ALRS 10-Q Quarterly Report Sept. 30, 2024

ALERUS FINANCIAL CORP

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alrs20240930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For th e quarterly period ended September 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39036

ALERUS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	45-0375407
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

401 Demers Avenue
Grand Forks , ND	58201
(Address of principal executive offices)	(Zip Code)

( 701 ) 795 ‑ 3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

Title of each class		Trading symbol		Name of each exchange on which registered
Common Stock, par value $1.00 per share		ALRS		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding at October 29, 2024 was 25,338,280 .

Table of Contents

Alerus Financial Corporation and Subsidiaries

Table of Contents

		Page
Part 1 :	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Changes in Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 4.	Controls and Procedures	64

Part 2 :	OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

Signatures		68

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

	*September 30,*			*December 31,*
(dollars in thousands, except share and per share data)	*2024*			*2023*
Assets
Cash and cash equivalents	$	65,975		$	129,893
Investment securities
Trading		2,708			—
Available-for-sale, at fair value (amortized cost of $ 549,122 and $ 584,754 , respectively)		466,003			486,736
Held-to-maturity, at amortized cost (fair value of $ 249,862 and $ 258,617 , respectively, with an allowance for credit losses on investments of $ 137 and $ 213 , respectively)		281,913			299,515
Loans held for sale		13,487			11,497
Loans		3,032,343			2,759,583
Allowance for credit losses on loans		( 39,142	)		( 35,843	)
Net loans		2,993,201			2,723,740
Land, premises and equipment, net		18,790			17,940
Operating lease right-of-use assets		9,268			5,436
Accrued interest receivable		16,469			15,700
Bank-owned life insurance		35,793			33,236
Goodwill		46,783			46,783
Other intangible assets, net		13,186			17,158
Servicing rights		1,874			2,052
Deferred income taxes, net		33,054			34,595
Other assets		86,136			83,432
Total assets	$	4,084,640		$	3,907,713
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	657,547		$	728,082
Interest-bearing		2,666,003			2,367,529
Total deposits		3,323,550			3,095,611
Short-term borrowings		244,700			314,170
Long-term debt		59,041			58,956
Operating lease liabilities		9,643			5,751
Accrued expenses and other liabilities		61,220			64,098
Total liabilities		3,698,154			3,538,586
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock, $ 1 par value, 2,000,000 shares authorized: 0 issued and outstanding		—			—
Common stock, $ 1 par value, 30,000,000 shares authorized: 19,790,005 and 19,734,077 issued and outstanding		19,790			19,734
Additional paid-in capital		151,257			150,343
Retained earnings		278,863			272,705
Accumulated other comprehensive income (loss)		( 63,424	)		( 73,655	)
Total stockholders’ equity		386,486			369,127
Total liabilities and stockholders’ equity	$	4,084,640		$	3,907,713

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

	*Three months ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
(dollars and shares in thousands, except per share data)	*2024*		*2023*		*2024*		*2023*
Interest Income
Loans, including fees	$	42,593	$	34,986	$	123,551	$	99,187
Investment securities
Taxable		4,596		6,146		14,008		18,222
Exempt from federal income taxes		169		182		512		558
Other		4,854		724		16,200		2,221
Total interest income		52,212		42,038		154,271		120,188
Interest Expense
Deposits		22,285		14,436		63,721		36,218
Short-term borrowings		6,706		6,528		19,748		15,684
Long-term debt		679		679		2,041		1,999
Total interest expense		29,670		21,643		85,510		53,901
Net interest income		22,542		20,395		68,761		66,287
Provision for credit losses		1,661		—		6,150		550
Net interest income after provision for credit losses		20,881		20,395		62,611		65,737
Noninterest Income
Retirement and benefit services		16,144		18,605		47,876		49,977
Wealth management		6,684		5,271		19,161		15,915
Mortgage banking		2,573		2,510		6,796		7,132
Service charges on deposit accounts		488		328		1,333		940
Other		2,474		1,693		5,891		5,475
Total noninterest income		28,363		28,407		81,057		79,439
Noninterest Expense
Compensation		21,058		19,071		60,655		57,076
Employee taxes and benefits		5,400		4,895		16,722		15,472
Occupancy and equipment expense		2,082		1,883		5,803		5,619
Business services, software and technology expense		4,879		4,774		14,823		15,367
Intangible amortization expense		1,324		1,324		3,972		3,972
Professional fees and assessments		4,267		1,716		8,633		4,397
Marketing and business development		764		750		2,200		2,139
Supplies and postage		422		410		1,321		1,275
Travel		330		322		954		876
Mortgage and lending expenses		684		689		1,592		1,401
Other		1,237		1,426		3,543		3,909
Total noninterest expense		42,447		37,260		120,218		111,503
Income before income taxes		6,797		11,542		23,450		33,673
Income tax expense		1,590		2,381		5,604		7,222
Net income	$	5,207	$	9,161	$	17,846	$	26,451
Per Common Share Data
Basic earnings per common share	$	0.26	$	0.46	$	0.90	$	1.31

Diluted earnings per common share	$	0.26	$	0.45	$	0.89	$	1.30
Dividends declared per common share	$	0.20	$	0.19	$	0.59	$	0.56
Average common shares outstanding		19,788		19,872		19,768		19,977
Diluted average common shares outstanding		20,075		20,095		20,037		20,193

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

	*Three months ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
(dollars in thousands)	*2024*			*2023*			*2024*			*2023*
Net Income	$	5,207		$	9,161		$	17,846		$	26,451
Other Comprehensive Income (Loss), Net of Tax
Net change in unrealized gains (losses) on debt securities		19,431			( 19,155	)		14,692			( 24,033	)
Net change in unrealized gain (losses) on cash flow hedging derivatives		( 869	)		1,011			( 160	)		1,011
Net change in unrealized gain (losses) on other derivatives		( 3,068	)		1,133			( 872	)		3,206
Total other comprehensive income (loss), before tax		15,494			( 17,011	)		13,660			( 19,816	)
Income tax expense (benefit) related to items of other comprehensive income (loss)		3,889			( 4,270	)		3,429			( 4,974	)
Other comprehensive income (loss), net of tax		11,605			( 12,741	)		10,231			( 14,842	)
Total comprehensive income (loss)	$	16,812		$	( 3,580	)	$	28,077		$	11,609

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders ’ Equity (Unaudited)

	*Three months ended*
										*Accumulated*
				*Additional*						*Other*
	*Common*			*Paid-in*			*Retained*			*Comprehensive*
(dollars and shares in thousands)	*Stock*			*Capital*			*Earnings*			*Income (Loss)*			*Total*
Balance as of June 30, 2023		19,915		$	152,673		$	285,839		$	( 100,742	)	$	357,685
Net income		—			—			9,161			—			9,161
Other comprehensive income (loss)		—			—			—			( 12,741	)		( 12,741	)
Common stock repurchased		( 70	)		( 1,172	)		—			—			( 1,242	)
Common stock dividends		—			—			( 3,838	)		—			( 3,838	)
Share‑based compensation expense		—			377			—			—			377
Vesting of restricted stock		3			( 3	)		—			—			—
Balance as of September 30, 2023		19,848		$	151,875		$	291,162		$	( 113,483	)	$	349,402

Balance as of June 30, 2024		19,778		$	150,857		$	277,620		$	( 75,029	)	$	373,226
Net income		—			—			5,207			—			5,207
Other comprehensive income (loss)		—			—			—			11,605			11,605
Common stock repurchased		—			( 76	)		—			—			( 76	)
Common stock dividends		—			—			( 3,964	)		—			( 3,964	)
Share‑based compensation expense		—			488			—			—			488
Vesting of restricted stock		12			( 12	)		—			—			—
Balance as of September 30, 2024		19,790		$	151,257		$	278,863		$	( 63,424	)	$	386,486

	*Nine Months Ended*
										*Accumulated*
				*Additional*						*Other*
	*Common*			*Paid-in*			*Retained*			*Comprehensive*
(dollars and shares in thousands)	*Stock*			*Capital*			*Earnings*			*Income (Loss)*			*Total*
Balance as of December 31, 2022		19,992		$	155,095		$	280,426		$	( 98,641	)	$	356,872
Cumulative effect of change in accounting principles, net of tax		—			—			( 4,452	)		—			( 4,452	)
Balance as of January 1, 2023		19,992			155,095			275,974			( 98,641	)		352,420
Net income		—			—			26,451			—			26,451
Other comprehensive income (loss)		—			—			—			( 14,842	)		( 14,842	)
Common stock repurchased		( 257	)		( 4,299	)		—			—			( 4,556	)
Common stock dividends		—			—			( 11,263	)		—			( 11,263	)
Share‑based compensation expense		18			1,174			—			—			1,192
Vesting of restricted stock		95			( 95	)		—			—			—
Balance as of September 30, 2023		19,848		$	151,875		$	291,162		$	( 113,483	)	$	349,402

Balance as of December 31, 2023		19,734		$	150,343		$	272,705		$	( 73,655	)	$	369,127
Net income		—			—			17,846			—			17,846
Other comprehensive income (loss)		—			—			—			10,231			10,231
Common stock repurchased		( 7	)		( 225	)		—			—			( 232	)
Common stock dividends		—			—			( 11,688	)		—			( 11,688	)
Share‑based compensation expense		—			1,202			—			—			1,202
Vesting of restricted stock		63			( 63	)		—			—			—
Balance as of September 30, 2024		19,790		$	151,257		$	278,863		$	( 63,424	)	$	386,486

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	*Nine Months Ended*
	*September 30,*
(dollars in thousands)	*2024*			*2023*
Operating Activities
Net income	$	17,846		$	26,451
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		( 1,888	)		857
Provision for credit losses		6,150			550
Depreciation and amortization		6,456			6,378
Amortization and accretion of premiums/discounts on investment securities		1,301			1,652
Amortization of operating lease right-of-use assets		60			( 372	)
Share‑based compensation expense		1,202			1,192
Originations on loans held for sale		( 233,656	)		( 239,004	)
Proceeds on loans held for sale		238,113			238,028
(Increase) in value of bank-owned life insurance		( 622	)		( 653	)
Realized loss (gain) on sale of premises and equipment		( 476	)		—
Realized loss (gain) on derivative instruments		421			( 322	)
Realized loss (gain) on loans sold		( 6,545	)		( 5,922	)
Realized loss (gain) on sale of foreclosed assets		( 1	)		( 27	)
Realized loss (gain) on BOLI mortality		—			( 1,196	)
Realized loss (gain) on servicing rights		( 149	)		( 28	)
Net change in:
Accrued interest receivable		( 769	)		( 2,692	)
Other assets		127			( 3,967	)
Accrued expenses and other liabilities		( 8,129	)		3,879
Net cash provided (used) by operating activities		19,441			24,804
Investing Activities
Proceeds from sales of trading investment securities		8,684			—
Purchases of trading investment securities		( 11,220	)		—
Proceeds from maturities of investment securities available-for-sale		35,011			52,624
Proceeds from calls of investment securities held-to-maturity		611			242
Proceeds from maturities and paydowns of investment securities held-to-maturity		16,180			17,188
Net (increase) decrease in loans		( 275,760	)		( 162,322	)
Net (increase) decrease in FHLB stock		2,809			( 5,953	)
Purchases of BOLI		( 1,935	)		—
Proceeds from BOLI mortality claim		—			2,828
Proceeds from sale of premises and equipment		2,799			—
Purchases of premises and equipment		( 7,331	)		( 1,474	)
Proceeds from sales of foreclosed assets		37			51
Net cash provided (used) by investing activities		( 230,115	)		( 96,816	)
Financing Activities
Net increase (decrease) in deposits		227,939			( 43,300	)
Net increase (decrease) in short-term borrowings		( 69,470	)		137,390
Cash dividends paid on common stock		( 11,481	)		( 11,040	)
Repurchase of common stock		( 232	)		( 4,556	)
Net cash provided (used) by financing activities		146,756			78,494
Net change in cash and cash equivalents		( 63,918	)		6,482
Cash and cash equivalents at beginning of period		129,893			58,242
Cash and cash equivalents at end of period	$	65,975		$	64,724

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

	*Nine Months Ended*
	*September 30,*
	*2024*			*2023*
Supplemental Cash Flow Disclosures
Interest paid	$	84,700		$	50,969
Income taxes paid		260			6,637
Cash dividends declared, not paid		3,963			3,838
Supplemental Disclosures of Noncash Investing and Financing Activities
Loan collateral transferred to foreclosed assets		( 5	)		3
Premises and equipment transferred to other assets		2,086			—
Right-of-use assets obtained in exchange for new operating lease liabilities, net		5,244			1,938
Change in fair value hedges presented within residential real estate loans and other assets		98			716

See accompanying notes to consolidated financial statements (unaudited)

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Alerus Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

The accompanying unaudited consolidated interim financial statements and notes thereto of the Company have been prepared in accordance with instructions for Form 10 -Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America, or GAAP, for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated balance sheets of Alerus Financial Corporation, or the Company, as of September 30, 2024 and December 31, 2023 , the consolidated statements of income for the three and nine months ended September 30, 2024 and 2023 , consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023 , the consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2024 and 2023 , and the consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023 .

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s principal operating subsidiary is Alerus Financial, National Association, or the Bank. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10 -Q. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2023 , included in the Company’s Annual Report on Form 10 -K filed with the SEC on March 8, 2024.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: ( 1 ) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S- 1, which was declared effective by the U.S. Securities and Exchange Commission, or SEC, on September 12, 2019; ( 2 ) the last day of the fiscal year in which the Company has $1.235 billion or more in annual revenues; ( 3 ) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or ( 4 ) the date on which the Company has, during the previous three -year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on the exemptions available to emerging growth companies. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile. The last year the Company qualifies as an emerging growth company is 2024.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7 (a)( 2 )(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

NOTE 2 Recent Accounting Pronouncements

The following Financial Accounting Standards Board, or FASB, Accounting Standards Updates, or ASUs, are divided into pronouncements which have been adopted by the Company since January 1, 2024, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of September 30, 2024 .

Adopted Pronouncements

There have been no new ASUs adopted by the Company since January 1, 2024.

Pronouncements Not Yet Effective

In November 2023, the FASB issued guidance within ASU 2023 - 07, Segment Reporting (Topic 280 ). The amendments in this update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures related to significant segment expenses. The amendments do not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments, and all existing segment disclosure requirements in ASC 280 and other Codification topics remain unchanged. The amendments in this update are incremental and require public entities that report segment information to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss as well as other segment items. Annual disclosure of the title and position of the chief operating decision maker and how the reported measures of segment profit or loss are used to assess performance and allocation of resources is also required.

The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and are applied on a retrospective basis. The Company is currently evaluating the impact these amendments will have on its consolidated financial statements.

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In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures. The amendments in this ASU related to the rate reconciliation and income taxes paid disclosures, to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction disclosures. The amendments allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. The other amendments in this ASU improve the effectiveness and comparability of disclosures by adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (“SEC”) Regulation S- X 210.4 - 08 (h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this ASU should be applied on a prospective basis. Retrospective application is also permitted.

NOTE 3 Business Combinations

On October 9, 2024, the Company completed the acquisition of HMN Financial, Inc. (“HMNF”) (Nasdaq: HMNF) and its wholly owned subsidiary, Home Federal Savings Bank (together, “Home Federal”). As a result of the transaction, HMNF merged with and into Alerus Financial Corporation, and Home Federal Savings Bank merged with and into Alerus Financial, National Association. The all-stock transaction was valued at approximately $ 128.8 million as of closing, based on the closing price of the Company’s common stock on October 8, 2024, the trading day immediately preceding the closing of the merger, of $ 22.90 .

Founded in 1934, Home Federal had 12 branches in Minnesota and one branch in each of Iowa and Wisconsin. As of June 30, 2024, HMNF had, on a consolidated basis, $ 1.1 billion in total assets, which included approximately $ 876.6 million in loans and $ 199.0 million in investment securities, as well as $ 983.2 million in total deposits.

The transaction expanded the Company’s franchise into Rochester, Minnesota and represents the largest bank acquisition in the Company’s history. The Company’s acquisition of Home Federal is expected to provide earnings benefit, growth potential, synergies and economies of scale arising from the combination of Home Federal with the Company. With the addition of Home Federal, based on June 30, 2024 amounts, the Company now has approximately $ 5.5 billion in total assets, $ 3.8 billion in total loans, $ 4.3 billion in total deposits, and $ 43.6 billion in assets under administration/management, with 29 locations across the Midwest, as well as Arizona.

The Company is in the process of determining the value of the acquired assets and liabilities, and, therefore, no estimated fair value adjustments are available as of October 31, 2024 .

As a result of the transaction, stockholders of HMNF received 1.25 shares of the Company’s common stock for each share of HMNF common stock, resulting in the issuance of 5,547,658 shares of the Company’s common stock. The merger was structured to qualify as a tax-free reorganization for HMNF’s stockholders. Following the transaction, former stockholders of HMNF now hold approximately 21.9 % of the Company’s outstanding common stock.

During the three and nine months ended September 30, 2024 , the Company incurred $ 1.7 million and $ 2.3 million, respectively, in pre-tax acquisition expenses related to the acquisition of HMNF, comprised of legal and professional fees included in professional fees and assessments expense in the consolidated statements of income.

NOTE 4 Investment Securities

Trading securities are reported on the Company’s consolidated balance sheet at fair value. As of September 30, 2024 , the fair value of the Company’s trading securities was $ 2.7 million. There were no trading securities as of December 31, 2023 . Changes in fair value of trading securities are recorded in other noninterest income on the Company’s consolidated statements of income. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company’s deferred compensation plan for eligible employees, executives, and directors.

The following tables present amortized cost, gross unrealized gains and losses, allowance for credit losses, or ACL, and fair value of the available-for-sale, or AFS, investment securities and the amortized cost, gross unrealized gains and losses and fair value of held-to-maturity, or HTM, securities as of September 30, 2024 and December 31, 2023 :

	September 30, 2024
	Amortized		Unrealized		Unrealized			Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses			Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	739	$	2	$	( 2	)	$	—	$	739
Mortgage backed securities
Residential agency		488,915		2		( 74,529	)		—		414,388
Commercial		1,460		—		( 59	)		—		1,401
Asset backed securities		20		—		—			—		20
Corporate bonds		57,988		—		( 8,533	)		—		49,455
Total available-for-sale investment securities		549,122		4		( 83,123	)		—		466,003
Held-to-maturity
Obligations of state and political agencies		122,717		—		( 9,124	)		81		113,593
Mortgage backed securities
Residential agency		159,333		—		( 23,064	)		56		136,269
Total held-to-maturity investment securities		282,050		—		( 32,188	)		137		249,862
Total investment securities	$	831,172	$	4	$	( 115,311	)	$	137	$	715,865

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	December 31, 2023
	Amortized		Unrealized		Unrealized			Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses			Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	1,119	$	4	$	( 3	)		—	$	1,120
Mortgage backed securities
Residential agency		524,140		1		( 88,547	)		—		435,594
Commercial		1,476		—		( 123	)		—		1,353
Asset backed securities		26		—		( 1	)		—		25
Corporate bonds		57,993		—		( 9,349	)		—		48,644
Total available-for-sale investment securities		584,754		5		( 98,023	)		—		486,736
Held-to-maturity
Obligations of state and political agencies		129,603		—		( 12,613	)		114		116,990
Mortgage backed securities
Residential agency		170,125		—		( 28,498	)		99		141,627
Total held-to-maturity investment securities		299,728		—		( 41,111	)		213		258,617
Total investment securities	$	884,482	$	5	$	( 139,134	)	$	213	$	745,353

The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of September 30, 2024 represented a credit loss impairment. As of both September 30, 2024 and December 31, 2023 , the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions as of both September 30, 2024 and December 31, 2023 ; however, all such bonds had an investment grade rating as of both September 30, 2024 and December 31, 2023 . Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

The ACL on HTM debt securities is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Using a probability of default and loss given default analysis, the ACL on HTM debt securities was $ 137 thousand and $ 213 thousand as of September 30, 2024 and December 31, 2023 , respectively. The change in the ACL on HTM debt securities was due to a change in the provision for credit losses, with no charge-offs or recoveries for the three and nine months ended September 30, 2024 .

Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of September 30, 2024 , the accrued interest receivable on AFS investment securities and HTM investment securities totaled $ 1.6 million and $ 0.9 million, respectively. As of December 31, 2023 , the accrued interest receivable on AFS investment securities and HTM investment securities totaled $ 1.5 million and $ 1.4 million, respectively.

The Company had no sales or calls of AFS investment securities for the three and nine months ended September 30, 2024 and 2023 .

The Company had no sales of HTM investment securities for the three and nine months ended September 30, 2024 and 2023 .

The following tables present investment securities with gross unrealized losses, for which an ACL was not recorded at September 30, 2024 and December 31, 2023 , aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:

			*September 30, 2024*
			*Less than 12 Months*					*Over 12 Months*					*Total*
	*Number of*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*
(dollars in thousands)	*Holdings*		*Losses*			*Value*		*Losses*			*Value*		*Losses*			*Value*
Available-for-sale
U.S. Treasury and agencies		1	$	( 2	)	$	370	$	—		$	—	$	( 2	)	$	370
Mortgage backed securities
Residential agency		108		—			—		( 74,529	)		414,315		( 74,529	)		414,315
Commercial		1		—			—		( 59	)		1,401		( 59	)		1,401
Asset backed securities		3		—			—		—			20		—			20
Corporate bonds		12		—			—		( 8,533	)		49,455		( 8,533	)		49,455
Total available-for-sale investment securities		125	$	( 2	)	$	370	$	( 83,121	)	$	465,191	$	( 83,123	)	$	465,561

			December 31, 2023
			Less than 12 Months					Over 12 Months					Total
	*Number of*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*
(dollars in thousands)	*Holdings*		*Losses*			*Value*		*Losses*			*Value*		*Losses*			*Value*
Available-for-sale
U.S. Treasury and agencies		1	$	( 3	)	$	489	$	—		$	—	$	( 3	)	$	489
Mortgage backed securities
Residential agency		112		—			43		( 88,547	)		435,505		( 88,547	)		435,548
Commercial		1		—			—		( 123	)		1,353		( 123	)		1,353
Asset backed securities		3		—			—		( 1	)		25		( 1	)		25
Corporate bonds		12		—			—		( 9,349	)		48,644		( 9,349	)		48,644
Total available-for-sale investment securities		129	$	( 3	)	$	532	$	( 98,020	)	$	485,527	$	( 98,023	)	$	486,059

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As of September 30, 2024 and December 31, 2023 , none of the Company’s HTM debt securities were past due or on nonaccrual status. The Company did not recognize any interest income on nonaccrual HTM debt securities during the three months ended September 30, 2024 and 2023 .

