Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. Please note this event is being recorded. This call may include forward-looking statements, and the company's actual results may differ significantly from those suggested in any forward-looking statements. Important factors that could lead to actual results differing significantly from those suggested in the forward-looking statements are detailed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation's President and CEO, Katie Lorenson. Please proceed.

Thank you. Good morning, and thank you for joining us today. I'm Katie Lorenson, President and CEO, and I'm pleased to be here with our Chief Financial Officer, Al Villalon; our Chief Operating Officer, Karin Taylor; our Chief Banking and Revenue Officer, Jim Collins; and our Chief Retirement Services Officer, Forrest Wilson. Each of these leaders continues to play a crucial role in driving our company's progress towards transformational growth and top-tier performance. This quarter marked a significant step forward in our journey to deliver long-term, sustainable, top-tier performance as we reported an adjusted earnings per diluted share of $0.72, which represents an adjusted return on assets of 1.41%. Our results reflect our efforts to build on the strength of our uniquely diversified business model, combining traditional commercial and private banking with the highly valuable and capital-light fee-based businesses in Wealth Management and Retirement and Benefits. This business model not only differentiates us in the growing communities and client base we serve, but it also provides resilience across economic cycles and the ability to outperform traditional banks. We're seeing encouraging momentum across our core businesses. The transformation in our Commercial Wealth Bank is nearing completion, with our focus turned towards maximizing the capacity in our organization and infrastructure to further enhance profitability. While we continue to see the benefit of purchase accounting, we are replacing this with disciplined pricing on renewals of the core client base. During the quarter, deposit outflows were as expected from public funds and tax payments, while client retention in legacy Alerus and the recently acquired Home Federal portfolio remained at high levels. We see robust opportunities in our lending pipeline, but we'll continue to be highly selective, with our team focused on deposit-rich opportunities and prioritizing full C&I relationships. We also took proactive steps to optimize our balance sheet, including the strategic sale of $60 million in non-owner-occupied CRE hospitality loans, which resulted in a net $2 million gain during the quarter. As a result of the sale, we were able to reverse related reserves on the portfolio, which allowed us to record no provision for the quarter. Reserve levels remained robust at 1.47% of loans, and notably, net charge-offs were limited to 7 basis points when excluding the accounting entries of the hospitality loan sale. Industry-leading fee income of more than 42% will be the ultimate differentiator of our valuation. The cornerstone of our top-tier fee income levels is our Retirement and Benefits business. Our talented team continues to execute on several key strategic initiatives to grow our business, secure meaningful partnerships, and make impactful operational improvements. We remain bullish on this business, given the tailwinds of SECURE Act 2.0, in addition to growing opportunities for M&A. The value of the Retirement Business is multifaceted due to the stability and durability it brings to our company's earnings, with minimal capital allocation and balance sheet risk in addition to the tangible synergies we leverage in deposits and the capture of wealth business. Similarly, our Wealth business has strong momentum, and we're investing in talent and technology to deepen client relationships and expand our reach. As an enhancement to the business, we upgraded our wealth management platform, which will allow us to continue to progress on our long-term goal of doubling the number of wealth advisers and growing our assets under management at the same pace as our banking assets. A shout out to all of our team members and wealth advisers who made this conversion seamless for our clients. Results of our team's focus on expense management are evident with another quarter of improvement in our efficiency ratio. We continue to balance our investments in talent and technology with long-term and sustainable improvements while optimizing everywhere. In short, we're making significant progress. This quarter's results were excellent, and I want to thank our team members for their continued efforts to return Alerus to top-tier performance. We know this path is not linear and requires an unwavering focus on constant improvement and expense management. Our guidance for the year remains consistent with prior quarter's communication with the ultimate goal of achieving this quarter's level of performance consistently. The foundation is solid. The strategy is clear, and the opportunity ahead is compelling. Thank you again for your continued support. And I'll turn it over to Al to walk through the financials in more detail.

