Alerus Financial Corporation Reports Second Quarter 2025 Net Income of $20.3 Million

Alerus Financial Corporation (NASDAQ:ALRS), or the Company, reported net income of $20.3 million for the second quarter of 2025, or $0.78 per diluted common share, compared to net income of $13.3 million, or $0.52 per diluted common share, for the first quarter of 2025, and net income of $6.2 million, or $0.31 per diluted common share, for the second quarter of 2024.

CEO Comments

President and Chief Executive Officer Katie Lorenson said, "Alerus delivered another quarter of strong progress towards our goal of achieving sustained top tier performance. The results underscore the power of our diversified business model and disciplined execution. We reported net income of $20.3 million and adjusted earnings per diluted share of $0.72 for the second quarter of 2025, a 28.6% increase from the prior quarter. Our adjusted return on average tangible common equity expanded to 21.0%, and adjusted return on average assets improved to 1.41%, reflecting both revenue growth and disciplined expense management. We continued to optimize our balance sheet with the recent strategic sale of $62.5 million of non-owner occupied commercial real estate loans. These actions, combined with our adjusted net charge-offs to average loans of just 0.07%, demonstrate our proactive credit risk management and portfolio discipline. We maintained our long history of dividend increases in the second quarter while growing tangible book value per share by over 20.0% annualized compared to the prior quarter. These metrics demonstrate our commitment to delivering consistent shareholder value while maintaining a strong capital position and improving our balance sheet and risk profile. We remain focused on executing our long-term strategy, enhancing client relationships, and driving sustainable growth across our One Alerus integrated banking, wealth, and retirement services businesses."

Second Quarter Highlights

• Return on average total assets was 1.53% in the second quarter of 2025. Adjusted return on average total assets (non-GAAP)⁽¹⁾ was 1.41% in the second quarter of 2025, an increase of 31 basis points from 1.10% in the first quarter of 2025.
• Return on average tangible common equity (non-GAAP)⁽¹⁾ was 22.65% in the second quarter of 2025. Adjusted return on average tangible common equity (non-GAAP)⁽¹⁾ was 21.0% in the second quarter of 2025, an increase from 17.6% in the first quarter of 2025.
• Earnings per diluted common share in the second quarter of 2025 of $0.78. Adjusted earnings per diluted common share (non-GAAP)⁽¹⁾ of $0.72 in the second quarter of 2025, an increase of 28.6% from $0.56 in the first quarter of 2025.
• Net income was $20.3 million in the second quarter of 2025. Adjusted net income (non-GAAP)⁽¹⁾ was $18.6 million in the second quarter of 2025, an increase of 29.9% from $14.4 million in the first quarter of 2025.
• Net interest income was $43.0 million in the second quarter of 2025, an increase of 4.6% from $41.2 million in the first quarter of 2025.
• Net interest margin (non-GAAP)⁽¹⁾ was 3.51% in the second quarter of 2025, an increase of 10 basis points from 3.41% in the first quarter of 2025.
• Noninterest income was $31.8 million in the second quarter of 2025, an increase of 15.0% from $27.6 million in the first quarter of 2025.
• Realized gain on sale of $2.1 million on a purchased credit deteriorated ("PCD") hospitality loan in the second quarter of 2025.
• As of June 30, 2025, an additional $50.2 million of hospitality loans were classified as non-mortgage loans held for sale. These loans were subsequently sold in July 2025.
• Pre-provision net revenue (non-GAAP)⁽¹⁾ was $26.4 million in the second quarter of 2025. Adjusted pre-provision net revenue (non-GAAP)⁽¹⁾ was $24.3 million in the second quarter of 2025, an increase of 23.2% from $19.7 million in the first quarter of 2025.
• Efficiency ratio was 60.7% in the second quarter of 2025. Adjusted efficiency ratio (non-GAAP)⁽¹⁾ was 62.4% in the second quarter of 2025, improved from 66.9% in the first quarter of 2025.
• Increased quarterly dividend by 5.00% over the first quarter of 2025 to $0.21 per share. The increase in the dividend marks the 39th consecutive year that the Company has increased its dividend.
• Net charge-offs to average loans was 0.37% in the second quarter of 2025. Excluding the charge-offs related to the hospitality loan sale, adjusted net charge-offs to average loans (non-GAAP)⁽¹⁾ was 0.07% in the second quarter of 2025, compared to 0.04% in the first quarter of 2025.
• Tangible book value per common share (non-GAAP)⁽¹⁾ was $16.11 as of June 30, 2025, an increase of 5.5% from $15.27 as of March 31, 2025.

Selected Financial Data (unaudited)

Results of Operations

Net Interest Income

Net interest income for the second quarter of 2025 was $43.0 million, a $1.9 million, or 4.6%, increase from the first quarter of 2025. The increase was primarily due to the repricing of maturing loans into loans with higher yields and purchase accounting accretion partially offset by higher interest expense as the impact of lower rates paid on interest-bearing deposits was more than offset by increased short-term borrowings balances.

