Prepared remarks
Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. Today's call will reference slides that can be found on the Alerus Investor Relations website. You can also view the presentation slides directly within the website platform. Please note, this event is being recorded. This call may contain 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 like to turn the conference over to Alerus Financial Corporation President and CEO, Katie O'Neil Lorenson. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us. Joining me today on the call and in the Twin Cities is Forrest Wilson, Chief Retirement Services Officer; Al Villalon, Chief Financial Officer; Jim Collins, Chief Banking and Revenue Officer; and Karin Taylor, our Chief Operating Officer. We are pleased with our second quarter performance and believe the results further demonstrate the strength of the Alerus franchise and the benefits of the diversified business model we have purposely built over many years. Our second quarter results reflect disciplined execution across the organization with continued net interest margin expansion, solid performance from our fee-based businesses and a significant improvement in credit quality. We generated earnings per diluted share of $0.81, delivered a return on assets of 1.6% and a return on tangible common equity of nearly 20%, underscoring the earnings power of our company. The most significant highlight was the favorable resolution of the largest nonperforming loan and significantly improved credit quality metrics. Criticized loans have decreased over 60% from a year ago, with nonperforming loans now less than 20 basis points. In addition, we maintained robust reserves at 1.2%, strong capital levels with TCE exceeding 9% and continue to return capital to shareholders through buybacks and dividends. Importantly, this quarter highlights the advantages of a business model designed to generate balanced, sustainable growth, with noninterest income again representing more than 40% of total revenue. Our commercial banking, wealth advisory and retirement and benefit services businesses continue to work together to create value for clients while producing recurring revenue to allow for consistent returns to shareholders. While Al will provide additional detail on the quarterly financial results, we continue to measure our progress through the lens of long-term value creation and strategic execution. We are seeing the benefits of our shift towards full relationship commercial and private banking. We grew commercial relationships by more than 20%, expanded our core deposit franchise, increased fee-based revenues, and retirement and wealth assets reached record levels exceeding $50 billion. We also continued to reduce commercial real estate concentrations and improve the overall quality of the balance sheet. Most importantly, we see evidence that the evolution of our strategy is working. Since the launch of our IPO, we are increasingly gaining awareness from stakeholders that we are much more than just a traditional bank and instead a highly diversified financial institution with multiple engines for capital accretion and client growth. The performance demonstrates the durability of our earnings profile, the quality of our revenue streams and the advantages of a strategy designed to create long-term value. The driver behind our performance is the talented team we have assembled across Alerus. We are fortunate to have hundreds of dedicated long-tenured team members alongside exceptional new talent that continues to strengthen our organization. Together, they have played a critical role in the evolution of our company and the execution of our strategic plan. During the quarter, we continued to invest in leadership, growth markets, client-facing talent and technology capabilities. We announced the appointment of Dan Schrader as our permanent Chief Credit Officer. We expanded our commercial banking leadership and production talent in Arizona. We added new wealth management advisers in the Twin Cities and welcomed another class of interns. Lastly, we landed an experienced technology leader from FIS to help accelerate the overhaul of our retirement platform. These additions are not isolated hires. They reflect our continued ability to attract and retain the best-in-business professionals and support our belief that talent, leadership and culture are among the most sustainable competitive advantages in our industry. As we look ahead, our priorities remain unchanged. We continue to position Alerus as a leading commercial wealth bank and a national retirement plan provider. Our improved balance sheet profile, reduced CRE concentration, strong capital position and diversified earnings streams provide flexibility to pursue organic growth while maintaining our disciplined approach to risk management. Investments in talent and technology will continue to drive operational efficiency, automation and scalability throughout our enterprise. Within our retirement division, we believe the technology transformation currently underway will further strengthen our position as a consolidator of choice for subscale operators across the industry. At the same time, our commercial and private banking teams continue to see attractive opportunities to deepen middle market relationships, grow treasury management, explore opportunities for wealth and retirement and add HSA and other synergistic deposits. We remain confident in our efforts and believe Alerus is uniquely positioned as very few organizations of our size operate with the same level of diversification, recurring revenue and relationship-driven growth. We believe those advantages will continue to differentiate Alerus with clients, future acquisition targets and investors. Thank you again for your continued trust and support. And with that I'll turn the call over to Al to review the quarter in more detail.
