The City Beat had a story in Sunday’s paper about Alerus Financial and how it’s been expanding like mad this year. Two months and – pow, pow pow — they bought three businesses. That was pretty newsworthy, I thought.
I usually find business stories so blah-blah because there’s never any action. Business people so frequently engage in PR talk about boring stuff like their mission statement or value statement or how dedicated they are to their customers. It’s nothing you couldn’t get from their Web site.
Luckily, Alerus Financial’s chief executive is Randy Newman, who I already know from covering the Alerus Center commission. I give Randy a hard time sometimes — that’s kind of my job – but I always know I’m going to get a straight forward answer from him. Even when I’ve pounded the Alerus Center for losing money and Randy was chairman, he was always willing to talk about both the center’s strengths and weaknesses. He never played defense (I’ve since learned that he used to QB for the high school football team in Cando, N.D.).
So I sit Randy down and tell him I want to know what kind of strategy Alerus Financial’s been pursuing that it’d be buying up all these businesses in rapid succession.
One, he said, the opportunities just came up in rapid succession. And two, he said, Alerus Financial has a clear strategy that meant it was always looking for these kinds of opportunities. So when opportunities do knock, it can make a decision rapidly. In fact, one of the deals was completed in about five days.
And three, it had cash available. I didn’t get that from Randy. Somehow I forgot to ask him about the money, so I called up the chief operating officer, Kris Compton. She was a little more cautious than Randy, but she said the bank had been pretty conservative and managed to have some extra money sitting around for deals.
Alerus Financial’s strategy is two-pronged: One, branch outside of North Dakota. And two, diversify into businesses more profitable than banking.
Randy explained that being a bank in "a slow-growth/no-growth state" like North Dakota meant that you have to do things a little differently if you want to avoid being a slow-growth/no-growth bank. So this strategy was of necessity.
"If North Dakota was growing 10 percent a year, I would’ve stayed a bank," he said.
Besides being slow to grow, North Dakota is also very competitive when it comes to banking, according to Randy. With a population that’s less than half of Phoenix, Az., we have something like 150 to 170 banks. In all of Arizona, there’s about 50.
So, to grow big in North Dakota, banks either have to make riskier loans or compete like mad for the smaller number of good loans. The alternative is to grow slow.
One of the reasons North Dakota is a slow-growth state is people keep leaving. For banks, that means the customers are leaving. So Alerus Financial just followed those customers, first to Fargo and then to the Twin Cities and now Phoenix. The company is so focused on the markets where its customers are that, when it bought a failed Sioux Falls, S.D., bank with a branch in Minneapolis, it passed on the Sioux Falls branch, letting another bank have that branch.
(I should point out that apparently another bank in the region, Western State Bank in Devils Lake, bought an Arizona branch of some other bank, too, according to Bob Entringer, the assistant state banking commissioner.)
Diversification also helps because, essentially, Alerus Financial can get more business from the same customers with stock brokerage, insurance, retirement planning, etc. It’s also gotten into managing and administering funds of those that aren’t directly its customers. One example of this is its 401(k) plan administration business. The amount of money in the funds it administers makes it the 36th largest administrator in the country.
And if Alerus Financial is going to branch out, it’s usually cheaper to buy than to build from scratch. Look at the timeline below and you’ll see that the strategy of the past two decades has been to buy up failed or weakened banks if possible. Randy was named president in 1988, our records show.
|1961||Opened Grand Forks AFB branch||New branch|
|1964||Opened Express Bank branch||New branch|
|1974||Opened Gateway branch||New branch|
|1985||Acquired Northwood (N.D.) State Bank||N/A|
|1987||Acquired West Fargo (N.D.) State Bank||N/A|
|1989||Acquired Dakota Bank (Grand Forks)||Failed bank|
|1991||Acquired First Federal S&L (Fargo)||Failed bank|
|2002||Acquired BNC National Bank branch (Fargo)||Weakened bank?|
|2007||Opened Minneapolis bank office||New branch|
|2009||Acquired Meridian Bank branch (Phoenix-area)||Weakened bank|
|2009||Acquired BankFirst branch (Minneapolis)||Failed bank|
Kris said BNC National and Meridian were not failed banks and that, for whatever reasons, they decided to sell. I think she was just being careful. It’s pretty obvious why Meridian sold. (This Arizona Republic story has more details.)
