Alerus Financial Corporation Reports Fourth Quarter 2021 Net Income of $12.7 Million and Record Annual Net Income of $52.7 Million

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GRAND FORKS, N.D., January 26, 2022--(BUSINESS WIRE)--Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $12.7 million for the fourth quarter of 2021, or $0.72 per diluted common share, compared to net income of $13.1 million, or $0.74 per diluted common share, for the third quarter of 2021, and net income of $10.2 million, or $0.57 per diluted common share, for the fourth quarter of 2020.

CEO Comments

President and Chief Executive Officer Katie Lorenson said, "Alerus continues to be a purpose-driven company, focused on its business model, strategy and culture. Our talented Alerus team members executed at exceptional levels, resulting in a strong finish to the fourth quarter and another record setting year for Alerus with annual net income of $52.7 million. Our team is focused on serving clients holistically and with their best interests in mind. This advice-based approach coupled with our diversified business model resulted in our highest annual levels of new business in nearly every product offering of the Company. Our company continues to be agile in meeting client needs, serving more clients than ever through digital channels, all while managing our expense base. The overall quality of our credit portfolio remained strong with a significant recovery during the quarter leading to a $1.5 million reversal of provision expense. The company continues to maintain robust capital levels which we believe will position Alerus for ongoing organic and in-organic growth. We continued to execute our acquisition strategy and announced in early December our proposed acquisition of MPB BHC, Inc. and it’s wholly-owned banking subsidiary, Metro Phoenix Bank. Assuming the consummation of the transactions, this will be our twenty-fifth acquisition since 2000. We look forward to welcoming the clients and employees of the high performing Metro Phoenix Bank, a commercial focused community bank headquartered in the strong and growing Phoenix market. We are proud of our company’s performance, ability to focus on long-term growth for shareholders through our diversified business model, solid financial foundation and, strategic focus on serving clients holistically."

Quarterly Highlights

  • Return on average total assets of 1.50%, compared to 1.62% for the third quarter of 2021

  • Return on average tangible common equity(1) of 17.36%, compared to 18.13% for the third quarter of 2021

  • Net interest margin (tax-equivalent)(1) was 2.84%, compared to 2.78% for the third quarter of 2021

  • Allowance for loan losses to total loans, excluding PPP loans was 1.83%, compared to 2.00% as of December 31, 2020

  • Efficiency ratio(1) of 71.06%, compared to 71.49% for the third quarter of 2021

  • Noninterest income for the fourth quarter of 2021 was 59.67% of total revenue, compared to 63.04% for the third quarter of 2021

  • Mortgage originations totaled $356.8 million, a 14.2% decrease from the third quarter of 2021

  • Investment securities increased $613.4 million, or 103.5%, since December 31, 2020

  • Loans held for sale decreased $76.0 million, or 62.0%, since December 31, 2020

  • Loans held for investment decreased $221.4 million, or 11.2%, since December 31, 2020; excluding Paycheck Protection Program, or PPP, loans, loans held for investment increased $13.5 million, or 0.8%, since December 31, 2020

  • Deposits increased $348.6 million, or 13.6%, since December 31, 2020

Full Year 2021 Highlights

  • Net income of $52.7 million, an increase of $8.0 million, or 17.9%, compared to $44.7 million in 2020

  • Diluted earnings per share, or EPS, of $2.97, compared to $2.52 in 2020

  • Return on average total assets of 1.66%, compared to 1.61% in 2020

  • Return on average tangible common equity(1) of 18.89%, compared to 17.74% in 2020

  • Revenue of $234.5 million, an increase of $1.3 million, or 0.5%, compared to $233.2 million in 2020

    • Net interest income was $87.1 million, an increase of $3.3 million, or 3.9%, compared to $83.8 million in 2020

    • Noninterest income was $147.4 million, a decrease of $2.0 million, or 1.3%, compared to $149.4 million in 2020

  • Noninterest expense of $168.9 million, an increase of $5.1 million, or 3.1%, compared to $163.8 million in 2020

  • Provision for loan losses expense reversed $3.5 million, a decrease of $14.4 million from 2020

  • Average loans of $1.9 billion, a decrease of $86.9 million, or 4.5%, from 2020

  • Average deposits of $2.7 billion, an increase of $372.6 million, or 15.9%, from 2020

