Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Results of operations for the year ended December 31, 2024 compared to results for the year ended December 31, 2023 can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 14, 2025.

Overview

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

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

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

As of December 31, 2025, the Company had $5.2 billion of total assets, $4.0 billion of total loans, $4.2 billion of total deposits, $564.9 million of stockholders' equity, $44.9 billion of assets under administration/management in the Company's retirement and benefit services segment, and $4.9 billion of assets under administration/management in the Company's wealth segment.

Net Interest Income

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

Noninterest Income

Noninterest income primarily consists of the following:

●

The Company's retirement and benefit services business, which includes retirement plan administration, retirement plan investment advisory, HSA, ESOP administration and recordkeeping, and other benefit services, is the Company's largest source of noninterest income. Over half of the Company's retirement and benefit services fees are transaction or participant-based fees and are impacted by the number of plans and participants. The remainder of noninterest income is based on the market value of the related AUA and AUM and impacted by the level of contributions, withdrawals, new business, lost business and fluctuation in market values.

●

Wealth includes personal trust, investment and brokerage services. The Company earns trust, investment, and IRA fees from managing assets, including corporate trusts, personal trusts, and separately managed accounts. Trust and investment management fees are primarily based on a tiered scale relative to the market value of the AUM. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.

●

Mortgage noninterest income consists of gains on originating and selling mortgages and origination fees. Mortgage gains are primarily impacted by the level of originations, amount of loans sold, the type of loans sold and market conditions.

●

Service charges on deposit accounts are comprised of income generated through deposit account related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of the Company's clients.

●

Net gains (losses) on investment securities consists of the realized gains or losses related to the sale of available-for-sale investment securities.

●

Other noninterest income consists of debit card interchange income, income earned on the growth of the cash surrender value of life insurance policies the Company holds on certain key employees, loan servicing income net of the related amortization, income earned on wire transfer fees, gains on the sale of premises and equipment, income earned of swap fees, and any other income which does not fit within one of the specific noninterest income lines described above. Other noninterest income is generally impacted by business activities and level of transactions.

Noninterest Expense

Noninterest expense is comprised primarily of the following:

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Compensation and employee taxes and benefits-include all forms of personnel related expenses including salary, commissions, incentive compensation, payroll related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, ESOP and other benefit related expenses. Compensation and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.

●

Occupancy and equipment-costs related to owning and leasing the Company's office space, depreciation charges for the furniture, fixtures and equipment, amortization of leasehold improvements, utilities and other occupancy related expenses. Occupancy and equipment costs are primarily impacted by the number and size of the locations the Company occupies.

●

Business services, software and technology-costs related to contracts with core system and third-party data processing providers, software and information technology services to support office activities and internal networks. The Company believes its technology spending enhances the efficiency of the Company's employees and enables the Company to provide outstanding service to its clients. Technology and information system costs are primarily impacted by the number of locations the Company occupies, the number of employees, clients and volume of transactions the Company has and the level of service the Company requires from its third-party technology vendors.

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Intangible amortization expense is the result of acquisitions of fee income and banking companies. Identified intangible assets with definite lives consist of client relationship intangibles and core deposit intangibles and are amortized on a straight-line basis or sum-of-the-years' digits basis over the period representing the estimated remaining lives of the assets. The amount of expense is impacted by the timing of acquisitions and the estimated remaining lives of the assets.

●

Professional fees and assessments-costs related to legal, accounting, tax, consulting, personnel recruiting, directors fees, insurance, mergers and acquisitions and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that the Company pays to the FDIC for deposit insurance.

●

Other operational expenses-includes costs related to marketing, donations, promotions, and expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned ("OREO"), for sale, and other general corporate expenses that do not fit within one of the specific noninterest expense lines described above. Other operational expenses are generally impacted by the Company's business activities and needs.

​

Operating Segments

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

Critical Accounting Policies

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

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

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

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

The Company considers the ACL on loans to be a critical accounting policy given the uncertainty in evaluating the allowance required to cover management's estimate of all expected credit losses over the expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key management function that requires significant judgment and estimate by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in future periods. While the Company's current evaluation indicates that the ACL on loans at December 31, 2025 and 2024 was appropriate, the allowance may need to be increased under adversely different conditions or assumptions.

The significant key assumptions used with the ACL on loans calculation at December 31, 2025 using the CECL methodology, included:

​

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Macroeconomic factors (loss drivers): Macroeconomic factors are used within our discounted cash flow model to forecast the PD over the forecast period. As macroeconomic factors worsen the PD increases, and the corresponding LGD increases, resulting in an increase in the ACL on loans. The Company utilizes national unemployment, changes in national gross domestic product ("GDP"), and changes in the National Housing Price Index in estimation of the ACL on loans. Macroeconomic factors used in the calculation of the ACL on loans may change from time to time and in times of greater uncertainty. The Company may consider a range of possible forecasts and evaluate the probability of each scenario.

​

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Forecast period and reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable is set annually and validated through an assessment of economic leading indicators. In periods of greater volatility and uncertainty, such as that seen across the global markets and economies, including the U.S., the Company may elect to use a shorter forecast period, whereas when markets, economies and various other factors are considered more stable and certain, the Company may elect to use a longer forecast period. Generally, the Company expects its forecast period to range from one to two years. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. "reversion speed"), the Company considers such factors such as, but not limited to, historical loan loss experience over previous economic cycles, as well as where the Company believes it is within the current economic cycle. At December 31, 2025, the Company used a one-year forecast period and one-year reversion period for each loan segment to measure the ACL on loans, except for PCD agricultural land and PCD agricultural production loans which utilize static PD and LGD assumptions.

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Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing the Company's own historical loan data, as well as consideration of current environmental factors. The prepayment speed assumption is utilized with the discounted cash flow model (i.e. the CECL model) to forecast expected cash flows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.

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Qualitative factors: ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. The Company continues to consider qualitative factors in determining and arriving at our ACL on loans each reporting period.

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

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

As of December 31, 2025, the recorded ACL on loans was $61.9 million and represented the Company's best estimate of expected credit losses within the loan portfolio. However, the Company may adjust its assumptions to account for differences between expected and actual losses each period. A future change of the Company's assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in the aforementioned key assumptions, as well as asset quality within the loan portfolio, and the Company considers the impact of these trends on the ACL and the Company's financial condition, if any. The ACL on loans is reviewed and approved on a quarterly basis by the ACL Governance Committee, and later reviewed and ratified by the Bank's Board of Directors.

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

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

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

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

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

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

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

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

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Selected Financial Data

The following consolidated selected financial data is derived from the Company's audited consolidated financial statements as of and for the three years ended December 31, 2025.

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

		As of and for the year ended December 31,
(dollars and shares in thousands, except per share data)		2025				2024
Selected Income Statement Data
Net interest income		$	172,499			$	107,045
Provision for loan losses			556				18,141
Noninterest income			51,876				114,930
Noninterest expense			201,227				180,675
Income before income taxes			22,592				23,159
Income tax expense			5,153				5,379
Net income		$	17,439			$	17,780
Per Common Share Data
Earnings - basic		$	0.69			$	0.84
Earnings - diluted		$	0.68			$	0.83
Adjusted earnings - diluted (1)		$	2.78			$	1.45
Dividends declared		$	0.83			$	0.79
Tangible book value per common share (1)		$	17.55			$	14.44
Average shares outstanding − basic			25,380				21,047
Average shares outstanding − diluted			25,697				21,321
Selected Performance Ratios
Return on average total assets			0.33	%			0.39	%
Adjusted return on average total assets (1)			1.35	%			0.69	%
Return on average common equity			3.32	%			4.47	%
Return on average tangible common equity (1)			6.29	%			7.14	%
Adjusted return on average tangible common equity (1)			19.48	%			11.22	%
Noninterest income as a % of revenue			23.12	%			51.78	%
Net interest margin (taxable-equivalent basis)			3.53	%			2.56	%
Adjusted net interest margin (taxable-equivalent basis) (1)			4.09	%			3.14	%
Efficiency ratio (1)			84.10	%			77.92	%
Adjusted efficiency ratio (1)			64.45	%			73.45	%
Dividend payout ratio			122.06	%			95.18	%
Average equity to average assets			9.95	%			8.83	%
Selected Balance Sheet Data - Period Ending
Loans		$	4,048,022			$	3,992,534
Allowance for credit losses			(61,915	)			(59,929	)
Investment securities			768,543				863,638
Assets			5,230,084				5,261,673
Deposits			4,192,003				4,378,410
Long-term debt			59,182				59,069
Total stockholders' equity (2)			564,934				495,410
Asset Quality Ratios
Net charge-offs/(recoveries) to average loans			0.05	%			0.13	%
Nonperforming loans to total loans			1.71	%			1.58	%
Nonperforming assets to total assets			1.33	%			1.20	%
Allowance for credit losses to total loans			1.53	%			1.50	%
Allowance for credit losses to nonperforming loans			89.65	%			95.30	%
Other Data
Retirement and benefit services assets under administration/management		$	44,925,311			$	40,728,699
Wealth assets under administration/management		$	4,850,600			$	4,579,189
Mortgage originations		$	484,775			$	334,318

