So that'll be – 3Q will be a little bit higher on that side versus 4Q. And it also is going to be some Q2 when it comes to compensation, when it comes as we go through the year. So there is going to be some timing differences there.

Ben Gerlinger

Got you. Okay, and then when you think about just the margin from here, deposit flows and non-interest bearing deposit were going to play a big factor. If you just kind of assume that the terminal rate is where we're at. I think that's a fairly safe assumption. I know you have another quarter here, but I don't think that we're going to see any material move.

When you just think about the cadence of the re-pricing of both the left and the right hand of the balance sheet, I know it's early and I don't think you're going to have to hold your feet in fire. But do you think it's probably like a six months until you hit the slower and then the re-pricing in-flex to your favor of a margin expansion. I'm just trying to think about the magnitude of which each side is moving.

Alan Villalon

Yes, so the way we're thinking about it here is that, we do have about 15% of our deposits that are indexed. And given the recent rate move yesterday, if there's one more in this quarter, both – any rate moving this quarter will be re-priced in October. That basically hits our money market funds. So that time will happen in 4Q. But with that being said though, we continue to see very attractive spreads in our loans. So, as stuff matures on our back book or you know more maturing book, and then we would price it for higher rates, we are expecting hopefully that we'll see that margin uplift in the later months of this year.

Ben Gerlinger

Got you. And then finally, just kind of a big picture, Katie or Jim, whoever wants to take it. When you think of just the banking environment today, it seems like the Minneapolis market is a bit more competitive than one would guess relative to some of the other Midwest areas. I think part of this is due to the amount of banks, so the number of banks in the area, especially small private ones. I think about just the lending in areas for growth.

Are there any risk adjusted returns that have become more appealing, because some banks have pulled out where there – like are there any pockets of the loan categories that are areas that are a little bit more appealing now that some competitors have stuck away or being priced out.

Jim Collins

Yeah, thanks for the question. I would say it this way. We're focused on some very specific verticals, not only because some banks are retracting on offering credit, but also because they are more – generally we can get a better spread and they come with a lot more deposits.

So some of the verticals were going after, i.e., government non-profit or professional services would be an area where we can get a lot of deposits and loans versus just going after regular mid-market C&I, which is predominantly heavy loans of a smaller amount of deposits.

So from a competition standpoint, all banks are kind of looking at that, but because a number of banks have their balance sheet in a weird positioned and are just not lending as much, we're finding a lot more activity and a lot more success in those specific areas. Does that help with your question?

Ben Gerlinger

Yeah, that's helpful, thank you. I’ll step back in queue.

Operator

Thank you. The next question today comes from the line of Jeff Rulis from D.A. Davidson. Please go ahead Jeff. Your line is now open.

Jeff Rulis

Thanks. Good morning. Checking in on the loan growth conversation. Al, I think you had mentioned kind of for the full year, maybe I don't know, low to mid-single digits. I didn't know if I caught that. But I guess being that we're up 3% or 4% year-to-date, does that suggest kind of back half of the year pretty muted or flattish?

Alan Villalon

Yeah, so the low to mid-single digits was on the expense side. But on the loan growth side, I basically comment on modest. The thing we're seeing right now is that there's – as interest rates have risen here, we're just seeing a bit of a slowing demand for loans at these interest rate levels. So hence, there's been a little bit of slowing in demand from our clients and just appetite for it. So that's why we're still trying to really see the pipeline out there and what we think can be done, so hence why the modest comments.

Jeff Rulis

Okay. And I guess, how are payoffs trending as well? I mean, is that a net sort of benefit to the net if that churn is slower or are you seeing pretty consistent payoff activity as well?

Alan Villalon

Yes, we're seeing just consistent payoff activity. I mean, there's nothing really jumping out at us right now.

Jeff Rulis

Okay, got it. Circling back to capital, you had the buyback going this quarter. You've hiked the dividends and you're regular, well above regulatory minimums on capital. Just again, checking in on sounds like the appetite for the buyback is ongoing. And Katie, if there's any conversation about M&A, whether that be bank or within a product line, anything to touch on there?

Katie Lorenson

Sure. In regards to capital, I would say priorities remain the same. We’re very much focused on maintaining strong capital levels, maintaining strong balance sheets, and then organic growth, which includes the list out and the continuous list out of talent, as well as returning capital to shareholders via the dividend and repurchase where the numbers make sense, where it pencils out.

And on the M&A front, same sentiment as first quarter I would say in regards to continuing to have conversations and continuing to expand the awareness across the country in terms of our history of acquisitions and our reputation for strong execution in acquisition, particularly in the fee income space.

Jeff Rulis

Got it. And one last one if I could, a little creep up in the non-performers. You know, I guess maybe not much to tell there, but any segments or footprint that you're a little more cautious on that you could detail.

