Q1 2026 Alerus Financial Corp Earnings Call

April 30, 2026

Operator: Good morning, welcome to Alerus Financial Corporation Earnings Conference Call. All participants are 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'll be an opportunity to ask questions for analysts and institutional investors. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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.

Speaker #1: You can also view the presentation slides directly within the webcast platform. After today's presentation, there'll be an opportunity to ask questions for analysts and institutional investors.

Speaker #1: To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

Speaker #1: To restore your question, please press star 11 again. 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.

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 company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation's President and CEO, Katie Lorenson. Please go ahead.

Speaker #1: 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.

Speaker #1: I would now like to turn the conference over to ALERUS Financial Corporation's President and CEO, Katie Lorenson. Please go ahead.

Speaker #2: Thank you. And good morning, everyone. Appreciate you joining us today. With me today are ALERUS CFO, Al Villalon, our Chief Operating Officer, Karen Taylor, our Chief Banking and Revenue Officer, Jim Collins, and ALERUS's Chief Retirement Services Officer, Forrest Wilson.

Katie Lorenson: Thank you. Good morning, everyone. Appreciate you joining us today. With me today are Alerus CFO, Al Villalon; our Chief Operating Officer, Karin Taylor; our Chief Banking and Revenue Officer, Jim Collins; and Alerus' Chief Retirement Services Officer, Forrest Wilson. We delivered a strong Q1 to begin 2026. More importantly, one that demonstrates the progress we've made repositioning Alerus for higher quality, more durable performance. For the quarter, we reported net income of $23 million or $0.89 per diluted share. Return on average assets was 1.79%. Return on average tangible common equity was approximately 22%. These results were driven by margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality. We view this quarter as a clear validation that the strategic actions we've taken are translating into tangible financial outcomes.

Speaker #2: We delivered a strong first quarter to begin 2026, and more importantly, one that demonstrates the progress we've made repositioning Alerus for higher-quality, more durable performance.

Speaker #2: For the quarter, we reported net income of $23 million, or 89 cents per diluted share, return on average assets was 1.79%, and return on average tangible common equity was approximately 22%.

Speaker #2: These results were driven by margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality. We view this quarter as a clear validation that the strategic actions we've taken are translating into tangible financial outcomes.

Speaker #2: Our results reflect three structural strengths shaping the business. First, our balance sheet is fundamentally better positioned. Margin expansion in the quarter reflects disciplined funding management, the benefits of balance sheet actions taken last year, and a funding mix that continues to differentiate our franchise.

Katie Lorenson: Our results reflect three structural strengths shaping the business. First, our balance sheet is fundamentally better positioned. Margin expansion in the quarter reflects disciplined funding management, the benefits of balance sheet actions taken last year, and a funding mix that continues to differentiate our franchise. Growth in highly valuable agency balances sourced through our benefit services platform highlights the uniqueness of our funding model with nearly a quarter of the deposits sourced from our integrated and synergistic business lines. Second, diversification continues to matter. More than 40% of our revenue are fee-based, capital light, and recurring. Our retirement benefits services and wealth advisory fee streams provide stability across interest rate and market cycles. Even as asset levels and market conditions fluctuate, underlying engagement, client activity, and long-term profitability across these businesses remains solid.

Speaker #2: Growth in highly valuable HSA balances sourced through our benefits services platform highlights the uniqueness of our funding model, with nearly a quarter of the deposits sourced from our integrated and synergistic business lines.

Speaker #2: Second, diversification continues to matter. More than 40% of our revenue are fee-based capital light and recurring. Our retirement benefits services and wealth advisory fee streams provide stability across interest rate and market cycles.

Speaker #2: Even as asset levels and market conditions fluctuate, underlying engagement, client activity, and long-term profitability across these businesses remain solid. Third, we continued our success in recruiting high-quality talent.

Katie Lorenson: Third, we continued our success in recruiting high-quality talent, adding team members in key markets in Wisconsin and Arizona, in addition to progressing towards our goal of doubling the number of wealth advisors across the franchise. Impressively, we've maintained discipline on expenses while continuing to make these selective investments in technology and growth initiatives. Our focus remains on scalability, ensuring that as revenue grows, returns improve in a sustainable way. During the quarter, we remained focused on relationship-driven growth. Commercial and private banking continues to be an area of focus, with year-over-year C&I growth exceeding 10%, supported by healthy pipelines and strong client engagement. At the same time, we've remained intentional in reducing exposure to lower return and higher volatility segments of the balance sheet. The mix shift is improving risk-adjusted returns and strengthening the overall profile of the loan portfolio.

Speaker #2: Adding team members and key markets in Wisconsin and Arizona in addition to progressing towards our goal of doubling the number of wealth advisors across the franchise.

Speaker #2: Impressively, we've maintained discipline on expenses while continuing to make these selective investments in technology and growth initiatives. Our focus remains on scalability, ensuring that as revenue grows, returns improve, and a sustainable way.

Speaker #2: During the quarter, we remained focused on relationship-driven growth. Commercial and private banking continues to be an area of focus, with year-over-year CNI growth exceeding 10%.

Speaker #2: Supported by healthy pipelines and strong client engagement. At the same time, we've remained intentional in reducing exposure to lower return and higher volatility segments of the balance sheet.

Speaker #2: The mix shift is improving risk-adjusted returns and strengthening the overall profile of the loan portfolio. On the funding side, deposit trends reflect the value of our diversified platform.

Katie Lorenson: On the funding side, deposit trends reflect the value of our diversified platform. Growth in core deposits, including commercial and private banking relationships, in addition to our synergistic deposits, reinforces the strategic advantage of our integrated business model. As a result, the loan deposit ratio improved to under 93%. Asset quality improved meaningfully during the quarter. Non-performing assets declined and criticized loan balances continued to trend lower. We made significant progress resolving previously identified credit issues. During the quarter, we charged down a non-accrual and well-reserved C&I credit related to a long-standing client relationship negatively impacted by changes in government funding. This was a single event and not reflective of broader portfolio trends. We also made substantial progress in moving closer to resolution on our largest remaining non-accrual relationship, which represents approximately 65% of total non-accrual loans.

Speaker #2: Growth in core deposits, including commercial and private banking relationships, in addition to our synergistic deposits, reinforces the strategic advantage of our integrated business model.

Speaker #2: As a result, the loan deposit ratio improved to under 93%. Asset quality improved meaningfully during the quarter. Non-performing assets declined and criticized loan balances continued to trend lower.