Net interest income increased $19.0 million, or 79.3%, from $24.0 million for the second quarter of 2024. Interest income increased $17.4 million, or 32.8%, from the second quarter of 2024, primarily driven by earning assets acquired in the HMN Financial, Inc. ("HMNF") transaction, strong organic loan growth at higher yields, and purchase accounting accretion. Interest expense decreased $1.6 million, or 5.6%, from the second quarter of 2024, as a decrease in the average rate paid on deposits more than offset the increase in interest-bearing deposits stemming from the acquisition of HMNF and organic deposit growth.

Net interest margin (on a tax-equivalent basis) (non-GAAP) was 3.51% for the second quarter of 2025, a 10 basis point increase from 3.41% for the first quarter of 2025, and a 112 basis point increase from 2.39% for the second quarter of 2024. The quarter over quarter increase was mainly attributable to higher loan rates on new loan originations against a stable cost of funds. The increase from the second quarter of 2024 was primarily driven by higher rates on interest earning assets from organic loan growth and the HMNF acquisition, purchase accounting accretion, and lower rates paid on deposits.

Noninterest Income

Noninterest income for the second quarter of 2025 was $31.8 million, a $4.1 million increase from the first quarter of 2025. The quarter over quarter increase was primarily driven by increases in mortgage banking and gain on sale of non-mortgage loans. Mortgage banking revenue increased $2.1 million, or 139.1%, from the first quarter of 2025, primarily driven by increased mortgage originations due to expected seasonality. Gain on sale of non-mortgage loans increased from the first quarter of 2025 due to a $2.1 million gain on the sale of a PCD hospitality loan during the second quarter of 2025.

Noninterest income for the second quarter of 2025 increased by $4.4 million from the second quarter of 2024. Gain on sale of non-mortgage loans increased in the second quarter of 2025 compared to the second quarter of 2024 due to a $2.1 million gain on the sale of a PCD hospitality loan during the second quarter of 2025. Wealth revenue increased $1.0 million, or 15.8%, in the second quarter of 2025 compared to the second quarter of 2024, primarily driven by a 10.6% increase in assets under administration/management during that same period as a result of improved bond and equity markets as well as the HMNF acquisition. Mortgage banking revenue increased $1.1 million, or 43.0%, in the second quarter of 2025 compared to the second quarter of 2024, primarily driven by a higher gain on sale rate and increased mortgage servicing revenue driven by the HMNF acquisition.

Noninterest Expense

Noninterest expense for the second quarter of 2025 was $48.4 million, a $1.9 million, or 3.8%, decrease from the first quarter of 2025. Employee taxes and benefits expense decreased $1.1 million, or 14.5%, from the first quarter of 2025, primarily due to seasonality. Professional fees and assessments decreased $0.7 million, or 21.9%, from the first quarter of 2025, primarily driven by decreases in acquisition-related expenses and Federal Deposit Insurance Corporation ("FDIC") assessments. Other noninterest expense decreased $1.4 million, or 50.3%, from the first quarter of 2025, primarily driven by an insurance reimbursement. Compensation expense increased $1.4 million, or 6.0%, from the first quarter of 2025, partially driven by higher performance incentives, especially within the mortgage business.

Noninterest expense for the second quarter of 2025 increased $9.7 million, or 25.0%, from $38.8 million in the second quarter of 2024. The total increase was primarily driven by increases in compensation expense, employee taxes and benefits expense, intangible amortization expense, business services, software and technology expense, and occupancy and equipment expense. In the second quarter of 2025, compensation expense increased $4.1 million, or 20.1%, and employee taxes and benefits expense increased $1.5 million, or 29.2%. Both compensation expense and employee taxes and benefits expense increased compared to the second quarter of 2024 primarily due to increased headcount resulting from the HMNF acquisition. Intangible amortization expense increased $1.4 million in the second quarter of 2025, primarily driven by the $33.5 million core deposit intangible recorded in connection with the HMNF acquisition. Business services, software and technology expense increased $1.3 million, or 27.6%, from the second quarter of 2024, primarily driven by the increased company size due to the HMNF acquisition along with multiple platform upgrades. Occupancy and equipment expense increased $0.7 million, or 41.0%, from the second quarter of 2024, primarily driven by the increased branch footprint resulting from the HMNF acquisition.

Financial Condition

Total assets were $5.3 billion as of June 30, 2025, an increase of $62.1 million, or 1.2%, from December 31, 2024. The increase was primarily due to a $52.1 million increase in loans held for investment and a non-cash transfer of $50.2 million to non-mortgage loans held for sale, partially offset by a decrease of $46.9 million in available-for-sale investment securities and a decrease of $11.9 million in held-to-maturity investment securities.

