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ALERUS FINANCIAL CORP 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Alerus Financial Corporation

Filing date:

03/14/2025

TLDR:

ELI5:

Alerus Financial made more money this year, but they also spent more and set aside more for potential loan losses. They’re growing, but need to watch their loan quality carefully.

Accession #:

0001437749-25-007629

Published on

Analyst Summary

  • Net income increased significantly due to growth in net interest income (up 21.9%) and noninterest income (up 43.3%).
  • Noninterest expense increased by 20.3%, primarily due to compensation and professional fees related to the HMNF acquisition.
  • Provision for credit losses increased substantially, rising by 783.8% to $18.141 million.
  • Total assets increased by 34.6% to $5.26 billion, and total deposits increased by 41.4% to $4.38 billion, reflecting organic growth and the acquisition of HMN Financial, Inc.
  • Net Interest Margin (FTE) increased slightly to 2.56% from 2.46%.
  • Return on Average Assets (ROA) increased to 0.39% from 0.31%.
  • Efficiency Ratio improved to 77.92% from 85.85%.
  • Nonperforming Loans to Total Loans increased to 1.58% from 0.32%, indicating a deterioration in asset quality.
  • Allowance for Credit Losses to Total Loans increased to 1.50% from 1.30%.
  • Operating Profit Margin increased to 10.43% from 9.43%.
  • Net Profit Margin increased to 8.01% from 6.96%.
  • Return on Assets (ROA) increased to 0.39% from 0.31%.
  • Return on Equity (ROE) increased to 4.47% from 3.26%.
  • Basic Earnings Per Share (EPS) increased to $0.84 from $0.59.
  • Diluted Earnings Per Share (EPS) increased to $0.83 from $0.58.
  • The company’s debt-to-equity ratio increased slightly to 9.62 from 9.58.
  • The company highlights adjusted metrics, which are non-GAAP measures, to provide a clearer picture of underlying operating performance.
  • The company disclosed a material weakness related to the HMN Financial Inc. acquisition, indicating a failure in internal controls over financial reporting.
  • The company has an active stock repurchase program, authorizing the repurchase of up to 1,000,000 shares.

Opportunities and Risks

  • Credit Risk: Increased nonperforming loans and criticized loans suggest potential asset quality concerns. The high concentration of commercial real estate loans also poses a risk.
  • Interest Rate Risk: The company is exposed to interest rate risk, which could negatively affect earnings.
  • Operational Risk: The company is susceptible to fraudulent activity, information security breaches, and cybersecurity-related incidents.
  • Integration Risk: Challenges in integrating acquired entities, such as HMN Financial, Inc., could impact future performance.
  • Liquidity Risk: Dependence on dividends from the Bank and concentrations of large depositors create liquidity risks.
  • Diversified Revenue Stream: The company’s diversified business model, with significant noninterest income, provides stability.
  • Strategic Acquisitions: Acquisitions, such as HMN Financial, Inc., expand the company’s market presence and growth potential.
  • “One Alerus” Initiative: The company’s integrated service model and technology investments enhance client engagement and create efficiencies.
  • Synergistic Deposit Growth: Opportunity to grow synergistic deposits from retirement and benefit services and wealth segments.

Potential Implications

Company Performance

  • Closely monitor nonperforming loans and criticized loans, and proactively manage credit risk in the commercial real estate portfolio.
  • Implement strategies to mitigate the impact of interest rate fluctuations on net interest income.
  • Focus on successfully integrating acquired entities to realize cost savings and synergies.
  • Strengthen information security controls and cybersecurity defenses to protect against fraudulent activity and data breaches.

Stock Price

  • Alerus’s P/E ratio is higher than the industry average, suggesting it may be overvalued relative to its earnings.
  • Alerus’s EV/EBITDA ratio is lower than the industry average, suggesting it may be undervalued relative to its earnings.

Executive Summary

This report analyzes Alerus Financial Corp’s 10-K filing for the fiscal year ended December 31, 2024. Key findings include increased net income driven by noninterest income and net interest income growth, offset by higher noninterest expense and provision for credit losses. The company’s asset quality remains a key area of focus. Overall assessment: Hold. Recommendations: Closely monitor asset quality, manage interest rate risk, and effectively integrate acquisitions.

Company Overview

Alerus Financial Corporation is a diversified financial services company headquartered in Grand Forks, North Dakota. It operates through three segments: banking, retirement and benefit services, and wealth management. The company focuses on providing comprehensive financial solutions to businesses and consumers.

Financial Statement Analysis

Income Statement Highlights

Net income increased significantly, driven by growth in both net interest income and noninterest income. However, expenses also increased substantially.

