Q3 2025 Alerus Financial Corp Earnings Call

Good morning and welcome to Alerus Financial Corporation's earnings conference call. All participants will be in a listen-only mode. Today's call will reference slides that can be found on Alerus Investor Relations' website. You can also view the presentation slides directly within the webcast platform.

After today's presentation, there will be an opportunity for analysts and institutional investors to ask questions. During this session, you will need to press *1, 1 on your telephone. You will then hear an automated message. To indicate that your hand is raised to withdraw your question, please press *1, 1 again.

Please note this event is being recorded.

Operator: Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead. Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2025 earnings call. Joining me today in the Twin Cities is our CFO, Al Villalon, our COO, Karin Taylor, and our Chief Banking and Revenue Officer, Jim Collins. Joining us by phone is our Chief Retirement Services Officer, Forrest Wilson. I plan to cover a few highlights for the quarter and then spend a few minutes recapping the progress we have made as a team and as a company. Results for the quarter were consistent with expectations.

This call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corp's President and CEO, Katie Lorenson. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2025 earnings call.

Joining me today. In the Twin Cities is our CFO, Al villaon, our coo car and Taylor and our chief Banking and revenue Officer. Jim Collins joining us by phone is our chief Retirement Services officer Forest Wilson.

For a few highlights for the quarter, and then spend a few minutes recapping the progress we have made as a team and as a company.

Results for the quarter were consistent with.

Operator: Another pearl on the string as we continue to execute our long-term strategy, drive transformation across our commercial wealth bank, and position the company for sustainable, value-driven growth. Improved results reflect our team's strategic actions and progress towards top-tier performance. Our ultimate differentiator at Alerus is our diversified business model, which drives nearly double the average fee income compared to other banks. Due to the annuitized and capital-like businesses of retirement and wealth, Alerus has revenue resilience across cycles. This enables us to deliver consistent value to our clients and consistent returns to our shareholders. This quarter, we continue to deepen client relationships and expand our reach. Our seasoned team of bankers, both new and long-tenured at Alerus, drove robust organic growth in both our commercial and private banking segments. Our retirement and benefits business remains a national leader and continues to establish meaningful partnerships across the country.

Another pearl on the string as we can.

Long-term strategy Drive transformation across our commercial wealth bank and position the company for sustainable value-driven growth.

Improved results, reflect our team's strategic actions and progress towards top tier performance.

Our ultimate differentiator, Alerus, is our diversified business model, which drives nearly double the average fee income compared to other banks.

Due to the annuitized and capitalized businesses of retirement. And wealth Aeris has Revenue resilience across Cycles. This enables us to deliver consistent value to our clients and consistent returns to our shareholders.

This quarter, we continue to deepen client, relationships, and expand our reach. Our seasoned team of Bankers, both new and long tenured at Aeris, drove a robust organic growth. In both our commercial and private banking segments.

Operator: In wealth management, we completed a major platform upgrade, enhancing both the client and advisor experience and laying the groundwork for future recruiting efforts and client growth. We continue to de-risk the balance sheet with our company-wide prioritization of proactive risk management. Last quarter, we sold a portfolio of higher-risk acquired hospitality loans. We had previously marked this portfolio and realized a gain of $2.1 million on the sale in the second quarter. Throughout this year, we have continued to diligently work through and out of credits that are not core to where we are focused or those that we think could be negatively impacted in an economic downturn. Our emphasis on capital allocation to organic growth in full C&I relationships resulted in the investor CRE to capital ratio dropping below the 300% threshold.

Our retirement and benefits business remains a national leader and continues to establish meaningful partnerships across the country.

In wealth management. We completed a major platform. Upgrade enhancing both the client and adviser experience and lazing laying the groundwork for future recruiting efforts and client growth.

We continue to de-risk the balance sheet with our companywide prioritization of proactive risk management. Last quarter, we sold a portfolio of higher-risk acquired hospitality loans.

We had previously marked this portfolio and realized a gain of $2.1 million on the sale in the second quarter.

Throughout this year, we have continued to diligently work through and out of credits that are not core to where we are focused or those that we think could be negatively impacted in an economic downturn.

Operator: Another example of our conservative and proactive risk management was a large recovery during the quarter of a credit we charged off only five quarters ago, bringing the year-to-date charge-off ratio to eight basis points, which remains below our lower-than-industry long-term history of 27 basis points of net charge-off. Non-performing assets to total assets were 1.13%, an increase of 15 basis points from the prior quarter. The quarter-over-quarter increase in non-performing is driven by one commercial relationship. The commercial relationship that was recently identified has many clients since 2010. They are a general equipment lessor for transportation, logging, construction, and manufacturing industries. They experienced cash flow challenges relating to one large customer going out of business and delayed work tied to FEMA funding. There is currently a 50% reserve on the relationship, pending additional information on equipment values.

Our emphasis on capital allocation to organic growth in fully funded relationships resulted in the investor CRA to capital ratio dropping below the 300% threshold.

Another example of our conservative and proactive risk management was a large recovery during the quarter of a credit. We charged off. Only 5 quarters ago, bringing the year to date charge, operatio to Aid basis points which remains below our lower than industry. Long-term history of 27, basis points of net charge off.

Non-performing assets, total assets were 1.13% and increase of 15 basis points from the prior quarter. The quarter over quarter increase in non-performing driven by 1 commercial relationship.

Operator: Of the $60 million in non-performing assets, our largest exposure continues to be a large multifamily loan in the Twin Cities with a book balance of approximately $32 million. We saw some progress on this credit as a permanent certificate of occupancy was issued in July of this year and is currently 67% leased. The property was publicly listed for sale this month. Based on various expected outcomes, we are currently reserved at about 15% and expect resolution by mid-year 2026. These two loans make up nearly 75% of our total non-performers, and we do not believe the level of non-performers to be indicative of any widespread credit concerns. We ended the quarter with a strong reserve level of 1.51%. In addition, capital accretion boosted the tangible common equity ratio to over 8%.