(1) Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

Selected Financial Data (unaudited)

As of and for the

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

(dollars and shares in thousands, except per share data)

2021

2021

2020

2021

2020

Performance Ratios

Return on average total assets

1.50

%

1.62

%

1.34

%

1.66

%

1.61

%

Return on average common equity

14.12

%

14.68

%

12.30

%

15.22

%

14.40

%

Return on average tangible common equity (1)

17.36

%

18.13

%

15.13

%

18.89

%

17.74

%

Noninterest income as a % of revenue

59.67

%

63.04

%

62.57

%

62.86

%

64.05

%

Net interest margin (tax-equivalent) (1)

2.84

%

2.78

%

3.23

%

2.90

%

3.22

%

Efficiency ratio (1)

71.06

%

71.49

%

74.44

%

70.02

%

68.40

%

Net charge-offs/(recoveries) to average loans

(0.22)

%

(0.06)

%

(0.30)

%

(0.04)

%

0.03

%

Dividend payout ratio

22.22

%

21.62

%

26.32

%

21.21

%

23.81

%

Per Common Share

Earnings per common share - basic

$

0.73

$

0.75

$

0.58

$

3.02

$

2.57

Earnings per common share - diluted

$

0.72

$

0.74

$

0.57

$

2.97

$

2.52

Dividends declared per common share

$

0.16

$

0.16

$

0.15

$

0.63

$

0.60

Tangible book value per common share (1)

$

17.87

$

17.46

$

16.00

Average common shares outstanding - basic

17,210

17,205

17,122

17,189

17,106

Average common shares outstanding - diluted

17,480

17,499

17,450

17,486

17,438

Other Data

Retirement and benefit services assets under administration/management

$

36,732,938

$

36,202,553

$

34,199,954

Wealth management assets under administration/management

$

4,039,931

$

3,865,062

$

3,338,594

Mortgage originations

$

356,821

$

415,792

$

607,166

$

1,836,064

$

1,778,977

(1) Represents a non-GAAP financial measure. See "Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures."

Results of Operations

Net Interest Income

Net interest income for the fourth quarter of 2021 was $22.8 million, a $1.7 million, or 7.8%, increase from the third quarter of 2021. Net interest income decreased $364 thousand, or 1.6%, from $23.2 million for the fourth quarter of 2020. During the fourth quarter of 2021, average interest earning assets increased $158.7 million, primarily due to an increase of $249.9 million in investment securities, partially offset by decreases of $49.1 million in interest-bearing deposits with banks and $38.2 million in loans held for investment. The change in the balance sheet mix resulted in a 6 basis point increase in the average earning asset yield. Net interest income earned from PPP loans during the fourth quarter of 2021 totaled $2.2 million, an increase of $160 thousand, from the $2.0 million earned during the third quarter. The cost of interest-bearing liabilities had a modest decrease of 1 basis point from the third quarter of 2021.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 2.84% for the fourth quarter of 2021, a 6 basis point increase from 2.78% for the third quarter of 2021, and a 39 basis point decrease from 3.23% in the fourth quarter of 2020. The linked quarter increase was primarily due to higher yields on interest earning assets. Excluding PPP loans, net interest margin was 2.62% for the fourth quarter of 2021, unchanged from the third quarter of 2021. The year over year decrease was primarily attributable to the historically low and flat yield curve and a more liquid balance sheet mix which resulted in a 49 basis point decrease in interest earning asset yields. The decrease in earning asset yield was offset by a 16 basis point decrease in the average rate paid on interest-bearing liabilities.

Noninterest Income

Noninterest income for the fourth quarter of 2021 was $33.7 million, a $2.3 million, or 6.4%, decrease from the third quarter of 2021. The decrease was primarily driven by a $3.1 million decrease in mortgage banking revenue, a result of a $59.0 million decrease in mortgage originations. The decrease in mortgage banking revenue was partially offset by increases of $521 thousand in retirement and benefit services revenue and $338 thousand in wealth management revenue.

