Alerus (ALRS) Q1 2026 Earnings Transcript

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DATE

Thursday, April 30, 2026 at 12 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Katie A. Lorenson
• Chief Financial Officer — Alan A. Villalon
• Chief Operating Officer — Karin M. Taylor
• Chief Banking and Revenue Officer — Jim R. Collins
• Chief Retirement Services Officer — Forrest Rexford Wilson

TAKEAWAYS

• Net Income -- $23 million, or $0.89 per diluted share, with EPS inclusive of $6 million in share repurchases.
• Profitability Metrics -- Return on average assets was 1.79%, and return on average tangible common equity reached 21.96%.
• Net Interest Margin -- Expanded to 3.77%, marking an 8 basis point increase from the prior quarter and a post-IPO high.
• Tangible Book Value Per Share -- Rose 3.4% sequentially to $18.15.
• Tangible Common Equity Ratio -- Improved to 8.85% from the previous period.
• Deposit Growth -- Total deposits increased 3.7% sequentially; noninterest-bearing deposits rose 6.2%, comprising 19.7% of the deposit base.
• Loan-to-Deposit Ratio -- Improved to 92.8%, reflecting enhanced on-balance sheet liquidity.
• Asset Quality -- Nonperforming assets declined $15.4 million; criticized loans decreased 43% year over year.
• Reserve Release -- Released $4.9 million from the allowance for credit losses, maintaining coverage at 1.25% of total loans.
• Investment Portfolio Yield -- Increased by 139 basis points to 3.84% following fourth-quarter repositioning.
• Noninterest Expense -- Declined 2.9% sequentially, aided by lower incentive compensation while continuing technology and strategic investments.
• Adjusted Fee Income -- Over 40% of revenue is fee-based; adjusted fee income dropped 3.2% sequentially, mainly due to lower swap revenue.
• Mortgage Fee Income -- Rose more than 130% year over year, attributed to higher originations, improved gain-on-sale margins, and increased mortgage servicing rights valuation.
• Retirement and Benefit Services Revenue -- Increased to $17.4 million, up 0.8% sequentially, despite a 5.9% decline in assets under administration and management.
• HSA Deposits -- Health Savings Account deposits grew 7.1% to about $218 million, with an average cost of roughly 10 basis points.
• Wealth Management Revenue -- Reported at $7.2 million, down 2.7% quarter over quarter, with a 1.2% sequential decrease in assets under administration and management.
• Share Repurchases -- $6 million repurchased during the quarter at an average price of $23.90 per share.
• Guidance for 2026 -- Full-year net interest margin expected in the 3.55%-3.65% range, mid-single-digit loan growth, low-single-digit deposit and expense growth, and return on assets projected to exceed 1.25%.
• Interest Rate Sensitivity -- For every 25 basis point rate cut, net interest margin is expected to improve approximately 3–5 basis points.
• C&I Loan Growth -- Commercial and industrial lending grew more than 10% year over year, with the bank exiting select investor CRE loans to improve portfolio quality.
• Brokered Deposits -- Only $8 million in brokered funds at period-end.
• Loan Mix -- Portfolio evenly split between fixed- and floating-rate loans.
• New Origination Rates -- New loans originated in the low- to mid-6% range; new deposits gathered at rates in the low- to mid-2% range.
• Expense Outlook -- Noninterest expenses expected to rise slightly in the second quarter due to higher mortgage and banking production as well as increased wealth division incentives.
• Reserve on Largest Remaining Nonaccrual -- Decreased from about 17% in Q1 to 8% in Q2 as resolution processes advance.

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RISKS

• Chief Financial Officer Alan A. Villalon said, "in the second and third quarters we typically see outflows of deposits, especially from our public funds. That is going to put a little pressure on our deposit base because as we replace some of our lower-cost funding with higher-cost funding, that will put a little pressure on there as well."
• Villalon noted, "The benefit of those deposit cost-of-funds decreases is probably behind us right now unless we see another Fed cut in the future, because we are seeing more pressure on deposit costs in our footprint."
• Loan growth is expected to be weighted to the third and fourth quarters, with a slower build in the second quarter and continued runoff in select CRE loans, which may cause near-term balance sheet stagnation.