The commercial relationship that was recently. Identified has many clients since 2010, there are General equipment lists, or for transportation logging construction and Manufacturing Industries. They experienced cash flow, challenges relating to 1. Large customer going out of business and delayed work tied to FEMA funding. There's currently a 50% reserve on the relationship. Pending additional information on equipment value

Our largest exposure continues to be a large multifamily loan in the Twin Cities, with a book balance of approximately $32 million. We saw some progress on this credit as a permanent certificate of occupancy was issued in July.

And is currently 67% least.

The property was publicly listed for sale this month based on various expected outcomes. We are currently reserved at about 15% and expect resolution by mid year 2026.

These two loans make up nearly 75% of our total non-performers, and we do not believe the level of non-performers to be indicative of any widespread credit concerns.

Operator: Tangible book value grew nearly 5%, and we returned $5.3 million to shareholders through our longstanding commitment to our dividends. As we look back over the last several years and forward to the remainder of 2025 and beyond, our strategic positioning is exceptionally strong, and our priorities are clear. Since 2022, Alerus Financial Corporation has made transformational changes and substantial progress to return performance to top-tier profitability as a premier commercial wealth bank and a national retirement plan provider. We have completed succession at the entire executive team level and beyond and have strong leaders in place throughout all parts and levels of the organization, many of which have joined Alerus Financial Corporation from much larger institutions and are key to our progress in making Alerus Financial Corporation not just bigger, but even better.

We ended the quarter with a Strong Reserve. Level of 1.51%, in addition, Capital accretion boosted the TCU ratio to over 8%

Tangible Book value grew nearly 5% and we returned 5.3 million to shareholders through our long-standing commitment to our dividends.

As we look back over the last several years and forward to the remainder of 2025, and beyond our strategic positioning is exceptionally strong. In our priorities are clear.

Since 2022, aaris has made transformational changes and substantial progress to return performance to top tier profitability as our Premier Commercial Wealth bank. And a national retirement plan provider, we have completed succession at the entire executive team, level, and Beyond, and have strong leaders in place throughout all parts and levels of the organization.

Operator: We have courageously transitioned the majority of our commercial banking team in our growth markets over the last several years with specialized industry veterans with deep credit acumen. Key verticals have been established, and team lift-ups have positioned us to grow mid-market C&I and equipment finance. In addition, we have added teams in deposit-rich verticals, including private banking and government not-for-profit. In 2023, we lifted out and added over 120 new team members while reducing headcount over 10%. We have strategically divested business lines that are not core to our franchise and successfully acquired in key markets including Arizona, Rochester, and Wisconsin. We retain number one market share in our hometown market of Grand Forks, despite new market entries and targeted competition. Our markets across our franchise are exceptional in terms of full relationship growth opportunities and economic and household demographics.

Many of whom have joined from much larger institutions and are key to our progress in making Aeris not just bigger, but even better.

We have courageously transitioned the majority of our Commercial Banking team in our growth markets over the last several years, with specialized industry veterans who possess deep credit acumen.

Key verticals have been established in Team Liftoff and positioned us to grow: Mid-market CNI and Equipment Finance.

In addition, we have added teams.

Verticals, including private banking and government, offer profits.

In 2023, we lifted out and added over 120 new team members while reducing headcount by over 10%.

With strategically developed business lines that are not core to our franchise and successfully acquired in key markets, including Arizona, Rochester, and Wisconsin.

We retained our number one market share in our hometown market of Grand Forks, despite new market entries and targeted competition.

Operator: While performance ratios are improving, we continue to monitor and evaluate opportunities to enhance our core earnings profile. This includes the engagement of a third-party consultant to ensure we have processes and systems in place to profitably and sustainably scale and grow our business with improving margins and exceptional risk management. These challenging efforts to transform and improve the returns of our commercial wealth bank were critical in order to receive the recognition of the embedded value of our stable and recurring revenue from our retirement and wealth businesses. We remain bullish on our retirement business, of which we are the 25th largest in the country. We intend to continue to build organically and inorganically in this highly scalable business. We put in place the first dedicated and experienced executive to oversee the business a year ago.

Our markets across our franchise are exceptional in terms of full relationship, growth opportunities, and economic and healthful demographics.

While performance ratios are improving, we continue to monitor and evaluate opportunities to enhance our core earnings profile. This includes the engagement of a third-party consultant to ensure we have processes and systems in place to profitably and sustainably scale and grow our business with improving margins and exceptional risk management.

It's challenging; efforts to transform and improve the returns of our commercial wealth bank were critical in order to receive recognition of the embedded value of our stable and recurring revenue from our retirement wealth businesses.

Operator: With the leadership team now in place, we are doing the work to transition the operating model to optimize margins and introduce automation and AI in an industry that is growing with the support of legislation at rates well above GDP. Our robust wealth division at Alerus Financial Corporation is more valuable than that of the typical community bank, with nearly all of the business being full fiduciary management and advising clients. The conversion to the new platform went incredibly well. We have a unique and differentiated value proposition for recruiting wealth advisors, and with improved technology, we are moving forward with our plan to double the number of wealth advisors, mostly in our growth markets, over the next several years. The fundamental foundation of the company is strong.

We remain bullish on our retirement business, of which we are the 25th largest in the country. We intend to continue to build, both organically and inorganically. In this highly scalable business, we put in place the first dedicated and experienced executive to oversee the business a year ago, along with the leadership team. Now in place, we are doing the work to transition the operating model to optimize margins and introduce automation and AI in an industry that is growing with the support of legislation at rates well above GDP.

Our robust wealth division at Aeris is more valuable than that of the typical community bank, with nearly all of the business being full fiduciary management. Advising clients on the conversion to the new platform was incredibly well received. We have a unique and differentiated value proposition for recruiting wealth advisors. With improved technology, we are moving forward with our plan to double the number of wealth advisors, mostly in our growth markets, over the next several years.