Noninterest income for the fourth quarter of 2021 decreased $5.0 million, or 12.9%, from $38.7 million in the fourth quarter of 2020. This decrease was primarily due to an $8.8 million decrease in mortgage banking revenue, a result of a $250.3 million decrease in mortgage originations, as well as a 28 basis point decrease in the gain on sale margin. Partially offsetting this decrease was a $2.6 million increase in retirement and benefit services income, primarily driven by the December 2020 acquisition of Retirement Planning Services, Inc. and a $544 thousand increase in document restatement fees. In addition, wealth management revenue increased $826 thousand, or 17.2%, primarily driven by organic growth and market increases in assets under management.

Noninterest Expense

Noninterest expense for the fourth quarter of 2021 was $41.3 million, a decrease of $765 thousand, or 1.8%, compared to the third quarter of 2021. The decrease was primarily due to decreases of $1.2 million in compensation expense, $743 thousand in mortgage and lending expense, partially offset by increases of $532 thousand in employee taxes and benefits expense, $350 thousand in other noninterest expense, and $305 thousand in professional fees and assessments. The decreases in compensation expense as well as mortgage and lending expense were primarily attributable to the $59.0 million decrease in mortgage originations from the previous quarter. Mortgage and lending expense was also positively impacted by a $314 thousand change in the valuation of mortgage servicing rights. The increase in employee taxes and benefits expense was primarily a result of an increase in incentive awards due to the Company’s record financial performance. The $330 thousand increase in other noninterest expense was primarily attributable to an operating charge-off of $134 thousand in the fourth quarter compared to a $250 thousand recovery in the third quarter. The increase in professional fees and assessments was due to expenses related to the announced acquisition of Metro Phoenix Bank.

Noninterest expense for the fourth quarter of 2021 decreased $5.8 million, or 12.4%, from $47.1 million in the fourth quarter of 2020. The decrease was primarily attributable to decreases in compensation expense, mortgage and lending expense, and occupancy and equipment expense, partially offset by increased employee taxes and benefits expense. The decline in mortgage originations in the fourth quarter of 2021 drove the decreases of compensation expense, as well as mortgage and lending expense. Employee taxes and benefits expense increased as a result of increased health insurance expenses. Occupancy and equipment expense decreased due to the closure of certain offices in 2021 and to the transition of many of our employees to a hybrid work environment.

Financial Condition

Total assets were $3.4 billion as of December 31, 2021, an increase of $378.9 million, or 12.6%, from December 31, 2020. The overall increase in total assets included an increase of $613.4 million in investment securities, partially offset by a $221.4 million decrease in loans held for investment and a $76.0 million decrease in loans held for sale. The decrease in loans held for investment was primarily due to PPP loan balances decreasing by $234.9 million from December 31, 2020.

Loans

Total loans were $1.8 billion as of December 31, 2021, a decrease of $221.4 million, or 11.2%, from December 31, 2020. The decrease was primarily due to a $255.1 million decrease in the commercial and industrial loan portfolio, primarily attributable to a $234.9 million decrease in PPP loans. Excluding PPP loans, total loans increased $13.5 million, or 0.8%, in 2021. This increase was primarily due to a $47.3 million increase in residential real estate first mortgages and a $35.9 million increase in commercial real estate, partially offset by a $27.9 million decrease in consumer revolving and installment loans, a $20.2 million decrease in commercial and industrial loans, and a $17.7 million decrease in residential real estate junior liens.

The following table presents the composition of our loan portfolio as of the dates indicated:

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2021

2021

2021

2021

2020

Commercial

Commercial and industrial (1)

$

436,761

$

506,599

$

572,734

$

678,029

$

691,858

Real estate construction

40,619

37,751

36,549

40,473

44,451

Commercial real estate

598,893

573,518

567,987

569,451

563,007

Total commercial

1,076,273

1,117,868

1,177,270

1,287,953

1,299,316

Consumer

Residential real estate first mortgage

510,716

501,339

470,822

454,958

463,370

Residential real estate junior lien

125,668

130,243

130,180

130,299

143,416

Other revolving and installment

45,363

50,936

57,040

64,135

73,273

Total consumer

681,747

682,518

658,042

649,392

680,059

Total loans

$

1,758,020

$

1,800,386

$

1,835,312

$

1,937,345

$

1,979,375

(1)

Includes PPP loans of $33.6 million at December 31, 2021, $103.5 million at September 30, 2021, $165.0 million at June 30, 2021, $256.8 million at March 31, 2021 and $268.4 million at December 31, 2020.