The following table presents the carrying value and fair value of HTM investment securities and the amortized cost and fair value of AFS investment securities as of September 30, 2024 , by contractual maturity:

	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	8,282	$	8,203	$	—	$	—
Due after one year through five years		56,385		53,122		1,838		1,778
Due after five years through ten years		48,042		43,323		57,992		49,460
Due after 10 years		10,008		8,945		377		377
		122,717		113,593		60,207		51,615
Mortgage-backed securities
Residential agency		159,333		136,269		488,915		414,388
Total investment securities	$	282,050	$	249,862	$	549,122	$	466,003

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment securities with a total carrying value of $ 335.9 million and $ 250.0 million were pledged as of September 30, 2024 and December 31, 2023 , respectively, to secure public deposits and for other purposes required or permitted by law.

As of September 30, 2024 and December 31, 2023 , the carrying value of the Company’s Federal Reserve stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:

	*September 30,*		*December 31,*
(dollars in thousands)	*2024*		*2023*
Federal Reserve	$	4,623	$	4,623
FHLB		13,757		16,566

These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of September 30, 2024 , the conversion ratio was 1.5875 . Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares ( 10,992 Class A equivalents) that the Company owned as of September 30, 2024 and December 31, 2023 , were carried at a zero cost basis.

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NOTE 5 Loans and Allowance for Credit Losses

The following table presents total loans outstanding, by portfolio segment, as of September 30, 2024 and December 31, 2023 :

	*September 30,*		*December 31,*
(dollars in thousands)	*2024*		*2023*
Commercial
Commercial and industrial	$	606,245	$	562,180
Commercial real estate
Construction, land and development		173,629		124,034
Multifamily		275,377		245,103
Non-owner occupied		686,071		569,354
Owner occupied		296,366		271,623
Total commercial real estate		1,431,443		1,210,114
Agricultural
Land		45,821		40,832
Production		39,436		36,141
Total agricultural		85,257		76,973
Total commercial		2,122,945		1,849,267
Consumer
Residential real estate
First lien		690,451		697,900
Construction		11,808		28,979
HELOC		134,301		118,315
Junior lien		36,445		35,819
Total residential real estate		873,005		881,013
Other consumer		36,393		29,303
Total consumer		909,398		910,316
Total loans	$	3,032,343	$	2,759,583

Total loans included net deferred loan fees and costs of $ 601 thousand and $ 248 thousand at September 30, 2024 and December 31, 2023 , respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $ 3.8 million and $ 5.1 million as of September 30, 2024 and December 31, 2023 , respectively.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $ 13.4 million at September 30, 2024 and $ 12.2 million at December 31, 2023 .

The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends early, implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company monitors and manages credit risk through the following governance structure:

●

The Credit Risk team, Collection and Special Assets team and the Credit Governance Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking, oversee the Company’s systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system.

●

The Loan Committee is responsible for reviewing and approving all credit requests that exceed individual limits that have not been countersigned by an individual with sufficient assigned authority. This committee has full authority to commit the Bank to any request that fits within its assigned approval authority.

●

The adequacy of the ACL is overseen by the ACL Governance Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking. The ACL Governance Committee supports the oversight efforts of the Board of Directors.

●

The Board of Directors has approval authority and responsibility for all matters regarding loan policy, reviews all loans approved or declined by the Loan Committee, approves lending authority and monitors asset quality and concentration levels.

●

The ACL Governance Committee and Bank Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.

Loans with a carrying value of $ 2.1 billion and $ 1.6 billion as of September 30, 2024 and December 31, 2023 , respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.

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ACL on Loans

The following tables present, by loan portfolio segment, a summary of the changes in the ACL on loans for the three and nine months ended September 30, 2024 and 2023 :

	*Three months ended September 30, 2024*
	*Beginning*		*Provision for*			*Loan*			*Loan*		*Ending*
(dollars in thousands)	*Balance*		Credit Losses ⁽¹⁾			*Charge-offs*			*Recoveries*		*Balance*
Commercial
Commercial and industrial	$	6,234	$	660		$	( 246	)	$	153	$	6,801
Commercial real estate
Construction, land and development		10,820		( 447	)		—			—		10,373
Multifamily		2,430		161			—			—		2,591
Non-owner occupied		8,772		( 260	)		—			—		8,512
Owner occupied		2,280		233			( 98	)		14		2,429
Total commercial real estate		24,302		( 313	)		( 98	)		14		23,905
Agricultural
Land		259		( 2	)		—			20		277
Production		185		( 3	)		—			—		182
Total agricultural		444		( 5	)		—			20		459
Total commercial		30,980		342			( 344	)		187		31,165
Consumer
Residential real estate
First lien		5,366		74			—			—		5,440
Construction		458		( 355	)		—			—		103
HELOC		886		68			—			—		954
Junior lien		314		807			—			—		1,121
Total residential real estate		7,024		594			—			—		7,618
Other consumer		328		190			( 161	)		2		359
Total consumer		7,352		784			( 161	)		2		7,977
Total	$	38,332	$	1,126		$	( 505	)	$	189	$	39,142

( 1 )

The diff erenc e in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $ 549 thousand related to off-balance sheet credit exposure and ($ 14 ) thousand related to HTM investment securities.

	*Nine Months Ended September 30, 2024*
	*Beginning*		*Provision for*			*Loan*			*Loan*		*Ending*
(dollars in thousands)	*Balance*		Credit Losses ⁽¹⁾			*Charge-offs*			*Recoveries*		*Balance*
Commercial
Commercial and industrial	$	9,705	$	( 159	)	$	( 3,140	)	$	395	$	6,801
Commercial real estate
Construction, land and development		6,135		4,238			—			—		10,373
Multifamily		1,776		815			—			—		2,591
Non-owner occupied		7,726		786			—			—		8,512
Owner occupied		2,449		73			( 127	)		34		2,429
Total commercial real estate		18,086		5,912			( 127	)		34		23,905
Agricultural
Land		96		161			—			20		277
Production		84		98			—			—		182
Total agricultural		180		259			—			20		459
Total commercial		27,971		6,012			( 3,267	)		449		31,165
Consumer
Residential real estate
First lien		6,087		( 647	)		—			—		5,440
Construction		485		( 382	)		—			—		103
HELOC		835		119			—			—		954
Junior lien		264		786			( 3	)		74		1,121
Total residential real estate		7,671		( 124	)		( 3	)		74		7,618
Other consumer		201		307			( 174	)		25		359
Total consumer		7,872		183			( 177	)		99		7,977
Total	$	35,843	$	6,195		$	( 3,444	)	$	548	$	39,142

( 1 )

The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $ 31 thousand related to off-balance sheet credit exposure and ($ 76 ) thousand related to HTM investment securities.

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	Three months ended September 30, 2023
	Beginning		Provision for			Loan			Loan		Ending
(dollars in thousands)	Balance		Credit Losses			Charge-offs			Recoveries		Balance
Commercial
Commercial and industrial	$	8,170	$	93		$	( 134	)	$	456	$	8,585
Commercial real estate
Construction, land and development		3,731		770			—			251		4,752
Multifamily		1,991		( 25	)		—			—		1,966
Non-owner occupied		8,555		( 198	)		—			—		8,357
Owner occupied		2,894		( 148	)		—			11		2,757
Total commercial real estate		17,171		399			—			262		17,832
Agricultural
Land		138		( 22	)		—			—		116
Production		103		( 5	)		—			—		98
Total agricultural		241		( 27	)		—			—		214
Total commercial		25,582		465			( 134	)		718		26,631
Consumer
Residential real estate
First lien		7,571		( 317	)		( 9	)		—		7,245
Construction		785		( 22	)		—			—		763
HELOC		1,117		( 54	)		—			3		1,066
Junior lien		330		( 6	)		—			—		324
Total residential real estate		9,803		( 399	)		( 9	)		3		9,398
Other consumer		311		( 66	)		( 8	)		24		261
Total consumer		10,114		( 465	)		( 17	)		27		9,659
Total	$	35,696	$	—		$	( 151	)	$	745	$	36,290

	*Nine Months Ended September 30, 2023*
	*Beginning*		*Adoption*			*Provision for*			*Loan*			*Loan*		*Ending*
(dollars in thousands)	*Balance*		*of ASC 326*			Credit Losses ⁽¹⁾			*Charge-offs*			*Recoveries*		*Balance*
Commercial
Commercial and industrial	$	8,690	$	( 535	)	$	( 126	)	$	( 394	)	$	950	$	8,585
Commercial real estate
Construction, land and development		1,458		2,551			492			—			251		4,752
Multifamily		1,062		( 162	)		1,066			—			—		1,966
Non-owner occupied		7,543		1,344			( 530	)		—			—		8,357
Owner occupied		4,188		( 1,324	)		( 140	)		—			33		2,757
Total commercial real estate		14,251		2,409			888			—			284		17,832
Agricultural
Land		281		( 86	)		( 80	)		—			1		116
Production		250		( 76	)		( 76	)		—			—		98
Total agricultural		531		( 162	)		( 156	)		—			1		214
Total commercial		23,472		1,712			606			( 394	)		1,235		26,631
Consumer
Residential real estate
First lien		5,495		1,800			( 43	)		( 9	)		2		7,245
Construction		345		468			( 50	)		—			—		763
HELOC		951		59			50			—			6		1,066
Junior lien		352		( 85	)		85			( 77	)		49		324
Total residential real estate		7,143		2,242			42			( 86	)		57		9,398
Other consumer		531		( 97	)		( 188	)		( 36	)		51		261
Total consumer		7,674		2,145			( 146	)		( 122	)		108		9,659
Total	$	31,146	$	3,857		$	460		$	( 516	)	$	1,343	$	36,290

( 1 )

The difference in the credit loss expense reported herein compared to the consolidated statements of income is associated with the credit loss expense of $ 44 thousand related to off-balance sheet credit exposure and $ 46 thousand related to HTM investment securities.

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The ACL on loans at September 30, 2024 was $ 39.1 million, an increase of $ 3.3 million, or 9.2 %, from December 31, 2023 . The increase was primarily due to an increase of $ 4.2 million in the provision for credit losses on construction, land and development loans. This increase was primarily due to organic loan growth and an increased reserve related to an individually evaluated construction, land and development loan. This was partially offset by a decreased ACL for commercial and industrial loans and residential real estate (“RRE”) loans. This decrease was primarily driven by a $ 2.6 million charge-off of one commercial and industrial loan in the second quarter of 2024.

Credit Concentrations

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes and state and county codes. Property type coding is used for investment real estate. There were no industry concentrations exceeding 10% of the Company’s total loan portfolio as of September 30, 2024 .

Credit Quality Indicators

The Company’s consumer loan portfolio is primarily comprised of secured loans that are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred. These loans are rated as either performing or nonperforming.

The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:

●

Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.

●

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

●

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well‑defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

●

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

●

Loss: Loans classified as loss are considered uncollectible and charged off immediately.

Table of Contents

The following tables set forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of September 30, 2024 and December 31, 2023 :

													*Revolving*
(dollars in thousands)	*Term Loans Amortized Cost Basis by Origination Year*												*Loans Amortized*
As of September 30, 2024	*2024*		*2023*		*2022*		*2021*		*2020*		*Prior*		*Cost Basis*		*Total*
Commercial and industrial
Pass	$	139,653	$	147,857	$	63,749	$	40,651	$	50,753	$	38,881	$	90,695	$	572,239
Special mention		—		515		—		9,368		—		6		192		10,081
Substandard		—		4,448		—		4,027		3,062		2,009		10,379		23,925
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	139,653	$	152,820	$	63,749	$	54,046	$	53,815	$	40,896	$	101,266	$	606,245
Gross charge-offs for the period ended	$	—	$	191	$	—	$	—	$	2,668	$	281	$	—	$	3,140
CRE − Construction, land and development
Pass	$	47,796	$	58,373	$	25,508	$	1,263	$	—	$	1,652	$	14,032	$	148,624
Special mention		—		—		—		—		—		—		—		—
Substandard		1,139		—		23,866		—		—		—		—		25,005
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	48,935	$	58,373	$	49,374	$	1,263	$	—	$	1,652	$	14,032	$	173,629
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Multifamily
Pass	$	24,189	$	57,051	$	110,246	$	18,525	$	31,639	$	20,484	$	134	$	262,268
Special mention		—		—		—		—		12,807		—		—		12,807
Substandard		—		—		—		—		—		302		—		302
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	24,189	$	57,051	$	110,246	$	18,525	$	44,446	$	20,786	$	134	$	275,377
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Non-owner occupied
Pass	$	110,526	$	154,417	$	146,842	$	56,666	$	60,671	$	132,675	$	64	$	661,861
Special mention		—		—		—		7,032		—		1,098		4,578		12,708
Substandard		—		—		—		7,788		—		3,714		—		11,502
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	110,526	$	154,417	$	146,842	$	71,486	$	60,671	$	137,487	$	4,642	$	686,071
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Owner occupied
Pass	$	52,339	$	32,986	$	49,367	$	42,406	$	28,424	$	76,053	$	1,798	$	283,373
Special mention		—		—		—		944		—		336		—		1,280
Substandard		—		244		2,635		2,437		—		6,397		—		11,713
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	52,339	$	33,230	$	52,002	$	45,787	$	28,424	$	82,786	$	1,798	$	296,366
Gross charge-offs for the period ended	$	—	$	—	$	29	$	—	$	—	$	98	$	—	$	127
Agricultural − Land
Pass	$	8,423	$	5,653	$	12,726	$	4,504	$	5,461	$	6,502	$	82	$	43,351
Special mention		—		—		—		—		—		—		—		—
Substandard		—		304		2,166		—		—		—		—		2,470
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	8,423	$	5,957	$	14,892	$	4,504	$	5,461	$	6,502	$	82	$	45,821
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural − Production
Pass	$	6,913	$	6,178	$	4,709	$	493	$	1,294	$	599	$	17,915	$	38,101
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		1,335		—		—		—		—		1,335
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	6,913	$	6,178	$	6,044	$	493	$	1,294	$	599	$	17,915	$	39,436
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − First lien
Performing	$	17,117	$	69,102	$	191,133	$	204,117	$	100,781	$	106,253	$	—	$	688,503
Nonperforming		—		579		—		301		12		1,056		—		1,948
Subtotal	$	17,117	$	69,681	$	191,133	$	204,418	$	100,793	$	107,309	$	—	$	690,451
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − Construction
Performing	$	4,035	$	1,796	$	—	$	1,297	$	—	$	—	$	—	$	7,128
Nonperforming		—		—		4,680		—		—		—		—		4,680
Subtotal	$	4,035	$	1,796	$	4,680	$	1,297	$	—	$	—	$	—	$	11,808
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − HELOC
Performing	$	2,712	$	6,392	$	6,103	$	1,199	$	968	$	1,398	$	114,041	$	132,813
Nonperforming		—		—		—		—		—		138		1,350		1,488
Subtotal	$	2,712	$	6,392	$	6,103	$	1,199	$	968	$	1,536	$	115,391	$	134,301
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − Junior lien
Performing	$	3,942	$	9,803	$	7,643	$	4,304	$	2,865	$	3,937	$	200	$	32,694
Nonperforming		1,775		—		300		107		—		1,569		—		3,751
Subtotal	$	5,717	$	9,803	$	7,943	$	4,411	$	2,865	$	5,506	$	200	$	36,445
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	3	$	—	$	3
Other consumer
Performing	$	7,452	$	3,662	$	4,732	$	418	$	2,236	$	849	$	16,754	$	36,103
Nonperforming		—		—		272		—		7		11		—		290
Subtotal	$	7,452	$	3,662	$	5,004	$	418	$	2,243	$	860	$	16,754	$	36,393
Gross charge-offs for the period ended	$	—	$	6	$	3	$	150	$	4	$	11	$	—	$	174
Total loans	$	428,011	$	559,360	$	658,012	$	407,847	$	300,980	$	405,919	$	272,214	$	3,032,343
Gross charge-offs for the period ended	$	—	$	197	$	32	$	150	$	2,672	$	393	$	—	$	3,444

Table of Contents

													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	189,643	$	83,233	$	66,837	$	62,367	$	31,859	$	14,879	$	83,522	$	532,340
Special mention		—		—		—		—		—		—		—		—
Substandard		464		4,844		236		6,328		94		2,513		15,361		29,840
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	190,107	$	88,077	$	67,073	$	68,695	$	31,953	$	17,392	$	98,883	$	562,180
Gross charge-offs for the period ended	$	39	$	—	$	49	$	11	$	247	$	90	$	—	$	436
CRE − Construction, land and development
Pass	$	29,902	$	57,944	$	14,326	$	122	$	—	$	952	$	121	$	103,367
Special mention		—		—		—		—		—		—		—		—
Substandard		—		20,667		—		—		—		—		—		20,667
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	29,902	$	78,611	$	14,326	$	122	$	—	$	952	$	121	$	124,034
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Multifamily
Pass	$	71,994	$	67,368	$	16,637	$	48,643	$	24,581	$	15,435	$	135	$	244,793
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		310		—		310
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	71,994	$	67,368	$	16,637	$	48,643	$	24,581	$	15,745	$	135	$	245,103
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Non-owner occupied
Pass	$	154,813	$	127,550	$	79,046	$	62,857	$	69,269	$	69,680	$	5,121	$	568,336
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		875		143		—		1,018
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	154,813	$	127,550	$	79,046	$	62,857	$	70,144	$	69,823	$	5,121	$	569,354
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE − Owner occupied
Pass	$	39,030	$	55,337	$	41,623	$	36,339	$	22,340	$	66,574	$	2,538	$	263,781
Special mention		—		—		—		—		—		262		—		262
Substandard		—		587		2,872		—		2,815		1,306		—		7,580
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	39,030	$	55,924	$	44,495	$	36,339	$	25,155	$	68,142	$	2,538	$	271,623
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural − Land
Pass	$	6,424	$	15,294	$	4,721	$	5,958	$	672	$	7,763	$	—	$	40,832
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	6,424	$	15,294	$	4,721	$	5,958	$	672	$	7,763	$	—	$	40,832
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural − Production
Pass	$	7,890	$	5,858	$	854	$	1,904	$	2,744	$	174	$	16,717	$	36,141
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	7,890	$	5,858	$	854	$	1,904	$	2,744	$	174	$	16,717	$	36,141
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − First lien
Performing	$	61,201	$	190,749	$	217,146	$	108,100	$	33,102	$	87,213	$	284	$	697,795
Nonperforming		—		—		—		—		—		105		—		105
Subtotal	$	61,201	$	190,749	$	217,146	$	108,100	$	33,102	$	87,318	$	284	$	697,900
Gross charge-offs for the period ended	$	—	$	—	$	9	$	—	$	—	$	—	$	—	$	9
Residential real estate − Construction
Performing	$	10,978	$	16,428	$	1,573	$	—	$	—	$	—	$	—	$	28,979
Nonperforming		—		—		—		—		—		—		—		—
Subtotal	$	10,978	$	16,428	$	1,573	$	—	$	—	$	—	$	—	$	28,979
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate − HELOC
Performing	$	7,470	$	6,835	$	789	$	1,184	$	308	$	1,341	$	100,388	$	118,315
Nonperforming		—		—		—		—		—		—		—		—
Subtotal	$	7,470	$	6,835	$	789	$	1,184	$	308	$	1,341	$	100,388	$	118,315
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	40	$	—	$	40
Residential real estate − Junior lien
Performing	$	10,938	$	8,820	$	5,157	$	3,673	$	1,461	$	3,939	$	50	$	34,038
Nonperforming		—		—		—		—		—		—		1,781		1,781
Subtotal	$	10,938	$	8,820	$	5,157	$	3,673	$	1,461	$	3,939	$	1,831	$	35,819
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	77	$	—	$	77
Other consumer
Performing	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Nonperforming		—		—		—		—		—		—		—		—
Subtotal	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Gross charge-offs for the period ended	$	4	$	2	$	—	$	31	$	6	$	8	$	—	$	51
Total loans	$	596,067	$	667,909	$	452,797	$	341,964	$	191,674	$	273,541	$	235,631	$	2,759,583
Gross charge-offs for the period ended	$	43	$	2	$	58	$	42	$	253	$	215	$	—	$	613

Table of Contents

Past Due and Nonaccrual Loans

The Company closely monitors the performance of its loan portfolio. A loan is placed on nonaccrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on nonaccrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on nonaccrual status. All previously accrued and unpaid interest is reversed at that time. A loan will return to accrual when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months.

