ALRS US Equity☆

ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and the Company’s audited consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary NoteRegarding Forward-Looking Statements,”“Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the forward-looking statements. The Company assumes no obligation to update any of these forward-looking statements.

Results of operations for the year ended December 31, 2023 compared to results for the year ended December 31, 2022 can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 8, 2024.

Overview

The Company is a diversified financial services company headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, the Company provides innovative and comprehensive financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth. In prior periods, the Company had a fourth operating segment, mortgage. As of January 1, 2024, the mortgage division was fully integrated into the banking division to reflect the way the Company currently manages and views the business. These solutions are delivered through a relationship oriented primary point of contact along with responsive and client friendly technology.

The Company’s primary banking market areas are the states of North Dakota, Minnesota, specifically, the Twin Cities MSA and Rochester MSA, and Arizona, specifically, the Phoenix MSA. In addition to the Company’s offices located in the Company’s banking markets, its retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota and Colorado.

The Company’s business model produces strong financial performance and a diversified revenue stream, which has helped the Company establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. The Company believes its client first and advice based philosophy, diversified business model and history of high performance and growth distinguishes the Company from other financial service providers. The Company generates a majority of its overall revenue from noninterest income, which is driven primarily by the Company’s retirement and benefit services and wealth business lines.

As of December 31, 2024, the Company had $5.3 billion of total assets, $4.0 billion of total loans, $4.4 billion of total deposits, $495.4 million of stockholders’ equity, $40.7 billion of AUA/AUM in the Company’s retirement and benefit services segment, and $4.6 billion of AUA/AUM in the Company’s wealth segment.

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Net Interest Income

Net interest income represents interest income less interest expense. The Company generates interest income on interest-earning assets, primarily loans and available-for-sale securities. The Company incurs interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, the Company measures and monitors: (i) yields on loans, available-for-sale securities and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest the Company earns on interest-earning assets or pay on interest-bearing liabilities.

Noninterest Income

Noninterest income primarily consists of the following:

Noninterest Expense

Noninterest expense is comprised primarily of the following:

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Operating Segments

The Company measures the overall profitability of business operations based on income before income tax. The Company allocates costs to its segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within banking, retirement and benefit services and wealth. The Company measures the profitability of each segment based on the direct and indirect allocations of expense as it believes it better approximates the contribution generated by the Company’s reportable operating segments. All indirect overhead allocations to each segment are determined by management based on an annual review of department expenses. Income tax expense is allocated to corporate administration. A description of each segment is provided in Note 22 (Segment Reporting) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with current GAAP, but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could differ from these estimates. The most critical of the accounting policies is discussed below.

Allowance for credit losses (“ACL”)— In 2023, the Company adopted the new accounting standard for credit losses, Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses(Topic 326):Measurement of Credit Losses on Financial Instruments, as amended (“ASU 2016-13”). This new accounting standard, commonly referred to as “CECL,” significantly changed the Company’s methodology for accounting for reserves on loans, unfunded off balance sheet credit exposures, including certain unfunded loan commitments and standby guarantees, as well as introduced the consideration for an allowance on HTM investment securities. ASU 2016-13 replaced the “incurred loss” methodology used prior to 2023 to establish an allowance on loans and off-balance sheet credit exposures, with an “expected loss” approach. Under CECL, the ACL at each reporting period serves as the Company’s best estimate of projected credit losses over the contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and forecasts as of the valuation date. The Company considers the ACL on loans to be a critical accounting policy.

The recorded ACL on loans is determined based on the amortized cost basis of the assets and may be determined at various levels, including homogeneous loan pools and individual credits with unique risk factors. Since adoption of CECL in 2023, the Company has used a discounted cash flow approach to calculate the ACL for each loan segment, except for purchase credit deteriorated (“PCD”) loans. Within the discounted cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the expected loss for each loan segment. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. PD and LGD data is derived using a combination of external data and internal historical default and loss experience. The Company uses an expected loss method to calculate the ACL on the unpaid principal balance for PCD loans. This expected loss method utilizes PD and LGD assumptions applied to non-discounted cash flows at the instrument level.

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CECL may create more volatility in the Company’s ACL. Under CECL, the Company’s ACL may increase or decrease period to period based on many factors, including, but not limited to: macroeconomic forecasts and conditions; a change in the prepayment speed assumption; an increase or decrease in loan balances, including changes to the Company’s loan portfolio mix; credit quality of the loan portfolio; and various qualitative factors outlined in ASU 2016-13.

The Company considers the ACL on loans to be a critical accounting policy given the uncertainty in evaluating the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key management function that requires significant judgment and estimate by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in future periods. While the Company’s current evaluation indicates that the ACL on loans at December 31, 2024 and 2023 was appropriate, the allowance may need to be increased under adversely different conditions or assumptions.

The significant key assumptions used with the ACL on loans calculation at December 31, 2024 using the CECL methodology, included:

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PCD loans are purchased loans, that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. An ACL is determined using either an expected loss method or discounted cash flow analysis to calculate gross expected losses on unpaid principal. The expected loss method utilizes PD and LGD assumptions applied to non-discounted cash flows at the instrument level. The discounted cash flow analysis uses assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, loss given defaults, and estimates of prevailing discount rates. The initial ACL determined on a collective basis is allocated to individual loans. The sum of a loan’s purchase price, allowance for credit losses, and non-credit discount or premium becomes its initial unpaid principal. The non-credit discount or premium is amortized into interest income over the life of the loan.

Non-purchased credit deteriorated (“non-PCD”) loans are purchased loans, that, as of the date of acquisition, have not experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The loan’s purchase price becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the unpaid principal of the loan is a discount or premium, which is comprised of a credit and non-credit component, and is accreted or amortized into interest income over the life of the loan. An ACL is determined using the same methodology as other loans held for investment, but no “day one” ACL is established on the date of acquisition. Instead, a subsequent “day two” ACL for non-PCD loans is recorded through the provision for credit losses, which reflects the estimated lifetime credit losses.

Management utilizes their best judgement and information available; however, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s control which are inherently difficult to predict. The most significant factor is the macroeconomic scenario forecasts that determine the economic variables utilized in the loss driver models. Due to the inherent uncertainty in the macroeconomic forecasts, management utilized baseline, upside, and downside macroeconomic scenarios and weights the scenarios each period. At

December 31, 2024, the quantitative portion of the ACL estimate for collectively evaluated loans ranged from approximately $29.5 million when weighting the upside scenario to 100%, to approximately $65.1 million when weighting the most severe downside scenario 100%. Management determined that a $33.2 million reserve for the quantitative portion of the ACL for collectively evaluated loans was appropriate as of

December 31, 2024.

