ALERUS FINANCIAL CORP Q3 FY2026 earnings call

• Strategic Execution: The company achieved record revenue and EPS growth, driven by a diversified model focusing on relationship-based commercial banking and wealth management.
• Loan Growth: Commercial loans surged nearly 37% YoY, now comprising over one-third of the loan portfolio. New originations were strong at $375 million, with a focus on full-service relationships that bring synergistic deposits.
• Deposit Strategy: Total deposits grew 2.7% linked-quarter. Non-interest-bearing deposits increased 7.1%, and synergistic deposits from retirement/wealth businesses account for 22.1% of total deposits. HSA deposits rose 9% with a low cost of ~10 basis points.
• Credit Quality: Non-performing assets fell to 30 basis points of total assets. Criticized loans dropped >55% YoY. Net recoveries were 10 basis points, and reserves remain solid at 1.23% of loans.
• Operational Efficiency: Expense discipline is maintained while investing in technology. Adjusted non-interest expense increased 2.0% linked-quarter due to strategic hiring and tech investments.
• Capital Returns: Tangible book value grew nearly 11% YoY. The company returned over $37 million to shareholders through dividends and repurchases in the first nine months.

Total revenue reached $81 million, a record high. Net interest income was $46.7 million (up 8.3% YoY), representing 57.7% of total revenue. Adjusted non-interest income was $32.8 million (up 11.3% YoY), contributing 42% of total revenue. Within non-interest income, Wealth Advisory Services generated $8 million in revenue (up 22% YoY), while Retirement and Benefit Services contributed $17.7 million in revenue growth (up 7.1% YoY). Banking fees and other income saw modest declines linked-quarter but grew 10% year-over-year.

• Loan Growth: Full-year 2026 guidance remains mid-single-digit loan growth.
• Deposit Growth: Low single-digit deposit growth expected for the full year.
• Net Interest Margin: Reported NIM guidance set at 3.75% to 3.85% for full-year 2026.
• Revenue: Adjusted revenue and adjusted non-interest income are expected to grow in the mid-single digits, driven by wealth and retirement businesses.
• Expenses: Adjusted non-interest expense is projected to increase in the low-to-mid-single digits due to strategic hiring.
• Profitability: Full-year adjusted return on assets (ROA) is targeted to be above 1.25%.

• Interest Rate Sensitivity: While the balance sheet is neutrally positioned, rising rates may increase cost of funds, particularly on money market deposits. Management anticipates a deposit beta of 50%.
• Mortgage Market Weakness: High 30-year mortgage rates (>7%) and seasonal factors are causing a slowdown in mortgage pipelines and originations in Q4.
• Credit Concentration: A small number of long-term workout deals nearing maturity may require specific reserves or result in charge-offs early next year.
• Purchase Accounting Accretion: Declining purchase accounting accretion will exert downward pressure on net interest margin in coming quarters.

Q: Analyst asked if fee income and expenses would step down in Q4 given the exclusion of premises gains and seasonality. / A: CFO confirmed reported fee income will step down as there is no offset to the premises gain. Expenses are expected to stabilize, though some Q4 seasonality exists, potentially balanced by offsets. Regarding purchase accounting accretion, total is ~$13M for 2026 and ~$9M for 2027.

Q: Analyst inquired about credit demand pipelines and the implication for Q4 loan growth after strong Q3 performance. / A: CBO stated pipelines are robust for Q4, citing large wins in healthcare, construction, and logistics. He noted that mid-market C&I clients onboarded earlier in the year are bringing more deposits in Q3/Q4, supporting both loan and deposit growth momentum.

Q: Analyst requested details on short-term rate sensitivity, specifically variable vs. fixed loan mix and deposit beta expectations. / A: CFO disclosed a 50/50 split between variable and fixed-rate loans, with SOFR at 44% and Prime at 28%. For deposit costs, management expects a deposit beta of 50% as rates rise, particularly impacting money market funds.

Q: Analyst questioned how the bank would defend margins and deposit pricing if further rate hikes occur in late 2026/2027. / A: ALM modeling shows minimal NII impact (+/- 10bps) under +/- 100bps scenarios. CBO explained they intentionally raise deposit prices slowly to protect margins, staying close to largest depositors and being reactive to competitors rather than aggressive.