Alerus Financial Q2 2025 Earnings Report

Alerus Financial EPS Results

• Actual EPS: $0.72
• Consensus EPS: $0.56
• Beat/Miss: Beat by +$0.16
• One Year Ago EPS: N/A

Alerus Financial Revenue Results

• Actual Revenue: $74.80 million
• Expected Revenue: $69.96 million
• Beat/Miss: Beat by +$4.83 million
• YoY Revenue Growth: N/A

Alerus Financial Announcement Details

• Quarter: Q2 2025
• Date: 7/28/2025
• Time: Before Market Opens
• Conference Call Date: Monday, July 28, 2025
• Conference Call Time: 11:00AM ET

Alerus Financial (NASDAQ:ALRS) Corporation operates as the bank holding company for Alerus Financial, National Association that engages in the provision of various financial services to businesses and consumers. The company operates in four segments: Banking, Mortgage, Retirement and Benefit Services, and Wealth Management. It offers various deposit products, including demand deposits, interest-bearing transaction accounts, money market accounts, time and savings deposits, checking accounts, and certificates of deposit; and treasury management products, including electronic receivables management, remote deposit capture, cash vault services, merchant services, and other cash management services. The company also provides commercial loans, business term loans, lines of credit, and commercial real estate loans, as well as construction and land development loans; consumer lending products, including residential first mortgage loans; installment loans and lines of credit; and second mortgage loans. In addition, it offers retirement plan administration and investment advisory services, employee stock ownership plan, fiduciary services, payroll, health savings accounts, and other benefit services, as well as individual retirement accounts; and financial planning, investment management, personal and corporate trust, estate administration, and custody services. Further, the company provides debit and credit cards, online banking, mobile banking/wallet, payment, private banking, payroll accounts, flex spending accounts, administration, and government health insurance program services. It offers banking services in North Dakota, Minnesota, and Arizona; and retirement and benefit plans through offices located in Michigan, Minnesota, and Colorado. The company was formerly known as First National Bank North Dakota and changed its name to Alerus Financial Corporation in 2000. Alerus Financial Corporation was founded in 1879 and is headquartered in Grand Forks, North Dakota.

Alerus Financial Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Reported adjusted EPS of $0.72 and an adjusted ROA of 1.41%, driven by a diversified model with fee income exceeding 42% of revenues.
• Positive Sentiment: Strategic sale of $60 million in non-owner occupied CRE hospitality loans generated a $2 million gain, enabled reversal of related reserves, and resulted in no provision this quarter.
• Positive Sentiment: Wealth management platform upgrade completed, positioning the firm to double advisers and grow AUM alongside banking assets, while retirement services saw AUA rise 6.3% and remains a capital-light, stable fee generator.
• Positive Sentiment: Efficiency improvements drove the adjusted efficiency ratio down to 52.4% from 66.9%, as expense discipline was balanced with targeted investments in talent and technology.
• Neutral Sentiment: Full-year guidance remains: mid-single-digit loan growth, low-single-digit deposit growth, net interest margin of 3.25–3.35%, and fee income up low single digits (including mortgage seasonality effects).

Presentation

[Operator]

Good morning, and welcome to the Alaris Financial Corporation earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

[Operator]

This call may include forward looking statements, and the company's actual results may differ materially from those indicated in any forward looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward looking statements are listed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Aleris Financial Corporation's President and CEO, Katie Please go ahead.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Thank you. Good morning, and thank you for joining us today.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

I'm Katie Ornson, president and CEO, and I'm pleased to be here with our chief financial officer, Al Villavan our chief operating officer, Karin Taylor our chief banking and revenue officer, Jim Collins and our chief retirement services officer, Boris Wilson. Each of these leaders continues to play a crucial role in driving our company's progress to transformational growth and top tier performance. This quarter marks a significant step forward in our journey to deliver long term sustainable top tier performance as we reported an adjusted earnings per diluted share of $0.72 which represents an adjusted return on assets of 1.41%. Our results reflect our efforts to build on the strength of our uniquely diversified business model combining traditional commercial and private banking with the highly valuable and capital light fee based businesses in wealth management and retirement benefits. This business model not only differentiates us in the growing communities and client base we serve, it also provides resilience across economic cycles and the ability to outperform traditional banks.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

