Alerus Financial Corporation — Q3 2023 Form 10-Q
Business context and period. Alerus is a diversified financial services company operating banking, retirement and benefit services, wealth management, and mortgage businesses. This unaudited report covers the three and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollar figures below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $20.4 | $28.3 | $66.3 | $72.8 |
| Noninterest income | $28.4 | $27.0 | $79.4 | $85.7 |
| Revenue (net interest income plus noninterest income) | $48.8 | $55.3 | $145.7 | $158.5 |
| Net income | $9.2 | $9.6 | $26.5 | $29.1 |
| Diluted earnings per share | $0.45 | $0.47 | $1.30 | $1.56 |
| Net interest margin, taxable-equivalent basis | 2.27% | 3.21% | 2.50% | 3.02% |
| Noninterest expense | $37.3 | $42.8 | $111.5 | $120.8 |
- Balance sheet at September 30: assets $3,869.1; loans $2,606.4; deposits $2,872.2; stockholders’ equity $349.4.
- Credit: allowance for loan losses was $36.3, or 1.39% of loans. Nonperforming loans were $9.0 (0.35% of loans), versus $3.8 (0.16%) at year-end 2022. Criticized loans rose to $55.8, or 2.14% of loans, from $35.3, or 1.44%.
- Cash flow, nine months: operating cash flow $30.6; investing cash outflow $102.4; financing cash inflow $78.3; cash and cash equivalents increased $6.5 to $64.7.
- Funding and debt: deposits declined $43.3 from year-end. Short-term borrowings increased $137.4 to $515.5; total borrowed funds were $574.4, including $58.9 of long-term debt. Average cost of interest-bearing liabilities rose substantially year over year.
- Liquidity and capital: reported on-balance-sheet liquidity was $623.4, down from $778.9 at year-end. Management cited additional FHLB borrowing capacity of $477.1 and unsecured correspondent-bank lines of $107.0. Consolidated CET1 capital ratio was 13.01%; management said the Company and Bank met regulatory capital requirements.
Changes versus comparable periods
- Q3 net income fell 4.8%; nine-month net income fell 9.1%. The main earnings pressure was lower net interest income as funding costs rose faster than asset yields.
- Q3 interest expense increased $17.7 year over year, partly offset by $9.8 more interest income. The average rate paid on interest-bearing liabilities rose 252 basis points in Q3; the average balance of those liabilities also increased.
- Nine-month noninterest income declined 7.3%, primarily due to lower mortgage banking revenue. Mortgage originations were $298.6 versus $686.1 in the first nine months of 2022.
- Noninterest expense decreased 12.9% in Q3 and 7.7% year to date, reflecting lower compensation and professional fees, including reduced prior-year merger-related costs.
- Loans grew $162.4, or 6.6%, from year-end, led by commercial real estate growth of $143.3. Deposits shifted from noninterest-bearing to interest-bearing accounts; noninterest-bearing deposits fell $143.0.
- Available-for-sale securities had $156.0 of gross unrealized losses at September 30, versus $132.3 at December 31, 2022. Management attributed losses primarily to interest-rate movements, said it did not intend to sell the securities, and did not expect to be required to sell them before recovery.
Outlook, commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management expects net interest income and margin to remain under pressure in future periods amid recent and anticipated rate increases; it also expects higher rates and inflation to continue weighing on mortgage originations and mortgage revenue.
- Management anticipates continued commercial and industrial and commercial real estate loan growth, citing recently added production talent, while noting higher-rate and competitive headwinds.
- The Company adopted CECL on January 1, 2023, recording a $4.5 reduction to retained earnings and an approximately $5.9 increase in credit-loss allowances, including unfunded commitments. Nine-month provision for credit losses was $0.55.
- Key disclosed risks include deposit concentration and uninsured deposits (estimated at approximately $1.0 billion), liquidity reliance on higher-cost funding, interest-rate sensitivity, commercial real estate and other loan concentrations, credit deterioration, securities valuation, and weaker mortgage activity. Interest-rate simulations show net interest income sensitivity of negative 6.3% over 12 months under an immediate +400-basis-point shock; modeled economic value of equity falls 23.1% under that scenario. Actual results may differ from models.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $796.0. The filing says commitments may expire undrawn and are not necessarily future cash requirements.
- The board declared a quarterly dividend of $0.19 per share, paid October 13, 2023. The Company repurchased 238,474 shares during the first nine months under its repurchase program. Management reported no material pending legal proceedings; disclosure controls were considered effective and no material change in internal control was reported.
Important facts for investors to verify
- How deposit retention, deposit pricing, and wholesale borrowing needs evolve, particularly given approximately $1.0 billion of estimated uninsured deposits and higher short-term borrowings.
- Whether net interest margin stabilizes or continues to contract, and how actual funding costs and asset repricing compare with management’s interest-rate models.
- Whether criticized and nonperforming loans continue to rise, especially in commercial real estate, and whether the allowance remains adequate under CECL assumptions.
- Whether mortgage originations and fee income recover, and whether retirement and benefit services and wealth management can offset continued mortgage weakness.
- How unrealized securities losses, capital levels, liquidity availability, and the disclosed sensitivity to higher rates change in subsequent filings.