ALERUS FINANCIAL CORP (Form: S-1, Received: 08/16/2019 16:18:05)

ALERUS FINANCIAL CORPORATION

/s/ Randy L. Newman

Randy L. Newman

Chairman, Chief Executive Officer and President

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on August 16, 2019.

Registration No. 333-

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

ALERUS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		6021 (Primary Standard Industrial Classification Code Number)		45-0375407 (I.R.S. Employer Identification No.)

401 Demers Avenue
Grand Forks, North Dakota 58201
(701) 795-3200
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Randy L. Newman
Chairman, President and Chief Executive Officer
Alerus Financial Corporation
401 Demers Avenue
Grand Forks, North Dakota 58201
(701) 795-3200
(Name, address, including zip code and telephone number, including area code, of agent for service)


Copies to:
Joseph T. Ceithaml Barack Ferrazzano Kirschbaum & Nagelberg LLP 200 West Madison Street Chicago, Illinois 60606 (312) 984-3100		James J. Barresi Squire Patton Boggs (US) LLP 201 East Fourth Street, Suite 1900 Cincinnati, Ohio 45202 (513) 361-1260

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý		Smaller reporting company o Emerging growth company ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Proposed maximum aggregate offering price (1)(2)	Amount of registration fee




Common Stock, $1.00 par value per share	$75,000,000.00	$9,090.00

(1): Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2): Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST 16, 2019

PROSPECTUS

Shares

Common Stock

This is the initial public offering of Alerus Financial Corporation. We are offering shares of our common stock.

Prior to this offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "ALRS." We anticipate that the public offering price of our common stock will be between $ and $ per share. We have applied to list our common stock on the Nasdaq Capital Market under the symbol "ALRS."

Investing in our common stock involves risk. See "Risk Factors" beginning on page 16.

We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements.

	Per Share	Total

Public offering price	$	$
Underwriting discounts and commissions (1)	$	$
Proceeds to us, before expenses	$	$

(1): See "Underwriting" for additional information regarding underwriting compensation.

The underwriters have an option to purchase up to an additional shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Shares of our common stock are not savings accounts or deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

The shares of common stock will be ready for delivery on or about , 2019.


RAYMOND JAMES		D.A. Davidson & Co.
Piper Jaffray

The date of this prospectus is , 2019.

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TABLE OF CONTENTS


Prospectus Summary			1
The Offering			11
Selected Historical Consolidated Financial Data			13
Risk Factors			16
Cautionary Note Regarding Forward-Looking Statements			58
Use of Proceeds			60
Dividend Policy			61
Market for our Common Stock			63
Capitalization			64
Dilution			66
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures			68
Management's Discussion and Analysis of Financial Condition and Results of Operations			71
Business			127
Management			148
Executive Compensation			157
Principal Stockholders			173
Description of Capital Stock			176
Shares Eligible for Future Sale			180
Certain Relationships and Related Party Transactions			182
Supervision and Regulation			184
Material United States Federal Income Tax Considerations for Non-U.S. Holders			197
Underwriting			202
Legal Matters			208
Experts			208
Where You Can Find More Information			208
Index to Consolidated Financial Statements			F-1

About this Prospectus

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be delivered to you. We and the underwriters have not authorized anyone to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. Our business, financial condition, results of operations and growth prospects may have changed since that date.

Unless we state otherwise or the context otherwise requires, references in this prospectus to "we," "our," "us" or "the Company" refer to Alerus Financial Corporation, a Delaware

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corporation, and our consolidated subsidiaries, and references to "Alerus Financial" or "Bank" refer to our banking subsidiary, Alerus Financial, National Association, a national banking association. References to "common stock" refer to the common stock, par value $1.00 per share, of the Company.

We have proprietary rights to trademarks and other intellectual property appearing in this prospectus that are important to our business. Solely for convenience, the trademarks appearing in this prospectus are without the ® symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks and other intellectual property. All trademarks appearing in this prospectus are the property of their respective owners.

Any discrepancies included in this prospectus between totals and the sums of the percentages and dollar amounts presented are due to rounding.