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of September 30, 2024 and December 31, 2023 :

	*September 30, 2024*
							*90 Days*
	*Accruing*		*30 - 59 Days*		*60 - 89 Days*		*or More*				*Total*
(dollars in thousands)	*Current*		*Past Due*		*Past Due*		*Past Due*		*Nonaccrual*		*Loans*
Commercial
Commercial and industrial	$	600,976	$	1,807	$	397	$	—	$	3,065	$	606,245
Commercial real estate
Construction, land and development		148,624		—		—		—		25,005		173,629
Multifamily		275,377		—		—		—		—		275,377
Non-owner occupied		677,266		3,588		—		—		5,217		686,071
Owner occupied		293,851		3		—		—		2,512		296,366
Total commercial real estate		1,395,118		3,591		—		—		32,734		1,431,443
Agricultural
Land		45,821		—		—		—		—		45,821
Production		39,366		—		—		—		70		39,436
Total agricultural		85,187		—		—		—		70		85,257
Total commercial		2,081,281		5,398		397		—		35,869		2,122,945
Consumer
Residential real estate
First lien		687,874		151		478		—		1,948		690,451
Construction		7,128		—		—		—		4,680		11,808
HELOC		132,077		655		81		—		1,488		134,301
Junior lien		32,653		17		24		—		3,751		36,445
Total residential real estate		859,732		823		583		—		11,867		873,005
Other consumer		36,007		88		8		—		290		36,393
Total consumer		895,739		911		591		—		12,157		909,398
Total	$	2,977,020	$	6,309	$	988	$	—	$	48,026	$	3,032,343

	December 31, 2023
							90 Days
	*Accruing*		*30 - 59 Days*		*60 - 89 Days*		*or More*				*Total*
(dollars in thousands)	*Current*		*Past Due*		*Past Due*		*Past Due*		*Nonaccrual*		*Loans*
Commercial
Commercial and industrial	$	554,602	$	844	$	—	$	139	$	6,595	$	562,180
Commercial real estate
Construction, land and development		124,034		—		—		—		—		124,034
Multifamily		245,103		—		—		—		—		245,103
Non-owner occupied		569,267		87		—		—		—		569,354
Owner occupied		270,467		41		—		—		1,115		271,623
Total commercial real estate		1,208,871		128		—		—		1,115		1,210,114
Agricultural
Land		40,832		—		—		—		—		40,832
Production		36,061		80		—		—		—		36,141
Total agricultural		76,893		80		—		—		—		76,973
Total commercial		1,840,366		1,052		—		139		7,710		1,849,267
Consumer
Residential real estate
First lien		695,807		901		554		—		638		697,900
Construction		28,979		—		—		—		—		28,979
HELOC		117,540		597		—		—		178		118,315
Junior lien		35,680		69		—		—		70		35,819
Total residential real estate		878,006		1,567		554		—		886		881,013
Other consumer		29,086		170		47		—		—		29,303
Total consumer		907,092		1,737		601		—		886		910,316
Total	$	2,747,458	$	2,789	$	601	$	139	$	8,596	$	2,759,583

Table of Contents

In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following tables present the amortized cost basis on nonaccrual status loans and loans 90 days or more past due and still accruing as of September 30, 2024 and December 31, 2023 :

	*As of September 30, 2024*
					*90 Days*
	*Nonaccrual*				*or More*
	*with no Allowance*				*Past Due*
(dollars in thousands)	*for Credit Losses*		*Nonaccrual*		*and Accruing*
Commercial
Commercial and industrial	$	2,790	$	3,065	$	—
Commercial real estate
Construction, land and development		—		25,005		—
Multifamily		—		—		—
Non-owner occupied		5,217		5,217		—
Owner occupied		1,781		2,512		—
Total commercial real estate		6,998		32,734		—
Agricultural
Land		—		—		—
Production		70		70		—
Total agricultural		70		70		—
Total commercial		9,858		35,869		—
Consumer
Residential real estate
First lien		1,941		1,948		—
Construction		4,680		4,680		—
HELOC		138		1,488		—
Junior lien		1,894		3,751		—
Total residential real estate		8,653		11,867		—
Other consumer		—		290		—
Total consumer		8,653		12,157		—
Total	$	18,511	$	48,026	$	—

	December 31, 2023
					90 Days
	*Nonaccrual*				*or More*
	*with no Allowance*				*Past Due*
(dollars in thousands)	*for Credit Losses*		*Nonaccrual*		*and Accruing*
Commercial
Commercial and industrial	$	79	$	6,595	$	139
Commercial real estate
Construction, land and development		—		—		—
Multifamily		—		—		—
Non-owner occupied		—		—		—
Owner occupied		95		1,115		—
Total commercial real estate		95		1,115		—
Agricultural
Land		—		—		—
Production		—		—		—
Total agricultural		—		—		—
Total commercial		174		7,710		139
Consumer
Residential real estate
First lien		632		638		—
Construction		—		—		—
HELOC		115		178		—
Junior lien		70		70		—
Total residential real estate		817		886		—
Other consumer		—		—		—
Total consumer		817		886		—
Total	$	991	$	8,596	$	139

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended September 30, 2024 and 2023 , is estimated to have been $ 1.9 million and $ 186 thousand, respectively.

The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual status. As a result, the Company did not record any interest income on its nonaccrual loans for the three months ended September 30, 2024 or 2023 . At September 30, 2024 and December 31, 2023 , total accrued interest receivable on loans, which had been excluded from reported amortized cost basis on loans, was $ 13.4 million and $ 12.2 million, respectively, and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

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In cases where a borrower experiences financial difficulty, the Company may make certain concessions for which the terms of the loan are modified. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During both the three and nine months ended September 30, 2024 and 2023 , the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.

The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of September 30, 2024 and December 31, 2023 :

	*As of September 30, 2024*
	*Primary Type of Collateral*
									*Allowance for*
(dollars in thousands)	*Real estate*		*Equipment*		*Other*		*Total*		*Credit Losses*
Commercial
Commercial and industrial	$	2,790	$	76	$	—	$	2,866	$	76
Commercial real estate
Construction, land and development		25,005		—		—		25,005		4,984
Multifamily		—		—		—		—		—
Non-owner occupied		5,217		—		—		5,217		—
Owner occupied		864		—		—		864		298
Total commercial real estate		31,086		—		—		31,086		5,282
Agricultural
Land		—		—		—		—		—
Production		—		70		—		70		—
Total agricultural		—		70		—		70		—
Total commercial		33,876		146		—		34,022		5,358
Consumer
Residential real estate
First lien		1,948		—		—		1,948		3
Construction		4,680		—		—		4,680		—
HELOC		1,529		—		—		1,529		54
Junior lien		3,745		—		—		3,745		825
Total residential real estate		11,902		—		—		11,902		882
Other consumer		—		—		280		280		47
Total consumer		11,902		—		280		12,182		929
Total	$	45,778	$	146	$	280	$	46,204	$	6,287

	As of December 31, 2023
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	6,124	$	—	$	—	$	6,124	$	2,384
Commercial real estate
Construction, land and development		—		—		—		—		—
Multifamily		—				—		—		—
Non-owner occupied		—				—		—		—
Owner occupied		695				96		791		601
Total commercial real estate		695		—		96		791		601
Agricultural
Land		—		—		—		—		—
Production		—		—		—		—		—
Total agricultural		—		—		—		—		—
Total commercial		6,819		—		96		6,915		2,985
Consumer
Residential real estate
First lien		638		—		—		638		3
Construction		—				—		—		—
HELOC		64		22		—		86		—
Junior lien		70		—		93		163		6
Total residential real estate		772		22		93		887		9
Other consumer		—		—		—		—		—
Total consumer		772		22		93		887		9
Total	$	7,591	$	22	$	189	$	7,802	$	2,994

Collateral dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral when there are no other available and reliable sources of repayment.

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NOTE 6 Land, Premises and Equipment, Net

Components of land, premises and equipment at September 30, 2024 and December 31, 2023 were as follows:

	*September 30,*			*December 31,*
(dollars in thousands)	*2024*			*2023*
Land ⁽¹⁾	$	2,775		$	4,542
Buildings and improvements ⁽¹⁾		22,096			28,172
Leasehold improvements		2,657			2,657
Furniture, fixtures, and equipment		36,519			34,086
		64,047			69,457
Less accumulated depreciation		( 45,257	)		( 51,517	)
Total	$	18,790		$	17,940

( 1 )

Excludes assets held for sale.

Depreciation expense was $ 0.7 million and $ 0.6 million for the three months ended September 30, 2024 and 2023 , respectively. Depreciation expense was $ 2.1 million and $ 1.9 million for the nine months ended September 30, 2024 and 2023 , respectively.

On July 1, 2024, the Company entered into a purchase agreement to sell its South Fargo branch in Fargo, North Dakota. At June 30, 2024, the facility included assets with a carrying value of approximately $ 1.7 million. The sale of this facility during 2024 is likely, and the Company expects to record a gain on the sale upon closing, since the agreed upon purchase price of $ 5.1 million is greater than the property’s carrying value. The Company’s West Fargo, North Dakota branch is listed for sale for $ 3.8 million and is expected to sell within the next 12 months. At September 30, 2024, the facility included assets with a carrying value of approximately $ 0.4 million. The Company expects to record a gain on the sale upon closing, as the expected sale price is greater than the property’s carrying value. Total assets held for sale by the Company at September 30, 2024 were $ 2.1 million and was included in other assets on the Company’s consolidated balance sheet and not included in the table above.

NOTE 7 Goodwill and Other Intangible Assets

The following table summarizes the carrying amount of goodwill, by segment, as of September 30, 2024 and December 31, 2023 :

	September 30,		December 31,
(dollars in thousands)	2024		2023
Banking	$	35,260	$	35,260
Retirement and benefit services		11,523		11,523
Total goodwill	$	46,783	$	46,783

Goodwill is evaluated for impairment on an annual basis, at a minimum, and more frequently when the economic environment warrants. The Company determined that there was no goodwill impairment as of September 30, 2024 .

The gross carrying amount and accumulated amortization for each type of identifiable intangible asset, as of September 30, 2024 and December 31, 2023 , were as follows:

	*September 30, 2024*							*December 31, 2023*
(dollars in thousands)	*Gross Carrying Amount*		*Accumulated Amortization*			*Total*		*Gross Carrying Amount*		*Accumulated Amortization*			*Total*
Identifiable customer intangibles	$	41,423	$	( 32,982	)	$	8,441	$	41,423	$	( 29,959	)	$	11,464
Core deposit intangible assets		7,592		( 2,847	)		4,745		7,592		( 1,898	)		5,694
Total intangible assets	$	49,015	$	( 35,829	)	$	13,186	$	49,015	$	( 31,857	)	$	17,158

Amortization of intangible assets was $ 1.3 million for both the three months ended September 30, 2024 and 2023 . Amortization of intangible assets was $ 4.0 million for both the nine months ended September 30, 2024 and 2023 .

NOTE 8 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $ 181.8 million and $ 190.0 million as of September 30, 2024 and December 31, 2023 , respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

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The following table summarizes the Company’s activity related to servicing rights for the three and nine months ended September 30, 2024 and 2023 :

	*Three months ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
(dollars in thousands)	*2024*			*2023*			*2024*			*2023*
Servicing Assets:
Balance at beginning of period	$	1,963		$	2,351		$	2,052		$	2,643
Additions, net of valuation reserve ⁽¹⁾		225			210			358			236
Amortization ⁽²⁾		( 105	)		( 140	)		( 327	)		( 458	)
Balance at end of period		2,083			2,421			2,083			2,421
Less valuation reserve ⁽³⁾		( 209	)		( 207	)		( 209	)		( 207	)
Balance at end of period, net of valuation reserve	$	1,874		$	2,214		$	1,874		$	2,214
Fair value, beginning of period	$	2,082		$	2,351		$	2,062		$	2,643
Fair value, end of period	$	1,874		$	2,269		$	1,874		$	2,269

( 1 )

Associated income was reported within mortgage banking income, net on the consolidated statements of income.

( 2 )

Associated amortization expense was reported within other noninterest income on the consolidated statements of income.

( 3 )

Associated valuation reserve was reported within mortgage and lending expenses on the consolidated statements of income.

The following is a summary of key data and assumptions used in the valuation of servicing rights as of September 30, 2024 and December 31, 2023 . Increases or decreases in any one of these assumptions would result in lower or higher fair value measurements.

	*September 30,*			*December 31,*
(dollars in thousands)	*2024*			*2023*
Fair value of servicing rights	$	1,874		$	2,062
Weighted-average remaining term, years		19.1			18.8
Prepayment speeds		10.1	%		6.2	%
Discount rate		10.5	%		11.1	%

NOTE 9 Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee are comprised of real property for offices and office equipment rentals with terms extending through 2037. Portions of certain properties are subleased for terms extending through July 2025. Substantially all of the Company’s leases are classified as operating leases. The Company has no existing finance leases.

The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements. The following table presents the classification of the Company’s right-of-use, or ROU, assets and lease liabilities on the consolidated financial statements as of September 30, 2024 and December 31, 2023 :

		*September 30,*		*December 31,*
(dollars in thousands)		*2024*		*2023*
Lease Right-of-Use Assets	*Classification*
Operating lease right-of-use assets	Operating lease right-of-use assets	$	9,268	$	5,436
Lease Liabilities
Operating lease liabilities	Operating lease liabilities	$	9,643	$	5,751

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.

	*September 30,*			*December 31,*
	*2024*			*2023*
Weighted-average remaining lease term, years
Operating leases		12.1			7.3
Weighted-average discount rate
Operating leases		4.47	%		3.9	%

As the Company elected, for all classes of underlying assets, not to separate lease and non‑lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for usage or maintenance of those capitalized equipment operating leases.

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The following table presents lease costs and other lease information for the three and nine months ended September 30, 2024 and 2023 :

	*Three months ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
(dollars in thousands)	*2024*			*2023*			*2024*			*2023*
Lease costs
Operating lease cost	$	500		$	503		$	1,404		$	1,438
Variable lease cost		269			219			741			918
Short-term lease cost		54			46			158			128
Finance lease cost
Interest on lease liabilities		—			—			—			—
Amortization of right-of-use assets		—			—			—			—
Sublease income		( 47	)		( 50	)		( 146	)		( 169	)
Net lease cost	$	776		$	718		$	2,157		$	2,315
Other information
Cash paid for amounts included in the measurement of lease liabilities operating cash flows from operating leases	$	549		$	499		$	1,469		$	1,275
Right-of-use assets obtained in exchange for new operating lease liabilities		5,136			( 1,240	)		5,244			1,938

Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of September 30, 2024 were as follows:

	*Operating*
(dollars in thousands)	*Leases*
Twelve months ended
September 30, 2025	$	1,747
September 30, 2026		1,574
September 30, 2027		1,470
September 30, 2028		970
September 30, 2029		758
Thereafter		8,309
Total future minimum lease payments	$	14,828
Amounts representing interest		( 5,185	)
Total operating lease liabilities	$	9,643

NOTE 10 Deposits

The components of deposits in the consolidated balance sheets as of September 30, 2024 and December 31, 2023 were as follows:

	*September 30,*		*December 31,*
(dollars in thousands)	*2024*		*2023*
Noninterest-bearing	$	657,547	$	728,082
Interest-bearing
Interest-bearing demand		1,034,694		840,711
Savings accounts		75,675		82,485
Money market savings		1,067,187		1,032,771
Time deposits		488,447		411,562
Total interest-bearing		2,666,003		2,367,529
Total deposits	$	3,323,550	$	3,095,611

Certificates of deposit in excess of $250,000 totaled $ 170.9 million and $ 121.8 million at September 30, 2024 and December 31, 2023 , respectively.

NOTE 11 Short ‑ Term Borrowings

Short-term borrowings at September 30, 2024 and December 31, 2023 consisted of the following:

	*September 30,*		*December 31,*
(dollars in thousands)	*2024*		*2023*
Fed funds purchased	$	44,700	$	114,170
FHLB short-term advances		200,000		200,000
Total	$	244,700	$	314,170

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NOTE 12 Long ‑ Term Debt

Long‑term debt as of September 30, 2024 and December 31, 2023 consisted of the following:

	*September 30, 2024*
						*Period End*
	*Face*		*Carrying*			*Interest*			*Maturity*
(dollars in thousands)	*Value*		*Value*		Interest Rate	*Rate*			*Date*	*Call Date*
Subordinated notes payable	$	50,000	$	50,000	Fixed		3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,616	Three-month CME SOFR + 0.26% + 3.10%		8.02	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,425	Three-month CME SOFR + 0.26% + 1.80%		7.01	%	9/15/2036	9/15/2011
Total long-term debt	$	60,310	$	59,041

	December 31, 2023
						Period End
	*Face*		*Carrying*			*Interest*			*Maturity*
(dollars in thousands)	*Value*		*Value*		Interest Rate	*Rate*			*Date*	Call Date
Subordinated notes payable	$	50,000	$	50,000	Fixed		3.50	%	3/30/2031	3/31/2026
Junior subordinated debenture (Trust I)		4,124		3,583	Three-month CME SOFR + 0.26% + 3.10%		8.72	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,186		5,373	Three-month CME SOFR + 0.26% + 1.80%		7.45	%	9/15/2036	9/15/2011
Total long-term debt	$	60,310	$	58,956

NOTE 13 Commitments and Contingencies

Commitments

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk as of September 30, 2024 and December 31, 2023 , respectively, was as follows:

	*September 30,*		*December 31,*
(dollars in thousands)	*2024*		*2023*
Commitments to extend credit	$	927,235	$	942,413
Standby letters of credit		11,231		10,045
Total	$	938,466	$	952,458

The Company establishes an ACL on unfunded commitments, except those that are unconditionally cancellable by the Company. As of both September 30, 2024 and December 31, 2023 , the ACL on unfunded commitments was $ 7.4 million. The ACL on unfunded commitments was presented within accrued expenses and other liabilities on the consolidated balance sheet. For the nine months ended September 30, 2024 and 2023 , the provision for credit losses on unfunded commitments was $ 31 thousand and $ 44 thousand, respectively.

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

The Company was not required to perform on any financial guarantees and did not incur any losses on its commitments during the past two years.

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had no letters of credit outstanding with the FHLB as of September 30, 2024 or December 31, 2023 . With the Bank of North Dakota, the Company had letters of credit outstanding in the amount of $ 150.0 million and $ 182.0 million as of September 30, 2024 and December 31, 2023 , respectively. Letters of credit with the Bank of North Dakota were collateralized by loans pledged to the Bank of North Dakota in the amount of $ 469.1 million and $ 454.6 million as of September 30, 2024 and December 31, 2023 , respectively.

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Legal Contingencies

In the normal course of business, including in connection with business combinations pursued by the Company, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that, based on the information currently available, the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.

The Company did not have any material loss contingencies that were provided for and/or that were required to be disclosed as of September 30, 2024 and December 31, 2023 , respectively.

NOTE 14 Share-Based Compensation

On May 6, 2019, the Company’s stockholders approved the Alerus Financial Corporation 2019 Equity Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Since inception, all awards issued under the plan have been restricted stock and restricted stock units. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Restricted stock units issued do not participate in dividends and recipients are not entitled to vote these restricted stock units until shares of the Company’s common stock are delivered after vesting of the restricted stock units. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. Awards issued to Company directors are not subject to any service requirements and vest immediately. The plan authorizes the issuance of up to 1,100,000 shares of common stock. As of September 30, 2024 , 669,332 shares of common stock are still available for issuance under the plan.

The compensation expense relating to awards under these plans was $ 488 thousand and $ 377 thousand for the three months ended September 30, 2024 and 2023 , respectively. The compensation expense relating to awards under these plans was $ 1.2 million for both the nine months ended September 30, 2024 and 2023 .

The following table presents the activity in the stock plans for the nine months ended September 30, 2024 and 2023 :

	*Nine Months Ended September 30,*
	*2024*					*2023*
				*Weighted-*					*Weighted-*
				*Average Grant*					*Average Grant*
	*Awards*			*Date Fair Value*		*Awards*			*Date Fair Value*
Restricted Stock and Restricted Stock Unit Awards
Outstanding at beginning of period		231,657		$	22.96		238,929		$	23.66
Granted		108,561			20.93		115,174			20.00
Vested		( 55,429	)		23.87		( 93,767	)		21.34
Forfeited or cancelled		—			—		( 26,840	)		21.33
Outstanding at end of period		284,789		$	22.00		233,496		$	23.05

As of September 30, 2024 , there was $ 3.1 million of unrecognized compensation expense related to non-vested awards granted under the plans. The expense is expected to be recognized over a weighted-average period of 1.9 years.

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NOTE 15 Income Taxes

The components of income tax expense (benefit) for the three and nine months ended September 30, 2024 and 2023 were as follows:

	*Three months ended September 30,*
	*2024*						*2023*
				*Percent of*						*Percent of*
(dollars in thousands)	*Amount*			*Pretax Income*			*Amount*			*Pretax Income*
Taxes at statutory federal income tax rate	$	1,427			21.0	%	$	2,424			21.0	%
Tax effect of:
Tax exempt income		( 308	)		( 4.5	)%		( 189	)		( 1.6	)%
State income taxes, net of federal benefits		332			4.9	%		499			4.3	%
Nondeductible items and other		139			2.0	%		( 353	)		( 3.1	)%
Applicable income taxes	$	1,590			23.4	%	$	2,381			20.6	%

	*Nine months ended September 30,*
	*2024*						*2023*
				*Percent of*						*Percent of*
(dollars in thousands)	*Amount*			*Pretax Income*			*Amount*			*Pretax Income*
Taxes at statutory federal income tax rate	$	4,925			21.0	%	$	7,071			21.0	%
Tax effect of:
Tax exempt income		( 776	)		( 3.3	)%		( 489	)		( 1.5	)%
State income taxes, net of federal benefits		1,143			4.9	%		1,445			4.3	%
Nondeductible items and other		312			1.3	%		( 805	)		( 2.4	)%
Applicable income taxes	$	5,604			23.9	%	$	7,222			21.4	%

It is the opinion of management that, as of September 30, 2024 , the Company had no significant uncertain tax positions that would be subject to change upon examination.

NOTE 16 Tax Credit Investments

The Company invests in qualified affordable housing projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.

The following table presents a summary of the Company’s investments in qualified affordable housing project tax credits as of September 30, 2024 and December 31, 2023 :

		September 30, 2024				December 31, 2023
(dollars in thousands)		Investment		Unfunded Commitment		Investment		Unfunded Commitment
Investment	*Accounting Method*
Low income housing tax credit	Proportional amortization	$	17,906	$	5,473	$	17,906	$	12,347

The following tables present a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects for the three and nine months ended September 30, 2024 and 2023 :

	*Three months ended September 30,*
	*2024*					*2023*
	*Amortization*		*Tax Benefit*			*Amortization*		*Tax Benefit*
(dollars in thousands)	Expense ⁽¹⁾		Recognized ⁽²⁾			Expense ⁽¹⁾		Recognized ⁽²⁾
Low income housing tax credit	$	432	$	( 352	)	$	245	$	( 435	)

( 1 )

The amortization expense for low income housing tax credits was included in the income tax expense.

( 2 )

All of the tax benefits recognized were included in income tax expense.

	*Nine months ended September 30,*
	*2024*					*2023*
	*Amortization*		*Tax Benefit*			*Amortization*		*Tax Benefit*
(dollars in thousands)	Expense ⁽¹⁾		Recognized ⁽²⁾			Expense ⁽¹⁾		Recognized ⁽²⁾
Low income housing tax credit	$	1,296	$	( 1,103	)	$	884	$	( 1,171	)

( 1 )

The amortization expense for low income housing tax credits was included in the income tax expense.

( 2 )

All of the tax benefits recognized were included in income tax expense.

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NOTE 17 Segment Reporting

Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. Reportable segments are determined based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial statements, and management’s regular review of the operating results of those services. The Company currently operates through three operating segments: Banking, Retirement and Benefit Services, and Wealth Management. 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 by the Company to reflect the way the Company currently manages and views the business. The Company has restated all historical periods presented within these financial statements, and has not included the Mortgage operating segment.

The financial information presented for each segment includes net interest income, provision for credit losses, noninterest income, and direct and indirect noninterest expense. Corporate Administration includes all remaining income and expenses not allocated to the three operating segments.

