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

Explicit Guidance:

• Full-Year 2026 Loan Growth: Mid-single-digit growth expected; YTD growth of 3.4% through Q3.
• Full-Year 2026 Deposit Growth: Low single-digit growth expected; YTD growth of 2.7% led by commercial relationships.
• Full-Year 2026 Net Interest Margin (NIM): Reported margin guidance of 3.75% to 3.85%.
• Full-Year 2026 Adjusted Revenue & Non-Interest Income: Mid-single-digit growth projected, driven by Wealth and Retirement segments.
• Full-Year 2026 Adjusted Non-Interest Expense: Low to mid-single-digit increase expected due to strategic hiring.
• Full-Year 2026 Adjusted Return on Assets (ROA): Expected to be above 1.25%.
• Purchase Accounting Accretion (2026): Total accretion expected to be approximately $13 million.
• Purchase Accounting Accretion (2027): Total accretion expected to decline to approximately $9 million.
• Loan Turnover: Anticipated turnover of slightly over $300 million per quarter in upcoming quarters.
• Loan Repricing: Approximately $2 billion of fixed-rate commercial real estate loans maturing/rolling off over the next 12 months with an expected reprice yield of ~6%.

Business-Segment Outlook:

• Wealth Advisory: Focus on expanding institutional and high net worth relationships; strategic advisor hiring; expected steady quarter-over-quarter pipeline performance without a material Q4 seasonal bump.
• Retirement & Benefits: Revenue expected to remain steady in Q4 assuming neutral markets; 63% of revenue tied to plans/participants rather than market levels; focus on modernization, streamlined onboarding, and reduced manual work to build capacity for consolidation opportunities over the next several years.
• Banking: Strategic shift toward full-relationship commercial and private banking; commercial loans up 37% YoY; synergistic deposits (HSA, wealth, retirement) expected to continue growing.
• Mortgage: Q4 expected to see typical seasonal slowdown and pipeline lightness due to rates >7%; recovery and seasonality pick-up anticipated in March–April.
• Credit Quality: Q4 provision expected to reflect loan growth; loan growth in double-digits for Q4 to achieve full-year targets; net charge-offs expected to be lower than previous quarters in 2026 but may creep back toward long-term averages (mid-to-high 20 bps) in the second half of next year.

Market and Competitive Outlook:

• Deposit Pricing & Beta: Management expects a 50% beta on deposits; intends to defend pricing for largest depositors while watching competition and moving rates up slowly to protect margins.
• Loan Mix: Floating rate loans split 50/50 (Variable vs. Fixed); of variable loans, 28% tied to Prime, 44% to SOFR.
• Mortgage Market: Acknowledged slowdown in the broader market with 30-year rates stubbornly above 7%, leading to lighter pipelines; reliance on experienced staff and referral networks to pull volume.
• Fee Income Variability: Swap fee income excluded from guidance due to variability; Q4 reported fee income may step down due to the absence of non-recurring premises sale gains.

Macro / Industry Outlook:

• Interest Rate Environment: Balance sheet neutrally positioned to rate changes over a 12-month horizon; ALM modeling shows minimal NII impact (approx. 10 bps) in +/- 100 bps scenarios.
• Rate Hikes: Management notes potential for rate hikes in December and early 2027, though confident in defending core margins through controlled deposit pricing.
• Margin Trajectory: Anticipates some NIM contraction in late 2026/2027 driven by diminishing purchase accounting accretion and rising deposit costs (cost of funds up 2 bps).
• Consolidation: Sees a catalyst for industry consolidation over the next several years, positioning the firm for organic growth and strategic opportunities.

Strategic Initiatives:

• M&A: Will remain selective and disciplined; no intent to acquire for size's sake; maintaining flexibility for strategic opportunities given differentiated business model.
• Capital Allocation: Priorities remain: 1) Support organic growth, 2) Return capital to shareholders via dividends and buybacks, 3) Maintain M&A flexibility.
• Share Repurchases: No fixed run rate; execution will be opportunistic based on available excess capital after funding growth and dividends.
• Technology & Operations: Selective investment in technology and strategic hiring to improve productivity and service capacity; ongoing modernization of retirement operations.
• Facility Optimization: Continued right-sizing of the physical footprint.

Risks and Headwinds to Outlook:

• Credit Risk: A small number of long-term credits nearing maturity being worked through; potential for specific reserves/charge-offs on one or two deals early in 2027.
• Margin Pressure: Contraction risk from diminishing purchase accounting accretion and rising cost of funds (particularly money market rates).
• Seasonality: Q4 mortgage volume expected to weaken due to seasonality and high rates; Q4 expenses may see seasonal pickup offset by other factors.
• Market Sensitivity: Retirement business has ~37% market-sensitive exposure; wealth advisory revenue subject to market dynamics.
• One-time Items: Q4 results will lack the non-recurring $1.6M premises sale gain realized in Q2.

Management Tone on the Future:

• Confidence Level: High confidence in achieving full-year 2026 objectives and maintaining neutral NIM positioning; describes momentum as "strong" and the balance sheet as "well-positioned."
• Strategic Certainty: Clear commitment to relationship-based growth, capital discipline, and creating long-term shareholder value.
• Operational Outlook: Optimistic regarding organic growth levers, particularly the synergy between wealth/retirement businesses and commercial banking.
• Caution: Acknowledges macro headwinds (rates, mortgage slowdown) but emphasizes experienced teams and robust pipelines to navigate challenges.

Miscellaneous:

• Capital Ratios: CET1 ratio of 10.5%, well above regulatory requirements.
• Funding Strategy: No broker deposits on balance sheet; 22% of deposits are synergistic from wealth/retirement; HSA deposits up 9% YoY at ~10 bps cost.
• Loan Yield: New loan originations continue at higher rates than legacy portfolio, supporting yield improvement.