Market and Industry Data

Although we are responsible for all of the disclosures contained in this prospectus, this prospectus contains industry, market and competitive position data and forecasts that are based on industry publications and studies conducted by independent third parties. The industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Although we believe that the economic, employment, industry and other market data, including market position, market opportunity and market size information included in this prospectus is generally reliable, we have not verified the data, which is inherently imprecise and subject to change. The forward-looking statements included in this prospectus related to industry, market and competitive data position may be materially different than actual results.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenues during our last fiscal year, we qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

•: we may present as few as two years of audited financial statements and two years of related management discussion and analysis of financial condition and results of operations;
•: we are exempt from the requirement to obtain an attestation and report from our auditors on management's assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;
•: we are permitted to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation; and

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•: we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.

In this prospectus, we have opted to present three years of audited financial statements and the related management discussion and analysis of financial condition and results of operations, but otherwise, we have elected to take advantage of the reduced disclosure requirements and other relief described above, and in the future we may take advantage of any or all of these exemptions for as long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the first fiscal year in which (A) the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) we have been a public reporting company under the Securities Exchange Act of 1934, as amended, or Exchange Act, for at least twelve calendar months and (C) we have filed at least one annual report on Form 10-K.

In addition to the relief described above, the JOBS Act permits us to take advantage of an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to use this extended transition period, which means that the financial statements included in this prospectus, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis.

ESOP Repurchase Right Termination

In accordance with provisions of the Internal Revenue Code of 1986, as amended, or the Code, that are applicable to private companies, the terms of the Alerus Financial Corporation Employee Stock Ownership Plan, or ESOP, currently provide that ESOP participants have the right, for a specified period of time, to require us to repurchase shares of our common stock that are distributed to them by the ESOP. As a result, the ESOP-owned shares are deducted from total stockholders' equity in our consolidated balance sheets. The shares of common stock held by the ESOP are reflected in our consolidated balance sheets as a line item called "ESOP-owned shares" appearing between total liabilities and stockholders' equity. Upon the completion of this offering and the listing of our common stock on the Nasdaq Capital Market, our repurchase liability will be extinguished and the ESOP-owned shares will be included in total stockholders' equity.

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. Because this is a summary, it does not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and our historical financial statements and the accompanying notes before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements."

Company Overview

We are a diversified financial services company headquartered in Grand Forks, North Dakota. Through our subsidiary, Alerus Financial, National Association, we provide innovative and comprehensive financial solutions to businesses and consumers through four distinct business lines—banking, retirement and benefit services, wealth management and mortgage. These solutions are delivered through a relationship-oriented primary point of contact along with responsive and client-friendly technology.

As of June 30, 2019, we had $2.2 billion of total assets, $27.9 billion of assets under administration, or AUA, and $5.3 billion of assets under management, or AUM. For the year ended December 31, 2018, we achieved a return on average assets, or ROAA, return on average equity, or ROAE, and a return on average tangible common equity, or ROATCE, of 1.21%, 13.81% and 21.02%, respectively. For the six months ended June 30, 2019, we achieved an annualized ROAA, ROAE and ROATCE of 1.36%, 14.49% and 20.53%, respectively.

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diversified business model and history of high performance and growth distinguishes us from other financial service providers. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.

Our primary banking market areas are the states of North Dakota, Minnesota, specifically, the Minneapolis-St. Paul-Bloomington metropolitan statistical area, or Twin Cities MSA, and Arizona, specifically, the Phoenix-Mesa-Scottsdale metropolitan statistical area, or Phoenix MSA. Our bank branch expansion into the Twin Cities MSA in 2007 and the Phoenix MSA in 2009 was an intentional part of our strategic plan to diversify our geographic footprint and expand into metropolitan markets outside of North Dakota. In addition to our offices located in our banking markets, our retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota and New Hampshire.

Our History and Growth

Our operations date back to 1879, when we were originally founded as the Bank of Grand Forks, one of the first banks chartered in the Dakota Territory. In 2000, we changed our name to Alerus Financial Corporation, reflecting our evolution from a traditional community bank to a high-value financial services company focused on serving the needs of businesses and consumers who desire comprehensive financial solutions delivered through relationship-based advice and service. Since this rebranding, we have experienced significant growth, both organically and through a series of strategic acquisitions. This growth has allowed us to build a diversified franchise and expand our geographic footprint into growing metropolitan areas. We believe these initiatives have transformed our Company into a high-tech, high-touch client service provider, increased our earnings and allowed us to return more value to stockholders.

