Alerus Financial Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the filing also provides unaudited fourth-quarter results. Alerus is a diversified financial services company with banking, retirement and benefit services, wealth management, and mortgage businesses, operating primarily in North Dakota, Minnesota, and Arizona.
Financial performance and condition
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $233.2 million | $188.7 million |
| Net income | $44.7 million | $29.5 million |
| Diluted earnings per share | $2.52 | $1.91 |
| Net interest income | $83.8 million | $74.6 million |
| Net interest margin, taxable-equivalent | 3.22% | 3.65% |
| Noninterest income / share of revenue | $149.4 million / 64.1% | $114.2 million / 60.5% |
| Provision for loan losses | $10.9 million | $7.3 million |
| Noninterest expense | $163.8 million | $142.5 million |
| Efficiency ratio | 68.40% | 73.22% |
- Balance sheet: Assets were $3.01 billion, loans $1.98 billion, deposits $2.57 billion, and stockholders’ equity $330.2 million. Assets rose 27.9% year over year, with substantial deposit growth and increased securities and loans.
- Asset quality: Nonperforming loans were $5.1 million, or 0.26% of loans, versus 0.45% a year earlier. The allowance was $34.2 million, or 1.73% of loans, compared with $23.9 million and 1.39%. Net charge-offs were 0.03% of average loans.
- Cash flow: Operating activities used $22.3 million, compared with $19.2 million provided in 2019; investing activities used $538.4 million; financing activities provided $589.6 million, principally reflecting $600.7 million of deposit growth. Cash and cash equivalents ended the year at $173.0 million.
- Liquidity and debt: Management reported $511.1 million of on-balance-sheet liquidity and $631.7 million of available FHLB borrowing capacity. No short-term borrowings were outstanding at year-end. Long-term debt was $58.7 million, including $50.0 million of subordinated notes and $8.6 million of junior subordinated debentures.
- Capital: The Bank’s year-end common equity Tier 1 ratio was 12.10%, total capital ratio 13.36%, and Tier 1 leverage ratio 8.50%; it was categorized as well capitalized. Tangible common equity to tangible assets was 9.27% (non-GAAP).
Material changes and notable items
- Net income increased 51.2%. The main drivers were higher mortgage banking revenue and net interest income; higher operating expenses and loan-loss provision partly offset the gains.
- Mortgage originations increased 88.0% to $1.78 billion, and mortgage banking revenue rose 138.9% to $61.6 million. Higher mortgage-related compensation and lending costs accompanied the production increase.
- Net interest margin fell 43 basis points to 3.22%, as lower asset yields in the rate-cut environment outweighed reductions in funding costs. Interest expense declined $6.5 million, while net interest income increased $9.3 million.
- Retirement and benefit services revenue declined 4.5% to $61.0 million, with plan attrition exceeding new business and a transition away from revenue sharing. Year-end segment assets under administration/management were $34.2 billion; market gains and an acquisition offset net outflows.
- Deposits grew 30.5% to $2.57 billion, supported by PPP-related customer balances, government stimulus, synergistic deposits, and precautionary liquidity accumulation. Loans grew 15.0%; $268.4 million of year-end loans were PPP loans.
- Alerus acquired Retirement Planning Services, Inc. on December 18, 2020, for a reported purchase price of $13.4 million, including an earn-out liability. The acquisition added approximately $1.3 billion in retirement and benefit assets under administration/management.
- The company redeemed its $50.0 million subordinated notes on January 29, 2021. A subsequent $50.0 million Bank of North Dakota subordinated-debt commitment was approved at a stated initial fixed rate of 3.50%; management said it planned to draw on it, but the filing does not establish that the borrowing was completed.
Outlook, risks, and contingencies
Management gave no specific earnings or revenue guidance. It said COVID-19 had not adversely affected FY2020 results as of year-end, but expected continuing uncertainty and potential adverse effects on borrowers, collateral values, loan demand, asset-based fees, mortgage activity, liquidity, capital, and future results. At year-end, 577 loans totaling $153.6 million had received payment deferrals; most had returned to normal payment status, while 39 loans totaling $12.1 million remained on first or second deferrals.
- Key exposures include credit deterioration from the pandemic, commercial real estate and other loan concentrations, and geographic concentration: 93.5% of loans were to borrowers in North Dakota, Minnesota, or Arizona.
- Fee revenue depends on retirement-plan and wealth-management assets, client retention, market values, and mortgage origination and sale activity. Fee compression and client outflows could weigh on revenue.
- Other stated risks include interest-rate and securities valuation changes, large-depositor concentration, LIBOR transition, cybersecurity and third-party service interruptions, regulatory and compliance obligations, and potential mortgage repurchase claims.
- Loan commitments and standby letters of credit totaled $617.7 million at year-end; these are contingent commitments, not reported funded debt.
- The board intended to maintain or increase the quarterly dividend, but payment remains discretionary and subject to earnings, capital, regulatory, and other constraints. FY2020 dividends declared were $0.60 per share.
Reporting and audit notes: The independent auditor gave an unqualified opinion on the financial statements. A separate auditor attestation on internal control over financial reporting was not required because Alerus was an emerging growth company; management assessed controls as effective.
Important facts for investors to verify
- Whether mortgage production and unusually strong mortgage revenue can be sustained, and how the associated compensation and operating costs evolve.
- How the loan portfolio performs as pandemic-related deferrals expire, particularly in commercial real estate and affected industries; monitor criticized loans, charge-offs, and allowance adequacy.
- Whether retirement and benefit services can replace plan outflows with new business or acquisitions, and how market movements affect asset-based fees.
- Deposit stability and liquidity after unusually large stimulus- and PPP-related inflows, including depositor concentration and collateral availability for borrowing.
- Completion and terms of the planned subordinated-debt borrowing, the effect of the note redemption on funding and capital, and future dividend capacity.
- The eventual effect of CECL adoption, expected by the company on January 1, 2023, and the transition away from LIBOR on affected contracts and systems.