Speaker #2: And we made significant progress resolving previously identified credit issues. During the quarter, we charged down a non-accrual and well-reserved CNI credit, related to a long-standing client relationship, negatively impacted by changes in government funding.

Speaker #2: This was a single event and not reflective of broader portfolio trends. We also made substantial progress in moving closer to resolution on our largest remaining non-accrual relationship, which represents approximately 65% of total non-accrual loans.

Speaker #2: As a result of portfolio improvement and credit resolution activity, we recorded a reserve release of $4.9 million during the quarter, while maintaining an allowance for credit losses of 1.25% of total loans.

Katie Lorenson: As a result of portfolio improvement and credit resolution activity, we recorded a reserve release of $4.9 million during the quarter while maintaining an allowance for credit losses of 1.25% of total loans. Taken together, these actions underscore the strength of our credit discipline and our commitment to proactive risk management. Our capital position remains strong. Tangible book value per share increased to $18.15, and tangible common equity to tangible assets improved to nearly 9%. Capital ratios remain comfortably above regulatory requirements. During the quarter, we also repurchased $6 million of common stock while continuing to return capital through dividends. Our approach to capital allocation remains disciplined and balanced, supporting growth while returning excess capital to shareholders. Most importantly, the company's trajectory remains highly positive.

Speaker #2: Taken together, these actions underscore the strength of our credit discipline and our commitment to proactive risk management. Our capital position remains strong. Tangible book value per share increased to $18.15, and tangible common equity to tangible assets improved to nearly 9%.

Speaker #2: Capital ratios remain comfortably above regulatory requirements. During the quarter, we also repurchased $6 million of common stock while continuing to return capital through dividends.

Speaker #2: Our approach to capital is balanced, supporting growth while returning excess capital to shareholders. Most importantly, the company's trajectory remains highly positive. The underlying fundamentals of the business, our talented team, balance sheet positioning, diversified revenue models, credit discipline, and operating focus are stronger than they have been at any other time in our nearly 150 years as an institution.

Katie Lorenson: The underlying fundamentals of the business, our talented team, balance sheet positioning, diversified revenue models, credit discipline, and operating focus are stronger than they have at any other time in our nearly 150 years as an institution. We remain focused on disciplined growth, continued execution, and delivering sustainable long-term value for our shareholders. With that, I will turn the call over to Al to walk through the financial results in more detail.

Speaker #2: We remain focused on disciplined growth, continued execution, and delivering sustainable, long-term value for our shareholders. And with that, I will turn the call over to Al to walk through the financial results in more detail.

Speaker #3: Thanks, Katie. Let's start on page 9 of our fester deck, which is posted on the investor relations section of our website. In the first quarter, we delivered a strong start to 2026 and demonstrated that earnings power of the franchise following the balance sheet repositioning completed late last year.

Al Villalon: Thanks, Katie. Let's start on page nine of our investor deck, which is posted on the investor relations section of our website. In Q1, we delivered a strong start to 2026 and demonstrated the earnings power of the franchise following the balance sheet reposition completed late last year. We generated adjusted diluted EPS of $0.89, inclusive of $6 million of share repurchases during the quarter. Our results reflect continued core net interest margin improvement, disciplined expense management, and the benefit of our diversified business model, with non-interest income representing just over 40% of total revenue. Profitability remained strong, with an adjusted return on average tangible common equity of 21.96% and an adjusted return on average assets of 1.79%, improving 17 basis points from the prior quarter.

Speaker #3: We generated adjusted diluted EPS of $0.89, inclusive of $6 million of share repurchases during the quarter. Our results reflect continued core and interest margin improvement, disciplined expense management, and the benefit of our diversified business model, with non-interest income representing just over 40% of total revenue.

Speaker #3: Profitability remained strong, with an adjusted return on average tangible common equity of 21.96%, and an adjusted return on average assets of 1.79%. Improving 17 basis points from the prior quarter.

Speaker #3: Tangible book value per share increased 3.4% link quarter to $18.15, and our tangible common equity ratio improved to 8.85%, underscoring continued capital generation. Turning to the balance sheet, we remain well-positioned to support organic growth.

Al Villalon: Tangible book value per share increased 3.4% in the quarter to $18.15, and our tangible common equity ratio improved to 8.85%, underscoring continued capital generation. Turning to the balance sheet, we remain well-positioned to support organic growth. Deposits increased 3.7% on a period end basis, and our loan-to-deposit ratio improved to 92.8%. In addition, we continue to maintain robust liquidity, approximately $2.7 billion, providing flexibility to fund loan growth, manage through market volatility, and continue returning capital through dividends and share repurchases. Let's turn to page 16 to talk about our earning assets. At quarter end, loans were relatively stable versus the prior quarter. We continued to proactively reallocate capital to full relationships, primarily in C&I and private banking.

Speaker #3: Deposits increased 3.7% on a period M basis, and our loan-to-deposit ratio improved to 92.8%. In addition, we continue to maintain robust liquidity, approximately $2.7 billion, providing flexibility to fund loan growth, manage through market volatility, and continue returning capital through dividends and share repurchases.

Speaker #3: Let's turn to page 16 to talk about our earning assets. At quarter end, loans were relatively stable versus the prior quarter. We continue to proactively reallocate capital to full relationships, primarily in CNI and private banking.

Speaker #3: Excluding discontinued rationalization, end-of-period loans would have grown modestly. Overall, our loan mix remains balanced at approximately 50% fixed and 50% floating. On investments, we continue to benefit from the strategic portfolio repositioning executed in the fourth quarter.

Al Villalon: Excluding discontinued rationalization, end-of-period loans would have grown modestly. Overall, our loan mix remains balanced at approximately 50% fixed and 50% floating. On investments, we continue to benefit from the strategic portfolio reposition executed in Q4. During Q4, we sold $360 million of available-for-sale securities, representing over two-thirds of total AFS securities at year-end 2025. This restructuring improved the overall average investment portfolio yield by 139 basis points from Q4 2025 to 3.84% in Q1 2026 and has been a meaningful contributor to margin expansion. Currently, our balance sheet remains positioned slightly liability sensitive. On a rate cut, we will see slight margin improvement and vice versa on a hike.

Speaker #3: During 4Q, we sold 360 million dollars of available-for-sale securities representing over two-thirds of total AFS securities at year-end 2025. This restructuring improved the overall average investment portfolio yield by 139 basis points from 4Q '25 to 3.84% in the first quarter of '26.

Speaker #3: And has been meaningful contributor to margin expansion. Currently, our balance sheet remains positioned slightly liability-sensitive. On a rate cut, we will see slight margin improvement and vice versa on a hike.

