Alerus Financial (NASDAQ:ALRS) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Alerus Financial Corporation reported record total revenue of $81 million, with a 17% year-over-year increase in earnings per share and a return on tangible common equity of 17%.
The company experienced strong growth in noninterest income, which grew nearly 17% and represented 42% of total revenues, with wealth advisory revenue up 22% and retirement and benefits revenue up 7%.
Strategic priorities include expanding institutional and high net worth relationships, optimizing retirement operations through technology, and emphasizing full relationship commercial and private banking.
Commercial and business loans grew nearly 37% year-over-year, and the company’s balance sheet improved with nonperforming loans at 17 basis points and criticized loans down over 55% from the previous year.
Alerus continues to invest in talent and technology, maintaining expense discipline, and returned over $37 million to shareholders through dividends and stock repurchases.
The full-year 2026 guidance remains positive, with expectations of mid-single-digit loan growth, low single-digit deposit growth, and adjusted revenue growth driven by wealth and retirement businesses.
Full Transcript
OPERATOR
Good morning and welcome to the Alerus Financial Corporation earnings conference call. All participants are in a listen-only mode. Today’s call will reference slides that can be found on Alerus Financial’s investor relations website. You can also view the presentation slides directly within the webcast platform. After today’s presentation, there will be an opportunity to ask questions for analysts and institutional investors. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To start your question, please press star one again. Please note this event is being recorded.
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 can 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 Alerus Financial Corporation President and CEO Katie O’Neil Lorenson. Please go ahead.
Katie O’Neil Lorenson (President and Chief Executive Officer)
Thank you. Good morning everyone and thank you for joining us. Joining me today on the call is Forrest Wilson, our Chief Retirement Services Officer, Al Vilawan, our Chief Financial Officer, Jim Collins, our Chief Banking and Revenue Officer and Cara 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 Financial operating model continue 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 purpose-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. Noninterest income grew nearly 17% representing 42% of total revenues, 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 delivered 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 Financial 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 20, just 10 basis points. This provides a meaningful funding advantage and the company continues to operate with no broker 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. Nonperforming loans are 17 basis points of total loans and nonperforming 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. 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 Financial 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 Financial 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.
OPERATOR
Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You’ll hear the automated message advising your hand is raised. To remove yourself, please press star 11 again. We also ask that you please wait for your company and name to be called before proceeding with your question. One moment while we compile the Q and A roster. Our first question will be coming from the line of Jeff Rellis of DA Davidson.
Please go ahead.
Jeff Rellis (Analyst at DA Davidson)
Thanks. Good morning. Hey, Al, while you just closed with kind of the outlook slide, maybe I’ll just kind of ask about that. Maybe both the fee income and expense. If I think about those run rates, the guides would imply maybe a step down in the fourth quarter for both, and even if I back out the gains. Maybe on the fee income side you talked about maybe mortgage seasonality and then you don’t include swaps, but maybe on both, if you could just kind of engage that a little bit more.
It seems like both levels would pull back linked quarter.
Al (Chief Financial Officer)
Yeah. So on the fee income side, there’s going to be a little bit of a step back there on a reported basis because we won’t have the net gains from the premises again. So we don’t anticipate there’s going to be any offset to that, so you’ll definitely see that come out of the results. The rest of it will be kind of dependent on how the markets react for the remaining two months of the quarter. And on the expense side, we’re kind of thinking of things being a little bit more stable quarter over quarter. Now, I do have to warn that we do have some seasonality in our expenses, so there is some pickup in the fourth quarter, but we have some offsets potentially as well.
Jeff Rellis (Analyst at DA Davidson)
Okay. And then maybe hop into the margin. Appreciate, I think you gave the remaining 33 million in purchase accounting. Let’s see. I guess, could you just tell us what the expectation for the full year accretion ’26 versus ’27? If you got a million eight coming in Q4, just total up ’26 versus ’27, if we could.
Al (Chief Financial Officer)
Yeah, approximately. We’re thinking about probably around $13 million for ’26 in total and then down to about $9 million in total for ’27.
Jeff Rellis (Analyst at DA Davidson)
Perfect. Got it. Okay, thanks, Al.
Al (Chief Financial Officer)
Thank you.
OPERATOR
Thank you. One moment please for the next question. Our next question will be coming from the line of Brendan Nozzle of Herve Day Group. Please go ahead.
