Alerus Financial Corporation Reports Second Quarter 2022 Net Income of $9.3 Million

MINNEAPOLIS, July 27, 2022–(BUSINESS WIRE)–Alerus Financial Corporation (Nasdaq: ALRS) reported net income of $9.3 million for the second quarter of 2022, or $0.52 per diluted common share, compared to net income of $10.2 million, or $0.57 per diluted common share, for the first quarter of 2022, and net income of $11.7 million, or $0.66 per diluted common share, for the second quarter of 2021.

CEO Comments

President and Chief Executive Officer Katie Lorenson said, “In the second quarter, we reported earnings per share of $0.53, which included a merger expense impact of $(0.05) related to the acquisition of Metro Phoenix Bank. Excluding the impact of this merger related expense, our underlying core ROE was 12.7% which is consistent with our long-term strategic performance and continued goal of achieving a ROE greater than 12%. We continue to see robust loan growth which drove solid net interest income growth. Despite the challenging mortgage and equity markets, we saw the value of our diversified business model as we expanded our client base in both retirement services and wealth management through consistent execution of our One Alerus Growth Strategy.

Our credit quality remains strong and our allowance for loan loss reserve is 1.66% to total loans. We are well positioned for any potential economic volatility, with a common tier 1 ratio of 14.19%. With the closing of the Metro Phoenix Bank acquisition and the continued recruiting successes, Alerus is poised to expand its commercial presence especially in the faster growing parts of our footprint. As we continue to grow and position ourselves for the long term, I want to thank our talented team members for their hard work and dedication to serving in the best interest of our clients.”

Quarterly Highlights

• Return on average total assets of 1.14%, compared to 1.26% for the first quarter of 2022

• Return on average common equity of 11.93%, compared to 11.78% for the first quarter of 2022

• Return on average tangible common equity⁽¹⁾ of 15.25%, compared to 14.72% for the first quarter of 2022

• Net interest margin (tax-equivalent) was 2.98%, compared to 2.83% for the first quarter of 2022

• Allowance for loan losses to total loans was 1.66%, compared to 1.80% as of December 31, 2021

• Noninterest income for the second quarter of 2022 was 56.20% of total revenue, compared to 57.62% for the first quarter of 2022

• Loans held for investment increased $132.2 million, or 7.5%, since December 31, 2021; excluding Paycheck Protection Program, or PPP loans, loans held for investment increased $158.8 million, or 9.2%, since December 31, 2021

• Common equity tier 1 capital to risk weighted assets was 14.19%, compared to 14.65% as of December 31, 2021

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

Selected Financial Data (unaudited)

Results of Operations

Net Interest Income

Net interest income for the second quarter of 2022 was $22.8 million, a $1.1 million, or 5.1%, increase from the first quarter of 2022. Net interest income increased $1.6 million, or 7.7%, from $21.1 million for the second quarter of 2021. The linked quarter increase in net interest income was primarily driven by increases of $696 thousand in interest income from loans and $625 thousand in interest income from investment securities, partially offset by a $259 thousand increase in interest expense. Interest expense increased due to an increase in short-term borrowings because of corresponding decrease in deposits. Interest income from loans increased primarily due to a $70.4 million increase in average loans.

Net interest margin (tax-equivalent), a non-GAAP financial measure, was 2.98% for the second quarter of 2022, a 15 basis point increase from 2.83% for the first quarter of 2022, and a 10 basis point increase from 2.88% in the second quarter of 2021, primarily due to an increase in earning asset yields and a change in balance sheet mix given strong growth in the loan portfolio.

Noninterest Income

Noninterest income for the second quarter of 2022 was $29.2 million, a $244 thousand, or 0.8%, decrease from the first quarter of 2022. This linked quarter decrease was primarily driven by a $1.4 million decrease in retirement and benefit services revenue, partially offset by a $1.1 million increase in mortgage banking revenue. Retirement and benefit services revenue decreased primarily due to decreases of $685 thousand in non-asset based fees and $668 thousand in asset based fees. The decreases in non-asset based fees were primarily the result of seasonally lower revenues in the health and welfare and payroll businesses. Asset based fees for retirement and benefit services revenue decreased primarily as a result of a $3.6 billion, or 10.1%, decrease in the market value of assets under administration/management primarily due to market value decreases in the bond and equity markets. Mortgage banking revenue increased primarily due to an $82.6 million, or 44.2%, increase in mortgage originations as well as a 64 basis point increase in the gain on sale margin.

