425: Alerus Financial Corporation Reports Second Quarter 2024 Net Income of $6.2 Million

Alerus Financial Corporation announced a net income of $6.2 million for the second quarter of 2024, a slight decrease compared to the previous quarter and a more significant decrease compared to the same period last year.

Summary

• Alerus Financial Corporation reported a net income of $6.2 million for Q2 2024, or $0.31 per diluted common share.
• This compares to $6.4 million in Q1 2024 ($0.32 per diluted share) and $9.1 million in Q2 2023 ($0.45 per diluted share).
• Total deposits reached $3.3 billion as of June 30, 2024, a 6.6% increase from December 31, 2023.
• Total loans were $2.9 billion as of June 30, 2024, up 5.7% from December 31, 2023.
• The net interest margin was 2.39% in Q2 2024, compared to 2.30% in Q1 2024.
• Noninterest income was $27.4 million, representing 53.3% of total revenues, an 8.1% increase from the previous quarter.
• Noninterest expense decreased slightly by 0.7% to $38.8 million.
• Total assets under administration/management were $43.6 billion as of June 30, 2024, a 1.9% increase from March 31, 2024.
• The quarterly dividend increased by 5.26% to $0.20 per share.
• The allowance for credit losses to total loans remained stable at 1.31%.
• The common equity tier 1 capital ratio was 11.67%, well above the minimum threshold.
• Tangible book value per common share was $15.77, a 0.9% increase from March 31, 2024.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While net income decreased, there were improvements in deposits, loans, and noninterest income. The company is also pursuing strategic acquisitions.

Positives

• Total deposits increased by 6.6% since the end of 2023, reaching $3.3 billion.
• Total loans increased by 5.7% since the end of 2023, reaching $2.9 billion.
• Noninterest income increased by 8.1% compared to the previous quarter, contributing to 53.3% of total revenues.
• Noninterest expense decreased slightly by 0.7% compared to the previous quarter.
• Total assets under administration/management increased by 1.9% since the previous quarter, reaching $43.6 billion.
• The quarterly dividend increased by 5.26% to $0.20 per share.
• The company continues to hold cash of $355.0 million from the Bank Term Funding Program (BTFP), earning 52 basis points of risk free return.

Negatives

• Net income decreased to $6.2 million in Q2 2024 from $6.4 million in Q1 2024 and $9.1 million in Q2 2023.
• One previously identified construction, land and development loan of $21.5 million moved to nonaccrual status.
• Net charge-offs increased to $2.5 million due to a $2.6 million charge-off of one commercial and industrial loan.
• The provision for credit losses was $4.5 million for the second quarter of 2024, compared to no provision for each of the first quarter of 2024 and the second quarter of 2023.

Risks

• Interest rate risk, including the effects of sustained high interest rates.
• Ability to successfully manage credit risk and maintain an adequate level of allowance for credit losses.
• Business and economic conditions generally and in the financial services industry, nationally and within our market areas, including high rates of inflation and possible recession.
• The effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short-period of time that resulted in recent bank failures.
• The overall health of the local and national real estate market.
• Concentrations within the loan portfolio.
• The level of nonperforming assets on the balance sheet.
• Ability to implement organic and acquisition growth strategies, including the integration of Metro Phoenix Bank and the pending acquisition of HMN Financial, Inc.
• The impact of economic or market conditions on fee-based services.
• Ability to continue to grow the retirement and benefit services business.
• Ability to continue to originate a sufficient volume of residential mortgages.
• The occurrence of fraudulent activity, breaches or failures of our or our third party vendors information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools.
• Interruptions involving information technology and telecommunications systems or third-party servicers.
• Potential losses incurred in connection with mortgage loan repurchases.
• The composition of the executive management team and ability to attract and retain key personnel.
• Rapid technological change in the financial services industry.
• Increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including digital asset service providers.
• Ability to successfully manage liquidity risk, including the need to access higher cost sources of funds such as fed funds purchased and short-term borrowings.
• The concentration of large deposits from certain clients, who have balances above current Federal Deposit Insurance Corporation (FDIC) insurance limits.
• The effectiveness of the risk management framework.
• The commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which the Company may become subject.
• Potential impairment to the goodwill recorded in connection with past acquisitions, including the acquisition of Metro Phoenix Bank and the pending acquisition of HMN Financial, Inc.
• The extensive regulatory framework that applies to us.
• The impact of recent and future legislative and regulatory changes, including in response to the recent bank failures.
• Fluctuations in the values of the securities held in the securities portfolio, including as a result of changes in interest rates.
• Governmental monetary, trade and fiscal policies.
• Risks related to climate change and the negative impact it may have on customers and their businesses.
• Severe weather, natural disasters, widespread disease or pandemics.
• Acts of war or terrorism, including the ongoing Israeli-Palestinian conflict and the Russian invasion of Ukraine, or other adverse external events.
• Any material weaknesses in internal control over financial reporting.
• Changes to U.S. or state tax laws, regulations and guidance.
• Potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election.
• Talent and labor shortages and employee turnover.
• Success at managing the risks involved in the foregoing items.
• Any other risks described in the Risk Factors sections of the reports filed by Alerus Financial Corporation with the Securities and Exchange Commission.

Future Outlook

The company is focused on long-term success through organic growth, talent acquisitions, strategic acquisitions, and productivity and efficiency initiatives.

Management Comments

• President and Chief Executive Officer Katie Lorenson said, 'We continued to see improvement in our underlying core business during the second quarter of 2024.'
• Overall revenues grew 8% sequentially from the prior quarter as both our spread based and fee based revenues grew at a similar rate.
• A continued rebound in our net interest margin coupled with strong balance sheet growth in loans and deposits, including noninterest bearing deposits, propelled our spread income higher.
• Fee based revenues benefitted from an improvement in both asset based and non-market based fees from our wealth and retirement businesses.
• In addition, operating leverage improved with continued prudent expense management, which drove overall expenses down slightly during the quarter.
• These strong core underlying trends led to sequential improvement of over 48% in pre-provision net revenue from the prior quarter.
• Overall classified asset levels improved during the quarter and credit quality is strong relative to historical standards.
• Reserve and capital levels remain robust with an allowance of 1.31% to total loans, CET1 ratio of 11.67%, while tangible book value per common share grew more than 8% over the past year.
• 'I want to thank all the Alerus team members for their efforts in driving continuous improvement, their expertise and commitment to our clients, communities and shareholders to make Alerus better every day.'

Industry Context

The company is operating in a competitive financial services industry with increasing competition from non-banks and Fintech companies. Recent bank failures and economic uncertainty add to the challenges.

Comparison to Industry Standards

• The document compares Alerus Financial's ROA and ROE to the KBW Regional Bank Index, both the average and top quartile.
• Alerus Financial's ROA for the 5-year period from 2019-2023 was 1.31%, while the KBW Regional Bank Index averaged 1.08% and the top quartile averaged 1.28%.
• Alerus Financial's ROE for the same period was 12.5%, while the KBW Regional Bank Index averaged 9.2% and the top quartile averaged 11.2%.

Stakeholder Impact

• Shareholders will see a slightly lower net income but an increased dividend.
• Customers will benefit from the company's continued investment in technology and diversified services.
• Employees may experience changes due to the pending acquisition of HMN Financial, Inc.

Next Steps

• The company will host a conference call on July 25, 2024, to discuss the financial results.
• The company is working towards completing the acquisition of HMN Financial, Inc.

Key Dates