The following tables present key metrics related to the Company’s segments for the periods presented:

	*As of and for the three months ended September 30, 2024*
			*Retirement and*		*Wealth*		*Corporate*
(dollars in thousands)	*Banking*		*Benefit Services*		*Management*		*Administration*			*Consolidated*
Net interest income (loss)	$	23,220	$	—	$	—	$	( 678	)	$	22,542
Provision for credit losses		1,661		—		—		—			1,661
Noninterest income (loss)		4,940		16,144		6,684		595			28,363
Noninterest expense		20,269		14,154		3,838		4,186			42,447
Net income (loss) before taxes	$	6,230	$	1,990	$	2,846	$	( 4,269	)	$	6,797
Total assets	$	4,009,535	$	32,882	$	5,288	$	36,935		$	4,084,640

	*As of and for the nine months ended September 30, 2024*
			*Retirement and*		*Wealth*		*Corporate*
(dollars in thousands)	*Banking*		*Benefit Services*		*Management*		*Administration*			*Consolidated*
Net interest income (loss)	$	70,803	$	—	$	—	$	( 2,042	)	$	68,761
Provision for credit losses		6,150		—		—		—			6,150
Noninterest income (loss)		13,428		47,876		19,161		592			81,057
Noninterest expense		57,837		41,757		11,494		9,130			120,218
Net income (loss) before taxes	$	20,244	$	6,119	$	7,667	$	( 10,580	)	$	23,450
Total assets	$	4,009,535	$	32,882	$	5,288	$	36,935		$	4,084,640

	*As of and for the three months ended September 30, 2023*
			*Retirement and*		*Wealth*		*Corporate*
(dollars in thousands)	*Banking*		*Benefit Services*		*Management*		*Administration*			*Consolidated*
Net interest income (loss)	$	21,073	$	—	$	—	$	( 678	)	$	20,395
Provision for credit losses		—		—		—		—			—
Noninterest income		4,660		18,605		5,271		( 129	)		28,407
Noninterest expense		18,881		13,269		3,351		1,759			37,260
Net income (loss) before taxes	$	6,852	$	5,336	$	1,920	$	( 2,566	)	$	11,542
Total assets	$	3,801,230	$	36,114	$	4,224	$	( 8,590	)	$	3,832,978

	*As of and for the nine months ended September 30, 2023*
			*Retirement and*		*Wealth*		*Corporate*
(dollars in thousands)	*Banking*		*Benefit Services*		*Management*		*Administration*			*Consolidated*
Net interest income (loss)	$	68,285	$	—	$	—	$	( 1,998	)	$	66,287
Provision for credit losses		550		—		—		—			550
Noninterest income		13,440		49,977		15,915		107			79,439
Noninterest expense		56,832		39,515		9,703		5,453			111,503
Net income (loss) before taxes	$	24,343	$	10,462	$	6,212	$	( 7,344	)	$	33,673
Total assets	$	3,801,230	$	36,114	$	4,224	$	( 8,590	)	$	3,832,978

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Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through fourteen offices in North Dakota, Minnesota, and Arizona. After the closing of the HMNF acquisition, the Company added 15 banking offices in Minnesota, Wisconsin, and Iowa. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the Banking segment’s balance sheet.

Retirement and Benefit Services

The Retirement and Benefit Services division 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.

Wealth Management

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

NOTE 18 Earnings Per Share

The calculation of basic and diluted earnings per share using the two -class method for the three and nine months ended September 30, 2024 and 2023 are presented below:

	*Three months ended*				*Nine months ended*
	*September 30,*				*September 30,*
(dollars and shares in thousands, except per share data)	*2024*		*2023*		*2024*		*2023*
Net income	$	5,207	$	9,161	$	17,846	$	26,451
Dividends and undistributed earnings allocated to participating securities		24		67		102		186
Net income available to common stockholders	$	5,183	$	9,094	$	17,744	$	26,265
Weighted-average common shares outstanding for basic earnings per share		19,788		19,872		19,768		19,977
Dilutive effect of stock-based awards		287		223		269		216
Weighted-average common shares outstanding for diluted earnings per share		20,075		20,095		20,037		20,193
Earnings per common share:
Basic earnings per common share	$	0.26	$	0.46	$	0.90	$	1.31
Diluted earnings per common share	$	0.26	$	0.45	$	0.89	$	1.30

There were no antidilutive shares for the three and nine months ended September 30, 2024 and 2023 .

NOTE 19 Derivative Instruments

The company uses a variety of derivative instruments to mitigate exposure to both market and credit risks inherent in its business activities. The Company manages these risks as part of its overall asset and liability management process and through its policies and procedures. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

Derivatives are often measured in terms of notional amount, but this amount is generally not exchanged, and it is not recorded on the Company’s consolidated balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate, security price, credit spread, or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.

Derivatives Designated as Hedging Instruments

The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s). As of September 30, 2024 , the Company only used fair value and cash flow hedges.

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Fair value hedges: These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying mortgage-backed investment securities and mortgage loan pools. The interest rate swaps are carried on the Company’s Consolidated Balance Sheet at their fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). The changes in fair value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair value of the interest rate swaps due to changes in benchmark interest rates are recorded as an adjustment to the hedged instruments and offset in the same interest income line items.

Cash flow hedges: These derivatives are interest rate swaps the Company uses to hedge the variability of expected future cash flows due to market interest changes. The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), or OCI, until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in OCI is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in OCI is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within accumulated other comprehensive income (loss), or AOCI. The Company estimates that an additional $ 0.1 million will be reclassified as an increase to interest expense over the next 12 months. All cash flow hedges were highly effective for the three and nine months ended September 30, 2024 . As of September 30, 2024 , the maximum length of time over which forecasted transactions are hedged is 16 months.

Derivatives Not Designated as Hedging Instruments

Interest rate swaps: The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.

Interest rate lock commitments, forward loan sales commitments and to be announced (TBA) mortgage backed securities: The Company enters into forward delivery contracts to sell mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments.

The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of September 30, 2024 and December 31, 2023 :

	Derivative Assets ⁽¹⁾				Derivative Liabilities ⁽²⁾
	*Notional*		*Fair*		*Notional*		*Fair*
(dollars in thousands)	*Amount*		*Value*		*Amount*		*Value*
*September 30, 2024*
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	—	$	—	$	200,000	$	1,113
Cash flow hedges:
Interest rate swaps		—		—		200,000		458
Total derivatives designated as hedging instruments	$	—	$	—	$	400,000	$	1,571
Not designated as hedging instruments:
Interest rate swaps ⁽³⁾	$	423,909	$	11,740	$	423,909	$	11,740
Interest rate lock commitments		19,425		377		—		—
Forward loan sales commitments		1,597		60		—		—
To-be-announced mortgage backed securities		—		—		39,250		18
Total asset derivatives not designated as hedging instruments	$	444,931	$	12,177	$	463,159	$	11,758
*December 31, 2023*
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	—	$	—	$	600,000	$	352
Cash flow hedges:
Interest rate swaps		—		—		200,000		297
Total derivatives designated as hedging instruments	$	—	$	—	$	800,000	$	649
Not designated as hedging instruments:
Interest rate swaps ⁽³⁾	$	120,671	$	8,327	$	120,671	$	8,348
Interest rate lock commitments		8,126		179		—		—
Forward loan sales commitments		190		6		—		—
To-be-announced mortgage backed securities		—		—		20,500		183
Total asset derivatives not designated as hedging instruments	$	128,987	$	8,512	$	141,171	$	8,531

( 1 )

Derivative assets are included in other assets on the Company’s consolidated balance sheet.

( 2 )

Derivative liabilities are included in accrued expenses and other liabilities on the Company’s consolidated balance sheet.

( 3 )

Reported fair values include accrued interest receivable and payable.

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The following table shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses), before tax, reclassified from other comprehensive income (loss) into earnings for the periods indicated:

				*Gains (Losses)*
	*Gains (Losses)*			*Reclassified*
	*Recognized in*			*from OCI*
(dollars in thousands)	*OCI*			*into Earnings*
Derivatives designated as hedging instruments
*For the three months ended September 30, 2024*
Cash flow hedges:
Interest rate swaps	$	( 616	)	$	253

*For the three months ended September 30, 2023*
Cash flow hedges:
Interest rate swaps	$	1,216		$	( 205	)

*For the nine months ended September 30, 2024*
Cash flow hedges:
Interest rate swaps	$	625		$	785

*For the nine months ended September 30, 2023*
Cash flow hedges:
Interest rate swaps	$	1,216		$	( 205	)

The following table shows the effect of fair value and cash flow hedge accounting on derivatives designated as hedging instruments in the Consolidated Statements of Income:

	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income				Interest Expense
	Loans,		Investment
	including		securities -		Short-term
(dollars in thousands)	fees		Taxable		borrowings
For the three months ended September 30, 2024
Total amounts in the Consolidated Statements of Income	$	42,593	$	4,596	$	6,706
Fair value hedges:
Interest rate swaps		46		653		—
Cash flow hedges:
Interest rate swaps		—		—		( 253	)
For the three months ended September 30, 2023
Total amounts in the Consolidated Statements of Income	$	34,986	$	6,146	$	6,528
Fair value hedges:
Interest rate swaps		71		606		—
Cash flow hedges:
Interest rate swaps		—		—		( 205	)

For the nine months ended September 30, 2024
Total amounts in the Consolidated Statements of Income	$	123,551	$	14,008	$	19,748
Fair value hedges:
Interest rate swaps		367		1,954		—
Cash flow hedges:
Interest rate swaps		—		—		( 785	)
For the nine months ended September 30, 2023
Total amounts in the Consolidated Statements of Income	$	99,187	$	18,222	$	15,684
Fair value hedges:
Interest rate swaps		71		1,229		—
Cash flow hedges:
Interest rate swaps		—		—		( 205	)

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The following tables show the notional amount, carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships at September 30, 2024 and December 31, 2023 , respectively:

	*September 30, 2024*
					*Cumulative Fair*
					*Value Hedging*
					*Adjustment in the*
			*Carrying Amount*		*Carrying Amount of*
	*Notional*		*of Hedged Assets/*		*Hedged Assets/*
(dollars in thousands)	*Amount*		*Liabilities*		*Liabilities*
Mortgage-backed securities
Residential agency ⁽¹⁾	$	200,000	$	201,113	$	1,113
Total	$	200,000	$	201,113	$	1,113

( 1 )

Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At September 30, 2024 , the amortized cost of the closed portfolios used in these hedging relationships was $ 304.7 million.

	December 31, 2023
					Cumulative Fair
					Value Hedging
					Adjustment in the
			*Carrying Amount*		*Carrying Amount of*
	*Notional*		*of Hedged Assets/*		*Hedged Assets/*
(dollars in thousands)	*Amount*		*Liabilities*		*Liabilities*
Mortgage-backed securities
Residential agency ⁽¹⁾	$	200,000	$	200,241	$	241
Mortgage loan pools ⁽²⁾		400,000		400,098		98
Total	$	600,000	$	600,339	$	339

( 1 )

Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At December 31, 2023 , the amortized cost of the closed portfolios used in these hedging relationships was $ 323.4 million.

( 2 )

These amounts include the amortized cost basis of RRE loans that were used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023 , the amortized cost basis of the RRE loans used in these hedging relationships was $ 687.5 million.

The gain (loss) recognized on derivatives not designated as hedging relationships for the three and nine months ended September 30, 2024 and 2023 was as follows:

(dollars in thousands)		*Three months ended September 30,*						*Nine months ended September 30,*
Derivatives not designated as hedging instruments	*Consolidated Statements of Income Location*	*2024*			*2023*			*2024*			*2023*
Interest rate swaps	Other noninterest income	$	—		$	121		$	21		$	121
Interest rate lock commitments	Mortgage banking		( 111	)		( 342	)		100			87
Forward loan sales commitments	Mortgage banking		( 116	)		( 9	)		54			55
To-be-announced mortgage backed securities	Mortgage banking		( 315	)		221			( 189	)		350
Total gain (loss) from derivatives not designated as hedging instruments		$	( 542	)	$	( 9	)	$	( 14	)	$	613

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. These requirements are dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 0.8 million and $ 0.6 million as of September 30, 2024 and December 31, 2023 , respectively. The amount of collateral posted with third parties was deemed to be sufficient as of those dates to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures.

Credit Risk-Related Contingent Features

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where, if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.

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As of September 30, 2024 and December 31, 2023 , the fair value of derivatives in a net liability position, which included accrued interest but excluded any adjustment for non-performance risk, related to these agreements was $ 1.6 million and $ 0.6 million, respectively. As of September 30, 2024 and December 31, 2023 , the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $ 0.8 million and $ 0.6 million, respectively. If the Company had breached any of these provisions at September 30, 2024 or December 31, 2023 , it could have been required to settle its obligations under the agreements at their termination value of $ 1.6 million and $ 0.6 million, respectively.

Balance Sheet Offsetting

The following tables present the Company’s derivative positions and the potential effect of netting arrangements on its financial position as of the dates indicated:

							*Gross Amount*
							*Not Offset in the*
							*Consolidated*
							*Balance Sheets*
	*Gross Amount*		*Gross Amount*		*Net Amount*
	*Recognized in the*		*Offset in the*		*Presented in the*
	*Consolidated*		*Consolidated*		*Consolidated*		*Cash Collateral*
(dollars in thousands)	*Balance Sheets*		*Balance Sheets*		*Balance Sheets*		*Pledged (Received)*			*Net Amount*
*September 30, 2024*
Derivative assets:
Interest rate swaps − Company ⁽¹⁾	$	—	$	—	$	—	$	—		$	—
Interest rate swaps − dealer bank ⁽¹⁾		11,740		—		11,740		( 6,068	)		5,672
To-be-announced mortgage backed securities		—		—		—		—			—
Total	$	11,740	$	—	$	11,740	$	( 6,068	)	$	5,672
Derivative liabilities:
Interest rate swaps − Company ⁽¹⁾	$	1,571	$	—	$	1,571	$	752		$	819
Interest rate swaps − customer ⁽²⁾		11,740		—		11,740		—			11,740
To-be-announced mortgage backed securities		18		—		18		—			18
Total	$	13,329	$	—	$	13,329	$	752		$	12,577

( 1 )

The Company maintains a master netting agreement with each counterparty and settles collateral on a net basis for all interest rate swaps with counterparty banks.

( 2 )

The Company manages its net exposure on its customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices. The Company does not post collateral to its customers as part of its contract.

							Gross Amount
							Not Offset in the
							Consolidated
							Balance Sheets
	*Gross Amount*		*Gross Amount*		*Net Amount*
	*Recognized in the*		*Offset in the*		*Presented in the*
	*Consolidated*		*Consolidated*		*Consolidated*		*Cash Collateral*
(dollars in thousands)	*Balance Sheets*		*Balance Sheets*		*Balance Sheets*		*Pledged (Received)*			*Net Amount*
*December 31, 2023*
Derivative assets:
Interest rate swaps − Company ⁽¹⁾	$	—	$	—	$	—	$	—		$	—
Interest rate swaps − dealer bank ⁽¹⁾		8,327		—		8,327		( 1,740	)		6,587
To-be-announced mortgage backed securities		—		—		—		—			—
Total	$	8,327	$	—	$	8,327	$	( 1,740	)	$	6,587
Derivative liabilities:
Interest rate swaps − Company ⁽¹⁾	$	649	$	—	$	649	$	550		$	99
Interest rate swaps − customer ⁽²⁾		8,348	$	—		8,348		—			8,348
To-be-announced mortgage backed securities		183		—		183		—			183
Total	$	9,180	$	—	$	9,180	$	550		$	8,630

( 1 )

The Company maintains a master netting agreement with each counterparty and settles collateral on a net basis for all interest rate swaps with counterparty banks.

( 2 )

NOTE 20 Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes that, at September 30, 2024 and December 31, 2023 , each of the Company and the Bank had met all of the capital adequacy requirements to which it was subject.

The following tables present the Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2024 and December 31, 2023 :

	*September 30, 2024*
											*Minimum to be*
						*Minimum Required*					*Well Capitalized*
						*for Capital*					*Under Prompt*
	*Actual*					*Adequacy Purposes*					*Corrective Action (1)*
(dollars in thousands)	*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*
Common equity tier 1 capital to risk weighted assets
Consolidated ⁽¹⁾	$	394,381		11.12	%	$	159,542		4.50	%		N/A		N/A
Bank		379,074		10.73	%		158,974		4.50	%		229,629		6.50	%
Tier 1 capital to risk weighted assets												.
Consolidated ⁽¹⁾		403,422		11.38	%		212,722		6.00	%		N/A		N/A
Bank		379,074		10.73	%		211,966		6.00	%		282,621		8.00	%
Total capital to risk weighted assets
Consolidated ⁽¹⁾		497,768		14.04	%		283,629		8.00	%		N/A		N/A
Bank		423,265		11.98	%		282,621		8.00	%		353,276		10.00	%
Tier 1 capital to average assets
Consolidated ⁽¹⁾		403,422		9.30	%		173,498		4.00	%		N/A		N/A
Bank		379,074		8.90	%		170,336		4.00	%		212,920		5.00	%

( 1 )

“Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank holding companies.

	December 31, 2023
											Minimum to be
						*Minimum Required*					*Well Capitalized*
						*for Capital*					*Under Prompt*
	*Actual*					*Adequacy Purposes*					Corrective Action ⁽¹⁾
(dollars in thousands)	*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*
Common equity tier 1 capital to risk weighted assets
Consolidated ⁽¹⁾	$	382,578		11.82	%	$	145,605		4.50	%	$	N/A		N/A
Bank		367,445		11.40	%		145,101		4.50	%		209,590		6.50	%
Tier 1 capital to risk weighted assets												.
Consolidated ⁽¹⁾		391,534		12.10	%		194,139		6.00	%		N/A		N/A
Bank		367,445		11.40	%		193,468		6.00	%		257,957		8.00	%
Total capital to risk weighted assets
Consolidated ⁽¹⁾		477,590		14.76	%		258,853		8.00	%		N/A		N/A
Bank		403,501		12.51	%		257,957		8.00	%		322,446		10.00	%
Tier 1 capital to average assets
Consolidated ⁽¹⁾		391,534		10.57	%		148,111		4.00	%		N/A		N/A
Bank		367,445		9.92	%		148,186		4.00	%		185,232		5.00	%

( 1 )

“Minimum to be Well Capitalized Under Prompt Corrective Action” is not formally defined under applicable banking regulations for bank holding companies.

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act rules. The rules include a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount will be subject to the limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of September 30, 2024 , the capital ratios for the Company and the Bank were sufficient to meet the conservation buffer. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development, or HUD, regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of September 30, 2024 and December 31, 2023 , the Company was in compliance with the aforementioned guidelines.

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NOTE 21 Other Comprehensive Income (Loss)

The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:

	*For the Three Months Ended*
	*September 30, 2024*									*September 30, 2023*
				*Tax*									*Tax*
	*Pre-Tax*			*(Expense)*			*After-Tax*			*Pre-Tax*			*(Expense)*			*After-Tax*
(dollars in thousands)	*Amount*			*Benefit*			*Amount*			*Amount*			*Benefit*			*Amount*
Debt Securities:
Change in fair value	$	19,497		$	( 4,894	)	$	14,603		$	( 19,075	)	$	4,789		$	( 14,286	)
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM ⁽¹⁾		66			( 16	)		50			80			( 20	)		60
Less: reclassification adjustment for net realized losses ⁽²⁾		—			—			—			—			—			—
Net change		19,431			( 4,878	)		14,553			( 19,155	)		4,809			( 14,346	)
Cash Flow Hedges:
Change in fair value		( 616	)		706			90			1,216			( 305	)		911
Less: reclassified AOCI gain (loss) into interest expense ⁽³⁾		253			( 64	)		189			205			( 51	)		154
Net change		( 869	)		770			( 99	)		1,011			( 254	)		757
Other Derivatives:
Change in fair value		( 3,068	)		219			( 2,849	)		1,133			( 285	)		848
Less: reclassified AOCI gain (loss) into interest expense ⁽⁴⁾		—			—			—			—			—			—
Net change		( 3,068	)		219			( 2,849	)		1,133			( 285	)		848
Other comprehensive income (loss)	$	15,494		$	( 3,889	)	$	11,605		$	( 17,011	)	$	4,270		$	( 12,741	)

( 1 )

Reclassified into taxable and/or exempt from federal income taxes interest income on investment securities on the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

( 2 )

Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

( 3 )

Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.

( 4 )

Reclassified into interest income on loans, including fees and/or interest income on taxable investment securities on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.

	*For the Nine Months Ended*
	*September 30, 2024*									*September 30, 2023*
				*Tax*									*Tax*
	*Pre-Tax*			*(Expense)*			*After-Tax*			*Pre-Tax*			*(Expense)*			*After-Tax*
(dollars in thousands)	*Amount*			*Benefit*			*Amount*			*Amount*			*Benefit*			*Amount*
Debt Securities:
Change in fair value	$	14,899		$	( 3,740	)	$	11,159		$	( 23,782	)	$	5,970		$	( 17,812	)
Less: reclassification adjustment from amortization of securities transferred from AFS to HTM		207			( 52	)		155			251			( 63	)		188
Less: reclassification adjustment for net realized losses		—			—			—			—			—			—
Net change		14,692			( 3,688	)		11,004			( 24,033	)		6,033			( 18,000	)
Cash Flow Hedges:
Change in fair value		625			22			647			1,216			( 305	)		911
Less: reclassified AOCI gain (loss) into interest expense ⁽³⁾		785			( 197	)		588			205			( 51	)		154
Net change		( 160	)		219			59			1,011			( 254	)		757
Other Derivatives:
Change in fair value		( 872	)		40			( 832	)		3,206			( 805	)		2,401
Less: reclassified AOCI gain (loss) into interest expense ⁽⁴⁾		—			—			—			—			—			—
Net change		( 872	)		40			( 832	)		3,206			( 805	)		2,401
Other comprehensive income (loss)	$	13,660		$	( 3,429	)	$	10,231		$	( 19,816	)	$	4,974		$	( 14,842	)

( 1 )

( 2 )

Reclassified into net gains (losses) on investment securities in the consolidated statements of income. Refer to “NOTE 4 Investment Securities” for further details.

( 3 )

Reclassified into interest expense on short-term borrowings on the consolidated statements of income. Refer to “NOTE 19 Derivative Instruments” for further details.

( 4 )

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				*Net Unrealized*			*Net Unrealized*
	*Net Unrealized*			*Gains (Losses) on*			*Gains (Losses)*
	*Gains (Losses) on*			*Cash Flow*			*on Other*
(dollars in thousands)	Debt Securities ⁽¹⁾			Hedges ⁽¹⁾			Derivatives ⁽¹⁾			AOCI ⁽¹⁾
*For the Three Months Ended September 30, 2024*
Balance at June 30, 2024	$	( 76,707	)	$	( 79	)	$	1,757		$	( 75,029	)
Other comprehensive income (loss) before reclassifications		14,603			90			( 2,849	)		11,844
Less: Amounts reclassified from AOCI		50			189			—			239
Other comprehensive income (loss)		14,553			( 99	)		( 2,849	)		11,605
Balance at September 30, 2024	$	( 62,154	)		( 178	)		( 1,092	)		( 63,424	)
*For the Nine Months Ended September 30, 2024*
Balance at December 31, 2023	$	( 73,158	)	$	( 237	)	$	( 260	)	$	( 73,655	)
Other comprehensive income (loss) before reclassifications		11,159			647			( 832	)		10,974
Less: Amounts reclassified from AOCI		155			588			—			743
Other comprehensive income (loss)		11,004			59			( 832	)		10,231
Balance at September 30, 2024	$	( 62,154	)		( 178	)		( 1,092	)		( 63,424	)

*For the Three Months Ended September 30, 2023*
Balance at June 30, 2023	$	( 102,201	)	$	—		$	1,459		$	( 100,742	)
Other comprehensive income (loss) before reclassifications		( 14,286	)		911			848			( 12,527	)
Less: Amounts reclassified from AOCI		60			154			—			214
Other comprehensive income (loss)		( 14,346	)		757			848			( 12,741	)
Balance at September 30, 2023	$	( 116,547	)		757			2,307			( 113,483	)
*For the Nine Months Ended September 30, 2023*
Balance at December 31, 2022	$	( 98,547	)	$	—		$	( 94	)	$	( 98,641	)
Other comprehensive income (loss) before reclassifications		( 17,812	)		911			2,401			( 14,500	)
Less: Amounts reclassified from AOCI		188			154			—			342
Other comprehensive income (loss)		( 18,000	)		757			2,401			( 14,842	)
Balance at September 30, 2023	$	( 116,547	)	$	757		$	2,307		$	( 113,483	)

( 1 )

All amounts net of tax.