Metric 2024 (USD thousands) 2023 (USD thousands) Change
Net Interest Income 107,045 87,839 +21.9%
Noninterest Income 114,930 80,229 +43.3%
Noninterest Expense 180,675 150,157 +20.3%
Provision for Credit Losses 18,141 2,057 +783.8%
Net Income 17,780 11,696 +52.0%

Balance Sheet Highlights

Total assets and deposits increased, reflecting organic growth and the acquisition of HMN Financial, Inc.

Metric 2024 (USD thousands) 2023 (USD thousands) Change
Total Assets 5,261,673 3,907,713 +34.6%
Total Loans 3,992,534 2,759,583 +44.7%
Total Deposits 4,378,410 3,095,611 +41.4%

Key Ratios

Ratio 2024 2023
Net Interest Margin (FTE) 2.56% 2.46%
Return on Average Assets 0.39% 0.31%
Efficiency Ratio 77.92% 85.85%
Nonperforming Loans to Total Loans 1.58% 0.32%
Allowance for Credit Losses to Total Loans 1.50% 1.30%

Management’s Discussion and Analysis (MD&A) Insights

Management attributes the increase in net income to growth in both net interest income and noninterest income. The increase in noninterest expense is attributed to compensation and professional fees, primarily related to the HMNF acquisition. The MD&A highlights the company’s “One Alerus” initiative and its focus on providing comprehensive financial solutions.

Risk Assessment

  • Credit Risk: Increased nonperforming loans and criticized loans suggest potential asset quality concerns. The high concentration of commercial real estate loans also poses a risk.
  • Interest Rate Risk: The company is exposed to interest rate risk, which could negatively affect earnings.
  • Operational Risk: The company is susceptible to fraudulent activity, information security breaches, and cybersecurity-related incidents.
  • Integration Risk: Challenges in integrating acquired entities, such as HMN Financial, Inc., could impact future performance.
  • Liquidity Risk: Dependence on dividends from the Bank and concentrations of large depositors create liquidity risks.

Opportunity Assessment

  • Diversified Revenue Stream: The company’s diversified business model, with significant noninterest income, provides stability.
  • Strategic Acquisitions: Acquisitions, such as HMN Financial, Inc., expand the company’s market presence and growth potential.
  • “One Alerus” Initiative: The company’s integrated service model and technology investments enhance client engagement and create efficiencies.
  • Synergistic Deposit Growth: Opportunity to grow synergistic deposits from retirement and benefit services and wealth segments.

Conclusion & Actionable Insights

Alerus Financial Corp demonstrates a diversified business model with growth potential. However, increasing expenses and potential asset quality issues warrant caution. Overall Assessment: Hold.

Recommendations:

  • Monitor Asset Quality: Closely monitor nonperforming loans and criticized loans, and proactively manage credit risk in the commercial real estate portfolio.
  • Manage Interest Rate Risk: Implement strategies to mitigate the impact of interest rate fluctuations on net interest income.
  • Integrate Acquisitions Effectively: Focus on successfully integrating acquired entities to realize cost savings and synergies.
  • Enhance Cybersecurity: Strengthen information security controls and cybersecurity defenses to protect against fraudulent activity and data breaches.

1. Commentary

Alerus Financial Corporation’s financial performance in 2024 shows a mixed picture. Net income increased significantly compared to 2023, driven by substantial growth in noninterest income and net interest income. However, this was offset by a considerable rise in noninterest expenses and a large provision for loan losses. Asset quality deteriorated, as indicated by higher nonperforming loans and net charge-offs, while capital ratios decreased, reflecting the impact of the HMNF acquisition and share repurchases.