A summary of our asset growth during the past five years and timeline of our milestones and growth since 2000 are shown below:

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Our Business Model and Products and Services

Our business model is client-centric, with a focus on offering a diversified range of solutions to clients who desire an advice-based relationship, enabling us to become the preferred financial services provider to clients. Through this approach, instead of focusing on the broader population, we target specific business and consumer segments that we believe we can serve better than our competitors and that have meaningful growth potential. By offering sound financial advice and a long-term partnership, we believe we align best with clients who are achievement-oriented in their purpose and will allow us to play an active role in their success at all stages of their businesses and lives. We classify our consumer clients based on age and income, aligning best with clients who have complex financial needs. Our business clients are classified by industry with a focus on specific high priority industries and client types, including professional services, finance and insurance, wholesale, small business, construction, retail and manufacturers. We target businesses with sales between $2.0 million and $100.0 million.

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Through our four business lines, we offer a diverse set of financial services and solutions to serve the needs of our consumer and business clients, as shown below:

Our commitment to delivering diversified solutions is driven by our "One Alerus" initiative, launched in 2017, which enables us to bring all of our product and service offerings to clients in a cohesive and seamless manner. Underlying the One Alerus initiative is our strategy of serving clients through a combination of technology and skilled advisors—a "high-tech, high-touch" approach that we believe clients demand and deserve. One Alerus lays the strategic foundation for current and future technology investments and the synergistic growth strategies of a diversified financial services firm. It also brings together our product and service offerings in a unified way, which we believe differentiates us from our competitors and allows us to impact clients more meaningfully and generate long-term value for our Company. The primary components of One Alerus are:

•: providing proactive advice to clients;
•: offering an integrated client-access portal (My Alerus);
•: seeking additional ways to improve the client experience;
•: leveraging synergistic growth opportunities; and
•: focusing on process reinvention and efficiency.

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or IRAs, 401(k) rollovers, retirement planning, employer-sponsored plans, employee stock ownership plans, payroll and HSA/FSA administration, government health insurance program services and wealth management services such as advisory, investment management and trust and fiduciary services. The advisor is equipped to tailor this diverse set of products and services to each client's unique goals and is empowered to reach across our organization to bring the client in contact with product specialists as needed. One Alerus bridges the gaps between our business units with a focus on client advocacy. We believe the One Alerus initiative will enable us to achieve future organic growth by leveraging our existing client base and help us continue to provide strong returns to our stockholders.

Our Growth Strategy

We have demonstrated our ability to successfully grow and expand into new markets since transforming our Company into a high-value financial services provider. Our long history of growing organically and through acquisitions is the result of careful strategic planning and the successful execution of our business model. We are committed to continued business expansion opportunities, which are both multi-faceted and interrelated. We intend to use the net proceeds from this offering to strengthen our capital position and continue to execute our business model. To accomplish our growth objectives, we plan to focus on the following strategies:

Leverage our existing client base. We believe our most significant opportunity for continued growth is within our existing client base, consisting of nearly 50,000 consumers, over 10,000 businesses and over 355,000 retirement plan participants. The diversified nature of our business allows us to leverage our business lines across our expansive client base and find synergies that are unavailable to traditional banking organizations. The success of our organic growth lies with our integrated One Alerus strategy. For example, through our recently formalized "National Market," we intend to further diversify services offered to our retirement plan participants by deepening each relationship, primarily by offering our mortgage and wealth management products, as well as by attracting low cost deposits through our newly-developed HSA deposit program and other initiatives. We believe our adoption of digital trends and investments in technology have allowed us to reach this nationwide participant client base without a physical presence in a manner not previously achievable. Further, we intend to deploy our recently acquired and expanded services that are highly complementary to our retirement plan business—including payroll, health savings accounts, or HSAs, flexible spending accounts, or FSAs, and government health insurance program services—to our existing business client base. Additionally, we began offering a competitive money market product as a fund option for clients with retirement plans, allowing us to bring value to clients while growing our deposit base in a new way. We believe that these new products will play a key role in driving organic growth across our Company.

Execute strategic acquisitions. We consider both fee income acquisitions and traditional bank acquisitions as part of our business strategy. Throughout our Company's history, we have completed 12 fee income acquisitions and 11 bank acquisitions, demonstrating our ability to successfully execute and integrate acquisitions. The retirement and benefit services industry is currently experiencing rapid consolidation, and we are actively pursuing acquisition targets in this space as we seek to further grow this division. We believe our industry experience, demonstrated ability to acquire and integrate other businesses and culture allow us to be viewed as a favored strategic acquirer. We see significant and unique opportunities to add stockholder value with these business services companies, as they provide enhanced fee income, are capital efficient and provide an additional base of clients (both businesses and consumers) where we can overlay our diverse product and service offerings. We intend to be selective when evaluating

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traditional bank acquisitions, as we seek opportunities that are strategically and culturally synergistic, allowing us to significantly grow in an existing market, or enter a new, high-growth metropolitan market. Cultural fit is paramount and emphasis will be placed on those institutions that embrace our strategy and the desire to serve clients through our integrated, holistic approach.