NOTE 22 Stock Repurchase Program

On February 18, 2021, the Board of Directors of the Company approved a stock repurchase program, or the Old Stock Repurchase Program, which authorized the Company to repurchase up to 770,000 shares of its common stock subject to certain limitations and conditions. The Old Stock Repurchase Program expired on February 18, 2024.

On December 12, 2023, the Board of Directors of the Company approved a new stock repurchase program, or the New Stock Repurchase Program, which authorizes the Company to repurchase up to 1,000,000 shares of its common stock subject to certain limitations and conditions. The New Stock Repurchase Program became effective on February 18, 2024, and will expire on February 18, 2027. On February 18, 2024, the New Stock Repurchase Program replaced and superseded the Old Stock Repurchase Program.

The New Stock Repurchase Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the nine months ended September 30, 2024 , the Company had not repurchased any shares under the Old Stock Repurchase Program or the New Stock Repurchase Program. The Company also repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

NOTE 23 Fair Value of Assets and Liabilities

The Company categorizes its assets and liabilities measured at estimated fair value into a three level hierarchy based on the priority of the inputs to the valuation technique used to determine estimated fair value. The estimated fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 ) and the lowest priority to unobservable inputs (Level 3 ). If the inputs used in the determination of the estimated fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the estimated fair value measurement. Assets and liabilities valued at estimated fair value are categorized based on the following inputs to the valuation techniques as follows:

Level 1 —Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 —Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.

Level 3 —Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may re‑measure the carrying value of assets and liabilities measured on a nonrecurring basis to estimated fair value. Adjustments to estimated fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their estimated fair value.

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Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at estimated fair value for the initial and subsequent measurement on an instrument‑by‑instrument basis. The Company adopted the policy to value certain financial instruments at estimated fair value. The Company has not elected to measure any existing financial instruments at estimated fair value; however, it may elect to measure newly acquired financial instruments at estimated fair value in the future.

Recurring Basis

The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures.

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis as of September 30, 2024 and December 31, 2023 :

	*September 30, 2024*
(dollars in thousands)	*Level 1*		*Level 2*		*Level 3*		*Total*
Trading	$	2,708	$	—	$	—	$	2,708
Available-for-sale
U.S. treasury and government agencies		—		739		—		739
Mortgage backed securities
Residential agency		—		414,388		—		414,388
Commercial		—		1,401		—		1,401
Asset backed securities		—		20		—		20
Corporate bonds		—		49,455		—		49,455
Total available-for-sale investment securities	$	—	$	466,003	$	—	$	466,003
Other assets
Derivatives	$	—	$	12,177	$	—	$	12,177
Other liabilities
Derivatives	$	—	$	13,329	$	—	$	13,329

	*December 31, 2023*
(dollars in thousands)	*Level 1*		*Level 2*		*Level 3*		*Total*
Available-for-sale
U.S. treasury and government agencies	$	—	$	1,120	$	—	$	1,120
Mortgage backed securities
Residential agency		—		435,594		—		435,594
Commercial		—		1,353		—		1,353
Asset backed securities		—		25		—		25
Corporate bonds		—		48,644		—		48,644
Total available-for-sale investment securities	$	—	$	486,736	$	—	$	486,736
Other assets
Derivatives	$	—	$	8,512	$	—	$	8,512
Other liabilities
Derivatives	$	—	$	9,180	$	—	$	9,180

The following is a description of the valuation methodologies used for instruments measured at estimated fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities, Trading for Deferred Compensation

The fair value of trading securities for deferred compensation is reported using market quoted prices as such securities and underlying securities are actively traded and no valuation adjustments have been applied and therefore are classified as Level 1.

Investment Securities, Available-for-Sale

Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are classified as Level 2.

Derivatives

All of the Company’s derivatives are traded in over‑the‑counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts.

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Nonrecurring Basis

Certain assets are measured at estimated fair value on a nonrecurring basis. These assets are not measured at estimated fair value on an ongoing basis; however, they are subject to estimated fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.

The estimated fair value of certain assets on a nonrecurring basis as of September 30, 2024 and December 31, 2023 consisted of the following:

	*September 30, 2024*
(dollars in thousands)	*Level 1*		*Level 2*		*Level 3*		*Total*
Collateral dependent loans	$	—	$	—	$	28,930	$	28,930
Servicing rights		—		—		1,874		1,874

	December 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Collateral dependent loans	$	—	$	—	$	3,998	$	3,998
Foreclosed assets		—		—		32		32
Servicing rights		—		—		2,062		2,062

Loans Held for Sale

Loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate estimated fair value of the held for sale loans is greater than cost.

Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value represent additional net write‑downs during the period to record these loans at the lower of cost or estimated fair value, subsequent to their initial classification as loans held for sale.

The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values as of September 30, 2024 and December 31, 2023 , were as follows:

			*September 30, 2024*
(dollars in thousands)								*Weighted*
Asset Type	*Valuation Technique*	*Unobservable Input*	*Fair Value*		*Range*			*Average*
Individually evaluated	Appraisal value	Property specific adjustment	$	28,930		10.0	%		10.0	%
Servicing rights	Discounted cash flows	Prepayment speed assumptions		1,874		100 - 847			169
		Discount rate				10.5	%		10.5	%

			*December 31, 2023*
(dollars in thousands)								*Weighted*
Asset Type	*Valuation Technique*	*Unobservable Input*	*Fair Value*		*Range*			*Average*
Individually evaluated	Appraisal value	Property specific adjustment	$	3,998		10.0	%		10.0	%
Foreclosed assets	Appraisal value	Property specific adjustment ⁽¹⁾		32		N/A			N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		2,062		85 - 151			104
		Discount rate				11.1	%		11.1	%

( 1 )

There were no discounts taken on the collateral that comprises the balance of foreclosed assets as of December 31, 2023 .

Disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, estimated fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived estimated fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments, with an estimated fair value that is not practicable to estimate and all non‑financial instruments, are excluded from the disclosure requirements. Accordingly, the aggregate estimated fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments for which the ending balances, as of September 30, 2024 and December 31, 2023 , were not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the consolidated balance sheets approximate those assets and liabilities estimated fair values.

Investment Securities, Held-to-Maturity

The fair values of debt securities held-to-maturity are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.

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Loans

For variable‑rate loans that reprice frequently and with no significant change in credit risk, estimated fair values are based on carrying values. The estimated fair values of other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Bank ‑ Owned Life Insurance

Bank‑owned life insurance is carried at the amount due upon surrender of the policy, which is also the estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying insurance contract.

Deposits

The estimated fair values of demand deposits are, by definition, equal to the amount payable on demand at the consolidated balance sheet date. The estimated fair values of fixed‑rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

Short ‑ Term Borrowings and Long ‑ Term Debt

For variable‑rate borrowings that reprice frequently, estimated fair values are based on carrying values. The estimated fair values of fixed‑rate borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off ‑ Balance Sheet Credit ‑ Related Commitments

Off‑balance sheet credit related commitments are generally of short‑term nature. The contract amount of such commitments approximates their estimated fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at the dates indicated were as follows:

	*September 30, 2024*
	*Carrying*		*Estimated Fair Value*
(dollars in thousands)	*Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial Assets
Cash and cash equivalents	$	65,975	$	65,975	$	—	$	—	$	65,975
Investment securities held-to-maturity		281,913		—		249,862		—		249,862
Loans, net		2,993,201		—		—		2,864,072		2,864,072
Accrued interest receivable		16,469		16,469		—		—		16,469
Bank-owned life insurance		35,793		—		35,793		—		35,793
Financial Liabilities
Noninterest-bearing deposits	$	657,547	$	—	$	657,547	$	—	$	657,547
Interest-bearing deposits		2,177,556		—		2,177,556		—		2,177,556
Time deposits		488,447		—		487,291		—		487,291
Short-term borrowings		244,700		244,700		—		—		244,700
Long-term debt		59,041		—		58,210		—		58,210
Accrued interest payable		7,636		7,636		—		—		7,636

	December 31, 2023
	Carrying		Estimated Fair Value
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	129,893	$	129,893	$	—	$	—	$	129,893
Investment securities held-to-maturity		299,728		—		258,617		—		258,617
Loans, net		2,723,740		—		—		2,590,535		2,590,535
Accrued interest receivable		15,700		15,700		—		—		15,700
Bank-owned life insurance		33,236		—		33,236		—		33,236
Financial Liabilities
Noninterest-bearing deposits	$	728,082	$	—	$	728,082	$	—	$	728,082
Interest-bearing deposits		1,955,967		—		1,955,967		—		1,955,967
Time deposits		411,562		—		408,910		—		408,910
Short-term borrowings		314,170		314,170		—		—		314,170
Long-term debt		58,956		—		57,437		—		57,437
Accrued interest payable		6,826		6,826		—		—		6,826

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Item 2 – Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion explains the Company ’ s financial condition and results of operations as of and for the three and nine months ended September 30, 2024 and 2023 . Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company ’ s Annual Report on Form 10-K for the year ended December 31, 2023 , filed with the SEC on March 8, 2024.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation. These statements are often, but not always, identified by words such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized,” “target” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements the Company makes regarding the Company’s projected growth, anticipated future financial performance, financial condition, credit quality, management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on the Company’s current beliefs, expectations and assumptions regarding the Company’s business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. The Company’s actual results and financial condition may differ materially from those indicated in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause the Company’s actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:

●

interest rate risk, including the effects of changes in interest rates;

●

the Company’s ability to successfully manage credit risk, including in the commercial real estate portfolio, and maintain an adequate level of allowance for credit losses;

●

new or revised accounting standards;

●

business and economic conditions generally and in the financial services industry, nationally and within the Company’s market areas, including the level and impact of inflation and possible recession;

	●	the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in recent bank failures;

	●	the Company’s ability to raise additional capital to implement its business plan;

●

the overall health of the local and national real estate market;

	●	concentrations within the Company’s loan portfolio;

	●	the concentration of large loans to certain borrowers;

●

the level of nonperforming assets on the Company’s balance sheet;

●

the Company’s ability to implement organic and acquisition growth strategies, including the integration HMNF which the Company acquired in the fourth quarter of 2024;

●

the impact of economic or market conditions on the Company’s fee-based services;

●

the Company’s ability to continue to grow the retirement and benefit services business;

●

the Company’s ability to continue to originate a sufficient volume of residential mortgages;

●

the occurrence of fraudulent activity, breaches or failures of the Company’s or the Company’s third party vendors’ information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools;

●

interruptions involving the Company’s information technology and telecommunications systems or third-party servicers;

●

potential losses incurred in connection with mortgage loan repurchases;

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●

the composition of the Company’s executive management team and the Company’s ability to attract and retain key personnel;

●

rapid and expensive technological change in the financial services industry;

●

increased competition in the financial services industry, including from non-banks such as credit unions, Fintech companies and digital asset service providers;

●

the Company’s ability to successfully manage liquidity risk, including the Company’s need to access higher cost sources of funds such as fed funds purchased and short-term borrowings;

●

the concentration of large deposits from certain clients, including those who have balances above current Federal Deposit Insurance Corporation (“FDIC”) insurance limits;

●

the effectiveness of the Company’s risk management framework;

●

the commencement and outcome of litigation and other legal proceedings and regulatory actions against the Company or to which the Company may become subject;

●

potential impairment to the goodwill the Company recorded in connection with the Company’s past acquisitions, including the acquisitions of Metro Phoenix Bank and HMNF;

●

the extensive regulatory framework that applies to the Company;

●

the impact of recent and future legislative and regulatory changes, including in response to recent bank failures;

●

fluctuations in the values of the securities held in the Company’s securities portfolio, including as a result of changes in interest rates;

●

governmental monetary, trade and fiscal policies;

●

risks related to climate change and the negative impact it may have on the Company’s customers and their businesses;

●

severe weather, natural disasters, widespread disease or pandemics;

●

acts of war or terrorism, including the ongoing conflict in the Middle East and the Russian invasion of Ukraine, or other adverse external events;

●

any material weaknesses in the Company’s internal control over financial reporting;

●

changes to U.S. or state tax laws, regulations and guidance;

●

potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

●

talent and labor shortages and employee turnover;

●

the Company’s success at managing the risks involved with the foregoing items; and

●

any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus Financial Corporation with the SEC.

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

Overview

The Company is a commercial wealth bank and national retirement services provider headquartered in Grand Forks, North Dakota. Through the Company’s subsidiary, Alerus Financial, National Association, the Company provides financial solutions to businesses and consumers through three distinct business lines—banking, retirement and benefit services, and wealth management. These solutions are delivered through a relationship‑oriented primary point of contact along with responsive and client‑friendly technology.

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 generates a majority of overall revenue from noninterest income, which is driven primarily by the Company’s retirement and benefit services and wealth management business lines. The remainder of the Company’s revenue consists of net interest income, which the Company derives from offering traditional banking products and services.

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Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues, and expenses reported. Actual results could differ materially from our current estimates as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near term change, including (i) the ACL, including the ACL on investment securities, loans, and unfunded commitments; (ii) goodwill and intangible assets impairment; and (iii) fair value measurements.

There have been no material changes to the Company’s critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2023. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of the Company’s critical accounting policies.

Refer to “NOTE 2 Recent Accounting Pronouncements” of the consolidated financial statements included in this report for a discussion of accounting pronouncements issued but yet to be adopted and implemented.

The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.

Recent Developments

Business Combination

On October 9, 2024, the Company completed the acquisition of HMNF and its wholly owned subsidiary, Home Federal Savings Bank. As a result of the transaction, HMNF merged with and into Alerus Financial Corporation, and Home Federal Savings Bank merged with and into Alerus Financial, National Association. The all-stock transaction was valued at approximately $128.8 million as of closing, based on the closing price of the Company’s common stock October 8, 2024, the trading day immediately preceding the closing of the merger, of $22.90. Former stockholders of HMNF received 1.25 shares of the Company’s common stock for each share of HMNF common stock, resulting in the issuance of 5,547,658 shares of the Company’s common stock. The merger was structured to qualify as a tax-free reorganization for HMNF’s stockholders. Following the transaction, former stockholders of HMNF now hold approximately 21.9% of the Company’s outstanding common stock.

During the three and nine months ended September 30, 2024, the Company incurred $1.7 million and $2.3 million, respectively, in pre-tax acquisition expenses related to the acquisition of HMNF, comprised of legal and professional fees included in professional fees and assessments expense in the consolidated statements of income.

Stockholder Dividend

On August 20, 2024, the Board of Directors of the Company declared a quarterly cash dividend of $0.20 per common share. This dividend was paid on October 11, 2024, to stockholders of record at the close of business on September 13, 2024.

Property Sale

On July 1, 2024, the Company entered into a purchase agreement to sell its South Fargo branch in Fargo, North Dakota. The completion of the sale of this facility is likely to occur in 2024, and the Company expects to record a gain on the sale upon closing, since the purchase price of $5.1 million is greater than the property’s carrying value of approximately $1.7 million. The Company’s West Fargo, North Dakota branch is listed for sale for $3.8 million and is expected to sell within the next 12 months. At September 30, 2024, the facility included assets with a carrying value of approximately $0.4 million. The Company expects to record a gain on the sale upon closing, as the expected sale price is greater than the property’s carrying value.

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Operating Results Overview

The following table summarizes key financial results as of and for the periods indicated:

	Three months ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)	2024			2024			2023			2024			2023
Performance Ratios
Return on average total assets		0.48	%		0.58	%		0.95	%		0.56	%		0.93	%
Adjusted return on average total assets ⁽¹⁾		0.57	%		0.65	%		0.75	%		0.62	%		0.85	%
Return on average common equity		5.52	%		6.76	%		10.05	%		6.43	%		9.79	%
Return on average tangible common equity ⁽¹⁾		7.83	%		9.40	%		13.51	%		8.98	%		13.27	%
Adjusted return on average tangible common equity ⁽¹⁾		9.04	%		10.30	%		10.97	%		9.80	%		12.27	%
Noninterest income as a % of revenue		55.72	%		53.28	%		58.21	%		54.10	%		54.51	%
Net interest margin (taxable-equivalent basis)		2.23	%		2.39	%		2.27	%		2.31	%		2.50	%
Adjusted net interest margin (tax-equivalent basis) ⁽¹⁾		2.35	%		2.47	%		2.24	%		2.41	%		2.46	%
Efficiency ratio ⁽¹⁾		80.29	%		72.50	%		73.37	%		77.17	%		73.57	%
Adjusted efficiency ratio ⁽¹⁾		77.71	%		70.80	%		77.03	%		75.50	%		74.58	%
Average equity to average assets		8.73	%		8.59	%		9.47	%		8.73	%		9.51	%
Net charge-offs/(recoveries) to average loans		0.04	%		0.36	%		(0.09	)%		0.14	%		(0.04	)%
Dividend payout ratio		76.92	%		64.52	%		42.22	%		66.29	%		43.08	%
Per Common Share
Earnings (losses) per common share − basic	$	0.26		$	0.31		$	0.46		$	0.90		$	1.31
Earnings (losses) per common share − diluted	$	0.26		$	0.31		$	0.45		$	0.89		$	1.30
Adjusted earnings (losses) per common share − diluted ⁽¹⁾	$	0.31		$	0.34		$	0.36		$	0.98		$	1.19
Dividends declared per common share	$	0.20		$	0.20		$	0.19		$	0.59		$	0.56
Book value per common share	$	19.53		$	18.87		$	17.60
Tangible book value per common share ⁽¹⁾	$	16.50		$	15.77		$	14.32
Average common shares outstanding − basic		19,788			19,777			19,872			19,768			19,977
Average common shares outstanding − diluted		20,075			20,050			20,095			20,037			20,193
Other Data
Retirement and benefit services assets under administration/management	$	41,249,280		$	39,389,533		$	34,552,569
Wealth management assets under administration/management	$	4,397,505		$	4,172,290		$	3,724,091
Mortgage originations	$	82,388		$	109,254		$	109,637		$	245,743		$	298,626

(1)	Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

Selected Financial Data

The following tables summarize selected financial data as of and for the periods indicated:

	Three months ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(dollars in thousands)	2024		2024		2023		2024		2023
Selected Average Balance Sheet Data
Loans	$	2,968,947	$	2,837,232	$	2,544,836	$	2,858,634	$	2,495,122
Investment securities		749,062		756,413		971,913		760,219		1,004,436
Assets		4,298,080		4,297,294		3,821,601		4,245,181		3,799,645
Deposits		3,264,138		3,230,699		2,844,758		3,219,632		2,905,675
Fed funds purchased and Bank Term Funding Program		327,543		366,186		312,121		325,455		320,861
FHLB short-term advances		200,000		200,000		173,913		200,000		84,982
Long-term debt		59,027		58,999		58,914		58,999		58,886
Stockholders’ equity		375,229		369,217		361,735		370,758		361,260

	September 30,			June 30,			December 31,			September 30,
(dollars in thousands)	2024			2024			2023			2023
Selected Period End Balance Sheet Data
Loans	$	3,032,343		$	2,915,792		$	2,759,583		$	2,606,430
Allowance for credit losses on loans		(39,142	)		(38,332	)		(35,843	)		(36,290	)
Investment securities		750,624			748,745			786,251			943,269
Assets		4,084,640			4,358,623			3,907,713			3,869,138
Deposits		3,323,550			3,298,575			3,095,611			2,872,184
Long-term debt		59,041			59,013			58,956			58,928
Total stockholders’ equity		386,486			373,226			369,127			349,402

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	Three months ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(dollars in thousands)	2024		2024		2023		2024		2023
Selected Income Statement Data
Net interest income	$	22,542	$	24,001	$	20,395	$	68,761	$	66,287
Provision for credit losses		1,661		4,489		—		6,150		550
Noninterest income		28,363		27,371		28,407		81,057		79,439
Noninterest expense		42,447		38,752		37,260		120,218		111,503
Income before income taxes		6,797		8,131		11,542		23,450		33,673
Income tax expense		1,590		1,923		2,381		5,604		7,222
Net income	$	5,207	$	6,208	$	9,161	$	17,846	$	26,451

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. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, adjusted tangible common equity to tangible assets, tangible book value per common share, return on average tangible common equity, efficiency ratio, pre-provision net revenue, adjusted noninterest income, adjusted noninterest expense, adjusted pre-provision net revenue, adjusted efficiency ratio, adjusted net income, adjusted return on average assets, adjusted return on average tangible common equity, net interest margin (tax-equivalent), and adjusted net interest margin (tax-equivalent). Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders’ equity less goodwill and other intangible assets; (ii) adjusted tangible common equity as total common stockholders’ equity less goodwill, other intangible assets, and cash proceeds from BTFP; (iii) tangible book value per common share as tangible common equity divided by shares of common stock outstanding; (iv) tangible assets as total assets, less goodwill and other intangible assets; (v) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax-equivalent adjustment; (vii) pre-provision net revenue as net interest income plus noninterest income less noninterest expense; (viii) adjusted noninterest income as noninterest income less BOLI mortality proceeds less gain on sale of ESOP trustee business less net gain on sale of premises and equipment; (ix) adjusted noninterest expense as noninterest expense less HMNF merger- and acquisition-related expenses less severance and signing bonus; (x) adjusted pre-provision net revenue as net interest income plus adjusted noninterest income less adjusted noninterest expense; (xii) adjusted efficiency ratio as adjusted noninterest expense less intangible amortization expense, divided by net interest income plus adjusted noninterest income plus a tax-equivalent adjustment; (xiii) adjusted net income as net income less adjusted noninterest income items net of tax plus adjusted noninterest expense items net of tax; (xiv) adjusted return on average assets as adjusted net income divided by average total assets; (xv) adjusted return on average tangible common equity as adjusted net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (xvi) adjusted net interest margin (tax equivalent) as net interest income less cash interest income and interest expense related to BTFP and less purchase accounting net accretion, adjusted for tax equivalent related to loans and securities, and adjust interest earning assets less average cash proceeds balance from BTFP and add the change in unearned purchase accounting discount; and (xvii) adjusted earnings per common share - diluted as net income adding back HMNF merger- and acquisition-related expenses adjusted for tax less dividends and undistributed earnings allocated to participating securities, divided by the weighted-average common shares outstanding for diluted earnings per share.

