Overview

The Company is a diversified financial services company headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, the Company provides innovative and comprehensive financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth. The Company’s primary banking market areas are the states of North Dakota, Minnesota, and Arizona. The Company’s business model produces strong financial performance and a diversified revenue stream, which has helped the Company establish a brand and culture yielding both a loyal client base and passionate and dedicated employees.

Net Interest Income

Net interest income represents interest income less interest expense. The Company generates interest income on interest-earning assets, primarily loans and available-for-sale securities. The Company incurs interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest the Company earns on interest-earning assets or pay on interest-bearing liabilities.

Noninterest Income

Noninterest income primarily consists of the Company’s retirement and benefit services business, wealth management, mortgage banking, service charges on deposit accounts, and other sources. The retirement and benefit services business is the Company’s largest source of noninterest income, generating over half of the Company’s noninterest income from transaction or participant-based fees. Wealth management fees are primarily based on a tiered scale relative to the market value of the assets under administration/management (AUA/AUM). Mortgage banking income consists of gains on originating and selling mortgages and origination fees.

Noninterest Expense

Noninterest expense is primarily comprised of compensation and employee benefits, occupancy and equipment, business services and technology, intangible amortization, professional fees and assessments, and other operational expenses. Compensation and employee benefits are the largest component of noninterest expense and are primarily impacted by changes in headcount and fluctuations in benefits costs.

Operating Segments

The Company has three operating segments: banking, retirement and benefit services, and wealth. The banking division offers a complete line of loan, deposit, cash management, and treasury services. The retirement and benefit services business provides record-keeping, administration, and investment fiduciary services nationally. The wealth division provides advisory, planning, investment management, and trust services.

Critical Accounting Policies

The most critical accounting policy is the allowance for credit losses (ACL). The Company adopted the CECL accounting standard in 2023, which requires the recognition of expected lifetime credit losses on loans and certain off-balance sheet credit exposures. The ACL is determined using a discounted cash flow approach with probability of default and loss given default assumptions applied to each loan segment. The ACL may increase or decrease period to period based on factors such as macroeconomic forecasts, prepayment speeds, loan balances, and credit quality.

Another critical policy is the accounting for goodwill, which is evaluated annually for impairment. The determination of goodwill impairment involves various valuation techniques, including the market approach and income approach, which require management to make estimates regarding expected future cash flows and discount rates.

Selected Financial Data

The Company reported net income of $17.8 million in 2024, up from $11.7 million in 2023. This increase was driven by a $34.7 million increase in noninterest income and a $19.2 million increase in net interest income, partially offset by a $30.5 million increase in noninterest expense and a $16.1 million increase in provision for credit losses. Key ratios improved, with return on average assets increasing to 0.39% and return on average tangible common equity increasing to 7.12%.

Total assets grew 34.6% to $5.3 billion, primarily due to a $1.2 billion increase in loans. The loan portfolio is well-diversified, with 50.0% in commercial real estate, 30.2% in consumer, 16.7% in commercial and industrial, and 3.1% in agricultural. Asset quality metrics remained strong, with nonperforming loans to total loans at 1.58% and the allowance for credit losses to total loans at 1.50%.

The Company’s retirement and benefit services segment managed $40.7 billion in AUA/AUM at the end of 2024, up 11.0% from the prior year. The wealth segment had $4.6 billion in AUA/AUM, an increase of 8.1% year-over-year.

Overall, the Company demonstrated solid financial performance in 2024, with growth across its key business lines and continued strength in its diversified revenue model and balance sheet.