Al Villalon: Turning to deposits on page 17, our funding profile continues to strengthen and remains a key contributor to margin expansion and balance sheet flexibility. On a period end basis, total deposits increased 3.7% from the prior quarter, reflecting growth across both public funds and core client deposits. Importantly, we continue to see favorable mix improvement and operated during the quarter with only $8 million of broker deposits. Non-interest bearing deposits increased 6.2% linked quarter and now represents approximately 19.7% of total deposits. This shift meaningfully supports our cost of funds and improves the durability of our funding base. The quarter-over-quarter increase in deposits was driven by seasonal public inflows, public fund inflows, as well as steady growth from commercial and private banking clients.

Speaker #3: Turning to deposits on page 17, our funding profile continues to strengthen and remains a key contributor to margin expansion and balance sheet flexibility. On a period-end basis, total deposits increased 3.7% from the prior quarter, reflecting growth across both public funds and core client deposits.

Speaker #3: Importantly, we continue to see favorable mix improvement in operating during the quarter, with only $8 million of broker deposits. Non-interest-bearing deposits increased 6.2% linked quarter and now represent approximately 19.7% of total deposits.

Speaker #3: This shift meaningfully supports our cost of funds and improves the durability of our funding base. The quarter-over-quarter increase in deposits was driven by seasonal public inflows, public fund inflows, as well as steady growth from commercial and private banking clients.

Speaker #3: We are particularly pleased by the continued stability of our core deposit franchise, which reflects core operating and treasury management relationships rather than rate-sensitive behavior.

Al Villalon: We are particularly pleased by the continued stability of our core deposit franchise, which reflects core operating and treasury management relationships rather than rate sensitive behavior. As a result of deposit growth and selective loan originations, our loan and deposit ratio improved to 92.8%, providing additional on-balance sheet liquidity and positioning us well to continue to support organic loan growth going forward without relying on higher cost wholesale funding. Overall, our deposit franchise remains a competitive advantage, supporting loan growth and providing flexibility as we navigate the evolving rate environment. Turning to page 18, net interest income remained stable at $44.9 million. Reported net interest margin expanded 8 basis points to 3.77%, a new post-IPO high. Purchase accounting accretion contributed approximately 25 basis points in the quarter.

Speaker #3: As a result of deposit growth and selective loan originations, our loan to deposit ratio improved to 92.8%, providing additional on-balance sheet liquidity and positioning us well to continue to support organic loan growth going forward without relying on higher-cost wholesale funding.

Speaker #3: Overall, our deposit franchise remains a competitive advantage, supporting loan growth and providing flexibility as we navigate the evolving rate environment. Turning to page 18, net interest income remains stable at 44.9 million dollars.

Speaker #3: Reported net interest margin expanded 8 basis points to 3.77%, a new post-IPO high. Purchase accounting accretion contributed approximately 25 basis points in the quarter.

Al Villalon: Excluding accretion, core margin was 3.52%, representing a 35 basis point improvement from the core margin in Q4. Drivers of the core margin improvement included a 21 basis point decline in total cost of funds to 1.97%, and a higher portfolio yield of 3.84% following the Q4 balance sheet repositioning. Strong new business margins across both loans and deposits supported continued margin momentum. New loans were originated at average rates in the low to mid 6% range, while new deposits were in the low to mid 2% range. Turning to page 19, adjusted fee income, excluding the balance sheet repositioning and other one-time items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue.

Speaker #3: Excluding accretion, core margin was 3.52%, representing a 35 basis point improvement from the core margin in the fourth quarter. Drivers of the core margin improvement included a 21 basis point decline in the total cost of funds to 1.97%, and the higher portfolio yield of 3.84% following the fourth quarter balance sheet repositioning.

Speaker #3: In addition, strong new business margins across both loans and deposits supported continued margin momentum. New loans were originated at average rates in the low to mid-6% range, while new deposits were in the low to mid-2% range.

Speaker #3: Turning to page 19, adjusted fee income, excluding the balance sheet repositioning and other one-time items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue.

Al Villalon: Importantly, fee income continues to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment. Let's turn to page 20 for additional detail on fee income. Turning to banking services fee income, adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues. We do not include swap revenues and guidance due to inherent variability and client-driven timing. Importantly, our core transaction-based fees remained stable, supported by continued activity across our commercial and consumer client base. Mortgage fee income increased over 130% from the prior year, driven by increased originations, improved gain on sale margins, and a higher valuation of mortgage servicing rights. While originations remain seasonally lower, economics per loan improved, demonstrating our ability to generate solid fee contribution even in a muted volume environment.

Speaker #3: Importantly, fee income continued to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment. Let's turn to page 20 for additional detail on fee income.

Speaker #3: Turning to banking services fee income, adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues. We do not include swap revenues in guidance due to inherent variability and client-driven timing.

Speaker #3: Importantly, our core transaction-based fees remain stable, supported by continued activity across our commercial and consumer client base. Mortgage fee income increased over 130% from the prior year, driven by increased originations, improved gain-on-sale margins, and a higher valuation of mortgage servicing rights.

Speaker #3: While originations remain seasonally lower, economics per loan improved, demonstrating our ability to generate solid fee contribution even in a muted volume environment. On page 21, I'll provide highlights for retirement and benefit services.

Al Villalon: On page 21, I'll provide highlights for Retirement and Benefit Services. Total revenue increased to $17.4 million, up 0.8% linked quarter. Assets under administration and management declined 5.9%. It's important to note this change had and is expected to have minimal impact on revenues as the revenues were replaced with new partnership onboarded during the quarter. Synergistic deposits within the Retirement segment increased 2.3% linked quarter. HSA deposits grew 7.1% to approximately $218 million and continued to be a particularly attractive funding source, carrying an average cost of roughly 10 basis points. Turning to page 22, in wealth advisory services, revenue in the quarter was $7.2 million.

Speaker #3: Total revenue increased to 17.4 million dollars of 0.8% link quarter. Assets under administration and management declined 5.9%. It is important to note this change had an expected to have minimal impact on revenues as the revenue was replaced with new partnership onboarded during the quarter.

Speaker #3: Synergistic deposits within retirement, within the retirement segment, increased 2.3% link quarter. HSA deposits grew 7.1% to approximately $218 million and continued to be a particularly attractive funding source, carrying an average cost of roughly 10 basis points.

Speaker #3: Turning to page 22 and wealth advisory services, revenue in the quarter was 7.2 million dollars. modest 2.7%, primarily driven by market-related pressure on asset values as client retention remained strong.

