Alerus Financial Corporation Q1 FY2026 earnings call

• Delivered strong first quarter 2026, demonstrating progress in repositioning for higher quality performance. • Balance sheet is better positioned with margin expansion due to disciplined funding management and unique funding mix. • Diversification matters with over 40% of revenue being fee-based, capital-light, and recurring. • Continued success in recruiting high-quality talent, adding team members in key markets and progressing towards doubling wealth advisors. • Focus on relationship-driven growth, with commercial and private banking C&I growth exceeding 10%. • Deposits growing with core deposits and synergistic deposits reinforcing the strategic advantage. • Asset quality improved with non-performing assets and criticized loans trending lower, and reserve release. • Capital position strong with tangible book value per share increasing and capital ratios comfortably below regulatory requirements. • Repurchased $6 million of common stock while returning capital through dividends.

For the quarter, net income was $23 million or $0.89 per diluted share. Return on average assets was 1.79%, and return on average tangible common equity was approximately 22%. Net interest income was stable at $44.9 million, with reported net interest margin expanding eight basis points to 3.77%. Adjusted fee income declined 3.2% from the prior quarter, but fee income still represents over 40% of total revenue. Retirement and benefit services total revenue increased to $17.4 million, up 0.8% linked quarter, with synergistic deposits within the retirement segment increasing 2.3% and HSA deposits growing 7.1% to approximately $218 million. Wealth Advisory Services revenue in the quarter was $7.2 million, down 2.7% on a lean quarter basis. Non-interest expense declined 2.9% on a linked quarter basis. Asset quality improved meaningfully with non-performing assets declining $15.4 million link order, criticized loans down 43% year over year, and a $4.9 million reserve release.

• Loans to grow at a mid-single-digit rate for the full year despite contractual maturities. • Deposits to grow in the low single digits with ample liquidity to support loan growth. • Net interest margin of approximately 3.55% to 3.65% for 2026, with second quarter expected to have about 20 basis points of contractual purchase accounting accretion and exit rate of net interest margin in March was approximately 3.65%. • Adjusted non-interest income to grow in the mid-single digits driven by wealth and retirement businesses. • Total net revenue growth in the mid-single digits with non-interest expense growth in the low single digits supporting positive operating leverage, though second quarter non-interest expenses expected to be slightly higher. • Full-year return on assets will exceed 1.25%. • For each additional 25 basis point cut in rates, net interest margins expected to improve roughly 3 to 5 basis points.

• Market conditions and interest rate fluctuations could impact margin and revenue. • Competition in the deposit market could affect cost of funds. • Credit risks associated with loan portfolios, although asset quality has improved, there could be unforeseen credit issues. • Macroeconomic factors could influence loan growth and provisioning. • Volatility in equity markets could impact wealth advisory services revenue.

Q: Hey, good morning, everybody. Hope you're doing well. Maybe just starting off here on the retirement business, can you just unpack the decline in plan participants in AUA this quarter and help us understand why it's revenue neutral, as you pointed out in the release?

A: Thanks for the question. I can say since I got here, we've been putting that emphasis on a much more disciplined and aggressive approach to our growth strategy, really scrutinizing the mix of business that we take on more closely than ever, and specifically looking at profitability, operational leverage, and complexity. In this past quarter, we were able to exit a large, low-margin client that it was a legacy relationship that had significant assets but generated limited revenue relative to size and added kind of disproportionate operational complexity, for sure, for our division. Coincidentally, additionally... Hey, Forrest? Yeah. Forrest, this is Al. Can you... We're getting some feedback here. Can you... start over because you're sounding a little muffled. Yeah, sorry about that. Is that okay? Still muffled. That's okay. I can take it, Forrest. All right. Thank you for the question. In regards to the drop in assets participants for the quarter, it was driven by the exit of a large lower margin legacy relationship and replaced with a new partnership that has much higher levels of profitability but lower levels of assets and participants. Yeah, is that better? Sorry. That's better. All right. Sorry about that. Thanks, Katie. Yeah, no problem. Yeah, I mean, as Katie mentioned, so coincidentally, we exited a large low margin client that had significant assets, and we onboarded a very substantial new partnership that does have lower assets, but is much higher, more simplified business, which is in line with our strategy. So all in all, it was absolutely just an episodic event of this quarter. But does reflect a deliberate focus on us trying to achieve higher quality, more profitable business. But it happened in the same quarter and is largely a revenue neutral event between the two.

Q: Maybe moving on to loan growth and demand, can you spend a minute talking about what gives you confidence you'll still hit the mid-single-digit growth guide for the year, just given the softer start to the year?

A: Yeah, this is Jim Collins. We're staying the course, right? Started off a little slow on loan production, but we are moving out some investor CRE that doesn't fit our risk tolerance or is some risk-rated loans that we're pushing out now. But our C&I pipelines are fairly robust in all markets, except for our ag. Our ag is relatively flat, which is fine with us. We will still plan to hit single-digit growth for the year, but we are still pushing out some credits for in 2026 in the investor CRE buckets.

Q: Al, I think you said the exit margin in the month of March was 365 versus the quarter's reported 377. Just help us understand kind of the evolution from the full quarter's reported number to that exit margin. Like, what were the puts and takes there?

A: Yeah. I mean, a lot of it had to be lower deposit mix. So, we did see really good mix shift, especially on the deposit side, because we had good inflows there. We do expect lower purchase accounting accretion on a go-forward basis. That's why I want to get the exit rate there. So, we're only anticipating 20 basis points of purchasing account accretion in the second quarter, and it's probably going to step down from there, because as we continue to see accelerated payoffs that's far from the future into today. So, those are kind of the main puts and takes. We did, our cost of funds did decline nicely, too, from the Fed cuts in the fourth quarter of last year, and that was one of the big drivers, along with the BSR.