Thanks, Katie. Turning to Page 11 of our investor deck that is posted in the Investor Relations part of our website. On a reported basis, net interest income increased 4.6% over the prior quarter, while fee income increased 15%. The increase in net interest income was primarily driven by remixing of maturing loans being replaced by organic loan growth at higher spreads, while interest expense remained relatively stable. Our fee income remains over 40% of revenues and well above the industry average of 19%. Let's dive into the drivers of net interest income on the next slide. Turning to Page 12. In the second quarter, net interest income continued to reach new heights at $43 million, and our reported net interest margin increased another 10 basis points to 3.51%. Our net interest margin continues to show improvement. Our total cost of funds remained stable at 2.33%. We had 45 basis points of purchase accounting accretion in the quarter. Of those 45 basis points, 9 basis points were from early payoffs. We remain disciplined in pricing as we continue to not price on the version of the yield curve for loans. In the second quarter, we continue to see strong spreads, which contributed to core net interest margin expansion, as the average rate on our loan portfolio during the quarter increased 8 basis points from the end of the first quarter. Let's turn to Page 13 to talk about our earning assets. At the end of the second quarter, we either sold or classified as held for sale over $60 million of hospitality loans. The net gain from the sale of all these loans was over $2 million. Excluding the loan sale and reclassification, loan growth was approximately 0.5% over the prior quarter, with the most growth in C&I and owner-occupied CRE. We remain focused on full relationships within the middle market and business banking space. For the remainder of 2025, we expect over $271 million of loan contractual maturities, which is almost 7% of total loans. Our Investment portfolio declined to $807 million, or just around 16% of earning assets. AOCI improved an unrealized loss of under $60 million. For the remainder of 2025, we expect over $45 million, or close to 6% of the total portfolio, of principal paydowns with a yield in the low 2% range. We will continue to let the balance sheet remix from low-yielding investments to higher-yielding loans. Turning to Page 14. On a period-ending basis, our deposits shrank 3.3% as we saw expected seasonal outflow from public funds, and our clients using liquidity to meet tax obligations. Since 2010, the median decrease in deposits from 1Q to 2Q has been over 5%. We do expect the seasonal volatility to continue to increase as our average deposit account size has grown over 20% since the end of 2019, due to our focused efforts to grow in the commercial space. Lastly, since the close of the acquisition of Home Federal, our net retention rate remains close to 97%. Turning to Page 15. I'll now talk about our banking segment, which also includes our Mortgage business. Our focus on the fee income components now since net interest income was previously discussed. Overall, noninterest income from banking was $8.4 million for the second quarter. The quarter included a $2.1 million gain related to the sale of hospitality loans. Mortgage revenues also improved $2.1 million from the first quarter as we saw our seasonal uptick in the business. We also saw very little swap income this quarter, which tends to be lumpy from quarter to quarter. On Page 16, I'll provide some highlights on our Retirement business. Total revenue from this business was relatively stable at over $16 million. Retirement services continue to be a stable and reliable source of fee income and is not a capital-intensive segment. Assets under administration and management increased 6.3%, mainly due to market performance. We continue to see solid new business production through the first half of 2025. Turning to Page 17, you can see highlights for our Wealth Management business. On a linked quarter basis, revenues increased 6.6%, while end-of-quarter assets under management increased 2.5%, mainly due to market performance. During the quarter, we transitioned to a new platform that will deliver a better experience for both clients and financial advisers. With a new and highly regarded system, we not only provide a unique value proposition to our clients, but we also are able to differentiate ourselves in our recruiting efforts to add more wealth advisers. Page 18 provides an overview of our noninterest expense. During the quarter, noninterest expense decreased 3.8% due to the seasonal decrease in benefits, less acquisition expenses in the quarter on a reported basis, and due to an insurance reimbursement. Our adjusted efficiency ratio was 62.4%, versus 66.9% in the prior quarter. Most of the improvement in our adjusted efficiency ratio was driven by both core expense and revenue improvements. Turning to Page 19, you can see our credit metrics. During the quarter, adjusted net charge-offs were only 7 basis points, which excludes the impact of the hospitality loan sale. Nonperforming assets remained stable at 98 basis points compared to the prior quarter. We continue to have close to $7.8 million in reserves related to the CECL double count and approximately $50 million of fair value marks related to the Home Federal acquisition. I'll discuss our capital liquidity on Page 20. We continue to remain well-capitalized as our common equity Tier 1 capital ratio to risk-weighted assets is at 10.5%, our tangible common equity ratio improved 44 basis points to 7.87%. On the bottom right, you'll see a breakdown of sources of $2.7 billion in potential liquidity. We did utilize some broker deposits in the quarter to optimize our funding structure. Although we continue to remain well-positioned from both a liquidity and capital standpoint to support future growth. Turning to Page 21, I will now update you on our guidance for 2025. Our guidance for the year remains consistent with prior quarters and has not materially changed. While we continue to make improvement, given the seasonality we experienced in our businesses, improvement is never linear from quarter to quarter. We are still expecting loan growth of mid-single digits for 2025, excluding the loans moved to held for sale. Deposit growth of low single digits remains the same. For the third quarter, though, we will see continued seasonal deposit outflows from our public funds. Net interest margin of 3.25% to 3.35%. Within this guidance, we're assuming several things. First, we are expecting less purchase accounting accretion in the back half of the year. We're expecting less in purchase accounting accretion for the remaining quarter due to accelerated payoffs already recognized. Currently, we're expecting 27 basis points of purchase accounting accretion in the third quarter, which is an 18 basis point reduction compared to the second quarter. For the fourth quarter, we expect only 22 basis points of accretion. Both accretion numbers are based on contractual payoff data. Second, we are not expecting any early payoffs, which have averaged over 8 basis points over the past 3 quarters since the closing of the Home Federal acquisition. Lastly, we're expecting an increase in deposit costs by 8 to 10 basis points due to mix shift in deposits and continued competition. We expect our noninterest income for the year to be up low single digits now on a reported basis due to the gain on loan sale recognized in the first half. On the mortgage side, we expect mortgages to ease a little in the third quarter and have a seasonal downturn in the fourth quarter. We expect our adjusted efficiency ratio, excluding one-time items to be below 68% for 2025, as we continue to realize cost savings from Home Federal. Summarized on Page 22, we continue to build on the momentum we saw in the first quarter. Adjusted pre-provision net revenue grew 23.2% over the prior quarter. Our current adjusted ROA of 1.41% and adjusted ROTCE of over 21% are definitely in the top quartile of the banking industry. We see this as another solid quarter in the line of more to come. With that, I will now open up for Q&A.

