Alerus Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Alerus is a diversified financial services company with banking, retirement and benefit services, wealth management, and mortgage businesses.
Financial performance and position
- Revenue: Net interest income was $23.7 million, up 9.2% year over year; noninterest income was $25.3 million, down 14.3%. Combined, these components totaled $48.9 million, versus $51.1 million in Q1 2022.
- Earnings: Net income was $8.2 million, down 19.6% from $10.2 million. Diluted EPS was $0.40 versus $0.57. Pretax income was $10.5 million; income tax expense was $2.3 million and the effective tax rate was 22.0%.
- Net interest margin and efficiency: Tax-equivalent net interest margin was 2.70%, versus 2.83% a year earlier. The efficiency ratio was 74.53%, compared with 72.25%.
- Cash flow: Operating activities provided $0.4 million; investing activities used $20.1 million; financing activities provided $106.6 million. Cash and cash equivalents increased $86.9 million to $145.2 million.
- Balance sheet at March 31: Assets were $3.89 billion; loans were $2.49 billion, up $42.6 million from year-end; deposits were $3.03 billion, up $116.5 million. Stockholders’ equity was $359.1 million.
- Funding and debt: Short-term borrowings were $372.1 million, all federal funds purchased, versus $378.1 million at year-end, which included $225 million of FHLB advances. Long-term debt was $58.9 million. Average Q1 rates were 4.84% on federal funds purchased and 4.69% on short-term borrowings.
- Liquidity and capital: Management reported $788.2 million of on-balance-sheet liquidity, plus capacity for up to $560.3 million of additional FHLB borrowing and $107 million under correspondent-bank lines. The company and bank exceeded regulatory well-capitalized thresholds; consolidated CET1 was 13.30% and total capital was 16.50%.
- Credit: The allowance for credit losses on loans was $35.1 million, or 1.41% of loans. Nonperforming loans were $2.1 million, 0.09% of loans; criticized loans were $34.2 million, or 1.38% of loans.
Material changes versus Q1 2022 and year-end 2022
- Net interest income rose $2.0 million year over year, but higher deposit and borrowing costs offset much of the increase in interest income. Interest expense increased to $14.2 million from $1.4 million.
- Noninterest income fell $4.2 million, principally from lower mortgage banking revenue and retirement and benefit services revenue. Mortgage originations declined 58.4% to $77.7 million.
- Noninterest expense was nearly flat at $37.9 million. The efficiency ratio worsened, and net income declined despite higher net interest income.
- Deposits grew from year-end, but noninterest-bearing deposits fell $68.0 million and their share of deposits decreased to 26.2% from 29.5%. Approximately $1.8 billion of deposits exceeded FDIC insurance limits.
- Loans grew 1.7% from year-end, led by commercial real estate and construction lending; commercial and industrial loans declined $30.3 million.
- On January 1, 2023, Alerus adopted CECL. Adoption increased the loan-loss allowance by $3.9 million and the unfunded-commitment reserve by $1.9 million, and reduced retained earnings by $4.5 million after tax. Q1 provision for credit losses was $550,000.
- Available-for-sale securities had $127.3 million of gross unrealized losses at March 31. Management attributed the losses primarily to interest rates and said it did not intend, and was not expected to be required, to sell the securities before recovery. Accumulated other comprehensive loss was $96.3 million.
Outlook, commentary, and risks
- Management expects net interest income and margin to remain under pressure amid recent and anticipated rate increases, reflecting faster increases in funding costs than asset yields.
- Management expects interest rates and inflationary pressures to continue weighing on mortgage originations and mortgage banking revenue, and anticipates slower loan growth across loan portfolios due to rates and competition.
- Key disclosed risks include liquidity pressure and reliance on higher-cost funding, large uninsured and potentially concentrated deposits, interest-rate exposure and securities valuation losses, credit quality and loan concentrations, real estate conditions, and economic and financial-industry developments.
- The filing provides no specific earnings or revenue guidance. Management stated it believed liquidity resources were adequate to fund commitments. It also reported no material pending legal proceedings, no material changes to the previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Deposit stability, uninsured-deposit concentration, and the cost and availability of wholesale or borrowed funding.
- Whether deposit pricing continues to outpace loan and securities yield adjustments, and the resulting trajectory of net interest margin.
- Trends in mortgage originations and retirement-services fees, including the effects of lower assets under administration and the payroll-services exit.
- Credit performance and allowance adequacy under CECL, especially across commercial real estate and other concentrated loan exposures.
- Interest-rate and liquidity sensitivity, including the significant unrealized securities losses and the assumptions underlying management’s expectation that securities need not be sold before recovery.