Hello, everyone. And welcome to the Alerus Financial Corporation Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. 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 call over to the Alerus Financial Corporation President and CEO, Katie Lorenson, to begin. Katie, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today for our quarterly earnings call. Here in the Twin City today with me is Al Villalon, our CFO; Karin Taylor, our Chief Operating and Risk Officer; and Jim Collins, our Chief Revenue Officer and Head of our Commercial Wealth Bank. Forrest Wilson, our Chief Retirement Services Officer is also joining us on the call. I’ll start the call with some prepared remarks and strategic highlights for the quarter. Al will spend a few minutes hitting on the key financial highlights, and then we will address your questions. There is no question that this was a tough quarter for Alerus. We are not and will not be satisfied with our results until we are delivering superior returns. That being said, we also firmly believe success is not measured by a single quarter, and while the third quarter came up short, it was also a period of continued progress and execution of our key long-term strategic initiatives for our company. While the path to returning to top performance is not linear, the substantial strides we’ve made demonstrate our commitment to achieving our consistent top-tier performance. Our focus remains on driving shareholder value through steady growth, diversified revenue, positive operating leverage, and maintaining conservative efforts. Let me begin with the transformational changes we’ve been making over the past year and a half as we build a premier Commercial Wealth Bank. Over this period, we have added key talent, continued to diversify our loan portfolio, and closed on our largest acquisition to date. We’ve also managed through the challenging work of numerous restructurings, rightsizing, and exiting of several business lines, which were not core to our focus. Regarding talent, we have worked with urgency on getting the right people in the right seats, and our great culture and best-in-class diversified business model have allowed us to retain top talent and recruit dozens of new team members to the company, including many key hires with areas of deep expertise. Our additions on the revenue-proving side are supported with key hires and continued investments in risk management infrastructure. These are all long-term investments that put some near-term pressure on operating expenses, but are critical to growing in the right way to support the consistent top-tier returns we expect to deliver in the future and have delivered in the past. A key strategic priority was and will continue to be to build strong mid-market and business banking C&I teams in our larger markets to support the well-established and successful teams in our North Dakota markets. Changes of this significance take time to show through to the bottom line, but the momentum is clear with nearly 45% of year-to-date loan origination to C&I clients compared to our pre-transformation origination percentages of 17%. We recently rolled out our formal private banking offering after adding a team of professionals, and the synergies between Wealth Management, Commercial Banking, and Mortgage are exceeding our expectations, particularly in deposit and wealth generation. We remain deeply committed to diversification and believe establishing verticals to augment traditional C&I banking is important to growing the client base and expanding relationships. We’ve added specialty areas of SBA, government non-profit, and most recently, our equipment finance vertical. Turning to our most recent announcement, which was the receipt of regulatory approval and the closing of our Home Federal acquisition, both of which happened in the expected timeframe, and a signal of our position of strength, relationships with our regulators, and capabilities in executing acquisitions. The Home Federal partnership is our 26th acquisition in the past 20 years. Our playbook of integration is proven, and in this particular partnership, the conversion is more straightforward than the previous smaller banks we’ve acquired. We are so pleased with the leaders and the banking group that have joined us. Together as a bigger company, we are committed to getting better and achieving the results in our pro forma company and feel confident in our ability to do so. As for the results of the third quarter, our deposit growth for the year is over 7%, and despite facing the headwinds of seasonal outflows, we held deposits flat by continuing to win new clients despite the incredibly competitive environment. We experienced some positive migration, but it’s important to note the majority was simply in movement between accounts. We continue to operate with no brokered deposits and highlight our CD portfolio that is core clients with a rollover rate in excess of 96%. Loan growth was also robust during the year with the majority of business coming from market share gains of long-established companies. Although the economy in our market continues to be strong, we remain highly selective. And in commercial real estate, where we run below regulatory guidelines in terms of concentration, we are stringent with our dry powder, reserving capacity for the highest quality sponsors with underwriting structures that