Loans Held for Investment

Total loans held for investment were $4.0 billion as of June 30, 2025, an increase of $52.1 million, or 1.3%, from December 31, 2024. The increase was primarily driven by a $36.8 million increase in commercial loans and a $15.3 million increase in consumer loans. Non-owner occupied commercial real estate loans held for investment decreased $63.9 million, or 6.7%, from the first quarter of 2025, primarily driven by a transfer of $50.2 million to non-mortgage loans held for sale.

The following table presents the composition of our loans held for investment portfolio as of the dates indicated:

Deposits

Total deposits were $4.3 billion as of June 30, 2025, a decrease of $40.9 million, or 0.9%, from December 31, 2024. Interest-bearing deposits increased $72.2 million and noninterest-bearing deposits decreased $113.2 million from December 31, 2024. The decrease in total deposits was due primarily to seasonal outflows from public funds depositors, tax related outflows, as well as a return to more normalized levels of clearing and synergistic deposits. The decrease was partially offset by an increase in brokered deposit balances as callable brokered certificates of deposit were raised to diversify the funding structure while retaining optionality.

The following table presents the composition of the Company's deposit portfolio as of the dates indicated:

Asset Quality

Total nonperforming assets were $52.2 million as of June 30, 2025, a decrease of $10.7 million from December 31, 2024. As of June 30, 2025, the allowance for credit losses on loans was $59.3 million, or 1.47% of total loans, compared to $59.9 million, or 1.50% of total loans, as of December 31, 2024.

The following table presents selected asset quality data as of and for the periods indicated:

For the second quarter of 2025, the Company had net charge-offs of $3.8 million, compared to net charge-offs of $0.4 million for the first quarter of 2025 and net charge-offs of $2.5 million for the second quarter of 2024. The quarter over quarter increase in net charge-offs was primarily driven by a $3.4 million charge-off related to the sale of one PCD non-owner occupied commercial real estate hospitality loan and the transfer of a pool of non-owner occupied commercial real estate hospitality loans to non-mortgage loans held for sale in the second quarter of 2025. Of the $3.4 million, $3.1 million represented reserves on PCD loans acquired in the HMNF acquisition that were reserved in the day 1 accounting. Excluding the charge-off of PCD reserves, the Company had adjusted net charge-offs (non-GAAP) of $0.7 million and adjusted net charge-offs to average loans (non-GAAP) of 0.07% the for the second quarter of 2025.

The Company recorded no provision for credit losses for the second quarter of 2025, compared to a provision for credit losses of $0.9 million for the first quarter of 2025 and a provision for credit losses of $4.5 million for the second quarter of 2024.

The unearned fair value adjustments on acquired loan portfolios were $58.0 million as of June 30, 2025, $70.6 million as of December 31, 2024, and $4.1 million as of June 30, 2024.

Capital

Total stockholders' equity was $533.2 million as of June 30, 2025, an increase of $37.7 million from December 31, 2024. The change was primarily driven by an increase in retained earnings of $23.2 million and a decrease in accumulated other comprehensive loss of $13.5 million. Tangible book value per common share (non-GAAP) increased to $16.11 as of June 30, 2025, from $15.27 as of December 31, 2024. Tangible common equity to tangible assets (non-GAAP) increased to 7.87% as of June 30, 2025, from 7.13% as of December 31, 2024. Common equity tier 1 capital to risk weighted assets increased to 10.54% as of June 30, 2025, from 9.91% as of December 31, 2024.

The following table presents our capital ratios as of the dates indicated:

Conference Call

The Company will host a conference call at 10:00 a.m. Central Time on Monday, July 28, 2025, to discuss its financial results. Attendees are encouraged to register ahead of time for the call at investors.alerus.com. The call can also be accessed via telephone at +1 (833) 470-1428, using access code 919175. A recording of the call and transcript will be available on the Company's investor relations website at investors.alerus.com following the call.

About Alerus Financial Corporation

Alerus Financial Corporation (NASDAQ:ALRS) is a commercial wealth bank and national retirement services provider with corporate offices in Grand Forks, North Dakota, and the Minneapolis-St. Paul, Minnesota metropolitan area. Through its subsidiary, Alerus Financial, National Association, Alerus provides diversified and comprehensive financial solutions to business and consumer clients, including banking, wealth services, and retirement and benefit plans and services. Alerus provides clients with a primary point of contact to help fully understand their unique needs and delivery channel preferences. Clients are provided with competitive products, valuable insight, and sound advice supported by digital solutions designed to meet their needs.