As of December 31, 2024, the recorded ACL on loans was $59.9 million and represented the Company’s best estimate of expected credit losses within the loan portfolio. However, the Company may adjust its assumptions to account for differences between expected and actual losses each period. A future change of the Company’s assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in the aforementioned key assumptions, as well as asset quality within the loan portfolio, and the Company considers the impact of these trends on the ACL and the Company's financial condition, if any. The ACL on loans is reviewed and approved on a quarterly basis by the ACL Governance Committee, and later reviewed and ratified by the Bank’s Board of Directors.

Refer to “–Results of Operations–Provision for Credit Losses,” “–Financial Condition–Asset Quality,” and Note 6 (Loans and Allowance for Credit Losses) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K for further discussion.

Goodwill—As a result of acquisitions, the Company carries goodwill. Goodwill represents the cost of acquired companies in excess of the fair value of net assets at the acquisition date. Goodwill is evaluated at least annually or when business conditions suggest impairment may have occurred. Should impairment occur, goodwill will be reduced to its revised carrying value through a charge to earnings. The determination of whether or not impairment exists is based upon various valuation techniques, including the market approach and the income approach utilizing discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires them to select a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, and company-specific performance and risk metrics, all of which are susceptible to change based on changes in economic and market conditions and other factors. Future events or changes in the estimates used to determine the carrying value of goodwill could have a material impact on the Company’s results of operations.

In the Company’s impairment analysis, the discount rates used for each reporting segment had the most significant impact on the analysis. Based on the goodwill impairment analysis, adjusting the discount rate +/- 100 basis points did not impact the final results which indicated no impairment.

A summary of the accounting policies used by management is disclosed in Note 1 (Significant Accounting Policies) and Note 8 (Goodwill and Other Intangible Assets) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

Fair values of loans acquired in business combinations—Loans acquired in business combinations are initially recorded at fair value as adjusted for credit risk and an ACL at the date of acquisition for PCD loans. For loans with no significant evidence of credit deterioration since origination, the difference between the fair value and the unpaid principal balance of the loan at the acquisition date is amortized into interest income using the effective interest method over the remaining period to contractual maturity.

Loans acquired with evidence of deterioration in credit quality since origination, or PCD loans, are accounted for in accordance with Accounting Standards Codification (“ASC”) 326. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and then discounting those cash flows at an appropriate market rate of interest. An ACL is recognized by estimating the expected credit losses of the purchased asset and recording an adjustment to the acquisition date fair value to establish the initial amortized cost basis of the asset. Differences between the established fair value and the unpaid principal balance of the asset is considered to be a non-credit discount/premium and is accreted/amortized into interest income using the interest method accounted for in accordance with ASC 310. Subsequent changes to the ACL are recorded through provision for credit loss expense using the same methodology as other loans held for investment.

Fair values for loans acquired in the HMNF acquisition were based on a discounted cash flow methodology that forecasts expected credit and prepayment adjusted cash flows, which were discounted using market-based discount rates. This approach also considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, and amortization status.

Selected larger loans with adverse risk ratings were specifically reviewed to evaluate fair value. Loans with similar risk characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans, indices of corporate and other bond spreads, and required rates of return for market participants to purchase similar assets, including adjustments for liquidity, servicing costs, and credit quality when necessary. In the Company’s valuation analysis, the discount rate had the most significant impact on the valuation. An increase of 0.25% to the discount rates used to derive the fair value of the loans at the time of the merger would have reduced the approximate fair value by $7.3 million, whereas a decrease of 0.25% to the discount rates would have increased the fair value by approximately $7.4 million.

A summary of the accounting policies used by management is disclosed in Note 1 (Significant Accounting Policies) and Note 3 (Business Combinations) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

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Selected Financial Data

The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the three years ended December 31, 2024.

The consolidated selected financial data presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States and have not been audited. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures” below.

As of and for the year ended December 31,

(dollars and shares in thousands, except per share data) 2024 2023

Selected Income Statement Data

Per Common Share Data

Earnings - diluted $ 0.83 $ 0.58

Adjusted earnings - diluted (1) $ 1.45 $ 1.45

Dividends declared $ 0.79 $ 0.75

Tangible book value per common share (1) $ 14.44 $ 15.46

Selected Performance Ratios

Return on average total assets 0.39 % 0.31 %

Adjusted return on average total assets (1) 0.69 % 0.77 %

Return on average common equity 4.47 % 3.26 %

Return on average tangible common equity (1) 7.12 % 5.37 %

Adjusted return on average tangible common equity (1) 11.22 % 11.30 %

Noninterest income as a % of revenue 51.78 % 47.74 %

Net interest margin (taxable-equivalent basis) 2.56 % 2.46 %

Adjusted net interest margin (taxable-equivalent basis) (1) 2.49 % 2.42 %

Average equity to average assets 8.83 % 9.39 %

Selected Balance Sheet Data - Period Ending

Asset Quality Ratios

Net charge-offs/(recoveries) to average loans 0.13 % (0.04 )%

Nonperforming loans to total loans 1.58 % 0.32 %

Nonperforming assets to total assets 1.20 % 0.22 %

Allowance for credit losses to total loans 1.50 % 1.30 %

Allowance for credit losses to nonperforming loans 95.30 % 410.34 %

Other Data

(2) Includes ESOP-owned shares.

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Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. Management uses the non-GAAP financial measures presented in the tables below 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. 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.

The following tables present these non-GAAP financial measures along with the most directly comparable financial measures calculated in accordance with GAAP for the periods indicated:

December 31, December 31,

Tangible common equity to tangible assets

Tangible common equity to tangible assets (a)/(b) 7.13 % 7.94 %

Tangible book value per common share

Total common shares issued and outstanding (d) 25,345 19,734

Tangible book value per common share (c)/(d) $ 14.44 $ 15.46

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December 31, December 31,

Return on average tangible common equity

Add: Intangible amortization expense (net of tax) (1) 5,353 4,184

Net income, excluding intangible amortization (e) 23,133 15,880

Less: Average other intangible assets (net of tax) (1) 17,534 15,624

Return on average tangible common equity (e)/(f) 7.12 % 5.37 %

Efficiency ratio

Less: Intangible amortization expense 6,776 5,296

Pre-Provision Net Revenue

Adjusted noninterest income

Less: Adjusted noninterest income items

BOLI mortality proceeds (non-taxable) — 1,196

Gain on sale of ESOP trustee business — 2,775

Net gains (losses) on investment securities — (24,643 )

Net gain on sale of premises and equipment 3,941 50

Total adjusted noninterest income items (i) 3,941 (20,622 )

Adjusted noninterest expense

Less: Adjusted noninterest expense items

Merger- and acquisition-related expenses 9,980 —

Severance and signing bonus expense 2,901 1,897

Total adjusted noninterest expense items (k) 12,881 1,897

Adjusted Pre-Provision Net Revenue

Adjusted pre-provision net revenue $ 50,240 $ 40,430

Adjusted efficiency ratio

Less: Intangible amortization expense 6,776 5,296

Adjusted noninterest expense for efficiency ratio (m) 161,018 142,964

Tax-equivalent revenue

Add: Tax-equivalent adjustment 1,202 671

Adjusted efficiency ratio (m)/(n) 73.45 % 75.50 %

(1) Items calculated after-tax utilizing a marginal income tax rate of 21.0%.