Pursue talent acquisition. Talent acquisition is a key initiative and provides us with opportunities for targeted and efficient growth. Given the consolidation of the banking industry, specifically the market disruption that has recently occurred in the Twin Cities MSA, along with a historically low number of new bank formations since the financial crisis, we have been successful in identifying and attracting high performing talent. We believe our culture, strategic vision and financial performance all play a role in attracting new talent to our organization. Over the past 20 months, we added four new business development individuals to expand our footprint in the south metro quadrant of the Twin Cities MSA. Our objective is to always keep our core strategy in mind and hire only those individuals that are capable of attracting clients that value our business model.

Enhance brand awareness. We believe increasing our market share in existing markets and expanding into new markets requires strong brand awareness. Our objective to increase brand awareness will help support the growth of our franchise while proactively positioning us as an acquirer and employer of choice. Similar to how we work with clients, our external marketing is centered on helping businesses and consumers with their financial decisions. We recently invested in one of the leading marketing automation technologies, allowing us to efficiently personalize our marketing efforts in a one-to-one manner using data and analytics.

Continue to strengthen and build infrastructure. As we grow in size and geographic footprint, we believe the discipline we employ to strengthen, unify and integrate our infrastructure enhances our reputation and brand equity. We seek to provide secure, reliable and innovative technology that meets evolving client expectations and effectively supports our growth strategy. We have recently invested heavily in technology-driven product and service offerings for our clients and will continue to evaluate the need for additional spending. Our strategy is to be a "fast-follower" and when new technology-driven products and services are introduced into the financial services industry, we aim to identify products and services that are succeeding and driving client demand and to offer similar products to our clients. We believe this is a more efficient and cost-effective approach to adopting new technology. Additionally, we centralized our operations teams under common leadership to further enhance scalable processes designed around our clients.

Our Competitive Strengths

We believe our client-centered structure, relationship-oriented business model and commitment to technology and innovation allow us to operate from a position of strength, particularly in working with clients to assist them proactively with their financial decisions. As we pursue our objectives of operating as a high performing institution with a focus on delivering strong stockholder returns, we believe the strengths highlighted below provide us with a competitive advantage over other financial institutions operating in our market areas:

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enhanced avenues for growth and expansion in varying market cycles. We believe these revenue streams allow for stronger and more consistent core earnings levels, and as part of our ongoing strategy, we will strive to maintain our noninterest income percentage at or in excess of current levels. Our retirement and benefits services business serves clients in all 50 states, and we recently formalized a "National Market" with a separately appointed National Market President to track clients that reside outside of our banking markets. As of June 30, 2019, the AUM, AUA and deposits attributable to the National Market were $3.0 billion, $20.7 billion and $326.3 million, respectively, representing approximately 56.4%, 74.2% and 18.6%, respectively, of our total AUM, AUA and deposits as of that date.

Experienced and invested management team and board of directors. We are led by an experienced and invested management team that has guided us through a long period of growth and diversification. Our team consists of both long-tenured individuals, as well as new members with significant industry experience. Based on our business model, historic performance and corporate culture, we successfully attracted new senior talent, including a Chief Financial Officer and Chief Risk Officer. Similarly, our board of directors has a diverse mix of industry, financial and professional experience which we are able to draw upon, including members who currently serve or previously have served on public-company boards. Collectively, our management team and board of directors owned approximately 9.9% of our outstanding shares of common stock as of July 31, 2019, demonstrating a long-term commitment and vested interest in our success.