Alerus operates 29 banking and commercial wealth offices, with locations in Grand Forks and Fargo, North Dakota; the Minneapolis-St. Paul, Minnesota metropolitan area; Rochester, Minnesota; Southern Minnesota; Marshalltown, Iowa; Pewaukee, Wisconsin; and Phoenix and Scottsdale, Arizona. Alerus also operates a commercial wealth office in La Crosse, Wisconsin. The Alerus Retirement and Benefit business serves advisors, brokers, employers, and plan participants across the United States.

Non-GAAP Financial Measures

Some of the financial measures included in this press release are not measures of financial performance recognized by U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, pre-provision net revenue, adjusted noninterest income, adjusted noninterest expense, adjusted pre-provision net revenue, adjusted efficiency ratio, adjusted net income, adjusted return on average total assets, adjusted return on average tangible common equity, net interest margin (tax-equivalent), adjusted earnings per common share - diluted, and adjusted net charge-offs to average loans. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy and financial performance. Reconciliations of non-GAAP disclosures used in this press release to the comparable GAAP measures are provided in the accompanying tables. Management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.

These non-GAAP financial measures should not be considered in isolation or as a substitute for total stockholders' equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as "may", "might", "should", "could", "predict", "potential", "believe", "expect", "continue", "will", "anticipate", "seek", "estimate", "intend", "plan", "projection", "would", "annualized", "target" and "outlook", or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements the Company makes regarding our projected growth, anticipated future financial performance, financial condition, credit quality, management's long-term performance goals, and the future plans and prospects of Alerus Financial Corporation.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following: the strength of the local, state, national and international economies and financial markets (including effects of inflationary pressures and future monetary policies of the Federal Reserve in response thereto); interest rate risk, including the effects of changes in interest rates; effects on the U.S. economy resulting from the threat or implementation of new, or changes to, existing policies, regulations, regulatory and other governmental agencies and executive orders, including tariffs, immigration, DEI and ESG initiatives, consumer protection, foreign policy and tax regulations; disruptions to the global supply chain, including as a result of domestic or foreign policies; our ability to successfully manage credit risk, including in the commercial real estate portfolio, and maintain an adequate level of allowance for credit losses; business and economic conditions generally and in the financial services industry, nationally and within our market areas, including the level and impact of inflation rates and possible recession; the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in several bank failures; our ability to raise additional capital to implement our business plan; the overall health of the local and national real estate market; credit risks and risks from concentrations (by type of borrower, geographic area, collateral, and industry) within our loan portfolio; the concentration of large loans to certain borrowers (including commercial real estate loans); the level of nonperforming assets on our balance sheet; our ability to implement our organic and acquisition growth strategies, including the integration of HMNF; the commencement, cost, and outcome of litigation and other legal proceedings and regulatory actions against us or to which the Company may become subject, including with respect to pending actions relating to the Company's previous ESOP fiduciary services commenced by government or private parties; the impact of economic or market conditions on our fee-based services; our ability to continue to grow our retirement and benefit services business; our ability to continue to originate a sufficient volume of residential mortgages; the occurrence of fraudulent activity, breaches or failures of our or our third-party vendors' information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools or as a result of insider fraud; interruptions involving our information technology and telecommunications systems or third-party servicers; potential losses incurred in connection with mortgage loan repurchases; the composition of our executive management team and our ability to attract and retain key personnel; rapid and expensive technological changes implemented by us and other parties in the financial services industry, including third-party vendors, which may be more difficult to implement or more expensive than anticipated or which may have unforeseen consequence to us and our customers, including the development and implementation of tools incorporating artificial intelligence; increased competition in the financial services industry, including from non-banks such as credit unions, Fintech companies and digital asset service providers; our ability to successfully manage liquidity risk, including our need to access higher cost sources of funds such as fed funds purchased and short-term borrowings; the concentration of large deposits from certain clients, including those who have balances above current FDIC insurance limits; the effectiveness of our risk management framework; potential impairment to the goodwill the Company recorded in connection with our past acquisitions, including the acquisitions of Metro Phoenix Bank and HMNF; the extensive regulatory framework that applies to us; changes in local, state and federal laws, regulations and government policies concerning the Company's general business, including interpretation and prioritization of such laws, regulations and policies; new or revised accounting standards, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission (the "SEC") or the Public Company Accounting Oversight Board; fluctuations in the values of the securities held in our securities portfolio, including as a result of changes in interest rates; governmental monetary, trade and fiscal policies; risks related to climate change and the negative impact it may have on our customers and their businesses; severe weather and natural disasters, and widespread disease or pandemics; acts of war or terrorism, including ongoing conflicts in the Middle East, the Russian invasion of Ukraine, or other adverse external events; any material weaknesses in our internal control over financial reporting; talent and labor shortages and employee turnover; our success at managing and responding to the risks involved in the foregoing items; and any other risks described in the "Risk Factors" sections of the reports filed by Alerus Financial Corporation with the SEC.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.