Al Villalon: On a linked quarter basis, revenue declined a modest 2.7%, primarily driven by market-related pressure on asset values as client retention remained strong. Assets under administration and management decreased 1.2% from the prior quarter, reflecting broader market performance during the period. From a fee mix standpoint, the decline was evenly split between asset-based and transaction-based revenue, consistent with lower market levels and typical Q1 seasonality. Turning to page 23, our expense discipline continued to translate into positive operating leverage during the quarter. Reported non-interest expense declined 2.9% on a linked quarter basis, reflecting lower incentive compensation as both mortgage activity and banking production were seasonally lower. Importantly, this decline was achieved while we continued to invest in the franchise.

Speaker #3: Assets under administration and management decreased 1.2% from the prior quarter, reflecting broader market performance during the period. From a fee mix standpoint, the decline was evenly split between asset-based and transaction-based revenue.

Speaker #3: Consistent with lower market levels and typical first-quarter seasonality. Turning to page 23, our expense discipline continued to translate into positive operating leverage during the quarter.

Speaker #3: Reported non-interest expense declined 2.9% on a link quarter basis, reflecting lower incentive compensation as both mortgage activity and banking production were seasonally lower. Importantly, this decline was achieved while we continued to invest in the franchise.

Speaker #3: The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology, rather than incremental new spend.

Al Villalon: The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology rather than incremental new spend. Overall, expense trends remained well controlled, and we continue to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in Q1. This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully. While net charge-offs were 71 basis points, the increase was driven primarily by a single $6.4 million charge-off on 1 previously identified C&I relationship that had previously been placed on non-accrual. This charge-down relationship still has remaining reserves of 78%. Importantly, non-performing assets declined $15.4 million linked quarter and criticized loans were down 43% year over year.

Al Villalon: The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology rather than incremental new spend. Overall, expense trends remained well controlled, and we continue to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in Q1. This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully. While net charge-offs were 71 basis points, the increase was driven primarily by a single $6.4 million charge-off on one previously identified C&I relationship that had previously been placed on non-accrual. This charge-down relationship still has remaining reserves of 78%. Importantly, non-performing assets declined $15.4 million linked quarter and criticized loans were down 43% year-over-year.

Speaker #3: Overall, expense trends remained well-controlled, and we continued to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in the first quarter.

Speaker #3: This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully, while net charges were 71 basis points.

Speaker #3: The increase was driven primarily by a single $6.4 million charge-off on one previously identified CNI relationship that had previously been placed on non-accrual.

Speaker #3: This charge-down relationship still has remaining reserves of 78%. Importantly, non-performing assets declined $15.4 million linked quarter, and criticized loans were down 43% year over year.

Speaker #3: We recorded a $4.9 million reserve release, primarily driven by lower loan balances and an improved mix. Despite the continued positive trends, we maintained our reserve level above the industry at 1.25%.

Al Villalon: We recorded a $4.9 million reserve release, primarily driven by lower loan balances and an improved mix. Despite the continued positive trends, we have maintained reserve level above the industry at 1.25%. On page 25, capital and liquidity remain strong. Tangible common equity to tangible assets improved to 8.85%, and tangible book value per share increased to $18.15. We continue to return capital to shareholders through both our quarterly dividend and $6 million of share repurchases at an average price of $23.90 while maintaining substantial liquidity to support organic growth. Turning to page 26, our 2026 guidance has improved and reflects continued disciplined growth and positive operating leverage.

Speaker #3: On page 25, capital and liquidity remained strong. Tangible accounting equity to tangible assets improved to 8.85%, and tangible book value per share increased to 18.18 dollars and 15 cents.

Speaker #3: We continued to return capital to shareholders through both our quarterly dividend and $6 million of share repurchases at an average price of $23.90.

Speaker #3: While maintaining substantial liquidity to support organic growth. Turning to page 26, our 2026 guidance has improved and reflects continued discipline and growth, continued discipline growth, and positive operating leverage.

Speaker #3: We expect the following: loans to grow at a mid-single digit rate for the full year despite more than 400 million dollars of contractual maturities.

Al Villalon: We expect the following: loans to grow at a mid-single-digit rate for the full year despite more than $400 million of contractual maturities. Deposits to grow in the low single digits. We have ample liquidity to support loan growth in excess of deposit growth. A net interest margin of approximately 3.55% to 3.65% for 2026. In the Q2, we expect about 20 basis points of contractual purchase accounting accretion. Also, for additional context, the exit rate of our net interest margin was approximately 3.65% for the month of March. Adjusted non-interest income to grow in the mid-single digits, driven by continued growth in our wealth and retirement businesses. Consistent with prior guidance, swap fee income is not included given variability.

Speaker #3: Deposits to grow in the low single digits. We have ample liquidity to support loan growth in excess of deposit growth. A net interest margin of approximately 3.55% to 3.65% for 2026.

Speaker #3: In the second quarter, we expect about 20 basis points of contractual purchase accounting increasion. Also, for additional context, the exit rate of our net interest margin was approximately 3.65% for the month of March.

Speaker #3: Adjusted non-interest income is expected to grow in the mid-single digits, driven by continued growth in our wealth and retirement businesses. Consistent with prior guidance, swap fee income is not included given its variability.

Al Villalon: Total net revenue growth in the mid-single digits with non-interest expense growth in the low single digits will continue to support positive operating leverage. We do expect Q2 non-interest expenses to be slightly higher due to a seasonal uptick in mortgage and banking production, along with improved equity markets in our wealth division, which will push incentives higher. Full year return on assets will exceed 1.25%. Finally, for each additional 25 basis point cut in rates, we'd expect net interest margin to improve roughly 3 to 5 basis points. In summary, our Q1 performance demonstrates that the earnings power of the franchise is taking flight, and we believe Alerus is well-positioned for 2026 and beyond to reach new heights. With that, I'll now open it up for Q&A.

Speaker #3: Total net revenue growth in the mid-single digits with non-interest expense growth in the low single digits will continue to support positive operating leverage. We do expect second quarter to a seasonal uptick in mortgage and banking production, along with proved equity markets on our wealth division, which will push incentives higher.

Speaker #3: Full year expect full year return on assets will exceed 1.25%. Finally, for additional for each additional 25 basis point cut in rates, we would expect net interest margins to improve roughly 3 to 5 basis points.

Speaker #3: In summary, our first quarter performance demonstrates that the earnings power of the franchise is taking flight, and we believe Alerus's wealth position for 2026 and beyond is poised to reach new heights.

