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…

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%…

[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.