SUMMARY

Alerus Financial Corporation delivered improved profitability metrics driven by margin expansion and disciplined expense control, with key credit indicators such as nonperforming assets and criticized loans showing marked improvement. Management emphasized that over 40% of total revenue now comes from recurring, fee-based businesses, while HSA and synergistic deposit growth amplified funding stability and supported net interest margin gains. Strategic moves in the investment portfolio led to yield enhancement, and the company further de-risked its loan portfolio by reducing lower-return CRE exposures. Capital strength was highlighted by tangible book value growth, elevated capital ratios, and continued shareholder returns via buybacks and dividends.

• Operational leverage improved as revenue growth outpaced expenses, supporting investments in technology and market expansion.
• Recent client transitions in the retirement services segment were revenue neutral, replacing a large low-margin client with a higher-margin partnership despite a drop in plan assets and participants.
• Guidance calls for mid-single-digit loan growth, low-single-digit deposit and expense growth, and enhanced net interest margin sensitivity to rate changes throughout 2026.
• Management signaled increased deposit competition and projected some short-term margin and deposit cost pressures, while still targeting positive operating leverage and above-peer credit loss reserves.
• Wealth management expansion is supported by recent advisor hiring and retention, with incremental revenue expected as hires gain traction through the remainder of the year.

INDUSTRY GLOSSARY

• HSA: Health Savings Account; a tax-advantaged deposit product frequently used for medical expenses, often valued as a low-cost, stable funding source for financial institutions.
• MSR: Mortgage Servicing Rights; the contractual right to service mortgage loans for a fee, with valuation changes affecting noninterest income.
• AFS Securities: Available-for-Sale Securities; debt or equity investments not classified as held-to-maturity or trading, marked to market with changes affecting other comprehensive income.
• CRE: Commercial Real Estate; loans secured by income-producing property, frequently monitored for risk due to potential volatility across credit cycles.
• C&I: Commercial and Industrial Loans; business-purpose loans not secured by real estate, often viewed as a core relationship banking segment.
• Purchase Accounting Accretion: Income recognized as discounts on acquired loans or securities are amortized into earnings, temporarily boosting net interest margin.

Full Conference Call Transcript

Katie A. Lorenson: Thank you. Good morning, everyone. Appreciate you joining us today. With me today are Alerus Financial Corporation’s CFO, Alan A. Villalon; our Chief Operating Officer, Karin M. Taylor; our Chief Banking and Revenue Officer, Jim R. Collins; and Alerus Financial Corporation’s Chief Retirement Services Officer, Forrest Rexford Wilson. We delivered a strong first quarter to begin 2026, and more importantly one that demonstrates the progress we have made repositioning Alerus Financial Corporation for higher quality, more durable performance. For the quarter, we reported 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 approximately 22%.

These results were driven by margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality. We view this quarter as a clear validation that the strategic actions we have taken are translating into tangible financial outcomes. Our results reflect three structural strengths shaping the business. First, our balance sheet is fundamentally better positioned. Margin expansion in the quarter reflects disciplined funding management, the benefits of balance sheet actions taken last year, and a funding mix that continues to differentiate our franchise. Growth in highly valuable HSA balances, sourced through our benefits services platform, highlights the uniqueness of our funding model, with nearly a quarter of deposits sourced from our integrated and synergistic business lines.

Second, diversification continues to matter. More than 40% of our revenues are fee-based, capital-light, and recurring. Our retirement, benefit services, and wealth advisory fee streams provide stability across interest rate and market cycles. Even as asset levels and market conditions fluctuate, underlying engagement, client activity, and long-term profitability across these businesses remain solid. Third, we continued our success in recruiting high-quality talent, adding team members in key markets in Wisconsin and Arizona, in addition to progressing towards our goal of doubling the number of wealth advisers across the franchise. Impressively, we have maintained discipline on expenses while continuing to make selective investments in technology and growth initiatives.

Our focus remains on scalability, ensuring that as revenue grows, returns improve in a sustainable way. During the quarter, we remained focused on relationship-driven growth. Commercial and private banking continues to be an area of focus, with year-over-year C&I growth exceeding 10%, supported by healthy pipelines and strong client engagement. At the same time, we have remained intentional in reducing exposure to lower-return and higher-volatility segments of the balance sheet. The mix shift is improving risk-adjusted returns and strengthening the overall profile of the portfolio. On the funding side, deposit trends reflect the value of our diversified platform.

