Home Federal Acquisition Will Positively Impact Future Earnings

Key Takeaways

• Strategic acquisitions and organic growth in loans and deposits are enhancing future earnings and positively impacting net interest income.
  
• Investments in wealth management and favorable legislation are driving revenue growth, supporting long-term stability and performance improvements.
  
• Increased nonperforming assets, higher noninterest expenses, and reliance on acquisitions pose risks to asset quality, net margins, and financial stability.

Catalysts

Operates as the bank holding company for Alerus Financial, National Association that engages in the provision of various financial services to businesses and consumers.

• The acquisition of Home Federal has expanded Alerus Financial's assets to over $5 billion, increased its client base by nearly 50%, and is expected to drive top-quartile performance metrics, impacting future revenue and earnings positively.
  
• Robust organic growth in loans and deposits continues across all Alerus markets, with a 30% growth reported, positively impacting net interest income and future earnings.
  
• The retirement business is experiencing core revenue growth driven by new plan sales and favorable legislation such as SECURE Act 2.0, expected to support long-term revenue growth and stability.
  
• The improvement in net interest margin by 97 basis points to 3.2% due to repricing of loans and deposits and successful acquisition integration is anticipated to enhance future earnings.
  
• Strategic investments in wealth management and increasing assets under management are aimed at aligning with bank assets, with a 19% revenue growth, positively influencing future net margins and earnings.

Alerus Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alerus Financial's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $85.6 million (and earnings per share of $3.19) by about March 2028, up from $21.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Alerus Financial Future Earnings Per Share Growth

Risks

• The increase in nonperforming assets, driven by issues with a large multi-family construction loan, raises concerns about asset quality and could impact net margins and earnings.
  
• Noninterest expenses increased significantly due to the acquisition, and the projected low double-digit growth in expenses could pressure net margins and earnings if revenue growth doesn't keep pace.
  
• The company's reliance on merger and acquisition-driven growth introduces integration risks, which may impact operational efficiencies and net margins.
  
• Fee income growth projections appear uncertain due to the company's reliance on variable income sources such as client swaps and property sales, which could result in revenue volatility.
  
• The company's Tier 1 equity capital and tangible common equity ratios have decreased post-acquisition, which could impact financial stability and earnings if unexpected economic uncertainties arise.

Valuation

• The analysts have a consensus price target of $23.5 for Alerus Financial based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $333.4 million, earnings will come to $85.6 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $18.79, the analyst price target of $23.5 is 20.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.