Alerus Financial Corp Stock

Thank you. 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 our 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 files. I would like to turn the conference over to Alaris 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 discipline 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 $0.81, 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 continue 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 BENEFIT SERVICES BUSINESSES CONTINUED TO WORK TOGETHER TO CREATE VALUE FOR CLIENTS WHILE PRODUCING RECURRING REVENUE TO ALLOW FOR CONSISTENT RECURRING REVENUE. 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 continued to reduce commercial real estate concentrations and improve the overall quality of the best-selling. 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 CONTINUED TO INVEST IN LEADERSHIP, GROWTH MARKETS, CLIENT FACING TALENT AND TECHNOLOGY CAPABILITIES.

WE ANNOUNCED THE APPOINTMENT OF DAN TRADER 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 Aleris 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 at the final 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. We 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 remains strong with a return on average tangible common equity of 19.33% and a return on average assets of 1.6%. Adjusted pre-provisioned net revenue continued to improve.

We also grew tangible book value per share We also grew 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. Reduce non-performing assets by 68.3%, increase tangible book value per share, and return meaningful capital to shareholders through dividend increases and share repurchases. We are proud of our overpriced assets. 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 are stable during the quarter as new production offset plan 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 product order 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 31, 2026.

Decrease was 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 22.6% of total deposits and continue to provide a meaningful funding advantage. Those synergistic deposits grew 3.3% over the prior year, primarily from low-cost HSA deposits. The continued contribution reinforces the strategic value of our integrated banking, wealth, retirement, and benefits services model. 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%, so $47.7 million, and reported net interest margin increased 3.97%. Our 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 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 ALERIS 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. Thank you. Mortgage revenue decreased to $0.3 million, or 9.6% from the first quarter, primarily driven by lower gain-on-sale margins from product mix changes and increased competition.

Turning to page 21, retirement and benefits services continues to be one of Aleris' 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 high 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. Larissa's 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. Similar 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 improves 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 remain 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 $0.22 per share.

Through the first six months of 2026, we returned $23.6 million to shareholders through dividends. and repurchases. We are 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 discipline 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 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. 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. Thank you. We will now begin our Q&A session. One moment while we compile the Q&A roster. And the first question is coming from the line of Jeff Roulis of DA-Davidson. Please go ahead.

Thanks, appreciate it. Al, I guess I'm on the margin. the full year guide, I guess, would reflect or pull back of reported in the 360 range. Do you have the... I'm sorry, hopping at loan yields a little bit, 624. Do you have that X recovery for the quarter, and as well as do you have the spot – loan yields at quarter end? So.

Jeff, can you just help me understand the question a little bit further? So our guidance has the recovery. It's a full-year guide with the recovery already in there.

Right. And I talked then to loan yields, sorry for the transition. Well, one, I was just, I guess the first question is implying that the reported 360 range in the back half of the year is, would get you in that midpoint of the range for the year. Is that fair?.

If I'm understanding the question correctly, yes. I mean, we're looking – I mean, our core margins have remained stable to end of June. We're in the mid-threes right now.

that's helpful. Got you. Maybe switch gears, Al, on the expected accretion in the second half of this year and 27 if you have that.

Yes, I have that. The expected accretion is going to decrease to roughly a couple hundred thousand dollars in each quarter. So last quarter, we had on that anticipated paydowns. This quarter, we had over $3 million of total accretion. But on contractual basis, we're expecting around $1.9 million for 3Q.

Okay. Appreciate it. Well, you've got enough guide there that we can get back into a couple of those. Maybe on the switching gears to the... Just the loan pace, you know, given... given, I guess, the full year, would assume that net growth really gained some steam ahead, and maybe the assumptions behind that, do you expect sort of payoffs to slow and begin to show a little bit more net growth in the second half? Yes.

Yes, I would say, this is Jim Collins. The pipeline right now is the largest and most robust since I've been here in four years. Like we discussed in the first quarter, the growth would really happen in the back half of this year. We worked really hard the last year. eight months with credit in the line, working through some credit issues, kind of cleaning up the portfolio and really building that CNI pipeline. Second quarter, we put on 30 full mid-market CNI relationships. One of those was a regional nonprofit. that is bringing 40 accounts with an average income collected balance of about $30 million. Once all those deposits flow in, which hasn't happened yet, about half of those have come in.

You know, just this week we approved a loan package of $28 million for a new client, and that client will walk in with $30 million in deposits. So just a couple examples of what we are doing. So the strategy is working. We're staying the course. You know, we're working on full C&I relationships. We brought in a team. teams. They're a little harder. It's a longer lead time for CNI. But as you'll see, we are bringing down the CRE, growing CNI.

That was the plan. That's the strategy. It is working. But I will tell you that that was the plan, and we will have more growth in the back half of this year.

Thanks, Jim. And just one follow-on is just the, I guess, the earning asset balance. Do we expect that to match really loan growth? I thought I heard some, you know, expects to reinvest in the securities portfolio, but I guess the growth of the earning asset, base, do we think that's going to match the loan growth pace for the second half? Thanks.

Yes, we do believe that. This is Al. Okay. Thanks, Al.

Thank you. One moment for the next question. The next question is coming up from the line of Brendan Nozzle of Hovde Group. Please go ahead.

Hey, good morning, everybody. Hope you're doing well. Maybe to start off here on kind of capital and M&A, stock as a currency, again, capital is a lot stronger than it had been a year ago. Can you just update us on your appetite for whole bank M&A at this point and perhaps walk through what would be of interest in terms of size, geography,.

business characteristics, anything like that? Sure, I'll take that. As we have talked about, the capital priorities remain the same. We are very focused on organic growth, client selection, reinvesting in ourselves in terms of talent, technology, and capabilities that really strengthen our franchise for the long term. Capital commitments or returning to shareholders has been very clearly demonstrated over many decades of this franchise. But strategic acquisitions are also a very enterprise strength of ours, and we remain committed to pursuing those that fit our culture, enhance our capabilities, and meet our return thresholds. And so when we look strategically for acquisitions, those are the three buckets, and you Again, retirement, we're agnostic to location because it's a national business. We believe we are viewed as a consolidator of choice for those subscale operators.

From a baking franchise standpoint, we look for, again, middle of the country is kind of our geographic. geographic focus. From a size standpoint, we're more so looking at the client base and what it can bring to us in terms of enhancing our franchise.

Okay, thanks for the thoughts there, Katie. Maybe turning back to the outlook, this is on a little bit more top level. So you're adding 15 basis points to the full year margin outlook. You maintain the other components of revenue, including loan growth and fee income, but you're keeping the same revenue outlook. So help us understand why that might be.

margin outlook is better, but the revenue outlook is unchanged. Yes, that's pretty simple, Brandon. Basically, we're forecasting lower originations from our mortgage business. Given there's a higher probability of a rate hike coming in September, we are seeing a slowdown in our pipelines right now. So that's kind of the offset that we're anticipating for the back half of the year. Hopefully it will be better than that, but right now we're just trying to be, you know, given that the market prediction for more rate hikes in September, we just wanted to give more cautious guidance on that.

Okay. All right. Thanks, Al. No problem. Thank you. If you would like to ask a question, please press star 1-1 on your telephone. One moment for the next question. The next question is coming from the line of Damon Del Monte of KBW. Please go ahead.

Hey, everyone. I hope you're all doing well, and thanks for taking my questions. I just had a question on the paydowns that occurred this quarter. How much of that was just normal CRE paydowns, like we're seeing across the industry, and how much of it was sort of like Alaris-specific targeted, where you're looking to maybe exit some credits.

you weren't comfortable with so what I can tell you right now on we had a total pay down Damon of overall the purpose of the county creation was about three point eight million dollars okay and two point one of it was based the regular payoffs of the accelerated pay off of 1.8 I would say which is a broad mix.

okay and then like a little bit more specifically are you guys kind of going through the portfolio and exiting certain credits that maybe aren't meeting your standards today versus when they were originated? Did that also contribute to the paydowns in the quarter? Yes.

Yes, Damon, this is Karin. It did. As Jim mentioned, our teams in credit and banking have worked very hard to identify credits that either had deteriorated or just weren't core to our business going forward. And we feel really good about the progress that we've made.

teams have made. And that will be a standard culture of ours going forward for the portfolio.

Got it, okay. And then the loan guidance for mid single digits, I mean, pretty much flat for the first half of the year. So, I mean, that would kind of imply, you know, close to 10% 10% link quarter annualized for each of the next two quarters. Is that a reasonable way to look at it? Or do you think that it's maybe a little less than the third quarter and then a really strong finish to the year end? Yes.

Yes, I think that's a way to look at it. We have a pretty good solid pipeline, but we'll have a good solid push at the end of the third quarter, and we should have a good push into fourth quarter.

Got it. Okay. And then I guess just lastly on the provision outlook, Al, any guidance on kind of what you think a normalized provision level would be?.

I don't want to step on Karin's toes, I'll let you take that one. Yes, Karin. You know, the provision is going to be driven by loan growth at this point. And I think, you know, the level that we're at now is probably reasonably where we're going to be.

Got it. Okay, great. That's all that I had. Thank you. Thanks, Damon.

Thank you. One moment for the next question. Our next question is coming from the line of Nathan Race.

Piper Sandler, please go ahead. Hi, everyone. Good morning. Thanks for taking the questions. While Karin has the microphone, curious how you're thinking about the normalized charge-off trajectory for Alaris going forward. Obviously, some meaningful credit cleanup occurred in the quarter. So, just curious how you are looking at what loss content could look like, just given all the enhancements across the franchise over the last several years.

years and particularly just given the cleanup here in 2Q? Sure. You know, certainly the back half of this year we'll see reduced levels. You know, I think back to our long history, probably 25 years plus, our average charge off rate was in that 25 to 27 basis points range. And I think ultimately that's what we're seeing.

where we're going to end up going into the future. Okay, great. And then just going back to the margin, Al, just hoping to unpack some of the moving pieces on the right side of the balance sheet that you expect in the back half of the year. Looked like borrowings were up on both an average and a period basis in the course. So just curious what you guys are seeing in terms of kind of the core deposit gathering pipeline to fund that growth, or do you anticipate kind of working on wholesale funding, which maybe kind of aligns with kind of your margin guide of kind of the mid 350s for the back half of the year, which is kind of consistent with what we saw here in 2Q when you strip out the recoveries and accretions. So, I just want to make sure I'm thinking about those moving pieces properly. Yep. Yep. Thanks for that question, Nate. I'll take the first part and Jim can comment on the pipelines.