Thanks, Katie. Let's start on Page 9 of our investor deck, which is posted on the Investor Relations section of our website. Before I begin, I want to emphasize 3 themes that define the quarter: durable earnings, significant credit improvement and continued shareholder value creation. In the second quarter, we delivered another exceptionally strong quarter, highlighted by strong profitability, improving balance sheet quality, stable core margin performance and continued capital generation. We generated adjusted diluted EPS of $0.80 and reported EPS of $0.81, while repurchasing $6.8 million of common stock during the quarter. Profitability remained strong with a return on average tangible common equity of 19.33% and a return on average assets of 1.6%. Adjusted pre-provision net revenue continued to improve. We also grew tangible book value per share — we also grew tangible book value per share of 3.2% from the prior quarter to $18.73 and improved tangible common equity to tangible assets to 9.05%. These are high-quality results, and we believe the quarter demonstrates the strength of the franchise. While earnings remained strong, the most important financial takeaway was balance sheet quality: reduced nonperforming assets by 68.3%, increased tangible book value per share and returned meaningful capital to shareholders through dividend increases and share repurchases. We are proud of our over four-year history of returning capital to our shareholders, especially in the form of dividends. Let's turn to Page 16 to talk about earning assets. Loans were stable during the quarter as new production offset planned balance sheet actions and reductions in nonperforming loans. We continue to see healthy client activity and pipelines remain robust. The investment portfolio increased $5.9 million or 0.8% from the prior quarter as paydowns and maturities were replaced with new investments. We continue to benefit from reinvesting paydowns at higher front book yields. Our balance sheet is positioned neutrally for interest rates due to strategic loan and investment portfolio repositioning. In a 100 basis point increase or decrease scenario, we do not expect NII to be significantly impacted. While future rates remain uncertain, we believe that the balance sheet is positioned appropriately across a range of rate scenarios. Turning to deposits on Page 17. Total deposits decreased $156 million or 3.6% from March 31, 2026. The decrease was primarily driven by seasonal outflows of public depositor funds. Despite the seasonal outflows, our loan-to-deposit ratio was 96.2%. Deposit costs remain stable, and the mix of relationship-based deposits remains a key strength of the franchise. Synergistic deposits now represent 22.6% of total deposits and continue to provide a meaningful funding advantage. Those synergistic deposits grew 3.3% over the prior year, primarily from low-cost HSA deposits. Their continued contribution reinforces the strategic value of our integrated banking, wealth, retirement and benefit services model. Our synergistic deposit franchise remains one of the strongest competitive differentiators in our business model and continues to provide a funding advantage that is difficult for many peers to replicate. This matters in the current environment where deposit quality, stability and cost discipline remain top priorities. Turning to Page 18. Net interest income increased 6.2% to $47.7 million and reported net interest margin increased to 3.97%. Core margin remained stable from the prior quarter, which we view as a strong outcome given the current operating environment. Reported results benefit from purchase accounting accretion and the resolution of a nonperforming loan. But overall, we continue to feel good about the positioning of the balance sheet and our margin outlook. Turning to Page 19. Adjusted noninterest income increased to $32.3 million, up 4.6% from the prior quarter and up 8.6% from the second quarter of last year. Adjusted banking fees and other income increased 16.3% linked quarter, primarily driven by higher swap fee income and mutual fund investment gains related to deferred compensation plan assets, partially offset by lower mortgage banking revenue. Retirement and benefit service revenue was essentially stable, while wealth revenue increased 6.5% due to higher asset-based fees tied to equity markets and an increase in transaction-based fees. These businesses continue to demonstrate the strategic value of the Alerus model by generating stable recurring fee income and attracting low-cost relationship deposits and diversifying earnings. That diversification continues to lower our dependence on spread income and remains a meaningful differentiator for our company. On Page 20, banking services noninterest income increased $1.7 million or 27.2% from the first quarter. Other income increased meaningfully primarily due to higher swap fee income, which totaled $738,000 in the quarter. As we noted before, swap fee revenue can be variable based on client timing and activity. Mortgage revenue decreased to $0.3 million or 9.6% from the first quarter, primarily driven by lower gain-on-sale margins from product mix changes and increased competition. Turning to Page 21. Retirement and benefit services continues to be one of Alerus's most significant differentiators. It generates recurring fee income, low-cost deposits and long-term client relationships while supporting more stable performance across economic cycles. During the quarter, market appreciation supported higher retirement assets and