Growth in core deposits, including commercial and private banking relationships in addition to our synergistic deposits, reinforces the strategic advantage of our integrated business model. As a result, the loan-to-deposit ratio improved to under 93%. Asset quality improved meaningfully during the quarter. Nonperforming assets declined, and criticized loan balances continued to trend lower. We made significant progress resolving previously identified credit issues. During the quarter, we charged down a nonaccrual and well-reserved C&I credit related to a longstanding client relationship negatively impacted by changes in government funding. This was a single event and not reflective of broader portfolio trends.

We also made substantial progress in moving closer to resolution on our largest remaining nonaccrual relationship, which represents approximately 65% of total nonaccrual loans. As a result of portfolio improvement and credit resolution activity, we recorded a reserve release of $4.9 million during the quarter while maintaining an allowance for credit losses of 1.25% of total loans. Taken together, these actions underscore the strength of our credit discipline and our commitment to proactive risk management. Our capital position remains strong. Tangible book value per share increased to $18.15 and tangible common equity to tangible assets improved to nearly 9%. Capital ratios remained comfortably above regulatory requirements.

During the quarter, we repurchased $6 million of common stock while continuing to return capital through dividends. Our approach to capital allocation remains disciplined and balanced, supporting growth while returning excess capital to shareholders. Most importantly, the company’s trajectory remains highly positive. The underlying fundamentals of the business—our talented team, balance sheet positioning, diversified revenue models, credit discipline, and operating focus—are stronger than they have been at any other time in our nearly 150 years as an institution. We remain focused on disciplined growth, continued execution, and delivering sustainable long-term value for our shareholders. I will now turn the call over to Alan to walk through the financial results in more detail.

Alan A. Villalon: Thanks, Katie. Let us start on page 9 of our investor deck posted on the Investor Relations section of our website. In the first quarter, we delivered a strong start to 2026 and demonstrated the earnings power of the franchise following the balance sheet reposition completed late last year. We generated adjusted diluted EPS of $0.89, inclusive of $6 million of share repurchases during the quarter. Our results reflect continued core net interest margin improvement, disciplined expense management, and the benefit of our diversified business model with noninterest income representing just over 40% of total revenue.

Profitability remained strong, with an adjusted return on average tangible common equity of 21.96% and adjusted return on average assets of 1.79%, improving 17 basis points from the prior quarter. Tangible book value per share increased 3.4% linked quarter to $18.15, and our tangible common equity ratio improved to 8.85%, underscoring continued capital generation. Turning to the balance sheet, we remain well positioned to support organic growth. Deposits increased 3.7% on a period-end basis, and our loan-to-deposit ratio improved to 92.8%. In addition, we continue to maintain robust liquidity of approximately $2.7 billion, providing flexibility to fund loan growth, manage through market volatility, and continue returning capital through dividends and share repurchases.

Let us turn to page 16 to talk about our earning assets. At quarter end, loans were relatively stable versus the prior quarter. We continue to proactively reallocate capital to full relationships, primarily in C&I and private banking. Excluding this continued rationalization, end-of-period loans would have grown modestly. Overall, our loan mix remains balanced at approximately 50% fixed and 50% floating. On investments, we continue to benefit from the strategic portfolio reposition executed in the fourth quarter. During 4Q, we sold $360 million of available-for-sale securities, representing over two-thirds of total AFS securities at year-end 2025.

This restructuring improved the overall average investment portfolio yield by 139 basis points from 4Q 2025 to 3.84% in the first quarter and has been a meaningful contributor to margin expansion. Currently, our balance sheet remains positioned slightly liability sensitive. On a rate cut, we will see slight margin improvement and vice versa on a hike. Turning to deposits on page 17, our funding profile continues to strengthen and remains a key contributor to margin expansion and balance sheet flexibility. On a period-end basis, total deposits increased 3.7% from the prior quarter, reflecting growth across both public funds and core client deposits.

Importantly, we continue to see favorable mix improvement and operated during the quarter with only $8 million of brokered deposits. Noninterest-bearing deposits increased 6.2% linked quarter and now represent approximately 19.7% of total deposits. This shift meaningfully supports our cost of funds and improves the durability of our funding base. The quarter-over-quarter increase in deposits was driven by seasonal public fund inflows as well as steady growth from commercial and private banking clients. We are particularly pleased by the continued stability of our core deposit franchise, which reflects core operating and treasury management relationships rather than rate-sensitive behavior.

