Alerus Achieves Top-Tier Performance with 1.41% Adjusted ROA and Strategic Balance Sheet Optimization

Management Highlights and Strategic Initiatives

During the second quarter of 2025, Alerus Financial Corporation (ALRS) delivered strong financial results, with a focus on long-term performance and operational efficiency. Katie Lorenson, President and CEO, emphasized that the company is making significant progress in its journey to deliver top-tier performance. The adjusted earnings per diluted share reached $0.72, reflecting an adjusted return on assets of 1.41%. This performance was supported by a diversified business model that provides resilience across different economic cycles and enables the company to outperform traditional banks.

Lorenson also highlighted the nearing completion of the transformation within the Commercial Wealth Bank, along with proactive balance sheet optimization. This included the strategic sale of $60 million in nonowner-occupied commercial real estate (CRE) hospitality loans, which resulted in a net gain of $2 million during the quarter. Reserve levels remained strong at 1.47% of loans, and net charge-offs were limited to 7 basis points when excluding the accounting entries from the hospitality loan sale.

The company continued to invest in its Wealth business, including a platform upgrade aimed at doubling the number of wealth advisers and growing assets under management. These efforts are part of a broader strategy to enhance client relationships and expand market share.

Financial Performance and Outlook

Alan A. Villalon, CFO, noted that on a reported basis, net interest income increased by 4.6% compared to the prior quarter, while fee income rose by 15%. The increase in net interest income was primarily driven by the remixing of maturing loans replaced by organic loan growth at higher spreads. Interest expense remained relatively stable, supporting the company’s overall financial health.

Looking ahead, Alerus expects loan growth of mid-single digits for 2025, excluding loans moved to held for sale. Deposit growth is projected to remain in the low single digits, and the net interest margin is expected to range between 3.25% and 3.35%. Villalon explained that purchase accounting accretion is expected to decrease in the back half of the year, with 27 basis points anticipated for the third quarter, down from 45 basis points in the second quarter. Additionally, deposit costs are expected to rise by 8 to 10 basis points due to shifts in deposit mix and continued competition.

Noninterest income for the year is expected to grow by low single digits on a reported basis, driven by gains from loan sales recognized in the first half of the year.

Key Financial Metrics

In Q2, net interest income reached $43 million, with the net interest margin increasing by 10 basis points to 3.51%. The total cost of funds remained stable at 2.33%. Excluding the hospitality loan sale and reclassification, loan growth was approximately 0.5% over the prior quarter.

Noninterest income from banking totaled $8.4 million, including a $2.1 million gain from the sale of hospitality loans. Mortgage revenues improved by $2.1 million from the first quarter. Total revenue from the Retirement business exceeded $16 million, with assets under administration and management rising by 6.3% due to positive market performance.

Wealth Management revenues increased by 6.6% on a linked quarter basis, and end-of-quarter assets under management grew by 2.5%. Noninterest expenses decreased by 3.8%, primarily due to seasonal reductions in benefits and lower acquisition costs. The adjusted efficiency ratio improved to 62.4% from 66.9% in the previous quarter.

Adjusted net charge-offs were 7 basis points, and nonperforming assets remained stable at 98 basis points. The common equity Tier 1 capital ratio stands at 10.5%, and the tangible common equity ratio improved by 44 basis points to 7.87%.

Q&A and Analyst Insights

During the Q&A session, analysts raised several questions about the company’s financial outlook and risk management strategies. Villalon confirmed that purchase accounting accretion for the third and fourth quarters is expected to be 27 and 22 basis points, respectively. Karin Taylor, COO, provided updates on a large construction credit, noting that the final certificate of occupancy was issued and the property was listed for sale in the second quarter. The project continues to lease up, currently at 57% occupancy.

Villalon also addressed concerns about a $50 million hospitality loan sale in July, stating that there was only a minimal loss on that transaction. When asked about capital deployment and mergers and acquisitions (M&A), Lorenson reiterated that the company’s priorities include organic balance sheet growth, maintaining its dividend history, and pursuing M&A opportunities in the retirement sector.

Jim Collins, Chief Banking and Revenue Officer, highlighted that loan growth is driven by leveraging the existing client base and capturing market share. Lorenson also shared details about the recent full conversion of the Wealth Management business, which was completed successfully in the second quarter.

Sentiment and Market Positioning

Analysts maintained a neutral to slightly cautious tone during the call, focusing on the sustainability of margins, credit risk, and the impact of loan sales. However, management remained confident, emphasizing discipline, stability, and proactive risk management. Lorenson expressed confidence in the company’s path forward and praised the team’s capabilities.

Compared to the previous quarter, both analysts and management remained focused on core profitability and credit normalization. Management appeared more assertive regarding progress on transformation and efficiency improvements.

Risk Factors and Challenges

Despite the positive performance, management identified ongoing macroeconomic uncertainty and persistent competitive pressures, particularly in deposit gathering. Seasonal deposit volatility and potential increases in deposit costs due to competition and mix shifts were also acknowledged as challenges.

Credit risk remains concentrated in two large nonperforming relationships, with expected resolutions extending into 2026. Analysts expressed concerns about fee income trends, loan growth sources, and the stability of nonperforming assets. In response, management is addressing these risks through proactive credit risk management, balance sheet optimization, and investments in technology and talent.

Final Takeaway

Alerus Financial Corporation delivered a strong second quarter, marked by improved efficiency, disciplined risk management, and proactive portfolio optimization. Management reaffirmed its commitment to consistent top-tier performance, with a stable outlook for loan and deposit growth, ongoing investments in technology and talent, and a clear strategy for capital deployment. As the company prepares for continued market volatility and competitive pressures, it remains focused on sustainable improvements and operational discipline.