In terms of what we're.

we're seeing in the back half of the year, we are anticipating a little bit more rising costs than our deposit costs, given the rate hikes. We're hoping to lag at some, but we know that deposit competition is pretty intense right now. With that being said, too, we did refinance our sub-debt recently, too, which put a little bit more pressure on our funding costs, but we do not anticipate too much use of wholesale funding to fund our loan growth here.

because we do believe that our deposits, we should have deposit growth to offset it, but we have plenty of liquidity to offset to fund that growth if we need to tap into it. Yes, and getting to the deposit pipeline, as I said, the full pipeline is pretty robust. That does still include the deposit pipeline, so that still goes to the forecast of deposit. growth in the low single digits. Our government nonprofit group is certainly trucking along really nicely on deposits. But again, those mid-market clients carry some decent deposits to fund part of that loan growth as well.

Okay, got it. And then maybe I can stick one last one in for Katie. You know, you guys have, and Alaris, have always been quite proactive, invest in technology, of course. You know, with all the AI, you know, chatter out there these days, you know, I imagine that's going to create some incremental opportunities. So just curious kind of where you're seeing some early applications for AI and maybe what that can mean for some of the improvements. improvement in terms of just the optimization of some areas of the franchise going forward.

Yes, great question. And that has been a huge focus of us and particularly one of our top priorities in 2026. We are making investments and we're making them in very targeted areas where we have a really long-term high conviction for future returns, particularly as we've discussed in modernizing the retirement platform. And so, as I mentioned in my opening remarks, the technology is great, but it's all about the talent. the technology. And so a big win for us to land one of the professionals from FIS who will be instrumental in that modernization of retirement platform, which we think is one of the areas areas that has the most opportunity in terms of AI, automation, scalability, and all of which we believe results in improving margins and improving scalability in every one of our divisions. So those investments are ongoing, and we are running pretty fast and hard, and I'm really pleased with the success that I'm seeing the team have early on.

Okay, that's really helpful. Thanks for that, Katie. I'm sorry, Al, if I could just sneak one more in on expenses. The other line was up about $900,000 quarter over quarter. Anything to call out there?.

Yes, part of that other line on expenses that we have at the form comp plan where there's an increase in liabilities that gets booked as an expense, but also offsetting other revenues that also flows through too. Okay, got it. So there's an offset in fees. Really helpful. I appreciate all the color.

Thanks. Thank you. One moment for the next question. Next question comes from the line of Ken Cohutt of Raymond James. Please go ahead.

Hi, good morning everybody. Thanks for taking my questions. Maybe starting out with asset quality, I'm just wondering, do you expect any more charge-offs related to that one C&I credit that drove the elevated charge-offs in 1Q and a little bit more in 2Q? Or do you think you have a good handle on that one right now? Yes.

Well, we could see some. I think they're going to be at a much lower level. We do continue to have about a million dollar reserve on that. So, as I said earlier, the charge off level in the back half of the year is going to be quite a bit lower.

Okay, great. And then regarding the residential property and apartment complex that was moved to Oreo during the quarter, how long do you expect these assets to remain on the balance sheet? And then what are the associated costs with managing these properties in the meantime? I believe you called that out in the press release regarding the increase in the cost.

INCREASE IN OTHER EXPENSES. ANY COLOR WOULD BE GREAT. ANY COLOR WOULD BE GREAT. THANK YOU. THANK YOU. SURE. SURE. THE RESIDENTIAL PROPERTY WE THE RESIDENTIAL PROPERTY WE EXPECT TO RESOLVE BY THE END OF EXPECT TO RESOLVE BY THE END OF THE YEAR. and some of the holding costs associated with that were just minor improvements that needed to be made. So I don't expect that to be ongoing. The apartment building is actually in receivership, so there are costs related to the receiver with that building. And that one will more likely be resolved in the first half of 27.

All right, great. Thank you for taking my questions. Thanks, Ken.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Katie for closing remarks.

Thank you. Thank you to our shareholders, our analysts, and our board of directors for your ongoing confidence and support. Most importantly, thank you to all of our team members across the layers. The results that we discussed today are a direct reflection of their commitment to our clients, our strategy, and to one another. And while we are proud of our performance, we also recognize that success is never final. We remain committed to our work. to balancing strong financial performance today with thoughtful investments in talent, technology, and growth opportunities that will strengthen Alaris for the future. That discipline has helped us to build a more diversified, resilient company, and we believe positions us well to continue creating long-term value for our shareholders. Thank you again for joining us today.

This now concludes today's presentation. Thank you so much for joining.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, and welcome to the Alerus Financial Corporation Annual Meeting of Stockholders. Please note that this meeting is being recorded. [Operator Instructions] The meeting is about to begin.

Good afternoon, ladies and gentlemen. Welcome to the 2026 Virtual Annual Meeting of Alerus Financial Corporation. I'm Dan Coughlin, Chairman of the Board of the company, and it is my pleasure to serve as Chairman of this meeting.

Before we move to the business at hand, there are a few housekeeping items I will address related to today's virtual meeting. If you have not yet voted and wish to vote, or if you wish to revoke a previously submitted proxy, you may do so by clicking the Vote My Shares tab at the top right of your screen. To vote your shares, you will need the control number provided on your proxy card. Logging in with your control number will also allow you to submit questions.

We have reserved time later in the meeting to address any questions related solely to today's agenda. Should you wish to submit a question during the meeting, please click on the question box to the right of your screen. Type your question into the text box, then click the submit button. Please note that in the interest of all stockholders, we will only address those questions that are related to the matters that are being voted on at this annual meeting. We will also limit each stockholder to 2 relevant questions to ensure time for all stockholders to ask questions. We appreciate your understanding. For any general business questions about the company, please refer to the information available on our Investor Relations website, which includes our SEC filings.

At this time, I call the meeting to order. I will now introduce the current directors of the company in attendance at this meeting. Katie Lorenson, Randy Newman, Janet Estep, Mary Zimmer, Galen Vetter, Niki Sorum, John Yuribe and Jeffrey Bolton. We're very proud of the members of the Board and are grateful for their dedicated service. I offer thanks for their leadership and governance. Also in attendance is Michael Grossman, a representative from the company's independent auditing firm, RSM US LLP.

Now to the business of the meeting. Nick Brenckman will serve as the Secretary of this meeting. Stockholders who have already voted by Internet, telephone or mail need not vote again online at this meeting. Your voting instructions will be carried out this afternoon by the appointed proxies. They are Kari Koob and Nick Brenckman.

Mr. Brenckman, will you please review the matters related to the organization of this meeting?

Thanks, Dan. I have received an affidavit of mailing from Equiniti Trust Company, LLC, which states that mailing of the notice of the meeting and the Internet availability of the related proxy materials commenced on April 1, 2026, to all stockholders of record as of the record date, March 16, 2026. The polls have been open for voting on the matters listed in the notice since April 1, 2026. The polls will close for voting on any item when discussion has been completed on that item.

Since no stockholder nominations or proposals were filed in advance of this meeting as provided in the company's bylaws, the business of this meeting is limited to the matters listed in the notice. An alphabetical list of stockholders entitled to vote at this meeting with the number of shares held by each is present and available electronically for inspection at this meeting. The list has been available for the 10 days preceding this meeting.

The notice of the meeting and affidavit of mailing of the notice will be inserted in the company's minute book. There are in excess of 20,654,000 common shares represented at this meeting, which constitutes approximately 80.8% of the outstanding shares entitled to vote here today. Since a majority of the outstanding voting shares are represented here today, a quorum is present.

As Secretary of this meeting, I declare a properly constituted meeting duly organized and ready for business. We will now proceed with the business of the meeting. To act as the inspector of election, the Board has appointed Chad Johnson. Mr. Johnson has been duly sworn in and his oath will be filed with the records of this meeting. That completes the necessary formalities.

The first item of business today is the election of 9 members of the Board of Directors, each of whom will serve a 1-year term until the Annual Meeting of Stockholders to be held in 2027. These are distinguished individuals who have achieved success in their own business activities and have also made significant contributions to their communities. More specific biographical information on each director nominee is provided in the company's proxy statement.

The Board of Directors has nominated myself, Katie A. Lorenson, Randy L. Newman, Janet O. Estep, Galen G. Vetter, Mary E. Zimmer, John Uribe, Nikki L. Sorum and Jeffrey W. Bolton as listed in the company's proxy statement to serve as directors for a 1-year term or until -- and until their successors have been duly elected.

The second proposal on this year's ballot is the approval on a nonbinding advisory basis of the compensation paid to the company's named executive officers. The last proposal on this year's ballot is the ratification of RSM US LLP as the company's independent public accounting firm for the fiscal year ending December 31, 2026.

The proposals were described in detail in the proxy statement for this meeting. We shall now proceed to vote on these proposals. You are entitled to 1 vote for each share registered in your name. For the election of directors, the 9 nominees receiving the highest vote totals will be elected to serve as directors. The approval of the compensation paid to the company's named executive officers require the affirmative vote of the majority of the shares of common stock present in person, or represented by proxy at this annual meeting and entitled to vote on the matter.

Please note that because the say-on-pay proposal is nonbinding and advisory, the outcome of this vote will not be binding on the Board. However, the Compensation Committee of the Board of Directors will take into account the outcome of the votes when considering future compensation arrangements. The ratification of the appointment of RSM US LLP must receive the affirmative vote of the majority of shares of the company present in person or represented by proxy at this annual meeting.

We will now take any stockholder questions related to today's agenda. As a reminder, should you wish to submit a question during the meeting, please click on the questions box to the right of your screen. Type your question into the text box, then click the submit button. As noted at the beginning of the meeting, we will only address those questions that are related to the matters that are being voted on at the annual meeting.

