Alerus Financial Q1 Earnings Call Highlights

Key Points

• Strong Q1 profitability: Alerus reported net income of $23 million (‑$0.89 per diluted share) with ROA of 1.79% and ROTCE roughly 22%, driven by margin expansion — reported NIM rose to 3.77% (core 3.52% excl. purchase accretion) after balance‑sheet repositioning and a higher‑yielding investment portfolio.
• Credit and reserves: Management recorded a $4.9 million reserve release and saw declines in non‑performing assets and criticized loans, but net charge‑offs were 71 bps due to a single $6.4 million C&I charge‑off while a large non‑accrual relationship is being negotiated for sale.
• Capital return and 2026 guidance: Alerus repurchased $6 million of common stock, kept its dividend, and guided to mid‑single‑digit loan and revenue growth, low‑single‑digit deposit growth, and a reported NIM target of about 3.55%–3.65%, with management intending to remain active in buybacks.

Alerus Financial NASDAQ: ALRS reported what management described as a “strong first quarter” to begin 2026, driven by net interest margin expansion, stable fee income and lower expenses, while credit metrics improved and the company returned capital through buybacks and dividends.

Quarterly results highlighted margin expansion and profitability

President and CEO Katie Lorenson said the company generated net income of $23 million, or $0.89 per diluted share. Return on average assets was 1.79%, and return on average tangible common equity was about 22%, which Lorenson attributed to “margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality.”

Chief Financial Officer Al Villalon said the quarter showed the “earnings power of the franchise” after balance sheet repositioning completed late last year. Villalon also reported tangible book value per share rose 3.4% during the quarter to $18.15, while the tangible common equity ratio improved to 8.85%.

Balance sheet repositioning, deposit mix shift lifted net interest margin

Villalon said net interest income was stable at $44.9 million, while reported net interest margin expanded 8 basis points to 3.77%, which he called a new post-IPO high. Purchase accounting accretion contributed about 25 basis points. Excluding accretion, he said core margin was 3.52%, representing a 35 basis point improvement from the fourth quarter core margin.

Management pointed to multiple drivers, including a lower cost of funds and a higher-yielding investment portfolio following fourth-quarter actions. Villalon said the company sold $360 million of available-for-sale securities in 4Q 2025—more than two-thirds of total AFS securities at year-end 2025—and that the restructuring increased the average investment portfolio yield by 139 basis points from 4Q 2025 to 3.84% in 1Q 2026.

On funding, deposits increased 3.7% on a period-end basis and the loan-to-deposit ratio improved to 92.8%. Villalon emphasized mix improvement, noting non-interest-bearing deposits rose 6.2% linked quarter and represented about 19.7% of total deposits, while brokered deposits were just $8 million. He said seasonal public fund inflows contributed to deposit growth, alongside “steady growth from commercial and private banking clients.”

In response to analyst questions about the margin outlook, Villalon said March’s net interest margin exit rate was about 3.65%. He said the reported quarterly margin benefited from deposit mix shift and purchase accounting accretion, but accretion is expected to decline as quarters progress, particularly as accelerated payoffs “borrow from the future into today.” He also noted that public funds typically see outflows in the second and third quarters, which can pressure funding costs as lower-cost deposits are replaced.

Fee income remained a significant share of revenue despite variability

Villalon said non-interest income represented just over 40% of total revenue, underscoring the company’s diversified model. Adjusted fee income declined 3.2% from the prior quarter, primarily due to lower swap fee revenue. Management said it does not include swap revenues in guidance because of variability and client-driven timing.

Within mortgage banking, Villalon said mortgage fee income increased more than 130% from the prior year due to increased originations, improved gain-on-sale margins and a higher valuation of mortgage servicing rights (MSRs). Later in the Q&A, management quantified the MSR fair value benefit at $200,000, while also noting that improved gain-on-sale economics—supported by higher-rate loans in the pipeline following late-2025 rate cuts—was a larger driver of sequential revenue improvement.

In Retirement and Benefits Services, Villalon said total revenue rose to $17.4 million, up 0.8% linked quarter, while assets under administration and management declined 0.9%. Management said the asset decline was expected to have minimal revenue impact because it was offset by onboarding a new partnership during the quarter. Synergistic deposits in the segment increased 2.3% linked quarter, and HSA deposits grew 7.1% to about $218 million, which Villalon said carried an average cost of roughly 10 basis points.