Speaker #3: With that, I'll now open it up for Q&A.

Speaker #1: Thank you. Keep in mind, if you would like to ask a question, please press star 11 on your telephone. You will then hear that automated message advising your hand is raised.

Operator: Thank you. Keep in mind, if you would like to ask a question, please press star one one on your telephone. You will then hear that automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. The first question will be coming from the line of Brendan Nosal of Hovde Group. Your line is open.

Speaker #1: We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster.

Speaker #1: The first question will be coming from the line of Brandon. Nozzle. Hardee Group, your line is open.

Brendan Nosal: Hey, good morning, everybody.

Speaker #2: 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 planned participants and AUA this quarter and help us understand why it's revenue neutral, as you pointed out in the release?

Al Villalon: Good morning.

Brendan Nosal: Hope you're doing well. Hi. 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?

Speaker #3: Yeah. Brandon is forced Wilson. Thanks for the question. I can take since I got here, we've been putting an emphasis on a much more disciplined and aggressive approach to our growth strategy, really scrutinizing kind of the mix of business that we take on more closely than ever and specifically looking at profitability, operational leverage, and complexity.

Forrest Wilson: Brendan, this is Forrest Wilson. Thanks for the question. I can say since I got here, we've been putting an emphasis on a much more disciplined and aggressive approach to our growth strategy, really scrutinizing, kind of, 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.

Speaker #3: In this past quarter, we were able to exit a large, low-margin client—it was a legacy relationship that had significant assets but generated limited revenue relative to the size and added kind of disproportionate operational complexity, for sure, for our division.

Speaker #3: Coincidentally, additionally.

Al Villalon: Hey, Forrest.

Speaker #4: Hey, Forrest.

Forrest Wilson: Yeah.

Speaker #3: Yep.

Al Villalon: Forrest, this is Al. We're getting some feedback here. Can you start over because you're sounding a little muffled?

Speaker #4: Forrest, this is Al. Can you we're getting some feedback here. Can you start over because you're sounding a little muffled?

Speaker #3: Yeah, sorry about that. Is that okay?

Forrest Wilson: Yeah, sorry about that. Is that okay?

Al Villalon: Still muffled.

Speaker #4: Still muffled.

Katie Lorenson: That's okay. I can take it, Forrest.

Speaker #5: That's okay, Forrest, I can take it. Thank you for the question. In regards to the drop in assets and 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.

Forrest Wilson: All right.

Katie Lorenson: 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.

Speaker #3: Yeah, in fact, that might be feeling better. Sorry. All right.

Forrest Wilson: Yeah. In fact, my mic is doing better. Sorry.

Al Villalon: That's better.

Forrest Wilson: All right. Sorry about that. Thanks, Katie.

Speaker #2: Sorry about that. Thanks, Katie.

Katie Lorenson: Yeah, no problem.

Speaker #5: Yeah. No problem.

Speaker #2: 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 a much higher, more simplified business, which is in line with our strategy.

Forrest Wilson: Yeah, I mean, as Katie mentioned, 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. All in all, it was absolutely just an episodic event of this quarter, but does reflect, you know, a deliberate focus on us trying to achieve higher quality, more profitable business. It happened in the same quarter and is largely a revenue neutral event between the two.

Speaker #2: So, all in all, it was absolutely just an episodic event of this quarter. But it does reflect a deliberate focus on us trying to achieve higher quality, more profitable business.

Speaker #2: But it happened in the same quarter and is largely a revenue-neutral event between the two.

Speaker #4: Okay. All right. That's helpful color there. I appreciate it. Maybe moving on to loan growth and demand. Can you just 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?

Brendan Nosal: Okay. All right. That's, that's helpful color there. I appreciate it. Maybe moving on to loan growth and demand, can you just 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?

Speaker #2: Yeah. This is Jim. Jim Collins. We're staying the course, right? We started off with 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 don't that we're pushing out now.

Al Villalon: Yeah. This is Jim Collins. We're staying the course, right? We 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. Our C&I pipelines are fairly robust in all markets except for our ag. Our ag is relatively flat, which is fine with us.

Jim Collins: Yeah. This is Jim Collins. We're staying the course, right? We 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. Our C&I pipelines are fairly robust in all markets except for our ag. Our ag is relatively flat, which is fine with us.

Speaker #2: But our CNI pipelines are fairly robust in all markets. Except for our ag—our ag is relatively flat, which is fine with us. We still plan to hit single-digit growth for the year, but we are still pushing out some credits for in 2026.

Jim Collins: We will still plan to hit single-digit growth for the year. We are still pushing out some credits for in 2026 in the investor CRE buckets.

Speaker #2: And the investor CRE buckets.

Speaker #4: Okay. Okay. That's helpful. I'm going to speak one more in there. Just on the margin, Al, I think you said the exit margin in the month of March was 365 versus the quarter's reported 377.

Brendan Nosal: Okay. Okay, that's helpful. I'm gonna sneak one more in there, just on the margin. 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?

Speaker #4: Just help us understand kind of the evolution from the full quarter's reported number to that exit margin. What were the puts and takes there?

Speaker #2: Yeah. I mean, a lot of it had to be loaner deposit mix. So we did see really good mixed shift there, especially on the deposit side because we had good inflows there.

Al Villalon: Yeah. I mean, a lot of it had to be lower deposit mix. We did see really good mix shift there, especially on the deposit side because we had good inflows there. We do expect lower purchase accounting accretion on a go-forward basis. Hence why I want to get the exit rate there. We're only anticipating 20 basis points of purchase accounting accretion in Q2, and it's probably gonna step down from there because as we continue to see accelerated payoffs that's borrowing from the future into today. Those are kind of the main puts and takes. Our cost of funds did decline nicely too from the Fed cuts in Q4 of last year. That was one of the big drivers along with the BSR.

Speaker #2: We do expect lower purchase account increasing on a go-forward basis. Hence why I want to give the exit rate there. So we're only anticipating 20 basis points of purchase account increasing in the second quarter, and it's probably going to step down from there.

Speaker #2: Because as we continue to see accelerated payoffs that's borrowing from the future into today. So those are kind of the main puts and takes.

Speaker #2: 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.

Speaker #4: Okay. Thanks, Al. Appreciate you taking my questions.

Brendan Nosal: Okay. Thanks, Al. Appreciate you taking my questions.

Speaker #2: Thank you.

Al Villalon: Thank you.

Speaker #1: Thank you. One moment for the next question. And the next question is coming from the line of Jeff Ruis of DA Davis in your line is open.

