Alerus Financial Corporation's Q2 Earnings: Navigating Growth in a High-Rate Environment

Alerus Financial Corporation (NYSE: ALS) is set to release its second-quarter 2025 earnings on July 28, providing critical insights into its ability to sustain growth amid persistent high interest rates and evolving economic conditions. The quarter will test the bank's strategies to balance loan growth, deposit management, and profitability in an environment where Federal Reserve policy remains uncertain and tariffs risk fueling stagflation. Here's what investors should watch for.

Q1 Momentum: Strong NIM and Strategic Shifts

The bank's first-quarter results laid the groundwork for Q2 scrutiny. Net interest margin (NIM) rose to 3.41%, a 21 basis point (bps) improvement from the prior quarter, driven by lower deposit costs and disciplined pricing on commercial loans. This reflects Alerus' strategic pivot to higher-yielding commercial lending, which now accounts for 70% of total loans, up from 58% at its 2019 IPO.

The loan-to-deposit ratio of 91.1%—below the target of 95%—suggests the bank has ample capacity to grow loans without overextending its funding base. Meanwhile, low-cost deposits, such as those tied to health savings accounts (HSAs), grew 7.5% quarter-over-quarter, offering a stable funding source with a cost of just 10 bps. These trends bode well for sustaining NIM in a high-rate environment, as deposit costs remain manageable despite macroeconomic headwinds.

Key Risks to Monitor in Q2

While Q1 highlighted Alerus' strengths, several risks could impact its growth trajectory:

1. Economic Uncertainty: The Trump administration's tariffs (25% on Mexico/Canada, 20% on China) threaten to stoke inflation and slow economic activity, potentially reducing loan demand or increasing credit costs. Alerus' nonperforming loans (NPLs) fell to 1.24% of total loans in Q1, but investors should watch for signs of deterioration in sectors exposed to trade tensions, such as manufacturing or real estate.

2. Mortgage Volatility: Mortgage-related fees dropped 18% year-over-year in Q1, reflecting seasonal trends and lower refinance activity. With mortgage income accounting for a significant portion of fee revenue (40% of total revenue), continued weakness could pressure earnings unless offset by growth in commercial banking or wealth management.

3. Deposit Competition: While Alerus' deposit costs remain low, the loan-to-deposit ratio suggests it may need to attract more deposits to support loan growth. Rising competition for deposits could force higher rates, compressing NIM if loan yields don't keep pace.

Why Alerus Could Outperform

Despite these risks, Alerus' liability-sensitive balance sheet positions it to benefit from anticipated Fed rate cuts. Analysts expect three cuts by year-end, which would further reduce deposit costs. The bank's focus on floating-rate commercial loans—which adjust downward as rates fall—could insulate margins from downward pressure.

Additionally, its wealth management and retirement services segment shows promise. AUM grew organically, and the transition to a new wealth management platform aims to boost revenue synergies. If these initiatives gain traction, they could diversify income streams and reduce reliance on volatile mortgage fees.

Investment Takeaways

• Hold for Q2 Earnings: Investors should wait for the July 28 results to gauge how Alerus navigated the quarter. A beat on EPS (estimates currently at $0.56) or a reaffirmed NIM guidance could lift shares.
• Monitor Credit Metrics: Look for updates on NPLs and charge-offs. Alerus' 1.52% allowance for credit losses is robust, but rising defaults in a slowing economy would raise concerns.
• Consider the Fed's Hand: Track Alerus' commentary on rate expectations and its hedging strategies. The bank's $63 million unrealized loss on investments is a non-cash item but could signal sensitivity to bond market volatility.

Conclusion

Alerus Financial's Q2 earnings will underscore its ability to thrive in a high-rate environment through disciplined balance sheet management and strategic focus on commercial lending. While risks like mortgage volatility and economic slowdowns linger, the bank's low-cost deposits, liability-sensitive structure, and geographic diversification in the Midwest and Texas position it to navigate challenges. Investors should view Q2 as a critical checkpoint for validating ALS's long-term growth story. For now, a hold stance makes sense, with a potential buy recommendation if earnings beat expectations or credit metrics improve.

Stay tuned for the July 28 results—and keep an eye on the Fed's next moves.