As a result of deposit growth and selective loan originations, our loan-to-deposit ratio improved to 92.8%, providing additional on-balance sheet liquidity and positioning us well to continue to support organic loan growth going forward without relying on higher-cost wholesale funding. Overall, our deposit franchise remains a competitive advantage, supporting loan growth and providing flexibility as we navigate the evolving rate environment. Turning to page 18, net interest income remained stable at $44.9 million. Reported net interest margin expanded 8 basis points to 3.77%, a new post-IPO high. Purchase accounting accretion contributed approximately 25 basis points in the quarter. Excluding accretion, core margin was 3.52%, representing a 35 basis point improvement from the core margin in the fourth quarter.

Drivers of the core margin improvement included a 21 basis point decline in the total cost of funds to 1.97% and a higher portfolio yield of 3.84% following the fourth quarter balance sheet repositioning. In addition, strong new business margins across both loans and deposits supported continued margin momentum. New loans were originated at average rates in the low- to mid-6% range, while new deposits were in the low- to mid-2% range. Turning to page 19, adjusted fee income, excluding the balance sheet repositioning and other one-time items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue.

Importantly, fee income continues to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment. Let us turn to page 20 for additional detail on fee income. In banking services fee income, adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues. We do not include swap revenues in guidance due to inherent variability and client-driven timing. Importantly, our core transaction-based fees remain stable, supported by continued activity across our commercial and consumer client base. Mortgage fee income increased over 130% from the prior year, driven by increased originations, improved gain-on-sale margins, and a higher valuation of mortgage servicing rights.

While originations remain seasonally lower, economics per loan improved, demonstrating our ability to generate solid fee contribution even in a muted volume environment. On page 21, highlights for retirement and benefit services: total revenue increased to $17.4 million, up 0.8% linked quarter. Assets under administration and management declined 5.9%. It is important to note this change had, and is expected to have, minimal impact on revenues, as the revenue was replaced with a new partnership onboarded during the quarter. Synergistic deposits within the retirement segment increased 2.3% linked quarter. HSA deposits grew 7.1% to approximately $218 million and continue to be a particularly attractive funding source, carrying an average cost of roughly 10 basis points.

Turning to page 22 in wealth and wealth advisory services, revenue in the quarter was $7.2 million. On a linked-quarter basis, revenue declined a modest 2.7%, primarily driven by market-related pressure on asset values, as client retention remained strong. Assets under administration and management decreased 1.2% from the prior quarter, reflecting broader market performance during the period. From a fee mix standpoint, the decline was evenly split between asset-based and transaction-based revenue, consistent with lower market levels and typical first-quarter seasonality. Turning to page 23, our expense discipline continued to translate into positive operating leverage during the quarter.

Reported noninterest expense declined 2.9% on a linked-quarter basis, reflecting lower incentive compensation as both mortgage activity and banking production were seasonally lower. Importantly, this decline was achieved while we continued to invest in the franchise. The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology, rather than incremental new spend. Overall, expense trends remained well controlled, and we continue to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in the first quarter. This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully.

While net charge-offs were 71 basis points, the increase was driven primarily by a single $6.4 million charge-off on one previously identified C&I relationship that had previously been placed on nonaccrual. This charged-down relationship still has remaining reserves of 78%. Importantly, nonperforming assets declined $15.4 million linked quarter and criticized loans were down 43% year-over-year. We recorded a $4.9 million reserve release, primarily driven by lower loan balances and an improved mix. Despite the continued positive trends, we maintain a reserve level above the industry at 1.25%. On page 25, capital and liquidity remained strong. Tangible common equity to tangible assets improved to 8.85%, and tangible book value per share increased to $18.15.

We continued to return capital to shareholders through both our quarterly dividend and $6 million of share repurchases at an average price of $23.90, while maintaining substantial liquidity to support organic growth. Turning to page 26, our 2026 guidance has improved and reflects continued disciplined growth and positive operating leverage.

We expect the following: 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—we have ample liquidity to support loan growth in excess of deposit growth; a net interest margin of approximately 3.55% to 3.65% for 2026; in the second quarter, we expect about 20 basis points of contractual purchase accounting accretion; also, for additional context, the exit rate of our net interest margin was approximately 3.65% for the month of March; adjusted noninterest income to grow in the mid single digits, driven by continued growth in our wealth and retirement businesses—consistent with prior guidance, swap fee income is not included, given variability; total net revenue growth in the mid single digits with noninterest expense growth in the low single digits, supporting positive operating leverage—we do expect second quarter noninterest expenses to be slightly higher due to a seasonal uptick in mortgage and banking production along with improved equity markets in our wealth division, which will push incentives higher; full-year return on assets is expected to exceed 1.25%.