Operator: Thank you. One moment for the next question. The next question is coming from the line of Jeff Rulis of D.A. Davidson. Your line is open.

Speaker #2: Thanks. Good morning. Just circling back on that margin, Al. Just to be clear, the 355 to 365, are you excluding accretion?

Jeff Rulis: Thanks. Good morning. Just circling back on that margin, Al.

Al Villalon: Yeah.

Jeff Rulis: Just to be clear, the 355 to 365, Are you excluding accretion?

Speaker #4: No, that's total reported numbers. That's for the full year.

Al Villalon: No, that's total reported numbers. That's for the full year.

Jeff Rulis: When you're including your expected accretion in that figure?

Speaker #2: And you're including your expected accretion in that figure?

Speaker #4: Correct. With no accelerated payoffs, the remainder of the year—so we do expect purchase accounting accretion to decrease as each quarter progresses.

Al Villalon: Correct. With no accelerated payoffs the remainder of the year, we do expect purchasing accounting accretion to decrease as each quarter progresses.

Speaker #2: Okay. And the I think you mentioned some adjustments in the March quarter, but that would imply flat to down. Is that maybe just it sounds like kind of margin compression from going forward.

Jeff Rulis: Okay. You know, I think you mentioned to some adjustments in Q1, but that would imply flat to down. Is that maybe it sounds like kind of margin compression, you know, going forward. What's the, I guess, the cautiousness on that part? Is it just easing of deposit benefits? Thanks.

Speaker #2: And what's the, I guess, the cautiousness on that part? Is it just easing of deposit benefits? Thanks.

Speaker #4: Yeah, no problem, Jeff. So it is partially easing the deposit benefits. We did see a couple of rate cuts late last year.

Al Villalon: Yeah, no problem, Jeff. It is partially easing deposit benefits. We did see 2 rate cuts up late last year, but also too, in Q2 and Q3, we typically see outflows of deposits, especially from our public funds. That's gonna put a little pressure on our deposit base 'cause 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.

Speaker #4: But also, too, in the second and third quarters, we typically see upflows 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.

Speaker #2: Okay. And Al, in the first quarter, were there any interest recoveries in the margin that impacted the 377? Is that anything in there?

Jeff Rulis: Okay. Al, in Q1, were there any interest recoveries in the margin that impacted the 377? Is that anything in there?

Al Villalon: No. No, we're none.

Speaker #4: No. There were none.

Speaker #2: Okay, got it. And then one other question, just to kind of back into the loan growth side. Do you have gross production in the first quarter versus Q4?

Jeff Rulis: Okay. Got it. One other question is just to kind of back into the loan growth side. Maybe do you have production, you know, gross production in Q1 versus Q4? It sounds like, you know, I heard the last commentary about, you know, pushing some credits out, but trying to get a sense for how that product. It sounds pretty good on a core basis. Anything on the production numbers that you can give us quarter over quarter?

Speaker #2: It sounds like I heard the last commentary about pushing some credits out, but trying to get a sense for how that— it sounds pretty good on a core basis.

Speaker #2: So, anything on the production numbers that you can give us quarter over quarter?

Jim Collins: From a, from a C&I standpoint, we had really solid C&I growth. I don't have the numbers in front of me per se, but we're driving mid-market C&I growth fairly well with the full relationships. The C&I, CRE, some of the CRE that we put on the books 2, 3 years ago, that's what we're moving off the books Q1, Q2. That's what you'll see moving off the books. You'll continue to see the percentages of C&I grow, quarter-over-quarter like you did last year. When you saw year-over-year 10% C&I growth, you'll continue to see that through 2026 and 2027, as that has been our core focus the last 3 years.

Speaker #3: 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.

Jim Collins: From a, from a C&I standpoint, we had really solid C&I growth. I don't have the numbers in front of me per se, but we're driving mid-market C&I growth fairly well with the full relationships. The C&I, CRE, some of the CRE that we put on the books two, three years ago, that's what we're moving off the books Q1, Q2. That's what you'll see moving off the books. You'll continue to see the percentages of C&I grow, quarter-over-quarter like you did last year. When you saw year-over-year 10% C&I growth, you'll continue to see that through 2026 and 2027, as that has been our core focus the last three years.

Speaker #3: The CRE, 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.

Speaker #3: 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.

Speaker #3: When you saw year-over-year 10% CNI growth, you'll continue to see that through 2026 and '27 as that has been our core focus the last three years.

Speaker #2: Would you say production and CNI was greater in the first quarter than it was in the fourth quarter?

Jeff Rulis: Would you say production in C&I was greater in Q1 than it was in Q4?

Jim Collins: No, I think it was a little bit lower than it was in Q4. I think the pipelines building Q2 and Q3 look very healthy.

Speaker #3: No, I think it was a little bit lower than it was in the fourth quarter. But I think the pipelines building in the second and third quarter looked very healthy.

Jim Collins: No, I think it was a little bit lower than it was in Q4. I think the pipelines building Q2 and Q3 look very healthy.

Speaker #2: Okay. Appreciate it. Thank you.

Jeff Rulis: Okay. Appreciate it. Thank you.

Speaker #1: Thank you. One moment for the next question. And the next question will be coming from the line of Nathan Rees of Piper Sandler. Your line is open.

Operator: Thank you. One moment for the next question. The next question will be coming from the line of Nathan Reiff of Piper Sandler. Your line is open.

Speaker #5: Hi, everyone. Good morning. Thanks for taking the questions. Al, just going back to the margin discussion, if you strip out the accretion that you mentioned in the quarter, that implies quarter loan yields are kind of 5.60% in 1Q.

Nathan Reiff: Hi, everyone. Good morning. Thanks for taking the question.

Al Villalon: Good day.

Nathan Reiff: Al, just going back to the margin discussion. You know, if you strip out the accretion that you mentioned in the quarter, you know, that implies core loan yields are kind of 5.60% in Q1. To get to your margin guide, I think that would imply, you know, 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 you mentioned in terms of new loan production coming down to low to mid-6s.

Speaker #5: 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.

Speaker #5: In response to earlier questions, I'm just trying to kind of jive the trajectory of loan yields, particularly within the context of what you mentioned in terms of new loan production coming on in the low to mid-sixes.

Al Villalon: Yep. Yep. Thanks for that, Nate. I mean, basically, it was just a little conservatism there, especially as we, you know, we still think our core margin will be in the mid-threes, you know. As we continue, you know, as Jim probably could talk about this a little bit more too, but we are seeing competition pick up, especially in the deposit front. You know, 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.