Nick, are there any suitable questions?

Thanks, Dan. We have not received any questions.

Since we have not received any questions regarding the business before this meeting, the question-and-answer session is now closed. If you have not already done so, we remind you to submit your vote on each matter by clicking the Vote My Shares tab at the top right of your screen. Voting is about to be closed.

[Voting]

I now declare that the polls are closed on all matters before the stockholders. That concludes the voting on the proposals to be considered at this meeting.

The votes have been tallied by the inspector and the results of the vote are as follows. Each of the nominees for director received the plurality of the votes cast. Accordingly, each has been elected as a director of the company. The proposal to approve on a nonbinding advisory basis, the compensation paid to the company's named executives in the 2025 received the approval of -- in 2025, received the approval of the majority of shares of common stock present in person or represented by proxy at the annual meeting and entitled to vote on this matter.

The ratification of the appointment of RSM US LLP as an independent public accounting firm for the company received the affirmative vote of the majority of the shares of common stock present in person or represented by proxy at the annual meeting and entitled to vote on this matter. Accordingly, the appointment of RSM US LLP as the independent public accounting firm for the company for the fiscal year ending December 31, 2026, is ratified.

The inspector is directed to submit the certificate of inspection of election to be filed with the Secretary for insertion into the company's minute books together with the minutes of this meeting.

That completes the items of the agenda, and I declare that this meeting is adjourned. Thank you very much, ladies and gentlemen, for attending our virtual annual meeting. Have a good afternoon.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. [Operator Instructions] Today's call will reference slides that can be found on Alerus' Investor Relations website. You can also view the presentation slides directly within the webcast platform. [Operator Instructions] 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 statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and company's SEC filings.

I would now like to turn the conference over to Alerus Financial Corporation's President and CEO, Katie Lorenson. Please go ahead.

Thank you, and good morning, everyone. I appreciate you joining us today. With me today are Alerus' CFO, Alan Villalon; our Chief Operating Officer, Karin Taylor; our Chief Banking and Revenue Officer, Jim Collins; and Alerus' Chief Retirement Services Officer, Forrest Wilson.

We delivered a strong first quarter to begin 2026 and more importantly, one that demonstrates the progress we've made repositioning Alerus 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've taken are translating into tangible financial outcomes. Our results reflect 3 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 benefit services platform highlights the uniqueness of our funding model with nearly 1/4 of the deposits sourced from our integrated and synergistic business lines. Second, diversification continues to matter. More than 40% of our revenue are fee-based, capital-light and recurring.

Our retirement and 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've maintained discipline on expenses while continuing to make these 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've 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 loan 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 continue to trend lower, and 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 long-standing 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 improvements 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 remain comfortably above regulatory requirements.

During the quarter, we also 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 model, 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.

And with that, I will turn the call over to Al to walk through the financial results in more detail.

Thanks, Katie. Let's start on Page 9 of our investor deck, which is 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 an 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's 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 repositioning executed in the fourth quarter. During 4Q, we sold $360 million of available-for-sale securities, representing over 2/3 of total AFS securities at year-end 2025. This restructuring improved the overall average investment portfolio yield by 139 basis points from 4Q '25 to 3.84% in the first quarter of '26 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 represents 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 inflows -- 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 onetime items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue. Importantly, fee income continued to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment.

Let's turn to Page 20 for additional detail on fee income.

Turning to 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 in client-driven timing. Importantly, our core transaction-based fees remained 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, I'll provide 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's important to note this change had and is expected to have minimal impact on revenues as the revenue was replaced with new partnership onboarded during the quarter. Synergistic deposits within retirement -- 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, 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 continue 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 charge-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 maintained reserve level above the industry at 1.25%.

On Page 25, capital and liquidity remains strong. Tangible common equity to tangible assets improved to 8.85% and tangible book value per share increased to $18.15. We continue 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 discipline and growth -- 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 will continue to support 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 will exceed 1.25%. Finally, for additional -- 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 is well positioned for 2026 and beyond to reach new heights. With that, I'll now open it up for Q&A.

[Operator Instructions] The first question will be coming from the line of Brendan Nosal of Hovde Group.

Maybe just starting off here on the retirement business. Can you just unpack the decline in plan participants in AUA this quarter and help us understand why it's revenue neutral, as you pointed out in the release?

Yes, Brendan, this is Forrest Wilson. Thanks for the question. I can say since I got here, we've been putting an emphasis on a much more disciplined and aggressive approach to our 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 it was a legacy relationship that had significant assets but generated limited revenue relative to the size and added kind of disproportionate operational complexity for sure for our division. Coincidentally, additionally...

Forrest, this is Al. Can you -- we're getting some feedback here. Can you start over because you're sounding a little muffled.

Yes. Sorry about that. Is that okay?

Still muffled.

That's okay. I can take it, Forrest. Thank you for the question. In regards to the drop in assets 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.

Yes. Better, sorry.

That's better.

Sorry about that. Yes. I mean, as Katie mentioned, so 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 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 does reflect a deliberate focus on us trying to achieve higher quality, more profitable business. But it happened in the same quarter and is largely a revenue-neutral event between the 2.

Okay. All right. That's helpful color there. I appreciate it. Maybe moving on to loan growth and demand. Can you just spend a minute talking about what gives you confidence you'll still hit the mid-single-digit growth guide for the year, just given the softer start to the year?

Yes. This is Jim Collins. We're staying the course, right? We started off a little slow on loan production, but we are moving out some investor CRE that doesn't fit our risk tolerance or is some risk-rated loans that we don't -- that we're pushing out now.

But our C&I pipelines are fairly robust in all markets, except for our ag, our ag is relatively flat, which is fine with us. We will still plan to hit single-digit growth for the year, but we are still pushing out some credits for -- in 2026. in the investor CRE buckets.

Okay. Okay. That's helpful. I'm going to sneak one more in there. Just on the margin. Al, I think you said the exit margin in the month of March was 3.65% versus the quarter's reported 3.77%. Just help us understand kind of the evolution from the full quarter's reported number to that exit margin? Like what were the puts and takes there?

Yes. I mean a lot of it had to be loan deposit mix. So 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.

That's why I want to give the exit rate there. So we're only anticipating 20 basis points of purchasing accounting accretion in the second quarter, and it's probably going to step down from there because as we continue to see accelerated payoffs as far in the future into today. So those are kind of the main puts and takes. We did -- our cost of funds did decline nicely, too, from the Fed cuts in the fourth quarter of last year, and that was one of the big drivers along with the BSR.

And the next question is coming from the line of Jeff Rulis of D.A. Davidson.

Just circling back on that margin, Al. Just to be clear, the 3.55% to 3.65%, is that -- are you excluding accretion?

No, that's full reported number. That's for the full year.

And you're including your expected accretion in that figure?

Correct. But no accelerated payoffs for the remainder of the year. So we do expect purchase accounting accretion to decrease as each quarter progresses.

Okay. And the -- I think you mentioned to some adjustments in the March quarter, but that would imply flat to down. Is that -- maybe just -- it sounds like kind of margin compression from -- going forward? And what's the -- I guess, the cautiousness on that part? Is it just easing of deposit benefits?

Yes. No problem, Jeff. So it is partially easing deposit benefits. We did see a couple of rate cuts late last year. But also too, in the second and third quarter, we typically see outflows of deposits, especially from our public funds. So that's 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 bit of pressure on there as well.

Okay. And Al, in the first quarter, were there any interest recoveries in the margin that impacted the 3.77%. Is that anything in there?

No, there were none.

Okay. Got it. And then one other question is just to kind of back into the loan growth side. Maybe do you have production -- gross production in the first quarter versus Q4? It sounds like I heard the last commentary about pushing some credits out, but trying to get a sense for how that -- it sounds pretty good on a core basis. So anything on the production numbers that you can give us quarter-over-quarter?

From a C&I standpoint, we had really solid C&I growth. I don't have the numbers in front of me per se, but we're driving mid-market C&I growth fairly well with the full relationships. The CRE, some of the CRE that we put on the books 3 years ago, that's what we're moving off the books, first quarter, second quarter, that's what you'll see moving off the books.

And you'll 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'll continue to see that through 2026 and '27 as that has been our core focus the last 3 years.

Would you say production in C&I was greater in the first quarter than it was in the fourth quarter?

No. I think it was a little bit lower than it was in the fourth quarter. But I think the pipelines building the second and third quarter look very healthy.

And the next question will be coming from the line of Nathan Race of Piper Sandler.

Al, just going back to the margin discussion. If you strip out the accretion that you mentioned in the quarter, that implies core loan yields were kind of 5.60% in 1Q. And to get to your margin guide, I think that would imply a decent step down in loan yields, but it doesn't sound like there's anything unique in kind of that core loan yield in terms of interest recoveries in response to earlier questions.

So I'm just trying to kind of jibe the trajectory of loan yields, particularly within the context of what you mentioned in terms of new loan production coming on the low to mid-6s.

Yes. Thanks for that, Nate. I mean basically, just a little conservatism there, especially as we still think our core margin will be in the mid-3s, but as we continue -- as Jim probably could talk about this a little bit more, too, but we are seeing competition pick up, especially on the deposit front. So the benefit of those deposit cost of fund 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.

Yes. I would say in all markets, obviously, all banks are focused on deposits just as we are. It's getting extremely competitive. It's been competitive the whole time. Everybody is sharpening their pencils. So that continues to tighten.

Okay. That's really helpful. Maybe a question for Katie, just in terms of maybe some updated thoughts on excess capital management. You guys are building capital at pretty strong clips that even with some balance sheet growth returning, I think you're still going to be accreting capital quite nicely going forward.

So just curious how you're thinking about maybe executing on buybacks as a more continuous capital management tool, particularly just I imagine you -- the valuation probably isn't quite where it needs to be or should be considering where you trade on a price tangible basis.

Yes. Great question. Thank you. So from a priority standpoint, pretty consistent with what we've discussed in the previous quarters, invest, first and foremost, in organic growth, but returning capital opportunistically, especially, as you mentioned, when valuations warrant it is -- continues to be a priority. We were active this quarter. We intend to remain active in our buyback going forward.