Karin Taylor

Sure Jeff, this is Karin. You know, we're not seeing a pattern in terms of any deterioration. I think we're beginning maybe to see just a little bit of normalization. The credits that are experiencing stress seem to be pretty specific and not indicative of any particular pattern. But I do think we're still at historically strong credit metrics, so would expect over time that we'll begin to see some of that normalize.

Jeff Rulis

Okay, thank you.

Alan Villalon

Thanks Jeff.

Operator

Thank you. The next question today comes from the line of Nathan Race from Piper Sandler. Please go ahead. Nathan, your line is now open.

Nathan Race

Yeah. Hi everyone, good morning? Hope everyone's doing well.

Alan Villalon

Hey Nate.

Nathan Race

Katie, going back to your comments earlier on the engagement of consultants to look at the retirement platform, just curious, you know as you look out longer term, does the opportunity or impetus behind this engagement more on kind of revenue growth side of things there are may be some expense synergies that you're looking to perhaps harvest down the road. Would love to just get any color and kind of your expectations with that engagement going forward.

Katie Lorenson

Sure. Absolutely. It's both, on the revenue side as well as on the efficiency and just optimizing our infrastructure within that division. So really, as we look at the opportunity that existed prior to the passage of SECURE Act 2.0, it was already significant in the retirement space in terms of the number of new plans, and the number of new participants.

The passage of SECURE Act 2.0 just takes that to the next level and so our engagement is very much targeted at positioning us to continue to take market share and to continue to be highly successful in growing new plans and participants given the amount of opportunity that's out there. So it's really two-fold and will allow us to take on more new plans faster as well as grow those plans and that opportunity.

Nathan Race

Okay, great. And then it sounds like you've having good sales momentum on the retirement platform lately. Is there any way to kind of parse out how much of the – a way growth in 2Q was driven by new client wins versus just the appreciation in equity markets.

Alan Villalon

Hey Nate, thanks for that question. If you look at our revenues typically on the retirement side about a third of it, the way think about it is market sensitive, and then you're going to attribute the rest of it to be organic.

Nathan Race

Okay, great. Is that the same case on the wealth side of things as well?

Alan Villalon

The wealth is going to be a little bit higher there, but I would say though, wealth has been really doing great for us, because we have seen a lot of organic client wins there. You know, as I did note in my commentary, we did see some synergistic deposit growth that really came from a wealth side. So that was a big growth in the synergistic deposit, because I think majority of that growth came from wealth.

Nathan Race

Got it, that’s great to hear. And the just on funding, it looks like the short term borrowings came up in the quarter. Any thoughts on this, how we should think about the wholesale funding levels going forward and just kind of how you guys kind of loan growth, which is up, your expectations are for more modest growth in 3Q and 4Q.

Alan Villalon

Yes, we're continuing to utilize overnight borrowings to fund loan growth right now. We're – it's just deposit right now. We have that seasonal outflow come out. So we'd love to have more deposits come in the door and we're focused on that.

We are also letting the investment to fully mature and roll that over and remix that into loans. But you know, if we have to continue to use overnight borrowings to fund loan growth, we’ll probably do so, we still got a lot of capacity there.

Nathan Race

Okay, can you remind us how much cash flow have come out the securities book each quarter?

Alan Villalon

So the way I think about it is that you know we have about – our investment portfolio has a duration of about five to six years. So you'd say maybe like 20% of our fold is going off an yearly basis. The quarterly is going to be a little bit lumpy here and there, but I would just look at it in like a yearly basis and then you can just take an average of that for the quarter, so.

Nathan Race

Okay great. And then just go back to some of the earlier comments around kind of deposit growth expectations, I appreciate a lot of the decline in the same quarter was tied to public fund clients. But just kind of overall, any kind of deposit growth expectations and when you may see not-interest levels flatten out?

Alan Villalon

All right, that's bit difficult to predict right now given where – I mean, the risk free rate in a short term is north of five, and there's just everybody's parking money into this high rate accounts right now. So I think there's going to be still more pressure to come on non-interest bearing, because that is being experienced not just by us, but across the whole industry.

So I think we're not going to see that pressure subside in the near term until these least rates get – you know, start coming down significantly. But on deposit side though, we're still expecting our public fund to come back in, back in the back half of this year and hopefully we can – we’ll still see some growth from here. But I think from the second quarter levels we’ll probably see some growth from the least – where we are from second quarter levels.

Nathan Race

Okay, got it. And then, are you guys seeing any easing in kind of deposit pricing pressures across the company footprint these days? We've heard from some other banks that it’s moderating to some degree more recently. Is that the case with you guys?