Q: Just circling back on that margin, Al, just to be clear, the 355 to 365, are you excluding accretion? No, that's total reported numbers. That's for the full year. And你're including your expected accretion in that figure?

A: Correct, with no accelerated payoffs the remainder of the year. So, we do expect personal accounting accretion to decrease as each quarter progresses.

Q: Yeah, no problem, Jeff. So, it is partially easing of deposit benefits. We did see a couple rate cuts of the late last year, but also to In the second and third quarters, we typically see uploads of deposits, especially from our public funds. So that's going to put a little pressure on our deposit base because as we replace some of our lower cost funding with higher cost funding, that'll put a little bit of pressure on there as well.

Q: No, there were none.

Q: From a CNI standpoint, we had really solid CNI growth. I don't have the numbers in front of me, per se, but we're driving mid-market CNI growth fairly well with the full relationships. Some of the CRE that we put on the books two, three years ago, that's what we're moving off the books, first quarter, second quarter. That's what you'll see moving off the books. And you'll continue to see the percentages of CNI grow quarter over quarter like you did last year. When you saw year over year 10% CNI growth, you'll continue to see that through 2026 and 2027, as that has been our core focus the last three years.

Q: Would you say production in CNI was greater in the first quarter than it was in the fourth quarter?

A: No, I think it was a little bit lower than it was in the fourth quarter. But I think the pipelines building the second and third quarter look very healthy.

Q: Hi, everyone. Good morning. Thanks for taking the question. Al, just going back to the margin discussion, if you strip out the accretion that you mentioned in the quarter, that implies core loan yields are kind of 560 in one queue. And to get to your margin, Guy, I think that would imply a decent step down in loan yields. But it doesn't sound like there's anything unique in kind of that core loan yield in terms of interest recoveries in response to earlier questions. I'm just trying to kind of jive the trajectory of loan yields, particularly within the context of what你mentioned in terms of new loan production coming on the low to mid-sixes.

A: Yeah. I mean, basically, it was just a little conservatism there, especially as we still think our core margin will be in the mid-threes. But as we continue... Jim probably could talk about this a little bit more too, but we are seeing competition pick up, especially in the deposit front. So the benefit of those deposit cost of funds decreases is probably behind us right now, unless we see another Fed cut in the future, because we are seeing more pressure on deposit costs in our footprint. Yeah, I would say in all markets, obviously all banks are are focused on deposits just as we are. It's getting extremely competitive. It's been competitive the whole time. Everybody's sharpening their pencils, so that continues to tighten.

Q: great question thank you um so from a priority standpoint uh pretty consistent with what we've discussed in the previous quarters invest first and foremost in organic growth, but returning capital opportunistically, especially as you mentioned with valuations warranted, continues to be a priority. We were active this quarter. We intend to remain active in our buyback going forward.

Q: Yeah, I would say we put on some hires end of last year, a couple more at the beginning of this year. We're seeing some traction on new revenue from them, and we have some additional hires that we're looking to hopefully hire on the balance half of this year. We've had solid retention of all clients as we put on that platform, if you recall, last year. We've had, you know, the first quarter was predominantly just issues with the markets, but we should see generally good performance out of additional revenue growth out of new clients as we're putting on new wealth advisors going forward.

Q: Hey, everybody. Hope你're all doing well today. And thanks for taking my questions here. So first one, circle back on the loan growth. So it sounds like你 still have some targeted CRE loans to kind of work off the balance sheet. So as you think about the quarterly cadence going forward, Should we expect kind of like flat-x balances here in the second quarter and then a nice jump in the third and fourth quarter to kind of get you to that full-year target?

A: I would look to that, yes.

Q: Given the slower growth here expected in the second quarter, should we kind of model in a very modest provision here? especially given the sizable release of reserves this quarter? It seems like你feel like you've right-sized your reserve given the credit profile you have, so should we expect kind of a minimal provision that would just cover whatever charge-offs that you have?

A: Yeah, Damon, I think that's right. I mean, going forward, our provision is going to be driven by loan growth and really the macroeconomic factors.

Q: So do you feel like the mid-120s is probably a good run rate for you guys over time, absent any type of, obviously, macro deterioration?

A: Yeah. I mean, you know, when I look at our pooled reserve, we're north of 110 to 120, I think, is a fair range, of course, depending on what happens in the economy.

Q: I guess lastly on expenses, I think, Al, did you say two to three or, sorry, low single-digit growth for the full year off of last year?

A: Yeah.

Q: Just looking at the mortgage banking segment, if I look at originations and sales, those are both seasonally down quite a bit, but the revenue was actually up sequentially. And I think你mentioned MSR, fair value benefits. Can you just size up how much of a benefit the MSR was this quarter?

A: Let me get that number for you. The other benefit, too, was that in our pipelines in the fourth quarter, we did have, you know, the rate cuts affecting our pipeline. So, we actually had some mortgages in there that came in at high rates. A lot of us get a bigger gain on sales. So, I'd say that was a bigger driver for mortgage that quarter. Less impact from the MSR part.

Q: I think你folks said in the prep remarks that you continue to make progress on that one large non-accrual loan that is still kind of working through resolution. Can you offer a little bit more color on kind of where you are on that credit, how你reserve, and kind of where ultimate loss content on that loan might end up?

A: Sure, Brendan. This is Karen. We do continue to make progress currently negotiating a sale on that deal. we are getting more clarity around value as we go through that process. And so we actually decreased our reserve from about 17% in Q1 to about 8% in Q2.

Q: Brandon, just to close the loop on the fair value mark, we're just looking at right now a couple hundred thousand for fair value on the MSR mark.

A: You're welcome. Thank you.