Alerus Financial Corporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter report. Alerus is a diversified financial-services company operating banking, retirement and benefit services, wealth management, and mortgage businesses. It reported $2.36 billion in assets, with primary banking markets in North Dakota, Minnesota, and Arizona and retirement services nationwide.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $188.7 million | $178.0 million |
| Net interest income | $74.6 million | $75.2 million |
| Noninterest income | $114.2 million | $102.7 million |
| Net income | $29.5 million | $25.9 million |
| Diluted earnings per share | $1.91 | $1.84 |
| Net interest margin, tax-equivalent | 3.65% | 3.84% |
| Efficiency ratio | 73.22% | 73.80% |
| Return on average assets | 1.34% | 1.21% |
| Return on average common equity | 12.78% | 13.81% |
- Balance sheet: Assets were $2.36 billion; loans were $1.72 billion; deposits were $1.97 billion; and stockholders’ equity was $285.7 million. Loans grew 1.1% and deposits grew 11.1% year over year.
- Credit: The allowance for loan losses was $23.9 million, or 1.39% of loans. Net charge-offs were $5.6 million, up from $3.0 million. Nonperforming loans were $7.8 million, or 0.45% of loans, compared with 0.41% a year earlier.
- Cash flow: Operating cash flow was $19.2 million, versus $53.6 million in 2018; investing cash flow was negative $65.6 million; financing cash flow was positive $149.7 million. Cash and cash equivalents rose $103.4 million to $144.0 million.
- Debt and liquidity: Year-end short-term borrowings were zero, down from $93.5 million. Long-term debt was $58.8 million carrying value, including $50.0 million face value of subordinated notes and junior subordinated debentures. On-balance-sheet liquidity was $250.7 million; reported available FHLB borrowing capacity was $552.2 million. The Bank was well-capitalized.
- Fee and asset measures: AUA was $28.9 billion and AUM was $6.1 billion at year-end. Mortgage originations were $946.4 million.
Material changes versus 2018
- Net income rose 14.2%, mainly as noninterest income increased $11.4 million, led by mortgage banking, and provision for loan losses declined $1.3 million. These gains were partly offset by a $6.2 million increase in noninterest expense.
- Mortgage banking income increased 46.4% to $25.8 million; originations rose 21.4%. Management attributed the income increase to greater volume and moving from best-efforts to mandatory loan delivery.
- Net interest income fell 0.9% and tax-equivalent net interest margin declined 19 basis points. Average interest-bearing liabilities and their average cost increased.
- Noninterest expense rose 4.6%, including higher compensation, employee benefits, and technology costs. Noninterest income reached 60.5% of total revenue.
- Retirement and benefit services AUA/AUM increased to $31.9 billion, with market appreciation more than offsetting net outflows; wealth management AUM also grew.
- The September 2019 IPO generated $62.8 million in net proceeds. The company said proceeds remained on deposit with the Bank, which used the deposits to pay down short-term borrowings. The IPO also extinguished the ESOP share repurchase obligation.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described plans to pursue organic growth through its integrated “One Alerus” strategy and technology investment; a unified client portal was expected to be rolled out by the end of first-quarter 2020. Management also discussed acquisitions as a growth avenue, particularly for retirement administration, but gave no quantified targets.
- Key disclosed risks include credit losses and real-estate exposure, geographic concentration, fee compression and market-sensitive AUA/AUM revenue, deposit competition and liquidity, interest-rate and net-interest-margin sensitivity, cybersecurity and third-party technology, regulatory compliance, and mortgage repurchase claims. Commercial real estate was 30.3% of loans and 189.8% of Bank capital; management said the Bank was below cited regulatory CRE concentration guidelines.
- The filing identified the COVID-19 pandemic as a subsequent event. Management said effects on borrowers, operations, markets, and 2020 results were uncertain and not reasonably estimable at the filing date; early-2020 equity-market declines were not reflected in 2019 statements.
- The Duluth branch sale closed April 26, 2019 and produced a $1.5 million pretax gain. Other noninterest income included a $542,000 gain on sale of Grand Forks land. The 2017 comparison included $4.8 million of deferred-tax remeasurement expense related to tax reform and $1.4 million of deferred-tax asset impairment.
- The financial statements received an unqualified audit opinion. Disclosure controls were considered effective; however, the company did not provide management’s ICFR assessment or an auditor attestation, citing the transition period for newly public companies.
Important facts for investors to verify
- Whether mortgage banking income and originations remain strong, and how the mandatory-delivery model affects margins and risk.
- Whether deposit growth is sustainable and how rising deposit costs affect net interest margin and liquidity.
- Credit trends, particularly commercial and industrial charge-offs, criticized loans, real-estate concentrations, and allowance adequacy.
- The realized effects of COVID-19 on borrower performance, AUA/AUM-based fees, operations, and expected credit losses.
- Progress and costs of the client-portal and technology initiatives, as well as acquisition activity and integration risks.
- Debt terms and the exposure of LIBOR-linked instruments to benchmark transition; the $50.0 million subordinated notes were scheduled to begin floating-rate pricing after December 30, 2020.
- Dividend capacity and capital at the Bank and holding-company levels, including the dependence of the parent on Bank dividends.