2. Financial Ratio and Metric Analysis

Profitability

  • Metric: Gross Profit Margin – Not Applicable (Financial institutions do not typically report gross profit)
  • Metric: Operating Profit Margin = (Income before income taxes) / (Net interest income + Noninterest income) = $23,159 / ($107,045 + $114,930) = 10.43%
  • Trend: 2023 Operating Profit Margin = $15,854 / ($87,839 + $80,229) = 9.43%. Percentage Change = (10.43% – 9.43%) / 9.43% = 10.60%
  • Industry: Industry average operating profit margins for banks typically range from 20-30%. Alerus’s operating margin is significantly lower, suggesting potential inefficiencies or higher operating costs compared to peers.
  • Metric: Net Profit Margin = Net income / (Net interest income + Noninterest income) = $17,780 / ($107,045 + $114,930) = 8.01%
  • Trend: 2023 Net Profit Margin = $11,696 / ($87,839 + $80,229) = 6.96%. Percentage Change = (8.01% – 6.96%) / 6.96% = 15.09%
  • Industry: Industry average net profit margins for banks typically range from 15-20%. Alerus’s net profit margin is below the industry average, indicating lower profitability relative to revenue.
  • Metric: Return on Assets (ROA) = Net income / Average total assets = $17,780 / $4,503,483 = 0.39%
  • Trend: Provided in the filing: 2023 ROA = 0.31%. Percentage Change = (0.39% – 0.31%) / 0.31% = 25.81%
  • Industry: The industry average ROA for banks is typically around 1%. Alerus’s ROA is significantly below this benchmark, suggesting it is not generating sufficient profit from its assets.
  • Metric: Return on Equity (ROE) = Net income / Average common equity = $17,780 / $397,738 = 4.47%
  • Trend: Provided in the filing: 2023 ROE = 3.26%. Percentage Change = (4.47% – 3.26%) / 3.26% = 37.12%
  • Industry: The industry average ROE for banks is typically around 10%. Alerus’s ROE is considerably lower, indicating it is not effectively using equity to generate profits.
  • Metric: Earnings Per Share (EPS) – Basic = $0.84
  • Trend: Provided in the filing: 2023 EPS (Basic) = $0.59. Percentage Change = ($0.84 – $0.59) / $0.59 = 42.37%
  • Industry: Industry average EPS varies widely based on the size and type of bank.
  • Metric: Earnings Per Share (EPS) – Diluted = $0.83
  • Trend: Provided in the filing: 2023 EPS (Diluted) = $0.58. Percentage Change = ($0.83 – $0.58) / $0.58 = 43.10%
  • Industry: Industry average EPS varies widely based on the size and type of bank.

Liquidity

  • Metric: Current Ratio = Total current assets / Total current liabilities. Current assets = Cash and cash equivalents + Trading + Available-for-sale investment securities + Loans held for sale + Accrued interest receivable = $61,239 + $3,309 + $588,053 + $16,518 + $20,075 = $689,194. Current liabilities = Short-term borrowings + Accrued expenses and other liabilities = $238,960 + $70,833 = $309,793. Current Ratio = $689,194 / $309,793 = 2.22
  • Trend: To determine the trend, we would need the Current Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A current ratio of 1.0 or greater is generally considered healthy for banks. Alerus’s current ratio suggests strong liquidity.
  • Metric: Quick Ratio = (Total current assets – Inventory) / Total current liabilities. Assuming loans held for sale are similar to inventory, Quick Ratio = ($689,194 – $16,518) / $309,793 = 2.17
  • Trend: To determine the trend, we would need the Quick Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A quick ratio of 1.0 or greater is generally considered healthy for banks. Alerus’s quick ratio suggests strong liquidity.
  • Metric: Cash Ratio = Cash and cash equivalents / Total current liabilities = $61,239 / $309,793 = 0.20
  • Trend: To determine the trend, we would need the Cash Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A cash ratio of 0.2 or greater is generally considered adequate for banks. Alerus’s cash ratio suggests adequate liquidity.

Solvency/Leverage

  • Metric: Debt-to-Equity Ratio = Total liabilities / Total stockholders’ equity = $4,766,263 / $495,410 = 9.62
  • Trend: 2023 Debt-to-Equity Ratio = $3,538,586 / $369,127 = 9.58. Percentage Change = (9.62 – 9.58) / 9.58 = 0.42%
  • Industry: The average debt-to-equity ratio for banks is around 7 to 8. Alerus’s ratio is higher, indicating a more leveraged position.
  • Metric: Debt-to-Assets Ratio = Total liabilities / Total assets = $4,766,263 / $5,261,673 = 0.91
  • Trend: 2023 Debt-to-Assets Ratio = $3,538,586 / $3,907,713 = 0.91. Percentage Change = (0.91 – 0.91) / 0.91 = 0.00%
  • Industry: The debt-to-assets ratio for banks typically ranges from 0.8 to 0.9. Alerus’s ratio is within this range.
  • Metric: Interest Coverage Ratio = Earnings before interest and taxes / Interest expense = (Net income + Income tax expense + Interest expense) / Interest expense = ($17,780 + $5,379 + $114,534) / $114,534 = 1.20
  • Trend: 2023 Interest Coverage Ratio = ($11,696 + $4,158 + $77,044) / $77,044 = 1.21. Percentage Change = (1.20 – 1.21) / 1.21 = -0.83%
  • Industry: A healthy interest coverage ratio for banks is typically above 3. Alerus’s ratio is significantly lower, indicating a potential struggle to cover interest expenses with current earnings.