Brendan Nozzle (Analyst at Herve Day Group)
Hey folks, thanks for taking the question.
Al (Chief Financial Officer)
Hey Brendan,
Brendan Nozzle (Analyst at Herve Day Group)
Looks like loan growth was really weighted towards the end of the quarter, just kind of given where spot versus average balances ended. Maybe just talk about credit demand over the course of the quarter, how pipelines looked after such a strong finish to the third, and kind of what that implies for expectations for loan growth in the fourth quarter.
Jim Collins (Chief Banking and Revenue Officer)
Yeah, Brendan, this is Jim. The pipelines going into third quarter were very robust, and going into the fourth quarter they’re looking very strong as well. As Al said, mid to single-digit loan growth is the guidance, and we still think we will hit that. Through the course of the third quarter, we had some really good loan growth. As some examples, in all markets we had a regional hospital at roughly $28 million of loan growth, a regional construction firm, $18 million in loans, a logistics and refrigeration company that was another $33 million in loan growth, storage entity. And all of these were full relationships getting deposits as well. And I’ll touch on some of the deposits while I’m talking about that.
We had a lot of the mid-market C&I companies that we onboarded in first and second quarter really start moving more of their additional deposits into the bank in third quarter. So that was a big chunk of the deposit growth in third quarter. And you’ll tend to see that ongoing, when the mid-market companies that came on in third quarter should bring on some additional cash in fourth quarter. So getting back to your question, the pipeline looks pretty good going into fourth quarter.
Now obviously you have a couple holidays, but we still feel we’ll finish pretty strong.
Brendan Nozzle (Analyst at Herve Day Group)
Okay, that’s helpful. Color. Thank you. I guess back to the period-end versus average question, any chance you have the spot margin at the end of September? And I think it’s really important here just given that so much of the balance sheet growth came kind of, you know, past the averages at quarter end. So the spot would be really helpful to kind of just see the exit run rate.
Al (Chief Financial Officer)
Yeah, no problem, Brendan. Both on a reported basis and core basis, we’re just looking down a couple basis points for that in September.
Brendan Nozzle (Analyst at Herve Day Group)
Got it. Or is that for the full month or for the 9/30?
Al (Chief Financial Officer)
For the full month. 9/30 reported, as you can see. But that spot right then at the end of September would be down.
Brendan Nozzle (Analyst at Herve Day Group)
Okay. All right, thanks for taking the question.
OPERATOR
No problem. One moment for the next question. Our next question is coming from the line of Nathan Race of Piper Sandler. Please go ahead.
Nathan Race (Analyst at Piper Sandler)
Yeah, hi everyone. Good morning. Thanks for taking the questions. Just going back to the margin discussion, Al, I was hoping that you could just update us in terms of kind of the short-term rate sensitivity that you have on both sides of the balance sheet in terms of kind of floating-rate loans and kind of where your index deposits are and kind of what beta you’re expecting on those index deposits going forward to the extent we get going forward.
Al (Chief Financial Officer)
Yeah, no problem. In terms of loan yields right now, we’re still continuing to put on loan yields that are above our legacy portfolio yields right now, so that should still be accretive to overall earning asset yields. In terms of deposit costs, we’re seeing them tick up a little bit too given the increase in rates, especially from our money market fund side. And then as for your third question there in terms of deposit beta, we’re thinking about 50%.
Nathan Race (Analyst at Piper Sandler)
Okay. And I’m sorry, on the floating-rate loans—
Al (Chief Financial Officer)
Well, I mean prime and so forth. Yeah, we’re 50/50 variable versus fixed.
Nathan Race (Analyst at Piper Sandler)
Okay, that’s helpful. And just in terms of loans that are fixed rate on the commercial real estate side of things, repricing over the next 12 months, can you just update us on kind of what that figure looks like?
Al (Chief Financial Officer)
Yeah, give me a second here. I’m gonna have to dig that one up.
Nathan Race (Analyst at Piper Sandler)
Maybe while you’re looking for that, I can throw a question out for Forest or Katie. You know, typically in the fourth quarter, when I look at, you know, retirement and wealth revenue, there tends to be an uptick in 4Q relative to 3Q. I know market dynamics can impact that, but I’m just curious if you’re kind of anticipating a similar increase even assuming some stable equity markets, and just kind of any other underlying growth avenues in those lines of businesses that are worth highlighting.