Speaker #2: Yep, yep. Thanks for that, Nate. I mean, basically just a little conservatism there, especially as we still think our core margin will be in the mid-3s.

Speaker #2: But as we continue as Jim probably could talk about this a little bit more too, but we are seeing competition pick up, especially in the deposit front.

Speaker #2: So, the benefit of those deposit cost of fund decreases is probably behind us right now, unless we see another Fed cut in the future.

Speaker #2: Because we are seeing more pressure on deposit costs in our footprint.

Karin Taylor: In our footprint.

Al Villalon: In our footprint.

Speaker #5: Yeah, I would say in all markets, obviously, all banks are focused on deposits, just as we are. It's getting extremely competitive. It's been competitive the whole time.

Jim Collins: Yeah, I would say in all markets. Obviously, all banks 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, that continues to tighten.

Speaker #5: Everybody's sharpening their pencils, so that continues to tighten.

Speaker #3: Okay, that's really helpful. Thanks. Maybe a question for Katie, just in terms of maybe some updated thoughts on excess capital management. You guys are building capital at a pretty strong clip.

Nathan Reiff: Okay. That's really helpful. Thanks. Maybe a question for Katie, just in terms of maybe some updated thoughts on excess capital management. You know, you guys are building capital at pretty strong clips, that, you know, even with, you know, some balance sheet growth returning, I think you're still gonna be accreting capital quite nicely going forward. Just curious how you're thinking about maybe executing on buybacks as a more continuous capital management tool. Particularly, just I imagine you're, you know, the valuation probably isn't quite where it needs to be or should be, considering where you trade on a price-to-tangible basis.

Speaker #3: Even with some balance sheet growth returning, I think you're still going to be accruing capital. Quite nicely going forward. So just curious how you're thinking about maybe executing on buybacks as a more continuous capital management tool particularly just I imagine you're the valuation probably isn't quite where it needs to be or should be considering where you trade on price tangible basis.

Katie Lorenson: Yes, great question. Thank you. From a priority standpoint, pretty consistent with what we've discussed in the previous quarters. Invest first and foremost in organic growth. Returning capital opportunistically, especially as you mentioned, when valuation's warranted, continues to be a priority. We were active this quarter. We intend to remain active in our buyback going forward.

Speaker #6: Yes. Great question. Thank you. So, from a priority standpoint, pretty consistent with what we've discussed in the previous quarters, invest first and foremost in organic growth.

Speaker #6: 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.

Speaker #3: Okay. Really helpful. If I could just sneak one more in on the wealth management front, would just be curious to get an update in terms of kind of the traction you're seeing from some of the production-related hires that you brought on over the last several quarters and just generally how you're thinking about that revenue line growing this year.

Nathan Reiff: Really helpful. If I could just sneak one more in on the wealth management front. Would just be curious to get an update in terms of kind of the traction you're seeing from some of the production-related hires that you brought on over the last several quarters, and just generally how you're thinking about that revenue line growing this year, assuming we have, you know, some stability in equity market valuations over the balance of this year.

Speaker #3: Assuming we have some stability in equity market valuations over the balance of this year.

Speaker #5: 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.

Jim Collins: Yeah, I would say, you know, we put on some hires end of last year, 2 more the beginning of this year. We're seeing some traction on new revenue from them. We have some additional hires that we're looking to hopefully hire on the balance H2 of this year. We've had solid retention of all clients as we put on that platform, if you recall last year. You know, Q1 was predominantly just issues with the markets. 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.

Jim Collins: Yeah, I would say, you know, we put on some hires end of last year, two more the beginning of this year. We're seeing some traction on new revenue from them. We have some additional hires that we're looking to hopefully hire on the balance H2 of this year. We've had solid retention of all clients as we put on that platform, if you recall last year. You know, Q1 was predominantly just issues with the markets. 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.

Speaker #5: And we have some additional hires that we're looking to hopefully bring on during the balance of the year. We've had solid retention of all clients as we put on that platform, if you recall, last year.

Speaker #5: The first quarter was predominantly just issues with the markets. But we should see generally good performance out of additional revenue growth from new clients, as we're putting on new wealth advisors.

Speaker #5: Going forward.

Speaker #3: Okay. That's great color. I really appreciate it. Thanks, everyone.

Nathan Reiff: Okay. That's great color. I really appreciate it. Thanks, everyone.

Katie Lorenson: Thanks.

Speaker #1: Thank you. If you would like to ask a question, please press *11 on your telephone. Our next question will be coming from the line of Damon Del Monte of KBW. Your line is open.

Operator: Thank you. If you would like to ask a question, please press star one one on your telephone. Our next question will be coming from the line of Damon DelMonte of KBW. Your line is open.

Damon DelMonte: Hey, everybody. Hope you're all doing well today. Thanks for taking my questions here. First one, kind of to circle back on the loan growth. It sounds like you still have some targeted CRE loans to kind of work off the balance sheet. As you think about like the quarterly cadence going forward, should we expect kind of like flattish balances here in Q2 and then a nice jump in Q3 and Q4 to kind of get you to that full-year target?

Speaker #7: Hey, everybody. Hope you're all doing well today, and thanks for taking my questions here. So, first one, just to circle back on the loan growth.

Speaker #7: So it sounds like you 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 flat-ish 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?

Jim Collins: I would look to that, yes.

Speaker #5: I would look to that, yes.

Jim Collins: I would look to that, yes.

Speaker #7: Okay. Okay. Great. And then, given the slower growth here expected in the second quarter, should we kind of model in a very modest provision, especially given the sizable release of reserves this quarter?

Damon DelMonte: Okay, great. Given the slower growth here expected in Q2, should we, you know, kind of model in a very modest provision, especially given the sizable release of reserves this quarter? Like, seems like you feel like you've right-sized your reserve given the credit profile you have. Should we expect kind of a minimal provision that would just cover whatever charge-offs that you have?

Speaker #7: It seems like you 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?

Speaker #6: 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.

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

Speaker #7: Okay. And 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?

Damon DelMonte: Okay. do you feel like the mid-120s is probably a good, a good run rate for you guys over time, absent any type of-

Katie Lorenson: Yeah-

Damon DelMonte: obviously, macro deterioration?

Speaker #6: Yeah, I mean, 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.

Katie Lorenson: Yeah, I mean, you know, when I look at our pooled reserve, we're north of 1. You know, 1.10 to 1.20, I think is a fair range. Of course, depending on what happens in the economy.

Katie Lorenson: Yeah, I mean, you know, when I look at our pooled reserve, we're north of one. You know, 1.10 to 1.20, I think is a fair range. Of course, depending on what happens in the economy.