We're seeing encouraging momentum across our core businesses. The transformation in our commercial wealth bank is nearing completion with our focus turned towards maximizing the capacity in our organization and infrastructure to further enhance profitability. While we continue to see the benefit of purchase accounting, we are replacing this with disciplined pricing on renewals of the core client base. During the quarter, deposit outflows were as expected from public funds and tax payments, while client retention in legacy Aleris and the recently acquired Home Federal portfolio remained at high levels. We see robust opportunities in our lending pipeline, but we'll continue to be highly selective with our team focused on deposit rich opportunities and prioritizing full C and I relationships.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

We also took proactive steps to optimize our balance sheet, including the strategic sales 60,000,000 in non owner occupied CRE hospitality loans, which resulted in a net $2,000,000 gain during the quarter. As a result of the sale, we were able to reverse related reserves on the portfolio, which allowed us to record no provision for the quarter. Reserve levels remain robust at 1.47% of loans, and notably, net charge offs were limited to seven basis points when excluding the accounting entries of the hospitality loan sale. Industry leading fee income of more than 42% will be the ultimate differentiator of our valuation. The cornerstone of our top tier fee income levels is our retirement and benefits business.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Our talented team continues to execute on several key strategic initiatives to grow our business, secure meaningful partnerships, and make impactful operational improvements. We remain bullish on this business given the tailwinds of Securic two point zero in addition to growing opportunities for M and A. The value of the retirement business is multifaceted due to the stability and durability it brings to our company's earnings with minimal capital allocation and balance sheet risk in addition to the tangible synergies we leverage in deposits and the capture of wealth business. Similarly, our wealth business has strong momentum, and we're investing in talent and technology to deepen client relationships and expand our reach. As an enhancement for the business, we upgraded our wealth management platform, which will allow us to continue to progress in our long term goal of doubling the number of wealth advisers and growing our assets under management at the same pace as our banking assets.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

A shout out to all of our team members and wealth advisers who made this conversion seamless for our clients. Results of our team's focus on expense management are evident with another quarter of improvements in our efficiency ratio. We continue to balance our investments in talent and technology with long term and sustainable improvements while optimizing everywhere. In short, we're making significant progress. This quarter's results were excellent, and I wanna thank our team members for their continued efforts to return awareness to top tier performance.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

We know this path is not linear and requires an unwavering focus on constant improvement and expense management. Our guidance for the year remains consistent with prior quarter's communication with the ultimate goal of achieving this quarter's level of performance consistently. The foundation is solid, the strategy is clear and the opportunity ahead is compelling. Thank you again for your continued support, and I'll turn it over to Al to walk through the financials in more detail.

[Al Villalon, EVP & CFO at Alerus Financial]

Thanks, Katie. Turning to Page 11 of our investor deck that is posted in the Investor Relations part of our website. On a reported basis, net interest income increased 4.6% over the prior quarter, while fee income increased 15%. The increase in net interest income is primarily driven by remixing of maturing loans being replaced by organic loan growth at higher spreads, while interest expense remained relatively stable. Our fee income remains over 40% of revenues and well above the industry average of 19%.

[Al Villalon, EVP & CFO at Alerus Financial]

Let's dive into the drivers of net interest income in the next slide. Turning to Page 12. In the second quarter, net interest income continues to be a few light at $43,000,000 and our reported net interest margin increased another 10 basis points to 3.51%. Our net interest margin continued to show improvement. Our total cost of funds remained stable at 2.33%.

[Al Villalon, EVP & CFO at Alerus Financial]

We had 45 basis points of purchase accounting accretion in the quarter. Although 45 basis points, nine basis points were from early payoffs. We remain disciplined in pricing as we continue to not price on the burden of the yield curve for loans. In the second quarter, we continue to see strong spreads, which contributed to core net interest margin expansion as average rate on the loan portfolio during the quarter increased eight basis points from the quarter from the end of the first quarter. Let's turn to Page 13 to talk about our earning assets.

[Al Villalon, EVP & CFO at Alerus Financial]

At the end of the second quarter, we were sold or classified as held for sale over $60,000,000 of hospitality loans. Net gain from the sale of all these loans was over $2,000,000 Excluding the loan sale and reclassification, loan growth was approximately 0.5% over the prior quarter with the most growth in C and I and owner occupied CRE. We remain focused on full relationships within middle market and business banking space. For the remainder of 2025, we expect over $271,000,000 of loan contractual maturities, which is almost 7% of total loans. Our investment portfolio declined to $8.00 $7,000,000 or just around 16% of earning assets.