Forrest Wilson (Chief Retirement Services Officer)
Yeah, Nathan, from the retirement side, I think it should be pretty steady, assuming a neutral market. Most of our fees are spread out pretty evenly throughout the year. We do have some that we do bill slightly higher in the fourth quarter, but I don’t think it will be too material. Certainly dwarfed a little bit by the market and the 37% that’s market sensitive, and that’s in the retirement division.
Katie O’Neil Lorenson (President and Chief Executive Officer)
And I’ll comment on the wealth side. When I look at the pipeline, it looks pretty steady quarter over quarter, so I don’t see any way I would say that there should be a big bump in the fourth quarter over the last couple quarters, specifically the third quarter.
Al (Chief Financial Officer)
And then as of Nate, what’s repricing over the next 12 months, we’re looking at roughly about just a little under $2 billion.
Nathan Race (Analyst at Piper Sandler)
And Al, the roll-off yields there versus what they would reprice up to—
Al (Chief Financial Officer)
It’s going to be around 6%.
Nathan Race (Analyst at Piper Sandler)
Okay. And I’m sorry, just to confirm again, Al, on the floating-rate loans, I think you said 50% variable. Can you just help me on kind of the proportions between prime and SOFR?
Al (Chief Financial Officer)
Yeah, I’d say right now in terms of prime, we have about 28% of those loans are in prime. SOFR is 44%.
Nathan Race (Analyst at Piper Sandler)
Okay, great. I appreciate all the color. Thanks everyone.
Al (Chief Financial Officer)
No problem.
OPERATOR
One moment for the next question. As a reminder, please press star 11 if you would like to ask a question. Our next question will be coming from the line of Damon Abdel Monte of KBW. Please go ahead.
Damon Abdel Monte (Analyst at KBW)
Hey, good morning everyone. Hope you’re all doing well. Thanks for taking my questions here. Hey Al, just to kind of circle back on the core margin outlook, I got your commentary of where the spot rate was and kind of, you know, the trajectory here in the fourth quarter. But if we get another rate hike in December and possibly one in early 2027, just curious how you think you’d be able to kind of defend the deposit pricing and kind of how we could forecast out the core margin as we progress through ’27.
Al (Chief Financial Officer)
Yeah, so the one thing I can say is that from our ALM modeling standpoint right now it’s like if you look at a plus 100 or down 100 scenario, we barely see any change to NII where maybe change 10 basis points in either direction. So that’s how I’m confident saying that we’re neutrally positioned. I’ll let Jim talk about deposit pricing and how they’ll be handled.
Jim Collins (Chief Banking and Revenue Officer)
Yeah, I mean we generally obviously go up slow in the market and we stay close to our largest depositors and defend them when we go up. But we intentionally go up slow to try to protect the margin. Obviously we’ll protect our deposits, but we’ll watch our competition, go up slow, and be a little bit more reactive in this situation, but obviously surround our best depositors.
Damon Abdel Monte (Analyst at KBW)
Got it. Okay, that’s helpful. Thank you. And just a question on mortgage. You commented that there’d be some typical seasonality here in the fourth quarter. But just curious how pipelines are looking just given the challenges in the overall mortgage market with the 30-year, for example, stubbornly staying over 7%. Just curious if you think there could be a little bit more weakness because of that dynamic.
Jim Collins (Chief Banking and Revenue Officer)
That’s a good question, Damon. I think there may be just a little bit more weakness from that dynamic. I mean, we’re going into a seasonally tougher time for us in mortgage this time of the year, and then also too, rates going up, and we saw 30-year mortgages tick up over 7% briefly. I mean, I am hearing that we are seeing a slowdown. There’s definitely a slowdown. The pipelines are definitely lighter. But if you look at our mortgage team and the experience they have, they definitely have deep, deep referral networks. So it is a slow market. It’s going to be a slow market. It’s going to be light pipelines. But because we have experienced staff, at least they have pipelines and we will be able to pull somebody in for sure.
And, Damon, we’ll probably see a good pickup here in our probably March to April pipelines too. That’s when we, seasonality, start picking up. So I’ll have a better answer for you on the rebound.