continued growth in our HSA deposit base, which remains an attractive source of funding. On Page 22, our wealth business continues to produce strong results while supporting broader client relationships across the organization. Wealth contributes meaningful recurring fee income and relationship-based deposits while helping diversify earnings beyond traditional spread revenue. Alerus's wealth business is differentiated with nearly 90% of the revenue coming from advisory services. Turning to Page 23. Adjusted non-interest expense increased $2.4 million or 4.8% compared to the first quarter. The increase was primarily driven by compensation and benefits, including annual merit increases, talent additions and deferred compensation plan liabilities tied to market gains. Other expense increased due to higher other real estate owned balances and related holding costs as well as higher corporate insurance costs. Business services, software and technology expense declined due to lower core processing expenses and lower IT hardware expense. We continue to manage expenses carefully while investing in growth areas that support long-term scalability. Turn to Page 24. Asset quality is one of the strongest parts of the quarter. Credit quality improved significantly during the quarter. Nonperforming assets declined over 68%, criticized loans declined meaningfully and charge-offs were substantially lower than the first quarter. Overall, we made significant progress improving balance sheet quality and reducing risk. On Page 25. Capital and liquidity remained strong. Tangible book value per share increased to $18.73, and tangible common equity to tangible assets improved to 9.05%. CET1 increased to 10.81%, and total risk-based capital remained comfortably above regulatory requirements. Total liquidity was approximately $2.6 billion at the end of June 30 or approximately $1.5 billion, excluding brokered CD capacity. During the quarter, we repurchased $6.8 million of common stock at an average price of $27.10 per share, reducing common shares outstanding by 250,000 shares at the end of the quarter. We also increased the quarterly dividend by 4.76% to $0.22 per share. Through the first 6 months of 2026, we returned $23.6 million to shareholders through dividends and repurchases. We are pleased to simultaneously increase tangible book value, repurchase shares, increase the dividend and strengthen regulatory capital ratios during the quarter. The increase in tangible book value per share, combined with share repurchase and dividend growth demonstrates our continued focus on disciplined shareholder value creation. Our capital allocation priorities remain consistent, support organic growth, return capital opportunistically when it creates value and maintain flexibility for strategic opportunities. Turning to Page 26. Our 2026 guidance framework has improved and reflects continued disciplined growth, stable core margin trends and positive operating leverage. As we enter the second half of the year, we remain encouraged by our performance in the first 5 months and believe Alerus is well positioned to achieve our full year objectives. We continue to expect mid-single-digit loan growth and low single-digit deposit growth. We now expect full year reported net interest margin of approximately 3.7% to 3.8%. Our confidence in the outlook is supported by stable core margin trends, favorable loan and investment repricing and the overall positioning of the balance sheet. We expect revenues to be up mid-single digits. Within that guide, we do anticipate lower mortgage originations with the market currently pricing in potential rate hikes. Noninterest expenses will increase low to mid-single digits as we anticipate more strategic hirings. Lastly, we continue to expect full-year ROA to be above 1.25%. In summary, the second quarter reinforced what makes Alerus unique. We generated strong returns, credit quality improved. We grew tangible book value, strengthened capital and leveraged a diversified business model that continues to differentiate us from many of our peers. We entered the second half of 2026 with strong momentum, strong capital and confidence in our ability to continue creating long-term value for shareholders. With that, let's go to Q&A.
Questions and answers
And the first question is coming from the line of Jeff Rulis of D.A. Davidson.
Al, on the margin, the full-year guide would reflect or imply a pullback to a reported margin in the 3.60% range. Do you have the ex-recovery loan yield for the quarter? And do you have the spot loan yields at quarter end?
So Jeff, can you just help me understand the question a little bit further? Our guidance has the recovery; it's a full-year guide with the recovery already in there.
Right. And I hopped then to loan yields, sorry for the transition. The first question is implying that the reported 3.60% range in the back half of the year would get you to the midpoint of the range for the year. Is that fair?
If I'm understanding the question correctly, yes. I mean, our core margins have remained stable at end of June. We're in the mid-3s right now. Is that helpful?
Got you. Maybe switch gears, Al, on the expected accretion in the second half of this year and '27 if you have that.
Yes, I have that. The expected accretion is going to decrease to roughly a couple of hundred thousand dollars in each quarter. Last quarter, we had more; that's anticipated paydowns. This quarter, we had over $3 million of total accretion. But on a contractual basis, we're expecting around $1.9 million for 3Q.