Al, I wanted to follow up because I missed the details on the margin. It seems like accretion was a bit high. Could you repeat your expectations for third and fourth quarter accretion?

Yes, I did. So Jeff, for the third quarter, we're expecting 27 basis points of purchase accounting accretion, and for the fourth, we're expecting 22. Neither of those numbers have any early payoffs embedded in them.

Okay. And I guess if we kind of unpack the core expectations for the second half?

Yes. In the second half, we still expect at the end of the year to have core margin improvement as we continue to see spreads on both loans and deposits to be above our core net interest margin.

Got you. I think the noninterest income guidance of low single digits includes the gains from this quarter?

That is correct, Jeff.

Okay. Got it. Just I guess hopping over to the credit side, I wanted to check back in on the larger construction credit. I think we were headed towards occupancy or listing for sale this summer, June and July. So I just wanted to check back in to see where the status of that is?

Sure, Jeff. This is Karin. The final certificate of occupancy was issued, and the property was listed for sale in the second quarter. That's a soft listing. The project continues to lease up. It's currently at 57%. And as that progresses, obviously, it will become better positioned for sale. There's just some minor work left on the outside to complete. So it's in line with our expectations.

Okay. Great. On the CRE side, could you remind us what deal was acquired? Are there any additional cleanups planned for that segment?

Are you referring to the loan sale, or to this particular construction project?

The loan sale, I apologize, in the hospitality side.

