425: Alerus Financial to Acquire HMN Financial in $116.4 Million All-Stock Deal

Alerus Financial Corporation (ALRS) and HMN Financial, Inc. (HMNF) have jointly announced a definitive agreement for Alerus to acquire HMNF in an all-stock merger valued at approximately $116.4 million.

Summary

• Alerus Financial Corporation (Alerus) will acquire HMN Financial, Inc. (HMNF) in an all-stock merger.
• The transaction is valued at approximately $116.4 million.
• HMNF stockholders will receive 1.25 shares of Alerus common stock for each HMNF share.
• The combined company will have approximately $5.5 billion in total assets, $3.7 billion in total loans, and $4.3 billion in total deposits.
• It will also have assets under administration and management of approximately $43.1 billion.
• The combined entity will operate 29 locations across the Midwest and Arizona.
• As of March 31, 2024, HMNF had $1.2 billion in total assets, $872.3 million in loans, and $1.0 billion in total deposits.
• The merger is expected to close in the fourth quarter of 2024.
• The deal is expected to be immediately accretive to Alerus' estimated earnings before one-time costs, with a tangible book value earn back of approximately 2.2 years and an internal rate of return in excess of 25%.

Sentiment

Score: 8

Explanation: The document presents a positive outlook on the merger, highlighting strategic benefits, financial gains, and cultural alignment. The tone is optimistic and confident.

Positives

• The merger provides Alerus with a strategic expansion into the growing Rochester, Minnesota, market.
• The combined company will benefit from increased scale and operating leverage.
• The transaction is expected to be immediately accretive to Alerus' earnings.
• The deal is projected to have a tangible book value earn back of approximately 2.2 years and an internal rate of return in excess of 25%.
• HMNF has a valuable core deposit franchise based on long-standing client relationships.
• The merger is expected to enhance Alerus' projected 2025 efficiency by 615bps+.
• The combined company will have strong pro forma capital ratios, creating capacity for continued growth.

Risks

• The possibility that any of the anticipated benefits of the proposed Merger will not be realized or will not be realized within the expected time period.
• The risk that integration of HMNFs operations with those of Alerus will be materially delayed or will be more costly or difficult than expected.
• The parties inability to meet expectations regarding the timing of the proposed Merger.
• Changes to tax legislation and their potential effects on the accounting for the Merger.
• The inability to complete the proposed Merger due to the failure of Alerus or HMNFs stockholders to adopt the Merger Agreement, or the failure of Alerus stockholders to approve the issuance of Alerus common stock in connection with the Merger.
• The failure to satisfy other conditions to completion of the proposed Merger, including receipt of required regulatory and other approvals.
• The failure of the proposed Merger to close for any other reason.
• Diversion of managements attention from ongoing business operations and opportunities due to the proposed Merger.
• The challenges of integrating and retaining key employees.
• The effect of the announcement of the proposed Merger on Alerus, HMNFs or the combined companys respective customer and employee relationships and operating results.
• The possibility that the proposed Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events.
• The amount of HMNFs stockholders equity as of the closing date of the Merger and any potential downward adjustment in the exchange ratio.
• The dilution caused by Alerus issuance of additional shares of Alerus common stock in connection with the Merger.
• Changes in the global economy and financial market conditions and the business, results of operations and financial condition of Alerus, HMNF and the combined company.

Future Outlook

The merger is expected to close in the fourth quarter of 2024 and is anticipated to be immediately accretive to Alerus' earnings before one-time costs.

Management Comments

• Katie Lorenson, President and Chief Executive Officer of Alerus, stated that they are pleased with the partnership and strategic expansion into Rochester, Minnesota, and other communities Home Federal serves.
• Brad Krehbiel, President and Chief Executive Officer of HMNF, believes they have found an exceptional partner in Alerus and is confident the merger will serve all constituents well.

Industry Context

The merger represents Alerus' twenty-sixth acquisition since 2000, reflecting a long-term strategy of expanding its business segments.

Comparison to Industry Standards

• The presentation compares Alerus' ROAE, Fee Income, and Loans/Deposits to a peer group of Midwest major exchange traded banks with between $1B $10B in total assets.
• Alerus' pro forma ROAE is projected to be in the top quartile of its peers in 2025.
• Alerus' pro forma fee income is projected to be in the top quartile of its peers in 2025.
• Alerus' pro forma loans/deposits ratio is projected to be in the median of its peers.

Management Changes

Stakeholder Impact

• The merger is expected to benefit stockholders through increased value and growth potential.
• Clients will have access to a broader range of services and a larger balance sheet.
• Employees will have opportunities for growth and development within the combined organization.
• Communities served by both Alerus and HMNF will benefit from a stronger, more diversified financial institution.

Next Steps

• Alerus will file a registration statement on Form S-4 with the SEC.
• A joint proxy statement will be sent to the stockholders of Alerus and HMNF.
• Alerus and HMNF will seek required regulatory approvals.
• Alerus and HMNF will seek approval by the stockholders of both companies.
• The merger is expected to close in the fourth quarter of 2024.

Key Dates