Alerus Financial Corporation Common Stock 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us. Joining me today on the call is Forrest Wilson, our Chief Retirement Services Officer, Al Villalon, our Chief Financial Officer, Jim Collins, our Chief Banking and Revenue Officer, and Karin Taylor, our Chief Operating Officer. We are pleased to be here with you all today to discuss another strong quarter of results. Total revenue for the quarter of $81 million was our highest level in our nearly 150-year history. It drove earnings per share up nearly 17% from a year ago and a return on tangible common equity of 17%. Our business mix and One Alerus operating model continued to support solid returns and continued balance sheet strengthening. These results reflect consistent execution of our strategic priorities and strong collaboration across our organization. Our purposefully built diversified model continues to deliver strong results.

Return on average assets was 1.45%, and net interest income grew over 8% year-over-year. Non-interest income grew nearly 17%, representing 42% of total revenue, a level that continues to set us apart and fuels our continued and future success. Wealth advisory revenue grew 22% from a year ago, and retirement and benefits grew 7%, both providing recurring revenues with minimal capital allocations. In wealth, we are strengthening both our growth capabilities and the scalability of our business. We implemented updated fee schedules during the quarter, better aligning pricing with the services we deliver with minimal client attrition. Looking ahead, our priorities include expanding institutional and high net worth relationships, adding advisors strategically across our markets, and aligning our service model with clients' needs and complexity. Our success with business owner liquidity events and retirement participants continues to demonstrate One Alerus in action.

These efforts deepen client relationships and build a more scalable and sustainable wealth business. In retirement, we are focused on optimization of the operation through modernization of technology, streamlining onboarding, and reducing manual work to improve service and build capacity. We believe the sequencing of our reinvestment is well-timed given the catalyst for consolidation we see over the next several years, positioning us for more organic growth, strategic opportunities, higher profitability, and greater operating leverage. In banking, our fee income grew 11%, led by higher swap fee income and treasury management fees. Our strategic shift towards full relationship commercial and private banking is gaining traction, and this quarter we saw solid broad-based commercial loan and deposit growth. Our teams won new commercial clients across all markets, and commercial and business loans are up nearly 37% from a year ago, and now represent well over a third of the loan portfolio.

Synergistic deposits from our retirement and wealth businesses are 22% of total deposits, and HSA deposits are up 9% from year-end at an average cost of just 10 basis points. This provides a meaningful funding advantage, and the company continues to operate with no brokered deposits. Expense discipline remains central to our strategy, and we are investing selectively in technology and growth with a clear expectation that these investments improve service, expand capacity, and strengthen our productivity. Our focus is converting that progress into sustainable operating leverage while managing ongoing cost pressures. Our balance sheet is also in a stronger position than a year ago. Non-performing loans are 17 basis points of total loans, and non-performing assets have fallen from 1.13% of assets a year ago to 30 basis points.

Criticized loans are down more than 55% from a year ago, and we had net recoveries in the quarter of 10 basis points. Credit quality continues to improve and leading indicators remain strong. A small number of long-term and previously identified credits nearing maturity are being worked through in the ordinary course of credit management. Reserve levels remain solid at 1.23% of loans, and CET1 is 10.5%, well above our regulatory requirements. Our balance sheet and business model strength drives value creation, and tangible book value grew nearly 11% from a year ago. We repurchased stock and paid a dividend, which in total led to returning over $37 million to shareholders through the first nine months. Our capital priorities are unchanged: support organic growth, return capital to our shareholders, and maintain flexibility for strategic opportunities. Of course, none of this success happens without our people.

We have a team that blends deep institutional experience with fresh energy and new ideas, and it's the combined strength of that talent across every role and every tenure that is making Alerus not just bigger but better, and a place where great people want to build great careers. The momentum across our franchise is strong. We remain focused on bringing holistic solutions to our clients, investing in our businesses, and sustaining a culture of high accountability and performance. Alerus remains well-positioned as both an employer and an acquirer of choice. Our diversification, recurring revenue and relationship-driven growth sets us apart with clients, future partners, and investors. Above all, we remain committed to delivering strong, consistent returns and creating long-term value for our shareholders. With that, I'll turn the call over to Al to review the quarter in more detail.

