Alerus Financial Corporation — 2022 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2022, compared primarily with 2021. Alerus is a diversified financial services company operating in banking, retirement and benefit services, wealth management, and mortgage, with primary banking markets in North Dakota, Minnesota, and Arizona.
On July 1, 2022, Alerus acquired Metro Phoenix Bank’s holding company for approximately $64.0 million in stock, adding $270.4 million of loans and $353.7 million of deposits.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $40.0 million | $52.7 million |
| Diluted earnings per share | $2.10 | $2.97 |
| Net interest income | $99.7 million | $87.1 million |
| Net interest margin, tax-equivalent | 3.04% | 2.90% |
| Noninterest income | $111.2 million | $147.4 million |
| Noninterest expense | $158.8 million | $168.9 million |
| Total assets at year-end | $3.78 billion | $3.39 billion |
| Loans at year-end | $2.44 billion | $1.76 billion |
| Deposits at year-end | $2.92 billion | $2.92 billion |
| Stockholders’ equity at year-end | $356.9 million | $359.4 million |
| Operating cash flow | $103.0 million | $149.8 million |
Net income fell 24.1%. Mortgage banking revenue declined 65.1% to $16.9 million as originations fell to $812.3 million from $1.84 billion. Retirement and benefit services revenue declined 6.4% to $67.1 million. Higher net interest income partly offset those declines; noninterest expense fell mainly because mortgage-related compensation and expenses decreased.
Year-end deposits were nearly flat overall, but excluding the acquired bank, deposits declined $358.8 million, or 12.3%. Short-term borrowings rose from zero to $378.1 million ($225.0 million FHLB advances and $153.1 million federal funds purchased). Long-term debt was $58.8 million, including $50.0 million of subordinated notes.
Available-for-sale securities had a $132.3 million pre-tax unrealized loss at year-end; the filing reports $183.3 million of aggregate unrealized losses across the securities portfolio. Other comprehensive loss was $94.4 million after tax, contributing to lower equity and tangible book value per share, which declined to $14.37 from $17.87.
Material changes and operating performance
- Loans increased 39.0%, including $270.4 million acquired and $415.6 million of organic growth. Commercial real estate was 36.0% of loans; residential real estate first mortgages were 27.8%.
- Net interest income rose 14.5%, but interest expense increased as deposit and borrowing costs repriced upward. Average interest-bearing deposit cost rose to 0.32% from 0.13%.
- Mortgage originations fell 55.8%. Retirement and benefit assets under administration/management declined 12.6% to $32.1 billion, reflecting market losses and net outflows. Wealth management assets under administration/management were $3.6 billion.
- Asset quality remained relatively strong by reported measures: nonperforming loans were 0.16% of loans, versus 0.12% in 2021; net charge-offs were 0.02% of average loans. The allowance was $31.1 million, or 1.27% of loans.
- Consolidated common equity Tier 1 capital ratio was 13.39%; the Bank’s was 12.76%. Both the Company and Bank were reported as meeting applicable capital requirements, and the Bank was well capitalized.
- Cash and cash equivalents declined $184.1 million to $58.2 million. Cash flows were $103.0 million from operations, $(292.6) million from investing, and $5.6 million from financing.
Outlook, risks, contingencies, and unusual items
The filing provides no quantified earnings or revenue guidance. Management expected further Federal Reserve rate increases in 2023 and anticipated continued weakness in mortgage demand and refinancing. It also described deposit competition, rising funding costs, and possible reliance on higher-cost borrowings as risks. Interest-rate modeling indicated a liability-sensitive position: an immediate 100-basis-point increase was estimated to reduce net interest income by 6.2% over 12 months and 1.8% over 24 months.
CECL became effective for Alerus on January 1, 2023. Before adoption, the Company estimated an initial allowance increase of approximately $5 million to $7 million, including reserves for acquired loans and unfunded commitments; the final amount was not provided in this filing. In February 2023, the Board declared a quarterly dividend of $0.18 per share.
Key risks include unrealized securities losses if liquidity needs force sales, interest-rate and funding sensitivity, commercial real estate and geographic concentration, economic deterioration, fee-income exposure to market values and client flows, acquisition integration and goodwill impairment, cybersecurity and third-party systems, and regulatory requirements. The filing states that no material legal proceedings were pending. CliftonLarsonAllen audited the 2022 financial statements and issued an unqualified opinion; the auditor did not attest to internal control effectiveness because Alerus was an emerging growth company. Management reported effective disclosure controls and internal control over financial reporting. The filing also says CLA would not stand for reappointment and RSM was appointed for the 2023 audit.
The liquidity discussion reports on-balance-sheet liquidity of “$778.9 billion,” which conflicts with the Company’s $3.78 billion of total assets and the listed liquidity components. The filing text does not provide a clear, internally consistent value for this figure.
Important facts for investors to verify
- Confirm deposit trends excluding Metro Phoenix Bank, funding costs, and the Company’s use and availability of wholesale borrowings.
- Assess securities portfolio duration, unrealized losses, liquidity needs, and potential earnings effects if securities are sold.
- Review final CECL adoption adjustments and subsequent credit quality, especially commercial real estate and acquired Metro Phoenix loans.
- Track mortgage volumes and fee-based assets, market-driven valuation changes, and retirement-plan client inflows and outflows.
- Verify the reported on-balance-sheet liquidity figure and its units against the audited statements or subsequent filings.
- Monitor acquisition integration, goodwill, capital ratios, dividend capacity, and the 2023 auditor transition.