Speaker #7: Okay. Okay. Great. And then I guess lastly on expenses, I think Al, did you say 2 to 3 or sorry, low single-digit growth for the full year?

Damon DelMonte: Okay. Okay, great. I guess lastly on expenses, I think, Al, did you say 2 to 3 low single digit growth for the full year off of last year?

Speaker #7: Off of last year?

Al Villalon: Yes.

Speaker #2: Yeah. Yeah. Correct.

Damon DelMonte: Is that correct?

Al Villalon: Yes. Correct.

Damon DelMonte: Okay. All right, great. That's all that I had. Thank you.

Speaker #7: Okay. All right. Great. That's all that I had. Thank you.

Operator: Thank you. We have a follow-up question from the line of Brendan Nosal of Hovde Group. Please go ahead.

Speaker #1: Thank you. And we have a follow-up question from the line, Brandon. Please go ahead.

Brendan Nosal: Thanks.

Speaker #3: Thanks.

Brendan Nosal: Thanks.

Al Villalon: Hi, Brendan.

Speaker #2: Hi, Brandon.

Brendan Nosal: Hi. Just looking at the mortgage banking segment. Like, if I look at originations and sales, like those are both seasonally down, you know, quite a bit. The, the revenue was actually up sequentially. I think you mentioned kind of MSR fair value benefits. Can you just size up, you know, how much of a, of a benefit the MSR was this quarter?

Speaker #3: I'm looking at just the mortgage banking segment. If I look at originations and sales, those are both seasonally down quite a bit.

Speaker #3: But the revenue was actually up sequentially. And I think you mentioned kind of MSR, fair value benefits. Can you just size up how much of a benefit the MSR was this quarter?

Al Villalon: Let me get that number for you. The other benefit too was that in our pipelines in Q4, we did have, you know, the rate cuts affecting our pipeline. We actually had some mortgages in there that came in at higher rates, which allowed us to make a gain on sale. I'd say that was the bigger driver for mortgage that quarter. Less impact from the MSR part.

Speaker #2: Let me get that number for you. Delta benefit two was at in our pipelines in the fourth quarter. We did have the rate cuts affecting our pipeline.

Speaker #2: So we actually had some mortgages in there. That came at a higher rate. So it allowed us to make a gain on sales. So I'd say that was the bigger driver for mortgages that quarter.

Speaker #2: Less impact from the MSR part.

Speaker #3: Okay. Okay. And then one final one from me. I think you folks said in the prep remarks that you continue to make progress on that one large amount of accrual loan that is still kind of working through resolution.

Brendan Nosal: Okay. Okay. Then one final one from me. I think you 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 you reserved and kind of where ultimate loss content on that loan might end up?

Speaker #3: Can you offer a little bit more color on kind of where you are on that credit? How you reserved and kind of where ultimate loss content on that loan might end up?

Speaker #6: Sure, Brandon. This is Karen. We do continue to make progress. Currently, we're negotiating a sale on that deal. We are getting more clarity around value as we go through that process.

Karin Taylor: Sure, Brendan, this is Karin. 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. We actually decreased our reserve from about 17% in Q1 to about 8% in Q2.

Speaker #6: And so we actually decreased our reserve from about 17% in Q1 to about 8% in Q2.

Speaker #3: Okay. All right. Thank you for taking the follow-ups. I appreciate it.

Brendan Nosal: Okay. All right. Thank you for taking the follow-up. I appreciate it.

Speaker #2: Yep. And Brandon, just for 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.

Al Villalon: Yep. Brendan, just for to close the loop on the fair value mark, we're just looking at right now $200,000 for fair value on the MSR mark.

Brendan Nosal: Great. Thanks, Al Villalon.

Speaker #3: Great. Thanks, Al.

Speaker #2: Yep. You're welcome.

Al Villalon: Yep, you're welcome.

Speaker #1: Thank you. I will now be turning the call back over to Katie for closing remarks. This does conclude our Q&A session.

Operator: Thank you. I will now be turning the call back over to Katie for closing remarks. This does conclude our Q&A session.

Katie Lorenson: All right. Well, thank you everyone. Appreciate you all joining today. I just want to take this opportunity to thank our team first and foremost. The results that we discussed today and that you heard about today reflect our culture, our talent, and our discipline across Alerus. We have built a stronger organization in a relatively short period of time. Very proud of how our teams continue to execute towards our long-term objectives. Over the past few years, I think the consistency of our fundamentals is evident. This quarter represents another pearl on the string, disciplined execution of our strategy that we've been articulating, continued progress across earnings power, margin funding, capital, and credit quality. I do want to mention that our overall credit quality has improved meaningfully. Trends in asset quality, criticized loans and non-performing assets continues to move in the right direction.

Speaker #6: All right. Well, thank you, everyone. I appreciate you all joining today. I just want to take this opportunity to thank our team, first and foremost.

Speaker #6: The results that we discussed today, and that you heard about today, reflect our culture, our talent, and our discipline across Alerus. And we have built a stronger organization in a relatively short period of time, and are very proud of how our teams continue to execute towards our long-term objectives.

Speaker #6: Over the past few years, I think the consistency of our fundamentals is evident. This quarter represents another pearl on the string. Disciplined execution of our strategy that we've been articulating continued progress across earnings power, margin, funding, capital, and credit quality.

Speaker #6: I do want to mention that our overall credit quality has improved meaningfully, trends in asset quality, criticized loans, and non-performing assets continues to move in the right direction.

Speaker #6: And we do remain confident that the net charge-offs will normalize towards our long-term historical averages, which compare favorably to the industry. From a balance sheet and capital allocation standpoint, we are growing where we want to grow.

Katie Lorenson: We do remain confident that the net charge-offs will normalize towards our long-term historical averages, which compare favorably to the industry. From a balance sheet per and capital allocation standpoint, we are growing where we want to grow with solid momentum in the verticals that we've invested in. We remain focused on consistent execution, and we feel great about the foundation we are continuing to build from the momentum of the company, and we are grateful for all of the collaboration and hard work of our talented team members. Thank you again for your time today and for your continued interest in Alerus.

Speaker #6: With solid momentum in the verticals that we've invested in, we remain focused on consistent execution, and we feel great about the foundation we are continuing to build from.

Speaker #6: The momentum of the company, and we are grateful for all of the collaboration and hard work of our talented team members. Thank you again for your time today and for your continued interest in Alerus.

Operator: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now all disconnect.

Q1 2026 Alerus Financial Corp Earnings Call

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