Our five-person executive management team has over 155 years of combined banking and financial services experience. As we continue to grow our Company, we believe the following members of our management team are key to our success:

•: Randy L. Newman, our Chairman, President and Chief Executive Officer, leads our management team and has spent 38 years with our Company. Randy joined us in 1981 and became our President in 1987 and Chief Executive Officer in 1995.
•: Katie A. Lorenson, our Executive Vice President and Chief Financial Officer, joined us in December 2017. Katie is a seasoned executive with extensive experience overseeing financial service organizations, most recently serving as Chief Financial Officer of MidWestOne Financial Group, Inc., an SEC-reporting company.
•: Ann M. McConn, our Executive Vice President and Chief Business Officer, has spent 17 years with our Company. Ann assumed her current role in 2017, which has her overseeing our business development efforts and operations, and she previously served as the executive director of retirement, benefits and wealth management and as Fargo Market President. Ann has over 30 years of experience in the financial industry.
•: Kris E. Compton, our Executive Vice President and Chief Strategy Officer, has spent 44 years with our Company. Prior to becoming Chief Strategy Officer in 2017, Kris held a variety of roles within our Company and Bank, including Chief Operating Officer, Human Resource Manager and Marketing Director.
•: Karin M. Taylor, our Executive Vice President and Chief Risk Officer, joined us in November 2018. Karin has 29 years of industry experience, including in the area of risk management. She most recently served as Chief Risk Officer for MidWestOne Bank, the subsidiary of MidWestOne Financial Group, Inc., an SEC-reporting company.

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To promote leadership development and pursue our goal of being an employer of choice, we formed the Alerus Leadership Council in 2017, which brings together the members of our current executive team and division, administrative and market leaders. This council is comprised of 17 talented individuals of varying ages, and with diverse backgrounds and experience. Through the Alerus Leadership Council, we continue to focus on developing the next generation of Company leadership.

Relationship-oriented business model, focused on advice. A key to our business model is client advocacy, which we define as a specialized form of sales and service that focuses on the best way to help businesses and consumers achieve their financial goals. As governed by our One Alerus philosophy and our objective of building a comprehensive client experience model, we strive to provide each client with a primary point of contact—a trusted advisor—who makes it their business to know the unique needs and delivery channel preferences of each client they serve. The advisor is empowered to draw upon the expertise of the organization to serve the relationship, providing competitive products, valuable insight and sound advice. The relationship that is established is a long-term partnership that we believe creates unmatched value for the client.

Commitment to technology and innovation. We recognize that our industry is rapidly evolving, driven largely by technological advancements and a corresponding shift in the ways clients interact with their chosen financial institution. We believe these technological changes present an opportunity for us to meet the needs of our clients in unique and innovative ways. Our client centered structure and strong core results have allowed us to proactively invest in the infrastructure and technology necessary to meet the evolving digital needs of our clients, with a focus on increasing our effectiveness, enhancing the client experience and enabling us to reach a broader set of clients through our National Market. For example, we recently partnered with a leading financial technology company to create an online account portal that seamlessly integrates our diverse product applications into a user-friendly experience for our consumer clients. Further, we implemented a premier client relationship management software tool to create a platform that will allow our interactions with clients to be more effective, meaningful and timely. We have the ability to embrace the digital shift, which has continued to create opportunities to expand our reach, impact more clients and grow our franchise. Our commitment to technology and innovation is steadfast and we will continue to look for ways to adapt to the evolving environment.

Highly-skilled and engaged professional service employee base. Our business model requires building and maintaining an employee base that not only possesses the skills required to serve our client base, but also the passion and energy that embraces our culture of service. Discovering and nurturing talent is and will remain a priority for us, as evidenced by our engaged employees who are highly invested in the success of our clients and our Company as a whole. A long-held belief in our Company is to position our employees as owners, where we work together to make decisions for the benefit of our clients and our Company. To that end, we established an ESOP in 1986 for all of our employees. Through the ESOP, our employees owned approximately 9.3% of our outstanding shares of common stock as of July 31, 2019. In addition, we maintain robust hiring practices, career and personal development opportunities and training as we continually adapt to the evolving environment. In addition, we believe leadership development is a critical component to our success, which we will continue to advance through the Alerus Leadership Council.