Damon Abdel Monte (Analyst at KBW)
Got it. Okay, that’s helpful. And then one more if I could squeeze it in. The provision, as you noted, this quarter reflective of the strong growth. So in order to kind of hit that mid-single-digit full-year growth, it looks like we’re probably in the probably double-digit range for the fourth quarter. So should we expect the provision to be kind of in that $2 million range, just be adequately reserved for this new growth?
Karen
Yeah, Damon, this is Karen. I can take that. As Al mentioned, we had some adjustments to our Q factors as a result of our annual review of our model, and so new growth coming in will likely be in the 1.15% range. In addition, Katie, in her opening comments, mentioned that we’re approaching maturity in a couple long-term workout deals. Really early in negotiation, but we could see some specific reserves on one or both of those deals.
Damon Abdel Monte (Analyst at KBW)
Okay. Okay, great. Very helpful. That’s all that I had. Thank you very much.
OPERATOR
Thanks, David. One moment for the next question please. The next question is coming from the line of Ken Kohut of Raymond James. Please go ahead.
Ken Kohut (Analyst at Raymond James)
Hi, good morning everybody. Thanks for taking my questions. Maybe sticking with, maybe sticking with credit. It was another great quarter. Declining NPAs, declining criticized loans. I’m just wondering how we should approach near-term charge-off expectations relative to the long-term average, which is, I guess, in the mid to high 20 basis point range.
Karen
Sure. Ken, this is Karen. For this quarter we would continue to expect lower charge-offs than we’ve had in the previous quarters this year. And then going into next year we’ve got a fairly clean portfolio again. We’ve got those couple deals I just mentioned that could carry some charge-offs, but it’s a little bit early to talk about that range. I think long term right now we’re at the low end of our metrics in terms of asset quality. Right. The low end of normal.
So we’ll, you know, we’ll see that creep back up a little bit. And I think that early in the year, next year will be lower than historical, but we’ll start to move towards that in the second half.
Ken Kohut (Analyst at Raymond James)
Great. Thank you for that color. And then maybe a question for Katie. You guys have been repurchasing about 250,000 shares per quarter pretty consistently this year. I’m just wondering if that’s an appropriate run rate to assume going forward given the new repurchase authorization during the quarter.
Katie O’Neil Lorenson (President and Chief Executive Officer)
You know, our capital priorities remain pretty consistent with where we’ve been. So as we’ve discussed in previous calls, it’s number one, it’s organic growth. It’s organic growth across the banking franchise, commercial and private banking in particular. We continue to reinvest back into the company. Certainly our dividend is a big part of our history that remains a priority. You know, we continue to want to maintain flexibility for strategic opportunities.
We’ve been very disciplined around M&A, but we also know that we’ve got a very differentiated business model which I think gives a potential partner a great value proposition. We obviously, the shareholders of Home Federal have experienced that in terms of the combined upside. That being said, from an acquisition standpoint, we’re going to remain selective and disciplined and, you know, are not looking to do a deal for deal’s sake or get bigger for bigger’s sake.
And then that leads us to the buyback which, as we have capital beyond those needs, we will continue to return that capital to shareholders through opportunistic share repurchases. So there isn’t really a defined plan. We’re analyzing and evaluating our opportunities on an ongoing basis and making the selections which we think deliver the best returns for our shareholders at the time, and just are very fortunate to be in a great position to allow that flexibility and think it gives us a real competitive advantage.
Ken Kohut (Analyst at Raymond James)
Great. Thank you for the color. That’s it for me.
Katie O’Neil Lorenson (President and Chief Executive Officer)
Thank you.
OPERATOR
Thank you. And this does conclude today’s Q&A session. I would now like to turn the call back over to Katie for closing remarks. Please go ahead.
Katie O’Neil Lorenson (President and Chief Executive Officer)
Thank you everyone. Thank you for joining us today and thank you to our shareholders, our analysts, our directors for your continued confidence and support. Most importantly, we want to thank our team members across Alerus Financial. These results are an absolute reflection of your talent, your commitment to our clients and the way we all work together as one Alerus Financial, and you are all the reason that we are very different. Our foundation is solid, our team is engaged, our model is delivering and we are going to continue to invest in our company, our people, our tech, our growth.
We’re confident in how Alerus Financial is well positioned to keep creating long-term value for our clients and our communities and our shareholders. Thank you again everyone for joining us today.
OPERATOR
This does conclude today’s conference. Thank you for attending today’s presentation. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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