Alerus Financial Corporation

Good morning and welcome to the Alaris Financial Corporation Earnings Conference Call. All participants are in a listen-only mode. Today's call will reference slides that can be found on Alaris Investor Relations website. You can also view the presentation slides directly within the website 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 withdraw your question, please press star 11 again. Please note, this event is being recorded. This call may contain forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statement. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statement are listed in the earnings release and the company's SEC file. I would now like to turn the conference over to LRS Financial Corporation President and CEO, Katie O'Neill-Lawrenson. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. Joining me today on the call and in the Twin Cities is Forrest Wilson, Chief Retirement Services Officer, Al Villalon, Chief Financial Officer, Jim Collins, Chief Banking and Revenue Officer, and Karin Taylor, our Chief Operating Officer. We are pleased with our second quarter performance and believe the results further demonstrate the strength of the Alaris franchise and the benefits of the diversified business model we have purposely built over many years. Our second quarter results reflect disciplined execution across the organization with continued net interest margin expansion, solid performance from our fee-based businesses, and a significant improvement in credit quality. We generated earnings per diluted share of 81 cents, delivered a return on assets of 1.6%, and a return on tangible common equity of nearly 20%, underscoring the earnings power of our company. The most significant highlight was the favorable resolution of the largest non-performing loan and significantly improved credit quality metrics. Criticized loans have decreased over 60% from a year ago, with non-performing loans now less than 20 basis points. In addition, we maintained robust reserves at 1.2%, strong capital levels with TCE exceeding 9%, and continued to return capital to shareholders through buybacks and dividends. Importantly, this quarter highlights the advantages of a business model designed to generate balanced, sustainable growth, with non-interest income again representing more than 40% of total revenue. Our commercial banking, wealth advisory, and retirement and benefits services businesses continue to work together to create value for clients while producing recurring revenue to allow for consistent returns to shareholders. While Al will provide additional detail on the quarterly financial results, we continue to measure our progress through the lens of long-term value creation and strategic execution. We are seeing the benefits of our shift toward full relationship commercial and private banking. We grew commercial relationships by more than 20%, expanded our core deposit franchise, increased fee-based revenues, and retirement and wealth assets reached record levels exceeding $50 billion. We also continue to reduce commercial real estate concentrations and improve the overall quality of the balance sheet. Most importantly, we see evidence that the evolution of our strategy is working. Since the launch of our IPO, we are increasingly gaining awareness from stakeholders that we are much more than just a traditional bank and instead a highly diversified financial institution with multiple engines for capital accretion and client growth. The performance demonstrates the durability of our earnings profile, the quality of our revenue streams, and the advantages of a strategy designed to create long-term value. The driver behind our performance is the talented team we have assembled across Alaris. We are fortunate to have hundreds of dedicated, long-tenured team members alongside exceptional new talent that continue to strengthen our organization. Together, they have played a critical role in the evolution of our company and the execution of our strategic plan. During the quarter, we continue to invest in leadership, growth markets, client-facing talent, and technology capabilities. We announced the appointment of Dan Schroeder as our permanent chief credit officer. We expanded our commercial banking leadership and production talent in Arizona. We added new wealth management advisors in the Twin Cities and welcomed another class of interns. Lastly, we landed an experienced technology leader from FIS to help accelerate the overhaul of our retirement platform. These additions are not isolated hires. They reflect our continued ability to attract and retain the best in the business professionals and support our belief that talent, leadership, and culture are among the most sustainable competitive advantages in our industry. As we look ahead, our priorities remain unchanged. We continue to position Alaris as a leading commercial wealth bank and a national retirement plan provider. Our improved balance sheet profile, reduced CRE concentrations, strong capital position, and diversified earnings streams provide flexibility to pursue organic growth while maintaining our disciplined approach to risk management. Investments in talent and technology will continue to drive operational efficiency, automation, and scalability throughout our enterprise. Within our retirement division, we believe the technology transformation currently underway will further strengthen our position as a consolidator of choice for subscale operators across the industry. At the same time, our commercial and private banking teams continue to see attractive opportunities to deepen middle market relationships, grow treasury management, expose opportunities for wealth and retirement, and add HSA and other synergistic deposits. We remain confident in our efforts and believe Alaris is uniquely positioned as very few organizations of our size operate with the same level of diversification, recurring revenue, and relationship-driven growth. We believe those advantages will continue to differentiate Alaris with clients, future acquisition targets, and investors. Thank you again for your continued trust and support. And with that, I'll turn the call over to Al to review the quarter in more detail.

