Company Overview
Alerus Financial Corporation (ALRS) is a leading commercial wealth bank and national retirement services provider headquartered in Grand Forks, North Dakota. Through its subsidiary, Alerus Financial, National Association, the company provides a comprehensive suite of financial solutions to businesses and consumers across three distinct business lines: banking, retirement and benefit services, and wealth management.
Historical Background
Founded in 1879 as First National Bank of Grand Forks, Alerus Financial Corporation has a rich history of serving its communities and adapting to changing market dynamics. The company's origins trace back to the Scandinavian-American Bank, which was established to cater to the financial needs of the growing immigrant population in the region. Over the decades, the bank underwent several name changes and strategic expansions, eventually becoming Alerus Financial Corporation in 1987.
In the 1990s and 2000s, Alerus Financial expanded beyond its North Dakota roots, opening offices in Minnesota, Arizona, and other markets. This geographic expansion was accompanied by a strategic shift towards providing a broader range of financial services, including wealth management, retirement planning, and commercial banking. A significant milestone for the company was its initial public offering in 2019, which provided capital to support continued growth. Since going public, Alerus Financial has made several strategic acquisitions to enhance its capabilities, including the 2021 purchase of Metro Phoenix Bank, a commercial bank based in Arizona.
Throughout its history, Alerus Financial has faced various challenges, including navigating the fallout from the financial crisis in the late 2000s, managing credit risk, and maintaining profitability. The company has also had to adapt to technological changes in the industry, investing in digital capabilities to meet evolving customer preferences.
Business Model and Operations
Alerus' diversified business model is a key strength, allowing the company to navigate various economic and market conditions. The banking division offers a wide range of loan, deposit, cash management, and treasury services, primarily through 14 offices in North Dakota, Minnesota, and Arizona. Following the recent acquisition of Home Federal Savings Bank, the company has expanded its footprint to 29 locations across the Midwest and Arizona, including 15 new banking offices in Minnesota, Wisconsin, and Iowa.
The retirement and benefit services division provides record-keeping, administration, and investment fiduciary services to qualified and other types of retirement plans, as well as health savings account and flexible spending account management. This segment has experienced robust growth, with assets under administration/management reaching $41.25 billion as of September 30, 2024.
Alerus' wealth management division offers advisory and planning services, investment management, and trust and fiduciary services to clients across the company's footprint. This division has demonstrated consistent growth, with assets under administration/management rising to $4.40 billion as of September 30, 2024.
The company's financial performance has been characterized by a diversified revenue stream, with a majority of its overall revenue derived from non-interest income generated by the retirement and benefit services and wealth management business lines. This has helped Alerus establish a strong brand and culture, fostering a loyal client base and a passionate, dedicated workforce.
Financial Performance
During the third quarter of 2024, Alerus reported revenue of $50,221,000 and net income of $5,183,000, or $0.26 per diluted common share, compared to $9.2 million, or $0.45 per diluted common share, in the same period of the prior year. The decline in net income was primarily attributable to a $5.2 million increase in noninterest expense and a $1.7 million increase in provision for credit losses. Operating cash flow for the quarter was negative $4,268,000, while free cash flow was $2,233,000.
Net interest income for the third quarter of 2024 was $22.5 million, up $2.1 million, or 10.5%, compared to the same period in 2023. This increase was driven by a $10.2 million rise in interest income, partially offset by an $8.0 million increase in interest expense. The company's net interest margin on a tax-equivalent basis decreased to 2.23% in the third quarter of 2024, compared to 2.27% in the same period of the prior year.
Loan Portfolio and Deposit Base
Alerus' loan portfolio experienced robust growth, increasing by 4.0% during the third quarter of 2024 compared to the prior quarter. This growth was primarily driven by market share gains in the company's commercial and industrial (C&I) and commercial real estate (CRE) portfolios. As of September 30, 2024, the company's loan portfolio stood at $3.03 billion, with C&I and CRE loans accounting for 20.0% and 47.3% of the total, respectively.
The company's deposit base also exhibited strong growth, increasing by 0.8% during the third quarter of 2024 compared to the prior quarter. However, the company experienced a shift from non-interest-bearing deposits to interest-bearing deposits, which contributed to the compression in net interest margin.