Okay. Really helpful. If I could just sneak one more in on the wealth management front. I would just be curious to get an update in terms of kind of the traction you're seeing from some of the production-related hires that you brought on over the last several quarters. And just generally, how you're thinking about that revenue line growing this year, assuming we have some stability in equity market valuations over the balance of this year?

Yes. I would say we put on some hires end of last year, a couple more at the beginning of this year. We're seeing some traction on new revenue from them. And we have some additional hires that we're looking to hopefully hire on the balance half of this year.

We've had solid retention of all clients as we put on that platform, if you recall, last year. We've had -- the first quarter was predominantly just issues with the markets, but we should see generally good performance out of additional revenue growth out of new clients as we're putting on new wealth advisers going forward.

[Operator Instructions] Our next question will be coming from the line of Damon DelMonte of KBW.

So first one, just to circle back on the loan growth. So it sounds like you still have some targeted CRE loans to kind of work off the balance sheet. So as we think about like the quarterly cadence going forward, should we expect kind of like flattish balances here in the second quarter and then a nice jump in the third and fourth quarter to kind of get you to that full year target?

I would look to that, yes.

Okay. Okay. Great. And then given the slower growth here expected in the second quarter, should we kind of model in a very modest provision, especially given the sizable release of reserves this quarter? Like it seems like you feel like you've rightsized your reserve given the credit profile you have. So should we expect kind of a minimal provision that would just cover whatever charge-offs that you have?

Yes, Damon, I think that's right. I mean, going forward, our provision is going to be driven by loan growth and really the macroeconomic factors.

Okay. And do you feel like the mid-120s is probably a good run rate for you guys over time? -- absent any type of, obviously, macro deterioration?

Yes. I mean when I look at our pooled reserve, we're north of 110 to 120, I think, is a fair range, of course, depending on what happens in the economy.

Okay. Okay. Great. And then I guess, lastly, on expenses. I think, Al, did you say 2% to 3% -- or sorry, low single-digit growth for the full year off of last year? Is that correct?

Yes.

And we have a follow-up question from the line of Brendan Nosal of Hovde Group.

Just looking at the mortgage banking segment, if I look at originations and sales, like those are both seasonally down quite a bit, but the revenue was actually up sequentially. And I think you mentioned kind of MSR fair value benefits. Can you just size up how much of a benefit the MSR was this quarter?

Let me get that number for you. The other benefit, too, is that in our pipelines in the fourth quarter, we did have the rate cuts affecting our pipeline. So we actually had some mortgages in there that came in at higher rates, allowed us to get bigger gain on sale. So I would say that was the bigger driver for mortgage that quarter. Less impact from the MSR part.

Okay. Okay. And then one final one for me. I think you folks said in the prepared remarks that you continue to make progress on that one large nonaccrual loan that is still kind of working through resolution. Can you offer a little bit more color on kind of where you are on that credit, how you reserved and kind of where ultimate loss content on that loan might end up?

Sure, Brendan. This is Karin. We do continue to make progress 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.

And Brendan, just to close the loop on the fair value mark, we're just looking at right now a couple of hundred thousand for fair value on the MSR mark.

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

All right. Well, thank you, everyone. Appreciate you all joining today. I just want to take this opportunity to thank our team, first and foremost. The results that we discussed today and that you heard about today reflect our culture, our talent and our discipline across Alerus. And we have built a stronger organization in a relatively short period of time. I'm very proud of how our teams continue to execute towards our long-term objectives. Over the past few years, I think the consistency of our fundamentals is evident. This quarter represents another pearl on the string, disciplined execution of our strategy that we've been articulating, continued progress across earnings power, margin, funding, capital and credit quality.

I do want to mention that our overall credit quality has improved meaningfully. -- trends in asset quality, criticized loans and nonperforming assets continues to move in the right direction. And we do remain confident that the net charge-offs will normalize towards 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 that we've invested in. 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.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now all disconnect.

Good morning, and welcome to the Alerus Financial Corporation earnings conference call [Operator Instructions]. Today's call will reference slides that can be found on Alerus' Investor Relations website. You can also view the presentation slides directly within the webcast platform. [Operator Instructions] 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 could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release in the company's SEC filings.

I would now like to turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us. I appreciate this opportunity to share reflections on the year and offer some perspective of the strategic position and momentum of our company as we enter into 2026. Joining me today is Alerus CFO, Al Villalon; COO, Karin Taylor; Chief Banking and Revenue Officer, Jim Collins; and Alerus Chief Retirement Services Officer, Forrest Wilson.

2025 was a milestone year for Alerus in which we demonstrated not only strong core financial performance but significant execution of major strategic initiatives that positions the company for sustainable organic growth and a return to top-tier profitability and performance. I'm incredibly proud of the team, not just for the financial results, including posting a core ROA of 1.62% this quarter, but for the collaborative efforts to accomplish these initiatives during the year. It is evident through our ability to set goals, hold each other accountable and exceed expectations that the leadership team and the talent throughout this company is exceptionally strong indeed.

One of the most notable accomplishments of 2025 was delivering results well above our committed targets, both financial and nonfinancial in our first full year of operating as a combined organization with Home Federal. We delivered an adjusted ROA of 1.35% and an adjusted efficiency ratio of 64.45%, in addition to a net retention rate of deposits close to 95% and critical retention of key talent throughout the organization. These results solidify our integration capabilities of aligning people, systems, resources and culture quickly and effectively.

Our focus in 2025 was to continue to enhance our commercial bank into sustainably improve returns while focusing on our long-term strategy. In the back half of the year, we executed a purposeful deleveraging plan, actively managing loan paydowns and pruning marginal credits to strengthen our balance sheet and improve our flexibility. As we saw success in these initiatives, we took disciplined action to sell our legacy low-yielding available-for-sale securities portfolio.

This balance sheet repositioning improved our earnings power going forward, reduces our AOCI volatility, enhances capital generation capacity and gives us greater flexibility for lending in our markets. The deliberate steps we took position Alerus for stronger performance and tangible book value growth in 2026 and beyond and demonstrates our commitment to creating long-term sustainable value for our clients, our communities and our shareholders.

On the banking side, we saw a steady build in momentum throughout 2025, especially in the second half of the year. Excluding the purposeful reductions in CRE, the targeted loan sales, and our selective managing of renewals, organic loan growth for the year would have been closer to mid-single digits. Of note, our strategic entry into the mid-market C&I space gained real traction as we move through the year, and we enter 2026 with strong pipeline.

Organic core deposit growth also picked up momentum in the back half of the year with the focus shifting from attention as the team members work through the deposit systems conversion. We are seeing some nice large opportunities for mid-market and government after-profit treasury management in early 2026, which should enhance our deposit growth through the year.

From a margin perspective, strong pricing discipline on both sides of the balance sheet throughout the organization drove the core NIM higher. Nonperforming loans ticked up higher with the migration of an acquired purchase participation that was previously identified as a problem loan. This is a multifamily property in the Twin Cities with a 15% reserve and it should resolve relatively quickly. Our largest nonperforming exposure continues to be a large multifamily loan in the Twin Cities with a book balance of approximately $32 million. This property now has multiple offers and is currently 74% leased. We are reserved at about 17% and continue to expect resolution by midyear.

Leading credit indicators showed meaningful improvement over the second half of 2025, including a 30% reduction in criticized asset levels. While we had another quarter of net recoveries and a slight reserve release, the allowance for loan losses remained robust at 1.53% of total loans. In addition, capital accretion boosted the TCE ratio to 8.72% putting the balance sheet in a strong position for organic loan growth.

Moving on to our ultimate differentiator, our fee income businesses, where we grew core revenues 7% year-over-year. Although our most recent acquisitions have been strategic bank additions in key markets like Rochester, Minnesota and Phoenix, Arizona, we have maintained fee income at over 40% of total revenues, almost 3x the average of most financial institutions.

Notably, we ended the year with assets in our retirement and wealth divisions at nearly $50 billion or 10x the assets in our Banking division. Our retirement division delivered strong results, including robust sales, continued better-than-industry client retention and growth in plans and participants. We ended 2025 with the strongest revenue momentum this division has seen. Momentum, we believe, will continue into 2026 and beyond. Our retirement business remains integral to our overall success, providing over 1/4 of the company's funding and serving as a powerful internal source of wealth management opportunities.

In 2025, we continue to expand our national presence through partnerships anchored in our distinguished reputation for outstanding client service. As the 25th largest provider in the country and with a new leadership team in place, we will continue to invest in technology and AI to enhance scalability and improve margins.

During the year, we successfully converted our entire wealth business onto a new system, achieving 100% client retention thanks to excellent execution by our support teams and the high-touch service delivered by our wealth advisers. This reinvestment strengthens our foundation and positions us to advance our strategic plan to double the number of advisers across the Alerus franchise with the aspirational goal of growing our wealth assets at the same pace as our baking assets.

Earlier this month, we finalized the first step in building our next-generation team with a selection of our new wealth management leader, an experienced professional with deep expertise in wealth, trust and institutional advisory and a proven ability to recruit talent and drive key strategic initiatives.

On a core and reported basis, we saw strong operating leverage even as we modernize our systems, implemented new core platforms and strengthened our digital capabilities, while we produced record levels of sales throughout many of our business lines. We did this all while managing our head count down over 6% from its peak in October 2024. These upgrades allow us to move faster, create more consistency in client experience and operate with greater scalability. They also ensure we're building a future-ready organization, one that is ready to embed AI and automation where it improves quality, efficiency and client insights.

CET1 capital levels ended the year at 10.28%, up from 9.91% a year ago, giving us ample flexibility to support growth, sustain our dividend and selectively pursue opportunities. Our primary focus remains on organic growth and strategic hiring as we continue to see meaningful talent and market share opportunities stemming from recent M&A disruption in the Twin Cities.

As the second largest locally-led financial institution in the market with $55 billion in banking wealth and retirement assets, nearly $300 million in adjusted revenue and over $600 million in market cap, Alerus is well positioned to capture this momentum. Over the past several years, we have successfully listed out high-performing teams and professionals, leveraging our deep expertise in C&I, private banking and wealth management. The strong synergies across these business lines, combined with our expanding physical and brand presence in the Twin Cities position us to continue attracting top talent, growing C&I relationships and serving more high net worth clients.