Operator: The difficult work has been completed, and now we look forward to the ultimate goal of top-tier performance and being recognized and rewarded with a deserved top-tier valuation. Our focus going forward is to keep growing organically by deepening client relationships and expanding in growth markets. Leverage technology, data, and AI to drive efficiency and deliver differentiated client experiences. Long-term, we will continue to evaluate M&A opportunities, particularly in retirement and HSA businesses, where we have deep experience and catalysts to consolidation, positioning Alerus Financial Corporation favorably as one of the few independent aggregators in the space. Lastly, and as always, we intend to maintain our disciplined approach to capital allocation, risk management, and expense control. We are confident in our strategy and the opportunities ahead. Our foundation is solid, and our team is energized.

The fundamental foundation of the company is strong. The difficult work has been completed, and now we look forward to the ultimate goal of top-tier performance and being recognized and rewarded for what they deserve at top-tier valuation.

Our Focus going forward is to keep growing organically, by deepening client relationships, and expanding in growth markets, leverage technology data, and AI to drive efficiency and deliver differentiated client experiences. Long term, we will continue to evaluate m&a opportunities. Particularly in retirement age. If a business is where we have deep experience and catalysts to consolidation positions, alerts favorably, as 1 of the few independent aggregators in the space

Lastly, and as always, we intend to maintain our disciplined approach to capital allocation, risk management, and control.

Operator: We are committed to delivering sustainable top-tier performance for our clients, our communities, and our shareholders. With that, I will now hand it over to Al to cover the financial results. Thanks, Katie. Turn to page 11 of our investor deck that is posted on the investor relations part of our website. On a reported basis, net interest income increased 0.2% over the prior quarter, while fee income decreased 7.3%. Net interest income was stable as deposit inflows and organic loan growth offset the impact of the CRE hospitality loan sale and purchase accounting accretion. Purchase account accretion was stable. Excluding one-time items, mainly the gain from the loan sale from the second quarter, fee income was down only 1%. Our fee income remains over 40% of revenues and over double the industry average. Let's dive into the drivers of net interest income on the next slide.

We are confident in our strategy and the opportunities ahead. Our foundation is solid, and our team is energized. We are committed to delivering sustainable, top-tier performance for our clients, our communities, and our shareholders.

With that, I will now hand it over to Al to cover the financial results.

Thanks Katie.

Turn to page 11 of our investor deck that is posted on the investor relations part of our website. On a reported basis, interest income increased 0.2% over the prior quarter, while free income decreased 7.3%.

Appreciation.

Uh, and the purchase account is increasingly stable, excluding one-time items, mainly due to gains from the loan sale from the second quarter fee. Income was down only 1%.

Our fee income remains over 40% of revenues and is more than double the industry average.

Operator: Turn to page 12. In the third quarter, net interest income continued to reach new heights at $43.1 million, and our reported net interest margin remained stable at 3.50%. Total cost of funds remained stable at 2.34%. We had 45 basis points of purchase account accretion in the quarter. Of those 45 basis points, 17 basis points were from early payoffs. We continue to remain disciplined in pricing as we continue to not price on the version of the yield curve for loans. In the third quarter, we saw new loan spreads of 259 basis points over Fed funds, while new deposit costs were coming in 92 basis points below Fed funds. With a new business margin of 351 basis points, we continue to expect purchase account accretion to be replaced by core net interest income. Let's turn to page 13 to talk about our earning assets.

Let's dive into the drivers and the interest income on the next slide.

Turn to page 12 in the third quarter. Managing the income continues to reach new heights at $43.1 million.

And our reported age margin remains stable at 3.5%.

Total cost of funds remains stable at 2.34%.

We had 45 basis points of persistent county increase in the quarter.

Of those 45 basis points, 17 basis points were from early payoffs. We continue to remain disciplined in pricing, as we do not price on the version of the yield curve for loans. In the third quarter, we saw a new loan spread of 259 basis points over Fed Funds, while new deposit costs were coming in 92 basis points below Fed Funds.

The new business margin is 351 basis points. We continue to expect purchase account increases to be replaced by core net interest income.

Operator: At the end of the third quarter, loans grew 1.4% over the previous quarter. Multifamily real estate, C&I, and residential real estate were the biggest drivers of loan growth. For the fourth quarter, we're expecting around $159 million, or 4% of our loans, to contractually mature. Overall, our loan mix is around 50% fixed and 50% floating. On investments, we continue to let the portfolio roll off and remix into higher-yielding loans. The portfolio has a duration just under five years. For the remainder of 2025, we expect another $37 million of securities to pay down. Excluding balance sheet derivatives, we remain slightly liability sensitive. Any 25 basis point cut in the Fed's funds should help improve our net interest margin around five basis points. Turn to page 14.

Let's turn to page 13 to talk about our earning assets.

At the end of the third quarter, loans grew 1.4% over the previous quarter.

Multi-family real estate, Commercial and Industrial (CNI), and residential real estate were the biggest drivers of loan growth.

For the fourth quarter, we're expecting around 159 million, or 4%, of our loans to contractually mature.

Overall, our loan mix is around 50% fixed and 50% floating.

On investments, we continue to let the portfolio roll off and remain in higher yield and loans.

The foil has a duration just under 5 years.

The remainder of 2025, we expect another $30,307 million in securities paid to pay down.

If you want to balance sheet derivatives, we mean slightly liability sensitive.

Any 255 basis point cut in the fed's fund should help improve our net interest margin by around 5 basis points.

Operator: On a period-ending basis, we were able to grow deposits by 1.7% despite the usual seasonal outflow we see from public funds. Growth was primarily driven by continued expansion to full commercial relationships. Over 70% of our commercial deposits now have a treasury management relationship with Alerus. Loan-to-deposit ratio remains stable at 93%. Lastly, since the close of the acquisition of Home Federal, our net retention rate remains over 97%. Turning to page 15, I'll now talk about our banking segment, which also includes our mortgage business. I'll focus on the fee income components now since net interest income was previously discussed. Overall, non-interest income for banking was $6.4 million for the third quarter. The second quarter included a $2.1 million gain related to the sale of hospitality loans. Excluding one-time items, net interest income was only up 1%. Mortgage saw a slight decrease in originations during the quarter.

Turn to page 14 on a period-ending basis. We were able to grow the pots by 1.7% despite the usual seasonal outflow we see from public funds.

Growth was primarily driven by continuing expansion to full commercial relationships.

