Alerus(ALRS) - 2020 Q1 - Quarterly Report

PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents Alerus Financial Corporation's unaudited consolidated financial statements for Q1 2020 and 2019, covering balance sheets, income, comprehensive income, equity, and cash flows Consolidated Balance Sheets Total assets increased to $2.51 billion from $2.36 billion at year-end 2019, driven by cash, securities, and loans, with liabilities rising due to a $150.2 million deposit increase Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,512,078 | $2,356,878 | | Net Loans | $1,731,258 | $1,697,355 | | Investment Securities, at fair value | $354,149 | $313,158 | | Cash and cash equivalents | $198,489 | $144,006 | | Total Liabilities | $2,218,470 | $2,071,150 | | Total Deposits | $2,121,514 | $1,971,316 | | Total Stockholders' Equity | $293,608 | $285,728 | Consolidated Statements of Income Net income for Q1 2020 decreased to $5.4 million from $6.4 million in Q1 2019, primarily due to lower net interest income and higher noninterest expenses Consolidated Income Statement Highlights (Unaudited) | (in thousands, except per share data) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $18,837 | $19,120 | | Provision for loan losses | $2,500 | $2,220 | | Noninterest Income | $27,189 | $25,074 | | Noninterest Expense | $36,726 | $33,514 | | Net Income | $5,363 | $6,436 | | Diluted earnings per common share | $0.30 | $0.46 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2020 increased to $10.6 million from $8.7 million in Q1 2019, driven by net income and unrealized gains on securities Comprehensive Income (Unaudited) | (in thousands) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net Income | $5,363 | $6,436 | | Other comprehensive income (loss), net of tax | $5,213 | $2,275 | | Total comprehensive income | $10,576 | $8,711 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $293.6 million from $285.7 million at year-end 2019, driven by net income and other comprehensive income, partially offset by dividends - Key changes in stockholders' equity for Q1 2020 include: Net income of $5.4 million, other comprehensive income of $5.2 million, common stock dividends of ($2.6 million), and common stock repurchases of ($0.3 million)[11] Consolidated Statements of Cash Flows Net cash increased by $54.5 million in Q1 2020, with $21.2 million used in operations and $71.6 million in investing, offset by $147.2 million from financing activities Cash Flow Summary (Unaudited) | (in thousands) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | ($21,166) | ($1,399) | | Net cash provided (used) by investing activities | ($71,567) | ($14,088) | | Net cash provided (used) by financing activities | $147,216 | $19,684 | | Net change in cash and cash equivalents | $54,483 | $4,197 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed disclosures on accounting policies, new standards, and financial statement line items, including COVID-19 impacts, loan details, and PPP participation - The company is an "emerging growth company" under the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards[28][29] - The company expects the COVID-19 pandemic to impact its 2020 operations and financial results, including additional loan loss reserves and costs for emergency preparedness, with the full impact currently unknown[26] - Subsequent to the quarter end, as of April 21, 2020, the company had assisted over 900 clients in securing approximately $300 million of PPP financing, expecting to receive $8.9 million in net processing fees[147] - The company executed a PPPL Facility Agreement with the Federal Reserve Bank of Minneapolis to provide additional liquidity for its PPP lending activities[149] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial condition and operations, highlighting COVID-19 impacts, decreased net income, noninterest income growth, and increased loan loss allowance Recent Developments This section details the significant impact of COVID-19 on operations, outlining policy responses like the CARES Act and the company's active participation in the PPP - The company anticipates significant adverse impacts on its business from COVID-19, particularly affecting borrowers in retail, restaurant, and hospitality industries, and expects decreases in assets under administration/management and mortgage originations[169] - Company response to COVID-19 includes offering payment deferrals for up to 90 days for consumer, small business, and commercial customers[171] - As of April 21, 2020, the company had assisted over 900 borrowers in receiving approval for approximately $300 million in PPP loans[173] Operating Results Overview Q1 2020 performance shows a decline in profitability ratios, with return on average assets at 0.89% and noninterest income contributing 59.07% of revenue Key Performance Ratios | Performance Ratios | March 31, 2020 | Dec 31, 2019 | March 31, 2019 | | :--- | :--- | :--- | :--- | | Return on average total assets | 0.89% | 1.33% | 1.20% | | Return on average tangible common equity (non-GAAP) | 9.76% | 13.78% | 18.99% | | Net interest margin (taxable-equivalent