As we enter 2026, we do so from a position of strength and are set for continued momentum. We have a unified and clearly defined strategy, a modernized operating environment, a derisked future-ready balance sheet, durable, diversified revenue engines across banking, wealth and retirement, strong capital liquidity, a deep leadership team built for the next chapter and a culture centered on accountability to each other, our shareholders, our clients and our communities. We expect to continue generating positive core operating leverage, expanding tangible book value and delivering top-tier long-term returns. The work we did in 2025, integrating, modernizing, derisking and aligning creates the conditions for stronger and more consistent performance in the years ahead.

With that, I will hand it over to Al Villalon.

Thanks, Katie. Before I start, let's recap at a high level, 2025, as you can see on Page 8 of our investor deck that is posted on the Investor Relations part of our website. We just posted record adjusted earnings and over 21% adjusted return on tangible equity after the biggest acquisition in company history. Also, we continued our strategic balance sheet repositioning to ensure continued success in driving shareholder value creation. For the past several years, the company's risk and return profile has dramatically improved for the better. Change takes time and change will continue as environment changes.

I will now jump to Page 11 of our investor deck to go over our financials in more detail. On a reported basis, net interest income increased 4.7% over the prior quarter, while adjusted noninterest income increased 8.3%, which excludes the loss on securities and other onetime items. Net interest income grew due to a decrease in our cost of funds. Fee income grew as revenues grew both in our retirement and wealth segments. Overall, fee income, excluding the loss on securities, continues to remain over 40% of revenues and over double the industry average.

Let's dive into drivers of net interest income on the next slide. Turning to Page 12 in the fourth quarter. Net interest income continued to reach new heights at $45.2 million, and our reported net interest margin increased to 3.69%. Total cost of funds decreased 16 basis points to 2.18%. We also had 52 basis points related to purchase accounting accretion and nonrecurring items in the quarter. Excluding these 52 basis points, core interest margin was 3.17%, a 12 basis point improvement from the third quarter.

We continue to remain disciplined in pricing on both loans and deposits. In the fourth quarter, we saw new loan spreads of 258 basis points over Fed funds while deposit costs were coming out of 116 basis points below Fed funds. These spreads make up what we call a new business margin of 374 basis points. This is a very strong margin, which we continue to expect to build core net interest income and will replace purchase accounting accretion.

Let's turn to Page 13 to talk about our earning assets. At the end of the fourth quarter, loans decreased 1.3% over the previous quarter. The decrease in loans was driven by strategic downsizing of the loan portfolio to help improve our overall risk profile. As previously mentioned, we pushed out credit risk from noncore loans and did not renew certain relationships. Overall, our loan mix remains around 50% fixed and 50% floating.

On investments, we sold $360 million of available-for-sale securities, which represented over 68% of total AFS securities. The securities sold had an average weighted yield of 1.7% and a weighted average duration of 5.1 years. Proceeds on the securities sale were reinvested into new investment securities with a weighted average yield of 4.7% and a weighted average duration of just over 3 years. Excluding balance sheet derivatives, we remain slightly liability sensitive. Any 25 basis point cut in Fed funds should help improve our net interest margin around 5 basis points.

Turning to Page 14. On a period ending basis, deposits declined 5%, mainly due to calling in of over $165 million in broker deposits and the running off of another $45 million in other wholesale funding to optimize our cost of funds. Excluding the intentional optimizations, deposits declined approximately only $10 million or 0.2% from the prior quarter. Despite the overall decline in deposits, our loan-to-deposit ratio was 96.6%. Lastly, since the close of the acquisition of Home Federal, our depositive retention rate remains close to 95%.

Turning to Page 15. I will now talk about our banking segment, which also includes our mortgage business. I will focus on the fee income components now since net interest income was previously discussed. Mortgage saw only a 4.2% decrease in originations during the quarter. We usually see a bigger seasonal slowdown in mortgage, but we saw refi activity pick up in the fourth quarter. Currently, we are seeing the usual slowdown in originations as January is off to a slower start. Lastly, we saw approximately $1 million in swap fee income this quarter. As a reminder, swap fee income tends to be lumpy from quarter-to-quarter.

On Page 16, I'll provide some highlights on our Retirement business. Total revenue from the business increased to $17.3 million, a 4.6% increase over the prior quarter. Most of the increase was driven by growth in both asset and transaction-based fees. Assets under administration and management increased 2.1% due to market performance and net positive asset flows into our Retirement business during the quarter. Synergistic deposits within our Retirement segment grew 5.6% over the prior quarter. HSA deposits grew over the prior quarter to over $203 million. HSA deposits continue to remain a strong source of funding for us as these deposits only carry a cost of 10 basis points. These deposits are a valuable source of funding for the bank, which are not reflected in the margin information in this slide.

Turning to Page 17, you can see highlights for our Wealth Management business. On a linked quarter basis, revenues increased 13.4% to $7.4 million, while end-of-quarter assets under management increased 0.8%, mainly due to market performance. Revenue increased due to an increase in asset-based fees.

Page 18 provides an overview of our noninterest expense. During the quarter, noninterest expense increased 2.7%. The increase was partially driven by an increase related to the opening of a new facility in Fargo, North Dakota. We also saw an increase in technology expenses driven by new core systems such as our wealth and online banking platforms. Professional fees increased related to the balance sheet restructuring that occurred at the end of 2025.

Turning to Page 19, you can see our credit metrics. During the quarter, we had net recoveries of 3 basis points. The quarter-over-quarter decrease was primarily driven by $1.9 million recovery in the third quarter of 2025 related to a loan that had previously been charged off. Nonperforming assets were 1.27%, an increase of 14 basis points from the prior quarter, driven by a slight increase in nonperforming assets and a decrease in overall assets.

I'll discuss our capital liquidity on Page 20. Our tangible common equity ratio improved to 8.72% versus 8.24% in the prior quarter. We continue to have close to $2.8 billion of liquidity to help support loan growth in any liquidity events. We remain committed to driving tangible book value growth with excess capital being used to support organic loan growth, our dividend payout and share repurchases.

Now turning to Page 21. I'll update you on our guidance for 2026. We expect the following: for 2026, we expect loans to continue to grow at a mid-single-digit growth rate. We expect to grow deposits in the low single digits. As previously mentioned, we have ample liquidity to meet any loan growth in excess of deposit growth. For 2026, we're expecting our net interest margin to be around 3.5% to 3.6% which will include about 16 basis points or just over $8 million of purchase accounting accretion and no early payoffs. This is close to a 60% reduction of purchase accounting accretion from 2025. You'll continue to see improvement in core net interest margin replacing purchase accounting accretion for 2026. As a reminder, improvement is not linear.

With the aforementioned guidance, net interest income is projected to grow low to mid-single digits for 2026. We expect our adjusted noninterest income to grow in the mid-single digits driven by continued core growth in our wealth and retirement businesses. Those swap fee income is included in this guidance as it tends to be difficult to estimate and dependent on client demand. Overall, net revenue is poised to grow mid-single digits. Noninterest expense is expected to grow low single digits, which shows our commitment to driving positive operating leverage.

For 2026, we expect our ROA to exceed 1.2% for the year. We do not have any further Fed cuts in our expectations for 2026. And again, for every 25 basis points cut in rates, we expect NIM to improve about 5 basis points. While we showed the underlying potential is better and bigger company in 2025, 2026 is about continued improvement of our core businesses to drive higher return -- to drive returns higher. So get on the bus and buy some Alerus.

With that, I'll open up Q&A.

The first question comes from Brendan Nosal of Hovde Group.

Maybe just starting off here on kind of balance sheet dynamics for '26 with the mid-single-digit loan guide and then the deposit guide for low single -- totally get that you had the liquidity to fund the loan growth that you're seeing coming through. Maybe just speak to your comfort bringing up the loan-to-deposit ratio from current levels? And is there any kind of internal ceiling that you want to manage around from here?

Brendan, I'll take this, this is Al. We try to manage around a 95% loan-to-deposit ratio, but we also acknowledge that we typically see that tick up as we see some outflows from our public funds, especially in the second and third quarter of every year. But we look to usually have around a 95% to 96% loan-to-deposit ratio.

Okay. Maybe turning to expenses. Just kind of curious what you have underlying that outlook in terms of tech investments or room for team ads across the year kind of baked into that outlook?

So in terms of team ads, I'll let Jim talk about that, but we do have a incorporated into net guidance. Also from a tech standpoint too, we've incorporated our contracts that have some variable costs going up over the year and also the new platforms we've just implemented.

We have ads for -- specifically in the wealth areas embedded in the expenses in '26 and a number of adds in Commercial Banking embedded in the expenses for '26.

Our next question comes from the line of Jeff Rulis of D.A. Davidson.

A question on the loan growth expectations and even the fourth quarter runoff. I want to get a read on a portion of which was credit trimming maybe in the -- take it, the fourth quarter first and any idea of kind of the portion of that runoff that was maybe driven by you are credit trimming?

I'll take that. This is Jim. A fair amount of it was designed, right? We certainly wanted to run out some of the marginal credits or the credits that were credit related. But we also wanted to drive out orphan credits or non-full relationship credits and pair down our CRE concentrations and really build up our C&I. So as we look at our portfolio, and know that the profitability of C&I is a lot higher than our CRE and change in our mix. We're pairing down our CRE. We're building up C&I, we don't want orphan relationships. We want full relationships, and we want to push out any marginal credits that we think might end up in the credit box. And we will continue that philosophy in '26. That's why we're looking at a mid percentage of loan growth in '26.

And Jim, if I were to look at kind of year-over-year low single digit in '25, mid and '26 and understand the mix focus there. But would it fair to say the sort of targeted or designed runoff in '26 that's less of a headwind than you saw in '25?

Yes, I would.

Okay. Great. And somewhat related on the -- Katie, I think you touched on the linked quarter nonaccrual lift. Again, what was that in terms of type and segment?