Finally, for each additional 25 basis point cut in rates, we would expect net interest margin to improve roughly 3 to 5 basis points. In summary, our first quarter performance demonstrates that the earnings power of the franchise is taking flight, and we believe Alerus Financial Corporation is well positioned for 2026 and beyond to reach new heights. We will now open the call for questions.

Operator: To ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. Please wait for your name and company to be announced before proceeding with your question. The first question will be coming from the line of Brendan Jeffrey Nosal of Hardate Group. Your line is open.

Brendan Jeffrey Nosal: Hey, good morning, everybody. Hope you are doing well. Maybe just starting off here on the retirement business. Can you unpack the decline in plan participants and AUA this quarter and help us understand why it is revenue neutral, as you pointed out in the release?

Forrest Rexford Wilson: Yeah, Brendan, this is Forrest Wilson. Thanks for the question. I can say, since I got here, we have been putting effort into a much more aggressive approach to a growth strategy, really scrutinizing the mix of business that we take on more closely than ever and specifically looking at profitability, operational leverage, and complexity. In this past quarter, we were able to exit a large low-margin client that—[inaudible]—it was a legacy relationship that had significant assets that generated limited revenue. Both the size and—[inaudible]—added disproportionate operational complexity for our division. Coincidentally, additionally—[inaudible]

Alan A. Villalon: Forrest, we are getting some feedback here. Can you start over? You are sounding a little muffled.

Forrest Rexford Wilson: Yeah, sorry about that. Is that okay?

Alan A. Villalon: Still muffled. That is okay, I can take it for us.

Alan A. Villalon: Thank you. In regards to the drop in assets and participants for the quarter, it was driven by the exit of a large lower-margin legacy relationship and replaced with a new partnership that has much higher levels of profitability but lower levels of assets and participants.

Forrest Rexford Wilson: Is that better? Sorry.

Brendan Jeffrey Nosal: That is better.

Alan A. Villalon: Alright. Sorry about that. Thanks, Katie.

Katie A. Lorenson: No problem.

Jim R. Collins: Yeah, as Katie mentioned, coincidentally we exited a large low-margin client that had significant assets, and we onboarded a very substantial new partnership that does have lower assets but is a much higher, more simplified business, which is in line with our strategy. So all in all, it was absolutely just an episodic event of this quarter, but it does reflect a deliberate focus on achieving higher-quality, more profitable business. It happened in the same quarter and is largely revenue neutral between the two.

Brendan Jeffrey Nosal: Okay. That is helpful color there. I appreciate it. Maybe moving on to loan growth and demand. Can you spend a minute talking about what gives you confidence you will still hit the mid-single-digit growth guide for the year, just given the softer start to the year?

Jim R. Collins: This is Jim Collins. We are staying the course. We started off a little slow on loan production, but we are moving out some investor CRE that does not fit our risk tolerance or is risk-rated credits that we are pushing out now. But our C&I pipelines are fairly robust in all markets except for ag. Our ag is relatively flat, which is fine with us. We still plan to hit single-digit growth for the year. We are still pushing out some credits in 2026 in the investor CRE buckets.

Brendan Jeffrey Nosal: Okay. That is helpful. I am going to sneak one more in there. Just on the margin, Alan, I think you said the exit margin in the month of March was 3.65% versus the quarter’s reported 3.77%. Help us understand the evolution from the full quarter’s reported number to that exit margin. What were the puts and takes there?

Alan A. Villalon: A lot of it had to do with deposit mix. We did see really good mix shift, especially on the deposit side, because we had good inflows there. We do expect lower purchase accounting accretion on a go-forward basis, hence why I wanted to give the exit rate. We are only anticipating 20 basis points of purchase accounting accretion in the second quarter, and it is probably going to step down from there because we continue to see accelerated payoffs that pull from the future into today. Those are the main puts and takes. Our cost of funds declined nicely too from the Fed cuts in the fourth quarter of last year.

That is one of the big drivers along with the balance sheet repositioning.

Brendan Jeffrey Nosal: Okay. Thanks, Alan. Appreciate you taking my questions.

Alan A. Villalon: Thank you.

Operator: Thank you. One moment for the next question. The next question is coming from the line of Jeffrey Allen Rulis of D.A. Davidson. Your line is open.