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Presence in diversified and growing markets. Over the last decade, we have diversified our geographic footprint and expanded into metropolitan markets outside of North Dakota, highlighted by our bank branch expansion into Minnesota and Arizona. We serve the Minnesota market through six full-service banking offices, one loan and deposit production office and one residential mortgage office, all located in the Twin Cities MSA. The Twin Cities MSA has become our largest market for loan generation, and as of June 30, 2019, $887.7 million, or 51.8%, of the loans in our total loan portfolio were attributable to our offices located in the Twin Cities MSA. We serve the Arizona market through our offices in Scottsdale and Mesa, Arizona. We believe that our business model, specifically our focus on clients who desire a comprehensive financial services relationship, is a better fit for high-growth metropolitan areas. The median household income in the Twin Cities MSA, our largest market, is over 25% higher than the national average and is expected to grow over 10% from 2019 to 2024. The Phoenix MSA also has attractive demographics, including a large number of households with income in excess of $100,000 and projected population growth of over 10% during the same five year period. Additionally, the projected population growth from 2019 to 2024 in North Dakota is expected to outpace the national average. Not only does our diversified presence provide expanded opportunities for growth, we believe it offers us the additional protection to withstand a downturn in any particular geographic region. With our current team and infrastructure, we feel that we continue to have significant organic growth opportunities in our current markets.

Ability to attract and retain low-cost deposits. Our history as a community-based bank provides us with a legacy of long-standing, loyal clients that provide a stable core deposit base. As of June 30, 2019, 28.9% of our deposits were noninterest bearing, and we had a total deposit cost of 0.71%. In particular, we believe our North Dakota market is rich in low-cost, core deposits, which we can use to fund loans in our higher growth metropolitan markets. As of June 30, 2019, we had $779.5 million of total deposits attributable to our North Dakota offices, representing approximately 44.5% of our overall deposit portfolio. To supplement our traditional funding sources, we now offer HSAs to our clients, which as of June 30, 2019, totaled $113.8 million in deposits, with a cost of 0.16%. We believe there are significant opportunities to further grow our HSA portfolio within our existing client base and we intend to actively pursue growth opportunities within this channel.

Recent Developments

On January 15, 2019, we announced an agreement to sell our branch offices located in Duluth, Minnesota, including loans and deposits attributable to those offices, to another financial institution. We decided to exit the Duluth market to reallocate resources to the Twin Cities MSA, which is a higher growth market in the State, and our other core markets in the Phoenix MSA and in Fargo and Grand Forks, North Dakota. These loans and deposits were classified as held for sale in our consolidated financial statements. The transaction closed on April 26, 2019.

Summary Risk Factors

There are a number of risks that you should consider before investing in our common stock. These risks are discussed more fully in the section titled "Risk Factors," beginning on page 16, and include, but are not limited to, the following:

•: credit risks, including risks relating to our ability to effectively manage our credit risk and the business and economic conditions in our market areas;

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•: operational, strategic and reputational risks, including risks related to the implementation of our organic growth and acquisition strategies, the risk that our fee income business lines, and specifically our retirement and benefit services business, will shrink over time without additional acquisitions, the risk that competitive pressures will force us to reduce the fees we charge for our services in our fee income businesses, and risks related to cybersecurity, a loss of members of our executive management team and maintaining our reputation;
•: liquidity and funding risks, including the risk that we will not be able to meet our obligations, such as repaying our borrowings or meeting deposit withdrawal demands and the risk that we may not be able to maintain a strong core deposit base;
•: legal, accounting and compliance risks, including risks related to the extensive federal regulation we operate under and changes in such regulations and accounting policies or standards;
•: market and interest rate risks, including risks related to interest rate fluctuations, the monetary policies and regulations of the Board of Governors of the Federal Reserve System, or Federal Reserve, and potential losses in our securities portfolio; and
•: offering and investment risks, including illiquidity and volatility in the trading of our common stock and the dilution that investors in this offering will experience.

Corporate Information

Our principal executive office is located at 401 Demers Avenue, Grand Forks, North Dakota 58201, and our telephone number at that address is (701) 795-3200. Our website address is www.alerus.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

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THE OFFERING


Common stock offered		shares
Underwriters' purchase option		shares
Total common stock outstanding after completion of this offering		shares (or shares if the underwriters exercise in full their option to purchase additional shares)
Use of proceeds		We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares), based on an assumed public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus. We intend to use the net proceeds from this offering to support our organic growth and for general corporate purposes, which may include, but is not limited to, the repayment or refinancing of debt, maintenance of our required regulatory capital levels and the funding of potential future acquisition opportunities. See "Use of Proceeds."
Voting rights		Each holder of our common stock will be entitled to one vote per share on all matters on which our stockholders generally are entitled to vote. See "Description of Capital Stock."
Dividend policy		It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to maintain or increase our current dividend levels in future quarters. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our stockholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant. See "Dividend Policy."
Nasdaq listing		We have applied to list our common stock on the Nasdaq Capital Market under the trading symbol "ALRS."