[Al Villalon, EVP & CFO at Alerus Financial]

AOCI includes an unrealized loss of under $60,000,000 For the remainder of 2025, we expect over $45,000,000 or close to 6% of the total portfolio of principal paydowns with a yield of low two in the low 2% range. We will continue to let the balance sheet be made from low yielding investments to higher yielding loans. Turning to Page 14. On a period ending basis, our deposits shrank 3.3 as we saw expected seasonal outflow from public funds and our clients using liquidity to meet tax applications. Since 2010, the median decrease in deposits from 1Q to Q2 has been over 5%.

[Al Villalon, EVP & CFO at Alerus Financial]

We do expect the seasonal volatility continue to increase as our average deposit account size has grown over 20% since the 2019 due to our focused efforts to grow in the commercial space. Lastly, since the close of acquisition of Home Federal, our net retention rate remains close to 97%. Turning to Page 15, I'll now talk about our banking segment, which also includes our mortgage business. I'll focus on the fee income components now since net interest income was previously discussed. Overall, noninterest income from banking was $8,400,000 for the second quarter.

[Al Villalon, EVP & CFO at Alerus Financial]

The quarter concluded a $2,100,000 gain related to the sale of hospitality loans. Mortgage revenues also improved $2,100,000 from the fourth quarter as we saw our seasonal uptick in the business. We also saw very little swap income this quarter, which tends to be lumpy from quarter to quarter. On Page 16, I'll provide some highlights on our retirement business. Total revenue from their business was relatively stable at over $16,000,000 Retirement services continues to be a stable and reliable source of fee income and is not a capital intensive segment.

[Al Villalon, EVP & CFO at Alerus Financial]

Assets under administration and management increased 6.3, mainly due to market performance. We continue to see solid business production with over through the first half of twenty twenty five. Turning to Page seventeen, you can see highlights for our wealth management business. On a linked quarter basis, revenues increased 6.6% while end of quarter assets under management increased 2.5%, mainly due to market performance. During the quarter, we transitioned to a new platform that will deliver a better experience for both clients and financial advisers.

[Al Villalon, EVP & CFO at Alerus Financial]

With a new and highly regarded system, we not only provide the unique value proposition to our clients, but we also are able to differentiate ourselves in our recruiting efforts to add more wealth advisors. Page 18 provides an overview of our noninterest expense. During the quarter, noninterest expense decreased 3.8% due to the seasonal decrease in benefits, less acquisition expenses in the quarter on a reported basis and due to an insurance reimbursement. Our adjusted efficiency ratio was 52.4% versus 66.9% in the prior quarter. Most of the improvement in adjusted for efficiency ratio was driven by both core expense and revenue improvements.

[Al Villalon, EVP & CFO at Alerus Financial]

Turning to Page 19, you can see our credit metrics. During the quarter, adjusted net charge offs were only seven basis points, which excludes the impact of the hospitality loan sale. Nonperforming assets remained stable at 98 basis points compared to the prior quarter. We continue to have close to $7,800,000 in reserves related to the CECL double count and approximately $50,000,000 of fair value marks related to the Home Federal acquisition. I'll discuss our capital liquidity on Page 20.

[Al Villalon, EVP & CFO at Alerus Financial]

We continue to remain well capitalized as our common equity Tier one capital ratio to risk weighted assets is at 10.5%. Our tangible common equity ratio improved 44 basis points to 7.87%. On the bottom right, you'll see a breakdown in sources of $2,700,000,000 in potential liquidity. We did utilize some broker deposits in the quarter to optimize our funding structure. Overall, we continue to remain well positioned from both liquidity and capital standpoint to support future growth.

[Al Villalon, EVP & CFO at Alerus Financial]

Turning to Page twenty nine twenty one, I will now update you on our guidance for 2025. Our guidance for the year remains consistent with prior quarters and has not materially changed. While we continue to make improvement, given the seasonality we experienced in our businesses, improvement is never linear from quarter to quarter. We are still expecting loan growth of mid single digits for 2025, excluding loans moved to held for sale. Deposit growth of low single digits remains the same.