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December 31, December 31,

Adjusted net income

Less: Adjusted noninterest income items (net of tax) (1) (i) 3,113 (16,040 )

Add: Adjusted noninterest expense items (net of tax) (1) (k) 10,176 1,499

Adjusted Return on Average Assets

Adjusted return on average assets (o)/(p) 0.69 % 0.77 %

Adjusted Return on Average Tangible Common Equity

Add: Intangible amortization expense (net of tax) (1) 5,353 4,184

Adjusted net income, excluding intangible amortization (q) 36,336 33,419

Less: Average other intangible assets (net of tax) (1) 17,534 15,624

Return on average tangible common equity (q)/(r) 11.22 % 11.30 %

Adjusted Net Interest Margin (Tax-Equivalent)

Less: BTFP cash interest income 12,494 —

Add: BTFP interest expense 11,291 —

Less: Purchase accounting net accretion 7,451 1,490

Net interest income excluding BTFP impact 98,391 86,349

Add: Tax equivalent adjustment for loans and securities 1,202 671

Less: Average cash proceeds balance from BTFP 231,366 —

Add: Change in unearned purchase accounting discount 7,451 1,490

Adjusted net interest margin (tax-equivalent) (s)/(t) 2.49 % 2.42 %

Adjusted Earnings Per Common Share - Diluted

Net income available to common stockholders (u) 30,946 29,240

Adjusted earnings per common share - diluted (u)/(v) $ 1.45 $ 1.45

(1) Items calculated after-tax utilizing a marginal income tax rate of 21.0%.

Results of Operations

The following discussion describes the consolidated operations and financial condition of the Company and the Bank. Results of operations for the year ended December 31, 2024 are compared to the results for the year ended December 31, 2023, and the consolidated financial condition of the Company as of December 31, 2024 is compared to December 31, 2023.

Summary

Net income for the year ended December 31, 2024 was $17.8 million, an increase of $6.1 million, or 52.0%, compared to $11.7 million for the year ended December 31, 2023. Diluted earnings per common share were $0.83 in 2024, compared to $0.58 in 2023. Return on average total assets was 0.39% in 2024, compared to 0.31% for 2023. The increase in net income was primarily driven by a $34.7 million increase in noninterest income and a $19.2 million increase in net interest income, partially offset by a $30.5 million increase in noninterest expense and a $16.1 million increase in provision for credit losses expense. Noninterest income increased primarily due to the $24.6 million loss on investment securities recognized in connection with a strategic balance sheet repositioning in the fourth quarter of 2023, as well as a $4.3 million increase in wealth revenue. The increase in net interest income was due to increased income on higher earning assets, organic loan growth, and lower average rates paid on deposit balances. The increase in noninterest expense was primarily due to an $11.0 million increase in compensation expense and a $12.9 million increase in professional fees and assessments, primarily driven by acquisition-related expenses.

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Net Interest Income—With Nontaxable Income Converted to Fully Taxable Equivalent (“FTE”)

Net interest income totaled $107.0 million in 2024, an increase of $19.2 million, or 21.9%, from 2023. Net interest margin increased 10 basis points to 2.56% in 2024, from 2.46% reported in 2023. The increase in net interest margin was primarily the result of a $56.7 million increase in interest income on interest earning assets, partially offset by a $37.5 million increase in interest expense on interest-bearing liabilities. The increase in the interest income earned on interest-bearing assets was driven by a 54 basis point increase in the average rate earned on loans as well as a $563.9 million increase in the average balance of total loans, driven by strong organic growth at higher yields and increased loan balances from the acquisition of HMNF. The increase in interest expense on interest-bearing liabilities was driven by a 57 basis point increase in the average rate paid on interest-bearing liabilities as well as a $637.4 million increase in the average balance of interest-bearing liabilities, driven by the acquisition of HMNF and organic deposit growth.

The following table sets forth information related to the Company’s average balance sheet, average yields on assets, and average rates of liabilities for the periods indicated. The Company derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. The Company derived average balances from the daily balances throughout the periods indicated. Average loan balances include loans that have been placed on nonaccrual, while interest previously accrued on these loans is reversed against interest income. In these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

Year ended December 31,

Interest Average Interest Average

Average Income/ Yield/ Average Income/ Yield/

(dollars in thousands) Balance Expense Rate Balance Expense Rate

Interest Earning Assets

Fed funds sold — — — — — —

Loans

Interest-Bearing Liabilities

Noninterest-Bearing Liabilities and Stockholders' Equity

Net interest rate spread on FTE basis (1) 1.80 % 1.70 %

Net interest margin on FTE basis (1) 2.56 % 2.46 %

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Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.

Compared with

Change due to: Interest

(tax-equivalent basis, dollars in thousands) Volume Rate Variance

Interest earning assets

Fed funds sold — — —

Loans

CRE − Construction, land and development 5,621 (1,529 ) 4,092

Interest-bearing liabilities

Provision for Credit Losses

The Company recorded a provision for credit losses expense of $18.1 million for the year ended December 31, 2024, compared to a provision for credit losses expense of $2.1 million for the year ended December 31, 2023. The provision for credit losses expense for the year ended December 31, 2024 included $18.1 million in provision for credit losses on loans, $0.1 million in provision for credit losses on unfunded commitments and ($0.1) million recovery for credit losses on investment securities held-to-maturity (“HTM”). The CECL accounting standard requires the Company to recognize losses over the expected life of the loan as opposed to the losses expected to already have been incurred. The increase in provision for credit losses was primarily a result a $7.3 million day one provision in connection with the acquisition of HMNF along with strong organic loan growth and increased nonaccrual loans.

Noninterest Income

The following table presents noninterest income for the years ended December 31, 2024 and 2023:

Year ended December 31,

(dollars in thousands) 2024 2023 $ Change % Change

Net gains (losses) on investment securities — (24,643 ) 24,643 (100.0 )%

Noninterest income as a % of revenue 51.8 % 47.7 %

Total noninterest income increased $34.7 million, or 43.3%, to $114.9 million in 2024, from $80.2 million for 2023. The increase in noninterest income was primarily driven by the strategic balance sheet repositioning transaction in the fourth quarter of 2023, which resulted in a $24.6 million loss on the sale of investment securities. Wealth revenue increased $4.3 in 2024 primarily driven by an increase in assets under administration/management of 13.9%. Other noninterest income increased $4.3 million in 2024 primarily as a result of a $3.9 million gain on the sale of fixed assets driven by the sale of two branches during the year.