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

(2)	Includes ESOP-owned shares.

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

In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. Management uses the non-GAAP financial measures presented in the tables below in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy and financial performance. Management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.

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

		December 31,				December 31,
		2025				2024
Tangible common equity to tangible assets
Total common stockholders' equity		$	564,934			$	495,410
Less: Goodwill			85,634				85,634
Less: Other intangible assets			33,371				43,882
Tangible common equity (a)			445,929				365,894
Total assets			5,230,084				5,261,673
Less: Goodwill			85,634				85,634
Less: Other intangible assets			33,371				43,882
Tangible assets (b)			5,111,079				5,132,157
Tangible common equity to tangible assets (a)/(b)			8.72	%			7.13	%
Tangible book value per common share
Total common stockholders' equity		$	564,934			$	495,410
Less: Goodwill			85,634				85,634
Less: Other intangible assets			33,371				43,882
Tangible common equity (c)			445,929				365,894
Total common shares issued and outstanding (d)			25,406				25,345
Tangible book value per common share (c)/(d)		$	17.55			$	14.44

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		December 31,				December 31,
		2025				2024
Return on average tangible common equity
Net income		$	17,439			$	17,780
Add: Intangible amortization expense (net of tax) (1)			8,304				5,353
Net income, excluding intangible amortization (e)			25,743				23,133
Average total equity			525,323				397,738
Less: Average goodwill			85,634				56,237
Less: Average other intangible assets (net of tax) (1)			30,470				17,534
Average tangible common equity (f)			409,219				323,967
Return on average tangible common equity (e)/(f)			6.29	%			7.14	%
Efficiency ratio
Noninterest expense		$	201,227			$	180,675
Less: Intangible amortization expense			10,511				6,776
Adjusted noninterest expense (g)			190,716				173,899
Net interest income (w)			172,499				107,045
Noninterest income			51,876				114,930
Tax-equivalent adjustment			2,402				1,202
Total tax-equivalent revenue (h)			226,777				223,177
Efficiency ratio (g)/(h)			84.10	%			77.92	%
Pre-Provision Net Revenue
Net interest income (w)		$	172,499			$	107,045
Add: Noninterest income			51,876				114,930
Less: Noninterest expense			201,227				180,675
Pre-provision net revenue		$	23,148			$	41,300
Adjusted noninterest income
Noninterest income		$	51,876			$	114,930
Less: Adjusted noninterest income items
Net gains (losses) on investment securities			(68,403	)			-
Net gain (loss) on sale of loans			2,080
Net gain (loss) on sale of premises and equipment			(530	)			3,941
Total adjusted noninterest income items (i)			(66,853	)			3,941
Adjusted noninterest income (j)		$	118,729			$	110,989
Adjusted Noninterest (Loss) Income as a Percentage of Revenue
Adjusted noninterest income (j)		$	118,729			$	110,989
Add: Net interest income (w)			172,499				107,045
Adjusted revenue (x)		$	291,228			$	218,034
Adjusted noninterest (loss) income as a percentage of revenue (j)/(x)			40.77	%			50.90	%
Adjusted noninterest expense
Noninterest expense		$	201,227			$	180,675
Less: Adjusted noninterest expense items
Merger- and acquisition-related expenses			142				9,980
Severance and signing bonus expense			1,319				2,901
Total adjusted noninterest expense items (k)			1,461				12,881
Adjusted noninterest expense (l)		$	199,766			$	167,794
Adjusted Pre-Provision Net Revenue
Net interest income (w)		$	172,499			$	107,045
Add: Adjusted noninterest income (j)			118,729				110,989
Less: Adjusted noninterest expense (l)			199,766				167,794
Adjusted pre-provision net revenue		$	91,462			$	50,240
Adjusted efficiency ratio
Adjusted noninterest expense (l)		$	199,766			$	167,794
Less: Intangible amortization expense			10,511				6,776
Adjusted noninterest expense for efficiency ratio (m)			189,255				161,018
Tax-equivalent revenue
Net interest income (w)			172,499				107,045
Add: Adjusted noninterest income (j)			118,729				110,989
Add: Tax-equivalent adjustment			2,402				1,202
Total tax-equivalent revenue (n)			293,630				219,236
Adjusted efficiency ratio (m)/(n)			64.45	%			73.45	%

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

		December 31,				December 31,
		2025				2024
Adjusted net income
Net income		$	17,439			$	17,780
Less: Adjusted noninterest income (loss) items (net of tax) (1) (i)			(52,814	)			3,113
Add: HMNF day one provision for credit losses and unfunded commitments (net of tax) (1)			-				6,140
Add: Adjusted noninterest expense items (net of tax) (1) (k)			1,154				10,176
Adjusted net income (o)		$	71,407			$	30,983
Adjusted Return on Average Assets
Average total assets (p)		$	5,277,867			$	4,503,483
Adjusted return on average assets (o)/(p)			1.35	%			0.69	%
Adjusted Return on Average Tangible Common Equity
Adjusted net income (o)		$	71,407			$	30,983
Add: Intangible amortization expense (net of tax) (1)			8,304				5,353
Adjusted net income, excluding intangible amortization (q)			79,711				36,336
Average total equity			525,323				397,738
Less: Average goodwill			85,634				56,237
Less: Average other intangible assets (net of tax) (1)			30,470				17,534
Average tangible common equity (r)			409,219				323,967
Adjusted return on average tangible common equity (q)/(r)			19.48	%			11.22	%
Adjusted Net Interest Margin (Tax-Equivalent)
Net interest income (w)		$	172,499			$	107,045
Less: BTFP cash interest income			-				12,494
Add: BTFP interest expense			-				11,291
Less: Purchase accounting net accretion			(26,580	)			(17,576	)
Adjusted net interest income excluding BTFP impact			199,079				123,418
Add: Tax equivalent adjustment for loans and securities			2,402				1,202
Adjusted net interest income (s)		$	201,481			$	124,620
Interest-earning assets			4,957,720				4,221,873
Less: Average cash proceeds balance from BTFP			-				231,366
Add: Change in unearned purchase accounting discount			(26,580	)			(17,576	)
Adjusted interest-earning assets (t)		$	4,931,140			$	3,972,931
Adjusted net interest margin (tax-equivalent) (s)/(t)			4.09	%			3.14	%
Adjusted Earnings Per Common Share - Diluted
Adjusted net income (o)		$	71,407			$	30,983
Less: Dividends and undistributed earnings allocated to participating securities			(29	)			37
Net income available to common stockholders (u)			71,436				30,946
Weighted-average common shares outstanding for diluted earnings per share (v)			25,697				21,321
Adjusted earnings per common share - diluted (u)/(v)		$	2.78			$	1.45
Adjusted Net Charge-Offs to Average Loans
Net charge-offs		$	2,148			$	4,154
Less: Charge-off of PCD reserves on loans transferred to non-mortgage loans held for sale			3,053				-
Adjusted net charge-offs (recoveries) (y)			(905	)			4,154
Average loans (z)		$	4,047,034			$	3,099,015
Adjusted net charge-offs (recoveries) to average loans (y)/(z)			(0.02	)%			0.13	%

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

Results of Operations

The following discussion describes the consolidated operations and financial condition of the Company and the Bank. Results of operations for the year ended December 31, 2025 are compared to the results for the year ended December 31, 2024, and the consolidated financial condition of the Company as of December 31, 2025 is compared to December 31, 2024.

