Q3 2026 Alerus Financial Corporation Earnings Conference Call - ALERUS FINANCIAL CORP

Financial Performance:

• Total revenue reached a record $81 million (highest in 150-year history), up nearly 17% year-over-year (YoY).
• Earnings per share (EPS) increased 17% YoY; adjusted diluted EPS was $0.71.
• Return on tangible common equity (ROTCE) was 17%; return on average assets (ROAA) was 1.45%.
• Net interest income grew 8.3% YoY; net interest margin (NIM) was 3.84% (up 34 bps YoY, down 13 bps sequentially).
• Non-interest income grew 11.3% YoY, representing 42% of total revenue; adjusted non-interest income was $32.8 million (+1.6% QoQ).
• Expense discipline maintained with adjusted non-interest expense at $53.7 million (+2.0% QoQ); year-to-date efficiency ratio in the low 60% range.
• Credit quality improved: Non-performing assets fell to 30 bps of total assets (from 1.13% a year ago); criticized loans down 55% YoY to 1.96%.
• Net recoveries of $1 million (10 bps); loan loss reserve ratio at 1.23%.
• Tangible book value grew nearly 11% YoY to $18.74 per share.
• Return of $37.2 million to shareholders in the first nine months via dividends and stock repurchases; $8.2 million in repurchases during Q3.
• CET1 ratio stood at 10.5%, well above regulatory requirements.

Guidance and Future Outlook:

• Full-year 2026 guidance expects mid-single-digit loan growth (up 3.4% YTD) and low single-digit deposit growth.
• Projected full-year 2026 reported net interest margin: 3.75%–3.85%.
• Adjusted revenue and non-interest income expected to grow mid-single digits, driven by wealth and retirement businesses (swap fees excluded).
• Adjusted non-interest expense expected to increase low to mid-single digits.
• Full-year adjusted ROAA target: >1.25%.
• Purchase accounting accretion expected at ~$13M for 2026 and ~$9M for 2027; Q4 expected ~$1.8M.
• Anticipates ~100 bps of deposit beta if rates rise further; 50% of loans are variable rate (28% Prime, 44% SOFR).
• Loan growth pipeline remains robust for Q4, though mortgage pipelines are currently lighter due to elevated interest rates.

Business Segments and Product Lines:

• Wealth Advisory: Revenue grew 22% YoY; Assets under Administration and Management (AUM) at $5.2 billion (-0.6% QoQ). Pre-tax income improved to $1.8 million. Implemented updated fee schedules with minimal attrition.
• Retirement and Benefits: Revenue up 7.1% YoY; Assets under Administration and Management stable at $44.9 billion. 63% of revenue is recurring/fee-based. HSA deposits up 9% YoY (10 bps average cost).
• Banking: Commercial loans grew 37% YoY, now >33% of the loan portfolio; commercial loan originations at $375 million.
• Fee Income: Banking fee income grew 11% YoY, led by swap fees and treasury management. Service charges on deposits up >10% QoQ.
• Mortgage: Originations increased to $127 million; 90% of volume is purchase loans.
• Deposits: Total deposits grew 2.7% QoQ to include $53.9M in non-interest-bearing deposits. Synergistic deposits (retirement/wealth) now 22.1% of total; commercial deposit growth driven by loan originations. No broker deposits on balance sheet.

Market and Competitive Landscape:

• Market consolidation in the retirement sector viewed as a catalyst for future organic growth and strategic opportunities.
• Commercial loan demand remains strong, evidenced by large wins in healthcare, construction, and logistics sectors.
• Mortgage market facing headwinds with 30-year rates hovering above 7%, leading to seasonal slowdowns and lighter pipelines in Q4.
• Alaris positions itself as a leader in "one Alaris" holistic solutions, leveraging high recurring revenue to outperform industry peers (fee income >40% vs. industry average).
• Strong competitive positioning in commercial banking via full-relationship models that capture operating and treasury deposits.

Risks and Challenges:

• Interest Rate Risk: Anticipated contraction in NIM due to diminishing purchase accounting accretion and rising cost of funds, though balance sheet is neutrally positioned over a 12-month horizon.
• Credit Risk: Potential for specific reserves and charge-offs on a small number of long-term workout deals nearing maturity.
• Mortgage Market: Seasonal weakness and high rates expected to reduce pipeline volume in Q4.
• Expense Pressure: Ongoing cost pressures managed via selective technology investment and hiring; compensation costs rising slightly due to insurance.
• Forward-Looking Statements: Actual results may differ due to factors listed in SEC filings.

Management Commentary and Tone:

• Tone was highly confident, emphasizing "strong momentum," "consistent execution," and a "diversified model" delivering record revenue.
• Management highlighted the strength of the franchise, specifically the recurring revenue stream and low-cost funding advantages.
• Emphasized strategic focus on organic growth, capital return, and flexibility for selective M&A rather than "growth for growth's sake."
• Leadership team (CEO Katie O'Neill-Lawrenson, CFO Al Villalon) expressed optimism about balance sheet strength and ability to scale wealth/retirement businesses.

Analyst Questions and Answers:

• Q4 Revenue/Expense Run Rate: Management confirmed Q4 will likely show a step-down in reported fee income (due to lack of recurring premises sale gains) and stable-to-slightly higher expenses due to seasonality.
• Loan Growth & Pipelines: Pipelines remain strong for commercial lending, with mid-market clients bringing deposits; retail consumer loans declined modestly.
• Deposit Pricing & Margins: Deposit beta expected at 50%; management intends to defend deposits but go up slowly on pricing to protect margins. Spot margin at quarter-end expected to be down a few basis points.
• Provisioning: Provision expected to reflect strong loan growth (mid-single-digit guidance implies double-digit Q4 growth), likely around $2M with reserves covering non-performing loans >7x.
• Mortgage Outlook: Q4 expected to be slow due to rates and seasonality; rebound anticipated in March-April 2027.
• Capital Allocation: No defined buyback run rate; repurchases will be opportunistic to return excess capital after funding growth and M&A opportunities.

Other Key Points:

• Alaris operates with a "one Alaris" model integrating banking, wealth, and retirement to create sticky client relationships.
• The company has no broker deposits, providing a stable funding base.
• Commercial loan portfolio composition has shifted significantly toward commercial/industrial and owner-occupied CRE.
• HSA deposits are a key differentiator, offering low-cost funding at ~10 bps.
• Management reiterated commitment to technology modernization to improve service and capacity without sacrificing expense discipline.