Alerus Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. Alerus is a diversified financial services company operating banking, retirement and benefit services, wealth management, and mortgage businesses. Dollar amounts below are in millions unless stated otherwise.
Financial results
- Revenue: Net interest income was $21.7 million, down 1.7% from $22.0 million in Q1 2021. Noninterest income was $29.5 million, down 27.9% from $40.9 million; total operating revenue was approximately $51.1 million versus $62.9 million.
- Earnings: Pretax income was $13.1 million, versus $19.9 million; net income was $10.2 million, down 33.1% from $15.2 million. Diluted EPS was $0.57 versus $0.86. The declared quarterly dividend was $0.16 per share, compared with $0.15.
- Margins and efficiency: Tax-equivalent net interest margin was 2.83%, down from 3.12%. The efficiency ratio was 72.25%, compared with 66.43%; higher is less favorable.
- Cash flow: Operating activities provided $34.8 million; investing activities used $112.6 million and financing activities used $31.7 million. Cash and equivalents decreased $109.5 million during the quarter to $132.8 million.
- Balance sheet and liquidity: Total assets were $3.34 billion. Loans were $1.82 billion, up 3.4% from year-end; deposits were $2.89 billion, down 1.0%. Reported on-balance-sheet liquidity was $998.7 million, down from $1.1 billion. Management said resources were adequate to fund commitments; available sources included up to $760.4 million of FHLB borrowing capacity and $102 million in unsecured bank lines.
- Debt and capital: Long-term debt was $58.9 million, including $50 million of subordinated notes. Stockholders’ equity was $328.5 million, down from $359.4 million. The company’s CET1 and total capital ratios were 14.27% and 18.12%; management reported the company and Bank met applicable capital requirements.
Material changes and drivers
- Mortgage banking income fell to $4.9 million from $17.1 million, as mortgage originations declined 63.9% to $186.8 million. This was the principal driver of lower noninterest income and earnings.
- Retirement and benefit services and wealth management income increased to $17.6 million and $5.3 million, respectively, partially offsetting the mortgage decline.
- Noninterest expense declined 11.5% to $38.1 million, primarily reflecting lower compensation and mortgage-related expenses as mortgage activity fell.
- Loan growth was led by commercial and industrial lending. Excluding PPP loans, management reported loans held for investment increased 4.7% from year-end. Total deposits declined, including a $107.3 million reduction in noninterest-bearing deposits.
- Accumulated other comprehensive loss widened to $42.3 million from $4.3 million, principally reflecting unrealized declines in available-for-sale securities as interest rates rose. Total equity consequently fell 8.6%.
- The allowance for loan losses was $31.7 million, or 1.74% of loans. No quarterly provision was recorded; net recoveries were $141,000. Criticized loans were 0.91% of loans versus 1.21% at year-end, while nonperforming loans increased to $4.2 million from $2.2 million.
Outlook, risks, and unusual items
- No specific full-year earnings or revenue guidance was provided. Management expected net interest income and margin to remain under pressure and anticipated slower loan growth amid rising rates and competition. It also warned that higher rates and inflation could further weigh on mortgage originations and mortgage revenue.
- Management said the ongoing COVID-19 pandemic had not adversely affected Q1 results, but the economic recovery remained uncertain. The filing also identifies inflation, interest-rate changes, credit quality, real estate exposure, deposit concentration, liquidity, cybersecurity, and operational disruption among material risks.
- Unrealized losses on investment securities were attributed generally to interest-rate changes and considered temporary by management, which expects securities’ values to recover as they approach maturity. The company cautioned losses could increase if rates continue to rise. Available-for-sale and held-to-maturity securities had aggregate unrealized losses of approximately $80.7 million at quarter-end.
- Interest-rate sensitivity modeling estimated that a parallel +100-basis-point move would reduce projected net interest income by 2.1% over 12 months but increase it 3.5% over 24 months; modeled economic value of equity declined 3.1% under the same shock. These are scenario estimates, not forecasts.
- The company had $660.7 million of commitments to extend credit and standby letters of credit. It reported no material pending legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether mortgage production and related income continue to decline, and how other fee businesses offset that pressure.
- Deposit trends, particularly noninterest-bearing and large or concentrated balances, alongside the reported liquidity position and available borrowing capacity.
- Credit quality, including the increase in nonperforming loans, criticized exposures, and the adequacy of the allowance under changing economic conditions.
- The impact of further rate changes on net interest income, securities values, accumulated other comprehensive loss, and capital.
- Whether management’s expectations for margin pressure and slower loan growth are reflected in subsequent results; the filing provides no formal earnings guidance.