Summary

Net income for the year ended December 31, 2025 was $17.4 million, a decrease of $0.3 million, or 1.9%, compared to $17.8 million for the year ended December 31, 2024. Diluted earnings per common share were $0.68 in 2025, compared to $0.83 in 2024. Return on average total assets was 0.33% in 2025, compared to 0.39% for 2024. The decrease in net income was primarily driven by a $63.1 million decrease in noninterest income and a $20.6 million increase in noninterest expense, offset by a $65.5 million increase in net interest income and a $17.6 million decrease in provision for credit losses expense. Noninterest income decreased primarily due to the $68.4 million loss on investment securities recognized in connection with a strategic balance sheet repositioning in the fourth quarter of 2025. The increase in net interest income was primarily driven by earning assets acquired in the HMNF acquisition, organic loan growth at higher yields, lower cost of funds, and purchase accounting accretion. The increase in noninterest expense was primarily due to a $10.1 million increase in compensation expense, a $4.2 million increase in occupancy and equipment expense, a $3.8 million increase in employee taxes and benefits expense, and a $3.7 million increase in intangible amortization expense, partially offset by a $8.5 million decrease in professional fees and assessments, as a result of the completion of the HMNF acquisition.

Net Interest Income-With Nontaxable Income Converted to Fully Taxable Equivalent ("FTE")

Net interest income totaled $172.5 million in 2025, an increase of $65.5 million, or 61.1%, from 2024. Net interest margin increased 97 basis points to 3.53% in 2025, from 2.56% in 2024. The increase in net interest margin was primarily the result of a $58.1 million increase in interest income on interest-earning assets and a $7.4 million decrease in interest expense on interest-bearing liabilities. The increase in the interest income earned on interest-earning assets was driven by a 35 basis point increase in the average rate earned on loans as well as a $948.0 million increase in the average balance of total loans, driven by increased loan balances from the acquisition of HMNF and strong organic growth at higher yields. The decrease in interest expense on interest-bearing liabilities was driven by a 70 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $562.3 million increase in the average balance of interest-bearing liabilities, driven primarily by the acquisition of HMNF.

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

		Year ended December 31,
		2025												2024
						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		$	54,150			$	2,654				4.90	%		$	299,666			$	16,142				5.39	%
Investment securities (1)			813,474				21,510				2.64				791,111				20,604				2.60
Loans held for sale			18,920				909				4.80				14,180				836				5.90
Loans
Commercial and industrial			665,635				49,383				7.42				588,269				42,505				7.23
CRE − Construction, land and development			341,533				22,712				6.65				172,700				11,699				6.77
CRE − Multifamily			356,019				22,828				6.41				272,125				15,974				5.87
CRE − Non-owner occupied			912,066				58,434				6.41				712,734				43,778				6.14
CRE − Owner occupied			421,997				27,920				6.62				286,540				16,354				5.71
Agricultural − Land			66,483				3,914				5.89				45,729				2,334				5.10
Agricultural − Production			64,118				4,518				7.05				43,361				2,988				6.89
RRE − First lien			895,225				43,259				4.83				747,874				31,153				4.17
RRE − Construction			36,309				2,675				7.37				22,832				1,503				6.58
RRE − HELOC			205,287				13,929				6.79				131,617				10,555				8.02
RRE − Junior lien			41,406				2,637				6.37				38,982				2,432				6.24
Other consumer			40,956				2,813				6.87				36,252				2,469				6.81
Total loans (1)			4,047,034				255,022				6.30				3,099,015				183,744				5.93
Federal Reserve/FHLB Stock			24,142				1,944				8.05				17,901				1,453				8.12
Total interest-earning assets			4,957,720				282,039				5.69				4,221,873				222,779				5.28
Noninterest-earning assets			320,147												281,610
Total assets		$	5,277,867											$	4,503,483
Interest-Bearing Liabilities
Interest-bearing demand deposits		$	1,257,069			$	22,385				1.78	%		$	1,010,888			$	21,436				2.12	%
Money market and savings deposits			1,583,232				44,414				2.81				1,250,939				45,008				3.60
Time deposits			687,320				25,842				3.76				518,826				22,798				4.39
Fed funds purchased and BTFP			62,618				2,879				4.60				249,180				12,338				4.95
FHLB short-term advances			201,781				9,018				4.47				200,000				10,246				5.12
Long-term debt			59,126				2,599				4.40				59,013				2,707				4.59
Total interest-bearing liabilities			3,851,146				107,137				2.78				3,288,846				114,533				3.48
Noninterest-Bearing Liabilities and Stockholders' Equity
Noninterest-bearing deposits			813,785												704,463
Operating lease liabilities			24,566												9,259
Accrued expenses and other liabilities			63,047												103,177
Other noninterest-bearing liabilities			87,613												112,436
Stockholders' equity			525,323												397,738
Total liabilities and stockholders' equity		$	5,277,867											$	4,503,483
Net interest income on FTE basis (1)						$	174,902											$	108,246
Net interest rate spread on FTE basis (1)											2.91	%											1.80	%
Net interest margin on FTE basis (1)											3.53	%											2.56	%

(1)	Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.

​

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.

		Year ended December 31, 2025
		Compared with
		Year ended December 31, 2024
		Change due to:								Interest
(tax-equivalent basis, dollars in thousands)		Volume				Rate				Variance
Interest-earning assets
Interest-bearing deposits with banks		$	(13,233	)		$	(255	)		$	(13,488	)
Investment securities (1)			581				325				906
Loans held for sale			280				(207	)			73
Loans
Commercial and industrial			5,594				1,284				6,878
CRE − Construction, land and development			11,430				(417	)			11,013
CRE − Multifamily			4,925				1,929				6,854
CRE − Non-owner occupied			12,239				2,417				14,656
CRE − Owner occupied			7,735				3,831				11,566
Agricultural − Land			1,058				522				1,580
Agricultural − Production			1,430				100				1,530
RRE − First lien			6,145				5,961				12,106
RRE − Construction			887				285				1,172
RRE − HELOC			5,908				(2,534	)			3,374
RRE − Junior lien			151				54				205
Other consumer			320				24				344
Total loans (1)			57,822				13,456				71,278
Federal Reserve/FHLB Stock			507				(16	)			491
Total interest income			45,957				13,303				59,260
Interest-bearing liabilities
Interest-bearing demand deposits			5,219				(4,270	)			949
Money market and savings deposits			11,963				(12,557	)			(594	)
Time deposits			7,397				(4,353	)			3,044
Fed funds purchased and BTFP			(9,235	)			(224	)			(9,459	)
FHLB short-term advances			91				(1,319	)			(1,228	)
Long-term debt			5				(113	)			(108	)
Total interest expense			15,440				(22,836	)			(7,396	)
Change in net interest income		$	30,517			$	36,139			$	66,656

(1)	Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0%.

​

Provision for Credit Losses

The Company recorded a provision for credit losses expense of $0.6 million for the year ended December 31, 2025, compared to a provision for credit losses expense of $18.1 million for the year ended December 31, 2024. The provision for credit losses expense for the year ended December 31, 2025 included $4.2 million in provision for credit losses on loans, ($3.6) million in provision release for credit losses on unfunded commitments, and ($8) thousand recovery for credit losses on investment securities held-to-maturity ("HTM"). The CECL accounting standard requires the Company to recognize losses over the expected life of the loan as opposed to the losses expected to already have been incurred. The decrease in provision for credit losses was primarily a result of a $7.3 million day one provision in connection with the acquisition of HMNF in 2024 and a reduction in the unfunded commitment reserve of $3.6 million.