Over 70% of our commercial loans have deposits. Now, we have a treasury management relationship with the LIS.

The loans-to-deposit ratio remains stable at 93%.

Lastly, since the close of the acquisition of Home Federal, our net retention rate remains over 97%.

During page 15, I'll now talk about our banking segment, which also includes our mortgage business.

I'll focus on the fee income components now since net interest income was previously discussed.

Overall, non-interest income for banking was $6.4 million for the third quarter. The second quarter included a $2.1 million gain related to the sale of hospitality loans. Excluding one-time items, net interest income was only up 1%.

Operator: We do expect a seasonal slowdown in mortgage for the upcoming quarters. We also saw very little swap income this quarter, which tends to be lumpy from quarter to quarter. On page 16, I'll provide some highlights on our retirement business. Total revenue from the business increased to $16.5 million, a 2.9% increase over the prior quarter. Most of the increase was driven by asset-based fees coupled with a slight increase in record-keeping fees. Assets under administration and management increased 3.7%, mainly due to market performance. Synergistic deposits within our retirement group grew 3.4% over the prior quarter. HSA deposits grew almost 2% over the prior quarter to over $202 million. HSA deposits continue to remain a strong source of funding for us since these deposits only carry a cost of around 10 basis points. Turning to page 17, you can see highlights of our wealth management business.

Mortgage saw a slight decrease in saw a slight increase in origination during the quarter. We do expect a seasonal slowdown in mortgage for the upcoming quarters. We also saw very little swapping come this quarter which tend to be Lumpy from quarter to quarter.

On page 16, I'll provide some highlights on our retirement business.

Total revenue from the business increased to $16.5 million, representing a 2.9% increase over the prior quarter. Most of the increase was driven by asset-based fees, coupled with a slight increase in recordkeeping fees.

Assets under administration and management increased 3.7%, mainly due to market performance.

Synergistic deposits within our Retirement Group grew 3.4% over the past quarter.

HSA deposits grew almost 2% over the quarter to over $202 million.

HSA deposits continue to be a strong source of funding for us, as these deposits only carry a cost of around 10 basis points.

Operator: On a link quarter basis, revenues decreased to $6.6 million, while end-of-quarter assets under management increased 4.3%, mainly due to market performance. Revenue declined due to a decrease in transactional revenue, such as brokerage and insurance commissions. Page 18 provides an overview of our non-interest expense. During the quarter, non-interest expense increased 4.3% due to an increase from higher incentives driven by a higher loan and deposit growth, along with incentives from higher mortgage originations. The increase in incentives was offset by a decrease in benefit-related expenses. We also saw an increase in technology expenses as we transitioned to a new wealth and deposit platform. Occupancy expense increased as we opened a new office in Fargo, North Dakota, and replaced two older facilities. Turning to page 19, you can see our credit metrics. During the quarter, we had net recoveries of 17 basis points.

During page 17, you can see highlights of our wealth management business.

On a link quarter basis, revenues decreased to $6.6 million, while end-of-porter assets under management increased 4.3%, mainly due to market performance.

Revenue declined due to a decrease in transactional revenue, such as brokerage and insurance commissions.

Page 18 provides an overview of our $96 expense during the quarter. $96 expense increased 4.3% due to an increase from higher incentives, driven by higher loan and deposit growth, along with an increase from higher mortgage originations.

The increase in incentives was offered by decreasing benefit-related expenses. We also saw an increase in technology expenses as we transition to a new wealth and deposit platform.

Occupancy expense increases. We opened a new office in Fargo, North Dakota, to replace two older facilities.

Operator: The quarter-over-quarter decrease was primarily driven by a $1.9 million recovery in the third quarter of 2025 related to a loan that had previously been charged off. Non-performing assets were 1.13%, an increase of 15 basis points from the prior quarter. As Katie mentioned in her opening comments, we are currently carrying a 50% reserve in the one commercial relationship related to a general equipment lessor. I'll discuss our capital liquidity on page 20. Our tangible common equity ratio improved to 8.24%, which is higher than a year ago of 8.11%, right before we closed on the acquisition of Home Federal. On the bottom right, you'll see a breakdown in the sources of $2.6 billion in potential liquidity. We continue to utilize some broker deposits to optimize our cost of funds.

During page 19, you can see our credit metrics, they're in a quarter, we had net recoveries of 17 basis points, the quarter over a quarter increased was primarily driven by a 1.9 million dollar recovery in the third quarter of a 2025 related to a loan that had been previously been charged off.

Quarter, as Katie mentioned earlier in the opening comments, we are currently preparing a 50% reserve related to a commercial relationship with a general equipment lessor.

Our discussion of capital equity and, on page 20, a tangible common equity ratio improved to 8.24%, which is higher than a year ago at 8.11%, right before we closed on the acquisition of Home Federal.

Operator: Overall, we continue to remain well positioned from both liquidity and capital standpoints to support future growth or weather economic uncertainty. Turning to page 21 now, I'll update you on our guidance for 2025 and provide preliminary guidance for 2026. We expect the following. For loans, we expect the year to end with over $4.1 billion. For 2026, we expect to continue to grow at a mid-single-digit growth rate. Total deposits should be around $4.3 billion at year-end. While we expect inflows from our public funds, we are also planning on calling in around $165 million in brokered CDs. For 2026, we expect to grow deposits in the low single digits based on the projected ending amount of $4.3 billion for 2025. Net interest margin for 2025 is now to be expected higher and end around 3.35% to 3.4% on a full-year basis.

On the bottom right, you'll see a breakdown of the sources of $2.6 billion in potential liquidity. We continue to utilize some broker deposits to optimize our cost of funds. Overall, we can continue to remain well positioned from both a liquidity and capital standpoint to support future growth, regardless of economic certainty.

During page 21, I will update you on our guidance for 2025 and provide preliminary guidance for 2026.

We expect the following.

For loans, we expect that the year will end with over $4.1 billion.

For 2026, we expect to continue to grow at a mid-single-digit growth rate.

Total deposits should be around $4.3 billion at year-end.

