Alerus Financial Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. Alerus is a diversified financial services company with banking, retirement and benefit services, wealth management, and mortgage businesses.
Financial performance and condition
| Metric | FY2021 / Dec. 31, 2021 | Prior comparable period |
|---|---|---|
| Net income | $52.7 million | $44.7 million; up 17.9% |
| Diluted EPS | $2.97 | $2.52 |
| Net interest income | $87.1 million | $83.8 million; up 3.9% |
| Noninterest income | $147.4 million | $149.4 million; down 1.3% |
| Noninterest expense | $168.9 million | $163.8 million; up 3.1% |
| Net interest margin, tax-equivalent | 2.90% | 3.22% |
| Efficiency ratio | 70.02% | 68.40% |
| Total assets | $3.39 billion | $3.01 billion |
| Loans / deposits | $1.76 billion / $2.92 billion | $1.98 billion / $2.57 billion |
| Stockholders’ equity | $359.4 million | $330.2 million |
Net income growth reflected a $14.4 million year-over-year reduction in loan-loss provision expense, including a $3.5 million provision reversal, and higher net interest income. The benefit was partly offset by lower mortgage banking revenue and higher operating expenses. Noninterest income remained the larger revenue source, at 62.9% of total revenue.
Cash flow: Net cash provided by operating activities was $149.1 million; investing activities used $416.9 million; financing activities provided $337.2 million. Cash and cash equivalents increased $69.3 million to $242.3 million.
Credit and liquidity: The allowance for loan losses was $31.6 million, or 1.80% of loans. Nonperforming loans were $2.2 million (0.12% of loans), down from $5.1 million (0.26%) in 2020. On-balance-sheet liquidity was $1.1 billion. Core deposits were 96.9% of deposits; the 10 largest depositor relationships represented 16.4% of deposits.
Debt and capital: Borrowed funds totaled $58.9 million, including $50.0 million of subordinated notes and $8.7 million of junior subordinated debentures; there were no short-term borrowings outstanding at year-end. The Bank was reported well-capitalized; its total risk-based capital ratio was 15.12%, and the Company’s was 18.64%.
Material changes versus FY2020
- Loans fell $221.4 million, or 11.2%, mainly as $234.8 million of PPP loans were forgiven. Excluding PPP loans, loans increased $13.5 million, or 0.8%.
- Deposits rose $348.6 million, or 13.6%; noninterest-bearing deposits increased to 32.1% of total deposits from 29.3%.
- Investment securities more than doubled to $1.21 billion from $592.3 million as the company deployed excess liquidity. In the second quarter, it transferred $149.2 million of municipal securities from available-for-sale to held-to-maturity. The available-for-sale portfolio moved from a $14.2 million unrealized gain in 2020 to a $6.6 million pretax unrealized loss in 2021.
- Retirement and benefit services revenue increased 17.6%, partly reflecting the prior-year acquisition of Retirement Planning Services, Inc. Wealth management revenue rose 20.6%. Mortgage banking revenue declined 21.3%, primarily due to a $17.3 million decrease in the change in fair value of derivatives.
- Net interest margin declined 32 basis points, reflecting lower asset yields and a shift toward cash and securities; lower deposit and debt costs partly offset the pressure.
Outlook, commentary and risks
- The filing gives no formal earnings or revenue guidance. Management expected Federal Reserve rate increases in 2022 and modeled deposit rates repricing more slowly than market rates, but cautioned that actual results may differ.
- Interest-rate simulations showed a liability-sensitive position at year-end: a parallel +100-basis-point shock was estimated to reduce net interest income by 2.0% over 12 months and 1.3% over 24 months. The filing notes that modeled outcomes depend on assumptions and may differ from actual results.
- On December 8, 2021, Alerus agreed to acquire MPB BHC, parent of Metro Phoenix Bank. Consideration is 0.74 Alerus shares per MPB share, subject to potential downward adjustment; the stated implied transaction value was approximately $85.3 million. Closing was expected in the second quarter of 2022, subject to conditions.
- Management stated COVID-19 had not adversely affected FY2021 results, but continued to identify pandemic variants, supply-chain disruption, inflation, regional economic and real estate conditions, credit concentrations, deposit liquidity, competition, cybersecurity and execution of growth and acquisition plans as risks.
- Other watch items include commercial real estate exposure (36.4% of loans), dependence on fee revenue and market-sensitive assets under administration/management, and the transition from LIBOR. CECL adoption was planned for January 1, 2023; management said the impact could not yet be reasonably estimated.
- The filing reports no material pending legal proceeding beyond routine litigation. It also states that the company was an emerging growth company: the auditor did not attest to internal control effectiveness, although management assessed controls as effective. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether the MPB merger closed on the expected terms and timetable, including any exchange-ratio adjustment, integration costs and realized benefits.
- Whether loan growth excluding PPP, credit quality and allowance coverage remain sound as pandemic-era support fades and economic conditions change.
- How rising rates affect net interest margin, deposit pricing, securities values and accumulated other comprehensive income; compare actual outcomes with the disclosed sensitivity models.
- Whether fee businesses sustain client assets and net inflows, particularly given retirement-services outflows of $6.0 billion versus inflows of $5.6 billion in 2021.
- The eventual CECL transition effect and progress on LIBOR-linked contract remediation.
- Whether liquidity, large-depositor concentrations, capital ratios and the Bank’s capacity to upstream dividends remain adequate.