Alerus Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Alerus is a diversified financial services company with banking, retirement and benefit services, wealth management, and mortgage businesses. Amounts below are in millions unless otherwise noted.
Financial performance and position
- Q2 earnings: Net income was $9.1 million, down 2% from $9.3 million in Q2 2022. Diluted EPS was $0.45 versus $0.52. First-half net income was $17.3 million, down 11.2%, and diluted EPS was $0.85 versus $1.10.
- Revenue and net interest: Q2 net interest income was $22.2 million, down 2.4%; noninterest income was $25.8 million, down 11.8%. First-half net interest income rose 3.2% to $45.9 million, while noninterest income fell 13.1% to $51.0 million.
- Margins and expenses: Tax-equivalent net interest margin was 2.52% in Q2 versus 2.98% a year earlier, and 2.61% for the first half versus 2.91%. Q2 noninterest expense declined 9% to $36.4 million; the efficiency ratio improved to 72.79% from 74.72%.
- Credit costs and asset quality: Q2 provision for credit losses was zero; first-half provision was $0.55 million. The loan allowance was $35.7 million, or 1.41% of loans, at June 30. Nonperforming loans were $2.6 million (0.10% of loans), while criticized loans were $40.4 million (1.59% of loans), up from $35.3 million (1.44%) at year-end.
- Balance sheet: Total assets were $3.83 billion, up 1.4% from year-end. Loans increased 3.7% to $2.53 billion, led by commercial real estate growth. Deposits declined 2.1% to $2.85 billion; noninterest-bearing deposits fell $145.5 million while interest-bearing deposits increased $82.8 million.
- Funding, debt, and liquidity: Short-term borrowings were $492.1 million, all federal funds purchased, versus $378.1 million at year-end; the quarter-end rate was 5.35%. Long-term debt was $58.9 million. On-balance-sheet liquidity was $654.4 million, down from $778.9 million. Management reported access to additional FHLB capacity of $493.5 million and $107.0 million of unsecured correspondent-bank lines.
- Cash flow and capital: First-half operating cash flow was $12.0 million, investing cash flow was negative $45.4 million, and financing cash flow was positive $40.6 million. Cash increased $7.2 million to $65.5 million. Consolidated CET1 capital was 13.30%; stockholders’ equity was $357.7 million.
Material changes and management commentary
- Higher funding costs weighed on Q2 net interest income: interest expense rose substantially as deposit rates and use of higher-cost funding increased. Management expects net interest income and margin to remain under pressure if rates continue to rise.
- Mortgage banking revenue declined $3.1 million in Q2; mortgage originations were down 58.7% year over year, which management attributed to higher interest rates. Management expects rate and inflation pressures to continue weighing on mortgage originations and noninterest income.
- Management expects loan growth to slow across major loan portfolios amid higher rates and competition. Deposit outflows reflected public-unit seasonality and customers using liquidity to pay down revolving debt; higher-yield alternatives also shifted balances away from noninterest-bearing deposits.
- The company adopted CECL on January 1, 2023. Adoption increased credit-loss allowances by approximately $5.9 million, including $3.9 million for loans and $1.9 million for unfunded commitments, and reduced opening retained earnings by $4.5 million, net of tax.
- Available-for-sale securities had $137.0 million of gross unrealized losses at June 30, which management attributed primarily to interest rates rather than credit deterioration. The company said it did not intend, and was not likely required, to sell these securities before recovery.
- Uninsured deposits were estimated at $983.6 million. The filing identifies deposit concentration and withdrawals, liquidity and funding costs, rate sensitivity, commercial real estate and other loan concentrations, economic conditions, cybersecurity, and integration of the Metro Phoenix Bank acquisition among its risks.
- Regulatory capital ratios exceeded well-capitalized requirements. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Whether deposit levels and the mix of noninterest-bearing versus interest-bearing funding stabilize, and whether reliance on costly federal funds declines.
- How higher rates affect net interest margin, securities marks, liquidity, and the company’s modeled rate sensitivity.
- Whether mortgage originations and fee income recover, particularly in mortgage and retirement and benefit services.
- Whether criticized loans, commercial real estate exposure, delinquencies, and CECL reserves change materially.
- How the Metro Phoenix Bank acquisition affects growth, expenses, and year-over-year comparability; the filing provides no specific earnings or margin guidance.