Thanks, Katie. Let's start on page 9 of our investor deck, which is posted on the investor relations section of our website. I want to frame the quarter around three themes: strong loan growth funded by relationship deposits, a stable to improving core margin, and continued excellent credit and shareholder value creation. We reported diluted EPS of $0.76 and adjusted diluted EPS of $0.71. The difference is primarily a $1.6 million net gain on the sale of premises, which we exclude from adjusted results. Compared to the third quarter of last year, reported EPS increased 17%, and adjusted EPS increased 8%. Return on average tangible common equity was 17.35%, and return on average assets was 1.45%. The linked quarter comparison is affected by two items from the second quarter that did not repeat.

A $1.6 million one-time interest income recovery on a non-accrual loan resolution, and higher payoff-related purchase accounting accretion. We also recorded a $2.2 million provision in the third quarter, reflecting strong loan growth in the quarter and updates to qualitative factors. Excluding those items, the underlying earnings engine continued to strengthen. Adjusted pre-provision net revenue was up 17% from a year ago. Tangible book value per share was $18.74, essentially flat from June 30, despite an increase in unrealized losses on securities from higher rates and $8.2 million of share repurchases, and up nearly 11% from a year ago. Through the first nine months, we returned $37.2 million to shareholders through dividends and repurchases. Let's turn to page 16 to talk about earning assets. Total loans increased to $150.5 million, or 3.7% from June 30. Commercial loans increased to $160.9 million, partially offset by $10.4 million decline in consumer loans.

Growth was led by commercial and industrial loans, up about $100 million, and owner-occupied CRE up about $70 million, while multifamily CRE and residential mortgage balances declined modestly. Production was the strongest we have seen this year. New originations and renewals were $375 million, and advances were $70 million. More than offsetting $238 million of payoffs. Importantly, new loans continued to originate at higher rates than our legacy portfolio rate, which supports continued improvement in core loan yields. In the upcoming quarters, we anticipate a little over $300 million of loan turnover per quarter. The investment portfolio increased $6.2 million, or 0.8%, as paydowns and maturities were reinvested. We continue to reinvest portfolio cash flows at yields above the existing portfolio yield, providing support to the margin. Overall, the balance sheet remains neutrally positioned to interest rate changes over a 12-month horizon. Turning to deposits on page 17.

Total deposits increased to $111.3 million, or 2.7% from June 30, primarily driven by growth in commercial deposits. Commercial loan growth brought operating and treasury management deposits with it. Non-interest-bearing deposits grew to $53.9 million or 7.1%, and represented nearly 19% of total deposits at quarter end. Money market and saving balances also grew to $51 million. This is exactly the growth our strategy is built around. Full commercial relationships, where the clients we add on the loan side also bring operating and treasury management deposits. Our loan-to-deposit ratio was 97.2%, and we continue to have ample liquidity to fund growth since we have no brokered deposits on our balance sheet at the end of the third quarter. Synergistic deposits from our retirement business and wealth businesses represented 22.1% of total deposits.

HSA deposits have increased 9% since the beginning of the year and carry an average cost of about 10 basis points, remaining one of the most attractive and durable funding sources in our franchise. HSA, along with non-interest-bearing deposits, now represent over 24% of total deposits. Turning to page 18, net interest income was $46.7 million, down $1 million or 2.1% from the second quarter, but up 8.3% from the third quarter of last year. Reported net interest margin was 3.84%, down 13 basis points from the second quarter and up 34 basis points from a year ago. The linked-quarter decline was driven by the $1.6 million one-time interest recovery in the second quarter, which contributed approximately 13 basis points to the second quarter margin, and modestly lower purchase accounting accretion in the third quarter.

Excluding those items, our core margin improved by approximately 3 basis points to 3.55%, as higher loan and investment yields more than offset a modest 2 basis point increase in deposit costs. Purchase accounting accretion contributed 28 basis points to margin in the third quarter versus 31 basis points in the second quarter. Total cost of funds was 2.05%, and the cost of total deposits was 1.84%. In the fourth quarter, we expect approximately $1.8 million of base contractual purchase accounting accretion with approximately $33 million of accretion remaining from our purchase of Home Federal. Turning to page 19, adjusted non-interest income was $32.8 million, up 1.6% from the second quarter and up 11.3% from the third quarter of last year. Adjusted non-interest income continues to represent over 40% of adjusted revenue, roughly over double the industry average.