[Al Villalon, EVP & CFO at Alerus Financial]

For the third quarter though, we will see continued seasonal deposit outflows from our public funds. Net interest margin of 3.25% to 3.35%. Within this guidance, we're assuming several things. First, we are expecting less purchase accounting accretion in the back half of the year. We're expecting less in purchase accounting accretion for the remaining quarters due to accelerated payoff already recognized.

[Al Villalon, EVP & CFO at Alerus Financial]

Currently, we're expecting 27 basis points of purchase accounting accretion in the third quarter, which is an 18 basis point reduction compared to the second quarter. For the fourth quarter, we are only expecting 22 basis points of accretion. Both accretion numbers are based on contractual payoff data. Second, we are not expecting any early payout, which has averaged over eight basis points over the past three quarters since the closing of the Home Federal acquisition. Lastly, we're expecting an increase in deposit cost by eight to 10 basis points due to mix shift in deposits and continued competition.

[Al Villalon, EVP & CFO at Alerus Financial]

We expect our noninterest income for the year to be up low single digits now on a reported basis due to the gain on loan sales recognized in the first half. On the mortgage side, we expect mortgage to ease a little in the third quarter and hit a seasonal downturn in the fourth quarter. We expect our adjusted efficiency ratio excluding onetime items to be below 68% for the 2025 as we continue to realize cost saves from Home Federal. In the upcoming third quarter, we expect our core expenses to be about 49,000,000 to $50,000,000 as we recognize investments made in our core business lines in talent and technology. Summarized on Page 22, we continue to build on the momentum we saw in the first quarter.

[Al Villalon, EVP & CFO at Alerus Financial]

Adjusted pre provision net revenue grew 23.2% over the prior quarter. Our current adjusted ROA of 1.41% and adjusted ROTCE of over 21% are definitely an outcortel of the banking industry. We see this as another soft quarter in the line of more to come. With that, I will now open up for Q and A. Thank

[Operator]

you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone. If you are using a speaker phone, please pick up your handset before pressing the keys. To ensure your question, please press star then 2.

[Operator]

At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Arulis with DA Davidson. Your line is open, Jeff.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Thanks. Good morning. Al, I just wanted to circle back on it. I I missed the margin piece there or components. So it sounds like accretion was running a little high.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Could you repeat did you outline third quarter accretion expectations and fourth?

[Al Villalon, EVP & CFO at Alerus Financial]

Yes, I did. So Jeff, for the third quarter, we're expecting 27 basis points of purchase accounting accretion. And for the fourth, we're expecting 22. Neither of those numbers has any early payoff embedded in it.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay.

[Al Villalon, EVP & CFO at Alerus Financial]

And I guess if we kind of unpack on a core basis expectations for on the core side in the second half.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Mhmm.

[Al Villalon, EVP & CFO at Alerus Financial]

Yeah. On the second half, we still expect at the end of the year to have core margin improvement as we continue to see spreads on both loans and deposits to be above our core net interest margin.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Got you. And then the think the noninterest income guide of you said the up low single digit is inclusive of the gain this quarter?

[Al Villalon, EVP & CFO at Alerus Financial]

That is correct, Jeff.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay. Got it.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Thanks. Just, I guess, hopping over to the credit side, I to check back in on the the larger construction credit. I I think we were headed towards occupancy or listing for sale this summer, June, July. So just wanted to check back in to see where the status of that is.

[Karin Taylor, EVP & COO at Alerus Financial]

Sure, Jeff. This is Karen. The final certificate of occupancy was issued, and the property was listed for sale in the second quarter. That's a soft listing. The project continues to lease up.

[Karin Taylor, EVP & COO at Alerus Financial]

It's currently at 57%. And as that progresses, obviously, it will become better positioned for sale. There's just a minor work left on the outside to complete, so it's it's in line with our expectations.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay. Great. And the I guess on the CRE side, it just the the acquired could you recall what remind us what what deal was that? And then are are more the cleanup in that segment contemplated?

[Karin Taylor, EVP & COO at Alerus Financial]

Are you referring to the loan sale or to this particular construction project?

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

The the loan sale, I apologize, in the hospitality side.