Well, I would expect inflows from our public funds. We are also planning on calling in around $165 million in brokerage CDs.

For 2026, we expect the world deposits to be in the low single digits, based on the projected ending amount of $4.3 trillion for 2025.

Operator: For the fourth quarter, we're only expecting 23 basis points of purchase account accretion, which includes no early payoffs. For 2026, we're expecting our net interest margin to be around 3.35% to 3.45%, which will include only about 18 basis points of purchase account accretion and no early payoffs. In comparison, we expect around 40 basis points of purchase account accretion for the full year 2025. As a reminder, we do not embed any further rate cuts in our guidance. However, the guidance does include the recent 25 basis point rate cut that was announced this week by the Fed. Again, for every 25 basis points cut in rates, we expect the NIM to improve about five basis points. We expect our adjusted non-interest income for the year to end around $115 million in total. This will exclude the $2.1 million gain on sale of loans in the second quarter.

Man, this margin for 2025 is now expected to be higher and end around 3.35% to 3.4% on a full-year basis.

For the fourth quarter, we're only expecting 23 basis points of purchase account increases, which include known early payoffs.

For 2026, we're expecting a negative margin to be around 3.35% to 3.45%, which will include only about 18 basis points of purchase account accretion and no early payoffs.

In comparison, we expect around 40 basis points of purchasing account increases for the full year 2025.

As a reminder, we do not embed any further rate cuts in our guidance.

However, the guidance does include the recent 25 basis point rate cut that was announced this week by the Fed. For every 25 basis point cut in rates, expect the NIM to improve by about 5 basis points.

Operator: On the mortgage side, we expect originations to see a seasonal downturn in the fourth quarter. For 2026, we expect non-interest income to grow in the mid-single digits from the adjusted $115 million in total we're expecting for 2025. Adjusted pre-provision net revenue should end the year around $85 million to $86 million. Again, this is adjusted for one-time items in 2025, which is mainly the gain on sale of loans and severance and signing expenses. For 2026, we expect low to mid-single-digit growth from the $85 million to $86 million in adjusted PP&R. Lastly, we expect our adjusted ROA to end 2025 greater than 1.15%, which excludes one-time items such as the loan sale. For 2026, we expect our ROA to exceed 1.10% for the year. We expect a normalized provision in 2026 and less purchase accounting accretion relative to 2025, as previously mentioned.

We expect our non-justiciable.

For 2026, we expect non-interest income to grow in the mid-single digits from the adjusted $115 million. In total, we're expecting for 2025.

Adjusted pre-provision net revenue should end the year around $85 million to $86 million. Again, this is adjusted for one-time items in 2020 and 2025, which are mainly the gain on the sale of loans in Severance and signing loan expenses.

For 2026, we expect low to mid-single-digit growth from the 85 to 86 million in adjusted PPNR.

Lastly, we expect our adjusted ra and 2025 greater than 1.15%, which excludes 1-time items such as the loan sale.

For 2026, we expect our ROI to succeed 1.100% for the year. We expect to normalize provision.

Operator: With that, I'll now open up for Q&A. We will now begin the question and answer session. The first question will come from Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead. Thanks. Good morning. Maybe just on that last one, Al, on the provisioning level this quarter. I guess pretty good growth. The lack of the provision, maybe on the recovery, I guess you've got some confidence on that larger credit as well. Just wanted to kind of get to that. As we go forward, when you say normalized provision, if you could refine that a little bit, that'd be great. Hi, Jeff. This is Karin. I'll start. You're correct.

In 2026 and less purchasing account, increasing relative to 2025 as per previously mentioned.

With that, I'll now open up for Q&A.

We will now begin the question and answer session.

The first question will come from.

Jeff rules with the Davis, and your line is open. Please go ahead.

Thanks, good morning. I may be just on that last one, Al, on the provisioning level this quarter. You know, I guess pretty good growth. Um, is the lack of the provision maybe on the recovery? I guess you got some confidence on that larger credit as well. I just wanted to kind of get to that. And then as we go forward, when you say normalize...

Provision. If you could refine that a little bit, that'd be great.

Operator: The lack of provision this quarter was driven primarily by the recovery, as well as a decrease in the requirement for pooled loans, particularly as we moved that one problem onto individual impairment, and then a decrease in our unfunded commitment requirement. In terms of provisioning going forward, that'll be driven primarily by loan growth and macroeconomic factors. Okay. So the normalized term is kind of reserving for growth versus kind of the inputs that we had this last quarter, recoveries and such. Is that kind of? That's correct. That's correct. Okay. All right. I appreciate the outlook on the loan growth. Interested in just your view, Katie or others, in terms of a mid-single-digit outlook. I guess where's the upside if things were to be better? What would you frame that up?

Hi Jeff, this is Karen. I'll I'll start. Um you're correct the lack of provision. This quarter was driven primarily by the recovery um as well as a as a decrease in. Um, the requirement for for pool loans, particularly as we move that 1 problem owned in individual impairment. Um, and then a a decrease in our, um, unfunded commitment requirement.

In terms of provisioning going forward, that will be driven primarily by long growth macroeconomic factors.

Operator: If we do get lower rates, where do we see higher than mid-single digits if that were to line up? Jeff, this is Jim. If we do see some lower rates, I think we could see some higher loan growth, closer to the 10%, 11%, 12% loan growth. That is really going to be—we are really going to be focusing on a lot of deposit growth at that point. For the most part, we are really sticking and focusing on full C&I relationship growth. Depending on how that deposit full relationship goes, obviously, that comes with loan growth. My guess is if rates do come in, we are probably inching up closer to that 9%, 10% loan growth.

Appreciate the outlook on the loan growth interested in just your view and Katie or others just in terms of amid single digit Outlook. But I guess, whereas the upside, if, if, if things were to be better, what would you frame that up if we do get lower rates kind of, um, where do we, where do we see higher than mid single digits? If, if that were to line up?

Uh Jeff this is Jim. Um, if we do see some uh some lower rates, um I think we could see some some higher uh loan growth uh closer to the 10% 11% 12% loan growth. But that's really going to be

We're really going to be focusing on a lot of the deposit growth at that point. For the most part, we're really sticking and focusing on full CNI relationship growth.