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

	September 30,			June 30,			December 31,			September 30,
(dollars and shares in thousands, except per share data)	2024			2024			2023			2023
Tangible common equity to tangible assets								.
Total common stockholders’ equity	$	386,486		$	373,226		$	369,127		$	349,402
Less: Goodwill		46,783			46,783			46,783			46,783
Less: Other intangible assets		13,186			14,510			17,158			18,482
Tangible common equity (a)		326,517			311,933			305,186			284,137
Total assets		4,084,640			4,358,623			3,907,713			3,869,138
Less: Goodwill		46,783			46,783			46,783			46,783
Less: Other intangible assets		13,186			14,510			17,158			18,482
Tangible assets (b)		4,024,671			4,297,330			3,843,772			3,803,873
Tangible common equity to tangible assets (a)/(b)		8.11	%		7.26	%		7.94	%		7.47	%
Adjusted Tangible Common Equity to Tangible Assets
Tangible assets (b)	$	4,024,671		$	4,297,330		$	3,843,772		$	3,803,873
Less: Cash proceeds from BTFP		—			355,000			—			—
Adjusted tangible assets (c)		4,024,671			3,942,330			3,843,772			3,803,873
Adjusted tangible common equity to tangible assets (a)/(c)		8.11	%		7.91	%		7.94	%		7.47	%
Tangible book value per common share
Total common stockholders’ equity	$	386,486		$	373,226		$	369,127		$	349,402
Less: Goodwill		46,783			46,783			46,783			46,783
Less: Other intangible assets		13,186			14,510			17,158			18,482
Tangible common equity (d)		326,517			311,933			305,186			284,137
Total common shares issued and outstanding (e)		19,790			19,778			19,734			19,848
Tangible book value per common share (d)/(e)	$	16.50		$	15.77		$	15.46		$	14.32

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	Three months ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)	2024			2024			2023			2024			2023
Return on Average Tangible Common Equity
Net income	$	5,207		$	6,208		$	9,161		$	17,846		$	26,451
Add: Intangible amortization expense (net of tax) ⁽¹⁾		1,046			1,046			1,046			3,138			3,138
Net income, excluding intangible amortization (f)		6,253			7,254			10,207			20,984			29,589
Average total equity		375,229			369,217			361,735			370,758			361,260
Less: Average goodwill		46,783			46,783			46,882			46,783			47,018
Less: Average other intangible assets (net of tax) ⁽¹⁾		10,933			11,969			15,109			11,969			16,149
Average tangible common equity (g)		317,513			310,465			299,744			312,006			298,093
Return on average tangible common equity (f)/(g)		7.83	%		9.40	%		13.51	%		8.98	%		13.27	%
Efficiency ratio
Noninterest expense	$	42,447		$	38,752		$	37,260		$	120,218		$	111,503
Less: Intangible amortization expense		1,324			1,324			1,324			3,972			3,972
Adjusted noninterest expense (h)		41,123			37,428			35,936			116,246			107,531
Net interest income		22,542			24,001			20,395			68,761			66,287
Noninterest income		28,363			27,371			28,407			81,057			79,439
Tax-equivalent adjustment		314			255			180			816			444
Total tax-equivalent revenue (i)		51,219			51,627			48,982			150,634			146,170
Efficiency ratio (h)/(i)		80.29	%		72.50	%		73.37	%		77.17	%		73.57	%
Pre-Provision Net Revenue
Net interest income	$	22,542		$	24,001		$	20,395		$	68,761		$	66,287
Add: Noninterest income		28,363			27,371			28,407			81,057			79,439
Less: Noninterest expense		42,447			38,752			37,260			120,218			111,503
Pre-provision net revenue	$	8,458		$	12,620		$	11,542		$	29,600		$	34,223
Adjusted Noninterest Income
Noninterest income	$	28,363		$	27,371		$	28,407		$	81,057		$	79,439
Less: Adjusted noninterest income items
BOLI mortality proceeds (non-taxable)		—			—			—			—			1,196
Gain on sale of ESOP trustee business		—			—			2,775			—			2,775
Net gain on sale of premises and equipment		476			—			—			476			—
Total adjusted noninterest income items (j)		476			—			2,775			476			3,971
Adjusted noninterest income (k)	$	27,887		$	27,371		$	25,632		$	80,581		$	75,468
Adjusted Noninterest Expense
Noninterest expense	$	42,447		$	38,752		$	37,260		$	120,218		$	111,503
Less: Adjusted noninterest expense items
HMNF merger- and acquisition-related expenses		1,661			563			—			2,251			—
Severance and signing bonus expense		31			315			343			626			1,475
Total adjusted noninterest expense items (l)		1,692			878			343			2,877			1,475
Adjusted noninterest expense (m)	$	40,755		$	37,874		$	36,917		$	117,341		$	110,028
Adjusted Pre-Provision Net Revenue
Net interest income	$	22,542		$	24,001		$	20,395		$	68,761		$	66,287
Add: Adjusted noninterest income (k)		27,887			27,371			25,632			80,581			75,468
Less: Adjusted noninterest expense (m)		40,755			37,874			36,917			117,341			110,028
Adjusted pre-provision net revenue	$	9,674		$	13,498		$	9,110		$	32,001		$	31,727
Adjusted Efficiency Ratio
Adjusted noninterest expense (m)	$	40,755		$	37,874		$	36,917		$	117,341		$	110,028
Less: Intangible amortization expense		1,324			1,324			1,324			3,972			3,972
Adjusted noninterest expense for efficiency ratio (n)		39,431			36,550			35,593			113,369			106,056
Tax-equivalent revenue
Net interest income		22,542			24,001			20,395			68,761			66,287
Add: Adjusted noninterest income (k)		27,887			27,371			25,632			80,581			75,468
Add: Tax-equivalent adjustment		314			255			180			816			444
Total tax-equivalent revenue (o)		50,743			51,627			46,207			150,158			142,199
Adjusted efficiency ratio (n)/(o)		77.71	%		70.80	%		77.03	%		75.50	%		74.58	%

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

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	Three months ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(dollars and shares in thousands, except per share data)	2024			2024			2023			2024			2023
Adjusted Net Income
Net income	$	5,207		$	6,208		$	9,161		$	17,846		$	26,451
Less: Adjusted noninterest income items (net of tax) ⁽¹⁾ (j)		376			—			2,192			376			3,388
Add: Adjusted noninterest expense items (net of tax) ⁽¹⁾ (l)		1,337			694			271			2,273			1,165
Adjusted net income (p)	$	6,168		$	6,902		$	7,240		$	19,743		$	24,228
Adjusted Return on Average Assets
Average total assets (q)	$	4,298,080		$	4,297,294		$	3,821,601		$	4,245,181		$	3,799,645
Adjusted return on average assets (p)/(q)		0.57	%		0.65	%		0.75	%		0.62	%		0.85	%
Adjusted Return on Average Tangible Common Equity
Adjusted net income (p)	$	6,168		$	6,902		$	7,240		$	19,743		$	24,228
Add: Intangible amortization expense (net of tax) ⁽¹⁾		1,046			1,046			1,046			3,138			3,138
Adjusted net income, excluding intangible amortization (r)		7,214			7,948			8,286			22,881			27,366
Average total equity		375,229			369,217			361,735			370,758			361,260
Less: Average goodwill		46,783			46,783			46,882			46,783			47,018
Less: Average other intangible assets (net of tax) (1)		10,933			11,969			15,109			11,969			16,149
Average tangible common equity (s)		317,513			310,465			299,744			312,006			298,093
Return on average tangible common equity (r)/(s)		9.04	%		10.30	%		10.97	%		9.80	%		12.27	%
Adjusted Net Interest Margin (Tax-Equivalent)
Net interest income	$	22,542		$	24,001		$	20,395		$	68,761		$	66,287
Less: BTFP cash interest income		4,113			4,766			—			12,494			—
Add: BTFP interest expense		3,717			4,307			—			11,290			—
Less: Purchase accounting net accretion		152			985			294			1,429			969
Net interest income excluding BTFP impact		21,994			22,557			20,101			66,128			65,318
Add: Tax equivalent adjustment for loans and securities		314			255			180			816			444
Adjusted net interest income (t)	$	22,308		$	22,812		$	20,281		$	66,944		$	65,762
Interest earning assets		4,077,716			4,075,003			3,591,478			4,024,942			3,574,675
Less: Average cash proceeds balance from BTFP		303,043			355,000			—			309,051			—
Add: Change in unearned purchase accounting discount		152			985			294			1,429			969
Adjusted interest earning assets (u)	$	3,774,825		$	3,720,988		$	3,591,772		$	3,717,320		$	3,575,644
Adjusted net interest margin (tax-equivalent) (t)/(u)		2.35	%		2.47	%		2.24	%		2.41	%		2.46	%
Adjusted Earnings Per Common Share − Diluted
Adjusted net income (p)	$	6,168		$	6,902		$	7,240		$	19,743		$	24,228
Less: Dividends and undistributed earnings allocated to participating securities		24			38			67			102			186
Net income available to common stockholders (v)		6,144			6,864			7,173			19,641			24,042
Weighted-average common shares outstanding for diluted earnings per share (w)		20,075			20,050			20,095			20,037			20,193
Adjusted earnings per common share − diluted (v)/(w)	$	0.31		$	0.34		$	0.36		$	0.98		$	1.19

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

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Discussion and Analysis of Results of Operations

Net Income

Net income for the three months ended September 30, 2024, was $5.2 million, or $0.26 per diluted common share, a $4.0 million, or 43.2%, decrease compared to $9.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2023. Earnings for the third quarter of 2024 compared to the third quarter of 2023 decreased primarily due to a $5.2 million increase in noninterest expense and $1.7 million increase in provision for credit losses. This negative result was partially offset by a $2.1 million increase in net interest income.

Net income for the nine months ended September 30, 2024, was $17.8 million, or $0.89 per diluted common share, a $8.6 million, or 32.5%, decrease compared to $26.5 million, or $1.30 per diluted common share, for the nine months ended September 30, 2023. Earnings for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 decreased primarily due to an $8.7 million increase in noninterest expense and a $5.6 million increase in provision for credit losses. This negative result was partially offset by a $2.5 million increase in net interest income and a $1.6 million increase in noninterest income.

Net Interest Income

Net interest income is the difference between interest income and yield related fees earned on assets and interest expense paid on liabilities. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of interest earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax-equivalent income, assuming a federal income tax rate of 21% for the three and nine months ended September 30, 2024 and 2023.

Net interest income for the three months ended September 30, 2024 was $22.5 million, an increase of $2.1 million, or 10.5%, compared to $20.4 million for the three months ended September 30, 2023. Net interest income for the third quarter of 2024 increased compared to the third quarter of 2023 primarily due to a $10.2 million increase in interest income, as interest earning assets increased $486.2 million while the average interest earning asset yield increased 46 basis points. This was partially offset by the increasing cost of interest-bearing liabilities as interest expense increased $8.0 million, mainly driven by an increase of 48 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $525.6 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Net interest income for the nine months ended September 30, 2024 was $68.8 million, an increase of $2.5 million, or 3.7%, compared to $66.3 million for the nine months ended September 30, 2023. Net interest income for the first nine months of 2024 increased compared to the first nine months of 2023 primarily due to a $34.1 million increase in interest income, as average interest earning assets increased $450.3 million while the average interest earning asset yield increased 64 basis points. This was partially offset by the increased cost of interest-bearing liabilities as interest expense increased $31.6 million, mainly driven by an increase of 89 basis points in the average rate paid on interest-bearing liabilities. In addition, the average balance of interest-bearing liabilities increased $520.4 million. The increase in interest earning assets was primarily due to organic loan growth and increased cash balances from deposit growth and BTFP borrowings. The increase in interest-bearing liabilities was due to core deposit growth, a shift from noninterest-bearing deposits to interest-bearing deposits and BTFP borrowings.

Net interest margin (on a tax-equivalent basis) for the three months ended September 30, 2024 was 2.23%, compared to 2.27% for the same period in 2023. The decrease in net interest margin (on a tax-equivalent basis) was mainly attributable to higher earning assets at lower yields resulting from the BTFP funding as those proceeds were held at the Federal Reserve Bank. Adjusted net interest margin (on a tax-equivalent basis) (non-GAAP), which excludes BTFP borrowings and purchase accounting accretion, was 2.35% for the third quarter of 2024, a 11 basis point increase from 2.24% for the third quarter of 2023.

The high target federal funds interest rate continues to pressure funding costs. However, the Company anticipates that net interest income and net interest margin (on an adjusted tax equivalent basis) will increase in future periods as the impact of recent and anticipated interest rate cuts lower funding costs and fixed interest rate derivatives mature.

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The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields on assets, average yields earned, and rates paid for the three and nine months ended September 30, 2024 and 2023. The Company derived these yields and rates 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 status, 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 fully taxable equivalent (“FTE”) basis.

	Three months ended September 30,
	2024							2023
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	326,350	$	4,490		5.47	%	$	29,450	$	229		3.09
Investment securities ⁽¹⁾		749,062		4,810		2.55			971,913		6,377		2.60
Loans held for sale		15,795		127		3.20			16,518		231		5.55
Loans
Commercial and industrial		593,685		10,837		7.26			523,263		8,713		6.61
CRE − Construction, land and development		184,611		2,637		5.68			88,450		1,900		8.52
CRE − Multifamily		242,558		3,427		5.62			209,020		2,723		5.17
CRE − Non-owner occupied		663,539		9,799		5.88			491,948		6,618		5.34
CRE − Owner occupied		289,963		3,943		5.41			256,983		3,381		5.22
Agricultural − Land		42,162		522		4.93			40,685		497		4.85
Agricultural − Production		40,964		704		6.84			32,386		545		6.68
RRE − First lien		689,382		6,903		3.98			681,610		6,576		3.83
RRE − Construction		16,792		163		3.86			33,264		431		5.14
RRE − HELOC		130,705		2,627		8.00			118,965		2,470		8.24
RRE − Junior lien		36,818		531		5.74			35,974		534		5.89
Other consumer		37,768		642		6.76			32,288		497		6.11
Total loans ⁽¹⁾		2,968,947		42,735		5.73			2,544,836		34,885		5.44
Federal Reserve/FHLB Stock		17,562		364		8.25			28,761		495		6.83
Total interest earning assets		4,077,716		52,526		5.12			3,591,478		42,217		4.66
Noninterest earning assets		220,364							230,123
Total assets	$	4,298,080						$	3,821,601
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	1,003,595	$	5,826		2.31	%	$	751,455	$	2,534		1.34
Money market and savings deposits		1,146,896		11,020		3.82			1,073,297		8,650		3.20
Time deposits		485,533		5,439		4.46			327,264		3,252		3.94
Fed funds purchased and BTFP		327,543		4,094		4.97			312,121		4,327		5.50
FHLB short-term advances		200,000		2,612		5.20			173,913		2,201		5.02
Long-term debt		59,027		679		4.58			58,914		679		4.57
Total interest-bearing liabilities		3,222,594		29,670		3.66			2,696,964		21,643		3.18
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		628,114							692,742
Other noninterest-bearing liabilities		72,143							70,160
Stockholders’ equity		375,229							361,735
Total liabilities and stockholders’ equity	$	4,298,080						$	3,821,601
Net interest income on FTE basis ⁽¹⁾			$	22,856						$	20,574
Net interest rate spread on FTE basis ⁽¹⁾						1.46	%						1.48
Net interest margin on FTE basis ⁽¹⁾						2.23	%						2.27

(1)	Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent.

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	Nine Months Ended September 30,
	2024							2023
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
Interest Earning Assets
Interest-bearing deposits with banks	$	375,365	$	15,146		5.39	%	$	35,892	$	927		3.45	%
Investment securities ⁽¹⁾		760,219		14,657		2.58			1,004,436		18,928		2.52
Loans held for sale		13,768		619		6.01			13,822		547		5.29
Loans
Commercial and industrial		578,839		31,228		7.21			524,083		25,627		6.54
CRE − Construction, land and development		146,454		7,710		7.03			93,098		5,197		7.46
CRE − Multifamily		245,372		10,223		5.57			171,043		6,594		5.15
CRE − Non-owner occupied		615,320		26,929		5.85			492,098		18,943		5.15
CRE − Owner occupied		284,315		11,519		5.41			253,460		9,543		5.03
Agricultural − Land		41,138		1,478		4.80			39,417		1,405		4.77
Agricultural − Production		38,110		1,897		6.65			29,377		1,410		6.42
RRE − First lien		695,313		20,927		4.02			667,041		18,685		3.75
RRE − Construction		19,847		727		4.89			33,693		1,257		4.99
RRE − HELOC		124,321		7,626		8.19			118,630		7,071		7.97
RRE − Junior lien		36,276		1,692		6.23			35,034		1,494		5.70
Other consumer		33,329		1,657		6.64			38,148		1,708		5.99
Total loans ⁽¹⁾		2,858,634		123,613		5.78			2,495,122		98,934		5.30
Federal Reserve/FHLB Stock		16,956		1,054		8.30			25,403		1,294		6.81
Total interest earning assets		4,024,942		155,089		5.15			3,574,675		120,630		4.51
Noninterest earning assets		220,239							224,970
Total assets	$	4,245,181						$	3,799,645
Interest-Bearing Liabilities
Interest-bearing demand deposits	$	944,143	$	15,412		2.18	%	$	757,995	$	6,559		1.16	%
Money market and savings deposits		1,160,391		32,961		3.79			1,127,630		22,915		2.72
Time deposits		458,545		15,348		4.47			276,797		6,744		3.26
Fed funds purchased and BTFP		325,455		12,065		4.95			320,861		12,556		5.23
FHLB short-term advances		200,000		7,683		5.13			84,982		3,128		4.92
Long-term debt		58,999		2,041		4.62			58,886		1,999		4.54
Total interest-bearing liabilities		3,147,533		85,510		3.63			2,627,151		53,901		2.74
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits		656,553							743,253
Other noninterest-bearing liabilities		70,337							67,981
Stockholders’ equity		370,758							361,260
Total liabilities and stockholders’ equity	$	4,245,181						$	3,799,645
Net interest income on FTE basis ⁽¹⁾			$	69,579						$	66,729
Net interest rate spread on FTE basis ⁽¹⁾						1.52	%						1.77	%
Net interest margin on FTE basis ⁽¹⁾						2.31	%						2.50	%

(1)	Taxable equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent.

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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.

	Three months ended September 30, 2024									Nine Months Ended September 30, 2024
	Compared with									Compared with
	Three months ended September 30, 2023									Nine Months Ended September 30, 2023
	Change due to:						Interest			Change due to:						Interest
(tax-equivalent basis, dollars in thousands)	Volume			Rate			Variance			Volume			Rate			Variance
Interest earning assets
Interest-bearing deposits with banks	$	2,306		$	1,955		$	4,261		$	8,768		$	5,451		$	14,219
Investment securities		(1,456	)		(111	)		(1,567	)		(4,607	)		336			(4,271	)
Loans held for sale		(10	)		(94	)		(104	)		(2	)		74			72
Loans
Commercial and industrial		1,508			616			2,124			2,681			2,920			5,601
CRE − Construction, land and development		1,250			(513	)		737			2,980			(467	)		2,513
CRE − Multifamily		450			254			704			2,866			763			3,629
CRE − Non-owner occupied		2,251			930			3,181			4,751			3,235			7,986
CRE − Owner occupied		554			8			562			1,162			814			1,976
Agricultural − Land		25			—			25			61			12			73
Agricultural − Production		83			76			159			420			67			487
RRE − First lien		100			227			327			794			1,448			2,242
RRE − Construction		(341	)		73			(268	)		(517	)		(13	)		(530	)
RRE − HELOC		174			(17	)		157			340			215			555
RRE − Junior lien		13			(16	)		(3	)		53			145			198
Other consumer		75			70			145			(216	)		165			(51	)
Total loans		6,142			1,708			7,850			15,375			9,304			24,679
Federal Reserve/FHLB Stock		(192	)		61			(131	)		(431	)		191			(240	)
Total interest income		6,790			3,519			10,309			19,103			15,356			34,459
Interest-bearing liabilities
Interest-bearing demand deposits		849			2,443			3,292			1,617			7,236			8,853
Money market and savings deposits		592			1,778			2,370			667			9,379			10,046
Time deposits		1,567			620			2,187			4,436			4,168			8,604
Fed funds purchased and BTFP		213			(446	)		(233	)		180			(671	)		(491	)
FHLB short-term advances		329			82			411			4,236			319			4,555
Long-term debt		1			(1	)		—			4			38			42
Total interest expense		3,551			4,476			8,027			11,140			20,469			31,609
Change in net interest income	$	3,239		$	(957	)	$	2,282		$	7,963		$	(5,113	)	$	2,850

Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods presented:

	Three months ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2024			2023		2024			2023
Provision (recovery) for loan losses	$	1,126		$	—	$	6,195		$	460
Provision (recovery) for credit losses on unfunded commitments		549			—		31			44
Provision (recovery) for HTM debt securities		(14	)		—		(76	)		46
Provision for credit losses	$	1,661		$	—	$	6,150		$	550

The Company recorded a provision for credit losses of $1.7 million for the third quarter of 2024, compared to no provision for the third quarter of 2023. The increase in the provision for credit losses was primarily driven by loan growth and an increase in nonaccrual loans.

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Noninterest Income

The Company’s noninterest income is generated from retirement and benefit services, wealth management, mortgage banking, and other general banking services.

The following table presents the Company’s noninterest income for the three and nine months ended September 30, 2024 and 2023:

	Three months ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2024			2023			2024			2023
Retirement and benefit services	$	16,144		$	18,605		$	47,876		$	49,977
Wealth management		6,684			5,271			19,161			15,915
Mortgage banking		2,573			2,510			6,796			7,132
Service charges on deposit accounts		488			328			1,333			940
Other		2,474			1,693			5,891			5,475
Total noninterest income	$	28,363		$	28,407		$	81,057		$	79,439
Noninterest income as a % of revenue		55.72	%		58.21	%		54.10	%		54.51	%

Total noninterest income for the three months ended September 30, 2024 was $28.4 million, a slight decrease of $44 thousand, or 0.2%, from the three months ended September 30, 2023. The decrease in noninterest income was primarily driven by a decrease of $2.5 million in retirement and benefit services revenue, driven by the divestiture of the Employee Stock Ownership Program (“ESOP”) trustee business included in the three months ended September 30, 2023, which resulted in a recognized gain of $2.8 million. This decrease was partially offset by a $1.4 million increase in wealth management revenue, primarily due to assets under administration/management growth as well as a $0.8 million increase in other noninterest income, primarily due to a gain on the sale of fixed assets related to the sale of the Shorewood, Minnesota branch in the western suburbs of the Twin Cities as well as increased client swap fees.