During Q&A, Lorenson and Chief Retirement Services Officer Forrest Wilson said the decline in retirement assets and plan participants stemmed from exiting a large, low-margin legacy relationship that had substantial assets but limited revenue and added operational complexity. They said it was replaced with a new partnership with lower assets and participants but higher profitability, making the change “largely a revenue neutral event.”

In Wealth Advisory, Villalon said revenue was $7.2 million and declined 2.7% linked quarter, primarily due to market-related pressure on asset values, while client retention remained strong. Assets under administration and management decreased 1.2% from the prior quarter, and Villalon said the revenue decline was evenly split between asset-based and transaction-based revenue amid market levels and typical first-quarter seasonality. In Q&A, Jim Collins, chief banking and revenue officer, said the company is seeing traction from wealth hires and expects revenue growth as additional advisors are added, assuming markets stabilize.

Credit trends improved; reserve release recorded amid a single charge-off event

Lorenson said asset quality “improved meaningfully,” with non-performing assets and criticized loans trending lower and progress made resolving previously identified issues. She noted a charge-down of a non-accrual, well-reserved C&I credit tied to a long-standing client relationship that was negatively impacted by changes in government funding, calling it a single event not reflective of broader trends.

Villalon said net charge-offs were 71 basis points, driven primarily by a single $6.4 million charge-off on a previously identified non-accrual C&I relationship, which still had remaining reserves of 78%. He added that non-performing assets declined $15.4 million linked quarter and criticized loans were down 43% year over year.

The company recorded a $4.9 million reserve release, which Villalon said was primarily driven by lower loan balances and an improved mix, while maintaining an allowance for credit losses of 1.25% of total loans. Lorenson said future provision levels would be driven by loan growth and macroeconomic factors, and she cited a pooled reserve range of roughly 1.10% to 1.20% as a “fair range,” depending on the economy.

On a large remaining non-accrual relationship that management previously flagged as representing about 65% of total non-accrual loans, COO Karin Taylor said Alerus is negotiating a sale and gaining clarity on value. She said the reserve on that credit was reduced “from about 17% in Q1 to about 8% in Q2.”

Capital return and 2026 guidance

Alerus repurchased $6 million of common stock during the quarter at an average price of $23.90, Villalon said, while also continuing its quarterly dividend. Lorenson said the company’s capital priorities remain consistent: invest first in organic growth and return capital opportunistically, adding that the company “intend[s] to remain active in our buyback going forward.”

Villalon updated 2026 guidance, stating expectations for:

• 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
• Net interest margin of approximately 3.55% to 3.65% for 2026 (reported, including expected accretion)
• Adjusted non-interest income growth in the mid-single digits, driven by wealth and retirement businesses (swap fees excluded)
• Total net revenue growth in the mid-single digits and non-interest expense growth in the low single digits, supporting positive operating leverage
• Full-year return on assets exceeding 1.25%

Management also said that for each additional 25 basis point cut in rates, it would expect net interest margin to improve roughly three to five basis points. Addressing loan growth cadence, Collins indicated the company expects to continue moving certain investor CRE exposures off the balance sheet, and told an analyst to expect a “flattish” second quarter with a stronger pickup in the third and fourth quarters to reach the full-year target.

In closing remarks, Lorenson said the quarter reflected “disciplined execution” and reiterated confidence that net charge-offs will normalize toward long-term historical averages, adding that the company feels positive about its momentum and the foundation being built across earnings, funding, capital and credit quality.

About Alerus Financial NASDAQ: ALRS

Alerus Financial Corporation NASDAQ: ALRS is a diversified financial services company headquartered in Grand Forks, North Dakota. The firm provides a full range of commercial and consumer banking products, including deposit accounts, lending solutions and treasury management services for individuals, small businesses and larger corporate clients. Through its community banking network, Alerus emphasizes local decision-making and personalized service to meet the needs of its varied client base.

In addition to traditional banking offerings, Alerus operates a national mortgage origination and servicing platform that delivers home purchase and refinance loans.

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