fit within our time-tested underwriting standards and those relationships that deliver superior ROEs. Credit quality remains a key area of focus. Early identification of problem loans, coupled with proactive and decisive actions are part of our credit culture. We continue to closely monitor and proactively downgrade loans where we see potential or emerging weaknesses. We monitor the individual loan level on an ongoing basis for every one of our large multifamily projects, and we do not see systemic issues in this portfolio. However, normalization of credit in the broader portfolio continued during the quarter as two large relationships drove the increase in non-accrual loans, of which we believe we are adequately reserved. One of the loans was a long-term Bank and Wealth client who has experienced credit issues, and the other was an acquired CRE loan originated in 2021 that was identified as higher risk marked in due diligence. Credit migration has come from the large category, and we do not backfill despite continuously reviewing our portfolio through annual reviews and independent internal and external loan views. Charge-offs to average loans remained low for the quarter at 4 basis points, and reserves to loans were stable at 1.29%. I will cover the margin in more detail, but I won’t shy away from the reality of the magnitude of it. We did take a step back in 2023 after a much-anticipated step forward last quarter. Our long-term guidance remains intact. The NIM was impacted by non-accrual and continued pricing pressure on deposits. We have consistently discussed the impact of deposit competition in our market, where many banks face high loan-to-deposit ratios and a reliance on brokered funds. The competition remains fierce, and we are focused here again on the long-term retention and doing what’s right. We have evaluated all exception-priced deposits on an account-by-account level, and we will be adjusting incentives to correlate with volume and pricing. Also, always the highlight for Alerus is our Wealth Management division, which has consistently grown topline revenue for many years. Our advisers are the best in the business, and our Wealth business is deeply embedded in our business lines, with over 40% of our client sourced from part of our Retirement focus business and 20% of our Wealth clients with personal or commercial bank relationships. We know how special our Wealth business is, and we are completely committed to continuing to invest in the business. We recently signed to move to a new technology platform that will transform the client experience and greatly improve the processes for our advisers and their support teams. This technology upgrade will help build on our established success in recruiting advisers as we offer a great user experience and the exceptional synergies that advisers are able to leverage from our Retirement business. Speaking of our Retirement business and our ultimate differentiator when it comes to value creation, given the recurring nature of the business with minimal capital allocation. Here, too, we have new leadership, new team members, and enhanced structure. The team had a record quarter of new revenue, and we see continued positive growth trends in plans and participants, which is where the majority of our new fees are sourced. National partnerships are one of the key initiatives in building our business, and we are pleased with the progress and the momentum we are seeing so far. We will continue to invest in this business with key talent additions and technology to improve efficiency, increase automation, and strengthen our margins in the business. Year-over-year core non-market-related revenues are up 5%. We are very bullish on the Retirement industry and our business and view the recent legislation of Secure Act 2.0 as a key catalyst in continuing our trend of improving organic growth. Moving on to expenses during the quarter, which trended upwards due to a few factors: the addition of key hires, the correlated severance and Retirement-related packages, in addition to M&A-related expenses, which were $1.7 million. We had some lumpiness between the quarters related to FDIC insurance, and we had some increases in professional fees, which I would characterize as operational but not recurring. We believe each of our revenue-producing hires will contribute to an improving fee with higher levels of production and more profitable business. The platform and technology changes in our Wealth and Retirement business will also greatly improve our processes, which will lead to efficiencies, all of which will allow us to continue to effectively manage headcount in the company. In regards to capital levels, they bounced back closer to core with the payoff of BTFP, and we grew book value by 4.6%. Our book value continues to include $63 million of AOCI that will be casually recaptured over the coming years. We believe in maintaining a fortress balance sheet and remain committed to our long history of delivering dividends to support returns to our shareholders. We have not been active in repurchases due to the recently closed acquisition, and our priorities remain focused on organic growth, but we absolutely understand the value of the sum of the parts of our business and will be active as deep disconnects on value present themselves. With that, I will turn it over to Al for specifics on the quarter.