Noninterest Income

The following table presents noninterest income for the years ended December 31, 2025 and 2024:

		Year ended December 31,
(dollars in thousands)		2025				2024				$ Change				% Change
Retirement and benefit services		$	65,885			$	64,365			$	1,520				2.4	%
Wealth			28,265				26,171				2,094				8.0	%
Mortgage banking			11,855				10,073				1,782				17.7	%
Service charges on deposit accounts			2,768				1,976				792				40.1	%
Net gains (losses) on investment securities			(68,403	)			-				(68,403	)			100.0	%
Other noninterest income			11,506				12,345				(839	)			(6.8	)%
Total noninterest income		$	51,876			$	114,930			$	(63,054	)			(54.9	)%
Noninterest income as a % of revenue			23.1	%			51.8	%

Total noninterest income decreased $63.1 million, or 54.9%, to $51.9 million in 2025, from $114.9 million for 2024. The decrease in noninterest income was almost entirely driven by the strategic balance sheet repositioning transaction in the fourth quarter of 2025, which resulted in a $68.4 million loss on the sale of investment securities. Wealth revenue increased $2.1 million in 2025 primarily driven by an increase in assets under administration/management of 5.9%.

Noninterest income as a percent of total operating revenue, which consists of net interest income plus noninterest income, was 23.12% in 2025, down from 51.78% the prior year. The decrease in 2025 was primarily driven by the strategic balance sheet repositioning transaction in the fourth quarter of 2025, which resulted in a $68.4 million loss on the sale of investment securities. Excluding the $68.4 million loss on the sale of investment securities associated with the strategic balance sheet repositioning transaction in the fourth quarter of 2025, adjusted noninterest income as a percent of total operating revenue, which consists of net interest income plus noninterest income, was 41.08% in 2025.

Noninterest Expense

The following table presents noninterest expense for the years ended December 31, 2025 and 2024:

		Year ended December 31,
(dollars in thousands)		2025				2024				$ Change				% Change
Compensation		$	97,457			$	87,311			$	10,146				11.6	%
Employee taxes and benefits			26,815				22,967				3,848				16.8
Occupancy and equipment expense			11,973				7,766				4,207				54.2
Business services, software and technology expense			24,699				21,758				2,941				13.5
Intangible amortization expense			10,511				6,776				3,735				55.1
Professional fees and assessments			11,100				19,597				(8,497	)			(43.4	)
Marketing and business development			3,837				3,249				588				18.1
Supplies and postage			2,454				2,046				408				19.9
Travel			1,428				1,403				25				1.8
Mortgage and lending expenses			3,127				2,162				965				44.6
Other			7,826				5,640				2,186				38.8
Total noninterest expense		$	201,227			$	180,675			$	20,552				11.4	%

Total noninterest expense increased $20.6 million, or 11.4%, to $201.2 million for the year ended December 31, 2025, from $180.7 million for the year ended December 31, 2024. The increase in noninterest expense was primarily driven by a $10.1 million increase in compensation expense, a $4.2 million increase in occupancy and equipment expense, a $3.8 million increase in employee taxes and benefits expense, and a $3.7 million increase in intangible amortization expense, partially offset by a $8.5 million decrease in professional fees and assessments, as a result of the completion of the HMNF acquisition.

Income Taxes

For the year ended December 31, 2025, the Company recognized income tax expense of $5.2 million on $22.6 million of pre-tax income, resulting in an effective tax rate of 22.8%. For the year ended December 31, 2024, the Company recognized income tax expense of $5.4 million on $23.2 million of pre-tax income, resulting in an effective tax rate of 23.2%. The decrease in the effective tax rate was primarily driven by items related to the acquisition of HMNF in 2024 and increased tax-exempt income.

Segment Reporting

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

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

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

Banking

The banking division offers a complete line of loan, deposit, cash management, and treasury services through 27 offices in North Dakota, Minnesota, Arizona, Wisconsin, and Iowa. These products and services are supported through various digital applications. The majority of the Company's assets and liabilities are on the banking segment balance sheet.

The following table presents the banking segment income statement, net of corporate administration, for the years ended December 31, 2025 and 2024:

		Year ended
		December 31,
(dollars in thousands)		2025				2024
Net interest income		$	172,499			$	107,045
Provision for credit losses			556				18,141
Noninterest income (loss)			(42,274	)			24,394
Total revenue			129,669				113,298
Noninterest expense (1)			113,918				88,517
Net income before taxes		$	15,751			$	24,781

(1)	Noninterest expense does 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.

Retirement and Benefit Services

The retirement and benefit services business provides the following services nationally: record-keeping and administration services to qualified and other types of retirement plans, investment fiduciary services to retirement plans, health savings accounts, flexible spending accounts, and COBRA recordkeeping and administration services. The division services approximately 8,800 retirement plans and more than 495,000 plan participants and operates within the Company's banking markets, as well as Lakewood, Colorado.

The following table presents the retirement and benefit services segment income statement for the years ended December 31, 2025 and 2024:

		Year ended
		December 31,
(dollars in thousands)		2025				2024
Recurring annual income (1)		$	53,245			$	51,522
Transactional income (2)			12,640				12,843
Total noninterest income			65,885				64,365
Noninterest expense			54,989				56,555
Net income before taxes		$	10,896			$	7,810

(1)	Recurring annual income primarily includes asset based fees, administration fees, record-keeping fees, trust/custody fees, and health and welfare fees. Of the amount presented, $26.0 million and $24.8 million for the years ended December 31, 2025 and 2024 , respectively, was from market sensitive revenue.
(2)	Transactional income primarily includes advisory fees and distribution fees.

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

		Year ended
		December 31,
(dollars in thousands)		2025				2024
AUA & AUM balance beginning of period		$	40,728,699			$	36,682,425
Inflows (1)			5,604,459				5,268,581
Outflows (2)			(6,485,947	)			(5,370,264	)
Market impact (3)			5,078,100				4,147,957
AUA & AUM balance end of period		$	44,925,311			$	40,728,699
Yield (4)			0.15	%			0.17	%

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

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

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

(4)	Retirement and benefit services noninterest income divided by simple average ending balances.

Total AUA and AUM for the retirement and benefit services segment was $44.9 billion at December 31, 2025, an increase of $4.2 billion, or 10.3%, compared to the total at December 31, 2024. The increase was primarily driven by an increase of $5.1 billion in market impact, driven by improved bond and equity markets.

Wealth

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

The following table presents the wealth segment income statement for the years ended December 31, 2025 and 2024:

		Year ended
		December 31,
(dollars in thousands)		2025				2024
Asset management		$	24,325			$	22,764
Brokerage			1,782				1,821
Insurance and advisory			2,158				1,586
Total noninterest income			28,265				26,171
Noninterest expense			21,472				15,641
Net income before taxes		$	6,793			$	10,530

The following table presents changes in the wealth combined AUA and AUM, disaggregated by product, for the years ended December 31, 2025 and 2024:

		Year ended
		December 31,
(dollars in thousands)		2025				2024
Total Wealth balance beginning of period		$	4,579,189			$	3,865,876
Inflows (1)(2)			4,326,335				1,146,690
Outflows (3)			(4,739,591	)			(812,100	)
Market impact (4)			684,667				378,723
Total Wealth balance end of period		$	4,850,600			$	4,579,189
Yield (5)(6)			0.52	%			0.54	%

(1)	Inflows include new account assets, contributions, dividends and interest.
(2)	Inflows for the year ended December 31, 2024 includes $272.5 million of AUA and AUM acquired in the HMNF transaction.

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

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

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

(6)	Yield does not include brokerage and insurance and advisory revenue of $3.9 million and $3.4 million for the years ended December 31, 2025 and 2024, respectively.

Total AUA and AUM for the wealth segment was $4.9 billion at December 31, 2025, an increase of $0.3 billion, or 5.9%, compared to the total at December 31, 2024. The increase was driven by a $0.7 billion increase in market impact driven by improved bond and equity markets.

