• Net Income: $6.2 million or $0.31 per share.
• Pre-Provision Net Revenue (PPNR): Increased by 48% on a linked quarter basis.
• Loan Growth: 4.2% for the quarter.
• Net Interest Income: Increased by approximately 8%.
• Net Interest Margin: Expanded by 13 basis points during the quarter.
• Fee Income: Increased by 8.1% during the quarter.
• Assets Under Administration and Management (AUA/AUM): $43.6 billion.
• Provision Expense: $4.5 million for the quarter.
• Allowance to Loan Losses: 1.31%.
• Common Equity Tier 1 (CET1) Ratio: 11.7%.
• Adjusted Tangible Common Equity (TCE): 7.91%.
• Dividend Increase: Raised by 5.3%.
• Non-Interest Expense: Decreased by 0.7% during the quarter.
• Non-Performing Assets to Total Assets: 63 basis points.

• Warning! GuruFocus has detected 7 Warning Sign with ALRS.

Release Date: July 25, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Alerus Financial Corp (NASDAQ:ALRS) reported net income of $6.2 million, with earnings per share of $0.31, exceeding expectations.
• The company achieved its fifth consecutive quarter of deposit growth, showcasing strong performance in a competitive environment.
• Loan growth was robust at 4.2% for the quarter, with a disciplined approach to pricing and credit.
• Fee income, a strategic differentiator for ALRS, contributed to over 53% of total revenues, with an 8.1% increase during the quarter.
• The acquisition of HMN Financial is progressing on schedule, with anticipated closing in the fourth quarter, marking ALRS's 26th acquisition.

Negative Points

• A $4.5 million provision expense was recorded due to expected credit normalization and a charge-off of a non-accrual C&I loan.
• Non-performing assets increased to 63 basis points, primarily due to a construction loan moved to non-accrual status.
• The company anticipates a seasonal outflow of $80 million to $100 million in deposits in the third quarter.
• Expenses are expected to grow mid-single digits in 2024, including merger-related costs.
• The company remains slightly liability sensitive, which could impact net interest income if interest rates decrease.

Q & A Highlights

Q: Can you provide more details on the construction credit that migrated to non-accrual status? A: Karin Taylor, Chief Risk Officer, explained that the construction credit has a 25% reserve against it. The project is 80% complete, and they believe there are feasible options to deliver the remaining equity needed to complete it. The issue was identified late in the quarter, and further assessment is ongoing.

Q: What is the outlook for net interest margin (NIM) expansion in the coming quarters? A: Alan Villalon, CFO, stated that they expect a few basis points of expansion in the next quarter from the core and reported numbers. The $400 million of swaps rolling off will make them slightly liability sensitive, but they anticipate mid-single-digit NII improvement if the Fed cuts rates by 100 basis points.

Q: How quickly can the new equipment finance team start contributing to growth, and what are the potential synergies? A: Jim Collins, Chief Banking and Revenue Officer, mentioned that the equipment finance team will serve as a wedge product into mid-market companies, aiming for full relationship takeovers. They expect some activity this year, with full activity starting next year, integrating with the existing C&I sales force.

Q: What are your expectations for charge-off levels in the coming quarters? A: Karin Taylor noted that aside from the construction deal, credit migration appears typical to pre-COVID levels. They had net upgrades, reducing criticized levels. There might be further adjustments as a company moves into liquidation, with a remaining balance of $2.5 million on the loan.

Q: How is the integration of HMN Financial progressing, and what is the expected timeline for closing the acquisition? A: Katie Lorenson, CEO, stated that the integration is progressing well, with positive feedback from employees and clients. They are targeting a close and conversion in the fourth quarter, with regulatory processes on track.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.