Deposits

Total deposits were $2.9 billion as of December 31, 2021, an increase of $348.6 million, or 13.6%, from December 31, 2020. Interest-bearing deposits increased $164.4 million, while noninterest-bearing deposits increased $184.1 million in 2021. Key drivers of the increase included new deposit production, ongoing higher depositor balances due to the uncertain economic environment and volatile financial markets. Synergistic deposits increased $73.4 million to $669.0 million as of December 31, 2021. Excluding synergistic deposits, commercial transaction deposits increased $156.3 million, or 14.1%, while consumer transaction deposits increased $95.0 million, or 14.8%, since December 31, 2020. Noninterest-bearing deposits as a percentage of total deposits were 32.1% as of December 31, 2021, compared to 29.3% as of December 31, 2020.

The following table presents the composition of our deposit portfolio as of the dates indicated:

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2021

2021

2021

2021

2020

Noninterest-bearing demand

$

938,840

$

797,062

$

758,820

$

775,434

$

754,716

Interest-bearing

Interest-bearing demand

714,669

673,916

736,043

674,466

618,900

Savings accounts

96,825

92,632

89,437

87,492

79,902

Money market savings

937,305

924,678

920,831

967,273

909,137

Time deposits

232,912

224,800

205,809

212,908

209,338

Total interest-bearing

1,981,711

1,916,026

1,952,120

1,942,139

1,817,277

Total deposits

$

2,920,551

$

2,713,088

$

2,710,940

$

2,717,573

$

2,571,993

Asset Quality

Total nonperforming assets were $3.1 million as of December 31, 2021, a decrease of $2.1 million, or 42.1%, from December 31, 2020. As of December 31, 2021, the allowance for loan losses was $31.6 million, or 1.80% of total loans, compared to $34.2 million, or 1.73% of total loans, as of December 31, 2020. Excluding PPP loans, the ratio of allowance for loan losses to total loans was 1.83% at December 31, 2021, compared to 2.00% as of December 31, 2020.

The following table presents selected asset quality data as of and for the periods indicated:

As of and for the three months ended

December 31,

September 30,

June 30,

March 31,

December 31,

(dollars in thousands)

2021

2021

2021

2021

2020

Nonaccrual loans

$

2,076

$

6,229

$

6,960

$

4,756

$

5,050

Accruing loans 90+ days past due

121

30

Total nonperforming loans

2,197

6,229

6,960

4,756

5,080

OREO and repossessed assets

885

862

858

139

63

Total nonperforming assets

$

3,082

$

7,091

$

7,818

$

4,895

$

5,143

Net charge-offs/(recoveries)

(1,006)

(302)

(6)

488

(1,509)

Net charge-offs/(recoveries) to average loans

(0.22)

%

(0.06)

%

%

0.10

%

(0.30)

%

Nonperforming loans to total loans

0.12

%

0.35

%

0.38

%

0.25

%

0.26

%

Nonperforming assets to total assets

0.09

%

0.22

%

0.25

%

0.16

%

0.17

%

Allowance for loan losses to total loans

1.80

%

1.78

%

1.84

%

1.74

%

1.73

%

Allowance for loan losses to nonperforming loans

1,437

%

515

%

...

485

%

710

%

674

%

For the fourth quarter of 2021, we had net recoveries of $1.0 million compared to net recoveries of $302 thousand for the third quarter of 2021 and $1.5 million of net recoveries for the fourth quarter of 2020. The $1.0 million recovery was the result of a payoff on a commercial real estate loan that was previously charged off.

There was a $1.5 million reversal of provision for loan losses recorded in the fourth quarter of 2021, a $500 thousand increase from the third quarter of 2021, and a decrease of $2.9 million from the fourth quarter of 2020. The negative provision in the fourth quarter of 2021 was driven by net recoveries in four of the last five quarters and improvement of credit quality indicators.

Capital

Total stockholders’ equity was $359.4 million as of December 31, 2021, an increase of $29.2 million, or 8.9%, from December 31, 2020. Tangible book value per common share, a non-GAAP financial measure, increased to $17.87 as of December 31, 2021, from $16.00 as of December 31, 2020. Tangible common equity to tangible assets, a non-GAAP financial measure, decreased to 9.21% as of December 31, 2021, from 9.27% as of December 31, 2020.

The following table presents our capital ratios as of the dates indicated:

December 31,

September 30,

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