[Karin Taylor, EVP & COO at Alerus Financial]

The hospitality loan sale was part of the Home Federal portfolio. You know, we saw an opportunity on that particular portfolio. The underwriting standards were a little bit more liberal than ours, and we had those well marked, and there was a market for those loans. So it's a good opportunity. We'll continue to look for those opportunities to reduce risk in our balance sheet and make sure that our resources are aligned with our strategic objectives.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay. Do you I mean, I guess the question is, do do you think you've ring fenced the areas that where that underwriting was a little more liberal? Have you kind of attacked that piece, or is it a case by case?

[Karin Taylor, EVP & COO at Alerus Financial]

No. We addressed that with our identification of purchase credit deteriorated loans, and, certainly, this particular group of loans was in that category.

[Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay. Great. Thanks. I'll step back.

[Operator]

Thank you. Your next question comes from Brandon Noble with Hofty Group. Please go ahead.

[Brendan Nosal, Director at Hovde Group]

Good morning, everybody. Hope you're doing well. Maybe just starting off on the loan sale piece. For the the piece that closed in this quarter, you recorded a a nice gain on that sale. Just kinda curious.

[Brendan Nosal, Director at Hovde Group]

So the the 50,000,000 you sold in July, any line of sight to a potential gain there?

[Al Villalon, EVP & CFO at Alerus Financial]

No. Actually, it is a very, very minimal loss on that one.

[Brendan Nosal, Director at Hovde Group]

Okay. Got it.

[Brendan Nosal, Director at Hovde Group]

Got it. Maybe moving over to capital then. You folks created a fair bit of capital this quarter. Just with with levels getting up to, you know, higher levels, just kinda curious how you think about deployment for the rest of this year and maybe your thoughts on the m and a landscape.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Sure. Good morning. My my capital priorities remain consistent as we discussed in the prior quarter, growing 24 basis points in q two consistent with with where we had pro form a levels at post Home Federal. We are targeting to get that 8% higher for higher TCE. But priorities are organic balance sheet growth with franchise accretive clients as well as maintaining our dividend history and m and a on the retirement side of the business, which is typically more of a bite sized cash deals.

[Brendan Nosal, Director at Hovde Group]

Okay. Perfect. I'm just gonna sneak one more here on the retirement business. You know, revenues were fairly flat for the quarter, but, Al, you noted nice AUA growth, but it looks like participants were were down a little bit. Maybe just talk about, you know, which of these two AUA versus participants had a bigger impact on on revenues for this business this quarter? Thanks.

[Al Villalon, EVP & CFO at Alerus Financial]

Orest, I'm gonna let you take this one.

[Forrest Wilson, EVP & Chief Retirement Services Officer at Alerus Financial]

Yeah. Yeah. So can you sorry.

[Forrest Wilson, EVP & Chief Retirement Services Officer at Alerus Financial]

Can you repeat that question really quick? It was the participants versus the AAA in terms of revenue.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Right. They never knew they were in the quarter.

[Forrest Wilson, EVP & Chief Retirement Services Officer at Alerus Financial]

Yeah. We had some we had some onetime effects on participants that affected us this quarter. We did some clean out in our HSA business that was that was very impactful to us in in a negative way in terms of participant count. With that said, these were zero balance participants that we weren't making any revenue off of. So I in the future, you can expect participant account, participant numbers to to be going up as they have in the past and and to see that trend continue, but there were some one off events this quarter that that led to that decline.

[Brendan Nosal, Director at Hovde Group]

Okay. Alright. Thank you for taking the questions.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Thanks, Brent. We now have Damon DelMonte with KBW. Please go ahead, Damon.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey. Good morning, everyone. Hope you're all doing well, and thanks for taking my questions. First question on on the loan growth and kind of the outlook that's supporting that. Are you seeing more demand across your footprint in in way of, like, new credits and new new customers coming on board?

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Or is this the growth opportunities more from kinda leveraging your current client base?

[Al Villalon, EVP & CFO at Alerus Financial]

It's leveraging the current client base, and it's it's taking market share. We're still not seeing a really solid robust new generation of loans with clients and prospects necessarily. It's it's still the staff that we brought into in all markets. It's really stealing market share from some of the other banks and increasing with our current client base.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. And is there any areas any segments that are are stronger than others that have better opportunity for the growth?