The hospitality loan sale was part of the Home Federal portfolio. We saw an opportunity on that particular portfolio. The underwriting standards were a little bit more liberal than ours, and we had those well marked, and there was a market for those loans. So it was a good opportunity. We'll continue to look for those opportunities to reduce risk in our balance sheet and make sure that our resources are aligned with our strategic objectives.

Okay. Do you think you've addressed the areas where the underwriting was more lenient? Have you tackled that issue, or is it evaluated individually?

No, we addressed that with our identification of purchase credit deteriorated loans. And certainly, this particular group of loans was in that category.

Maybe just starting off on the loan sale piece. For the piece that closed in this quarter, you recorded a nice gain on that sale. Just kind of curious for the $50 million you sold in July, any line of sight to a potential gain there?

No. Actually, there was just a very, very minimal loss on that one.

Okay. Got it. Got it. Maybe moving over to capital then. You folks created a fair bit of capital this quarter. Just with levels getting up to higher levels. Just kind of curious how you think about deployment for the rest of this year and maybe your thoughts on the M&A landscape?

Sure. Our capital priorities remain consistent, and as we've discussed in the prior quarters. Growing 44 basis points in Q2, consistent with where we had pro forma levels at post Home Federal. We are targeting to get to that 8% or higher TCE. Priorities are organic balance sheet growth with franchise accretive clients, as well as maintaining our dividend history and M&A on the retirement side of the business, which is typically more of the bite-sized cash deals.

Okay. Perfect. I'm just going to sneak one more in here, on the Retirement business. Revenues were fairly flat for the quarter. But Al you noted nice AUA growth, but it looks like participants were down a little bit. Maybe just talk about which of these two AUA versus participants had a bigger impact on revenues for this business this quarter?

Forrest, I'm going to let you take that one.

Yes, could you please repeat that question quickly? It was about the participants compared to AUA in terms of revenue?

Yes.

We faced some unique challenges with our participants this quarter. We conducted a clean-out in our HSA business, which negatively impacted our participant count. However, these were zero-balance participants from whom we were not generating any revenue. Moving forward, you can anticipate an increase in participant numbers, as we have experienced in the past, and we expect that trend to persist. Nonetheless, some isolated events this quarter contributed to the decline.

First question on the loan growth and kind of the outlook that's supporting that. Are you seeing more demand across your footprint in the way of like new credits and new customers coming on board? Or is this the growth opportunities more from kind of leveraging your current client base?

It's leveraging the current client base, and it's taking market share. We're still not seeing a really solid, robust new generation of loans with clients and prospects necessarily. It's still the staff that we brought in all markets. It's really stealing market share from some of the other banks and increasing with our current client base.

Got it. And is there any areas, any segments that are stronger than others that have better opportunity for the growth?

No. We're sticking to full C&I and really focused on that lower mid-market. So we're still really focused on manufacturing, wholesaling and distributing. So that's really where we're focused. There are opportunities across the board in a lot of different segments. But with the team that is really zeroing in on that lower mid-market, that's where we're going to find most of our growth.

Got it. Okay. I appreciate that. And then, Al, with regard to the full year margin outlook of the 3.25% to 3.35%, is that like on a reported basis? So including the benefit you guys got from the kind of the accelerated fair value accretion?

Yes, that is on a reported basis.

In your prepared remarks, you referenced some technology upgrades and platform transitions. So just curious, maybe, Katie, if you can kind of speak to how some of these technology initiatives could increase, kind of the capture rate across new clients within the Alerus franchise? And just how you see opportunities to also increase existing client wallet share with all these upgrades as well?

Sure. I'll start, and then Jim can add on where I miss. So we did a full conversion of our Wealth Management business that was completed in the second quarter. It went very well. In this platform, really improves the client experience, as well as the adviser experience and the operational experience. And so we believe besides our differentiated recruiting proposition that we have to advisers, this platform allows them to kind of level set in terms of their experience, in addition to the opportunities that they have within our organization because of the retirement synergies.