Alan Villalon

Yeah. We've seen some moderation there. But the one thing we've noticed too in our footprint, we've definitely seen an uptake in the lower banks where the loan to deposit ratio has exceeded over 100% and that's putting more pressure on loan growth for them. So they are trying to meet that by pricing up deposits more. But, I would say though that there's definitely more deposit data in the first quarter than there was in the second quarter. So we're seeing that definitely moderating.

Nathan Race

Got you. And just maybe one last one for Karen. Is there a tail to the recoveries that we've seen, periodically over the last several quarters now or do you think that's kind of largely run its scores?

Karen Bohn

You know, I think the larger recoveries Nate have kind of run their course. We continue to get some monthly payments on some things, but I would expect that level to decrease in coming quarters.

Nathan Race

Okay, great. I appreciate you guys taking all the questions and all the color. Great quarter.

Alan Villalon

Okay. Thanks, Nate.

Operator

Thank you. The next question today comes from the line of Eric Spector from Raymond James. Please go ahead, Eric. Your line is now open.

Eric Spector

Hey, everybody. This is Eric on the line for David Feaster. I appreciate you guys taking the questions. Most of my questions have already been asked and answered. But just curious, with the loan growth in the quarter, and obviously the outflows of public funds, the loan to deposit ratio ticked up quite a bit to almost like 89%. Just curious where you're comfortable with that going forward.

Alan Villalon

Yeah. I mean we definitely want to target a ratio of probably a little bit south of 100%. Ideally, it'd be 90% to 95%. But we know and also understand that there’s a lot of liquidities coming out of the system, that might gravitate a little bit higher from that range.

Eric Spector

Yes, okay. Yes, makes sense, makes sense. And then just can you provide more color just on the mortgage market. You did a little bit in the paper marks, but just kind of how volumes are trending early in the third quarter and how you think about portfolio versus gain on sale, and how margins are trending.

Alan Villalon

Yes. So margins are pretty stable there. I'd say they'll be similar in the third quarter as they do in the second and I'd say volumes too. Our outlook is probably similar in the third quarter. But then again, when that snow comes in Minnesota, we're going to see it downtick in the fourth quarter and the snow sometimes comes early unfortunately in Minnesota.

Eric Spector

Yes, makes sense. And then just how are new yields – loan yields trending in CRE and other segments. Have you been able to push raid and what’s the competition for new loans there?

Jim Collins

I would say that in general they are pushing up a little bit. You know, there's more and more banks are pulling out or slowing down, which is allowing the banks that are currently in the market have a little bit better pricing. So, I think that is probably happened the last month and a half and probably will continue a little bit is more and more banks are still just tightening the screws down on production.

Eric Spector

Great, all right, that's it for me. Thank you and congrats on a good quarter.

Alan Villalon

Thank you.

Operator

Thank you. The next question today comes from the line of Damon DelMonte from KBW. Damon please go ahead. Your line is now open.

Damon DelMonte

Hey, good morning everybody. Hope everybody's doing well today.

Katie Lorenson

Hey Damon.

Damon DelMonte

Hey Al. Just wanted to start off with a question for you, actually. On the margin, I think you noted that there was about 7 basis points of accreditable yield this quarter from the recent transaction. So should we just kind of model a similar level going forward? I thought first quarter was a little bit lower than that.

Alan Villalon

Yes. Yes, so the way I would think about it is that, we've previously guided to about margin accretion around two to four basis points from the Metro Phoenix Bank acquisition. So the difference is quarter, we had about three or four basis points coming in from a loan pay off in the quarter, which is typically sometimes you see in these deals.

Damon DelMonte

Got it, okay so more like two or four basis points a quarter. Okay, that makes sense. And then, you know I kind of – with regards to the direction of the margin here, it seems like it's still going to trend lower. And did you – did you say in your answer to one of your other questions that you think by the end of like the last couple months of this year you could see the monthly margin like stabilizing.

Alan Villalon

Yes, that's what we're – that's what I commented on. Actually I think it's going to rebound. So previously we thought this quarter was going to be the quarter where we saw the rebound, but given the feds – one to two more fed hikes that came down to pipe, quite a little bit of a rain delay right now on that rebound. So we'll see that kind of happen more in the fourth quarter.

Damon DelMonte

Okay. And then can you just remind us kind of how you're going to be positioned if the fed were to cut rates in 2024, given your position, would you see immediate benefit to the margin?

Alan Villalon

Yes, so you know, in our ALN [ph] modeling you'll see that typically when rates go down, 100 basis points, I'd say somewhere in a high single digits we’ll see improvement in NII. So, but that's on an annualized basis. So the big thing there is still maintaining loan discipline pricing on the assets side, but then also addressing our – the positive side and being able to cut rate there. So that's where our LIBOR sensitivity plays into our favor.