Okay. Appreciate it. Well, you've given enough guidance there that we can get back into a couple of those. Maybe switching gears to the loan pace: given the full-year would assume that net growth really gains some steam and the assumptions behind that, do you expect payoffs to slow and begin to show a bit more net growth in the second half?
Yes. The pipeline right now is the largest and most robust since I've been here in four years. Like we discussed in the first quarter, the growth would really happen in the back half of this year. We worked really hard over the last eight months with credit and the line, working through some credit issues, cleaning up the portfolio and really building that C&I pipeline. In the second quarter, we put on 30 full mid-market C&I relationships. One of those was a regional nonprofit that is bringing 40 accounts with an average collected balance of about $30 million. Once all those deposits flow in, which hasn't happened yet—about half of those have come in. Just this week, we approved a loan package of $28 million for a new client, and that client will walk in with $30 million in deposits. So just a couple of examples of what we are doing. The strategy is working. We're staying the course. We're working on full C&I relationships. We brought in a team that is focused on C&I relationships. They're a little harder; it's a longer lead time for C&I. But as you see, we are bringing down the CRE, growing C&I. That was the plan. That's the strategy. It is working. We will have more growth in the back half of this year.
And just one follow-on: the earning asset balance, do we expect that to match loan growth? I thought I heard you expect to reinvest in the securities portfolio, but do you think the growth of the earning asset base will match the loan growth pace for the second half?
Yes, we do believe that.
The next question is coming from the line of Brendan Nosal of Hovde Group.
Maybe to start off here on kind of capital and M&A. Stock as a currency: capital is a lot stronger than it had been a year ago. Can you just update us on your appetite for whole-bank M&A at this point and perhaps walk through what would be of interest in terms of size, geography, business characteristics, anything like that?
Sure. I'll take that. As we have talked about, the capital priorities remain the same. We are very focused on organic growth, client selection, reinvesting in ourselves in terms of talent, technology and capabilities that really strengthen our franchise for the long term. Returning capital to shareholders has been very clearly demonstrated over many decades of this franchise. But strategic acquisitions are also an enterprise strength of ours, and we remain committed to pursuing those that fit our culture, enhance our capabilities and meet our return thresholds. When we look strategically for acquisitions, those are the three buckets. And again, for retirement, we're agnostic to location because it's a national business. We believe we are viewed as a consolidator of choice for those subscale operators. From a banking franchise standpoint, we look for middle of the country as our geographic focus. From a size standpoint, we're more so looking at the client base and what it can bring to us in terms of enhancing our franchise.
Okay. Maybe turning back to the outlook, a little bit more top level. So you're adding 15 basis points to the full-year margin outlook. You maintained the other components of revenue, including loan growth and fee income, but you're keeping the same revenue outlook. Help us understand why the margin outlook is better, but the revenue outlook is unchanged.
Yes. That's pretty simple, Brendan. Basically, we're forecasting lower originations from our mortgage business, given there's a higher probability of a rate hike coming in September. We are seeing a slowdown in our pipelines right now. So that's kind of the offset that we're anticipating for the back half of the year. Hopefully, it will be better than that. But right now, we're just trying to be cautious given the market prediction for more rate hikes in September.
The next question is coming from the line of Damon DelMonte of KBW.
I just had a question on the paydowns that occurred this quarter. How much of that was normal CRE paydowns like we're seeing across the industry? And how much of it was Alerus-specific, targeted exits of credits that you weren't comfortable with?
So what I can tell you right now, Damon, the total purchase accounting accretion was about $3.8 million. Of that, $2.1 million was base. The accelerated payoffs were about $1.8 million. I would say it was a broad mix.
Got it. And then are you going through the portfolio and exiting certain credits that aren't meeting your standards today versus when they were originated? Did that also contribute to the paydowns in the quarter?
Yes, Damon. This is Karin. It did. As Jim mentioned, our teams in credit and banking have worked very hard to identify credits that either had deteriorated or just weren't core to our business going forward. We feel really good about the progress those teams have made.
And that will be a standard culture of ours going forward for the portfolio.
Got it. The loan guidance for mid-single digits implies little growth in the first half and more in the back half. Is it reasonable to look at it as close to 10% linked-quarter annualized for each of the next two quarters? Or do you think it's a little less in the third quarter and then a really strong finish to year end?
Yes, I think that's a way to look at it. We have a pretty solid pipeline, and we'll have a good push at the end of the third quarter, and we should have a good push in the fourth quarter.
