Alerus Financial Corporation (Nasdaq: ALRS), or the Company, reported net income of $9.1 million for the second quarter of 2023, or $0.45 per diluted common share, compared to net income of $8.2 million, or $0.40 per diluted common share, for the first quarter of 2023, and net income of $9.3 million, or $0.52 per diluted common share, for the second quarter of 2022.
CEO Comments
President and Chief Executive Officer Katie Lorenson said, “During the second quarter, we continued to evolve Alerus into a high performing commercial wealth bank and a national retirement and benefits provider through strategic talent acquisitions and infrastructure optimization. The foundational strength and unique business model of our Company allowed us to continue to attract experienced professionals who will continue to build our commercial banking segment in addition to doubling the size of our treasury management team. More recently, we lifted out a highly regarded and seasoned team to lead the launch of our private banking franchise. We believe that the addition of these professionals coupled with our tenured talent will drive continued new client acquisition and existing client expansion throughout our growing markets.
While the macroeconomic environment remains uncertain, our diversified business model shined in the second quarter as fee income represented 53.7% of total revenues, an industry leading standard, driven primarily by our nationally scaled retirement services and growing wealth management business.
During the quarter, we continued to execute on prudent expense management as noninterest expenses declined 4% from the prior quarter. Our focus on a client-centric organizational structure has resulted in efficiency improvements across the organization. As of July, these improvements have allowed us to reduce total headcount by 10% over the past 12 months, even after taking account of the acquisition of Metro Phoenix Bank.
Despite ongoing industry and economic challenges, we believe Alerus is positioned to emerge stronger than ever. Our unique business model is anchored by durable and highly recurring fee income and our balance sheet is characterized by superior capital and reserves, a highly diversified loan and deposit portfolio, and a long history of strong credit performance. We remain optimistic about our continued ability to attract and retain the best talent and are seeing the benefits of our ongoing implementation of infrastructure optimization.
We are grateful for our Alerus team members whose ongoing collaboration and client focus are continuing to position the company’s future for top tier shareholder returns and performance.”
Second Quarter Highlights
- Return on average tangible common equity(1) of 13.71%, compared to 12.58% for the first quarter of 2023
- Return on average common equity of 10.14%, compared to 9.17% for the first quarter of 2023
- Return on average total assets of 0.96%, compared to 0.88% for the first quarter of 2023
- Repurchased $3.0 million of the Company’s outstanding stock, reducing common shares outstanding by 170,046 at quarter end
- Increased quarterly dividend by 5.6% to $0.19 per share
- Loan to deposit ratio as of June 30, 2023 was 88.8%, compared to 83.8% as of December 31, 2022
- Common equity tier 1 capital to risk weighted assets as of June 30, 2023 was 13.30%, compared to 13.39% as of December 31, 2022
- Noninterest expense was $36.4 million, compared to $37.9 million for the first quarter of 2023
- Efficiency ratio improved to 72.79% compared to 74.53% for the first quarter of 2023
- Noninterest income was 53.69% of total revenue, compared to 51.63% for the first quarter of 2023
- Allowance for credit losses to total loans was 1.41% compared to 1.27% as of December 31, 2022
- Net recoveries to average loans of 0.07% compared to net charge-offs to average loans of 0.03% for the first quarter of 2023
(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 | Six months ended | |||||||||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||||||||
(dollars and shares in thousands, except per share data) | 2023 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Performance Ratios | ||||||||||||||||||
Return on average total assets | 0.96 | % | 0.88 | % | 1.14 | % | 0.92 | % | 1.20 | % | ||||||||
Return on average common equity | 10.14 | % | 9.17 | % | 11.93 | % | 9.66 | % | 11.85 | % | ||||||||
Return on average tangible common equity (1) | 13.71 | % | 12.58 | % | 15.25 | % | 13.15 | % | 14.97 | % | ||||||||
Noninterest income as a % of revenue | 53.69 | % | 51.63 | % | 56.20 | % | 52.65 | % | 56.91 | % | ||||||||
Net interest margin (tax-equivalent) | 2.52 | % | 2.70 | % | 2.98 | % | 2.61 | % | 2.91 | % | ||||||||
Efficiency ratio (1) | 72.79 | % | 74.53 | % | 74.72 | % | 73.67 | % | 73.50 | % | ||||||||
Net charge-offs/(recoveries) to average loans | (0.07 | ) | % | 0.03 | % | 0.07 | % | (0.02 | ) | % | 0.02 | % | ||||||
Dividend payout ratio | 42.22 | % | 45.00 | % | 34.62 | % | 43.53 | % | 30.91 | % | ||||||||
Per Common Share | ||||||||||||||||||
Earnings per common share - basic | $ | 0.45 | $ | 0.41 | $ | 0.53 | $ | 0.86 | $ | 1.11 | ||||||||
Earnings per common share - diluted | $ | 0.45 | $ | 0.40 | $ | 0.52 | $ | 0.85 | $ | 1.10 | ||||||||
Dividends declared per common share | $ | 0.19 | $ | 0.18 | $ | 0.18 | $ | 0.37 | $ | 0.34 | ||||||||
Book value per common share | $ | 17.96 | $ | 17.90 | $ | 17.75 | ||||||||||||
Tangible book value per common share (1) | $ | 14.60 | $ | 14.50 | $ | 14.93 | ||||||||||||
Average common shares outstanding - basic | 20,033 | 20,028 | 17,297 | 20,030 | 17,271 | |||||||||||||
Average common shares outstanding - diluted | 20,241 | 20,246 | 17,532 | 20,243 | 17,517 | |||||||||||||
Other Data | ||||||||||||||||||
Retirement and benefit services assets under administration/management | $ | 35,052,652 | $ | 33,404,342 | $ | 31,749,157 | ||||||||||||
Wealth management assets under administration/management | $ | 3,857,710 | $ | 3,675,684 | $ | 4,147,763 | ||||||||||||
Mortgage originations | $ | 111,261 | $ | 77,728 | $ | 269,397 | $ | 188,989 | $ | 456,159 | ||||||||
| (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 second quarter of 2023 was $22.2 million, a $1.4 million, or 6.0%, decrease from the first quarter of 2023. Net interest income decreased $542.0 thousand, or 2.4%, from $22.8 million for the second quarter of 2022. Interest income increased $2.5 million, or 6.7% from the first quarter of 2023, primarily driven by a 24 basis point increase in yield on interest earning assets. Contributing factors to higher asset yields were higher new loan yields and accretion of fair value marks from the Metro Phoenix Bank transaction. The increase in interest income was more than offset by a $4.0 million increase in interest expense, primarily due to an increase in rates paid on interest-bearing deposits. The increase in interest expense paid on deposits was due to heightened deposit competition, the impact of rising short-term interest rates on indexed money market deposits and clients moving deposits out of noninterest bearing products into interest-bearing products.