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Noninterest income as a percent of total operating revenue, which consists of net interest income plus noninterest income, was 51.78% in 2024, up from 47.7% the prior year. The increase in 2024 was due to a 43.3% increase in noninterest income and a 21.9% increase in net interest income.

Noninterest Expense

The following table presents noninterest expense for the years ended December 31, 2024 and 2023:

Year ended December 31,

(dollars in thousands) 2024 2023 $ Change % Change

Total noninterest expense increased $30.5 million, or 20.3%, to $180.7 million for the year ended December 31, 2024, from $150.2 million for the year ended December 31, 2023. The increase in noninterest expense was primarily driven by an $11.0 million increase in compensation expense and an $12.9 million increase in professional fees and assessments expense. The increase in compensation expense was primarily driven by acquisition-related compensation expenses, experienced talent acquisitions, and increased labor costs. Professional fees and assessments expenses increased due to acquisition-related expenses and an increase in FDIC assessments.

Income Taxes

For the year ended December 31, 2024, the Company recognized income tax expense of $5.4 million on $23.2 million of pre-tax income, resulting in an effective tax rate of 23.2%. For the year ended December 31, 2023, the Company recognized an income tax expense of $4.2 million on $15.9 million of pre-tax income, resulting in an effective tax rate of 26.2%. The decrease in the effective tax rate was primarily driven by items related to the acquisition of HMNF in 2024 and increased tax-exempt income.

Segment Reporting

The Company determined reportable segments based on the significance of the services offered, the significance of those services to the Company’s financial condition and operating results, and the Company’s regular review of the operating results of those services. The Company has three operating segments—banking, retirement and benefit services, and wealth. These segments are components for which financial information is prepared and evaluated regularly by management in deciding how to allocate resources and assess performance.

The selected financial information presented for each segment sets forth net interest income, provision for loan losses, noninterest income, and direct and indirect noninterest expense overhead allocations. Corporate administration includes all remaining income and expenses not allocated to the three operating segments. Certain reclassification adjustments have been made between corporate administration and the various lines of business for consistency in presentation.

For additional financial information on the Company’s segments see Note 22 (Segment Reporting) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

Banking

The banking division offers a complete line of loan, deposit, cash management, and treasury services through 29 offices in North Dakota, Minnesota, Arizona, Wisconsin, and Iowa. These products and services are supported through various digital applications. The majority of the Company’s assets and liabilities are on the banking segment balance sheet.

The following table presents the banking segment income statement, net of corporate administration, for the years ended December 31, 2024 and 2023:

Year ended

December 31,

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Retirement and Benefit Services

The retirement and benefit services business provides the following services nationally: record-keeping and administration services to qualified and other types of retirement plans, investment fiduciary services to retirement plans, health savings accounts, flexible spending accounts, and COBRA recordkeeping and administration services. The division services approximately 8,600 retirement plans and more than 500,200 plan participants and operates within the Company’s banking markets, as well as East Lansing, Michigan, and Lakewood, Colorado.

The following table presents the retirement and benefit services segment income statement for the years ended December 31, 2024 and 2023:

Year ended

December 31,

Gain on sale of ESOP trustee business — 2,775

(2) Transactional income primarily includes advisory fees and distribution fees.

The following table presents changes in the combined AUA and AUM for the Company’s retirement and benefit services segment for the periods presented:

Year ended

December 31,

(1) Inflows include new account assets, contributions, dividends and interest.

(2) Outflows include closed account assets, withdrawals and client fees.

(3) Market impact reflects gains and losses on portfolio investments.

AUA and AUM for the retirement and benefit services segment was $40.7 billion at December 31, 2024, an increase of $4.0 billion, or 11.0%, compared to the total at December 31, 2023. The increase was primarily driven by an increase of $4.1 billion in market impact, driven by improved bond and equity markets.

Wealth

The wealth division provides advisory and planning services, investment management, and trust and fiduciary services to clients across the Company’s footprint.

The following table presents the wealth segment income statement for the years ended December 31, 2024 and 2023:

Year ended

December 31,

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The following table presents changes in the wealth combined AUA and AUM, disaggregated by product, for the years ended December 31, 2024 and 2023:

Year ended

December 31,

(1) Inflows include new account assets, contributions, dividends and interest.

(2) Outflows include closed account assets, withdrawals and client fees.

(3) Market impact reflects gains and losses on portfolio investments.

(4) Wealth noninterest income divided by simple average ending balances.

AUA and AUM for the wealth segment was $3.4 billion, excluding $892.3 million of brokerage assets, at December 31, 2024, an increase of $0.3 million, or 8.1%, compared to the total at December 31, 2023. The increase was driven by a $0.3 million increase in market impact driven by improved bond and equity markets.

Financial Condition

Overview

Total assets were $5.3 billion at December 31, 2024, an increase of $1.4 billion, or 34.6%, compared to $3.9 billion at December 31, 2023. The increase in total assets was primarily due a $1.2 billion increase in loans held for investment and a $101.3 million increase in AFS investment securities, partially offset by a decrease of $68.7 million in cash and cash equivalents.

Investment Securities

The following table presents the fair value composition of the Company’s investment securities portfolio at the dates indicated:

Percent of Percent of

(dollars in thousands) Balance Portfolio Balance Portfolio

Available-for-sale

Mortgage backed securities

Asset backed securities 19 — 25 —

Held-to-maturity

Mortgage backed securities

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The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity for normal operations while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.

At December 31, 2024, the total fair value of investment securities was $825.0 million compared to $745.4 million at December 31, 2023. The fair value of investment securities as a percentage of total assets was 15.7% and 19.1%, as of December 31, 2024 and December 31, 2023, respectively. The increase in investment securities was primarily due to investment securities acquired in the HMNF transaction in the fourth quarter of 2024. Securities with a carrying value of $340.2 million were pledged at December 31, 2024, to secure public deposits and for other purposes required or permitted by law.

The net pre-tax unrealized market value loss on the AFS investment portfolio as of December 31, 2024 was $98.5 million, as compared to a $98.0 million loss as of December 31, 2023. The slight increase was a result of additional investment securities acquired in the HMNF transaction, partially offset by improved markets.

The investment portfolio is composed of U.S. Treasury debentures, U.S. Agency mortgage-backed pass-throughs, U.S. Agency, Commercial Mortgage Obligations (“CMOs”), Corporate bonds and Municipal bonds.

As of December 31, 2024 and December 31, 2023, the Company held 68 tax-exempt state and local municipal securities totaling $30.0 million and held 75 tax-exempt state and local municipal securities totaling $35.0 million, respectively. Other than the aforementioned investments, at December 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

The Company’s AFS debt securities that are in an unrealized loss position are assessed to determine if an allowance should be recorded or if a write-down is required in accordance with ASU 2016-13. As of and for the years ended years ended December 31, 2024 and 2023, the Company did not record any allowances or write-down any of the AFS debt securities in an unrealized loss position. Refer to Note 1 (Significant Accounting Policies) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K for additional details of the Company’s assessment of the allowance for AFS investments as of and for the year ended December 31, 2024.