Sure, Jeff. This is Karin. I can take that. The increase was related to multifamily loans that we acquired. It is here in the Twin Cities. We've got a 15% reserve on it. There are already offers on the property. And so we expect that, that will resolve certainly in the first half of this year.

That's great. And last one for me on the margin. the trajectory of that through the year is a 10 basis point range, 350 to 360. But -- and again, does not assume rate cuts, I appreciate the language there. But through the course of the year, is it kind of steady state 355 or kind of do you see it building throughout the year? Any color on the pace of the margin over the year?

Yes. Thanks for the question, Jeff. It's going to be gradual. And the way I determine it is it's going to be really dependent on how our deposit ebb and flows, especially as we see those summer months come in and our public funds go out. So I would expect some gradual improvement in there, but that's why I made the comment, it's not really linear.

Our next question comes from the line of Nathan Race of Piper Sandler.

Just going back to the margin discussion, Al, I was wondering if you had the dollar amount of accretion in the quarter. And maybe what's a good starting point for the core margin ex accretion just given the full benefit of the securities portfolio repositioning that you'll have in the first quarter?

Yes. So last year, we had approximately about $20 million of purchase accounting accretion from 2025. This year, we're looking for about $8 million and I would say that, that $8 million is pretty evenly spread out. So it's a little bit -- just a little bit over $2 million in the first quarter and kind of scaling down to just right at $2 million in the fourth quarter. And then I think a good exit rate right now is looking at the 317 that we had in the fourth quarter and growing it from that.

Okay. Great. Really helpful. And then Katie, your comments around kind of trying to double the wealth management advisers across the franchise going forward. I was wondering if you could just speak to kind of the time line and kind of where you're at in terms of bad head count and then kind of where you're looking to add additional depth to the wealth management team going forward across the...

This is Jim. I'll take that one. We have 26 advisers now in all the markets. We certainly want to add more advisers in our larger markets, the Twin Cities, Phoenix and Wisconsin. We've already added one this year, which will start here in a couple of weeks. We've had slated for another 6 or 7 the rest of this year, spread out throughout the markets. We will take the opportunity to add talent where we find it. So I'm not exactly sure at this point where we're going to find it, but we plan to actively recruit. We are actively recruiting in all markets. So it depends on where we find it, but we are actively recruiting in all markets. We plan to add those throughout the year. But again, it's all dependent on when we find the right talent at the right time.

Okay. Perfect. That's helpful. And then I would just be curious to get an update. You guys still -- even with the balance sheet repositioning in the quarter, still have nice excess capital position and that should continue to build just given the profitability improvement that was alluded to in the guidance. So maybe just curious to get an update from Katie in terms of if you're feeling more optimism these days in terms of the opportunities set out there to perhaps augment the retirements platform via acquisition?

Sure. Thanks, Nate. I would -- on the capital front, priorities remain consistent with what they've been over the course of the past several quarters and years. So organic growth, number one, team lift-outs, market share opportunities, dividends, buybacks and Obviously, on the M&A front in that retirement and HSA space continues to be a priority for us. We continue to expand and deepen the conversations that we're in with potential partners. And those that -- again, that's agnostic to location in the country will remain selective and disciplined and make sure that there are good matches. But I would say overall, yes, we continue to build our pipeline of potential partners in that space.

Okay. Great. Very helpful. I'm sorry, if I could just sneak one last one in for Al. On the expense -- on the occupancy expenses, I appreciate that, that included the costs with the location in Fargo. Does the increase from 3Q to 4Q, does that kind of come out starting the first quarter?

There is some of that in the fourth quarter, but then we had actually some -- there's going to be a tick up in occupancy because we did have opening of a new facility as well.

Okay. So any thoughts on just a better run rate for that number going forward?

Well, I mean we're still looking at, again, low single digits for expenses over the year. I mean, we exited the quarter roughly around $51 million. I mean I would just grow it from that.

Our next question comes from the line of Damon DelMonte of KBW.

First question as it relates to the loan growth. How much of your view on the growth is being driven just by continued strong underlying economic trends versus opportunities that are being created through like market disruption from M&A?

I would say what I see going into '26, it's probably for us, it's probably mostly market disruption and market share from the talent that we've acquired over the last 3 years. So if I was to guess, it's probably going to be 70-30, 70% from the talent and the relationships that they know at other banks and market disruption and 30% of just economic growth. That's my best guess rolling into '26 at this point. But talking to business owners, it feels like '26 is going to be a good year for a lot of businesses.

Great. I appreciate that color. And then with respect to credit and trying to think about provision, Al, any thoughts on kind of how you see the provision playing out over the upcoming quarters?

Yes. Damon, this is Karin. I'll take that. I think the provision in '26 is going to be driven by loan growth and macroeconomic factors. We feel that we're adequately reserved on those nonperforming deals. And with improving credit metrics, we think the primary growth in reserve will be loan growth.

Great. And I may have missed this earlier, but are you guys anticipating some of those nonperformers moving off here in the upcoming quarters to kind of lower some of those ratios?

Yes . We've got several in that bucket where we expect resolution in the first half of the year.

Okay. Great. And then just last question on the tax rate. What's a good tax rate we should think about here for 2026?

24% Damon.

Our next question comes from the line of David Long of RJ.

On the deposit side, just curious what you're seeing on competition both from your retail deposits, from the HSA deposits, does it differ across the different platforms? And is the pricing that you're seeing, do you feel like it's rational?

This is Jim. I think it's very competitive. I think in all markets, it's competitive. It's competitive on the retail side. It's competitive on the commercial side. I think we have a fairly good strategy in place for 2026, but it will be, again, very competitive across the board.

Is it rational? Generally speaking, yes. I think in pockets, you'll find some banks that are being aggressive. You can say that's a little irrational sometimes. But generally speaking, I think I would just put it as very competitive. So '26 will be very competitive for deposits. That's Al's comment earlier, that will be the kind of the part of the NIM that will be how we'll will be affected throughout the year on where that kind of levels out throughout the year. So we're going to work extremely hard on that piece throughout the entire year, but it's going to be very competitive.

Great. And then just a follow-up to that. As you're thinking about the loan growth into the next year, how will the mix look differently with your guide at the end of '26 versus what we're looking at here at the end of '25?

As I commented earlier, we're really focused on full C&I relationships. So the portfolio in '26 is really gearing up like we've trended towards the end of '25 is really full C&I relationships. So we're trying to change the mix to more full C&I and less CRE. So the goal at the end of '26 is to change that mix to more C&I, more mid-market C&I. Hopefully, that answers your question.

Yes. No, that's definitely helpful. And looking at the deposit side too, how do you see the concentration on the deposit side changing?

David, before I answer that question, first, I just want to congratulate you on your Indiana Hoosiers on winning the national title. I hope to feel that euphoria someday would Notre Dame. But to answer your deposit question, I mean, we are seeing some -- we continue to see some erosion on the noninterest-bearing side because the environment is still very competitive. We're still seeing our non-maturity deposit rates around the 2% to 3% level in terms of new rates -- for new accounts coming in. So we're still going to see some shift from noninterest-bearing to interest-bearing.

Great. And unfortunately, I did not take up your advice and purchased the options for tickets using the CFP website, but I was able to attend the game in [ Atlanta Beach Ball ]. So it was a ton of fun. Thanks.

And I'm showing no further questions. This concludes our question-and-answer session. I will now like to turn the conference back over to Katie Lorenson for any closing remarks.

Thank you, and thank you, everyone, for your time today. Thank you to all of our team members across this great company. The progress we've made together reflects the team's hard work, the strength of our strategy and the resilience of our diversified business model. I also want to thank our shareholders, our clients and our communities for their trust and partnership. We're excited about our outlook as we enter 2026 with confidence, momentum and a clear vision for the future. Thank you, everyone.

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

Good morning, and welcome to Alerus Financial Corporation Earnings Conference Call. [Operator Instructions] Today's call will reference slides that can be found on Alerus' Investor Relations website. You can also view the presentation slides directly within the webcast platform. [Operator Instructions] 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 could 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's Corporation President and CEO, Katie Lorenson. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2025 earnings call. Joining me today in the Twin Cities is our CFO, Al Villalon; our COO, Karin Taylor; and our Chief Banking and Revenue Officer, Jim Collins. Joining us by phone is our Chief Retirement Services Officer, Forrest Wilson. I plan to cover a few highlights for the quarter and then spend a few minutes recapping the progress we have made as a team and as a company.

Results for the quarter were consistent with expectations. Another pearl on the string as we continue to execute our long-term strategy, drive transformation across our commercial wealth bank and position the company for sustainable value-driven growth. Improved results reflect our team's strategic actions and progress towards top-tier performance.

Our ultimate differentiator at Alerus is our diversified business model, which drives nearly double the average fee income compared to other banks. Due to the annuitized and capital-light businesses of Retirement and Wealth, Alerus has revenue resilience across cycles. This enables us to deliver consistent value to our clients and consistent returns to our shareholders. This quarter, we continued to deepen client relationships and expand our reach. Our seasoned team of bankers, both the new and long tenured at Alerus drove robust organic growth in both our commercial and private banking segments.

Our Retirement and Benefits business remains a national leader and continues to establish meaningful partnerships across the country. In Wealth Management, we completed a major platform upgrade, enhancing both the client and adviser experience and laying the groundwork for future recruiting efforts and client growth.

We continue to derisk the balance sheet with our company-wide prioritization of proactive risk management. Last quarter, we sold a portfolio of higher risk acquired hospitality loans. We previously marked this portfolio and realized a gain of $2.1 million on the sale in the second quarter. Throughout this year, we have continued to diligently work through and out of credits that are not core to where we are focused or those that we think could be negatively impacted in an economic downturn.

Our emphasis on capital allocation to organic growth in full C&I relationships resulted in the investor CRE capital ratio dropping below the 300% threshold.

Another example of our conservative and proactive risk management was a large recovery during the quarter of a credit we charged off only 5 quarters ago, bringing the year-to-date charge-off ratio to 8 basis points which remains below our lower-than-industry long-term history of 27 basis points of net charge-offs.