Activity/Efficiency

  • Metric: Inventory Turnover – Not Applicable (Financial institutions do not typically have inventory)
  • Metric: Days Sales Outstanding (DSO) – Not Applicable (Financial institutions do not typically have sales in the same way as other businesses)
  • Metric: Days Payable Outstanding (DPO) – Not Applicable (Financial institutions do not typically have accounts payable in the same way as other businesses)
  • Metric: Asset Turnover = Total revenue / Average total assets = ($107,045 + $114,930) / $4,503,483 = 0.05
  • Trend: 2023 Asset Turnover = ($87,839 + $80,229) / $3,817,017 = 0.04. Percentage Change = (0.05 – 0.04) / 0.04 = 25.00%
  • Industry: The asset turnover ratio for banks typically ranges from 0.1 to 0.15. Alerus’s ratio is lower, indicating it is not generating as much revenue per dollar of assets compared to peers.

Valuation

  • Metric: Price-to-Earnings Ratio (P/E) = Stock Price / EPS = $18.29 / $0.83 = 22.04
  • Trend: To determine the trend, we would need the P/E Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: The average P/E ratio for banks typically ranges from 10 to 15. Alerus’s P/E ratio is higher, suggesting it may be overvalued relative to its earnings.
  • Metric: Price-to-Book Ratio (P/B) = Stock Price / Tangible book value per common share = $18.29 / $14.44 = 1.27
  • Trend: To determine the trend, we would need the P/B Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: The average P/B ratio for banks typically ranges from 1 to 1.5. Alerus’s P/B ratio is within this range.
  • Metric: Price-to-Sales Ratio (P/S) = Market Cap / Total Revenue. Market Cap = Shares Outstanding * Stock Price = 25,345,000 * $18.29 = $463,550,050. Total Revenue = Net interest income + Noninterest income = $107,045,000 + $114,930,000 = $221,975,000. P/S = $463,550,050 / $221,975,000 = 2.09
  • Trend: To determine the trend, we would need the P/S Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: The average P/S ratio for banks typically ranges from 1 to 3. Alerus’s P/S ratio is within this range.
  • Metric: Enterprise Value to EBITDA (EV/EBITDA) = (Market Cap + Total Debt – Cash) / EBITDA. EBITDA = Net Income + Interest Expense + Income Tax Expense + Depreciation and Amortization = $17,780 + $114,534 + $5,379 + $9,842 = $147,595. Total Debt = Short-term borrowings + Long-term debt = $238,960 + $59,069 = $298,029. Cash = Cash and cash equivalents = $61,239. EV = $463,550 + $298,029 – $61,239 = $700,340. EV/EBITDA = $700,340 / $147,595 = 4.75
  • Trend: To determine the trend, we would need the EV/EBITDA Ratio from the previous comparable period, which is not provided in the filing.
  • Industry: The average EV/EBITDA ratio for banks typically ranges from 6 to 10. Alerus’s EV/EBITDA ratio is lower, suggesting it may be undervalued relative to its earnings.

Growth Rates

  • Metric: Revenue Growth = (Current Year Revenue – Previous Year Revenue) / Previous Year Revenue = ($107,045 + $114,930 – $87,839 – $80,229) / ($87,839 + $80,229) = 31.61%
  • Metric: Net Income Growth = (Current Year Net Income – Previous Year Net Income) / Previous Year Net Income = ($17,780 – $11,696) / $11,696 = 52.02%
  • Metric: EPS Growth = (Current Year EPS – Previous Year EPS) / Previous Year EPS = ($0.83 – $0.58) / $0.58 = 43.10%

Other Relevant Metrics

  • Company-Specific KPIs: The company highlights “Adjusted” metrics, which are non-GAAP measures. These adjustments typically exclude items like merger-related expenses, severance, and gains/losses on investment securities. The company presents these metrics to provide a clearer picture of underlying operating performance.
  • Significance: While these adjusted metrics can be useful, it’s important to scrutinize the adjustments. For example, excluding merger-related expenses can make the company look more profitable, but these expenses are real costs.
  • Material Weakness in Internal Control: The disclosure of a material weakness related to the HMN Financial Inc. acquisition is a significant concern. This indicates a failure in the company’s internal controls over financial reporting, which could lead to inaccurate financial statements.
  • Stock Repurchase Program: The company has an active stock repurchase program, authorizing the repurchase of up to 1,000,000 shares. While this can boost EPS, it also reduces the company’s cash reserves.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️