Alerus Financial Corporation Q2 FY2025 earnings call

• Business Model: Diversified model combining traditional commercial/private banking with fee-based Wealth Management and Retirement/ Benefits, providing resilience across economic cycles.
• Commercial Wealth Bank: Transformation nearing completion, focusing on maximizing capacity and profitability, with disciplined pricing on renewals.
• Balance Sheet: Sold $60 million in nonowner-occupied CRE hospitality loans, net $2 million gain, no provision for the quarter, reserve levels robust at 1.47% of loans.
• Retirement and Benefits: Bullish on business with tailwinds from SECURE Act 2.0 and M&A opportunities, stable fee income with minimal capital allocation.
• Wealth Management: Investing in talent and technology, upgraded platform to double wealth advisers and grow AUM, efficiency ratio improved.

Banking Segment (including Mortgage): Noninterest income was $8.4 million in Q2, with a $2.1 million gain from the sale of hospitality loans and mortgage revenues up $2.1 million from the first quarter. Retirement Business: Total revenue was over $16 million, assets under administration and management increased 6.3% mainly due to market performance. Wealth Management Business: Revenues increased 6.6% linked quarter, end-of-quarter assets under management rose 2.5% due to market performance, and transitioned to a new platform. Net Interest Income: Increased 4.6% QoQ, net interest margin was 3.51%, loan growth was in C&I and owner-occupied CRE, deposits shrank 3.3% due to seasonal factors, and net retention rate post-Home Federal acquisition close to 97%.

• Loan Growth: Mid-single digits for 2025 excluding loans moved to held for sale.
• Deposit Growth: Low single digits, expected seasonal outflows in Q3.
• Net Interest Margin: 3.25% to 3.35% for 2025.
• Purchase Accounting Accretion: Lower in back half, 27 basis points in Q3 and 22 in Q4, with no early payoffs.
• Deposit Costs: Expected to increase 8-10 basis points due to mix shift and competition.
• Noninterest Income: Up low single digits, mortgage expected to ease in Q3 and downturn in Q4.
• Efficiency Ratio: Below 68% for 2025 excluding onetime items.

• Seasonal Volatility: Deposits subject to seasonal outflows.
• Credit Risk: Nonperformers driven by large relationships, resolutions expected in early 2026.
• Interest Rate Sensitivity: NIM could be affected by Fed cuts, but guidance not embedded with rate cuts.
• Competition: Tough deposit competition, impact on deposit costs.

Q: Circled back on margin components and third quarter accretion expectations A: Alan Villalon mentioned 27 basis points of purchase accounting accretion in the third quarter and 22 basis points in the fourth quarter, with neither including early payoffs Q: Status of larger construction credit A: Karin Taylor said the final certificate of occupancy was issued and the property was listed for sale in the second quarter, currently at 57% leased Q: Loan growth outlook A: Jim Collins said leveraging current client base and taking market share, focused on lower mid-market C&I Q: Deposit cost outlook A: Alan Villalon said expected 8-10 basis point increase in deposit costs due to mix shift and competition Q: M&A disruption and hiring appetite A: Jim Collins said existing team has capacity but is opportunistic if the right person to join the culture is found