Yes. I would say, Katie is right on. The new platform on the wealth side will allow us to leverage our current staff and then allow us to recruit better, and it will be a better client experience. It will also allow us better analytics to dive into that synergistic relationship and see where we can help our clients in the other areas that we have in Alerus. The other piece is we have a very solid treasury management group to grow our C&I, and we're putting on a new online retail and commercial online system, which acts the same way as the wealth platform. Better customer experience, better analytics, and speed to market will be better.

Okay. Great. That's helpful. And then just turn to credit. Your nonperformers are still almost 2x that of peers on a relative basis when you just look at the percentage of loans. So maybe, Karin, just curious to get some thoughts on kind of the outlook for some larger resolutions, or just opportunities to bring down nonperformers going forward?

Yes, the numbers are primarily influenced by the same two significant relationships we've discussed over the past few quarters. The construction deal is on track to meet its timelines, likely resolving in early 2026. The other is a major residential relationship, on which we are pursuing legal action, and I would expect that to also be resolved in the first half of 2026.

Okay. Great. And then maybe, Al, I appreciate all the commentary on the margin outlook, but can you just maybe update us in terms of the balance sheet sensitivity to a 25 basis point Fed cut?

Yes. Nate, on a 25 basis point Fed cut, we do expect our NIM to improve about 5 basis points. As a reminder, though, our guidance does not have any rate cuts embedded in it.

Al, I just want to confirm on the deposit outlook, deposit cost outlook. Did you say up 8 basis points in the third quarter? And then as a follow-up, I just wanted to get a better understanding of what your assumptions are tied to that? And then also maybe some color on overall deposit competition?

What I indicated was an increase in deposit cost of about 8 to 10 basis points in the third quarter, and then remaining stable from there. Jim, would you like to discuss the deposit outlook?

Yes. The deposit competition is tough, right? We have staffed up with a couple of seasoned commercial deposit bankers. And obviously, I think I talked about earlier, we have a solid treasury management group. So our strategy is still focused on full relationships of mid-market C&I and business banking. I think we have the pieces in place. But the competition is tough, and deposits are always hard to forecast, but we're sticking to our strategy.

To conclude on that, David, if you consider what Jim mentioned about the intense competition, we anticipate a shift in the mix from noninterest-bearing to interest-bearing deposits, which will create some pressure. This is part of the 8 to 10 basis points increase that we are projecting.

I wanted to revisit the fee income outlook. It seems that year-to-date you've experienced significant momentum, with core fees increasing roughly 10 percent year-over-year during the first half. Can you clarify the progress you've made so far this year in light of your relatively stable fee outlook for the entire year?

Right. Part of it, too, Brendan, is that, one, we're not forecasting any market outlook for the remainder of the year. Number two, we are expecting a seasonal downturn in our mortgage business. So the fourth quarter typically is one of our weaker ones for us, and now put some pressure on the fee income as well. And then we're expecting a little bit of a pullback maybe too in the third quarter in mortgage.

It seems like there's been a good amount of M&A-related disruption in the Twin Cities lately. So just curious maybe what the appetite is to hire some additional producers, maybe on the commercial or private wealth side? Or do you think some of those share gains are possible just with the existing team's capacity?

I would say at this point, we have capacity with our existing team, but we are always opportunistic. So if there comes a situation where we find the right person that could come into our culture and add some benefits to us right away, we would look at that. But right now, I would say we're pretty set with the team we have.

Your next question comes from Brendan Nosal with Hovde Group.

Yes. Thank you. Thank you, everyone, for taking the time to listen and for your investment in Alerus. Thank you to our team members who continue to make Alerus better every day. While the macroeconomic uncertainty and competitive pressures remain, we're staying disciplined and focused on getting better and bigger. Managing credit risk proactively, maintaining strong capital and reserve levels, and investing in areas that align with our long-term strategy. While we acknowledge there's more work to do, we're confident in the path we're on, and we're proud of the incredibly talented team we have in place. Thank you, everyone. Have a great day.

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