Financial Condition

Overview

Total assets were $5.2 billion at December 31, 2025, a decrease of $31.6 million, or 0.6%, compared to $5.3 billion at December 31, 2024. The decrease was primarily due a $74.0 million decrease in available-for-sale investment securities and a $21.1 million decrease in held-to-maturity securities, partially offset by an increase of $55.5 million in loans held for investment and an increase of $15.3 million in operating lease right-of-use assets.

Investment Securities

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

		December 31, 2025								December 31, 2024
						Percent of								Percent of
(dollars in thousands)		Balance				Portfolio				Balance				Portfolio
Available-for-sale
U.S. Treasury and agencies		$	405				0.1	%		$	30,707				3.7	%
Mortgage backed securities
Residential agency			476,746				64.2				503,706				61.1
Commercial			-				-				1,251				0.2
Asset backed securities			15				-				19				-
Corporate bonds			36,929				5.0				52,370				6.3
Total available-for-sale investment securities			514,095				69.3				588,053				71.3
Held-to-maturity
Obligations of state and political agencies			105,405				14.2				107,985				13.1
Mortgage backed securities
Residential agency			122,604				16.5				129,001				15.6
Total held-to-maturity investment securities			228,009				30.7				236,986				28.7
Total investment securities		$	742,104				100.0	%		$	825,039				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.

At December 31, 2025, the total fair value of investment securities was $742.1 million compared to $825.0 million at December 31, 2024. The fair value of investment securities as a percentage of total assets was 14.2% and 15.7%, as of December 31, 2025 and December 31, 2024, respectively. The decrease in investment securities was primarily due to principal paydowns on mortgage securities and maturities. Securities with a carrying value of $115.1 million were pledged at December 31, 2025, to secure public deposits and for other purposes required or permitted by law.

The net pre-tax unrealized market value loss on the AFS investment portfolio as of December 31, 2025 was $3.6 million, compared to a $98.5 million loss as of December 31, 2024. The decrease was primarily due to the $68.4 million loss on investment securities recognized in connection with the strategic balance sheet repositioning in the fourth quarter of 2025, as well as improved market conditions.

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

As of December 31, 2025 and December 31, 2024, the Company held 59 tax-exempt state and local municipal securities totaling $28.1 million, and 68 tax-exempt state and local municipal securities totaling $30.0 million, respectively. Other than the aforementioned investments, at December 31, 2025 and December 31, 2024, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders' equity.

The Company's AFS debt securities that are in an unrealized loss position are assessed to determine if an allowance should be recorded or if a write-down is required in accordance with ASU 2016-13. As of and for the years ended years ended December 31, 2025 and 2024, the Company did not record any allowances on or write-down any of the AFS debt securities in an unrealized loss position. Refer to Note 1 (Significant Accounting Policies) to the Company's audited consolidated financial statements included in Item 8 of this Form 10-K for additional details of the Company's assessment of the allowance for AFS investments as of and for the year ended December 31, 2025.

In accordance with ASU 2016-13, in each reporting period the Company's HTM debt securities are assessed to determine if any allowance should be recorded or if a write-down is required. As of and for the years ended December 31, 2025 and 2024, the Company recorded an allowance of $123 thousand and $131 thousand, respectively, and did not write-down any HTM debt securities. Refer to Note 1 (Significant Accounting Policies) to the Company's audited consolidated financial statements included in Item 8 of this Form 10-K for additional details of the Company's assessment of the allowance for HTM investments as of and for the years ended December 31, 2025 and 2024.

The investment securities presented in the following table are reported at fair value and by contractual maturity as of December 31, 2025. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, the mortgage backed securities receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis, assuming a 21.0% income tax rate.

		Maturity as of December 31, 2025
		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		$	-				-	%		$	207				4.81	%		$	-				-	%		$	198				4.94	%
Mortgage backed securities
Residential agency			42				2.70				4,201				3.52				15,634				3.68				456,869				2.32
Commercial			-				-				-				2.40				-				-				-				-
Asset backed securities			-				-				-				-				15				4.62				-				-
Corporate bonds			-				-				-				9.15				36,929				3.46				-				-
Total available-for-sale investment securities			42				2.70				4,408				5.84				52,578				3.54				457,067				2.32
Held-to-maturity
Obligations of state and political agencies			11,258				1.40				53,553				1.85				35,454				2.26				5,140				2.24
Mortgage backed securities
Residential agency			-				-				-				-				-				-				122,604				2.18
Total held-to-maturity investment securities			11,258				1.40				53,553				1.85				35,454				2.26				127,744				2.19
Total investment securities		$	11,300				1.41	%		$	57,961				2.32	%		$	88,032				3.13	%		$	584,811				2.29	%

Loans

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

Total loans outstanding were $4.0 billion as of December 31, 2025, an increase of $55.5 million, or 1.4%, from December 31, 2024. The increase in total loans was primarily driven by a $45.8 million increase in consumer loans and a $9.7 million increase in commercial loans. The fair value of net loans acquired in the HMNF transaction, which was completed on October 9, 2024, was $786.2 million.

The Company's loan portfolio is highly diversified. As of December 31, 2025, approximately 18.3% of loans outstanding were C&I, while 47.8% of loans outstanding were CRE, 30.8% of loans outstanding were consumer, and 3.1% of loans outstanding were agricultural.

		December 31, 2025								December 31, 2024
						Percent of								Percent of
(dollars in thousands)		Balance				Portfolio				Balance				Portfolio
Commercial and industrial:
General business		$	290,008				7.2	%		$	340,702				8.5	%
Services			237,966				5.9				177,813				4.5
Retail trade			101,374				2.5				88,105				2.2
Manufacturing			107,485				2.7				60,107				1.5
Total commercial and industrial			736,833				18.3				666,727				16.7
Commercial real estate:
Construction, land and development			246,238				6.1				294,677				7.4
Multifamily			383,505				9.5				363,123				9.1
Non-owner occupied
Office			142,095				3.5				168,170				4.2
Industrial			193,041				4.8				169,391				4.2
Retail			116,735				2.9				154,325				3.9
Hotel			110,022				2.7				170,982				4.3
Medical office			174,891				4.3				139,939				3.5
Medical or nursing facility			85,918				2.1				110,164				2.8
Other commercial real estate			53,160				1.3				54,054				1.3
Total non-owner occupied			875,862				21.6				967,025				24.2
Owner occupied			427,260				10.6				371,418				9.3
Total commercial real estate			1,932,865				47.8				1,996,243				50.0
Agricultural:
Land			64,799				1.6				61,299				1.5
Production			62,500				1.5				63,008				1.6
Total agricultural			127,299				3.1				124,307				3.1
Consumer:
RRE − First lien			874,737				21.6				921,019				23.1
RRE − Construction			33,703				0.8				33,547				0.8
RRE − HELOC			260,883				6.4				162,509				4.1
RRE − Junior lien			36,844				0.9				44,060				1.1
Other consumer			44,858				1.1				44,122				1.1
Total consumer			1,251,025				30.8				1,205,257				30.2
Total loans		$	4,048,022				100.0	%		$	3,992,534				100.0	%

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

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

CRE loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company does not monitor the CRE portfolio for attributes such as loan to value ratios, occupancy rates, and net operating income, as these characteristics are assessed and evaluated on an individual loan basis. Portfolio stress testing is completed based on property type and takes into consideration changes to net operating income and capitalization rates. The Company does not have exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with acceptable occupancy levels. As of December 31, 2025, at 303.4%, the Bank's applicable investor CRE loans, as a percentage of its risk-based capital, slightly exceeded the regulatory guideline limit of 300%. Robust concentration management processes are in place to monitor this level of exposure. Quarterly, Bank management and its Board of Directors review the level of investor real estate assets, taking into consideration geographic location, detailed market analysis by property type, portfolio performance, and asset quality trends. Construction loans at 49.3% were below the regulatory guideline limit of 100%.

