Q1 2024 Earnings Summary
- Robust Deposit and Loan Growth: The Q&A highlighted consistent 6%+ deposit growth and organic loan growth driven by strong client inflows and new C&I relationships, with evolving contributions from regions like Arizona reinforcing future asset expansion.
- Diversified and Growing Fee-Based Revenue: Executives emphasized that fee income now represents over 50% of total revenues, with the wealth management segment showing a 9.3% increase in net revenues and growing AUM, suggesting a stable and recurring revenue stream.
- Margin Expansion Through Strategic ALM: The discussion pointed out a strong path toward margin improvement with a current core net interest margin of 2.44% and expectations to exceed 3% by 2026 as key swaps roll off, reflecting disciplined balance sheet management and a positive impact on earnings.
- Margin Vulnerability from Derivatives: The use of swaps and the reliance on the BTFP trade could lead to margin volatility. The shift from fixed to floating exposure leaves the company more asset sensitive, meaning if rate cuts or market changes occur unexpectedly, it could negatively impact net interest income.
- Funding and Deposit Cost Pressure: There is potential risk from higher deposit costs as noninterest-bearing deposits migrate to interest-bearing ones and seasonal public funds outflows occur. This funding gap could pressure margins if the inflow of lower-cost deposits does not offset the higher costs.
- Slower Loan Growth Due to Payoffs: The expectation of a 7% to 8% payoff of total loans for the remainder of the year suggests that organic loan growth may be dampened, potentially limiting future earnings expansion.
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Margin Outlook
Q: What is our NIM outlook this year?
A: Management noted that even if the Fed stays on pause, our core net interest margin of 2.44% is expected to gradually improve, targeting an average of 3% by 2026. -
Loan Growth
Q: What are the loan growth expectations and challenges?
A: They expect modest growth despite 7–8% loan payoffs, reflecting a cautious approach in a higher-rate environment with selective CRE and C&I opportunities. -
Deposit Funding
Q: How will deposit gaps be managed and funded?
A: Management plans to fund any shortfall using cash or short-term borrowings while building new relationships to offset temporary seasonal outflows from public funds. -
Swaps Impact
Q: How do swaps affect margin performance?
A: Swap activity currently causes roughly a 1% drag on net interest income in adverse rate scenarios, shifting sensitivity from liabilities to assets until they roll off. -
BTFP Trade
Q: Will the BTFP remain for the full 12 months?
A: Yes, management confirmed that the BTFP is intended to stay match funded for 12 months unless market conditions change the arbitrage opportunity. -
Balance Sheet
Q: What is the strategy for managing the balance sheet?
A: They are remixing the balance sheet by strategically managing loan investments and employing targeted tail swaps, with limited changes needed on the investment side. -
Tax Rate
Q: What tax rate should we expect going forward?
A: Management anticipates a go-forward tax rate around 24%, factoring in recent upward pressure from state tax changes. -
Deposit Costs
Q: How will deposit costs trend this quarter?
A: There will be a modest increase as noninterest-bearing deposits shift to interest-bearing ones, though overall pressure is expected to remain marginal. -
Regional Growth
Q: Will Arizona become a significant contributor?
A: While the Twin Cities currently lead, Arizona’s contribution is expected to grow over time as the new team builds momentum. -
Mortgage Outlook
Q: How is mortgage banking expected to perform?
A: Mortgage activity might see a slight seasonal slowdown in Q2 due to higher rates and lower inventories, with a rebound anticipated in later quarters. -
Fair Value Accretion
Q: Is there a set fair value accretion level?
A: Management indicated there’s no predetermined level; they plan to continue with the current level going forward.
Research analysts covering ALERUS FINANCIAL.