Alerus Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are primarily with December 31, 2020. Alerus is a diversified financial services company with banking, retirement and benefit services, wealth management, and mortgage businesses.
Financial performance and position
- Revenue and earnings: Net interest income was $22.0 million, up 17% from Q1 2020. Noninterest income was $40.9 million, up 50%, led by mortgage banking revenue of $17.1 million versus $5.0 million. Net income was $15.2 million versus $5.4 million; diluted EPS was $0.86 versus $0.30.
- Expenses and margins: Noninterest expense rose 17% to $43.0 million, mainly from compensation associated with higher mortgage activity. Tax-equivalent net interest margin was 3.12%, down from 3.35%. The efficiency ratio improved to 66.43% from 77.47%; return on average assets was 2.02% versus 0.89%.
- Cash flow: Operating cash flow was $54.8 million, compared with a $21.2 million use in Q1 2020. Investing activities used $180.4 million, principally reflecting $262.1 million of securities purchases. Financing activities provided $142.8 million. Cash and cash equivalents were $190.2 million at quarter-end.
- Balance sheet and liquidity: Total assets were $3.15 billion, up 4.6% from year-end. Deposits rose 5.7% to $2.72 billion; loans declined 2.1% to $1.94 billion. Available-for-sale securities increased 34.2% to $795.1 million. Management reported $708.2 million of on-balance-sheet liquidity and access to additional FHLB and bank lines.
- Debt and capital: Long-term debt was $59.0 million. The company issued $50 million of new subordinated notes at a fixed 3.50% rate, replacing previously issued $50 million subordinated debt bearing 5.75%. The company’s total risk-based capital ratio was 17.54%; the Bank’s was 14.06%. Both exceeded applicable well-capitalized thresholds.
- Credit quality: The allowance for loan losses was $33.8 million, or 1.74% of loans (2.01% excluding PPP loans); no provision was recorded in the quarter. Nonperforming loans were 0.25% of loans. Criticized loans were 2.87% of total loans, broadly unchanged from year-end.
Material changes and notable items
- Mortgage originations were $518.0 million, up from $228.6 million in Q1 2020, and drove much of the growth in mortgage income and compensation expense.
- Accumulated other comprehensive income declined by $13.6 million, primarily reflecting unrealized losses on available-for-sale securities. Stockholders’ equity ended at $329.2 million, down from $330.2 million at year-end.
- Deposits increased partly due to government stimulus and elevated customer balances. Management expects some deposits to decline as customers use PPP and stimulus funds.
- The company authorized a 36-month repurchase program for up to 770,000 shares; no program shares had been repurchased by March 31. The declared quarterly dividend was $0.15 per share.
Outlook, risks, and contingencies
- Management said the pandemic had not adversely affected results through Q1, but the recovery remained uncertain and uneven. It warned of potential borrower stress, collateral-value pressure, increased credit losses, and impacts to commercial real estate, consumer lending, and fee-based businesses.
- Management expects net interest income and margin to face pressure from the low-rate environment and anticipates mortgage originations and mortgage revenue may decline as rates rise and inflationary pressure increases. It also expects loan growth to slow and the allowance ratio could rise if credit quality deteriorates.
- COVID-related payment modifications covered 582 loans totaling $154.0 million; 16 loans totaling $7.6 million had received a second deferral and six totaling $767,000 remained on an initial deferral. The filing states these short-term deferrals were generally not TDRs.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $600.0 million. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Interest-rate sensitivity modeling showed that a +400 basis-point shock was estimated to increase net interest income 2.9% over 12 months but reduce economic value of equity 10.8%; modeled outcomes depend on assumptions and may differ from actual results.
Important facts for investors to verify
- Whether mortgage revenue and originations remain strong, given their substantial contribution to Q1 earnings and management’s caution about future activity.
- How deposit growth, liquidity, and loan balances evolve as PPP and stimulus-related balances run off.
- Whether pandemic-related credit stress, criticized loans, nonperforming loans, or the allowance for loan losses increase.
- The effects of interest-rate changes on net interest margin, securities values, and capital; Q1 unrealized securities losses reduced accumulated other comprehensive income.
- The terms and impact of the new subordinated notes, and whether the company uses its authorized share-repurchase program while maintaining its dividend and regulatory capital buffers.