Alerus(ALRS) - 2023 Q2 - Quarterly Report

Part 1. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's analysis of its financial condition and operating results Consolidated Financial Statements This section presents Alerus Financial Corporation's unaudited consolidated financial statements and detailed notes for the periods ended June 30, 2023 Consolidated Balance Sheets Total assets increased to $3.83 billion driven by loan growth, while deposits slightly decreased and short-term borrowings rose Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 (Audited) | | :--- | :--- | :--- | | Total Assets | $3,832,978 | $3,779,637 | | Net loans | $2,497,826 | $2,412,848 | | Total investment securities (AFS & HTM) | $985,870 | $1,039,226 | | Total Liabilities | $3,475,293 | $3,422,765 | | Total deposits | $2,852,855 | $2,915,484 | | Short-term borrowings | $492,060 | $378,080 | | Total Stockholders' Equity | $357,685 | $356,872 | Consolidated Statements of Income Net income for Q2 2023 slightly decreased to $9.1 million due to lower noninterest and net interest income Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $22,234 | $22,776 | $45,892 | $44,449 | | Provision for credit losses | $0 | $0 | $550 | $0 | | Noninterest income | $25,778 | $29,226 | $51,031 | $58,696 | | Noninterest expense | $36,373 | $39,984 | $74,242 | $78,055 | | Net income | $9,104 | $9,293 | $17,290 | $19,477 | | Diluted EPS | $0.45 | $0.52 | $0.85 | $1.10 | Consolidated Statements of Comprehensive Income Total comprehensive income improved significantly to $4.7 million in Q2 2023, driven by a smaller other comprehensive loss Comprehensive Income (Loss) Summary (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $9,104 | $9,293 | $17,290 | $19,477 | | Other comprehensive income (loss), net of tax | $(4,435) | $(28,081) | $(2,101) | $(66,150) | | Total comprehensive income (loss) | $4,669 | $(18,788) | $15,189 | $(46,673) | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity slightly increased to $357.7 million, influenced by net income, share repurchases, dividends, and an accounting principle change - For the six months ended June 30, 2023, stockholders' equity was impacted by a $4.5 million reduction to retained earnings due to the adoption of a new accounting principle (CECL)[13] - Key activities affecting equity in the first six months of 2023 included $17.3 million in net income, $7.4 million in common stock dividends, and $3.3 million in common stock repurchases[13] Consolidated Statements of Cash Flows Net cash provided by operating activities was $12.0 million, with investing activities using $45.4 million and financing providing $40.6 million Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12,000 | $17,731 | | Net cash used in investing activities | $(45,383) | $(157,962) | | Net cash provided (used) by financing activities | $40,612 | $(65,037) | | Net change in cash and cash equivalents | $7,229 | $(205,268) | Notes to Consolidated Financial Statements This section details accounting policies, including CECL adoption, and provides insights into investment securities, loans, and segment reporting - The company operates as a diversified financial services company with four distinct business lines: banking, retirement and benefit services, wealth management, and mortgage[21] - The company qualifies as 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[27] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Q2 2023 financial performance, highlighting net interest margin pressure, declining mortgage revenue, expense management, and strong asset quality - The company generates a majority of its overall revenue from noninterest income, driven by its retirement and benefit services, wealth management, and mortgage business lines[161] - Net income for Q2 2023 was $9.1 million, a 2% decrease from Q2 2022, primarily due to a $3.4 million decrease in noninterest income and a $0.5 million decrease in net interest income, partially offset by a $3.6 million decrease in noninterest expense[174] - Total assets increased by $53.3 million (1.4%) to $3.8 billion since year-end 2022, driven by an $89.5 million increase in loans[194] Operating Results Overview Key Q2 2023 performance metrics include a 0.96% ROA, 13.71% ROTCE, 2.52% net interest margin, and 53.69% noninterest income as a percentage of revenue Key Performance Ratios | Performance Ratio | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Return on average total assets | 0.96% | 1.14% | | Return on average tangible common equity (Non-GAAP) | 13.71% | 15.25% | | Net interest margin (taxable-equivalent) | 2.52% | 2.98% | | Efficiency ratio (Non-GAAP) | 72.79% | 74.72% | | Noninterest income as a % of revenue | 53.69% | 56.20% | Net Interest Income Net interest income decreased by 2.4% to $22.2 million in Q2 2023, with net interest margin compressing to 2.52% due to