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

		December 31, 2025								December 31, 2024
						Percent of								Percent of
(dollars in thousands)		Balance				Total				Balance				Total
Geographical Market:
Minnesota		$	621,747				49.4	%		$	668,395				50.2	%
North Dakota			212,077				16.8				221,693				16.7
Arizona			133,618				10.6				169,473				12.7
Wisconsin			88,229				7.0				111,502				8.4
Texas			37,113				2.9				34,580				2.6
Colorado			23,358				1.9				23,386				1.8
Oregon			17,698				1.4				17,990				1.4
Kansas			16,656				1.3				15,183				1.1
Missouri			16,409				1.3				16,776				1.3
Georgia			14,569				1.2				-				-
Virginia			11,182				0.9				-				-
South Dakota			10,415				0.8				14,554				1.1
Other			56,296				4.5				36,616				2.8
Total non-owner occupied and multifamily commercial real estate loans		$	1,259,367				100.0	%		$	1,330,148				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.

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

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

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

The Company's consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of December 31, 2025, the Company's consumer mortgage portfolio was $1.2 billion, which represented a $45.0 million, or 3.9%, increase from $1.2 billion as of December 31, 2024. 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.

The following table shows the maturities and sensitivity to interest rates for the loan portfolio as of December 31, 2025:

		December 31, 2025
						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		$	184,850			$	356,025			$	189,024			$	6,934			$	736,833
Commercial real estate
Construction, land and development			74,888				87,278				35,439				48,633				246,238
Multifamily			105,114				188,545				89,846				-				383,505
Non-owner occupied			120,960				590,535				141,299				23,068				875,862
Owner occupied			25,572				272,589				80,963				48,136				427,260
Total commercial real estate			326,534				1,138,947				347,547				119,837				1,932,865
Agricultural
Land			8,956				17,703				14,604				23,536				64,799
Production			42,671				18,950				879				-				62,500
Total agricultural			51,627				36,653				15,483				23,536				127,299
Total commercial			563,011				1,531,625				552,054				150,307				2,796,997
Consumer
Residential real estate
First lien			9,784				46,181				73,019				745,753				874,737
Construction			23,657				3,432				-				6,614				33,703
HELOC			3,829				13,329				24,281				219,444				260,883
Junior lien			1,073				6,257				18,807				10,707				36,844
Total residential real estate			38,343				69,199				116,107				982,518				1,206,167
Other consumer			17,216				21,324				3,922				2,396				44,858
Total consumer			55,559				90,523				120,029				984,914				1,251,025
Total loans		$	618,570			$	1,622,148			$	672,083			$	1,135,221			$	4,048,022
Loans with fixed interest rates:
Commercial
Commercial and industrial		$	37,810			$	204,203			$	78,832			$	-			$	320,845
Commercial real estate
Construction, land and development			45,815				17,989				1,079				-				64,883
Multifamily			51,123				119,263				25,759				-				196,145
Non-owner occupied			79,648				336,502				73,684				-				489,834
Owner occupied			21,343				194,340				24,306				1,168				241,157
Total commercial real estate			197,929				668,094				124,828				1,168				992,019
Agricultural
Land			8,866				16,542				12,904				16,815				55,127
Production			2,163				16,958				879				-				20,000
Total agricultural			11,029				33,500				13,783				16,815				75,127
Total commercial			246,768				905,797				217,443				17,983				1,387,991
Consumer
Residential real estate
First lien			8,502				38,421				64,377				424,923				536,223
Construction			9,464				80				-				1,833				11,377
HELOC			61				1,585				5,852				3,279				10,777
Junior lien			503				4,028				13,872				10,119				28,522
Total residential real estate			18,530				44,114				84,101				440,154				586,899
Other consumer			845				12,393				3,922				205				17,365
Total consumer			19,375				56,507				88,023				440,359				604,264
Total loans with fixed interest rates		$	266,143			$	962,304			$	305,466			$	458,342			$	1,992,255
Loans with floating interest rates:
Commercial
Commercial and industrial		$	147,040			$	151,822			$	110,192			$	6,934			$	415,988
Commercial real estate
Construction, land and development			29,073				69,289				34,360				48,633				181,355
Multifamily			53,991				69,282				64,087				-				187,360
Non-owner occupied			41,312				254,033				67,615				23,068				386,028
Owner occupied			4,229				78,249				56,657				46,968				186,103
Total commercial real estate			128,605				470,853				222,719				118,669				940,846
Agricultural
Land			90				1,161				1,700				6,721				9,672
Production			40,508				1,992				-				-				42,500
Total agricultural			40,598				3,153				1,700				6,721				52,172
Total commercial			316,243				625,828				334,611				132,324				1,409,006
Consumer
Residential real estate
First lien			1,282				7,760				8,642				320,830				338,514
Construction			14,193				3,352				-				4,781				22,326
HELOC			3,768				11,744				18,429				216,165				250,106
Junior lien			570				2,229				4,935				588				8,322
Total residential real estate			19,813				25,085				32,006				542,364				619,268
Other consumer			16,371				8,931				-				2,191				27,493
Total consumer			36,184				34,016				32,006				544,555				646,761
Total loans with floating interest rates		$	352,427			$	659,844			$	366,617			$	676,879			$	2,055,767

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

Asset Quality

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

Credit Quality Indicators

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

The table below represents criticized loans outstanding by loan portfolio segment as of December 31, 2025 and 2024:

		December 31,				December 31,
(dollars in thousands)		2025				2024
Commercial
Commercial and industrial		$	33,323			$	35,127
Commercial real estate
Construction, land and development			34,201				37,633
Multifamily			28,541				27,188
Non-owner occupied			17,591				45,173
Owner occupied			14,058				27,637
Total commercial real estate			94,391				137,631
Agricultural
Land			7,653				8,034
Production			3,662				4,813
Total agricultural			11,315				12,847
Total commercial			139,029				185,605
Consumer
Residential real estate
First lien			2,602				2,988
Construction			4,680				4,680
HELOC			128				1,459
Junior lien			2,375				3,210
Total residential real estate			9,785				12,337
Other consumer			348				339
Total consumer			10,133				12,676
Total criticized loans		$	149,162			$	198,281
Criticized loans as a percent of total loans			3.68	%			4.97	%

Criticized loans represented 3.68% and 4.97% of total loans as of December 31, 2025 and 2024, respectively. The decrease in criticized loans in 2025 was driven by stabilization of credit quality and the sale of a pool of hospitality loans early in the third quarter of 2025.

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

		December 31,				December 31,
(dollars in thousands)		2025				2024
Nonaccrual loans		$	69,065			$	54,433
Accruing loans 90+ days past due			-				8,453
Total nonperforming loans			69,065				62,886
OREO and repossessed assets			308				-
Total nonperforming assets			69,373				62,886
Total restructured accruing loans			1,436				-
Total nonperforming assets and restructured accruing loans		$	70,809			$	62,886
Nonperforming loans to total loans			1.71	%			1.58	%
Nonperforming assets to total assets			1.33	%			1.20	%
ACL on loans to nonperforming loans			89.65	%			95.30	%

As of December 31, 2025, restructured accruing loans totaled $1.4 million. As of December 31, 2024, there were no restructured accruing loans. These loans represent financing receivables whose terms were modified for borrowers experiencing financial difficulty, typically through term extensions or interest rate reductions, but which continue to perform under the modified contractual terms. The increase during 2025 reflects one Agricultural − Land relationship where the borrower requested payment relief tied to cash-flow pressures. All such loans were evaluated under the Company's CECL methodology, and management determined that no specific allowance was required beyond amounts already captured in the collective reserve. Restructured accruing loans remain on accrual status because borrowers are current on all payments and demonstrate the ability to continue performing under the modified terms. Management continues to monitor these credits for performance trends and early-warning indicators.