Credit Quality
Alerus' credit quality remained a focus, with non-performing assets increasing to $48.0 million, or 1.18% of total assets, as of September 30, 2024, compared to $8.8 million, or 0.22% of total assets, as of December 31, 2023. This increase was primarily driven by two large credit relationships, one in the residential real estate portfolio and one in the commercial real estate portfolio. The company's allowance for credit losses on loans stood at 1.29% of total loans as of September 30, 2024.
Capital and Liquidity
In terms of capital and liquidity, Alerus remained well-capitalized as of September 30, 2024, with a common equity Tier 1 capital ratio of 11.12% and a tangible common equity to tangible assets ratio of 8.11%. The company's liquidity position remained strong, with $424.8 million in on-balance sheet liquidity and $1.8 billion in off-balance sheet liquidity as of the same date.
As of September 30, 2024, Alerus had $65.97 million in cash and cash equivalents. The company had access to additional liquidity through various credit facilities, including $44.70 million in federal funds purchased and $200 million in FHLB short-term advances.
Future Outlook and Strategic Priorities
Looking ahead, Alerus remains focused on its strategic priorities, which include continued organic growth, disciplined expense management, and selective acquisition opportunities. The company has also been actively investing in talent, technology, and infrastructure to support its long-term growth initiatives.
Despite the challenges faced during the third quarter of 2024, Alerus' diversified business model, strong capital position, and commitment to prudent risk management position the company well to navigate the evolving financial landscape and deliver value to its shareholders.
In terms of future guidance, Alerus has stated that their long-term guidance remains intact, although they did not provide specific quantitative details. The company is committed to achieving 30% cost savings announced in the Home Federal acquisition. Alerus expects their net interest margin to reach 3%, though they caution that the path will not be linear as different factors affect it each quarter. In a down 100-basis-point interest rate scenario, Alerus expects their net interest income to increase in the mid-single digits on their legacy book.
For their Retirement and Wealth Management businesses, Alerus expects fee income to be stable in Q4, with the Wealth business expected to be up slightly, excluding any market impact. The company acknowledges that while they had a tough quarter with results coming up short, they believe success is not measured by a single quarter and remain committed to delivering superior returns and profitability in the long-term.
Business Segments and Recent Developments
Alerus Financial Corporation operates through three main business segments:
1. Banking: This division offers a complete line of loan, deposit, cash management, and treasury services through 29 offices across North Dakota, Minnesota, Arizona, Wisconsin, and Iowa. These products and services are supported through web and mobile applications. The majority of the company's assets and liabilities are in the Banking segment's balance sheet.
2. Retirement and Benefit Services: This division provides services nationally, including record-keeping and administration services to qualified and other types of retirement plans, investment fiduciary services to retirement plans, health savings accounts, flexible spending accounts, and COBRA recordkeeping and administration services.
3. Wealth Management: This division provides advisory and planning services, investment management, and trust and fiduciary services to clients across the company's footprint.
A significant recent development for Alerus was the completion of its acquisition of HMN Financial, Inc. and its subsidiary Home Federal Savings Bank. This acquisition expanded the company's franchise into Rochester, Minnesota and represents its largest acquisition to date. The integration of Home Federal Savings Bank has added 15 new banking offices in Minnesota, Wisconsin, and Iowa, significantly expanding Alerus' presence in the Midwest region.
Key Financial Metrics
As of September 30, 2024: - Total assets were $4.10 billion, an increase of 4.5% compared to December 31, 2023. - Total loans outstanding were $3.00 billion, an increase of 9.9% from December 31, 2023. The increase was driven by growth in commercial and industrial loans, commercial real estate loans, and agricultural loans. - Total deposits were $3.32 billion, an increase of 7.4% from December 31, 2023. - Stockholders' equity increased 4.7% to $386.50 million compared to December 31, 2023.
Alerus Financial Corporation continues to execute on its strategy to diversify its revenue streams and expand its presence in larger markets outside of its North Dakota base. The company's regulatory capital ratios remained well above the well-capitalized standards as of September 30, 2024, reflecting its strong financial position. Despite facing challenges in the most recent quarter, Alerus remains committed to its long-term growth strategy and delivering value to its shareholders.