Nonperforming assets to total assets were 1.13%, an increase of 15 basis points from the prior quarter. The quarter-over-quarter increase in nonperforming by one commercial relationship. The commercial relationship that was recently identified has many clients since 2010. They are a general equipment lessor for transportation, logging, construction and manufacturing industries. They experienced cash flow challenges relating to one large customer going out of business and delayed work tied to FEMA funding. There is currently a 50% reserve on the relationship, pending additional information on equipment values.

Of the $60 million in nonperforming assets, our largest exposure continues to be a large multifamily loan in the Twin Cities with a book balance of approximately $32 million. We saw some progress on this credit as permanent certificate of occupancy was issued in July of this year and is currently 67% leased. The property was publicly listed for sale this month. Based on various expected outcomes, we are currently reserved at about 15% expect resolution by midyear 2026. These two loans make up nearly 75% of our total nonperformers and we do not believe the level of nonperformers to be indicative of any widespread credit concerns.

We ended the quarter with a strong reserve level of 1.51%. In addition, capital accretion boosted the TCE ratio to over 8%. Tangible book value grew nearly 5%, and we returned $5.3 million to shareholders through our long-standing commitment to our dividend.

As we look back over the last several years and forward through the remainder of 2025 and beyond, our strategic positioning is exceptionally strong, and our priorities are clear. Since 2022, Alerus has made transformational changes and substantial progress to return performance to top-tier profitability as a premier commercial wealth bank and a national retirement plan provider. We have completed succession at the entire negative team level and beyond and have strong leaders in place throughout all parts and levels of the organization, many of which have joined Alerus from much larger institutions and are key to our progress in making Alerus, not just bigger but even better.

We have courageously transitioned the majority of our commercial making team in our growth markets over the last several years with specialized industry veterans with deep credit acumen. Key verticals have been established and teams have positioned us to grow mid-market C&I and equipment finance. In addition, we have added teams of deposit-rich verticals, including private banking and government not for profit.

In 2023, we lifted out and added over 120 new team members while reducing head count over 10%. We have strategically divested business lines that are not core to our franchise and successfully acquired in key markets, including Arizona, Rochester and Wisconsin. We retained #1 market share in our hometown market of Grand Forks, despite new market entries and targeted competition. Our markets across our franchise are exceptional in terms of full relationship growth opportunities and economic and household demographics.

While performance ratios are improving, we continue to monitor and evaluate opportunities to enhance our core earnings profile. This includes the engagement of a third-party consultant to ensure we have processes and systems in place to profitably and sustainably scale and grow our business with improving margins and exceptional risk management. These challenging efforts to transform and improve the returns of our Commercial Wealth Bank were critical in order to receive the recognition of the embedded value of our stable and recurring revenue from our retirement and health businesses.

We remain bullish on our retirement business of which we are the 25th largest in the country. We intend to continue to build organically and inorganically in this highly scalable business. We put in place the first dedicated and experienced executive to oversee the business a year ago. With the leadership team now in place, we are doing the work to transition the operating model to optimize margins and introduce automation and AI in an industry that is growing with the support of legislation at rates well above GDP.

Our robust wealth division at Alerus is more valuable than that of the typical community bank with nearly all of the business being full fiduciary management and advising clients. The conversion of the new platform went incredibly well. We have a unique and differentiated value proposition for recruiting wealth advisers. And with improved technology, we are moving forward with our plan to double the wealth advisers, mostly in our growth markets over the next several years.

The fundamental foundation of the company is strong. The difficult work has been completed, and now we look forward to the ultimate goal of top-tier performance and being recognized and rewarded what they deserve in top-tier valuation. Our focus going forward is to keep growing organically by deepening client relationships and expanding in growth markets, leverage technology, data and AI to drive efficiency and deliver differentiated client experiences. Long term, we will continue to evaluate M&A opportunities, particularly in retirement and HSA businesses, where we have deep experience and catalysts to consolidation positions Alerus favorably as one of the few independent abrogators in the space.

Lastly, and as always, we intend to maintain our disciplined approach to capital allocation, risk management and expense control. We are confident in our strategy and the opportunities ahead. Our foundation is solid, and our team is energized. We are committed to delivering sustainable top-tier performance for our clients, our communities and our shareholders.

With that, I will now hand it over to Al to cover the financial results.

Thanks, Katie. Turning to Page 11 of our investor deck that is posted on the Investor Relations part of our website. On a reported basis, net interest income increased 0.2% over the prior quarter, while fee income decreased 7.3% Net interest income was stable as deposit inflows and organic loan growth offset the impact of the CRE hospitality loan sale and purchase accounting accretion was stable.

Excluding onetime items, mainly the gain from the loan sale from the second quarter, fee income was down only 1%. Our fee income remains over 40% of revenues and over double the industry average.

Let's dive into the drivers of net interest income on the next slide. Turning to Page 12. In the third quarter, net interest income continued to reach new highs at $43.1 million, and our reported net interest margin remained stable at 3.50%. Total cost of funds remained stable at 2.34%. We had 45 basis points of purchase accounting accretion in the quarter. Although 45 basis points, 17 basis points were from early payoffs.

We continue to remain disciplined in pricing as we continue to not price in the version of the yield curve for loans. In the third quarter, we saw a new loan spread of 259 basis points over Fed funds while the deposit costs were coming in 92 basis points below Fed funds. With the new business margin of 351 basis points, we continue to expect purchase account accretion to be replaced by core net interest income.

Let's turn to Page 13 to talk about our earning assets. At the end of the third quarter, loans grew 1.4% over the previous quarter. Multifamily real estate, C&I and residential real estate were the biggest drivers of loan growth. For the fourth quarter, we're expecting around $159 million or 4% of our loans to contractually mature. Overall, our loan mix is around 50% fixed and 50% supply.

On investments, we continue to let the portfolio roll off and revisit the higher-yielding loans. The portfolio has a duration of just under 5 years. For the remainder of 2025, we expect another $37 million of securities to pay down. Excluding balance sheet, derivatives remain slightly liability sensitive. Any 25 basis point cut in the Fed spun should help improve our net interest margin around 5 basis points.

Turning to Page 14. On a period-end basis, we were able to grow the cost by 1.7% despite the usual seasonal outflow we see from public funds. Growth was primarily driven by continued expansion to full commercial relationships. Over 70% of our commercial deposits now have a treasury management relationship with Alerus. Loan-to-deposit ratio remained stable at 93%. Lastly, since the close of the acquisition of Home Federal, our net retention rate remains over 97%.

Turning to Page 15, I'll now talk about our banking segment, which also includes our mortgage business. A focus on the fee income components now since net interest income was previously discussed. Overall, noninterest income for banking was $6.4 million for the third quarter. The second quarter included a $2.1 million gain related to the sale of hospitality loans. Excluding onetime items, net interest income was only up 1%. Mortgage saw a slight increase in originations during the quarter. We do expect the seasonal slowdown in mortgage for the upcoming quarters. We also saw very little swap income this quarter, which tend to be lumpy from quarter-to-quarter.

On Page 16, I'll provide some highlights on our retirement business. Total revenue from the business increased to $16.5 million or a 2.9% increase over the prior quarter. Most of the increase was driven by asset-based fees coupled with a slight increase in recordkeeping fees. Assets under administration and management increased 3.7%, mainly due to market performance. Synergistic deposits within our Retirement Group grew 3.4% over the prior quarter. HSA deposits grew almost 2% over the prior quarter, over $202 million. HSA deposits continue to remain a strong source of funding for us as these deposits only carry cost of around 10 basis points.

Turning to Page 17, you can see highlights of our Wealth Management business. On a linked-quarter basis, revenue decreased to $6.6 million, while end of quarter assets under management increased 4.3%, mainly due to market performance. Revenue declined due to a decrease in transactional revenues such as brokerage and insurance commissions.

Page 18 provides an overview of our noninterest expense. During the quarter, noninterest expense increased 4.3% due to an increase from higher incentives driven by our higher loan and deposit growth, along with incentives from higher mortgage originations. The increase in incentives was offset by decrease in benefit-related expenses. We also saw an increase in technology expenses as we transition to a new wealth and deposit platform. Occupancy expense increases, we opened a new office in Fargo, North Dakota and placed two older facilities.

Turning to Page 19, you can see our credit metric. During the quarter, we had net recoveries of 17 basis points. The quarter-over-quarter decrease was primarily driven by a $1.9 million recovery in the third quarter of a 2025 related to a loan that had been previously been charged off. Nonperforming assets were 1.13%, an increase of 15 basis points from the prior quarter. As Katie mentioned in her opening comments, we are currently carrying a 50% reserve in the long commercial relationship related to a general equipment lessor.

On the special capital liquidity on Page 20, our capital -- our tangible common equity ratio improved to 8.24%, which is higher than a year ago of 8.11%, right before we closed on the acquisition of Home federal. On the bottom right, you'll see a breakdown in the sources of $2.6 billion in potential liquidity. We continue to utilize some broker deposits to optimize our cost of funds. Overall, we continue to remain well positioned from both liquidity and capital standpoint to support future growth, or weather economic uncertainty.

Turning to Page 21 now. I will update you on our guidance for 2025 and provide preliminary guidance for 2026. We expect the following: For loans, we expect the year to end with over $4.1 billion. For 2026, we expect to continue to grow at a mid-single-digit growth rate. Total deposits should be around $4.3 billion at year-end. While we expect inflows from our public funds, we are also planning on calling in around $165 million in brokered CDs.

For 2026, we expect to grow deposits in the low single digits based on the projected ending amount of $4.3 billion for 2025. Net interest margin for 2025 is now to be expected higher and end around 3.35% to 3.4% on a full year basis.

For the fourth quarter, we're only expecting 23 basis points of purchase accounting accretion, which includes no early payoffs. For 2026, we're expecting our net interest margin to be around 3.35% to 3.45% which will include only about 18 basis points of purchase account accretion and no early payoffs. In comparison, we expect around 40 basis points of purchase and account accretion for the full year 2025.

As a reminder, we do not embed any further rate costs in our guidance. However, the guidance does include the recent 25 basis point rate cut that was announced this week by the Fed. Again, for every 25 basis points cuts in rates, expect NIM to improve about 5 basis points. We expect our non adjusted noninterest income for the year to end around $115 million in total. This will exclude the $2.1 million gain on sale of loans in the second quarter.