In accordance with ASU 2016-13, each reporting period the Company’s HTM debt securities are assessed to determine if any allowance should be recorded or if a write-down is required. As of and for the years ended December 31, 2024 and 2023, the Company recorded an allowance of $131 thousand and $213, respectively, and did not write-down any HTM debt securities. Refer to Note 1 (Significant Accounting Policies) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K for additional details of the Company’s assessment of the allowance for HTM investments as of and for the years ended December 31, 2024 and 2023.

The investment securities presented in the following table are reported at fair value and by contractual maturity as of December 31, 2024. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, the mortgage backed securities receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis, assuming a 21.0% income tax rate.

Maturity as of December 31, 2024

One year or less One to five years Five to ten years After ten years

Fair Average Fair Average Fair Average Fair Average

(dollars in thousands) Value Yield Value Yield Value Yield Value Yield

Available-for-sale

Mortgage backed securities

Asset backed securities — — — — 4 3.93 15 5.22

Held-to-maturity

Mortgage backed securities

Loans

The loan portfolio represents a broad range of borrowers comprised of C&I, CRE, agricultural, RRE, and consumer financing loans.

Total loans outstanding were $4.0 billion as of December 31, 2024, an increase of $1.2 billion, or 44.7%, from December 31, 2023. The increase in total loans was a combination of organic loan growth and loans acquired in the HMNF transaction. The fair value of net loans acquired in the HMNF transaction, which was completed on October 9, 2024, was $786.2 million. Additionally, the Company continued to invest in talent to support organic loan growth and added an equipment finance team in 2024. Loan growth included increases of $786.1 million in CRE loans, $280.1 million in RRE loans, and $104.5 million in C&I loans.

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The Company’s loan portfolio is highly diversified. As of December 31, 2024, approximately 16.7% of loans outstanding were C&I, while 50.0% of loans outstanding were CRE, 30.2% of loans outstanding were consumer, and 3.1% of loans outstanding were agricultural.

Percent of Percent of

(dollars in thousands) Balance Portfolio Balance Portfolio

Commercial and industrial:

Commercial real estate:

Non-owner occupied

Agricultural:

Consumer:

C&I loans represent loans for working capital, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. These loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer's industry, and market. While C&I loans are generally secured by the customer's assets including real property, inventory, accounts receivable, operating equipment, and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer's business. In addition, revolving lines of credit are generally governed by a borrowing base. Inherent lending risks are monitored on a continuous basis through interim reporting, covenant testing and annual underwriting.

CRE loans consist of term loans secured by a mortgage lien on the real property and includes both owner occupied CRE loans as well as non-owner occupied loans. Non-owner occupied CRE loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family, industrial, office, retail and other specific use properties as well as CRE construction loans that are offered to builders and developers generally within our geographical footprint. The primary risk characteristics in the non-owner-occupied portfolio include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses. The Company requires collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements and equity investment in the project. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates, rental rates, and capitalization rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and our annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions, stress testing, including an interest rate risk assessment, and guarantor liquidity, if applicable. CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each asset class. CRE loan policies are reviewed no less than semi-annually by management and approved by the Bank’s Board of Directors to ensure they align with current market conditions and the Bank’s moderate risk appetite. Construction loans are monitored monthly and includes on-site inspections. Management reviews all construction loans quarterly to ensure projects are on time and within budget. CRE concentration limits have been established by product type and are monitored quarterly by the Bank’s Credit Governance Committee and Board of Directors.

CRE loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company does not monitor the CRE portfolio for attributes such as loan to value ratios, occupancy rates, and net operating income, as these characteristics are assessed and evaluated on an individual loan basis. Portfolio stress testing is completed based on property type and takes into consideration changes to net operating income and capitalization rates. The Company does not have exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with acceptable occupancy levels. As of December 31, 2024, at 331%, the Company’s applicable investor CRE loans, as a percentage of its risk-based capital, exceeded the regulatory guideline limit of 300%. Robust concentration management processes are in place to monitor this level of exposure. Quarterly, Bank management and its Board of Directors review the level of investor real estate assets, taking into consideration geographic location, detailed market analysis by property type, portfolio performance, and asset quality trends. Construction loans at 59% were below the regulatory guideline limit of 100%.

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The following table presents the geographical markets of the collateral related to the non-owner occupied and multifamily CRE loans as of the dates presented:

Percent of Percent of

(dollars in thousands) Balance Total Balance Total

Geographical Market:

The Bank does not currently monitor owner occupied CRE loans based on geographical markets, as the primary source of repayment for these loans is predicated on the cash flow from the underlying operating entity. These loans are generally located within the Company’s geographical footprint.

Highly competitive conditions continue to prevail in the small and middle market commercial segments in which the Company primarily operates. The Company maintains a commitment to generating growth in the Company’s business portfolio in a manner that adheres to its twin goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology, and business development resources to further strengthen its capabilities.

RRE loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. RRE loans also include home equity loans and lines of credit that are secured by a first- or second lien on the borrower’s residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.

The Company originates both fixed and adjustable rate RRE loans conforming to the underwriting guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of the Company’s fixed rate residential loans, along with some of the Company’s adjustable rate mortgages are sold to other financial institutions with which the Company has established a correspondent lending relationship.

The Company’s consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. Volume in this portion of the loan portfolio increased over the last year due primarily to the acquisition of HMNF. As of December 31, 2024, the Company’s consumer mortgage portfolio was $1.2 billion, which represented a $280.1 million, or 31.8%, increase from $881.0 million as of December 31, 2023. Market interest rates, expected duration, and the Company’s overall interest rate sensitivity profile continue to be the most significant factors in determining whether the Company chooses to retain versus sell portions of new consumer mortgage originations.

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The following table shows the maturities and sensitivity to interest rates for the loan portfolio as of December 31, 2024:

After one After five

One year but within but within After

(dollars in thousands) or less five years fifteen years fifteen years Total

Commercial

Commercial real estate

Agricultural — — — — —

Consumer

Residential real estate

Loans with fixed interest rates:

Commercial

Commercial real estate

Agricultural

Consumer

Residential real estate

Loans with floating interest rates:

Commercial

Commercial real estate

Agricultural

Consumer

Residential real estate

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The expected life of the Company’s loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Consequently, the table above includes information limited to contractual maturities of the underlying loans.

Asset Quality

The Company’s strategy for credit risk management includes well defined, centralized credit policies; uniform underwriting criteria; and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry, and client level; regular credit examinations; and management reviews of loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for credit losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. The Company utilizes an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.