basis) (non-GAAP) | 3.35% | 3.45% | 3.86% | | Efficiency ratio (non-GAAP) | 77.47% | 73.68% | 73.30% | | Tangible book value per common share (non-GAAP) | $14.55 | $14.08 | $11.25 | Discussion and Analysis of Results of Operations Net income decreased to $5.4 million in Q1 2020, primarily due to higher noninterest expense and increased loan loss provision, partially offset by noninterest income growth - Net interest income decreased by $283 thousand year-over-year to $18.8 million, as a 31 basis point reduction in loan yields outweighed the benefit of lower borrowing costs, compressing net interest margin (FTE) to 3.35% from 3.86% in Q1 2019[188][189] - The provision for loan losses increased by $280 thousand to $2.5 million, primarily due to allocations for economic uncertainties related to COVID-19[198] - Noninterest income grew 8.4% to $27.2 million, led by a $1.2 million increase in retirement and benefit services revenue and a $476 thousand increase in mortgage banking revenue[202] - Noninterest expense rose 9.6% to $36.7 million, driven by higher compensation related to mortgage originations and increased technology spending for the 'One Alerus' initiative[205] Financial Condition Total assets grew to $2.5 billion, with total loans increasing to $1.76 billion and the allowance for loan losses rising to $27.0 million due to COVID-19 impacts Loan Portfolio Composition | (in thousands) | March 31, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Commercial | $1,050,230 | $1,000,225 | +5.0% | | Consumer | $708,047 | $721,054 | -1.8% | | Total Loans | $1,758,277 | $1,721,279 | +2.1% | - Nonperforming loans to total loans decreased to 0.40% at March 31, 2020, from 0.45% at December 31, 2019[221] - The allowance for loan losses to total loans increased to 1.54% from 1.39% at year-end 2019, primarily due to increased provision for economic uncertainties from COVID-19[224] - Stockholders' equity increased by $7.9 million to $293.6 million, driven by net income and an increase in accumulated other comprehensive income[241] Liquidity The company maintained strong liquidity, with on-balance sheet liquidity increasing to $364.3 million and significant additional funding available from FHLB and unsecured lines - On-balance sheet liquidity, including cash and unencumbered securities, stood at $364.3 million at the end of Q1 2020[252] - The company has access to significant off-balance sheet liquidity, including $573.3 million in borrowing capacity from the FHLB and $102.0 million in unsecured lines of credit[253] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, showing asset sensitivity where a +100 bps rate shock increases net interest income by 1.0%, while a -100 bps shock decreases EVE by 38.6% Net Interest Income (NII) Sensitivity Analysis (Next 12 Months) | Rate Shock | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | +300 bps | +5.2% | +4.2% | | +100 bps | +1.0% | +1.5% | | -100 bps | -1.2% | -5.4% | Economic Value of Equity (EVE) Sensitivity Analysis | Rate Shock | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | +300 bps | +11.9% | +11.4% | | +100 bps | +7.5% | +6.1% | | -100 bps | -38.6% | -23.2% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - The President and CEO and the CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[271] - No material changes to internal control over financial reporting occurred during the quarter[272] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material pending legal proceedings beyond ordinary routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business[273] Item 1A. Risk Factors This section highlights new risks from the COVID-19 pandemic, including adverse customer impacts and increased loan defaults, and risks associated with PPP participation - The COVID-19 pandemic could adversely impact customers, particularly in the retail, restaurant, and hospitality industries, impairing their ability to meet obligations and potentially leading to a recession[274][276] - The economic impact from COVID-19 is expected to be severe and could result in significant losses in the loan portfolio, materially impacting earnings and capital[279] - Participation in the SBA's Paycheck Protection Program (PPP) exposes the company to risks of litigation from customers regarding loan processing and the risk that the SBA may not fund all loan guarantees[279][280][283] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities and no material change in the use of IPO proceeds, which were used to pay down short-term borrowings - There were no unregistered sales of equity securities in the period[284] - Net proceeds from the 2019 IPO have been used by the Bank to pay down short-term borrowings, consistent with the plan described in the prospectus[285] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[286] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[287] Item 5. Other Information The company reports no other information for this item - None[287] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications under Rule 13(a)-14(a) and Section 906 of the Sarbanes-Oxley Act, as well as XBRL Instance Documents[289]