On the mortgage side, we expect originations to see a seasonal downturn in the fourth quarter. For 2026, we expect noninterest income to grow in the mid-single digits from the adjusted $115 million in total reflected for 2025. Adjusted pre-provision net revenue should end the year around $85 million to $86 million. Again, this is adjusted for onetime items in 2025, which is mainly the gain on sale of loans and severance and signing expenses. For 2026, we expect low to mid-single-digit growth from the $85 million to $86 million in adjusted PPNR.

Lastly, we expect our adjusted ROA to end 2025 greater than 1.15%, which excludes onetime items such as the loan sale. For 2026, we expect our ROA to exceed 1.10% for the year. We expect a normalized provision in 2026 and less purchasing account accretion relative to 2025, as previously mentioned.

With that, I'll now open up to Q&A.

[Operator Instructions] The first question will come from Jeff Rulis with D.A Davidson.

Maybe just on that last one, Al, on the provisioning level this quarter. I guess, pretty good growth is the lack of the provision maybe on the recovery I guess you've got some confidence on that larger credit as well. I just wanted to kind of get to that. And then as we go forward when you say normalized provision, if you could refine that a little bit, that would be great.

Jeff, this is Karin. I'll start. You're correct. The lack of provision this quarter was driven primarily by the recovery as well as a decrease in the requirement for pooled loans, particularly as we move that one problem owned individual impairment and then a decrease in our unfunded commitment requirement. In terms of provisioning going forward, that will be driven primarily by loan growth macroeconomic factors.

Okay. So the normalized term is kind of reserving for growth versus kind of the inputs that we had this last quarter, recoveries and such? Is that kind of...

That's correct.

All right. And I appreciate the outlook on the loan growth. Interested in your view, Katie or others, just in terms of a mid-single-digit outlook. But I guess where's the upside if things were to be better, would you frame that up? If we do get lower rates, kind of where do we see higher than mid-single digits, if that were to line up.

Jeff, this is Jim. If we do see some lower rates, I think we could see some higher loan growth closer to the 10%, 11%, 12% loan growth. But that's really going to be -- we're really going to be focusing on a lot of deposit growth -- at the point, for the most part, we're really sticking and focusing on full C&I relationship growth. So depending on how that deposit full relationship goes, Obviously, that comes with loan growth. So my guess is if rates do come in, we're probably inching up closer to that 9% to 10% loan growth.

Yes. I would add, Jeff, that the headwind to the loan growth is really our continued proactive work on the portfolio in terms of pushing out credits that just are core to our focus or that we don't have full relationships with and are not in our asset class priorities.

Katie, you mean there's -- would you suggest that there's maybe a little more work to do in '26 to kind of keep that capped a little bit? Is that what I'm hearing?

I think it will continue in -- throughout '25 and perhaps the early part of '26.

Our next question will come from the line of Brendan Nosal with Hovde Group.

I just wanted to dig into the margin outlook a little bit. Al, thanks for the comments on the accretion expectations for '26, I guess it kind of stands to reason even without additional rate cuts, it looks like you're baking in some improvement in the level of the core margin from here through 2026 even without additional rate cuts. Could you just maybe unpack the drivers of that a little bit?

Yes. That's a good question, Brendan. I mean we are expecting what you call core margin improvement or the way we look at it here, net interest margin, excluding purchase accounting accretion, but the big drivers of that for right now is -- I commented on earlier, we're seeing really good spreads on loans, and we're also seeing good spreads on deposits. So with that -- what we call the new business margin in excess of 350 basis points we continue to expect that net interest margin, excluding purchase accounting accretion to continue to improve.

Okay. That's helpful. Maybe one for me, just turning to fee income. If I annualize this quarter, you're around $118 million just on what you did this quarter. The guide for next year kind of implies right around there, plus or minus a little bit. So I just want to kind of dig into why the lack of more robust loan growth -- or sorry, more robust fee income growth and maybe what market and organic assumptions you're using for AUA and AUM in your fee business?

Yes. I'll take the first part of this is in terms of fee income growth for next year, we do expect mortgage to be under pressure just a little bit still. So that's just kind of where we're modeling we have to be conservative. The other part of it, too, is that we're not modeling much in terms of market growth.

Our next question comes from the line of Nathan Race with Piper Sandler.

Just going back to the last discussion point on fee income. Maybe Katie, could you just touch on some of the underlying drivers that you're seeing within the wealth and retirements in the areas these days? Particularly just curious around what you're seeing in terms of capture rate increases and just how you're kind of stemming some of the natural attrition within AUA as well these days.

I wouldn't say our trends are consistent in both the attrition side as well as the capture rate side on the retirement business. In the wealth business, again, we completed a full conversion onto a platform that is an upgrade for both the client experience as well as an adviser experience. We've had great success in recruiting and retaining exceptional advisers. And the technology now just removes a little bit of an obstacle because we do have such a differentiated recruiting profile. So those are not layered in yet in terms of the revenue growth of the expense side, but we do expect to move full force ahead in adding advisers in our growth markets.

That's really helpful. And just going back to the loan growth discussion, maybe for Jim. I appreciate there's potential upside to that mid-single-digit guide with lower rates. But curious how much of the M&A-related disruption the Twin Cities can also contribute to that. Obviously, there's been some distribution with a couple of notable competitors recently. So just curious if you guys can attract those clients just via your existing teams or if you're seeing opportunities or any appetite to hire additional commercial folks.

We are always very opportunistic on talent. So we always look for talent, and we do the cost benefit of that talent. We're -- certainly have upgraded talent and have a really good talented team now. And a lot of that talent has inroads to a lot of the disrupted banks in this market in the Minneapolis and some of the other markets. So we are finding success in those disruptions. So that will be part of the growth for 2026. For sure, that's some of the names that I see on the pipeline, that will be part of that growth. But we are always looking for talent, certainly in all markets where there's disruption and there's disruption in all markets, we definitely -- that is part of our strategy to take advantage of those disruptions, both with the talent and with the customer base.

Okay. That's great. And then, Al, I appreciate the guidance around PPNR growth for next year. Just curious, what kind of legacy expense growth you're kind of thinking about an underpinning that? There were some sequential increases across a handful of line items in the third quarter. So just wondering if there's any kind of cost that will come out as we enter 4Q or into next year? And just how you're thinking about overall legacy expense growth into 2026?

Thanks for that question, Dave. We're still in the midst of the budgeting process and evaluating opportunities to reinvest and save costs as well. So that's why there's a rate for PPNR right now, it will be up low to mid-single digits. We'll have more color for that as we get probably in the fourth quarter results when we finish the budgeting process.

Our next question is going to come from the line of Damon DelMonte with KBW.

Al, just to circle back on the expenses, given the uptick in the software technology line there, is that kind of like a run ratable level from this quarter? Or do you think there's some noise there that shakes out?

Yes, there's still going to be a little bit because a lot of the contracts these days have escalators in them. So we'll still see a slight uptick in that next year.

Okay. Great. And then the guide for the margin for '26, I may have missed what you said, you expect the fair value accretion impact to be that's embedded in there?

Yes. That's -- we're only expecting 18 basis points of purchasing accounting accretion in there, and that's with no early payoffs.

Got it. Okay. And then again, just to confirm, for each 25 basis point cut, the core margin should benefit by 5 basis points?

That's correct.

Okay. Great. And then lastly, do you guys have any NDFI loans in your portfolio?

No.

Okay, great. Everything else has been asked and answered.

Our next question comes from the line of David Long with Raymond James.

Just wanted to touch base on a couple of things on the balance sheet. On the funding side, time deposit growth led the deposit growth in the quarter. What are you looking at in deposit growth going forward? And what is the duration of what you've been adding and the yield on that?

So David, in terms of the deposits. Let me go circle back to you on that one. Let me just look this up what we've been adding on. Do you want to hit me another question and then?

Yes. Sure. The other thing I want to ask is just on the asset side, thanks for giving us some of the repricing metrics with the loans and the deposits. But how do you expect the mix to look over the next 6 to 12 months? Will that differ? Will you -- is there any interest in moving some of the securities cash flowing into loans at this point?

Yes. There's definitely the interest of moving the securities into loans because I mean, we basically have a low 2% yield right now in our securities book, and we're getting loans that are very much higher than Fed funds. So we definitely want to do that.

Our next question is a follow-up question from Brendan Nosal with Hovde Group.

Katie, I just want to kind of follow up on something you said in your prepared remarks about evaluating opportunities to enhance the return profile. Could you just expand upon that a little bit and kind of put a scope around what sort of things you might be looking to do in that regard. And then specifically, would you folks look at securities restructuring as part of that?

Sure. Well, as I mentioned, we have engaged a consultant, which is really focused primarily inside the commercial underwriting and origination processes. We believe, first and foremost, that's about getting better, faster and a better experience for all of our team members and our clients. But we do believe there may be some efficiencies that we realized from that, that will help us improve our profile.

In addition to a tremendous amount of work being done within the Retirement division to optimize how we deliver there. We think that industry, in particular, is absolutely full of opportunities for AI and automation. And so we think we can continue to improve margins over the long term in that business. And then relating to the balance sheet restructuring, that's something that we are always evaluating, those opportunities and that's not a change for us, that's been over the course of the past several years.

Also just on the follow-up call from -- for Dave Long there. New non-maturity deposit accounts in Q3 came in at rates of less than 3%, and our CD term rates were kept short.

This concludes our question-and-answer session. And I would like to turn the conference back over to Katie Lorenson for any closing remarks.

Thank you, everyone, for the questions and thank you for taking the time to join us today. I want to thank our employees for their unwavering dedication to our clients and our shareholders for your continued trust and support. The progress we've made together reflects the strength of our strategy, the resilience of our diversified business model.

And as we look ahead, we remain focused on disciplined growth, leveraging technology and innovation, delivering sustainable top-tier performance. Our foundation is solid. Our team is energized, and we are confident in the opportunities ahead. Thank you, everyone, and have a great day.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.