Alerus(US:ALRS)2023-10-26 21:53Financial Data and Key Metrics Changes - Net interest income declined by 8.3% on a linked quarter basis, primarily due to increased funding costs, representing 41.8% of total revenues [12][13] - Non-interest income increased by 10.2% on a linked-quarter basis, driven by the divestiture of the ESOP trustee business [12] - Net interest margin was 2.27%, a decrease of 25 basis points from the prior quarter, but showed improvement towards the end of the quarter [13][14] - Total loans grew by 2.9% from the prior quarter, with strong growth in C&I, commercial real estate, and residential real estate [14] - Deposits increased by 0.7% from the prior quarter, with non-interest-bearing deposits remaining at 25% of total deposits [15] Business Line Data and Key Metrics Changes - Retirement business accounted for approximately 38% of total revenues, with revenues increasing over 17% on a linked-quarter basis due to the divestiture of the ESOP trustee business [17][18] - Wealth management revenues decreased by 3.3% on a linked-quarter basis, with assets under management also decreasing by 3.5% due to challenging market conditions [21] - Mortgage revenues decreased by 13.6% from the prior quarter, with expectations for a further decrease in the fourth quarter due to seasonality [20] Market Data and Key Metrics Changes - Synergistic deposits sourced from retirement and wealth businesses grew by 21% year-over-year and 2.7% over the prior quarter, now accounting for 26.5% of total deposits [15][16] - HSA balances grew to $175.7 million, representing over 23% of synergistic deposits, highlighting a low-cost funding source [16] Company Strategy and Development Direction - The company is focused on strategic divestitures to prioritize growth in core product lines, particularly in retirement services [6][11] - Investments are being made in key business lines while exiting non-core products, aiming to enhance client service and operational efficiency [11][21] - The company is committed to improving profitability through rightsizing infrastructure and optimizing processes [9][21] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing challenges from the interest rate environment and deposit competition but expressed confidence in building a stronger franchise [4][10] - Future expectations include gradual improvement in net interest margin and stable deposit levels, with a focus on attracting new client relationships [14][15][46] - The company remains optimistic about growth in fee income from retirement and wealth management as market conditions stabilize [50][51] Other Important Information - Credit quality remains strong with low levels of past dues and non-performing loans, and the allowance for credit losses on loans remains stable at 1.39% [10][22] - Capital levels are robust, with common equity Tier 1 capital over 13%, well above regulatory minimums [22][23] Q&A Session Summary Question: Margin expectations for Q4 and 2024 - Management expects 7 to 10 basis points of margin compression in Q4 but anticipates improvement in net interest margin as the year progresses [25][26] Question: Details on non-accrual loans - The increase in non-accrual loans is attributed to a single commercial credit in the Arizona market, not indicative of broader issues [29][30] Question: Funding dynamics and deposit initiatives - The company is focused on attracting talent in deposit-rich verticals and has seen an increase in the CD book, with core deposits expected to remain stable [34][35] Question: Future loan growth and funding levels - Management is optimistic about increasing deposits and reducing reliance on wholesale funding to support loan growth [47][48] Question: Growth potential in fee income lines - Stable market conditions are expected to benefit both retirement and wealth management revenues, with ongoing initiatives to improve efficiencies [49][50]