The allowance for credit losses to nonperforming loans ratio decreased 565 basis points from December 31, 2024. The decrease was primarily the result of a $6.2 million increase in nonperforming loans for the year ended December 31, 2025. The increase in nonperforming loans was primarily driven by one commercial and industrial relationship of $12.2 million moving to nonaccrual status in the third quarter of 2025. In addition, two CRE - Multifamily relationships were moved to nonaccrual status in the fourth quarter of 2025, totaling $19.4 million. Protective advances totaling $5.4 million were made in order for construction to continue on a CRE - Construction, land and development loan totaling $33.6 million. Relief included the payoff of a CRE - Non-owner occupied relationship in the first quarter of 2025 and a commercial and industrial relationship in the third quarter of 2025 totaling $8.0 million, as well as an $8.5 million commercial and industrial loan which had been 90 days past due at December 31, 2024 that was paid current in 2025. The allowance for credit losses at December 31, 2025 also increased by $2.0 million over the allowance at December 31, 2024.

Interest income lost on nonaccrual loans approximated $3.3 million and $4.8 million for the years ended December 31, 2025 and 2024, respectively. There was no interest income included in net income related to nonaccrual loans for the years ended December 31, 2025 and 2024.

Allowance for Credit Losses

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

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

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

The ACL on loans was $61.9 million at December 31, 2025, compared to $59.9 million at December 31, 2024. The $2.0 million increase in the ACL was primarily due to an increase in reserves on individually evaluated loans.

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

		Year ended
		December 31,
(dollars in thousands)		2025				2024
ACL on loans at the beginning of the period		$	59,929			$	35,843
ACL on PCD acquired loans			-				10,151
Non-PCD day 1 provision for loan losses			-				7,332
(Credit) provision for loan losses			4,135				10,757
Net charge-offs (recoveries) (1)
Commercial and industrial			(1,992	)			3,225
CRE − Construction, land and development			-				-
CRE − Multifamily			-				-
CRE − Non-owner occupied			3,313				-
CRE − Owner occupied			(39	)			191
Agricultural − Land			(5	)			(20	)
Agricultural − Production			318				19
RRE − First lien			55				-
RRE − Construction			-				-
RRE − HELOC			518				19
RRE − Junior lien			(1	)			564
Other consumer			(18	)			156
Total net charge-offs (recoveries)			2,149				4,154
ACL on loans at the end of the period			61,915				59,929
Components of ACL:
ACL on HTM debt securities			123				131
ACL on loans			61,915				59,929
ACL on off-balance sheet credit exposures			3,886				7,534
ACL at end of the period			65,924				67,594
Total loans		$	4,048,022			$	3,992,534
Average total loans			4,047,034				3,099,015
ACL on loans to total loans			1.53	%			1.50	%
ACL on loans to nonaccrual loans			89.65	%			110.10	%
ACL on loans to nonperforming loans			89.65	%			95.30	%
Net charge-offs/(recoveries) to average total loans (annualized)			0.05	%			0.13	%

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

​

		For the year ended
		December 31,
																		Net Charge-offs
		Total				Total				Net Charge-offs				Average				(Recoveries) to
(dollars in thousands)		Charge-offs				Recoveries				(Recoveries)				Loans				Average Loans
2025:
Commercial
Commercial and industrial		$	916			$	2,908			$	(1,992	)		$	665,635				(0.30	)%
Commercial real estate
Construction, land and development			-				-				-				341,533				-
Multifamily			-				-				-				363,247				-
Non-owner occupied			3,401				88				3,313				927,665				0.36
Owner occupied			6				45				(39	)			427,412				(0.01	)
Total commercial real estate			3,407				133				3,274				2,059,857				0.16
Agricultural
Land			-				5				(5	)			66,483				(0.01	)
Production			384				66				318				64,118				0.50
Total agricultural			384				71				313				130,601				0.24
Total commercial			4,707				3,112				1,595				2,856,093				0.06
Consumer
Residential real estate
First lien			55				-				55				895,225				0.01
Construction			-				-				-				36,309				-
HELOC			548				30				518				205,287				0.25
Junior lien			300				301				(1	)			41,406				-
Total residential real estate			903				331				572				1,178,227				0.05
Other consumer			138				156				(18	)			40,956				(0.04	)
Total consumer			1,041				487				554				1,219,183				0.05
Total loans		$	5,748			$	3,599			$	2,149			$	4,075,276				0.05	%
2024:
Commercial
Commercial and industrial		$	3,727			$	502			$	3,225			$	588,269				0.55	%
Commercial real estate
Construction, land and development			-				-				-				172,700				-
Multifamily			-				-				-				274,175				-
Non-owner occupied			-				-				-				718,168				-
Owner occupied			237				46				191				288,114				0.07
Total commercial real estate			237				46				191				1,453,157				0.01
Agricultural
Land			-				20				(20	)			45,729				(0.04	)
Production			26				7				19				43,361				0.04
Total agricultural			26				27				(1	)			89,090				-
Total commercial			3,990				575				3,415				2,130,516				0.16
Consumer
Residential real estate
First lien			-				-				-				747,874				-
Construction			-				-				-				22,832				-
HELOC			19				-				19				131,617				0.01
Junior lien			638				74				564				38,982				1.45
Total residential real estate			657				74				583				941,305				0.06
Other consumer			186				30				156				36,252				0.43
Total consumer			843				104				739				977,557				0.08
Total loans		$	4,833			$	679			$	4,154			$	3,108,073				0.13	%

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

		December 31, 2025								December 31, 2024
						Percentage								Percentage
		Allocated				of loans to				Allocated				of loans to
(dollars in thousands)		Allowance				total loans				Allowance				total loans
Commercial and industrial		$	16,216				18.3	%		$	8,170				16.7	%
CRE − Construction, land and development			13,210				6.1				16,277				7.4
CRE − Multifamily			4,380				9.5				4,716				9.1
CRE − Non-owner occupied			11,006				21.6				16,513				24.2
CRE − Owner occupied			3,097				10.6				3,226				9.3
Agricultural − Land			959				1.6				597				1.5
Agricultural − Production			623				1.5				631				1.6
RRE − First lien			9,358				21.6				6,921				23.1
RRE − Construction			274				0.8				357				0.8
RRE − HELOC			1,787				6.4				1,339				4.1
RRE − Junior lien			395				0.9				742				1.1
Other consumer			610				1.1				440				1.1
Total loans		$	61,915				100.0	%		$	59,929				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. A reserve for unfunded commitments is established using historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets. The provision release for unfunded commitments for the year ended December 31, 2025 was $3.6 million. The expense for provision for unfunded commitments for the year ended December 31, 2024 was $0.1 million.

Deposits

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

Total deposits were $4.2 billion as of December 31, 2025, a decrease of $186.4 million, or 4.3%, from December 31, 2024. Noninterest-bearing deposits decreased $95.6 million and interest-bearing deposits decreased $90.8 million. The decrease in interest-bearing deposits consisted of decreases of $130.4 million in time deposits and $36.6 million in money market and savings, partially offset by an increase of $76.1 million in interest-bearing demand deposits. The decrease in interest-bearing deposits was primarily driven by a decrease in high-cost time deposits, which included $22.2 million of brokered CDs that matured in 2025 and were not renewed.

Interest-bearing deposit costs were 2.63% and 3.21% for the years ended December 31, 2025 and 2024, respectively. The decrease in interest-bearing deposit costs was the result of a declining interest rate environment.

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

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

		December 31, 2025								December 31, 2024
						Percent of								Percent of				Change
(dollars in thousands)		Balance				Portfolio				Balance				Portfolio				Amount				Percent
Noninterest-bearing demand		$	807,896				19.3	%		$	903,466				20.6	%		$	(95,570	)			(10.6	)%
Interest-bearing demand			1,296,315				30.9				1,220,173				27.9				76,142				6.2
Money market and savings (1)			1,511,250				36.1				1,547,806				35.4				(36,556	)			(2.4	)
Time deposits			576,542				13.7				706,965				16.1				(130,423	)			(18.4	)
Total deposits		$	4,192,003				100.0	%		$	4,378,410				100.0	%		$	(186,407	)			(4.3	)%

(1)	Money market and savings deposits include health savings account deposits of $203.4 million and $190.3 million as of December 31, 2025 and 2024, respectively.