Thank you, Katie. I'll begin my remarks on Page 11 of our investor presentation, which is available on the Investor Relations section of our website. Let's focus on our primary revenue sources. On a reported basis, net income fell by 6.1% compared to the previous quarter, while fee income increased by 3.6%. The decline in net interest income was mainly due to lower purchase accounting adjustments related to the Metro Phoenix Bank acquisition, an uptick in non-accrual loans, and higher interest expenses resulting from a shift from non-interest-bearing to interest-bearing deposits. The rise in fee income was notably driven by higher asset base fees in our Wealth and Retirement business, alongside a gain from the sale of one of our offices. Moving to Page 12 for a detailed look at interest income, net interest income decreased to $22.5 million, and our core net interest margin declined due to three main factors: reduced purchase accounting accretion for Metro Phoenix, as highlighted earlier; diminished net interest income due to increased non-accruals; and heightened interest expenses from an increase in interest-bearing deposits. By the quarter's end, we paid off our borrowings from the BTFP as the Fed recently lowered interest rates. As a result, our reported net interest margin no longer includes the negative effects of these low-interest earning assets. We believe there is a pathway for our net interest margin to reach 3%, although it will not be a straight line, with varying factors impacting it each quarter. The migration of non-interest-bearing deposits to interest-bearing ones will increase our funding costs. On Page 13, regarding earning assets, since acquiring Metro Phoenix Bank, we have achieved our eighth consecutive quarter of growth, with loans increasing by 4% from the previous quarter. We are intentionally allowing our loan investment portfolio to decrease as we transition from low-yielding securities to higher-yielding loans. On Page 14, at the end of the quarter, our costs rose by 0.8% compared to the last quarter. While we experienced seasonal outflows from our public funds, we are actively pursuing organic deposit growth to counteract these outflows. Interest-bearing deposits grew by 2.7%, while non-interest-bearing deposits declined by 6.3%, now accounting for 19.8% of total deposits compared to 21.3% in the prior quarter. With overall stable deposit levels, our loan-to-deposit ratio stood at 91.2%, well below our target of 95%. We have yet to utilize any broker deposits for our funding needs. Turning to Page 15, I'll discuss our Banking segment, which encompasses our Mortgage business. I will focus on the components of fee income since interest income has already been covered. Overall, non-interest income from Banking increased by $600,000, representing over a 12% rise from the last quarter. A significant portion of this increase stemmed from the gain recognized in the sale of one of our offices in the Minneapolis Metro area. Looking ahead to the fourth quarter, we anticipate a decline in total non-interest income compared to the third quarter, primarily due to expected reductions in Mortgage revenue resulting from seasonally lower originations. On Page 16, I'll share some highlights from our Retirement business. Total revenue from this segment grew by 0.4%, while assets under management rose by 4.7%, as equity and bond markets continued to recover. The number of participants in the Retirement program increased by 1.5% in the quarter, and new business production remains strong, with over 500 new opportunities secured this year. For the fourth quarter, we expect fee income from the Retirement business to remain stable. Turning to Page 17, we can review highlights from our Wealth Management division. On a linked-quarter basis, revenues grew by 5.1%, and our end-of-quarter assets under management increased by 5.4%, driven by ongoing improvements in the bond markets. In the fourth quarter, excluding any market influences, we expect fee income from our Wealth division to see a slight uptick. Page 18 summarizes our non-interest expenses. For this quarter, non-interest expenses rose by 9.5%. We incurred $1.7 million in one-time merger-related expenses due to the recent acquisition of HMN Financial. Excluding these merger costs, core non-interest expenses increased by 7.6%. Compensation and benefits rose because of the addition of the equipment finance team, several key hires, and increased employee benefits. We also noted an $800,000 rise in professional fees, excluding M&A-related expenses, primarily related to heightened examination and audit costs. In the fourth quarter, reported expenses will go up due to merger-related costs from the Home Federal deal. Looking ahead to 2025, we remain committed to achieving the 30% cost savings announced with the Home Federal acquisition. On Page 19, you can see our credit metrics, which Katie covered in her remarks, so I will move to the next slide. I'll address our capital and liquidity on Page 20. We continue to maintain a strong capital position, with our common equity Tier 1 capital to risk-weighted assets at 11.1%. Our tangible common equity ratio improved by 85 basis points to 8.11% due to better unrealized losses and the repayment of the BTFP. Following the acquisition of Home Federal, we now have an outstanding share of over $25.3 million, in line with our initial deal expectations, along with an addition of over $868 million in loans and $952 million in deposits. On the bottom right, you can see the breakdown of the sources of our $2.2 billion in potential liquidity. Overall, we remain well-positioned in terms of liquidity and capital to support future growth or navigate any uncertainties. On Page 21, we continue to see robust organic loan and deposit growth, which compensates for any seasonal outflows. There is ongoing positive momentum in both our Retirement and Wealth businesses, and our reserves and capital levels are strong enough to withstand any economic fluctuations. With that, I will now open the floor for questions and answers.

