ALERUS FINANCIAL CORP Q4 FY2024 earnings call

• Successful closing and conversion of the acquisition of Home Federal, pushing total assets to over $5 billion and increasing client base by nearly 50%.
• Adjusted return on tangible equity eclipsed 14%.
• Deal expenses were 5% less than original estimates.
• Robust organic growth in loans and deposits across all Alerus markets.
• Net interest income increased nearly 70%, net interest margin improved by 97 basis points.
• Non-interest income grew almost 20% quarter-over-quarter, supported by fee-based businesses and gains on sale of offices.
• Core fee income grew 10% year-over-year. Retirement business had core revenue growth of 6% with record new plan sales. Wealth Management business had 19% revenue growth.
• Adjusted efficiency ratio decreased to 68.97% from 77.71% in the third quarter. Process improvement and expense management remain priorities.
• Capital levels decreased due to acquisition and organic growth, but earnings accretion from the acquisition is strong and expected to build back capital.

Banking Segment

• Net interest income saw a substantial increase of nearly 70% and net interest margin improved by 97 basis points to 3.2%.
• Non-interest income grew by almost 20% quarter-over-quarter, with core fee income growing 10% year-over-year across all business lines.

Retirement Business

• Core year-over-year revenue growth of 6%, with another record level of new plan sales in 2024. Synergistic deposits within retirement grew 6.6% over the prior quarter. HSA deposits grew 2.2% over the previous quarter. Participants within Retirement grew 1.6% during the quarter.

Wealth Management Business

• Revenues grew 19% year-over-year. Assets under management increased 4.1% quarter-over-quarter linked, and synergistic deposits grew over 3.7% from the previous quarter.

• Loan growth of low to mid-single-digits.
• Deposit growth of low-single-digits.
• Net interest margin greater than 3% for 2025 with no further Fed rate cuts factored in, and 30-35 basis points of purchase account accretion per quarter.
• Fee income to remain stable year-over-year on a reported basis, with core fee income up mid-single-digits adjusted for one-time items.
• Adjusted efficiency ratio for one-time items to be below 70% in 2025 as cost savings from the Home Federal deal are realized.

• Non-performing assets increased to $62.9 million mainly due to one construction land and development deal.
• Market performance impact on assets under management in the Retirement business.
• Volatility in expenses and margin due to timing of cost savings, balance sheet growth, and seasonal expenses.

Q: Could you speak to the repricing benefits on the balance sheet and trajectory of core margin in the first half of 2025?

A: Deposit beta is around 30% and expected to reach 45% in the first half, with another $4+ million improvement on the deposit side. Loans contractually paying down expected to bring another 3-4 basis points improvement per quarter.

Q: What are the challenges and opportunities in integrating the Home Federal franchise?

A: Priorities include continued organic growth in various verticals, investment in Wealth Management, and expansion of the Retirement business.

Q: How are you thinking about managing capital and where do you want capital ratios to be by end of 2025?

A: Earnings accretion from the acquisition is strong, expect to build back capital throughout the year, with capital-light annuitized businesses aiding in faster build back. Priority on organic growth, dividends, and optimizing the balance sheet.

Q: Can you explain the fee guide and why quarterly run rate steps down from core run rate?

A: Fee income includes one-time gains from property sales and lumpy swap fees. Excluding these, core fee income is mid-single-digits growth, but reported fee income is guided at $115 million for 2025.

Q: What leads to the loan growth guidance of low to mid-single-digits?

A: Strategy focuses on C&I and commercial business, with some slowdown in investor CRE, but still has fundings and commitments, and strong pipelines despite market disruptions.

Q: Talk about the competitive backdrop and future of synergistic deposits in the Retirement Benefit Services division.

A: Synergistic deposits expected to continue steady trend, with opportunity in HSA space due to low cost of funds and rapid market growth, but short-term trends likely to be stable.

Q: How much do market appreciation and Alerus bringing in net new business attribute to AUM growth in Retirement and Wealth?

A: Retirement AUM has been fueled by market performance, but organic growth in participants and plans is strong. Wealth has seen customer growth and streamlined platforms, with continued focus on client acquisition.