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

		Year ended								Year ended
		December 31, 2025								December 31, 2024
		Average				Average				Average				Average
(dollars in thousands)		Balance				Rate				Balance				Rate
Noninterest-bearing demand		$	813,785				-	%		$	704,463				-	%
Interest-bearing demand			1,257,069				1.78	%			1,010,888				2.12	%
Money market and savings			1,583,232				2.81	%			1,250,939				3.60	%
Time deposits			687,320				3.76	%			518,826				4.39	%
Total deposits		$	4,341,406				2.13	%		$	3,485,116				2.56	%

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

		December 31, 2025								December 31, 2024
						Percent of								Percent of				Change
(dollars in thousands)		Balance				Portfolio				Balance				Portfolio				Amount				Percent
Commercial		$	1,563,239				37.3	%		$	1,647,131				37.7	%		$	(83,892	)			(5.1	)%
Consumer			1,469,813				35.1				1,556,522				35.5				(86,709	)			(5.6	)
Public (1)			180,755				4.3				201,197				4.6				(20,442	)			(10.2	)
Synergistic (2)
Retirement and benefit services (3)			725,618				17.3				683,149				15.6				42,469				6.2
Wealth (4)			252,578				6.0				290,411				6.6				(37,833	)			(13.0	)
Total synergistic			978,196				23.3				973,560				22.2				4,636				(6.8	)
Total deposits		$	4,192,003				100.0	%		$	4,378,410				100.0	%		$	(186,407	)			(4.3	)%

(1)	Public deposits primarily represent municipalities, school districts, and other governmental entities that receive public funding.
(2)	Synergistic deposits represent the on-balance money market balances that retirement and benefit services and wealth clients hold in proprietary money market products.
(3)	$395.7 million and $361.3 million of retirement and benefit services synergistic deposits were indexed as of December 31, 2025 and 2024, respectively.
(4)	$252.6 million and $290.4 million of wealth synergistic deposits were indexed as of December 31, 2025 and 2024, respectively.

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

		December 31,
(dollars in thousands)		2025
Maturing in:
3 months or less		$	71,558
3 months to 6 months			76,072
6 months to 1 year			36,648
1 year or greater			6,215
Total		$	190,493

The Company's total uninsured deposits, which are amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.4 billion and $1.5 billion at December 31, 2025 and 2024, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Borrowings and Subordinated Debt

The Company utilizes both short term and long term borrowings as part of its asset/liability management and funding strategies. Short term borrowings consist of FHLB advances and federal funds purchased. The Company had $308.8 million and $239.0 million in short term borrowings outstanding at December 31, 2025 and 2024, respectively.

FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of approximately $2.1 billion and $2.4 billion at December 31, 2025 and 2024, respectively.

Long-term debt is utilized to fund longer term assets and as a source of regulatory capital. At December 31, 2025, the Company had a $50.0 million outstanding 3.50% Fixed Rate Subordinated Note due 2031 (the "Subordinated Note"). The Subordinated Note currently bears interest at a fixed rate of 3.50% per year, payable annually through March 31, 2026. At the fifth anniversary of the issuance date of the Subordinated Note, on March 30, 2026, the interest rate will reset to a fixed interest rate equal to the FHLB rate, plus 2.0%, with a minimum annual fixed rate of not less than 3.5%. The Subordinated Note matures on March 30, 2031, and the Company has the option to redeem or prepay any or all of the Subordinated Note without premium or penalty at the time of interest payment beginning or after March 31, 2026, or at any time in the event of certain changes that affect the deductibility of interest for tax purposes or the treatment of the notes as Tier 2 Capital.

Junior subordinated debentures issued to capital trusts that issued trust preferred securities were $9.2 million as of December 31, 2025, compared to $9.1 million as of December 31, 2024. The increase was due to purchase accounting amortization on the junior subordinated notes assumed in the Beacon Bank acquisition in 2016. See Note 14 (Long-Term Debt) to the Company's audited consolidated financial statements included in Item 8 of this Form 10-K.

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

		December 31, 2025								December 31, 2024
						Percent of								Percent of
(dollars in thousands)		Balance				Portfolio				Balance				Portfolio
Fed funds purchased		$	58,800				16.0	%		$	38,960				13.1	%
FHLB short-term advances			250,000				67.9				200,000				67.1
Subordinated notes			50,000				13.6				50,000				16.8
Junior subordinated debentures			9,182				2.5				9,069				3.0
Total borrowed funds		$	367,982				100.0	%		$	298,029				100.0	%

Capital Resources

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

		For the years ended December 31,
(dollars in thousands)		2025				2024
Beginning balance		$	495,410			$	369,127
Net income			17,439				17,780
Other comprehensive income (loss)			71,210				289
Common stock repurchased			(737	)			(276	)
Common stock issued			-				123,602
Common stock dividends			(21,087	)			(16,762	)
Stock-based compensation expense			2,699				1,650
Ending balance		$	564,934			$	495,410

Total stockholders' equity was $564.9 million at December 31, 2025, an increase of $69.5 million, or 14.0%, compared to $495.4 million at December 31, 2024. The increase was primarily driven by the $68.4 million loss on investment securities recognized in connection with the strategic balance sheet repositioning in the fourth quarter of 2025, which contributed to the $71.2 million increase in other comprehensive income during the year.

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

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

At December 31, 2025 and 2024, the Company met all capital adequacy requirements to which the Company was subject.

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

		December 31,				December 31,
Capital Ratios		2025				2024
Alerus Financial Corporation Consolidated
Common equity tier 1 capital to risk weighted assets			10.28	%			9.91	%
Tier 1 capital to risk weighted assets			10.48	%			10.12	%
Total capital to risk weighted assets			12.87	%			12.49	%
Tier 1 capital to average assets			8.86	%			8.65	%
Tangible common equity to tangible assets (1)			8.72	%			7.13	%
Alerus Financial, National Association
Common equity tier 1 capital to risk weighted assets			10.41	%			10.18	%
Tier 1 capital to risk weighted assets			10.41	%			10.18	%
Total capital to risk weighted assets			11.66	%			11.43	%
Tier 1 capital to average assets			8.62	%			8.69	%

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

Contractual Obligations and Off-Balance Sheet Arrangements

Off Balance Sheet Arrangements

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

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

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

Liquidity

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

As of December 31, 2025, the Company had on balance sheet liquidity of $568.8 million, compared to $579.0 million as of December 31, 2024. On balance sheet liquidity includes cash and cash equivalents, federal funds sold, unencumbered securities available-for-sale and over collateralized securities pledging positions available-for-sale.

As of December 31, 2025, the Company had off balance sheet liquidity of $2.2 billion, compared to $2.3 billion as of December 31, 2024. Off balance sheet liquidity includes FHLB borrowing capacity, Federal Reserve Bank discount window capacity, federal fund lines, and brokered deposit capacity.

The Bank is a member of the FHLB, which provides short and long term funding to its members through advances collateralized by real estate related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of December 31, 2025, the Company had $2.1 billion of collateral pledged to the FHLB. Based on this collateral the Company is eligible to borrow up to $1.3 billion and had $1.0 billion of available capacity as of December 31, 2025. As of December 31, 2025, the Company had borrowing capacity through the Federal Reserve Bank discount window of $40.6 million. In addition, the Company can borrow up to $127.0 million through unsecured lines of credit the Company has established with five other banks.

In addition, because the Bank is "well capitalized," it can accept brokered deposits up to 20.0% of total assets based on current policy limits. Management believed that the Company had adequate resources to fund all of its commitments as of December 31, 2025 and December 31, 2024.

The Company's primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding. At December 31, 2025, the Company had $67.2 million of cash and cash equivalents of which $29.5 million were interest-bearing deposits held at the Federal Reserve, FHLB and other correspondent banks.

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

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

Recent Developments

Stockholder Dividend

On February 25, 2026, the Board declared a quarterly cash dividend of $0.21 per common share. This dividend is payable on April 10, 2026, to stockholders of record on March 27, 2026.