Thank you. And our first question comes from the line of Jeff Rulis from D.A. Davidson & Co.

Thanks. Good morning. A question on the larger credit, I guess, on non-accrual, as you extend more to potentially put yourself in a good position there. I guess, is that capped the extension of credit to that construction item, or is there more to come to kind of get it over to completion? And then I guess, secondarily, could you just remind us kind of where that is located and the timeline on resolution?

Sure, Jeff. This is Karin. Yeah. We continue to evaluate a number of options with regard to this particular credit. If you recall from last time, the borrower has been proactive in injecting equity into the project to cover overruns. It went to non-accrual because additional equity injections were delayed. They continue to try and source additional equity. That said, we will look at a range of options as we determine how to best resolve the credit. It is here in the Twin Cities market. It’s on the east side of Twin Cities, relatively close to both Downtown St. Paul and Downtown Minneapolis. It’s well located to entertainment, to public transportation; it’s a Class A property in a preferable location. So we continue to feel good about the market dynamics and the market's ability to support that property. It is about 87% complete at this point, and we’re looking at early 2025 for completion. Obviously, we’re doing everything we can to resolve as quickly as possible, but I don’t have a firm timeline for you.

I appreciate it. Thanks, Karin. Regarding expenses, Katie, I’m curious about areas that were operational but may not be recurring. We can identify the one-time expenses, but for the elevated areas, I’d like to understand the compensation line. Are those hires fully accounted for? Additionally, are there any professional services or other areas that might decrease over time that aren’t recurring?

Sure. Yeah. In regards to the professional fees. I would expect to see more normalization if you take the run rate for the past couple of quarters, excluding the M&A. There’s some lumpiness in between the second quarter and third quarter, I would say, for both the compensation line, as well as the professional fees line item.

Okay. I guess on a core basis to Al’s commentary, I mean, excluding the added platform, you’re bringing on legacy expenses, can we expect flat to down? Trying to get a sense for what the trend is there?

Jeff, when looking at our reported expenses, we will be merging our costs. However, if you consider our standalone performance, we are dedicated to reducing those expenses. As a result of the merger, you will notice an increase in reported expenses for the combined companies. We remain focused on achieving the 30% or greater cost savings that we initially outlined in our performance expectations for the deal.

Yeah, Al, I'm trying to get a sense of how we can track the expenses on the HMN side and what that could potentially add.

Yeah.

We can achieve cost savings in 2025, but the important aspect I'm trying to clarify is the run rate for our legacy operations.

Yeah. Yeah. You would expect that to come down. Yes.

Got you. Maybe just one last question then on loan growth. There is really strong growth, and Katie, I appreciate the focus on the market share gains. Does this suggest that the overall market isn't growing much and you're just taking a larger portion of it? Or is the underlying business trend and activity improving somewhat, and you're just doing a great job of capturing market share? I wanted to delve a bit deeper into that discussion.