rising interest expenses - Net interest income decreased by $542 thousand (2.4%) YoY to $22.2 million in Q2 2023[177] - The net interest margin (FTE) for Q2 2023 was 2.52%, a decrease from 2.98% in Q2 2022, due to rising costs of interest-bearing liabilities[177] Rate/Volume Analysis of Net Interest Income Change (Q2 2023 vs Q2 2022, in thousands) | Description | Change due to Volume | Change due to Rate | Total Interest Variance | | :--- | :--- | :--- | :--- | | Total interest income | $5,254 | $10,700 | $15,954 | | Total interest expense | $902 | $15,554 | $16,456 | | Change in net interest income | $4,352 | $(4,854) | $(502) | Noninterest Income Total noninterest income decreased by 11.8% to $25.8 million in Q2 2023, primarily due to a $3.1 million drop in mortgage banking revenue Noninterest Income Breakdown (in thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Retirement and benefit services | $15,890 | $16,293 | | Wealth management | $5,449 | $5,548 | | Mortgage banking | $2,905 | $6,038 | | Other | $1,534 | $1,347 | | Total noninterest income | $25,778 | $29,226 | - The decrease in noninterest income was primarily driven by a $3.1 million decline in mortgage banking revenue, as originations decreased by $158.1 million (58.7%) compared to 2022[188] Noninterest Expense Total noninterest expense decreased by 9% to $36.4 million in Q2 2023, mainly due to lower compensation and employee benefits Noninterest Expense Breakdown (in thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Compensation | $18,847 | $21,248 | | Employee taxes and benefits | $4,724 | $5,787 | | Business services, software and technology | $5,269 | $4,785 | | Professional fees and assessments | $1,530 | $2,246 | | Other | $6,003 | $5,888 | | Total noninterest expense | $36,373 | $39,984 | - The number of full-time equivalent employees was reduced by 65, or 8.1%, from Q2 2022 (after adjusting for the Metro Phoenix Bank acquisition), contributing to lower expenses[191] Financial Condition Total assets reached $3.8 billion driven by loan growth, while deposits decreased, and asset quality and capital ratios remained strong - Total loans grew by $89.5 million (3.7%) since year-end 2022, primarily driven by a $122.2 million increase in commercial real estate loans[195] - Nonperforming assets decreased to $2.6 million, or 0.07% of total assets, as of June 30, 2023, compared to $3.8 million, or 0.10% of total assets, at year-end 2022[203] - Total deposits decreased by $62.6 million (2.1%) since year-end 2022, with a notable shift from noninterest-bearing deposits (down $145.5 million) to interest-bearing deposits (up $82.8 million)[218] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through NII simulation and EVE sensitivity analysis, indicating liability sensitivity to rising rates - The company's primary market risk is interest rate risk, managed by the ALCO through NII simulation and EVE sensitivity analysis[230][232] Net Interest Income Sensitivity Analysis (as of June 30, 2023) | Rate Shock | Change in NII (Next 12 Months) | Change in NII (Next 24 Months) | | :--- | :--- | :--- | | +400 bps | -35.0% | -18.2% | | +200 bps | -17.5% | -9.2% | | +100 bps | -8.5% | -4.1% | | -100 bps | +7.7% | +2.8% | Economic Value of Equity (EVE) Sensitivity Analysis | Rate Shock | Change in EVE (June 30, 2023) | Change in EVE (Dec 31, 2022) | | :--- | :--- | :--- | | +400 bps | -27.7% | -19.5% | | +200 bps | -14.6% | -10.4% | | +100 bps | -6.9% | -4.9% | | -100 bps | +5.7% | +4.0% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The President and CEO, CFO, and Chief Accounting Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[235][238] - There were no changes in internal control over financial reporting during the fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[239] Part 2: OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and other disclosures 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[240] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K have occurred[241] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 170,046 shares of common stock at an average price of $17.37 per share during Q2 2023 Issuer Repurchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | — | $— | | May 2023 | 62,513 | $16.13 | | June 2023 | 107,533 | $18.09 | | Total | 170,046 | $17.37 | - The stock repurchase program, approved on February 18, 2021, authorizes the repurchase of up to 770,000 shares and is set to continue until February 28, 2024[243] Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading plans during the quarter ended June 30, 2023 - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the fiscal quarter[245] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and iXBRL data files Signatures The report is duly signed and authorized by the President and CEO, and the Executive Vice President and CFO, on August 3, 2023