[Al Villalon, EVP & CFO at Alerus Financial]

No. We're sticking to, you know, full c and I and really focused on that lower mid market. So we're still really focused on manufacturing, wholesaling, and distributing.

[Al Villalon, EVP & CFO at Alerus Financial]

So that's really where we're focused. There's opportunities across the board in a lot of different segments, but with the team that is really zeroing in on that lower mid market, that's where we're gonna find most of our growth.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Okay. Appreciate that.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

And then, Al, with regards to the the full year margin outlook of the 03/25 to March, is that, like, on a reported basis? So including, like, know, the the benefit you guys got from the kind of the accelerated fair value accretion?

[Al Villalon, EVP & CFO at Alerus Financial]

Yes. That is on a reported basis. On a reported basis.

[Al Villalon, EVP & CFO at Alerus Financial]

Okay. Okay. Great. Everything else is asked and answered. Thank you. Thank you.

[Operator]

We now have Nathan Race of Piper Sandler. Your line is open, Nathan.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Hi, everyone. Good morning. Thanks for taking the question. In your prepared remarks, you referenced, you know, some technology upgrades and platform transitions. So just curious, maybe, Katie, if you can kind of speak to, you know, how some of these technology initiatives could increase kind of the capture rate across new clients within the various franchise and just how you see, you know, opportunities to also increase existing client wall wallet share with all these upgrades as well.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Sure. I'll start, and then Jim can add on where I missed. So we we did a full conversion of our wealth management business that that was completed in the second quarter. It went very well. And this platform really improves the client experience as well as the adviser experience and the operational experience.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

And so we believe, you know, besides our differentiated recruiting proposition that we have to advisers, This platform allows them to kind of level us back in terms of their experience in addition to the opportunities that they have within our organization because of the retirement synergies.

[Jim Collins, EVP & Chief Banking and Revenue Officer at Alerus Financial]

Yeah. I would say Katie's right on the new platform on the wealth side. It will allow us to leverage our current staff and then allow us to recruit better and it'll be a better client experience. It'll also allow us better analytics to dive into that synergistic relationship and and see where we can help our clients in the other areas that we have in the layers. The other piece is we have a very solid treasury management group to grow our c and I, and we're putting on a new online retail and con commercial online system, which acts the same way as the wealth platform, better customer experience, better analytics, and the speed to market will be better.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Great. That's helpful. And then just turning to credit, your non performers are still almost 2x that of peers on a relative basis. Can you just look at the percentage of loans?

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

So maybe, Karin, just curious to get some thoughts on kind of the outlook for some larger resolutions, which is opportunities to bring down non performers going forward.

[Karin Taylor, EVP & COO at Alerus Financial]

Yes. The numbers are really being driven by the same two large relationships that we've been talking about the last couple of quarters. And so as I mentioned earlier, the the construction deal is performing as expected in terms of meeting time lines. Realistically, that's probably an early twenty twenty six resolution. The other one is that large large residential relationship, and we have we are pursuing legal action on that.

[Karin Taylor, EVP & COO at Alerus Financial]

And I would expect that would also be a first half twenty twenty six resolution.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Great. And then maybe, Al, appreciate all the commentary around the margin outlook, but can you just maybe update us in terms of the balance sheet sensitivity to a 25 basis point Fed cut? Yep.

[Al Villalon, EVP & CFO at Alerus Financial]

Nate, on a 25 basis point Fed cut, we do expect our NIM to improve about five basis points. As a reminder, though, our guidance does not have any rate cuts embedded in it.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Great. Okay. Great. I appreciate all the color. Thank you.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Thanks, Ben.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Thanks, Ben.

[Operator]

Thank you. We now have David Long with Raymond James. Your line is open.

[David Long, MD - Banking at Raymond James Financial]

Al, just want to confirm on the deposit outlook, deposit cost outlook. Did you say up eight basis points in the third quarter? And then as a follow-up, just wanted to get a better understanding of what your assumptions are tied to that? And then also maybe some color on overall deposit competition.

[Al Villalon, EVP & CFO at Alerus Financial]

David, what we're what I guided to was about eight to 10 basis points of deposit cost increase in the third quarter that'll you know, and then stable from there going forward.

