Alerus Financial Corporation Q4 FY2025 earnings call

Management Statement and Operational Highlights

• 2025 was a milestone year with strong financial performance, including a core ROA of 1.62% this quarter, and successful integration with Home Federal, achieving adjusted ROA of 1.35% and adjusted efficiency ratio of 64.45%.
• Implemented a deleveraging plan, selling legacy low-yielding available-for-sale securities portfolio to improve earnings power and balance sheet flexibility.
• Fee income businesses grew core revenues 7%, with fee income over 40% of total revenues. The retirement division had assets near $50 billion, 10 times the assets in the banking division.
• Successfully converted the entire wealth business onto a new system with 100% client retention. Plan to double wealth management advisors and grow wealth assets at the same pace as banking assets.
• CET1 capital levels ended the year at 10.28%, up from 9.91% a year ago, providing ample flexibility for growth.

Segment Performance

• Banking: In 2025, after integrating with Home Federal, Alerus delivered an adjusted ROA of 1.35% and an adjusted efficiency ratio of 64.45%, with a net retention rate of deposits close to 95%. Loan growth was organic, excluding strategic reductions. Mortgage originations saw a 4.2% decrease in the quarter but refi activity picked up. Swap fee income was approximately $1 million. At period end, the loan-to-deposit ratio was 96.6%.
• Retirement: Core revenues grew 7% year over year. Total revenue increased to $17.3 million, a 4.6% increase over the prior quarter. Assets under administration and management increased 2.1%. Synergistic deposits grew 5.6%, and HSA deposits were over $203 million.
• Wealth Management: Linked quarter revenues increased 13.4% to $7.4 million. End-of-quarter assets under management increased 0.8% due to market performance. Revenue increased due to asset-based fees.

Guidance

• 2026 loans expected to grow at a mid-single-digit rate, deposits at a low single-digit rate.
• Net interest margin expected to be around 3.5%-3.6%, including approximately $8 million of purchase accounting accretion.
• Adjusted noninterest income expected to grow in the mid-single digits.
• ROA expected to exceed 1.2% for 2026. No expected Fed cuts in 2026; a 25 basis point rate cut is expected to improve NIM by ~5 basis points.

Risks

• Competitive deposit environment could impact net interest margin.
• Macroeconomic factors may affect credit quality, though leading credit indicators showed meaningful improvement in 2025.
• Orphan credits or non-full relationship credits could pose risks if not managed properly.

Question and Answer

• Q: Brendan Nosal asks about loan-to-deposit ratio management and internal ceiling.

A: Alan Villalon says they try to manage around a 95% loan-to-deposit ratio.

• Q: Jeff Rulis asks about balance sheet runoff in Q4 and credit trimming.

A: Jim Collins says much of the runoff was designed to improve risk profile by paring down commercial real estate (CRE) and building commercial and industrial (C&I) loans.

• Q: Nathan Race asks about wealth management advisor timeline.

A: Jim Collins says they have 26 advisors, plan to add more in larger markets like the Twin Cities, Phoenix, and Wisconsin, with one added recently and plans for more throughout 2026.

• Q: Damon Del Monte asks about loan growth drivers.

A: Jim Collins says loan growth is mostly driven by market disruption from M&A and talent acquisition, with 70% from disruption and 30% from economic trends.

• Q: David Long asks about deposit competition and deposit mix change.

A: Jim Collins says deposits are very competitive, with a shift from non-interest-bearing to interest-bearing deposits expected due to the competitive environment.