Noninterest income for the second quarter of 2022 decreased $7.5 million, or 20.5%, from $36.7 million in the second quarter of 2021. This year over year decrease was primarily the result of a $6.2 million decrease in mortgage banking revenue as well as a $1.6 million decrease in retirement and benefit services revenue, partially offset by a $410 thousand increase in wealth management revenue. Mortgage banking revenue decreased primarily due to a $276.0 million decrease in mortgage originations as well as a 29 basis point decrease in gain on sale margin. Retirement and benefit services revenue decreased primarily due to decreases of $912 thousand in asset based fees and $667 thousand in non-asset based fees. The asset based fees for retirement and benefit services decreased primarily due to a $5.2 billion, or 14.1%, decrease in assets under administration/management. Non-asset based fees decreased primarily due to a $316 thousand decrease in plan document fees. Wealth management revenue increased primarily due to a $608.8 million increase in assets under management.

Noninterest Expense

Noninterest expense for the second quarter of 2022 was $40.0 million, a $1.9 million, or 5.0%, increase compared to the first quarter of 2022. The quarter over quarter increase was primarily driven by increases of $2.2 million in compensation expense and $705 thousand in professional fees and assessments. Partially offsetting these increases were decreases of $375 thousand in employee taxes and benefits and $314 thousand in occupancy and equipment expense. The increase in compensation expense was primarily due to an increase in mortgage originations. Professional fees and assessments increased primarily due to $814 thousand in merger related expenses from our acquisition of MPB BHC, Inc. The decrease in employee taxes and benefits was primarily due to seasonally higher payroll taxes in the first quarter. Occupancy and equipment expensed decreased primarily as a result of a decrease in depreciation expense, a result of assets being fully depreciated.

Noninterest expense for the second quarter of 2022 decreased $2.6 million, or 6.0%, from $42.6 million in the second quarter of 2021. The year over year decrease in noninterest expense was primarily due to a $3.1 million decrease in compensation expense as well as a $717 thousand decrease in mortgage and lending expenses, partially offset by a $737 thousand increase in professional fees and assessments. The decreases in compensation expense and mortgage and lending expenses were primarily due to a $276.0 million decrease in mortgage originations. Professional fees and assessments increased primarily due to the acquisition of Metro Phoenix Bank.

Financial Condition

Total assets were $3.3 billion as of June 30, 2022, a decrease of $97.6 million, or 2.9%, from December 31, 2021. The overall change in assets included decreases of $205.3 million in cash and cash equivalents and $75.2 million in investment securities. Partially offsetting these decreases were increases of $132.2 million in loans held for investment and $21.2 million in deferred tax assets. Deferred tax assets increased primarily due to the impact of unrealized losses attributed to available-for-sale investment securities. If PPP loans were excluded, loans held for investment would have increased $158.8 million, or 9.2%, from December 31, 2021.

Loans

Total loans were $1.9 billion as of June 30, 2022, an increase of $132.2 million, or 7.5%, from December 31, 2021. This increase was primarily a result of increases of $57.9 million in residential real estate first mortgages and $47.7 million in commercial and industrial loans. If PPP loans were excluded, commercial and industrial loans would have increased $74.3 million, or 18.4%, from December 31, 2021, primarily as a result of organic growth.

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

Deposits

Total deposits were $2.6 billion as of June 30, 2022, a decrease of $301.0 million, or 10.3%, from December 31, 2021. Interest-bearing deposits decreased $127.0 million, while noninterest-bearing deposits decreased $174.0 million in the second quarter of 2022. The decrease in interest-bearing deposits included decreases of $72.0 million in interest-bearing demand deposits, $32.5 million in time deposits and $22.9 million in money market savings deposits. The decrease in interest-bearing demand deposits decreased due to a seasonal decrease in our public unit deposits. Time deposits decreased primarily due to clients shifting balances to more liquid accounts. Synergistic deposits decreased $82.1 million from December 31, 2021, primarily due to year-end seasonally higher temporary balances from retirement plan terminations. Excluding synergistic deposits, commercial transaction deposits decreased $178.0 million and consumer transaction deposits decreased $10.1 million. Noninterest-bearing deposits as a percentage of total deposits were 29.2% as of June 30, 2022, compared to 32.1% as of December 31, 2021.

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

Asset Quality

Total nonperforming assets were $5.2 million as of June 30, 2022, an increase of $2.1 million, or 69.7%, from December 31, 2021. As of June 30, 2022, the allowance for loan losses was $31.4 million, or 1.66% of total loans, compared to $31.6 million, or 1.80% of total loans, as of December 31, 2021.

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