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| PART I | |
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| Item 1. Business | 4 |
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| Item 1A. Risk Factors | 16 |
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| Item 1B. Unresolved Staff Comments | 37 |
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| Item 1C. Cybersecurity | 37 |
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| Item 2. Properties | 38 |
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| Item 3. Legal Proceedings | 38 |
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| Item 4. Mine Safety Disclosures | 38 |
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| PART II | |
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| Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 38 |
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| Item 6. [Reserved] | 40 |
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| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 |
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| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 63 |
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| Item 8. Financial Statements and Supplementary Data | 65 |
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| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 117 |
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| Item 9A. Controls and Procedures | 117 |
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| Item 9B. Other Information | 119 |
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| Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 119 |
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| PART III | |
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| Item 10. Directors, Executive Officers and Corporate Governance | 119 |
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| Item 11. Executive Compensation | 119 |
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| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 119 |
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| Item 13. Certain Relationships and Related Transactions, and Director Independence | 120 |
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| Item 14. Principal Accounting Fees and Services | 120 |
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| PART IV | |
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| Item 15. Exhibits and Financial Statement Schedules | 120 |
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| Signatures | 123 |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of Alerus Financial Corporation, or the Company. These statements are often, but not always, identified by words such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized,” “target,” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. Examples of forward-looking statements include, among others, statements the Company makes regarding its projected growth, anticipated future financial performance, financial condition, credit quality, management’s long-term performance goals and the future plans and prospects of Alerus Financial Corporation.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on the Company’s current beliefs, expectations and assumptions regarding the Company’s business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. The Company’s actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause the Company’s actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| ● | the strength of the local, state, national and international economies and financial markets (including effects of inflationary pressures and future monetary policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and executive orders in response thereto); |
| ● | interest rate risk, including the effects of changes in interest rates; |
| ● | effects on the U.S. economy resulting from actions taken by the federal government, including the threat or implementation of tariffs, immigration enforcement and changes in foreign policy; |
| ● | disruptions to the global supply chain, including as a result of domestic or foreign policies; |
| ● | the Company’s ability to successfully manage credit risk, including in the commercial real estate ("CRE") portfolio, and maintain an adequate level of allowance for credit losses; |
| ● | business and economic conditions generally and in the financial services industry, nationally and within the Company’s market areas, including the level and impact of inflation rates and possible recession; |
| ● | the Company's ability to raise additional capital to implement its business plan; |
| ● | credit risks and risks from concentrations (including by type of borrower, geographic area, collateral, and industry) within the Company's loan portfolio; |
| ● | the concentration of large loans to certain borrowers (including CRE loans); |
| ● | the level of nonperforming assets on the Company’s balance sheet; |
| ● | the Company’s ability to implement organic and acquisition growth strategies; |
| ● | the commencement, cost, and outcome of litigation and other legal proceedings and regulatory actions against the Company or to which the Company may become subject, including with respect to pending actions relating to the Company’s previous employee stock ownership ("ESOP") fiduciary services commenced by government and private parties; |
| ● | the impact of economic or market conditions on the Company’s fee-based services; |
| ● | the Company’s ability to continue to grow the retirement and benefit services business; |
| ● | the Company’s ability to continue to originate a sufficient volume of residential mortgages; |
| ● | the occurrence of fraudulent activity, breaches or failures of the Company's or its third-party vendors’ information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools or as a result of insider fraud; |
| ● | interruptions involving the Company’s information technology and telecommunications systems or third-party servicers; |
| ● | potential losses incurred in connection with mortgage loan repurchases; |
| ● | the composition of the Company’s executive management team and the Company’s ability to attract and retain key personnel; |
| ● | rapid and expensive technological changes implemented by the Company and other parties in the financial services industry, including third-party vendors, which may be more difficult to implement or more expensive than anticipated or which may have unforeseen consequences to us and our customers, including the development and implementation of tools incorporating artificial intelligence; |
| ● | increased competition in the financial services industry, including from non-banks such as credit unions, financial technology companies and digital asset service providers; |
| ● | the Company’s ability to successfully manage liquidity risk, including the Company’s need to access higher cost sources of funds such as fed funds purchased and short-term borrowings; |
| ● | the concentration of large deposits from certain clients, including those who have balances above current Federal Deposit Insurance Corporation (“FDIC”) insurance limits; |
| ● | the effectiveness of the Company’s risk management framework; |
| ● | potential impairment to the goodwill the Company recorded in connection with the Company’s past acquisitions, including the acquisitions of Metro Phoenix Bank and HMN Financial, Inc. ("HMNF"); |
| ● | the extensive regulatory framework that applies to the Company; |
| ● | the ability of the Bank to pay dividends to the Company, and the Company's ability to pay dividends to its stockholders; |
| ● | new or revised accounting standards, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (the “SEC”) or the Public Company Accounting Oversight Board (“PCAOB”); |
| ● | fluctuations in the values of the securities held in the Company’s securities portfolio, including as a result of changes in interest rates; |
| ● | governmental monetary, trade and fiscal policies; |
| ● | risks related to climate change and the negative impact it may have on the Company’s customers and their businesses; |
| ● | severe weather, natural disasters, and widespread disease or pandemics; |
| ● | acts of war, military conflicts, or terrorism, including ongoing conflicts in the Middle East, the Russian invasion of Ukraine, and the recent military actions in Venezuela, or other adverse external events and changes in foreign relations; |
| ● | any material weaknesses in the Company’s internal control over financial reporting; |
| ● | the Company’s success at managing and responding to the risks involved in the foregoing items; and |
| ● | any other risks described in the “Risk Factors” section of this report and in other reports filed by Alerus Financial Corporation with the Securities and Exchange Commission. |
Any forward-looking statement made by the Company in this report is based only on information currently available to the Company and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