Jeffrey Allen Rulis: Thanks. Good morning. Just circling back on the margin, Alan. To be clear, the 3.55% to 3.65%—are you excluding accretion?

Alan A. Villalon: No, that is all reported numbers. That is for the full year.

Jeffrey Allen Rulis: And you are including your expected accretion in that figure?

Alan A. Villalon: Correct, but no accelerated payoffs for the remainder of the year. We do expect purchase accounting accretion to decrease as each quarter progresses.

Jeffrey Allen Rulis: And I think you mentioned some adjustments in March, but that would imply flat to down. Is that margin compression going forward? What is the cautiousness there? Is it just easing of deposit benefits?

Alan A. Villalon: Yes, partially easing of deposit benefits. We did see a couple of rate cuts late last year, but also in the second and third quarters we typically see outflows of deposits, especially from our public funds. That is going to put a little pressure on our deposit base because as we replace some of our lower-cost funding with higher-cost funding, that will put a little pressure on there as well.

Jeffrey Allen Rulis: Okay. And, Alan, in the first quarter, were there any interest recoveries in the margin that impacted the 3.77%?

Alan A. Villalon: No.

Jeffrey Allen Rulis: Got it. One other question, to back into the loan growth side. Do you have gross production in the first quarter versus Q4? It sounds like you are pushing some credits out, but trying to get a sense for how that product looked on a core basis. Anything on production numbers quarter over quarter?

Jim R. Collins: From a C&I standpoint, we had really solid C&I growth. I do not have the numbers in front of me per se, but we are driving mid-market C&I growth fairly well with full relationships. Some of the CRE that we put on the books two to three years ago—that is what we are moving off the books in the first and second quarters. You will continue to see the percentages of C&I grow quarter over quarter like you did last year. When you saw year-over-year 10% C&I growth, you will continue to see that through 2026 and 2027, as that has been our core focus the last three years.

Jeffrey Allen Rulis: Would you say production in C&I was greater in the first quarter than in the fourth quarter?

Jim R. Collins: No. I think it was a little bit lower than it was in the fourth quarter.

Alan A. Villalon: I think the pipeline is building. The second and third quarters look very healthy.

Operator: Thank you. One moment for the next question. The next question will be coming from the line of Nathan James Race of Piper Sandler. Your line is open.

Nathan James Race: Hi, everyone. Good morning. Thanks for taking the question. Alan, going back to the margin discussion, if you strip out the accretion you mentioned in the quarter, that implies core loan yields are kind of 5.6% in 1Q. To get to your margin guide, I think that would imply a decent step down in loan yields, but it does not sound like there is anything unique in that core loan yield in terms of interest recoveries. I am trying to square the trajectory of loan yields, particularly within the context of what you mentioned in terms of new loan production coming on in the low- to mid-6%s.

Alan A. Villalon: Thanks for that, Nate. Basically, we are just adding a little conservatism there. We still think our core margin will be in the mid-3%s. But as Jim could speak to as well, we are seeing competition pick up, especially on the deposit front. The benefit of those deposit cost-of-funds decreases is probably behind us right now unless we see another Fed cut in the future, because we are seeing more pressure on deposit costs in our footprint.

Jim R. Collins: I would say in all markets, banks are focused on deposits just as we are. It is getting extremely competitive. It has been competitive the whole time. Everybody is sharpening their pencils, so that continues to tighten.

Nathan James Race: Okay. That is really helpful. Thanks. Maybe a question for Katie on excess capital management. You are building capital at pretty strong clips, and even with some balance sheet growth returning, I think you are still going to be accruing capital quite nicely. How are you thinking about executing on buybacks as a more continuous capital management tool, particularly given valuation?

Katie A. Lorenson: Yes, great question. Thank you. From a priority standpoint, consistent with previous quarters, we invest first and foremost in organic growth, but returning capital opportunistically—especially, as you mentioned, when valuations warrant it—continues to be a priority. We were active this quarter and intend to remain active in our buyback going forward.

Nathan James Race: Really helpful. If I could sneak one more in on wealth management. Update on traction from the production-related hires you brought on over the last couple of quarters, and how you are thinking about that revenue line growing this year assuming some stability in equity market valuations?

Jim R. Collins: We put on some hires at the end of last year, with a couple more coming at the end of this year. We are seeing some traction on new revenue from them, and we have additional hires we are looking to bring on in the back half of this year. We have had solid retention of clients as we put that platform on. If you recall last year, the first quarter was predominantly issues with the markets, but we should see generally good performance and additional revenue growth from new clients as we add new wealth advisers going forward.