Total noninterest income for the nine months ended September 30, 2024 was $81.1 million, a $1.6 million, or 2.0%, increase compared to $79.4 million for the nine months ended September 30, 2023. The increase in noninterest income was primarily driven by an increase of $3.2 million in wealth management revenue due to assets under administration/management growth, primarily driven by improved equity and bond markets. Other noninterest income increased $0.4 million, primarily driven by a gain on the sale of fixed assets related to the sale of the Shorewood, Minnesota branch. This increase was partially offset by a $2.1 million decrease in retirement and benefits services, primarily driven by the divestiture of the ESOP trustee business included in the nine months ended September 30, 2023, which resulted in a recognized gain of $2.8 million.

The Company anticipates that noninterest income will continue to be adversely affected in future periods if interest rates remain higher than in periods prior to the Fed's rate hikes beginning in 2022 and inflationary pressure continues. These factors have adversely affected mortgage originations and mortgage banking revenue in recent periods. The Company believes mortgage revenue will increase in future periods as a result of recent and anticipated interest rate cuts.

See “NOTE 17 Segment Reporting” of the consolidated financial statements and Segment Reporting section below for additional discussion regarding the Company’s business lines.

Noninterest Expense

The following table presents noninterest expense for the three and nine months ended September 30, 2024 and 2023:

	Three months ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2024		2023		2024		2023
Compensation	$	21,058	$	19,071	$	60,655	$	57,076
Employee taxes and benefits		5,400		4,895		16,722		15,472
Occupancy and equipment expense		2,082		1,883		5,803		5,619
Business services, software and technology expense		4,879		4,774		14,823		15,367
Intangible amortization expense		1,324		1,324		3,972		3,972
Professional fees and assessments		4,267		1,716		8,633		4,397
Marketing and business development		764		750		2,200		2,139
Supplies and postage		422		410		1,321		1,275
Travel		330		322		954		876
Mortgage and lending expenses		684		689		1,592		1,401
Other		1,237		1,426		3,543		3,909
Total noninterest expense	$	42,447	$	37,260	$	120,218	$	111,503

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Total noninterest expense for the three months ended September 30, 2024 was $42.4 million, a $5.2 million, or 13.9%, increase compared to $37.3 million for the three months ended September 30, 2023. The year over year increase was primarily driven by higher professional fees and assessments, compensation, and employee taxes and benefits expenses. Professional fees and assessments increased primarily due to increased merger-related expenses of $1.7 million in connection with the acquisition of HMNF and an increase in FDIC assessments. Compensation expense increased primarily due to increased labor costs. Employee taxes and benefits expense increased primarily due to increased costs related to group insurance.

Total noninterest expense for the nine months ended September 30, 2024 was $120.2 million, a $8.7 million, or 7.8%, increase compared to $111.5 million for the nine months ended September 30, 2023. The increase was primarily driven by increases of $4.2 million in professional fees and assessments, $3.6 million in compensation, and $1.3 million in employee taxes and benefits expense. The increase in professional fees and assessments was primarily due to increased merger-related expenses in connection with the acquisition of HMNF and an increase in FDIC assessments. The increase in compensation expense was primarily due to rising labor costs. The increase in employee taxes and benefits expense was primarily due to increased costs related to group insurance and payroll taxes. These increases were partially offset by a $0.5 million decrease in business services, software and technology expense primarily due to reduced core processing and information technology hardware expenses.

Income Tax Expense

Income tax expense is an estimate based on the amount the Company expects to owe the applicable taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due, or to be received from, taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. If the final resolution of taxes payable differs from the Company’s estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.

For the three months ended September 30, 2024, the Company recognized income tax expense of $1.6 million on $6.8 million of pre-tax income, resulting in an effective tax rate of 23.4%, compared to income tax expense of $2.4 million on $11.5 million of pre-tax income for the three months ended September 30, 2023, resulting in an effective tax rate of 20.6%.

For the nine months ended September 30, 2024, the Company recognized income tax expense of $5.6 million on $23.5 million of pre-tax income, resulting in an effective tax rate of 23.9%, compared to income tax expense of $7.2 million on $33.7 million of pre-tax income for the nine months ended September 30, 2023, resulting in an effective tax rate of 21.4%.

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 17 Segment Reporting” of the Company’s consolidated financial statements.

Banking

The banking division offers a complete line of loan, deposit, cash management, and treasury services through fourteen offices in North Dakota, Minnesota, and Arizona. After the closing of the HMNF acquisition, the Company added 15 banking offices in Minnesota, Wisconsin, and Iowa. These products and services are supported through web and mobile based applications. The majority of the Company’s assets and liabilities are in the banking segment’s balance sheet.

The following table presents the banking segment income statement, net of corporate administration, for the three and nine months ended September 30, 2024 and 2023:

	Three months ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2024		2023		2024		2023
Net interest income	$	22,542	$	20,395	$	68,761	$	66,287
Provision for credit losses		1,661		—		6,150		550
Noninterest income		5,535		4,531		14,020		13,547
Total revenue		26,416		24,926		76,631		79,284
Noninterest expense ⁽¹⁾		20,269		18,881		57,837		56,832
Net income before taxes	$	6,147	$	6,045	$	18,794	$	22,452

(1)	Noninterest expenses do not include corporate administration expenses. Corporate administration expenses include executive compensation, premises and fixed assets expenses, and information technology expenses. These expenses are not specific to any specific segment.

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Retirement and Benefits Services

The retirement and benefit services segment 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 following table presents the retirement and benefits services segment income statement for the three and nine months ended September 30, 2024 and 2023:

	Three months ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2024		2023		2024		2023
Recurring annual income ⁽¹⁾	$	12,827	$	12,959	$	37,935	$	38,758
Transactional income ⁽²⁾		3,317		2,871		9,941		8,444
Gain on sale of ESOP trustee business		—		2,775		—		2,775
Total noninterest income		16,144		18,605		47,876		49,977
Noninterest expense		14,154		13,269		41,757		39,515
Net income before taxes	$	1,990	$	5,336	$	6,119	$	10,462

(1)

Recurring annual income primarily includes asset based fees, administration fees, record-keeping fees, trust/custody fees, and health and welfare fees. $6.4 million and $6.2 million for the three months ended September 30, 2024 and 2023, respectively, were due to movements in the market. $18.4 million and $17.4 million for the three and nine months ended September 30, 2024 and 2023, respectively, were due to movements in the market.

(2)

Transactional income primarily includes advisory fees and distribution fees.

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 three and nine months ended September 30, 2024 and 2023:

	Three months ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2024		2023		2024		2023
Asset management	$	5,972	$	4,726	$	16,790	$	13,963
Brokerage		365		391		1,170		1,189
Insurance and advisory		347		154		1,201		763
Total noninterest income		6,684		5,271		19,161		15,915
Noninterest expense		3,838		3,351		11,494		9,703
Net income before taxes	$	2,846	$	1,920	$	7,667	$	6,212

Financial Condition

Overview

Total assets were $4.1 billion as of September 30, 2024, an increase of $176.9 million, or 4.5%, compared to December 31, 2023. The increase was primarily due to a $272.8 million increase in loans, partially offset by a decrease of $63.9 million in cash and cash equivalents and a decrease of $35.6 million in investment securities.

Investment Securities

The following table presents the fair value composition of the Company’s investment securities portfolio as of September 30, 2024 and December 31, 2023:

	September 30, 2024					December 31, 2023
			Percent of					Percent of
(dollars in thousands)	Balance		Portfolio			Balance		Portfolio
Available-for-sale
U.S. Treasury and agencies	$	739		0.1	%	$	1,120		0.2	%
Mortgage backed securities
Residential agency		414,388		57.9			435,594		58.4
Commercial		1,401		0.2			1,353		0.2
Asset backed securities		20		—			25		—
Corporate bonds		49,455		6.9			48,644		6.5
Total available-for-sale investment securities		466,003		65.1			486,736		65.3
Held-to-maturity
Obligations of state and political agencies		113,593		15.9			116,990		15.7
Mortgage backed securities
Residential agency		136,269		19.0			141,627		19.0
Total held-to-maturity investment securities		249,862		34.9			258,617		34.7
Total investment securities	$	715,865		100.0	%	$	745,353		100.0	%

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.

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The investment securities presented in the following table are reported at fair value and by contractual maturity as of September 30, 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, residential mortgage backed securities and collateralized mortgage obligations 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 September 30, 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
U.S. Treasury and agencies	$	—		—	%	$	377		5.85	%	$	—		—	%	$	362		5.94	%
Mortgage backed securities
Residential agency		42		2.59			2,382		2.51			3,689		3.11			408,275		1.70
Commercial		—		—			1,401		2.40			—		—			—		—
Asset backed securities		—		—			—		—			4		4.12			16		5.18
Corporate bonds		—		—			—		—			49,455		3.69			—		—
Total available-for-sale investment securities		42		2.59			4,160		2.77			53,148		3.65			408,653		1.70
Held-to-maturity
Obligations of state and political agencies		8,203		1.14			53,122		1.54			43,323		2.10			8,945		2.22
Mortgage backed securities
Residential agency		—		—			—		—			—		—			136,269		2.18
Total held-to-maturity investment securities		8,203		1.14			53,122		1.54			43,323		2.10			145,214		2.18
Total investment securities	$	8,245		1.15	%	$	57,282		1.63	%	$	96,471		2.95	%	$	553,867		1.83	%

Loans

The loan portfolio represents a broad range of borrowers comprised of commercial and industrial, commercial real estate, agricultural, and consumer loans.

Total loans outstanding were $3.0 billion as of September 30, 2024, an increase of $272.8 million, or 9.9%, from December 31, 2023. The increase was primarily driven by a $116.7 million increase in non-owner occupied CRE loans, a $49.6 million increase in construction, land and development CRE loans, a $44.1 million increase in commercial and industrial loans, a $30.3 million increase in multifamily CRE loans, and a $24.7 million increase in owner occupied CRE loans, partially offset by $7.4 million and $17.2 million decreases in residential real estate first lien and residential real estate construction loans, respectively.

The Company’s loan portfolio is highly diversified. As of September 30, 2024, approximately 19.9% of loans outstanding were commercial and industrial, 47.3% of loans outstanding were CRE, 2.8% of loans outstanding were agricultural, and 30.0% of loans outstanding were consumer.

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	September 30, 2024					December 31, 2023
			Percent of					Percent of
(dollars in thousands)	Balance		Portfolio			Balance		Portfolio
Commercial and industrial:
General business	$	301,629		9.9	%	$	258,008		9.3	%
Services		152,354		5.0			146,318		5.3
Retail trade		93,437		3.1			91,216		3.3
Manufacturing		58,825		1.9			66,638		2.4
Total commercial and industrial		606,245		19.9			562,180		20.3
Commercial real estate:
Construction, land and development		173,629		5.7			124,034		4.5
Multifamily		275,377		9.1			245,103		8.9
Non-owner occupied
Office		103,422		3.4			124,684		4.5
Industrial		109,904		3.6			104,241		3.8
Retail		117,536		3.9			96,578		3.5
Hotel		125,451		4.1			80,576		2.9
Medical office		106,808		3.5			63,788		2.3
Medical or nursing facility		72,256		2.4			47,625		1.7
Other commercial real estate		50,694		1.8			51,862		1.9
Total non-owner occupied		686,071		22.7			569,354		20.6
Owner occupied		296,366		9.8			271,623		9.8
Total commercial real estate		1,431,443		47.3			1,210,114		43.8
Agricultural:
Land		45,821		1.5			40,832		1.5
Production		39,436		1.3			36,141		1.3
Total agricultural		85,257		2.8			76,973		2.8
Consumer:
RRE − First lien		690,451		22.8			697,900		25.3
RRE − Construction		11,808		0.4			28,979		1.1
RRE − HELOC		134,301		4.4			118,315		4.3
RRE − Junior lien		36,445		1.2			35,819		1.3
Other consumer		36,393		1.2			29,303		1.1
Total consumer		909,398		30.0			910,316		33.1
Total loans	$	3,032,343		100.0	%	$	2,759,583		100.0	%

Despite headwinds from a higher interest rate environment and competition in the Company’s market areas, the Company anticipates continued loan growth in the remainder of 2024 for the commercial and industrial and CRE loan portfolios as a result of recently added production talent.

Commercial and industrial loans represent loans for working capital, purchases of equipment and other needs of commercial customers primarily located within the Bank’s geographical footprint. These loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and the customer’s market. While commercial 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 real property and include 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 the Bank’s 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 and rental rates. Inherent lending risks are monitored on a continuous basis through quarterly monitoring and the Bank’s annual underwriting process, incorporating an analysis of cash flow, collateral, market conditions 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 Bank 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 or 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 strong occupancy levels.

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

	September 30, 2024					December 31, 2023
			Percent of					Percent of
(dollars in thousands)	Balance		Total			Balance		Total
Geographical Market:
Minnesota	$	413,482		43.0	%	$	394,754		48.5	%
North Dakota		211,022		21.9			214,884		26.4
Arizona		169,947		17.7			139,450		17.1
Texas		34,570		3.6			—		—
Colorado		22,171		2.3			1,246		0.2
Oregon		18,031		1.9			14,953		1.8
Wisconsin		17,446		1.8			502		0.1
Missouri		16,866		1.8			15,969		2.0
Kansas		15,215		1.6			4,343		0.5
South Dakota		14,617		1.5			14,790		1.8
Other		28,081		2.9			13,566		1.7
Total non-owner occupied and multifamily commercial real estate loans	$	961,448		100.0	%	$	814,457		100.0	%

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.

Agricultural loans include loans secured by farmland and loans for agricultural production. Farmland includes purposes such as crop and livestock production. Farmland loans are typically written with amortizing payment structures. Collateral values for farmland are determined based upon appraisals and evaluations in accordance with established policy guidelines and maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Agricultural production loans are for the purpose of financing working capital and/or capital investment for agriculture production activities. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate in applicable. Agricultural production loans are primarily paid by the operating cash flow of the borrower. Agricultural production loans may be secured or unsecured.

Residential real estate 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, or “HELOC”, consist mainly of revolving lines of credit secured by residential real estate.

Other 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 residential real estate 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 RRE loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of September 30, 2024, the Company’s RRE portfolio was $873.0 million, representing a $8.0 million, or 0.9%, decrease 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 presents the maturities and types of interest rates for the loan portfolio as of September 30, 2024:

	September 30, 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 and industrial	$	107,232	$	299,211	$	196,950	$	2,852	$	606,245
Commercial real estate
Construction, land and development		40,774		108,678		23,839		338		173,629
Multifamily		9,230		178,980		86,073		1,094		275,377
Non-owner occupied		92,321		409,055		161,720		22,975		686,071
Owner occupied		27,059		172,076		71,835		25,396		296,366
Total commercial real estate		169,384		868,789		343,467		49,803		1,431,443
Agricultural		—		—		—		—		—
Land		910		12,656		11,669		20,586		45,821
Production		19,795		16,569		3,072		—		39,436
Total agricultural		20,705		29,225		14,741		20,586		85,257
Total commercial		297,321		1,197,225		555,158		73,241		2,122,945
Consumer
Residential real estate
First lien		2,531		31,704		39,236		616,980		690,451
Construction		1,625		3,178		—		7,005		11,808
HELOC		3,567		15,767		13,839		101,128		134,301
Junior lien		3,468		6,778		16,365		9,834		36,445
Total residential real estate		11,191		57,427		69,440		734,947		873,005
Other consumer		14,609		19,610		2,174		—		36,393
Total consumer		25,800		77,037		71,614		734,947		909,398
Total loans	$	323,121	$	1,274,262	$	626,772	$	808,188	$	3,032,343
Loans with fixed interest rates:
Commercial
Commercial and industrial	$	15,631	$	210,933	$	75,291	$	—	$	301,855
Commercial real estate
Construction, land and development		15,967		36,615		1,001		—		53,583
Multifamily		4,442		88,147		65,185		1,094		158,868
Non-owner occupied		61,694		233,074		87,830		442		383,040
Owner occupied		22,205		136,978		30,904		—		190,087
Total commercial real estate		104,308		494,814		184,920		1,536		785,578
Agricultural
Land		828		12,535		11,606		19,189		44,158
Production		1,115		15,979		2,251		—		19,345
Total agricultural		1,943		28,514		13,857		19,189		63,503
Total commercial		121,882		734,261		274,068		20,725		1,150,936
Consumer
Residential real estate
First lien		2,279		28,412		32,690		390,755		454,136
Construction		817		662		—		2,325		3,804
HELOC		27		2,239		8,734		4,951		15,951
Junior lien		1,749		4,244		12,924		9,834		28,751
Total residential real estate		4,872		35,557		54,348		407,865		502,642
Other consumer		3,823		13,793		2,174		—		19,790
Total consumer		8,695		49,350		56,522		407,865		522,432
Total loans with fixed interest rates	$	130,577	$	783,611	$	330,590	$	428,590	$	1,673,368
Loans with floating interest rates:
Commercial
Commercial and industrial	$	91,601	$	88,278	$	121,659	$	2,852	$	304,390
Commercial real estate
Construction, land and development		24,807		72,063		22,838		338		120,046
Multifamily		4,788		90,833		20,888		—		116,509
Non-owner occupied		30,627		175,981		73,890		22,533		303,031
Owner occupied		4,854		35,098		40,931		25,396		106,279
Total commercial real estate		65,076		373,975		158,547		48,267		645,865
Agricultural
Land		82		121		63		1,397		1,663
Production		18,680		590		821		—		20,091
Total agricultural		18,762		711		884		1,397		21,754
Total commercial		175,439		462,964		281,090		52,516		972,009
Consumer
Residential real estate
First lien		252		3,292		6,546		226,225		236,315
Construction		808		2,516		—		4,680		8,004
HELOC		3,540		13,528		5,105		96,177		118,350
Junior lien		1,719		2,534		3,441		—		7,694
Total residential real estate		6,319		21,870		15,092		327,082		370,363
Other consumer		10,786		5,817		—		—		16,603
Total consumer		17,105		27,687		15,092		327,082		386,966
Total loans with floating interest rates	$	192,544	$	490,651	$	296,182	$	379,598	$	1,358,975

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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 5 Loans and Allowance for Credit Losses” of the consolidated financial statements for a definition of each of the risk ratings.

The table below presents criticized loans outstanding by loan portfolio segment as of September 30, 2024 and December 31, 2023:

	September 30,			December 31,
(dollars in thousands)	2024			2023
Commercial
Commercial and industrial	$	34,006		$	29,840
Commercial real estate
Construction, land and development		25,005			20,667
Multifamily		13,109			310
Non-owner occupied		24,210			1,018
Owner occupied		12,993			7,842
Total commercial real estate		75,317			29,837
Agricultural
Land		2,470			—
Production		1,335			—
Total agricultural		3,805			—
Total commercial		113,128			59,677
Consumer
Residential real estate
First lien		1,948			105
Construction		4,680			—
HELOC		1,488			—
Junior lien		3,751			1,781
Total residential real estate		11,867			1,886
Other consumer		290			—
Total consumer		12,157			1,886
Total loans	$	125,285		$	61,563
Criticized loans as a percent of total loans		4.13	%		2.23	%

The following table presents information regarding nonperforming assets as of September 30, 2024 and December 31, 2023:

	September 30,			December 31,
(dollars in thousands)	2024			2023
Nonaccrual loans	$	48,026		$	8,596
Accruing loans 90+ days past due		—			139
Total nonperforming loans		48,026			8,735
OREO and repossessed assets		—			32
Total nonperforming assets		48,026			8,767
Total restructured accruing loans		—			—
Total nonperforming assets and restructured accruing loans	$	48,026		$	8,767
Nonperforming loans to total loans		1.58	%		0.32	%
Nonperforming assets to total assets		1.18	%		0.22	%
ACL on loans to nonperforming loans		82	%		410	%

$25.0 million of the increase in nonaccrual loans was driven by one construction, land and development loan moving to nonaccrual status in the second quarter of 2024 and an additional advance on the same loan in the third quarter of 2024. During the third quarter of 2024, management elected to make protective advances in order for construction to continue on that project. Management is actively working with the borrower on strategies to complete construction, preserve value and support repayment of the loan. A large RRE relationship and one non-owner occupied CRE loan moving to nonaccrual status also contributed $13.6 million to the increase in nonaccrual loans during the third quarter of 2024.

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Interest income lost on nonaccrual loans approximated $2.8 million and $0.3 million for the nine months ended September 30, 2024 and 2023, respectively. There was no interest income included in net interest income related to nonaccrual loans for the nine months ended September 30, 2024 and 2023.

Allowance for Credit Losses

The allowance for credit losses, or 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 Current Expected Credit Loss accounting standard, the ACL is a valuation estimated at each balance sheet date and deducted from the amortized cost basis 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 and 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.