Thanks, Katie. Let's start on page nine of our investor deck, which is posted on the investor relations section of our website. Before I begin, I want to emphasize three themes that define the quarter. Durable earnings, significant credit improvement, and continued shareholder value creation. In the second quarter, we delivered another exceptionally strong quarter highlighted by strong profitability, improving balance sheet quality, stable core margin performance, and continued capital generation. who generated adjusted diluted EPS of 80 cents and reported EPS of 81 cents while repurchasing $6.8 million of common stock during the quarter. Profitability remained strong with a return on average tangible common equity of 19.33% and a return on average assets of 1.6%. Adjusted pre-provision net revenue continued to improve. We also grew tangible book value per share. We also grew tangible book share Tangible book value per share of 3.2% from the prior quarter to 1873 and improved tangible common equity to tangible assets to 9.05%. These are high-quality results, and we believe the quarter demonstrates the strength of the franchise. While earnings remain strong, the most important financial takeaway was balance sheet quality. Reduced non-performing assets by 68.3%, increased tangible book value per share, and returned meaningful capital to shareholders through dividend increases and share repurchases. We are proud of our over 40-year history of returning capital to our shareholders, especially in the form of dividends. Let's turn to page 16 to talk about earning assets. Loans were stable during the quarter as new production offset planned balance sheet actions and reductions in non-performing loans. We continue to see healthy client activity and pipelines remain robust. The investment portfolio increased $5.9 million, or 0.8%, from the prior quarter as paydowns and maturities were replaced with new investments. We continue to benefit from reinvesting paydowns at higher front book yields. Our balance sheet is positioned neutrally for interest rates due to strategic loan and investment portfolio repositioning. In a 100 basis point increase or decrease scenario, we do not expect NII to be significantly impacted. While future rates remain uncertain, we believe that the balance sheet is positioned appropriately across a range of rate scenarios. Turning to deposits on page 17, Total deposits decreased 156 million or 3.6% from March 31st, 2026. Decreases primarily driven by seasonal outflows of public deposit or funds. Despite the seasonal outflows, our loan to deposit ratio is 96.2%. Deposit costs remain stable and the mix of relationship-based deposits remains a key strength of the franchise. Synergistic deposits now represent Our synergistic deposit franchise remains one of the strongest competitive differentiators in our business model and continues to provide a funding advantage that is difficult for many peers to replicate. This matters in the current environment where deposit quality, stability, and cost discipline remain top priorities. Turning to page 18, net interest income increased 6.2% to $47.7 million and reported net interest margin increased to 3.97%. Core margin remains stable from the prior quarter, which we view as a strong outcome given the current operating environment. Reported results benefit from purchase account increase and the resolution of a non-performing loan. But overall, we continue to feel good about the positioning of the balance sheet and our margin outlook. Turning to page 19, adjusted non-interest income increased to $32.3 million, up 4.6% from the prior quarter and up 8.6% from the second quarter of last year. Adjusted banking fees and other income increased 16.3% link quarter, primarily driven by higher swap fee income and mutual fund investment gains related to deferred compensation plan assets. Partially offset by lower mortgage banking revenue. Retirement and benefits service revenue was essentially stable, while wealth revenue increased 6.5% due to higher asset-based fees tied to equity markets and an increase in transaction-based fees. These businesses continue to demonstrate the strategic value of the Alaris model by generating stable, recurring fee income and attracting low-cost relationship deposits and diversifying earnings. that diversification continues to lower dependence on spread income and remains a meaningful differentiator for a company. On page 20, banking services non-interest income increased $1.7 million or 27.2% from the first quarter. Other income increased meaningfully primarily due to higher swap fee income which totaled $738,000 in the quarter. As we noted before, swap fee revenue can be variable based on client timing and activity. Mortgage revenue decreased