Jeff, this is Jim. That is taking market share. We brought in a lot of talent over the last 18 months. Those non-solicits are up. So a lot of the relationships that are moving over, and we’re seeing that in the growth. Our relationships that have been known to a lot of the employees here now have come over for a long time. So it is market share in some of the other banks that are probably resting on their laurels a little bit.

Okay. And Jim, your pulse on the activity, generally speaking, of the market from demand, what would that be?

I think all the markets that we’re currently in are in pretty good economic shape. There’s not a ton of robust growth, I would say, but pretty average. So I don’t think there’s a lot of exponential growth, but there’s enough growth for us as other banks are still not overly active in the marketplace. I think our activities are going to generate a lot as the market competition comes back. Our activities now are going to be more fruitful in 2025 to 2026 just because many of the banks haven’t been in the market as much as we have been.

Okay. Appreciate it. Thank you.

We will now take our next question that comes from David Feaster with Raymond James. David, your line is now open.

Hi. Good morning, everybody.

Hi, David.

I wanted to dig into the margin for a second. Look, there’s a lot of moving parts in here. I was hoping you could just help us think through maybe like a core margin, what’s a good starting point? Look, we’ve unwound the BTFP. You got HMNF in the fold. Just thinking through the trajectory, again, you got the non-accrual reversal in the last quarter. Just how do you think about a good core margin starting point, the trajectory going forward as your liability sensitivity had improved? And if you had any updated expectations for accretion just on rate marks now the deals closed?

Thank you, David. In September, our legacy portfolio had an interest margin of approximately 2.41%. For the acquired HMN portfolio, their net interest margin was around 2.8% in the third quarter. Both figures represent quarter-to-quarter comparisons without deal marks. Looking ahead, we mentioned a $54.2 million mark on the loan book, although we are still awaiting the final valuation. We anticipate that the $54.2 million, based on the original deal assumptions, will be somewhat lower due to changes in rates since our May announcement. Consequently, we expect reduced income accretion from purchase accounting to net interest income next year, which will also lead to lower goodwill because of the marks.

Okay. Okay. And then just how do you think about deposit betas on the way down? You talked a lot about the competitive landscape in your market for deposits. That’s obviously way on the margin.

Yeah.

How do you think about the competitive landscape maybe impacting your ability to reprice deposits on the way down? I mean is that going to make it maybe a bit more difficult to do that, and just curious how you think about that and some of the assumptions in your outlook?

We have taken a cautious approach regarding our deposit betas. We anticipate that deposit pricing will decrease at a slower pace due to many banks maintaining loan-to-deposit ratios above 100%. During this quarter, we also observed a shift from non-interest-bearing accounts to interest-bearing ones, which has raised our funding costs. However, we are starting to see some stabilization, as CD rates have decreased across all our markets. This is positive, and we're not encountering rates in the high 5s or 6s anymore; rates are coming down now, especially following the Fed's cut. Nevertheless, I believe that the reduction in deposit betas will be slower than expected, likely requiring another 50 to 100 basis points before we notice a significant change in deposit costs.

So that just kind of putting that all together, your margin trajectory is probably going to be more back half weighted for the expansion side. Is that a fair characterization?

Yes, that's correct. When we review our ALM modeling based on current insights, we are focusing on our legacy book. We are still in the process of analyzing the HMN portfolio. For our legacy Alerus book, we still foresee a path to 3%, incorporating the lag effect. Given that there are no changes with no rate cuts, we anticipate reaching 3% by 2026. Additionally, even in a scenario where rates decline by 100 basis points, we expect our net interest income in the legacy book to grow by about mid-single digits.

Okay.

Ex…

You’ve had considerable success in the Retirement and Wealth businesses. I appreciate your insights on this. You mentioned achieving success with some national partners. I’m interested in hearing where you’re experiencing success in those areas. Additionally, regarding your comments on enhancing efficiency, I’ve noticed that profitability has declined significantly in those businesses. When do you anticipate this change will start showing, and how do you view the profitability outlook for those sectors?