Credit Quality Indicators

Loans are assigned a risk rating and grouped into categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The risk ratings are aligned to pass and criticized categories. The criticized categories include special mention, substandard, and doubtful risk ratings. See Note 6 (Loans and Allowance for Credit Losses) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K for a definition of each of the risk ratings.

The table below represents criticized loans outstanding by loan portfolio segment as of December 31, 2024 and 2023:

December 31, December 31,

Commercial

Commercial real estate

Agricultural

Total agricultural 12,847 —

Consumer

Residential real estate

Other consumer 339 —

Criticized loans as a percent of total loans 4.97 % 2.23 %

Criticized loans represented 4.97% and 2.23% of total loans as of December 31, 2024 and 2023, respectively. The increase in criticized loans in 2024 was driven by normalization of credit quality, the increase in nonperforming loans, and the acquisition of loans in the HMNF transaction. Criticized assets acquired from HMNF were identified and accounted for at closing.

The following table presents information regarding nonperforming assets as of the dates presented:

December 31, December 31,

OREO and repossessed assets — 32

Total restructured accruing loans — —

Total nonperforming assets and restructured accruing loans $ 62,886 $ 8,767

Nonperforming loans to total loans 1.58 % 0.32 %

Nonperforming assets to total assets 1.20 % 0.22 %

ACL on loans to nonperforming loans 95 % 410 %

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The allowance for credit losses to nonperforming loans ratio decreased 315 basis points from December 31, 2023. The decrease was primarily the result of an increase in nonperforming loans for the year ended December 31, 2024. The increase in nonperforming loans was primarily driven by one construction, land and development loan of $25.0 million moving to nonaccrual status in the second quarter of 2024. During the third and fourth quarters of 2024, management elected to make protective advances totaling $5.4 million in order for construction to continue on the project. Management is actively working with the borrower on strategies to complete construction, preserve value, and support repayment of the loan. One large RRE relationship and one CRE non-owner occupied loan moving to nonaccrual status during the third quarter of 2024 also contributed $13.6 million to the increase. A further $1.5 million of the increase in the fourth quarter of 2024 was driven by loans acquired from HMNF. Nonperforming assets included one loan over 90 days past due and still on accrual. This loan was renewed subsequent to year end.

Interest income lost on nonaccrual loans approximated $4.8 million and $0.5 million for the years ended December 31, 2024 and 2023, respectively. There was no interest income included in net income related to nonaccrual loans for the years ended December 31, 2024 and 2023.

Allowance for Credit Losses

The ACL on loans is maintained at a level management believes is sufficient to absorb expected losses in the loan portfolio over the remaining estimated life of loans in the portfolio. Under the CECL accounting standard, the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis or unpaid principal balance of loans held for investment to present the net amount expected to be collected. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current loan-specific risk characteristics such as different underwriting standards, portfolio mix, delinquency level, or life of the loan, as well as changes in environmental conditions, levels of economic activity, unemployment rates, property values and other relevant factors. The calculation also contemplates that the Company may not be able to make or obtain such forecasts for the entire life of the financial assets and requires a reversion to historical loss information.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. The ACL on individually evaluated loans is recognized on the basis of the present value of expected future cash flows discounted at the effective interest rate, the fair value of collateral adjusted of estimated costs to sell, or observable market price as of the relevant date, except for PCD loans in which the ACL is calculated against the unpaid principal balance.

The ACL on loans was $59.9 million at December 31, 2024, compared to $35.8 million at December 31, 2023. The $24.1 million increase in the ACL was primarily due to the acquisition of HMNF, which resulted in an additional ACL on PCD acquired loans of $10.2 million and a day one provision for credit losses on non-PCD acquired loans of $7.3 million.

The following table presents information concerning the components of the ACL for the periods presented:

Year ended

December 31,

ACL on loans at the beginning of the period $ 35,843 $ 31,146

ACL on PCD acquired loans 10,151 —

Non-PCD day 1 provision for loan losses 7,332 —

(Credit) provision for loan losses 10,757 (225 )

Net charge-offs (recoveries) (1)

Commercial and industrial 3,225 (723 )

CRE − Construction, land and development — (251 )

CRE − Multifamily — —

CRE − Non-owner occupied — —

CRE − Owner occupied 191 (44 )

Agricultural − Land (20 ) (1 )

Agricultural − Production 19 —

RRE − First lien — 7

RRE − Construction — —

Total net charge-offs (recoveries) 4,154 (1,065 )

ACL on loans at the end of the period 59,929 35,843

Components of ACL:

ACL on HTM debt securities 131 213

ACL on off-balance sheet credit exposures 7,534 7,401

ACL on loans to total loans 1.50 % 1.30 %

ACL on loans to nonperforming loans 95.30 % 410.34 %

Net charge-offs/(recoveries) to average total loans (annualized) 0.13 % (0.04 )%

​

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For the year ended

December 31,

Net Charge-offs

Total Total Net Charge-offs Average (Recoveries) to

(dollars in thousands) Charge-offs Recoveries (Recoveries) Loans Average Loans

Commercial

Commercial real estate

Construction, land and development — — — 172,700 —

Non-owner occupied — — — 718,168 —

Agricultural

Consumer

Residential real estate

Construction — — — 22,832 —

Commercial

Commercial real estate

Non-owner occupied — — — 498,884 —

Agricultural

Total agricultural — 1 (1 ) 70,495 —

Consumer

Residential real estate

Construction — — — 33,508 —

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The following table presents the allocation of the ACL as of the dates presented:

Percentage Percentage

Allocated of loans to Allocated of loans to

(dollars in thousands) Allowance total loans Allowance total loans

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets. The expense for provision for unfunded commitments was $0.1 million and $2.2 million for the years ended years ended December 31, 2024 and 2023, respectively.

Deposits

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and economic conditions, and fluctuations in the Company’s customers’ own liquidity needs and may also be influenced by recent developments in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in recent bank failures.

Total deposits were $4.4 billion as of December 31, 2024, an increase of $1.3 billion, or 41.4%, from December 31, 2023. Interest-bearing deposits increased $1.1 billion while noninterest-bearing deposits increased $175.4 million. The increase in interest-bearing deposits consisted of increases of $432.6 million in money market and savings, $379.5 million in interest-bearing demand deposits, and $295.4 million in time deposits. The increase in total deposits was primarily driven by the recent acquisition of HMNF, expanded and new commercial deposit relationships, and synergistic deposit growth.

Interest-bearing deposit costs were 3.21% and 2.44% for the years ended December 31, 2024 and 2023, respectively. The increase in interest-bearing deposit costs was the result of a rising interest rate environment and a highly competitive deposit environment.