Net interest margin (tax-equivalent), was 2.52% for the second quarter of 2023, an 18 basis point decrease from 2.70% for the first quarter of 2023, and a 46 basis point decrease from 2.98% for the second quarter of 2022. The decrease in net interest margin from the prior quarter reflected the impact of rising interest rates on our interest-bearing liabilities partially offset by slightly higher yields on new loans and accretion of fair value marks from the Metro Phoenix Bank transaction.
Noninterest Income
Noninterest income for the second quarter of 2023 was $25.8 million, a $525.0 thousand, or 2.1%, increase from the first quarter of 2023. The quarter over quarter increase was primarily driven by improvement across all fee-based business segments. Mortgage saw a $1.2 million, or 69.2%, increase in mortgage banking revenue due to a seasonal rebound in originations as mortgage originations grew 43% from the prior quarter. Retirement and benefit services revenue increased $408 thousand, or 2.6%, mainly due to increased administration, recordkeeping, and asset-based fees. Assets under management/administration grew due to improved equity markets and organic growth in plans and participants. Wealth management revenue increased $256 thousand, or 4.9%, as assets under management/administration grew due to improved equity markets and organic net inflows from new and existing relationships.
Noninterest income for the second quarter of 2023 decreased $3.4 million, or 11.8%, from $29.2 million in the second quarter of 2022. The year over year decrease was primarily driven by a $3.1 million decrease in mortgage revenue due to a $158.1 million decrease in mortgage originations as higher interest rates dramatically impacted demand. Retirement and benefit services decreased $403 thousand mainly from the exit of the payroll services business and one-time document restatement fees recognized in 2022.
Noninterest Expense
Noninterest expense for the second quarter of 2023 was $36.4 million, a $1.5 million, or 4.0% decrease from the first quarter of 2023. The quarter over quarter decrease was primarily driven by a $1.1 million decrease in employee taxes and benefits resulting from lower headcount and lower group insurance costs. Compensation expense decreased $311 thousand from the first quarter of 2023 due to a reduction in severance costs and salaries, offset by increased mortgage incentive compensation. Offsetting the improvement in compensation and benefits expense, professional fees and assessments increased $378 thousand due to higher Federal Deposit Insurance Corporation (FDIC) assessment fees.
Noninterest expense for the second quarter of 2023 decreased $3.6 million, or 9.0%, from $40.0 million in the second quarter of 2022. The year over year decrease was primarily due to a $2.4 million decrease in compensation, $1.1 million decrease in employee taxes and benefits, and $716 thousand decrease in professional fees and assessments. Compensation decreased primarily due to a decrease in mortgage related incentive compensation from lower mortgage originations. The decrease in employee taxes and benefits resulted from lower group insurance claims, reduced headcount, and lower compensation costs.
Financial Condition
Total assets were $3.8 billion as of June 30, 2023, an increase of $53.3 million, or 1.4%, from December 31, 2022. The increase was primarily due to an $89.5 million increase in loans, an $11.4 million increase in loans held for sale and a $7.2 million increase in cash and cash equivalents, offset by a decrease of $53.4 million in investment securities.
Loans
Total loans were $2.5 billion as of June 30, 2023, an increase of $89.5 million, or 3.7%, from December 31, 2022. The increase was primarily driven by a $122.2 million increase in commercial real estate and a $34.8 million increase in residential real estate loans, offset by a $32.0 million decrease in commercial and industrial, a $19.4 million decrease in real estate construction and a $16.1 million decrease in other consumer revolving and installment loans.
The following table presents the composition of our loan portfolio as of the dates indicated:
June 30, | March 31, | December 31, | September 30, | June 30, | |||||||||||
(dollars in thousands) | 2023 | 2023 | 2022 | 2022 | 2022 | ||||||||||
Commercial | |||||||||||||||
Commercial and industrial | $ | 551,860 | $ | 553,578 | $ | 583,876 | $ | 564,655 | $ | 484,426 | |||||
Real estate construction | 78,428 | 108,776 | 97,810 | 89,215 | 48,870 | ||||||||||
Commercial real estate | 1,003,821 | 934,324 | 881,670 | 819,068 | 599,737 | ||||||||||
Total commercial | 1,634,109 | 1,596,678 | 1,563,356 | 1,472,938 | 1,133,033 | ||||||||||
Consumer | |||||||||||||||
Residential real estate first mortgage | 707,630 | 698,002 | 679,551 | 649,818 | 568,571 | ||||||||||
Residential real estate junior lien | 157,231 | 152,281 | 150,479 | ||||||||||||
