What Alerus Financial (ALRS) Said on Its Q3 Earnings Call

Key Points

• Record performance: Alerus Financial reported quarterly revenue of $81 million, up year over year, with diluted EPS increasing nearly 17%. Net interest income rose 8.3%, while non-interest income grew nearly 17% and represented 42% of total revenue.
• Commercial growth drove expansion: Loans increased 3.7% sequentially, led by commercial and industrial lending, while deposits rose 2.7% through relationship-based commercial deposits. Management maintained its full-year outlook for mid-single-digit loan growth.
• Credit quality and shareholder returns improved: Nonperforming loans fell to 0.17% of total loans and criticized loans declined substantially year over year. Alerus repurchased 250,000 shares during the quarter and returned $37.2 million to shareholders through the first nine months.

Alerus Financial NASDAQ: ALRS reported record quarterly revenue and higher year-over-year earnings, supported by commercial lending growth, relationship deposits and expansion in its wealth and retirement businesses.

Total revenue reached $81 million during the quarter, the highest level in the company’s nearly 150-year history, President and CEO Katie O’Neill Lorenson said. Diluted earnings per share rose nearly 17% from a year earlier, while return on average tangible common equity was 17% and return on average assets was 1.45%.

“Our purposefully built diversified model continues to deliver strong results,” Lorenson said, pointing to growth in both net interest income and fee-based businesses. Net interest income increased more than 8% from the prior-year quarter, while non-interest income rose nearly 17% and represented 42% of total revenue.

Commercial lending and deposits drive growth

Chief Financial Officer Al Villalon said the quarter was defined by strong loan growth funded through relationship deposits, stable-to-improving underlying margin trends, and continued credit improvement.

Loans increased 3.7% from June 30, led by commercial lending. Commercial and business loans were up nearly 37% from a year earlier and represented more than one-third of the loan portfolio, according to Lorenson. Commercial and industrial loan balances increased by about $100 million during the quarter, while owner-occupied commercial real estate loans rose about $70 million.

Jim Collins, chief banking and revenue officer, said Alerus added commercial relationships across its markets, including lending relationships with a regional hospital, a construction firm, and a logistics and refrigeration company. He said those customers also brought operating and treasury-management deposits to the bank.

Total deposits increased 2.7% from June 30, primarily due to commercial deposit growth. Noninterest-bearing deposits grew 7.1% and accounted for nearly 19% of deposits at quarter-end. The loan-to-deposit ratio was 97.2%.

Alerus ended the quarter without brokered deposits. Deposits connected to its retirement and wealth businesses represented 22.1% of total deposits, while health savings account deposits increased 9% from the beginning of the year and carried an average cost of about 10 basis points.

Management said commercial loan pipelines remained strong entering the fourth quarter. The company maintained its outlook for mid-single-digit loan growth for the full year, after loans had grown 3.4% from year-end through September.

Margin, fee income and expenses

Net interest income totaled $46.7 million, down 2.1% from the second quarter but up 8.3% from a year earlier. Reported net interest margin was 3.84%, down 13 basis points sequentially and up 34 basis points year over year.

Villalon said the sequential decline reflected a $1.6 million one-time interest recovery recorded in the second quarter and lower purchase accounting accretion. Excluding those items, core margin improved by about 3 basis points to 3.55%, as higher loan and investment yields outweighed a modest increase in deposit costs.

The company expects approximately $1.8 million of base contractual purchase accounting accretion in the fourth quarter. Villalon said Alerus expects about $13 million of purchase accounting accretion for 2026 and about $9 million in 2027.

Adjusted non-interest income rose 1.6% from the prior quarter and 11.3% from a year earlier to $32.8 million. Retirement and benefit services revenue increased 7.1% year over year, while wealth advisory revenue increased 22%.

Retirement and benefit services had $44.9 billion in assets under administration and management. Wealth advisory services had $5.2 billion in assets under administration and management and generated $8 million in quarterly revenue. Wealth advisory pre-tax income increased to $1.8 million from $1.3 million in the second quarter.

Alerus also implemented updated wealth fee schedules during the quarter, which Lorenson said better aligned pricing with services provided while resulting in minimal client attrition.

Mortgage revenue increased 4.2% sequentially to $3.3 million as originations rose to $127 million. However, executives said they expect typical seasonal slowing in the fourth quarter, with higher mortgage rates contributing to lighter pipelines.

Adjusted non-interest expense increased 2% sequentially to $53.7 million, driven primarily by higher self-funded group insurance costs and seasonal advertising. The company said it continues to invest in talent and technology while seeking operating leverage.

Credit quality improves as capital returns continue

Credit metrics improved during the quarter. Alerus recorded net recoveries of $1 million, or 10 basis points of average loans, primarily tied to a recovery on a commercial and industrial relationship previously charged off in the second quarter.

Nonperforming loans were 0.17% of total loans, while criticized loans declined to 1.96% of total loans from 4.66% a year earlier. Nonperforming assets fell to 30 basis points of total assets, compared with 1.13% a year earlier.

The company recorded a $2.2 million provision for credit losses, reflecting loan growth and updates to qualitative factors in its reserve methodology. Its allowance for credit losses increased to 1.23% of loans and covered nonperforming loans by more than seven times.

Chief Operating Officer Karin Taylor said management expects lower charge-offs in the near term than in prior quarters, although the company is working through a small number of long-term credits approaching maturity that could require specific reserves.

Alerus reported a common equity Tier 1 ratio of 10.5%. During the quarter, it repurchased 250,000 shares for $8.2 million at an average price of $32.75. Through the first nine months, the company returned $37.2 million to shareholders through dividends and repurchases.

Management reaffirmed full-year guidance for low-single-digit deposit growth, mid-single-digit adjusted revenue and non-interest income growth, low- to mid-single-digit adjusted expense growth, reported net interest margin of 3.75% to 3.85%, and adjusted return on assets above 1.25%.

About Alerus Financial (NASDAQ:ALRS)

Alerus Financial Corporation is a diversified financial services company and the holding company for Alerus Financial, N.A. Through its banking subsidiary, the company provides consumer and commercial banking services, including checking and savings accounts, residential and commercial lending, treasury management, and digital banking solutions.

The company also offers wealth management, investment advisory, trust, retirement plan administration, and employee benefit services. These offerings are designed to serve individuals, families, businesses, nonprofit organizations, and employers through an integrated banking and financial planning model.

Alerus traces its roots to 1933 and serves clients through offices and operations in portions of the Upper Midwest and other selected U.S.

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