Yeah. I can take that. This is Forrest. I can take that for the Retirement business. One of the other benefits to this business is it's a very steady business, but we do anticipate margins to improve really in response to the groundwork that we’re laying in three areas: efficiency, increased revenue, and reduced client turnover. And Katie mentioned some of that in her opening comments, but we’re moving forward with multiple efforts in each of these areas, including upgrading some technology that we’re very excited about working on process improvement and forming new partnerships, which you specifically mentioned. I think there are about 10-plus states now that have state-mandated Retirement plans, and a lot of private companies do not want to go with the state plan, and there’s definitely a groundswell of startup plans, which with our PEP, our pooled employer plan model, we’re taking advantage of, and that’s leading to some significant partnerships. One that we could highlight is our partnership with Mass Mutual Financial Advisors that has yielded over 150 new Retirement plan clients in the last 14 months or so. So as far as margins go, we anticipate expanding margins through these various efforts, but it’s going to be steady over time.

Okay. Okay. Thanks, everybody.

Thanks, David.

And the next question comes from Brendan Nosal from Hovde. Your line is now open, Brendan.

Hey, everybody. Thanks for taking the question.

Hi, Brendan.

How are you doing well? Maybe just to unpack like this quarter’s margin before we get into the outlook here, could you help us understand some of the drivers of the loan and earning asset yield pressure? I guess, one, how much of a drag came from the non-accrual piece? And is that recurring for as long as those loans may not accrue? And then two, was there any impact from the swap maturity in this quarter? Thanks.

Yeah. Thanks, Brendan. So nothing on the swap maturity when it comes to the non-accruals, you could see that about roughly around 7 basis points to 8 basis points was from the non-accruals.

And does that drag stick around as long as those bonds are on non-accrual, or is that more of an interest reversal?

There will be a reversal.

So that 8-basis-point drag will not be present in the fourth quarter; just to make sure I understand completely clearly.

Yeah. That should not be there. Correct.

Okay. Got it. Thank you. And then as the rest of the swap book rolls off, as it is pertaining to timing versus where the terms of those stats are versus where Fed funds is? Is there any kind of intermediate impact one way or the other as those fall off the sheet?

We are expecting a slight decrease in our legacy interest expense this quarter. However, we anticipate margin improvement going forward because we have $200 million rolling off in January, leaving us with another $200 million due to roll off in January 2026. The remaining swap will have a very minor impact.

Okay. Perfect. And then maybe last one on Mortgage. I know you’ve kind of offered the guidance for the fourth quarter there. I mean, for this quarter, it seemed like things were better than I was thinking, even though originations were down; kind of the core gain on sale was quite a bit stronger quarter-over-quarter. Just wondering if there’s anything that was worth calling out for the third quarter performance?

No. We did disciplined pricing in that area is what really helped in the Mortgage area; hence why you saw the better gain on sale.

Okay. Yeah. Yeah. All right. Thank you for taking questions.

Thanks, Brendan.

And our next question comes from Nathan Race with Piper Sandler.

Hi, everyone. Good morning.

Your line is now open.

Thanks for taking the questions.

Hi, Nathan.

Hi, everyone. Good morning. Thanks for taking the questions. Just to put all the pieces together around the margin outlook and just the impact from Home Federal. Al, can you just help us with kind of a 4Q NII starting point, both on a core and reported basis?

Yeah. So I would look at it, it's like Home Federal at 2.8%, take 20% of that and then 80% at around 2.4%. You’re going to get to somewhere in the mid-2s, like 2.5-ish.

So you’re talking margin; I was referring to NII.

Oh! I’m sorry, for NII, my bad. Sorry. When we talk about NII, we’re looking at right now, I’m going to say, around $32 million to $33 million in total for NII.

That’s kind of the starting 4Q with Home Federal?

Yeah. Yes. Without any deal marks.

Right. Right. And just thinking about the opportunity to maybe deleverage the balance sheet at Home Federal. Any other balance sheet optimization initiatives that could come to fruition with that deal? Just curious to hear any thoughts as it relates to your loan sales or just securities portfolio restructuring that could help that margin outlook as we get through the integration into early 2025?