So, depending on how that deposit-full relationship goes, ...

Operator: I would add, Jeff, that the headwind to the loan growth is really our continued proactive work on the portfolio in terms of pushing out credits that just aren't core to our focus or that we don't have full relationships with and are not in our asset class priorities. Katie, you mean there's—would you suggest that there's maybe a little more work to do in 2026 then to kind of keep that cap a little bit? Is that what I'm hearing? I think it'll continue throughout 2025 and perhaps the early part of 2026. Okay. Great. Thanks. Thank you. One moment for our next question. Our next question will come from the line of Brendan Nosal with Hovde Group. Your line is open. Please go ahead. Hey, good morning, folks. Hope you're doing well. Just wanted to dig into the margin outlook a little bit.

Obviously, that comes with loan growth. Um, so my guess is, if rates do come in, we would probably be inching up closer to that 9-10% loan growth.

Yeah, I would add, Jeff, that the headwind to the loan growth, um, is really our continued proactive.

Uh, work on the portfolio in terms of, um, pushing out credits that are core to our focus or that we don't have full relationships with and are not in our asset class primaries.

Katie, are you suggesting that there might be a little more work to do in 2026, then, to kind of keep that cap a little bit? Is that what I'm hearing?

I think it'll continue into '25 and perhaps the early part of '26.

Okay, great. Thanks.

Thank you. And one moment for our next question.

Our next question will come from the line of Brandon Nosso with DGroup. Your line is open. Please go ahead.

Operator: Al, thanks for the comments on the accretion expectations for 2026. I guess it kind of stands to reason. Even without additional rate cuts, it looks like you're baking in some improvement in the level of the core margin from here through 2026, even without additional rate cuts. Could you just maybe unpack the drivers of that a little bit? Yeah. That's a good question, Brendan. I mean, we are expecting what you call core margin improvement or the way we look at it here, net interest margin excluding purchase account accretion. The big drivers of that for right now, as I commented on earlier, we are seeing really good spreads on loans, and we are also seeing good spreads on deposits.

Hey, good morning, folks. Hope you're doing well. Um, it's a little bit of a dig. Um, just wanted to dig into the margin outlook a little bit. Al, thanks for the comments on the accretion expectations for, uh, for 2026. Um, I guess it kind of stands to reason even without additional rate cuts, it looks like you're, you know, baking in some improvement in the level of the core margin from here through 2026, um, even without additional rate cuts. Could you just, you know, maybe unpack the driver for that a little bit?

Yeah. That's uh

Operator: With what we call that new business margin in excess of 350 basis points, we continue to expect that net interest margin excluding purchase account accretion to continue to improve. That's helpful. Maybe one for me just turning to fee income. If I annualize this quarter, you're around $118 million just on what you did this quarter. The guide for next year kind of implies right around there, plus or minus a little bit. Just want to kind of dig into why the lack of more robust loan growth or, sorry, more robust fee income growth and maybe what market and organic assumptions you're using for AUA and AUM in your fee businesses. I'll take the first part of this. In terms of fee income growth for next year, we do expect mortgage to be under pressure just a little bit still.

That's a good question, Brandon. I mean, we are expecting, uh, what you call, you know, a 4 margin improvement. The way we look at it here, and then the interest margin, excluding purchase accounting accretion, you know, with the big drivers of that for right now is, you know, what I commented on earlier. We're seeing really good spreads on loans, and we're also seeing good spreads on deposits. So, you know, with that, what we call that new business margin in excess of 350 basis points, you know, we continue to expect that interest margin, excluding purchase accounting, to continue to improve.

Okay, that's helpful. Um, anyone from me just turning to, um, to see income. Um, like, if I annualize this quarter, you're around $118 million, uh, just on what you did this quarter. You know, the guidance for next year kind of implies, you know, right around there plus or minus a little bit. Um, just want to kind of dig into, um, why the lack of more robust fee income growth or, sorry, more robust, um, income growth and maybe what, um, market and organic assumptions you're using for AUA and AUM in your, uh, fee businesses.

Operator: That's just kind of where we're modeling around to be conservative. The other part of it is that we're not modeling much in terms of market growth. All right. Thanks for the color. Thank you. One moment for our next question. Our next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead. Good morning, everyone. Thanks for taking the questions. Just going back to the last discussion point on fee income, maybe, Katie, could you just touch on some of the underlying drivers you're seeing within the wealth and retirement in the areas these days? Particularly just curious around what you're seeing in terms of capture rate increases and just how you're kind of stemming some of the natural attrition within AUA as well these days.

Yeah I'll take the first part of this is that in terms of fee income growth for next year. We do expect you know uh mortgage to be under pressure just a little bit still. So that's just kind of the where we're modeling around to be conservative. Uh the other part of it too. Is that we're not modeling much in terms of market growth

Okay. All right. Thanks for the call.

Okay.

Thank you. One moment for our next question.

Our next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead.

Good morning, everyone. Thanks for taking the questions. Uh, just going back to the last discussion point on P income.

Maybe Katie, could you just touch on, you know, some of the underlying drivers that you're seeing within the wealth and retirement space?

Uh, in the areas these days, particularly just curious around what you're seeing in terms of capture rate increases and just how you're kind of stemming some of the natural attrition within AUA as well. These days,

Operator: I would say our trends are consistent in both the attrition side as well as the capture rate side on the retirement business. In the wealth business, again, we completed a full conversion onto a platform that is an upgrade for both a client experience as well as an advisor experience. We've had great success in recruiting and retaining exceptional advisors. The technology now just removes a little bit of an obstacle because we do have such a differentiated recruiting profile. Those are not layered in yet in terms of the revenue growth or the expense side, but we do expect to move full force ahead in adding advisors in our growth markets. That's really helpful. Thanks for that. Just going back to the loan growth discussion, maybe for Jim, I appreciate there's potential upside to that mid-single-digit guide with lower rates.