I’m not entirely sure what happened with BNC National. Stories from the time didn’t indicate anything unusual was going on. More recently, though, the ratings indicate it’s got some problems.
While we’re looking at Bankrate.com, let’s check out how Alerus Financial is doing. The main rating is four stars, which means it’s got a "sound" performance; five stars is the top rating, which is "superior."
Dig into the memo and you can see that it gets five stars for asset quality, meaning the loans and investsments are top notch. It also gets five stars for liquidity, which is a measure of how much cash it can come up with at any one time. No wonder Alerus Financial was able to do those three deals so rapidly.
For profitability, Alerus Financial gets only three stars, which is good but not great. One reason: Overhead is "significantly higher than average." The company only gets two stars for bank capitalization, which is puzzling because it’s doing more than it needs to.
The chart to the left shows Alerus Center’s net income from 1985 to 2008. The big spike is 1997, which is probably natural because after a big flood a lot of people need loans. The post-flood years were leaner, though, and Alerus Financial slowed down loans to keep from getting too stretched out.
I’m not smart enough to understand the financial statement from Bankrate.com, so I really can’t say much about it. Randy did note with some pride that nonperforming assets are below 1 percent, mostly because Alerus Financial stayed away from construction loans, which tend to be riskier than other loans. Construction loans were only 2.68 percent of assets. Much of the company’s assets were in commercial realestate and commercial and industrial loans. Profits were modest.
Meridian Bank, which sold one of its suburban Phoenix branch to Alerus Financial, has a way different financial summary. Nonperforming assets were at 5.38 percent. Construction loans were 15.68 percent of assets. Profits were in the negative zone, but not by much.
A worse case is BankFirst, the Sioux Falls bank that failed. Pretty much bad news all around, but look at the nonperforming assets — 43.68 percent — and the construction loans — 32.06 percent of assets. Profits were in the hole and six feet under.
North Dakota values?
Besides Alerus Financial’s strategy, I spent quite a bit of time exploring with Randy why the company never got involved in the risky behavior of some other banks in the country.
There is, of course, the usual North Dakota conservatism, which is seen as a pretty good thing in this context. I tried to flesh this out a little, but eventually concluded, as Randy had, that it wasn’t necessarily virtue that made banks here, Alerus Financial among them, less likely to take risks.
"If this bank had been in California, or Florida or Arizona, would we look the way we do today?" Randy said. "Probably not."
There are fewer opportunities for opportunism here — remember that slow-growth thing — so the banking community as a whole faces fewer temptations, so goes the argument. If everybody and his brother in North Dakota were making money hand over fist in construction loans, it would be pretty hard for any banker, or the investors behind him, no matter how conservative, to forego those profits, even if they suspected there was a bubble.
If you look at the list of banks that failed — there were significantly more failures this year than in the past several years — and who bought them, you’ll see that there are other Alerus Financials out there in other states, banks that managed to stay strong enough to gobble the weak.
I just finished the list below and was surprised to find that: One, most of the failed banks aren’t in places like California, or Florida, or Arizona. Illinois and Georgia standout. And two, many of their buyers are in the same region or state, so that calls into question the lack of temptation theory.
You’ll notice, too, that most of the buyers, called assuming institution in FDIC parlance, have strong ratings like Alerus Financial.
(Actually, click on this link for the table. AreaVoices has this quirk where too many table-cells cause it to go insane, wherein it pukes out some of the HTML coding and you lose half your table.)
Anyway, I thought it was interesting that there’s been 69 bank failures nationwide so far this year. From 2000 to 2008, there were 53 bank failures.
While we’re on Bankrating.com, check out the list of banks in North Dakota. Most of them look like they’re doing OK or better, which is three stars or more. Some though have only two and one small town bank has one star, which sounds pretty scary, though bear in mind the FDIC guarantee you get up to $250,000 if your bank goes belly up.