[Al Villalon, EVP & CFO at Alerus Financial]

Jim, do you want to take on the deposit outlook?

[Jim Collins, EVP & Chief Banking and Revenue Officer at Alerus Financial]

Yeah. The deposit competition is tough. Right? We have stepped up with a couple of seasoned commercial deposit bankers.

[Jim Collins, EVP & Chief Banking and Revenue Officer at Alerus Financial]

Obviously, think I talked about earlier, we have a solid treasury management group. So our strategy is still focused on full relationships of mid market c and I and business banking. I think we have the pieces in place, but the competition is tough. And deposits are always hard to forecast, but we're sticking to our strategy.

[Al Villalon, EVP & CFO at Alerus Financial]

Right.

[Al Villalon, EVP & CFO at Alerus Financial]

And just to finish on that data too, I mean, you're thinking about, you know, what you're just saying is competition means up the other we are expecting some mixture from non interest bearing to interest bearing that's going to put that pressure, that's part of the eight to 10 basis point increase that we're guiding to.

[David Long, MD - Banking at Raymond James Financial]

Perfect. Thanks for that additional color.

[Al Villalon, EVP & CFO at Alerus Financial]

Thanks, guys.

[Operator]

We now have a follow-up from Brendan Mazel with Hub Degree. Please go ahead. Brandon, please, could you ensure your line is unmuted locally before speaking?

[Brendan Nosal, Director at Hovde Group]

Apologies. I just wanted to circle back to the fee income outlook because it looks like year to date, you've got quite a bit of momentum. I think, you know, core fees are up, I don't know, 10 or so percent year over year through the first half. Yes. If you could just kinda help me square up the good progress you've made year to date versus that, you relatively stable fee outlook you have for all of this year?

[Al Villalon, EVP & CFO at Alerus Financial]

Right. Part of it too, Brendan, is that, one, we're not, you know, forecasting any market outlook for the remainder of the year. Number two, we are expecting a seasonal downturn in our mortgage business. So the fourth quarter typically is one of our weaker ones for us, and that will put some pressure on the fee income as well. And then we're expecting a little bit of a pullback maybe too in the third quarter in mortgage.

[Brendan Nosal, Director at Hovde Group]

Okay. Okay. That's helpful. Thank you.

[Operator]

Thank you. Do you have another follow-up from the line of Nathan Race with Piper Sandler? Please go ahead when you're ready.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Yeah. Thanks for taking the follow-up. You know, it seems like there's been a good amount of M and A related disruption in The Twin Cities lately. So, you know, just curious maybe what the upside is to hire some additional producers maybe on the commercial or private wealth side Or if, you know, you think some of those share gains are possible just with the existing team's capacity?

[Al Villalon, EVP & CFO at Alerus Financial]

I would say at this point, we have capacity with our existing team, but we are always opportunistic. So there comes a situation where we find the right person that could come into our culture and add add some benefits to us right away, we would look at that. But right now, I would say we're pretty set with the with the team we have.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Great. Well, thank you. Thank

[Operator]

you. I can confirm this does conclude our question and answer session. And I would like to turn the conference back over to Katie Millinson for any closing remarks.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Yes. Thank you.

[Katie Lorenson, President, CEO & Director at Alerus Financial]

Thank you everyone for taking the time to listen and for your investment in Aleris. Thank you to our team members who continue to make Aleris better every day. While macroeconomic uncertainty and competitive pressures remain, we're staying disciplined and focused on getting better and bigger, managing credit risk proactively, maintaining strong capital and reserve levels, and investing in areas that align with our long term strategy. While we acknowledge there's more work to do, we're confident in the path we're on, and we're proud of the incredibly talented team we have in place. Thank you, everyone. Have a great day.

[Operator]

Thank you. This conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.

Participants

Executives

• Katie Lorenson, President, CEO & Director
• Al Villalon, EVP & CFO
• Karin Taylor, EVP & COO
• Forrest Wilson, EVP & Chief Retirement Services Officer
• Jim Collins, EVP & Chief Banking and Revenue Officer

Analysts

• Jeff Rulis, MD & Senior Research Analyst at D.A. Davidson Companies
• Brendan Nosal, Director at Hovde Group
• Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies
• Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)
• David Long, MD - Banking at Raymond James Financial