As well as an advisor experience. We've had, um, great success in recruiting and retaining exceptional advisors, um, and the technology, um, now just removes a little bit of an obstacle because we do have such a differentiated recruiting profile. So, um, those are not layered in yet, in terms of the revenue growth or the expense side. But we do expect to move full force ahead in adding advisors in our growth markets.

Operator: Curious how much of the M&A-related disruption in the Twin Cities can also contribute to that. Obviously, there's been some disruption with a couple of notable competitors recently. Just curious if you guys can attract those clients via your existing teams or if you're seeing opportunities or any appetite to hire additional commercial folks. We are always very opportunistic on talent. We always look for talent, and we do the cost-benefit of that talent. We certainly have upgraded talent and have a really good talented team now. A lot of that talent has inroads to a lot of the disrupted banks in this market, in Minneapolis, and some of the other markets. We are finding success in those disruptions. That will be part of the growth for 2026 for sure. Some of the names that I see on the pipeline will be part of that growth.

That's really helpful. Thanks for that. And just going back to the loan growth discussion, maybe for Jim, you know, I appreciate you know there's potential upside of that mid single digit guide with you know, lower rates. But you know, I'm curious, you know how much uh the m&a related disruption. The Twin Cities can also contribute to that. Obviously, you know, there's been some uh, disruption with, you know, a couple notable competitors recently. Um, so just curious, you know, if you guys can, you know, attract those clients just via your existing teams or if you're seeing opportunities or any appetite to hire additional commercial. Uh,

Folks.

We are, we are always very opportunistic on talent. So we always look for talent and we do the cost-benefit of that talent. We're certainly have, uh,

Operator: We are always looking for talent, certainly in all markets where there's disruption, and there's disruption in all markets. Definitely, that is part of our strategy to take advantage of those disruptions, both with the talent and with the customer base. That's great. Al, I appreciate the guidance around picking our growth for next year. Just curious what kind of legacy expense growth you're thinking about underpinning that. There were some sequential increases across a handful of line items in the third quarter. Just wondering if there's any kind of cost that will come out as we enter Q4 or into next year and how you're thinking about overall legacy expense growth into 2026. Thanks for that question, Nate. We're still in the midst of the budgeting process and evaluating opportunities to reinvest and save costs as well.

Upgraded talent and have a really good talented team now. Um, and a lot of that Talent has inroads to a lot of the disrupted, uh, banks in in this market in the Minneapolis and some of the other markets. So we are finding success in those disruptions. So that will be part of the growth, uh, for 2026, for sure. That's, um, some of the, the names that I see on the pipeline, um, that will be part of that growth, uh, but we are always looking for talent. Um, certainly in all markets, where there's disruption and there's disruption in all markets. Uh, we definitely that is part of our strategy uh to take advantage of those disruptions both with the talent and with the customer base.

Okay, that's great. Um and then Al I appreciate, you know, the guidance around uh you know, our group for next year, you know, just curious what kind of Legacy expense growth. You're kind of thinking about and underpinning that, you know, there was some, you know, sequential increases across a handful of line items um, in the third quarter. So just wondering if there's any um, kind of cost that will come out as we enter 4 keyword into next year. And just how you're thinking about overall Legacy expense growth into 2026.

Operator: That's why there's a range for PP&R right now to be up low to mid-single digits. We'll have more color for that as we get probably in the fourth quarter results when we finish the budgeting process. Fair enough. I appreciate all the color. Thanks, everyone. Thanks, Nate. Thank you. One moment for our next question. Our next question is going to come from the line of Damon DelMonte with KBW. Your line is open. Please go ahead. Hey, good morning, everyone. Thanks for taking my questions. Al, just to circle back on the expenses. Given the uptick in the software technology line there, is that kind of like a run-ratable level from this quarter, or do you think there's some noise there that shakes out?

Thanks for that question, Nate. Uh, we're still in the midst of the budgeting process and evaluating opportunities to reinvest and save costs as well. So that's why there's a range for PPR right now. It’ll be in single digits. We'll have more color for that as we get, uh, probably in the Q4 results when we finish the budgeting process.

Okay, fair enough. I appreciate all the color. Thanks, everyone.

Thanks, Dave. Thank you. One moment for our next question.

Our next question is going to come from the line of Damon Damonte with KBW. Your line is open. Please go ahead.

Operator: There's still going to be a little bit because a lot of the contracts these days have escalators in them, so we'll still see a slight uptick in that next year. Okay. Great. And then the guide for the margin for '26. I may have missed what you said you expect the fair value accretion impact to be that's embedded in there. Yeah. We're only expecting 18 basis points of purchase account accretion in there, and that's with no early payoffs. Got it. Okay. And then again, just to confirm, for each 25 basis point cut, the "core margin" should benefit by five basis points? That's correct. Okay. Great. And then lastly, do you guys have any NDFI loans in your portfolio? No. No. Okay. Okay. Great. Everything else has been asked and answered. Thank you. Thank you. Thank you. And one moment for our next question.

Good morning everyone. Thanks for uh, taking my questions. Um, Al just to Circle back on the expenses. Um, you know, given the, the, the um, the uptick in, in the uh, software technology line there. Um, do is that kind of like a, a run rateable level from this quarter or, or do you think there's some noise there that shakes out?

Yeah, there's still going to be a little bit. We could a lot of the contracts. These days have escalators in them, so we'll see a slight uptick in that next year.

Okay, great. Um, and then the guide for the margin for 26, I may have missed what you said. What do you expect the fair value accretion impact to be that's embedded in there?

Yeah, that's, uh, we're only expecting 18 basis points of purchasing county increasing in there, and that's with no early payoffs.

Okay. And then again, just to confirm, for each 25 basis point cut, the...

Quote unquote, core margin should benefit by 5 basis points.

That's correct.

Okay.

Great. Um, and then lastly, um, do you guys have any NDF loans in your portfolio?

No.

No.

Okay. Um, okay, great. Um, everything else has been asked and answered. Thank you.

Thank you.

Thank you. And one moment for our next question.