Nathan James Race: Okay. That is great color. I really appreciate it. Thanks, everyone.

Operator: Thank you. If you would like to ask a question, please press 11 on your telephone. Our next question will be coming from the line of Damon Paul DelMonte of KBW. Your line is open.

Damon Paul DelMonte: Hey, everybody. Hope you are all doing well today, and thanks for taking my questions. First, circling back on loan growth, it sounds like you still have some targeted CRE loans to work off the balance sheet. Thinking about the quarterly cadence going forward, should we expect flattish balances in the second quarter and then a nice jump in the third and fourth quarters to get to the full-year target?

Jim R. Collins: I would look to that, yes.

Damon Paul DelMonte: Great. Given the slower growth expected in the second quarter, should we model a very modest provision, especially given the sizable release of reserves this quarter? It seems like you feel you have rightsized your reserve given the credit profile. So should we expect a minimal provision that would just cover whatever charge-offs you have?

Katie A. Lorenson: Damon, I think that is right. Going forward, our provision is going to be driven by loan growth and the macroeconomic factors.

Damon Paul DelMonte: Okay. Do you feel like the mid-120s is a good ACL run rate over time, absent any macro deterioration?

Katie A. Lorenson: When I look at our pooled reserve, we are north of 1%. I think 1.10% to 1.20% is a fair range, of course depending on what happens in the economy.

Damon Paul DelMonte: Great. Lastly on expenses, Alan, did you say low single-digit growth for the full year off of last year?

Alan A. Villalon: Yes, that is correct.

Damon Paul DelMonte: Alright. Great. That is all that I had. Thank you.

Operator: Thank you. We have a follow-up question from the line of Brendan Jeffrey Nosal of Hodei Group. Please go ahead.

Brendan Jeffrey Nosal: Thanks. Looking at the mortgage banking segment, originations and sales were both seasonally down quite a bit, but revenue was actually up sequentially. I think you mentioned MSR fair value benefits. Can you size how much of a benefit the MSR was this quarter?

Alan A. Villalon: Let me get that number for you. The other benefit was that in our pipelines in the fourth quarter, we had the rate cuts affecting our pipeline, so we actually had some mortgages in there that came in at higher rates, which allowed us to get bigger gain on sales. I would say that was the bigger driver for mortgage in the quarter, with less impact from the MSR.

Brendan Jeffrey Nosal: Okay. And then one final one. You said in the prepared remarks that you continue to make progress on that one large nonaccrual loan still working through resolution. Can you offer a little more color on where you are on that credit, how you are reserved, and where ultimate loss content might end up?

Karin M. Taylor: Sure, Brendan. We do continue to make progress and are currently negotiating a sale on that deal. We are getting more clarity around value as we go through that process, and so we actually decreased our reserve from about 17% in Q1 to about 8% in Q2.

Brendan Jeffrey Nosal: Okay. Thank you for taking the follow-ups. I appreciate it.

Alan A. Villalon: And, Brendan, to close the loop on the fair value mark, we are looking at a couple hundred thousand dollars for the MSR fair value mark.

Brendan Jeffrey Nosal: Great. Thanks.

Operator: Thank you. I will now be turning the call back over to Katie for closing remarks. This does conclude our Q&A session.

Katie A. Lorenson: Thank you, everyone. I appreciate you all joining today. I want to take this opportunity to thank our team first and foremost. The results we discussed today reflect our culture, our talent, and our discipline across Alerus Financial Corporation. We have built a stronger organization in a relatively short period of time. I am very proud of how our teams continue to execute toward our long-term objectives. Over the past few years, the consistency of our fundamentals is evident. This quarter represents another pearl on the string—disciplined execution of our strategy that we have been articulating—and continued progress across earnings power, margin, funding, capital, and credit quality. Our overall credit quality has improved meaningfully.

Trends in asset quality, criticized loans, and nonperforming assets continue to move in the right direction, and we remain confident that net charge-offs will normalize toward our long-term historical averages, which compare favorably to the industry. From a balance sheet and capital allocation standpoint, we are growing where we want to grow, with solid momentum in the verticals in which we have invested. We remain focused on consistent execution, and we feel great about the foundation we are continuing to build from, the momentum of the company, and we are grateful for all of the collaboration and hard work of our talented team members. Thank you again for your time today and for your continued interest in Alerus Financial Corporation.

Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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