Alerus Financial 2026 Q2 Earnings Call

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 purposefully 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 non-performing loan and significantly improved credit quality metrics. Criticized loans have decreased over 60% from a year ago, with non-performing loans now less than 20 basis points. In addition, we maintained robust reserves at 1.2%, strong capital levels with TCE exceeding 9%, and continued 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 non-interest income again representing more than 40% of total revenue. Our commercial banking, wealth advisory, and retirement and benefits services businesses continued 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 Schroeder as our permanent Chief Credit Officer. We expanded our commercial banking leadership and production talent in Arizona. We added new wealth management advisors 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-the-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 concentrations, 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, expose 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. With that, I'll turn the call over to Al to review the quarter in more detail.

Thanks, Katie. Let's start on page nine of our investor deck, which is posted on the investor relations section of our website. Before I begin, I want to emphasize three 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 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. We believe the quarter demonstrates the strength of the franchise. While earnings remain strong, the most important financial takeaway was balance sheet quality. Reduced non-performing 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 40-year history of returning capital to 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 non-performing 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 31st, 2026. The decrease was primarily driven by seasonal outflows of public depositor funds. Despite the seasonal outflows, our loan-to-deposit ratio is 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 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 account accretion and the resolution of a non-performing loan. Overall, we continue to feel good about the positioning of the balance sheet and our margin outlook.

Turning to page 19, adjusted non-interest 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 Alerus's model by generating stable, recurring fee income and attracting low-cost relationship deposits and diversifying earnings. That diversification continues to lower dependence on spread income and remains a meaningful differentiator for our company. On page 20, banking services non-interest 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 benefits 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.