Operator: Our next question comes from the line of David Long with Raymond James. Your line is open. Please go ahead. Hey, everyone. Just wanted to touch base on a couple of things on the balance sheet. On the funding side, time deposit growth led to deposit growth in the quarter. What are you looking at in deposit growth going forward, and what is the duration of what you've been adding and the yield on that? David, in terms of the deposit, let me circle back to you on that one. Let me just look this up, what we've been adding on. You want to hit me on another question? Yeah. Yeah, yeah. For sure. Sure.

Our next question comes from the line of David Long with Raymond James. Your line is open, please go ahead.

Hey everyone. Um, I just wanted to touch base on a couple of things on the balance sheet, specifically on the funding side. Time deposit growth led the deposit growth in the quarter.

What are you looking at in deposit growth going forward? And what is the duration of what you've been adding in the yield on that?

so,

but in terms of, uh,

The deposit. Let me get back to you on that one. Let me just look this up. What we've been adding on.

Operator: The other thing I want to ask about is just on the asset side, thanks for giving us some of the repricing metrics with the loans and the deposits, but how do you expect the mix to look over the next 6 to 12 months? Will that differ? Is there any interest in moving some of the securities cash flowing into loans at this point? Yes. There's definitely interest in moving the securities into loans because, I mean, we basically have a low 2% yield right now in our securities book, and we're getting loans that are very much higher than Fed funds. We definitely want to do that. Got it. That's all that I had. So anything you can find on the time deposits, that'd be awesome. Thanks, Al. Okay. Sounds good. You can follow up. Okay. Sounds good. Thank you. One moment for our next question.

You want to hit me with another question, and then, yeah, yeah, yeah, for sure.

Sure. The other thing I want to ask, I'm just on the...

Asset side. You know, thanks for giving us some of the repricing metrics with the loans and the deposits. But how do you expect the mix to look over the next 6 to 12 months? Well that will that differ? Um, will will you is there any interest in moving some of the Securities cash flowing into into loans at this point?

Yes, there's definitely some interest in moving the securities into loans because, I mean, we basically have a low 2% yield right now in our securities book, and you know, we're getting loans.

You know, there are much higher levels than you know, Fed Funds. So we definitely want to do that.

Got it. That's, uh, that's all that I have. So, anything you can find on the time to process, that would be awesome. Thanks a lot.

Okay. Sounds good. You can follow up. Okay, sounds good.

Thank you. One moment for our next question.

Operator: Our next question is a follow-up question from Brendan Nosal with Hovde Group. Your line is open. Please go ahead. Thanks. Katie, I just wanted to follow up on something you said in your prep remarks about evaluating opportunities to enhance the return profile. Could you just expand upon that a little bit and kind of put a scope around what sorts of things you might be looking to do in that regard? Specifically, would you folks look at a securities restructuring as part of that? Sure. As I mentioned, we have engaged a consultant, which is really focused primarily inside the commercial underwriting and origination processes. We believe, first and foremost, that's about getting better, faster, and a better experience for all of our team members and our clients. We do believe there may be some efficiencies that we realize from that that will help us improve our profile.

Our next question is a follow-up from Brandon Nozzle with Hope D Group. Your line is open. Please go ahead.

Um, thanks, um, Katie. I just wanted to follow up on something. You said in your prep remarks about uh evaluating opportunities to enhance the return profile. Uh could you just expand upon that a little bit and and kind of, you know, put a scope around what sorts of things you you might be looking to, um, to do in that regard. Uh, and then specifically, um, would you folks look at um, a Securities restructuring, uh, as part of that?

Operator: In addition to a tremendous amount of work being done within the retirement division to optimize how we deliver there, we think that industry in particular is absolutely full of opportunities for AI and automation. We think we can continue to improve margins over the long term in that business. Relating to the balance sheet restructuring, that's something that we are always evaluating, those opportunities. That's not a change for us; that's been over the course of the past several years. Okay. Thanks for the follow-up, Katie. Appreciate it. Also, just on the follow-up call from Dave Long there, new non-maturity deposit accounts in Q3 came in at rates of less than 3%, and our CD term rates were kept short. Thank you. This concludes our question and answer session, and I would like to turn the conference back over to Katie Lorenson for any closing remarks. Thank you.

Sure. Um, well as, as I mentioned, we have engaged a consultant, um, which is really focused primarily inside the commercial, um, underwriting and origination processes. Um, we believe, you know, first and foremost, that's about getting better faster and a, and a better experience for all of our team members and our clients. Um, but we do believe there may be some efficiencies that we realize from that, um, that will help us improve.

Um, in addition to, um, a tremendous amount of work being done within the retirement division to optimize how we deliver there, we think that, uh, the industry in particular is absolutely full of opportunities for AI and automation. Um, and so we think we can continue to improve margins over the long term in that business. Um, and then relating to the balance sheet restructuring, that's something that we are always evaluating, um, those opportunities. And that's, uh, not a change for us; that's been over the course of the past several years.

Okay, thanks for the, uh, the follow-up. Katie, appreciate it.

Also, just on the follow-up call from, uh, for uh, Dave Long there. Uh, new non-maturity deposit accounts in Q3 came in at rates less than 3%, and our CD term rates were kept short.

Thank you, this.

Your question and answer session has concluded, and I would like to turn the conference back over to Katie Lorenson for any closing remarks.

Operator: Thank you, everyone, for the questions, and thank you for taking the time to join us today. I want to thank our employees for their unwavering dedication to our clients and our shareholders for your continued trust and support. The progress we've made together reflects the strength of our strategy, the resilience of our diversified business model. As we look ahead, we remain focused on disciplined growth, leveraging technology and innovation, delivering sustainable top-tier performance. Our foundation is solid, our team is energized, and we are confident in the opportunities ahead. Thank you, everyone, and have a great day. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you. Thank you, everyone, for the questions. And thank you for taking.

To join us today, I want to thank our employees for their unwavering dedication to our clients, and our shareholders for your continued trust and support. The progress we've made together reflects the strength of our strategy and the resilience of our diversified business model. As we look ahead, we remain focused on disciplined growth, leveraging technology and innovation, and delivering sustainable top-tier performance. Our foundation is solid, our team is energized, and we are confident in the opportunities ahead. Thank you, everyone, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.