Alerus Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Alerus is a commercial wealth bank and national retirement-services provider, with Banking, Retirement and Benefit Services, and Wealth Management segments. Mortgage was integrated into Banking beginning January 1, 2024; historical segment information was restated.
Financial performance
Amounts below are in millions except per-share data; comparisons are with Q1 2023 unless otherwise noted.
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net interest income | $22.2 | $23.7 |
| Noninterest income | $25.3 | $25.3 |
| Total revenue (net interest income plus noninterest income) | $47.5 | $48.9 |
| Net income | $6.4 | $8.2 |
| Diluted earnings per share | $0.32 | $0.40 |
| Net interest margin, tax-equivalent | 2.30% | 2.70% |
| Adjusted net interest margin, tax-equivalent (non-GAAP) | 2.44% | 2.70% |
| Efficiency ratio | 78.88% | 74.53% |
| Net charge-offs / average loans, annualized | 0.01% | 0.03% |
- Interest income rose $11.2 million, but interest expense increased $12.7 million as the average rate paid on interest-bearing liabilities rose 133 basis points and their average balance grew $456.3 million. Net interest income declined 6.1%.
- Noninterest income was nearly flat. Wealth management revenue increased $0.9 million and retirement and benefit services rose $0.2 million; these gains were largely offset by the absence of a $1.2 million BOLI mortality benefit recorded in Q1 2023. Q1 2023 also included $0.9 million from an ESOP trustee business later divested.
- Noninterest expense increased 3.0% to $39.0 million, mainly due to higher FDIC assessments and recruitment expense. Professional fees and assessments rose from $1.2 million to $2.0 million.
- The reported provision for credit losses was zero, versus $0.6 million in Q1 2023. In Q1 2024, $0.8 million of loan-loss provision was offset by a $0.8 million recovery on unfunded commitments and a small recovery on HTM securities.
Balance sheet, funding and capital
- Total assets were $4.34 billion at March 31, up $430.4 million (11.0%) from year-end. Cash and cash equivalents rose to $545.8 million, primarily reflecting BTFP borrowing proceeds; loans increased to $2.80 billion.
- Total deposits were $3.28 billion, up $189.4 million from December 31. Interest-bearing deposits rose $224.9 million while noninterest-bearing deposits fell $35.6 million; noninterest-bearing deposits declined to 21.1% of total deposits from 23.5%.
- Short-term borrowings were $555.0 million, including $355.0 million borrowed through the Bank Term Funding Program at a fixed 4.88% for up to one year, secured by investment securities, and $200.0 million of FHLB advances. Long-term debt was $59.0 million.
- On-balance-sheet liquidity was $712.3 million. Management reported access to up to $898 million of additional FHLB borrowing capacity and $107 million through unsecured correspondent-bank lines. Uninsured deposits were estimated at approximately $1.2 billion.
- Stockholders’ equity was $371.6 million. The company’s CET1 ratio was 11.87% and total capital ratio was 14.93%; the Bank’s CET1 ratio was 11.73%. Management said the company and Bank met applicable capital requirements. Tangible common equity to tangible assets was 7.23%, down from 7.94% at year-end.
- Cash from operating activities was $12.0 million, investing activities used $22.4 million, and financing activities provided $426.3 million. Financing inflows primarily reflected deposit growth and increased short-term borrowings.
Credit quality and material changes
- Total loans grew 1.4% from year-end, led by commercial real estate (up $28.0 million) and commercial and industrial loans (up $13.4 million). CRE represented 45.7% of loans; commercial and industrial loans were 21.8%.
- Criticized loans increased to $106.0 million, or 3.79% of loans, from $61.6 million, or 2.23%, at year-end. The largest increases were in CRE and commercial and industrial loans. Management attributed the ACL increase in those pools partly to recent downgrades.
- Nonaccrual loans declined to $7.3 million from $8.6 million at year-end; nonperforming assets were $7.3 million, or 0.17% of assets. The loan allowance was $36.6 million, 1.31% of loans, compared with $35.8 million, or 1.30%, at year-end.
- Available-for-sale securities had $101.5 million of gross unrealized losses at quarter-end; HTM securities had $42.3 million. Management attributed the losses primarily to interest rates, not credit deterioration, and said it did not intend, nor was it more likely than not required, to sell the affected securities before recovery of amortized cost.
Outlook, risks and contingencies
- No numerical full-year guidance was provided. Management expects net interest income and adjusted net interest margin to recover in future periods as earning assets reprice and deposit-cost increases slow. It also anticipates continued C&I and CRE loan growth, while warning that higher rates and inflation are expected to continue to adversely affect mortgage originations and mortgage banking revenue.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income increasing 3.0% under an immediate +100-basis-point move and declining 0.8% under a -100-basis-point move. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments, deposits and balance-sheet composition.
- Key stated risks include funding costs and liquidity, potential deposit withdrawals and uninsured-deposit concentration, interest-rate exposure, CRE and other credit risk, economic and real estate conditions, cybersecurity and third-party technology disruptions, competition, and regulatory or legal developments.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $929.0 million. The allowance for unfunded commitments was $6.6 million. Management said ordinary-course litigation was not expected to have a material adverse effect and disclosed no material loss contingencies.
- The quarterly dividend was $0.19 per share, declared February 28 and paid April 12, 2024. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit pricing and funding mix stabilize enough to support the anticipated recovery in net interest income and margin, especially after the one-year BTFP borrowing matures.
- Whether criticized-loan growth, particularly in CRE and C&I, leads to higher nonaccruals, charge-offs or further allowance increases.
- The liquidity implications of approximately $1.2 billion in uninsured deposits, securities pledged as collateral, and reliance on wholesale or borrowed funding.
- How the sizable unrealized securities losses and the company’s plans to hold affected securities develop as interest rates change.
- Whether mortgage production and fee income meet expectations, and how the company’s efficiency ratio and earnings respond to expense growth and funding costs.