The Company competes for local deposits by offering products with competitive rates and rely on the deposit portfolio to fund loans and other asset growth. Management understands the importance of core deposits as a stable source of funding and may periodically implement various deposit promotion strategies to encourage core deposit growth. For periods of rising interest rates, management has modeled the aggregate yields for non-maturity deposits and time deposits to increase at a slower pace than the increase in underlying market rates. The mix of average deposits has been changing throughout the last several years. The weightings of core funds (noninterest checking, interest checking, savings, and money market accounts) and time deposits’ have increased. The Company is focused on expanding core account relationships and customers’ preference for unrestricted accounts in the low interest rate environment. The weighting of time deposits increased as clients are looking for higher yielding alternative investments with increased short-term rates.

The following table presents the composition of the Company’s deposit portfolio by category for the periods indicated:

Percent of Percent of Change

(dollars in thousands) Balance Portfolio Balance Portfolio Amount Percent

The following table presents the average balances and rates of the Company’s deposit portfolio by category for the periods indicated:

Year ended Year ended

Average Average Average Average

(dollars in thousands) Balance Rate Balance Rate

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The following table presents the composition of the Company's deposit portfolio by client segment for the periods indicated:

Percent of Percent of Change

(dollars in thousands) Balance Portfolio Balance Portfolio Amount Percent

Synergistic (2)

The following table presents the contractual maturity of time deposits, including certificate of deposits and IRA deposits of $250 thousand and over, that were outstanding as of the date presented:

December 31,

(dollars in thousands) 2024

Maturing in:

The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.5 billion and $1.1 billion at December 31, 2024 and 2023, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Borrowings and Subordinated Debt

The Company utilizes both short term and long term borrowings as part of its asset/liability management and funding strategies. Short term borrowings consist of FHLB advances and federal funds purchased. The Company had $239.0 million and $314.2 million in short term borrowings outstanding at December 31, 2024 and 2023, respectively.

FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of approximately $2.4 billion and $1.7 billion at December 31, 2024 and 2023, respectively.

Long-term debt is utilized to fund longer term assets and as a source of regulatory capital. At December 31, 2024, the Company had a $50.0 million outstanding 3.50% Fixed Rate Subordinated Note due 2031 (the “Subordinated Note”). The Subordinated Note currently bears interest at a fixed rate of 3.50% per year, payable annually through March 31, 2026. At the fifth anniversary of the issuance date of the Subordinated Note, on March 30, 2026, the interest rate will reset to a fixed interest rate equal to the FHLB rate, plus 2.0%, with a minimum annual fixed rate of not less than 3.5%. The Subordinated Note matures on March 30, 2031, and the Company has the option to redeem or prepay any or all of the Subordinated Note without premium or penalty any time after March 31, 2026, or at any time in the event of certain changes that affect the deductibility of interest for tax purposes or the treatment of the notes as Tier 2 Capital.

Junior subordinated debentures issued to capital trusts that issued trust preferred securities were $9.1 million as of December 31, 2024, compared to $9.0 million as of December 31, 2023. The increase was due to purchase accounting amortization on the junior subordinated notes assumed in the Beacon Bank acquisition in 2016. See Note 14 (Long-Term Debt) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

Selected financial information pertaining to the components of the Company’s borrowings and subordinated debt as of the dates indicated is as follows:

Percent of Percent of

(dollars in thousands) Balance Portfolio Balance Portfolio

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Capital Resources

The following table summarizes the changes in the Company’s stockholders’ equity for the periods indicated:

For the years ended December 31,

Cumulative effect of change in accounting principles, net of tax — (4,452 )

Other comprehensive income (loss) 289 24,986

Common stock repurchased (276 ) (6,638 )

Stock‐based compensation expense 1,650 1,628

Total stockholders’ equity was $495.4 million at December 31, 2024, an increase of $126.3 million, or 34.2%, compared to $369.1 million at December 31, 2023. The increase was primarily driven by the issuance of common stock in connection with the acquisition of HMNF.

The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner while at the same time attempting to maximize stockholder value. Capital adequacy is assessed against the risk inherent in the Company’s balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

The Company is subject to various regulatory capital requirements both at the Company and the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. The Company has consistently maintained regulatory capital ratios at or above the well capitalized standards.

At December 31, 2024 and 2023, the Company met all capital adequacy requirements to which the Company was subject.

The table below sets forth the capital ratios for the Company and the Bank as of the dates indicated. See Note 26 (Regulatory Matters) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K for additional disclosures.

December 31, December 31,

Alerus Financial Corporation Consolidated

Common equity tier 1 capital to risk weighted assets 9.91 % 11.82 %

Tier 1 capital to risk weighted assets 10.12 % 12.10 %

Total capital to risk weighted assets 12.49 % 14.76 %

Tier 1 capital to average assets 8.65 % 10.57 %

Tangible common equity to tangible assets (1) 7.13 % 7.94 %

Alerus Financial, National Association

Common equity tier 1 capital to risk weighted assets 10.18 % 11.40 %

Tier 1 capital to risk weighted assets 10.18 % 11.40 %

Total capital to risk weighted assets 11.43 % 12.51 %

Tier 1 capital to average assets 8.69 % 9.92 %

Contractual Obligations and Off-Balance Sheet Arrangements

Off Balance Sheet Arrangements

In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreased its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.

Further information related to financial instruments can be found in Note 15 (Commitments and Contingencies) to the Company’s audited consolidated financial statements included in Item 8 of this Form 10-K.

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Liquidity

Liquidity management is the process by which the Company manages the flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of the Company’s operations, and capital expenditures. Liquidity is monitored and closely managed by the Company’s asset and liability committee (“ALCO”), a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is ALCO’s responsibility to ensure the Company has the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.

As of December 31, 2024, the Company had on balance sheet liquidity of $579.0 million, compared to $668.2 million as of December 31, 2023. On balance sheet liquidity includes cash and cash equivalents, federal funds sold, unencumbered securities available-for-sale and over collateralized securities pledging positions available-for-sale.

As of December 31, 2024, the Company had off balance sheet liquidity of $2.3 billion, compared to $1.6 billion as of December 31, 2023. Off balance sheet liquidity includes FHLB borrowing capacity, federal fund lines, and brokered deposit capacity.

The Bank is a member of the FHLB, which provides short and long term funding to its members through advances collateralized by real estate related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of December 31, 2024, the Company had $2.4 billion of collateral pledged to the FHLB. Based on this collateral the Company is eligible to borrow up to $2.4 billion and had $1.2 billion available capacity as of December 31, 2024. In addition, the Company can borrow up to $92.0 million through unsecured lines of credit the Company has established with four other banks.

In addition, because the Bank is “well capitalized,” it can accept brokered deposits up to 20.0% of total assets based on current policy limits. Management believed that the Company had adequate resources to fund all of its commitments as of December 31, 2024 and December 31, 2023.