We have already considered some loan sales and are thinking about laying off options related to loans. In terms of securities, we have taken steps to support net interest income. However, the contribution from the securities portfolio will be minimal since it consists of only about $190 million.

Okay. Perfect. Very helpful. And then just in terms of just the rate sensitivity of the combined franchise going forward. I think we talked about the liabilities since the position of the balance sheet previously. You have some swaps going off next year. So just curious how you are kind of thinking about just the static margin or NII impact from each 25 basis points?

Yeah. We are still working through that right now as we get our two systems merged in place. But what we could see from the surface right now is that they’re liability sensitive, so that’s just going to add to liability sensitivity that we have.

Got it. Thanks for that. Switching gears, maybe a question for Karin. Curious if you could just touch on what you saw in terms of criticized classified loan trends in the quarter?

Sure. Good morning, Nate. We did see those increase again. What I would say about that is that while we’ve been experiencing increases, overall levels are fairly consistent with what we saw pre-pandemic. And so the non-performing obviously are higher, and those are being driven over half of that by that one loan. So those are higher than what we’ve experienced in the past. But generally speaking, the criticized and classified levels are more consistent with pre-pandemic. And when you look at these few credits that Katie pointed out in her comments, they’re really made up of all different segments, even the asset classes within the commercial real estate are different, and then origination date kind of spans all the way back actually to mid-2015. So I think really what we’re seeing is we’re seeing some continued normalization, which isn’t unexpected, but then we’ve got these couple of big deals that are really bouncing those non-performing numbers.

Got it. That’s very helpful. Maybe one last question for me for Katie. Now that you got Home Federal closed in a pretty timely fashion here in the fourth quarter, I would just love to hear your updated perspective in terms of managing excess capital. Obviously, with the profitability improvement with Home Federal, you guys should be accreting excess capital at stronger clips going forward. So just curious how you’re thinking about weighing those options and deploying excess capital between additional acquisitions, whether it’s on the Retirement or Wealth side or in terms of whole big acquisitions or perhaps resuming share repurchases just given where the stock is trading.

Sure. Yeah. Thank you. In regards to capital, our priorities remain consistent with the previous quarters. Organic growth is certainly a key priority to maintain our fortress balance sheet, which is always number one in our priority books. Our commitment to our dividend remains consistent with our long history. And as I mentioned in my opening comments, we understand the value embedded in this company, and so having the share repurchase out there from a defensive standpoint, I think, serves us all well. In regards to M&A, again, there are a couple of catalysts particularly in the Retirement space for some scale providers, and we are known and have proven that we are a partner of choice for many of those companies. We’ll be highly selective, of course, because there’s a lot of work that we’re doing internally in that business, but we believe we will continue to see opportunities specifically in the Retirement, as well as in the Wealth space.

Got it. Very helpful. Thanks for all the color.

Thanks, Nate.

The next question comes from Damon DelMonte with KBW. Your line is now open, Damon.

Hi, everyone. Thanks for taking my questions. First one, just regards to expenses. Al, kind of just wondering what your thoughts are on the combined company here in the fourth quarter. I think you guys mentioned the Wealth platform upgrade you guys are going to be doing. Just trying to get a gauge on kind of what we could expect here in the fourth quarter?

Yeah. Damon, I’m going to say that fourth quarter is going to be a little messy here because we’re going to have a lot of the deal expenses flowing through, especially contract terminations and onboarding of new stuff. So I don’t have a good guide for you at this moment in terms of the fourth quarter run rate. But what I could say for the 2025 run rate is that we’re still on track to meet all the goals we set for in 2025.

Okay. I understand there will be many factors to consider. If we exclude the merger from this quarter, our figure stands at approximately $40.8 million. Considering the HMNF expense base and removing some expenses, we would be looking at a range around the upper $47 million to low $48 million. Is that about right?

That’s the way to think about it, right, on a core basis. Correct.