Got it. And then provision outlook: Al, any guidance on what you think a normalized provision level would be?
I don't want to step on Karin's toes, so I'll let you take that one.
The provision is going to be driven by loan growth at this point. I think the level that we're at now is probably reasonably where we're going to be.
Our next question is coming from the line of Nathan Race of Piper Sandler.
While Karin has the microphone, curious how you're thinking about the normalized charge-off trajectory for Alerus going forward. Obviously, some meaningful credit cleanup occurred in the quarter. So just curious what loss content could look like, given the enhancements across the franchise over the last several years and particularly given the cleanup here in 2Q?
Sure. Certainly, in the back half of this year we'll see reduced levels. If I look back to our long history — probably 25 years plus — our average charge-off rate was in that 25 to 27 basis points range. Ultimately, I think that's where we'll end up going into the future.
Okay. And then related to margin, can you unpack some of the moving pieces on the right side of the balance sheet that you expect in the back half of the year? Borrowings were up on both an average and period basis in the quarter. What are you seeing in terms of the core deposit gathering pipeline to fund growth? Or do you anticipate working on wholesale funding, which maybe aligns with your margin guide in the mid-350s for the back half of the year?
Thanks for that question, Nate. I'll take the first part, and Jim can comment on the pipelines. We're anticipating a bit more rising cost on our deposit costs given rate hikes; we hope to lag it some, but deposit competition is intense. We did refinance our subordinated debt recently, which put some pressure on funding costs. We do not anticipate much use of wholesale funding to fund our loan growth because we believe deposits should grow to offset it. But we have plenty of liquidity and can tap wholesale if needed.
Getting to the deposit pipeline, the full pipeline is pretty robust and includes the deposit pipeline. That supports our forecast of low single-digit deposit growth. Our government and nonprofit group continues to perform well on deposits, and those mid-market clients carry decent deposits to fund part of the loan growth as well.
Okay. And then quick one for Katie: you've been proactive investing in technology. With the AI chatter, where are you seeing early applications for AI and what might that mean for optimizations across the franchise?
Great question. AI has been a huge focus for us and is one of our top priorities in 2026. We are making investments in targeted areas where we have high conviction for future returns, particularly in modernizing the retirement platform. As I mentioned earlier, technology is important, but it's all about the talent leading the technology. Landing a professional from FIS will be instrumental in the modernization of our retirement platform, which we think has significant opportunity in AI, automation, scalability — all of which should improve margins and scalability across our divisions. These investments are ongoing, we're moving quickly, and I'm pleased with early results.
That's helpful. One more quick one on expenses: the 'other' line was up about $900,000 quarter-over-quarter. Anything to call out there?
Yes. Part of that 'other' line relates to a deferred compensation plan where there's an increase in liabilities that gets booked as an expense, but these are offsetting other revenues that also flow through.
Next question comes from the line of Ken Kohut of Raymond James.
Maybe starting with asset quality: do you expect any more charge-offs related to that one C&I credit that drove elevated charge-offs in 1Q and a little bit more in 2Q? Or do you think you have a good handle on that one right now?
We could see some additional charge-offs, but they would be at a much lower level. We continue to have about $1 million reserve on that credit. As I said earlier, charge-off levels in the back half of the year should be quite a bit lower.
Regarding the residential property and apartment complex moved to OREO during the quarter, how long do you expect these assets to remain on the balance sheet? And what are the associated costs with managing these properties in the meantime?
The residential property we expect to resolve by the end of the year; some of the holding costs were minor improvements that needed to be made, so I don't expect that to be ongoing. The apartment building is in receivership, so there are costs related to the receiver. That one is more likely to be resolved in the first half of 2027.
This concludes today's Q&A session. I would now like to turn the call back over to Katie for closing remarks.
Thank you. Thank you to our shareholders, our analysts and our Board of Directors for your ongoing confidence and support. Most importantly, thank you to all of our team members across Alerus. The results that we discussed today are a direct reflection of their commitment to our clients, our strategy and to one another. And while we are proud of our performance, we also recognize that success is never final. We remain committed to balancing strong financial performance today with thoughtful investments in talent, technology and growth opportunities that will strengthen Alerus for the future. That discipline has helped us to build a more diversified, resilient company, and we believe positions us well to continue creating long-term value for our shareholders. Thank you again for joining us today.
This now concludes today's presentation. Thank you so much for joining, and you may now disconnect.