to $0.3 million, or 9.6% from the first quarter, primarily driven by lower gain-on-sale margins from product exchanges and increased competition. Turning to page 21, retirement and benefits services continues to be one of Alaris' most significant differentiators. It generates recurring fee income, low-cost deposits, and long-term client relationships while supporting more stable performance across economic cycles. During the quarter, market appreciation supported higher retirement assets and continued growth in our HSA deposit base, which remains an attractive source of funding. On page 22, our wealth business continues to produce strong results while supporting broader client relationships across the organization. Wealth contributes meaningful recurring fee income and relationship-based deposits while helping diversify earnings beyond traditional spread revenue. Alaris' wealth business is differentiated with nearly 90% of the revenue coming from advisory services. Turning to page 23, adjusted non-usiness expense increased $2.4 million, or 4.8%, compared to the first quarter. The increase was primarily driven by compensation and benefits, including annual merit increases, talent additions, and deferred compensation plan liabilities tied to market gains. Other expense increased due to higher other real estate owned balances and related holding costs, as well as higher corporate insurance costs. Business, services, software, and technology expense declined due to lower core processing expenses and lower IT hardware expense. We continue to manage expenses carefully while investing in growth areas that support long-term scalability. Turn to page 24. Asset quality is one of the strongest parts of the quarter. Credit quality improved significantly during the quarter. Non-performing assets declined over 68%, criticized loans declined meaningfully, and charge-offs were substantially lower than the first quarter. Overall, we made significant progress improving balance sheet quality and reducing risk. On page 25, capital and liquidity remained strong. Tangible book value per share increased to 1873, and tangible common equity to tangible assets improved to 9.05%. CET1 increased to 10.81%, and total risk-based capital remained comfortably above regulatory requirements. Total liquidity was approximately $2.6 billion at the end of June 30th, or approximately 1.5 billion excluding broker CD capacity. During the quarter, we repurchased $6.8 million of common stock at an average price of $27.10 per share, reducing common shares outstanding by 250,000 shares at the end of the quarter. We also increased the quarterly dividend by 4.76% to 22 cents per share. Through the first six months of 2026, we returned $23.6 million to shareholders through dividends and repurchases. We were pleased to simultaneously increase tangible book value Repurchase shares, increase the dividend, and strengthen regulatory capital ratios during the quarter. The increase in tangible book value per share combined with share repurchase and dividend growth demonstrates our continued focus on disciplined shareholder value creation. Our capital allocation priorities remain consistent. Support organic growth, return capital opportunistically when it creates value, and maintain flexibility for strategic opportunities. Turning to page 26. Our 2026 guidance framework has improved and reflects continued disciplined growth, stable core margin trends, and positive operating leverage. As we enter the second half of the year, we remain encouraged by our performance in the first six months and believe Alaris is well positioned to achieve our full-year objectives. We continue to expect mid-single-digit loan growth and low single-digit deposit growth. We now expect full-year reported net interest margin of approximately 3.7% to 3.8%. Our confidence in that outlook is supported by stable core margin trends, favorable loan and investment repricing, and the overall positioning of the balance sheet. We expect revenues to be up mid-single digits. Within that guide, we do anticipate lower mortgage originations with the market currently pricing in potential rate hikes. Non-interest expenses will increase low to mid-single digits as we anticipate more strategic hirings. Lastly, we continue to expect full-year ROA to be above 1.25%. In summary, The second quarter reinforced what makes LLRC unique. We generate strong returns, credit quality improved, we grew tangible book value, strengthened capital, and leveraged a diversified business model that continues to differentiate us from many of our peers. We entered the second half of 2026 with strong momentum, strong capital, and confidence in our ability to continue creating long-term value for shareholders. With that, let's go to Q&A.