The Company’s primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding. At December 31, 2024, the Company had $61.2 million of cash and cash equivalents of which $19.7 million were interest-bearing deposits held at the Federal Reserve, FHLB and other correspondent banks.

Though remote, the possibility of a funding crisis exists at all financial institutions. Accordingly, management has addressed this issue by formulating a liquidity contingency plan, which has been reviewed and approved by both the Bank’s Board of Directors and the ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.

A short term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long term funding crisis would most likely be the result of both external and internal factors and would most likely result in drastic credit deterioration. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.

Recent Developments

Stockholder Dividend

On February 26, 2025, the Board declared a quarterly cash dividend of $0.20 per common share. This dividend is payable on April 11, 2025, to stockholders of record on March 14, 2025.

ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank’s Board of Directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. The objectives of interest rate risk management are to control exposure of net interest income changes associated with interest rate movements and to achieve sustainable growth in net interest income. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact the Company’s assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

Management regularly reviews the Company’s exposure to changes in interest rates. Among the factors considered are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. ALCO reviews, on at least a quarterly basis, the interest rate risk position.

The interest rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short term and long term interest rate risk exposure.

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Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of the Company’s loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what the Company’s overall sensitivity position is as of the Company’s most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of the Company’s equity.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

The estimated impact on the Company’s net interest income in hypothetical rising and declining rate scenarios assuming immediate, parallel moves in interest rates, calculated as of December 31, 2024 and December 31, 2023, are presented in the table below:

Following Following Following Following

The above interest rate simulation suggests that the Company’s balance sheet is slightly asset sensitive, in the short-term, as of December 31, 2024, demonstrating that an increase in interest rates would have a marginal positive impact on net interest income over the next 12 and 24 months. The balance sheet has shifted from being liability sensitive as of December 31, 2023. This change is attributable to both active derivatives strategies as well as balance sheet growth from the acquisition of HMNF and organic loan growth and deposit growth.

Management strategies may impact future reporting periods, as actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

Management uses economic value of equity sensitivity analysis to understand the impact of interest rate changes on long term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.

The table below presents the change in the economic value of equity as of December 31, 2024 and December 31, 2023, assuming immediate parallel shifts in interest rates:

December 31, December 31,

Operational Risk

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. Management continuously strives to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of the Company’s operational risk.

Compliance Risk

Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose the Company to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of the Company’s banking center network, employment and tax matters.

Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various risks, including those related to the development of new products and business initiatives.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Alerus Financial Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Alerus Financial Corporation and its subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated March 13, 2025 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters do not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses—Loans

The Company’s allowance for credit losses (ACL) on loans was $59.9 million at December 31, 2024. As described in Notes 1 and 6, the ACL on loans reduces the loan portfolio to the net amount expected to be collected and represents the expected losses over the life of all loans at the reporting date. Management disaggregates the loan portfolio into pools of similar risk characteristics and utilizes a discounted cash flow (DCF) or expected loss approach to calculate the expected loss for each segment. The DCF method incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast period. Within the loss driver models, a probability of default and loss given default assumption is applied to calculate the expected loss for each segment. The ACL on loans also considers various qualitative factors that are likely to cause estimated credit losses to differ from historical loss experience, such as: actual or expected changes in economic trends and conditions, changes in the value of underlying collateral for loans, changes to lending policies, underwriting standards and/or management personnel performing such functions, delinquency and other credit quality trends, credit risk concentrations, changes to the nature of the Company’s business impacting the loan portfolio and other external factors.

We identified the determination of the forecasted economic scenarios and qualitative factors of the ACL as a critical audit matter because auditing management’s underlying assumptions required a high degree of complexity and auditor judgment and involved a high degree of estimation uncertainty.

Our audit procedures related to the determination of the forecasted economic scenarios and qualitative factors of ACL for pooled loans included the following, among others:

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Fair Value of Loans Held for Investment Acquired in Business Combinations

The Company completed an acquisition on October 9, 2024, acquiring loans held for investment with an estimated fair value of $785.4 million as of the acquisition date. As described in Notes 1 and 3 to the financial statements, the Company estimated the acquisition date fair value of loans held for investment by segmenting the acquired portfolio into purchase credit deteriorated (PCD) and non-PCD loans.

The estimated fair value of non-PCD loans and PCD loans at the acquisition date was $632.6 million and $152.8 million, respectively. Non-PCD loans were pooled based on similar characteristics and were valued using a discounted cash flow analysis, based on the cash flows projected for each loan pool. PCD loans were valued at the individual loan level or pooled with similar characteristics as non-PCD pooled loans. The discount rate utilized to determine the estimated fair value of non-PCD loans and PCD loans considered the projected future interest rates based on forward rates, a spread over the forward curve, spreads for estimated servicing costs and illiquidity. The credit discount for non-PCD loans and PCD loans was estimated based on probability of default and loss given default assumptions. The discounted cash flow approach models the credit losses directly in the projected cash flows.

The determination of the estimated fair value of loans held for investment required management to make certain estimates about discount rates, future expected cash flows, and market conditions at the time of the acquisition, as well as other future events that are highly subjective in nature.

We identified the estimated fair value of loans that were acquired in the current year as a critical audit matter because of the judgements necessary by management to determine the fair value of loans, and the related high degree of auditor judgement and the extensive audit effort involved in testing management’s estimates and assumptions. The significant estimates and assumptions necessary to estimate the fair value of non-PCD and PCD loans that required a high degree of auditor judgement and increased audit effort included assumptions included the probability of default, loss given default, and the discount rate.

Our audit procedures related to the determination of the significant estimates and assumptions necessary to estimate the fair value of non-PCD and PCD loans acquired in the current year included the following, among others:

/s/ RSM US LLP

We have served as the Company’s auditor since 2022.

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Des Moines, Iowa

March 13, 2025

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Board of Directors and Stockholders

Alerus Financial Corporation

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Opinion on the Financial Statements

We have audited the accompanying consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of Alerus Financial Corporation and Subsidiaries (the Company) for the year ended December 31, 2022, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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Basis for Opinion

The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

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/s/ CliftonLarsonAllen LLP

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CliftonLarsonAllen LLP

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We have served as the Company’s auditor from 2014 through 2022.

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Minneapolis, Minnesota

March 10, 2023

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CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.

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Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

December 31, December 31,

(dollars in thousands, except share and per share data) 2024 2023

Assets

Investment securities

Allowance for credit losses on loans (59,929 ) (35,843 )

Operating lease right-of-use assets 13,438 5,436

Liabilities and Stockholders’ Equity

Liabilities

Deposits

Accrued expenses and other liabilities 70,833 64,098

Commitments and contingencies (Note 13)

Stockholders’ equity

Accumulated other comprehensive income (loss) (73,366 ) (73,655 )

See Accompanying Notes to Consolidated Financial Statements

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