ALERUS FINANCIAL CORP Q1 FY2025 earnings call

• The first quarter of 2025 showcased continued progress in performance and strategic execution with HMNF fully integrated driving high-quality organic growth. - Focused on the One Alerus strategy, with loan, deposit, and Wealth Management client growth. - Net interest margin increased, non-performing loans decreased, and risk management was prudent with a allowance for credit losses at 1.52% of total loans. - Non-interest income performed well, with Wealth Management and Retirement businesses showing strength. - Cost management was a top priority with an adjusted efficiency ratio of 66.9%, recent headcount reductions, and a consultant engaged to optimize Commercial credit operating model. - Capital levels improved, with priorities on organic growth, Retirement roll-off opportunities, and maintaining dividends.

1. Adjusted ROA: 1.1%, a 25-basis-point improvement from the previous quarter. 2. Net interest income: Reported net interest income increased 7.5% over the prior quarter, driven by organic loan growth at higher spreads and lower interest expense. 3. Non-interest income: Excluding building gains and MSR adjustments, non-interest income grew almost 11% year-over-year, with non-interest income as a percentage of revenues at 40%. 4. Banking segment: First quarter non-interest income from Banking was $4.6 million. Excluding a property sale gain, adjusted non-interest income declined by $2.3 million, with Mortgage revenues down $1.8 million and MSR fair value decrease of $734,000. 5. Retirement business: Total revenue decreased 2.3% mainly due to market base and other fees, but saw growth across core products, won 161 plans in Q1, and synergistic deposits grew 8.8%. 6. Wealth Management Group: Revenues 13% higher than a year ago, assets under management affected by market performance, but synergistic deposits grew over 4.7%. 7. Loans and deposits: Organic loan growth 2.3%, commercial loans now make up over 70% of total loans; deposits organically grew 2.4%, loan-to-deposit ratio stable at 91.1%.

• Loan growth expected to be mid-single digits in 2025. - Deposit growth expected to be low-single digits. - Net interest margin expected to be 3.2% to 3.3%. - Not expecting non-accrual recoveries to aid margin like in the previous quarter. - Expecting 35 basis points of purchase accounting accretion, and seasonal outflows from public funds and decline in non-interest-bearing deposits. - Non-interest income outlook unchanged, but market volatility may impact fee income. - Adjusted efficiency ratio expected to be below 68% in 2025, with core expenses in Q2 around $49 million including seasonal Mortgage incentives.

• Potential impact of tariffs and government spending cuts. - Uncertainty in credit normalization. - Volatility in interest rates affecting MSR portfolio valuation. - Seasonal outflows from public funds impacting net interest margin.

Q: Please dig into the core margin trend off the 2.94% level over the next two quarters?

A: We still continue to expect our core margin to improve from these levels, seeing strong loan growth around the 7% range and favorable spreads on both sides of the balance sheet.

Q: Update on the non-accrual construction loan?

A: The project has made good progress, borrower in compliance, interior substantially complete, temporary certificate of occupancy, expecting certificate of occupancy in June or July timeframe, and project listed for sale this quarter with good interest.

Q: Timing of fees assessment for market-sensitive components in Wealth and Retirement?

A: On the Retirement side, about 40% of assets are market-sensitive and billed on an average daily balance for the quarter. On the Wealth side, billed at quarter end.

Q: Areas/geographies of opportunities and borrower pullback?

A: Focus on Commercial C&I, finding growth in Arizona, Minnesota, and North Dakota markets, pulling back on investor CRE, and not seeing a lot of customers expanding but moving relationships due to various reasons, with mid-market C&I as the bulk of the pipeline.

Q: Expenses growth expectation?

A: Still expecting low double-digit growth from the $170 million reported last year, with core expenses in Q2 around $49 million including seasonal Mortgage incentives.