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

	At or for the						At or for the
	three months ended						nine months ended
	September 30,						September 30,
(dollars in thousands)	2024			2023			2024			2023
ACL on loans at the beginning of the period	$	38,332		$	35,696		$	35,843		$	31,146
Adoption of ASC 326		—			—			—			3,857
(Credit) provision for loan losses		1,126			—			6,195			460
Net charge-offs (recoveries) ⁽¹⁾
Commercial and industrial		93			(322	)		2,745			(556	)
CRE − Construction, land and development		—			(251	)		—			(251	)
CRE − Multifamily		—			—			—			—
CRE − Non-owner occupied		—			—			—			—
CRE − Owner occupied		84			(11	)		93			(33	)
Agricultural − Land		(20	)		—			(20	)		(1	)
Agricultural − Production		—			—			—			—
RRE − First lien		—			9			—			7
RRE − Construction		—			—			—			—
RRE − HELOC		—			(3	)		—			(6	)
RRE − Junior lien		—			—			(71	)		28
Other consumer		159			(16	)		149			(15	)
Total net charge-offs (recoveries)		316			(594	)		2,896			(827	)
ACL on loans at the end of the period		39,142			36,290			39,142			36,290
Components of ACL:
ACL on HTM debt securities		137			218			137			218
ACL on loans		39,142			36,290			39,142			36,290
ACL on off-balance sheet credit exposures		7,431			5,202			7,431			5,202
ACL at end of the period		46,710			41,710			46,710			41,710
Total loans	$	3,032,343		$	2,606,430		$	3,032,343		$	2,606,430
Average total loans		2,968,947			2,544,836			2,858,634			2,495,122
ACL on loans to total loans		1.29	%		1.39	%		1.29	%		1.39	%
ACL on loans to nonaccrual loans		81.50	%		402.91	%		81.50	%		402.91	%
ACL on loans to nonperforming loans		81.50	%		402.91	%		81.50	%		402.91	%
Net charge-offs/(recoveries) to average total loans (annualized)		0.04	%		(0.09	)%		0.14	%		(0.04	)%

(1)

Additional information related to net charge-offs (recoveries) is presented in the following table for the periods indicated:

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	Three months ended
	September 30,
										Net Charge-offs
	Total		Total		Net Charge-offs			Average		(Recoveries) to
(dollars in thousands)	Charge-offs		Recoveries		(Recoveries)			Loans		Average Loans
2024:
Commercial
Commercial and industrial	$	246	$	153	$	93		$	593,685		0.06	%
Commercial real estate
Construction, land and development		—		—		—			184,611		—
Multifamily		—		—		—			242,558		—
Non-owner occupied		—		—		—			663,539		—
Owner occupied		98		14		84			289,963		0.12
Total commercial real estate		98		14		84			1,380,671		0.02
Agricultural
Land		—		20		(20	)		42,162		(0.19	)
Production		—		—		—			40,964		—
Total agricultural		—		20		(20	)		83,126		(0	)
Total commercial		344		187		157			2,057,482		0.03
Consumer
Residential real estate
First lien		—		—		—			689,382		—
Construction		—		—		—			16,792		—
HELOC		—		—		—			130,705		—
Junior lien		—		—		—			36,818		—
Total residential real estate		—		—		—			873,697		—
Other consumer		161		2		159			37,768		1.67
Total consumer		161		2		159			911,465		0.07
Total loans	$	505	$	189	$	316		$	2,968,947		0.04	%
2023:
Commercial
Commercial and industrial	$	134	$	456	$	(322	)	$	523,263		(0.24	)%
Commercial real estate
Construction, land and development		—		251		(251	)		88,450		(1.13	)
Multifamily		—		—		—			209,020		—
Non-owner occupied		—		—		—			491,948		—
Owner occupied		—		11		(11	)		256,983		(0.02	)
Total commercial real estate		—		262		(262	)		1,046,401		(0.10	)
Agricultural
Land		—		—		—			40,685		—
Production		—		—		—			32,386		—
Total agricultural		—		—		—			73,071		—
Total commercial		134		718		(584	)		1,642,735		(0.14	)
Consumer
Residential real estate
First lien		9		—		9			681,610		0.01
Construction		—		—		—			33,264		—
HELOC		—		3		(3	)		118,965		(0.01	)
Junior lien		—		—		—			35,974		—
Total residential real estate		9		3		6			869,813		—
Other consumer		8		24		(16	)		32,288		(0.20	)
Total consumer		17		27		(10	)		902,101		—
Total loans	$	151	$	745	$	(594	)	$	2,544,836		(0.09	)%

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	Nine Months Ended
	September 30,
										Net Charge-offs
	Total		Total		Net Charge-offs			Average		(Recoveries) to
(dollars in thousands)	Charge-offs		Recoveries		(Recoveries)			Loans		Average Loans
2024:
Commercial
Commercial and industrial	$	3,140	$	395	$	2,745		$	578,839		0.63	%
Commercial real estate
Construction, land and development		—		—		—			146,454		—
Multifamily		—		—		—			245,372		—
Non-owner occupied		—		—		—			615,320		—
Owner occupied		127		34		93			284,315		0.04
Total commercial real estate		127		34		93			1,291,461		0.01
Agricultural
Land		—		20		(20	)		41,138		(0.06	)
Production		—		—		—			38,110		—
Total agricultural		—		20		(20	)		79,248		(0.03	)
Total commercial		3,267		449		2,818			1,949,548		0.19
Consumer
Residential real estate
First lien		—		—		—			695,313		—
Construction		—		—		—			19,847		—
HELOC		—		—		—			124,321		—
Junior lien		3		74		(71	)		36,276		(0.26	)
Total residential real estate		3		74		(71	)		875,757		(0.01	)
Other consumer		174		25		149			33,329		0.60
Total consumer		177		99		78			909,086		0.01
Total loans	$	3,444	$	548	$	2,896		$	2,858,634		0.14	%
2023:
Commercial
Commercial and industrial	$	394	$	950	$	(556	)	$	524,083		(0.14	)%
Commercial real estate
Construction, land and development		—		251		(251	)		93,098		(0.36	)
Multifamily		—		—		—			171,043		—
Non-owner occupied		—		—		—			492,098		—
Owner occupied		—		33		(33	)		253,460		(0.02	)
Total commercial real estate		—		284		(284	)		1,009,699		(0.04	)
Agricultural
Land		—		1		(1	)		39,417		—
Production		—		—		—			29,377		—
Total agricultural		—		1		(1	)		68,794		—
Total commercial		394		1,235		(841	)		1,602,576		(0.07	)
Consumer
Residential real estate
First lien		9		2		7			667,041		—
Construction		—		—		—			33,693		—
HELOC		—		6		(6	)		118,630		(0.01	)
Junior lien		77		49		28			35,034		0.11
Total residential real estate		86		57		29			854,398		—
Other consumer		36		51		(15	)		38,148		(0.05	)
Total consumer		122		108		14			892,546		—
Total loans	$	516	$	1,343	$	(827	)	$	2,495,122		(0.04	)%

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

	September 30, 2024					December 31, 2023
			Percentage					Percentage
	Allocated		of loans to			Allocated		of loans to
(dollars in thousands)	Allowance		total loans			Allowance		total loans
Commercial and industrial	$	6,801		20.0	%	$	9,705		20.4	%
CRE − Construction, land and development		10,373		5.7			6,135		4.5
CRE − Multifamily		2,591		9.1			1,776		8.9
CRE − Non-owner occupied		8,512		22.6			7,726		20.5
CRE − Owner occupied		2,429		9.8			2,449		9.8
Agricultural − Land		277		1.5			96		1.5
Agricultural − Production		182		1.3			84		1.3
RRE − First lien		5,440		22.8			6,087		25.3
RRE − Construction		103		0.4			485		1.1
RRE − HELOC		954		4.4			835		4.3
RRE − Junior lien		1,121		1.2			264		1.3
Other consumer		359		1.2			201		1.1
Total loans	$	39,142		100.0	%	$	35,843		100.0	%

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. An ACL on off-balance sheet credit exposures is measured using similar internal and external assumptions as the ACL on loans. This allowance is located in accrued expenses and other liabilities on the consolidated balance sheets. The ACL for unfunded commitments was $7.4 million and $5.2 million as of September 30, 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 $3.3 billion as of September 30, 2024, an increase of $227.9 million, or 7.4%, from December 31, 2023. Interest-bearing deposits increased $300.4 million during this period, while noninterest-bearing deposits decreased $67.9 million. The increase in total deposits was due to both expanded and new commercial deposit relationships, along with time deposit and synergistic deposit growth. Noninterest-bearing deposits decreased from 23.5% of total deposits as of December 31, 2023 to 19.8% as of September 30, 2024, as higher yields on interest-bearing accounts and other investment alternatives, such as U.S. treasuries, attracted such funds. Time deposit balances increased as higher short-term CD rates attracted both existing non-maturity deposits as well as new deposits to the Company.

The following table presents the composition of the Company’s deposit portfolio as of September 30, 2024 and December 31, 2023:

	September 30, 2024					December 31, 2023
			Percent of					Percent of			Change
(dollars in thousands)	Balance		Portfolio			Balance		Portfolio			Amount			Percent
Noninterest-bearing demand	$	657,547		19.8	%	$	728,082		23.5	%	$	(70,535	)		(9.7	)%
Interest-bearing demand		1,034,694		31.1			840,711		27.2			193,983			23.1
Money market and savings ⁽¹⁾		1,142,862		34.4			1,115,256		36.0			27,606			2.5
Time deposits		488,447		14.7			411,562		13.3			76,885			18.7
Total deposits	$	3,323,550		100.0	%	$	3,095,611		100.0	%	$	227,939			7.4	%

(1)

Money market and savings deposits include health savings account deposits of $186.1 million and $176.7 million as of September 30, 2024 and December 31, 2023, respectively.

The following table presents the average balances and rates of the Company’s deposit portfolio for the three months ended September 30, 2024 and 2023:

	Three months ended September 30,
	2024					2023
	Average		Average			Average		Average
(dollars in thousands)	Balance		Rate			Balance		Rate
Noninterest-bearing demand	$	656,553		—	%	$	743,253		—	%
Interest-bearing demand		944,143		2.31			757,995		1.34
Money market and savings		1,160,391		3.82			1,127,630		3.20
Time deposits		458,545		4.46			276,797		3.94
Total deposits	$	3,219,632		2.75	%	$	2,905,675		1.97	%

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The following table presents the composition of the Company’s deposit portfolio by client segment as of September 30, 2024 and December 31, 2023:

	September 30, 2024					December 31, 2023
			Percent of					Percent of			Change
(dollars in thousands)	Balance		Portfolio			Balance		Portfolio			Amount			Percent
Commercial	$	1,289,693		38.8	%	$	1,128,152		36.4	%	$	161,541			14.3	%
Consumer		927,472		27.9			921,650		29.8			5,822			0.6
Public ⁽¹⁾		185,776		5.6			194,265		6.3			(8,489	)		(4.4	)
Synergistic ⁽²⁾
Retirement and benefit services ⁽³⁾		640,571		19.3			598,160		19.3			42,411			7.1
Wealth ⁽⁴⁾		280,038		8.4			253,384		8.2			26,654			10.5
Total synergistic		920,609		27.7			851,544		27.5			69,065			18
Total deposits	$	3,323,550		100.0	%	$	3,095,611		100.0	%	$	227,939			7.4	%

	(1)	Public deposits primarily represent municipalities, school districts, and other governmental entities that receive public funding.
	(2)	Synergistic deposits represent the on-balance sheet money market balances that Alerus Retirement and Benefit Services and Alerus Wealth clients hold in proprietary Alerus money market products.
	(3)	$337.7 million and $288.9 million of retirement and benefit services synergistic deposits were indexed as of September 30, 2024 and December 31, 2023, respectively.
	(4)	$280.0 million and $253.4 million of wealth synergistic deposits were indexed as of September 30, 2024 and December 31, 2023, respectively.

The following table presents the contractual maturity of time deposits, including certificate of deposit account registry services and IRA deposits of $250,000 and over, that were outstanding as of September 30, 2024:

	September 30,
(dollars in thousands)	2024
Maturing in:
3 months or less	$	52,716
3 months to 6 months		94,957
6 months to 1 year		18,627
1 year or greater		4,554
Total	$	170,854

The Company’s total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.3 billion at September 30, 2024, and approximately $1.1 billion at December 31, 2023. These amounts were estimated based on the same methodologies used for regulatory reporting purposes.

Borrowings

Borrowings as of September 30, 2024 and December 31, 2023 were as follows:

	September 30, 2024					December 31, 2023
			Percent of					Percent of
(dollars in thousands)	Balance		Portfolio			Balance		Portfolio
Fed funds purchased	$	44,700		14.7	%	$	114,170		30.6	%
FHLB Short-term advances		200,000		65.8			200,000		53.6
Subordinated notes		50,000		16.5			50,000		13.4
Junior subordinated debentures		9,041		3.0			8,956		2.4
Total borrowed funds	$	303,741		100.0	%	$	373,126		100.0	%

Capital Resources

Stockholders’ equity is influenced primarily by earnings, dividends, the Company’s sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available-for-sale securities.

Stockholders’ equity increased $17.4 million, or 4.7%, to $386.5 million as of September 30, 2024, compared to $369.1 million as of December 31, 2023. Tangible common equity to tangible assets, a non-GAAP financial measure, increased to 8.11% as of September 30, 2024, from 7.94% as of December 31, 2023. Common equity tier 1 capital to risk weighted assets decreased to 11.12% as of September 30, 2024, from 11.82% as of December 31, 2023.

The Company strives to maintain an adequate capital base to support the Company’s 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 at 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.

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At September 30, 2024 and December 31, 2023, the Company met all the capital adequacy requirements to which the Company was subject. The table below presents the Company’s and the Bank’s regulatory capital ratios and the Company’s tangible common equity to tangible assets ratio as of September 30, 2024 and December 31, 2023:

	September 30,			December 31,
Capital Ratios	2024			2023
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets		11.12	%		11.82	%
Tier 1 capital to risk weighted assets		11.38	%		12.10	%
Total capital to risk weighted assets		14.04	%		14.76	%
Tier 1 capital to average assets		9.30	%		10.57	%
Tangible common equity to tangible assets ⁽¹⁾		8.11	%		7.94	%

Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets		10.73	%		11.40	%
Tier 1 capital to risk weighted assets		10.73	%		11.40	%
Total capital to risk weighted assets		11.98	%		12.51	%
Tier 1 capital to average assets		8.90	%		9.92	%

(1)	Represents a non-GAAP financial measure. See “Non-GAAP to GAAP Reconciliations and Calculation of Non-GAAP Financial Measures.”

The regulatory capital ratios for the Company and the Bank, as of September 30, 2024, as shown in the above table, were at levels above the regulatory minimums to be considered “well capitalized.” See “NOTE 20 Regulatory Matters” of the consolidated financial statements for additional information.

Off ‑ Balance Sheet Arrangements

The Company is a party to financial instruments with off‑balance sheet risk in the normal course of business to meet the financing needs of the Company’s customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normal credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitments is considered immaterial for disclosure purposes.

A summary of the contractual amounts of the Company’s exposure to off‑balance sheet agreements as of September 30, 2024 and December 31, 2023, was as follows:

	September 30,		December 31,
(dollars in thousands)	2024		2023
Commitments to extend credit	$	927,235	$	942,413
Standby letters of credit		11,231		10,045
Total	$	938,466	$	952,458

Liquidity

Liquidity management is the process by which the Company manages the flow of funds necessary to meet the Company’s 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, or the ALCO, a group of senior officers from the finance, enterprise risk management, deposit, investment, treasury, and lending areas. It is the 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 that management has plans in place to respond. The 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 September 30, 2024, the Company had on balance sheet liquidity of $424.8 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 September 30, 2024, the Company had off balance sheet liquidity of $1.8 billion, compared to $1.6 billion as of December 31, 2023. Off balance sheet liquidity includes FHLB borrowing capacity, federal funds lines, and brokered deposit capacity. There were no brokered deposits as of September 30, 2024 and December 31, 2023.

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. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2024, the Company had $44.7 million in federal funds purchased and $200.0 million in short-term borrowings from the FHLB. As of September 30, 2024, the Company had $1.1 billion of collateral pledged to the FHLB and, based on this collateral, the Company was eligible to borrow up to an additional $851.4 million from the FHLB. In addition, the Company can borrow up to $107.0 million through the unsecured lines of credit the Company has established with four other correspondent banks.

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In addition, because the Bank is “well capitalized,” the Company can accept wholesale deposits up to 20.0% of total assets based on current policy limits, or $816.9 million, as of September 30, 2024. Management believed that the Company had adequate resources to fund all of the Company’s commitments as of September 30, 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.

Though remote, the possibility of a funding crisis exists at all financial institutions. The economic impact of the recent rise in inflation and rising interest rates could place increased demand on the Company’s liquidity if the Company experiences significant credit deterioration and as the Company meets borrowers’ needs. 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.

ITEM 3. 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. 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 consequences 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. The 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.

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. The balance sheet composition and size are assumed to remain static 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 as of September 30, 2024 and December 31, 2023, assuming immediate parallel moves in interest rates, is presented in the table below:

	September 30, 2024						December 31, 2023
	Following			Following			Following			Following
	12 months			24 months			12 months			24 months
+400 basis points		−2.4	%		10.1	%		1.0	%		2.4	%
+300 basis points		−1.8	%		7.4	%		0.5	%		1.4	%
+200 basis points		−0.9	%		5.5	%		0.3	%		0.9	%
+100 basis points		−0.3	%		3.1	%		0.4	%		0.9	%
−100 basis points		0.8	%		−2.7	%		−1.0	%		−1.7	%
−200 basis points		2.1	%		−5.0	%		−2.3	%		−4.1	%
−300 basis points		3.5	%		−7.4	%		−4.1	%		−7.2	%
−400 basis points		8.9	%		−2.1	%		−5.0	%		−7.6	%

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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 an 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 September 30, 2024 and December 31, 2023, assuming immediate parallel shifts in interest rates:

	September 30,			December 31,
	2024			2023
+400 basis points		−6.1	%		−15.5	%
+300 basis points		−5.0	%		−12.6	%
+200 basis points		−2.1	%		−7.7	%
+100 basis points		−0.6	%		−3.1	%
−100 basis points		−0.8	%		1.6	%
−200 basis points		−3.0	%		2.0	%
−300 basis points		−8.6	%		−0.3	%
−400 basis points		−14.6	%		−5.6	%

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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the President and Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer, its Chief Financial Officer and its Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a‑15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1 – Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company or its subsidiaries, to which the Company or any of its subsidiaries are a party or to which the Company’s property is the subject.

Item 1A – Risk Factors

Other than as set forth below, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2024.

Risks Related to the Merger

Litigation May Be Filed Against the Company (directly or as successor by merger to HMNF) (or the Company’ s or HMNF’s Boards of Directors) that Could Result in the Payment of Damages Following Consummation of the Merger.

It is possible that, in connection with the merger of HMNF with and into the Company, stockholders may file putative class action lawsuits against the Company directly or against the Company as successor by merger to HMNF (or the Company’s or HMNF’s boards of directors). One purported stockholders of the Company, and eight purported stockholders of HMNF, sent demand letters to the companies prior to the closing of the merger, alleging that the joint proxy statement/prospectus filed by the Company omitted certain material information regarding the merger and threatening litigation. Although the transaction has closed, these stockholders could still pursue litigation against the Company directly against the Company as successor by merger to HMNF to seek financial damages. The outcome of any such litigation is uncertain. The defense or settlement of any lawsuit or claim that results from these lawsuits, including any cost associated with the indemnification of directors and officers of each company, may adversely affect the combined company’s business, financial condition, results of operations and cash flows and the market price of the stock of the Company.

The Company May Fail to Realize the Anticipated Benefits of the Merger.

The merger of HMNF with and into the Company closed on October 9, 2024. The success of the merger, including anticipated benefits and cost savings, will depend on, among other things, the Company’s ability to combine the businesses of the Company and HMNF in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and does not materially disrupt the existing customer relationships of the Company or HMNF nor result in decreased revenues due to any loss of customers. If the Company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the Company’s business, financial condition, operating results, prospects and stock price as the resulting company of the merger.

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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Repurchases of Equity Securities

The following table presents information related to repurchases of shares of the Company’s common stock for each calendar month in the third quarter of 2024:

					Total Number of		Maximum Number of
	Total Number		Average		Shares Purchased as		Shares that May
	of Shares		Price Paid		Part of Publicly		Yet be Purchased
(dollars in thousands, except per share data)	Purchased ⁽¹⁾		per Share		Announced Plans		Under the Plan ⁽²⁾
July 1-31, 2024		3,227	$	19.24		—		1,000,000
August 1-31, 2024		530		20.82		—		1,000,000
September 1-30, 2024		128		21.54		—		1,000,000
Total		3,885	$	19.53		—		1,000,000

(1)	Represents shares of the Company’s common stock surrendered by employees to the Company to pay withholding taxes on the vesting of restricted stock awards.

(2)

On December 12, 2023, the Board approved a stock repurchase program, or the Program, which authorized the Company to repurchase up to 1,000,000 shares of its common stock, subject to certain limitations and conditions. The Program became effective on February 18, 2024, and replaced an existing stock repurchase program. The Program will expire on February 18, 2027. The Program does not obligate the Company to repurchase any shares of its common stock and there is no assurance that the Company will do so. For the three months ended September 30, 2024, the Company did not repurchase any shares of common stock under the Program. Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan.

Use of Proceeds from Registered Securities

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

During the fiscal quarter ended September 30, 2024 , none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5 - 1 (c) or any non-Rule 10b5 - 1 trading arrangement.

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Item 6 – Exhibits


Exhibit No.		Description

2.1		Agreement and Plan of Merger, by and between Alerus Financial Corporation and HMN Financial, Inc., dated May 14, 2024* (incorporated herein by reference to Exhibit 2.1 on Form 8-K filed on May 15, 2024.

3.1		Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019).

3.2		Second Amended and Restated Bylaws of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.2 on Form S-1 filed on August 16, 2019).

31.1		Chief Executive Officer’s Certifications required by Rule 13(a)‑14(a) – filed herewith.

31.2		Chief Financial Officer’s Certifications required by Rule 13(a)‑14(a) – filed herewith.

32.1		Chief Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2		Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101.INS		iXBRL Instance Document

101.SCH		iXBRL Taxonomy Extension Schema

101.CAL		iXBRL Taxonomy Extension Calculation Linkbase

101.DEF		iXBRL Taxonomy Extension Definition Linkbase

101.LAB		iXBRL Taxonomy Extension Label Linkbase

101.PRE		iXBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibits 101)

* The Company has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ALERUS FINANCIAL CORPORATION

Date: October 31, 2024	By:	/s/ Katie A. Lorenson
		Name: Katie A. Lorenson
		Title: President and Chief Executive Officer (Principal Executive Officer)

Date: October 31, 2024	By:	/s/ Alan A. Villalon
		Name: Alan A. Villalon
		Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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Part 1. Financial Information Item 1 - Consolidated Financial Statements Note 1 Basis Of Presentation Note 2 Recent Accounting Pronouncements Note 3 Business Combinations Note 4 Investment Securities Note 5 Loans and Allowance For Credit Losses Note 6 Land, Premises and Equipment, Net Note 7 Goodwill and Other Intangible Assets Note 8 Loan Servicing Note 9 Leases Note 10 Deposits Note 11 Short Term Borrowings Note 12 Long Term Debt Note 13 Commitments and Contingencies Note 14 Share-based Compensation Note 15 Income Taxes Note 16 Tax Credit Investments Note 17 Segment Reporting Note 18 Earnings Per Share Note 19 Derivative Instruments Note 20 Regulatory Matters Note 21 Other Comprehensive Income (loss)Note 22 Stock Repurchase Program Note 23 Fair Value Of Assets and Liabilities Item 2 Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Mine Safety Disclosures Item 5 Other Information Item 6 Exhibits

Exhibits

2.1 Agreement and Plan of Merger, by and between Alerus Financial Corporation and HMN Financial, Inc., dated May 14, 2024* (incorporated herein by reference to Exhibit 2.1 on Form 8-K filed on May 15, 2024. 3.1 Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-1 filed on August 16, 2019). 3.2 Second Amended and Restated Bylaws of Alerus Financial Corporation (incorporated herein by reference to Exhibit 3.2 on Form S-1 filed on August 16, 2019). 31.1 Chief Executive Officers Certifications required by Rule13(a)14(a)filed herewith. 31.2 Chief Financial Officers Certifications required by Rule13(a)14(a)filed herewith. 32.1 Chief Executive Officer Certifications pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002filed herewith. 32.2 Chief Financial Officer Certifications pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002filed herewith.

ALRS 10-Q Quarter ended Sept. 30, 2024

Exhibits