Damon DelMonte

Got it, okay. And then just one last question on the provision outlook. You know with the prospect that loan growth would probably slow a bit here in the second half and discontinued just strong underlying credit trends and limited visibility on any NPL formation, you think you're going to be needing to book a reserve, any meaningful reserve in the next couple quarters.

Karin Taylor

Hi Damon. This is Karin. You know, it's really going to depend I think on what happens with the…

Damon DelMonte

Hi Karin.

Karin Taylor

Hi there. I think it’s going to depend really on what happens with the macro environment and the related forecast. And then to your point, loan growth, if we see that moderate here in the second half, you know that certainly would probably be a driver to not have significant provisioning.

Damon DelMonte

Got it. Okay, that's helpful. Thank you very much.

Alan Villalon

Thanks, Damon.

Operator

Thank you. [Operator Instructions]. Our next question today comes – is a follow-up question from Ben Gerlinger from Hovde. Please go ahead. Ben, your line is no open.

Ben Gerlinger

Thanks.

Alan Villalon

Welcome back Ben.

Ben Gerlinger

I figured – yeah, hi. I figured I wasn't going to ask this in kind of a follow up call, but it’ll probably add some shareholder value. So, Karin you took this role about a year and a half ago. I feel like the biggest and main task was enhancing core bank, more specifically the deposit franchise.

I mean, the fee income opportunity you guys have in front of you are pretty phenomenal, especially relative to the bank you had. But the hires you made and the people that you've put in place over the past year and a half seem to have done a good job. But then again, with rates moving up 550 basis points over the course of the past couple of years, are there any key performance indicators that we should be looking at to really assess what you think the new relationships are core, rather than potentially just saying their core and could shop once rates get lowered?

Karen Bohn

Thanks Ben for the question, and I think your analysis is spot on in terms of where we are focused and the reason why. Building our commercial wealth bank is a strong priority if you look historically. From an organic growth standpoint we believe you've got tremendous opportunity, even in this environment. Very much focused on client selection and bringing over experienced bankers, as well as professionals to support those, and then positioning ourselves to focus very much on specific segments.

So we can really be responsive fast and bring value to our client relationship and that absolute growth relationship that is not transactional business. And I think the way that you can view the success going forward is seeing the commercial wealth bank growth. Full relationships, both on the lending, the deposit, the private banking, the wealth side, that will become evidence and we're already seeing those early successes.

Certainly in this rate environment, the opportunities will be coming from those loans and credits that are coming to a maturity. And they are looking for refinance and they are going to follow their banker that they've been doing work with and relation with over a long period of time. Does that answer your question Ben?

Ben Gerlinger

Yes, and just kind of following off that, it seems like the people you have, the cultures is intact. In fact, we probably upgraded in terms of the personnel. Are there any verticals that you could see additional higher than or any potential add on that you might not already have or deepening in the relationships.

Alan Villalon

I can handle that one. Yes, we've already started to build up the verticals. We're probably not going to expand to any more additional ones, but we will be adding additional talent in those verticals as we continue to have success. So we're not going to overstaff, but we're certainly going to keep the talent pool ready to add staff as we start winning in various segments all over the place.

Ben Gerlinger

And I assume that's a continuous plan. It's not like a 12 or 18 month, correct?

Alan Villalon

Yes, no that's continuous. I think as we continue our growth, you know we’ll be strategic on those verticals in those hires, but like I kind of commented earlier, some of those verticals are key to deposit gathering as well as loans and they are key to synergistic private banking wealth, and I'm specifically talking about the, kind of the mid-market verticals.

We'll find a lot of success and to your original question about – those relationships are core and they become core not only in commercial C&I, but in private banking, in wealth and in private mortgage. So that's where you can see those – that growth going all over those areas and you can see that that clearly is a core growth.

Ben Gerlinger

That’s helpful color. Thank you.

Karen Bohn

Thanks Ben.

Operator

Thank you. [Operator Instructions]. There are no additional questions waiting, so this concludes our question-and-answer session. I would like to turn the conference back over to Katie Lorenson for any closing remarks.

Katie Lorenson

Thank you, and thank you to everyone for joining our call this morning. Thank you for listening, and thank you for the questions. Our unique and highly diversified business model is a substantial differentiator in driving long term value for our shareholder, serving our clients, as well as attracting and retaining top talent.

We thank you our shareholders and our clients for the trust that you put in us and to our team members for your service mindset and client focus. For helping us to evolve Alerus into a top performing commercial wealth bank and national retirement benefits providers, and in the long term delivering top tier shareholder returns and performance.

Thank you everyone and have a great day!

Operator

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