Alerus Financial Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter earnings report; the filing does not provide a clear set of Q4-only results. Alerus is a diversified financial-services company operating banking, retirement and benefit services, wealth management, and mortgage businesses, primarily in North Dakota, Minnesota, and Arizona.
Key financial results
| Metric | 2023 | 2022 |
|---|---|---|
| Total operating revenue (net interest income plus noninterest income) | $168.1 million | $211.0 million |
| Net interest income | $87.8 million | $99.7 million |
| Net interest margin, taxable-equivalent | 2.46% | 3.04% |
| Noninterest income | $80.2 million | $111.2 million |
| Noninterest expense | $150.2 million | $158.8 million |
| Net income | $11.7 million | $40.0 million |
| Diluted earnings per share | $0.58 | $2.10 |
| Return on average assets | 0.31% | 1.14% |
| Efficiency ratio | 85.85% | 72.86% |
- Net income declined 70.8%. The principal drivers were a $24.6 million loss on securities sold in a fourth-quarter balance-sheet repositioning, lower mortgage revenue, and reduced net interest income. Lower operating expenses partly offset the declines.
- Net interest income fell 11.9% as funding costs rose faster than yields on earning assets. Interest expense increased $61.2 million, partly offset by a $49.3 million increase in interest income. Average cost of interest-bearing liabilities rose 220 basis points.
- Noninterest income fell 27.9%, including a $24.6 million securities-sale loss and an $8.5 million decline in mortgage banking revenue. Mortgage originations were $364.1 million, down from $812.3 million.
- Noninterest expense decreased 5.4%, mainly from lower compensation and employee benefit costs, partially offset by higher technology expenses.
Financial position, credit, and liquidity
- At year-end, assets were $3.91 billion, loans $2.76 billion, deposits $3.10 billion, and stockholders’ equity $369.1 million. Loans grew 12.9% and deposits grew 6.2% from year-end 2022.
- Deposits shifted toward interest-bearing products: interest-bearing deposits increased $313.0 million while noninterest-bearing deposits fell $132.9 million. Estimated uninsured deposits were approximately $1.1 billion, down from $1.8 billion.
- Cash and cash equivalents were $129.9 million. Management reported $668.2 million of on-balance-sheet liquidity and $706.6 million of remaining FHLB borrowing capacity, subject to available collateral. The company also reported $107 million of unsecured lines of credit.
- Short-term borrowings were $314.2 million at year-end, including $200 million of FHLB advances and $114.2 million of federal funds purchased. Long-term debt was $59.0 million, including $50 million of subordinated notes and approximately $9 million of junior subordinated debentures.
- Cash from operating activities was $29.0 million; investing activities used $52.1 million; financing activities provided $94.8 million. Cash and cash equivalents increased $71.7 million during the year.
- The loan allowance was $35.8 million, or 1.30% of loans. Nonperforming loans were $8.7 million, or 0.32% of loans, compared with $3.8 million, or 0.16%, in 2022. Criticized loans rose to $61.6 million, or 2.23% of loans, primarily due to a $20.6 million multifamily construction loan.
- Commercial real estate loans were $1.25 billion, or 45.3% of loans. Real estate collateral was a primary component for approximately 77.5% of the loan portfolio. Management states the bank remained below applicable CRE supervisory guidelines, using its stated regulatory measures.
- Regulatory capital ratios remained above minimum requirements. At year-end, the bank’s CET1 ratio was 11.40%, total capital ratio 12.51%, and leverage ratio 9.92%; the bank was categorized as well capitalized.
Material changes, outlook, and risks
- In the fourth quarter, Alerus sold $171.8 million of available-for-sale securities, recording a $24.6 million pretax loss. Proceeds were redeployed into loans and used to reduce borrowings. The available-for-sale portfolio had $98.0 million of pretax unrealized losses at year-end; the filing attributes these primarily to interest rates and says it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Alerus adopted the CECL expected-credit-loss standard in 2023. Adoption reduced opening retained earnings by $4.5 million and increased the loan allowance by $3.9 million. The company also recorded a $7.4 million allowance for off-balance-sheet credit exposures at year-end.
- Retirement and benefit services assets under administration/management increased 14.2% to $36.7 billion, including a positive $4.8 billion market impact; outflows of $4.8 billion were partly offset by $4.5 billion of inflows. Wealth-management assets increased to $4.0 billion, including brokerage assets in the reported total.
- Management expects the lower mortgage-origination trend to continue in 2024. The filing provides no numerical earnings or margin guidance. A $0.19 quarterly dividend was declared in February 2024. A new authorization to repurchase up to 1 million shares became effective February 18, 2024, and does not obligate the company to make purchases.
- Key risks include deposit pricing and retention, reliance on wholesale funding, interest-rate sensitivity and securities values, CRE and regional loan concentrations, credit deterioration, fee-income sensitivity to market values and client flows, mortgage-market weakness, and cybersecurity and third-party technology risks. The filing also identifies regulatory changes and the planned end of the Federal Reserve Bank Term Funding Program as relevant uncertainties.
- The financial statements received an unqualified audit opinion from RSM. The auditor did not attest to internal control over financial reporting; Alerus reported that it qualified as an emerging growth company and management concluded its controls were effective.
Important facts for investors to verify
- Reconcile the filing’s asset-quality disclosures: selected data reports nonperforming assets at 0.22% of assets, while narrative risk-factor text cites 0.32%; the detailed year-end table reports $8.8 million of nonperforming assets.
- Assess the securities repositioning, including the $24.6 million realized loss, remaining unrealized losses, and the pace at which reinvested assets improve earnings and funding costs.
- Track deposit mix, deposit costs, uninsured-deposit levels, collateral availability, and actual access to stated contingent funding capacity.
- Review CRE and construction credit trends, especially the criticized multifamily construction exposure, and confirm the definitions used for CRE concentration measures and supervisory thresholds.
- Monitor whether mortgage volumes and retirement/benefit client flows stabilize, and whether recurring earnings recover without reliance on market gains or one-time items.