Okay. Great. And then with regards to the two new loans that moved into non-accrual this quarter, could you just scale a little bit more color? One of them was a large residential relationship; like how big was it, and what kind of reserves do you have against that?

Yeah. Damon, this is Karin. That relationship is approximately $8.5 million and includes an owner-occupied property as well as a previously listed property for sale. The current reserve is around 5%, and we will receive updated valuations for both properties.

Okay. Great. Great. So both of those were to one borrower. One part of it was residential, and one was owner-occupied?

Yes. This is a long-term Banking and Wealth client, as Katie mentioned. He constructed a new residence, which we financed, and he had a primary residence. Both of those residences are single-family homes. He is now in the new home, and the previous home is currently listed for sale.

Got it. Okay. And then with regard to the construction loan, this may have been asked before, so I apologize. But is there any additional funds to be released to this borrower to help complete the project, or are you at full exposure right now?

We’re at full exposure on that deal.

Okay. And then that’s at about how much now, 20, is it upper 20s?

Oh! Oh! I’m sorry, you’re talking about the original deal. I thought you were talking about the residential deal. No, no, I’m sorry.

I’m talking about the construction loan, yeah, sorry.

We are still evaluating several options regarding that matter. The borrower is actively seeking to raise equity and has shown a willingness to contribute equity, so we are supporting that effort. However, we may also consider additional funding as we explore the quickest way to resolve this situation.

Got you. Okay. And have you quantified what the total exposure is to that one particular borrower?

Right now, as of 9/30, the balance was $25 million, and the approved or they’re approved up to just under $29 million.

Great. Okay. That’s helpful. Thank you. I think that covers everything. So, thank you very much.

Thanks, Damon.

The next question comes from David Feaster with Raymond James. David, your line is now open.

Hi. Thanks for letting me hop back in. I just wanted to touch on…

Yeah.

… the hiring front. You guys have been really active. You’ve attracted a lot of new talent. I’m curious, I guess, A, what’s your appetite for new hires and how much of the production, like, how much of the growth that you’re seeing from those guys is still on the come?

Hi, David. This is Jim. I want to mention that we are still actively hiring, but as we have some people leaving the organization, we are reallocating those positions for many of the new hires. The growth is coming from these new hires since they bring in fresh capacity and relationships, but we are also seeing significant growth from our existing traditional portfolios.

Okay. As you consider funding growth moving forward, is the mid-90s loan-to-deposit ratio still the goal? How do you view funding growth with core deposits given the competition you've mentioned?

Yeah. Thanks, David, thank you for the question. I mean that is our target is 95%, but we understand too that will drift up above that in certain quarters due to seasonality. So you could see us get up to 97%, 98% and maybe some quarters below 95%. So the average will get to 95% through the cycle. But with that being said, too, though, as we continue to grow, we will probably be utilizing other means to fund those growths if we can get core deposits in the door.

I do want to note, David, we do have some very specific deposit strategies around our homeowners’ associations, around large non-profits and large specific mid-market clients that generate a lot of cash and don’t need a lot of loans. So we are very focused on driving those core deposits, and I think we’ve been fairly successful over the last year, and we will continue to drive those.

Okay. Just to be clear, is that 2.45% the core margin we discussed, and would any accretion be in addition to that?

Correct. That is correct.

Okay. Okay. Appreciate it. Thanks, everybody.

Thanks, David.

So this does conclude our question-and-answer session. And I would like to turn the conference back over to Katie Lorenson for any closing remarks.

Thank you. Thank you all for joining our call and for your relationships, and of course, for your investments. We acknowledge and take full responsibility for a tough quarter. The path to superior returns is certainly not linear. It does take time for some of these investments we have made to result in top-tier performance. So the sum of the parts of this incredibly valuable company will be recognized with time, and we are transforming from within, and we’re making progress every day. We have a best-in-class diversified business model and a company that will deliver superior profitability and tremendous value creation to our shareholders. I want to say thank you to all of our team members who are part of our journey to get better every day. Have a great day, everyone.

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