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Reserved share program		At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, existing stockholders, certain employees of our Company and Bank and other persons having relationships with us. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.
Risk factors		Investing in shares of our common stock involves a high degree of risk. See "Risk Factors" beginning on page 16 for a discussion of certain factors you should consider carefully before deciding to invest.

Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after the completion of this offering is based on 13,816,050 shares outstanding as of June 30, 2019, and:

•: assumes no exercise of the underwriters' option to purchase additional shares of our common stock;
•: excludes 289,564 shares of unvested restricted stock;
•: excludes 84,477 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objectives are achieved; and
•: excludes 1,112,681 additional shares of common stock reserved for future issuance under our equity incentive plans.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data of our Company as of and for (i) the six months ended June 30, 2019 and 2018 and (ii) each of the years in the five-year period ended December 31, 2018. The historical information as of December 31, 2018, 2017 and 2016 set forth under the caption "Period End Balances," and for the years ended December 31, 2018, 2017 and 2016 set forth under the captions "Income Statement Data" and "Per Common Share" is derived from our audited financial statements included elsewhere in this prospectus. The historical information as of December 31, 2015 and 2014 set forth under the caption "Period End Balances," and for the years ended December 31, 2015 and 2014 set forth under the captions "Income Statement Data" and "Per Common Share" is derived from our audited financial statements that do not appear in this prospectus. The historical information as of June 30, 2019 set forth under the caption "Period End Balances," and for the six months ended June 30, 2019 and 2018 set forth under the captions "Income Statement Data" and "Per Common Share" is derived from our unaudited financial statements included elsewhere in this prospectus. The historical information as of June 30, 2018 set forth under the caption "Period End Balances" is derived from our unaudited financial statements that do not appear in this prospectus. The information under the captions "Performance Ratios," "Average Balances," "Capital Ratios," "Asset Quality Ratios" and "Other Data" for all periods is unaudited.

You should read the following financial data in conjunction with the other information contained in this prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our consolidated financial statements and related notes included elsewhere in this prospectus. Certain items in prior periods may have been reclassified to conform to the current presentation. The selected historical consolidated 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 "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

	As of and for the Six Months Ended June 30,				As of and for the Years Ended December 31,

(dollars and shares in thousands, except per share data)	2019		2018		2018		2017		2016		2015		2014
Income Statement Data
Net interest income	$	37,411	$	37,042	$	75,224	$	67,670	$	62,940	$	52,870	$	51,078
Provision for loan losses		4,017		5,550		8,610		3,280		3,060		4,200		(400	)
Noninterest income		55,058		50,350		102,749		103,045		105,089		93,105		78,306
Noninterest expense		68,775		66,078		136,325		134,920		143,792		118,134		100,115

Income before income taxes		19,677		15,764		33,038		32,515		21,177		23,641		29,669
Income tax expense		4,893		3,301		7,172		17,514		7,141		6,631		8,964

Net income (1)		14,784		12,463		25,866		15,001		14,036		17,010		20,705
Less: Preferred stock dividends		—		—		—		—		25		200		200

Net income attributable to common stockholders	$	14,784	$	12,463	$	25,866	$	15,001	$	14,011	$	16,810	$	20,505



Per Common Share
Earnings per common share	$	1.07	$	0.91	$	1.88	$	1.10	$	1.04	$	1.26	$	1.55
Diluted earnings per common share	$	1.05	$	0.89	$	1.84	$	1.07	$	1.00	$	1.21	$	1.48
Dividends declared per common share	$	0.28	$	0.26	$	0.53	$	0.48	$	0.44	$	0.42	$	0.38
Average common shares outstanding		13,796		13,751		13,763		13,653		13,495		13,413		13,290
Diluted average common shares outstanding		14,089		14,056		14,063		14,007		14,000		13,947		13,877

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	As of and for the Six Months Ended June 30,						As of and for the Years Ended December 31,

(dollars and shares in thousands, except per share data)	2019			2018			2018			2017			2016			2015			2014
Performance Ratios
Net interest margin (taxable-equivalent basis) (2)(11)		3.74	%		3.88	%		3.86	%		3.76	%		3.63	%		3.81	%		3.96	%
Return on average total assets (1)(11)		1.36	%		1.20	%		1.21	%		0.75	%		0.72	%		1.11	%		1.46	%
Return on average common equity (1)(11)		14.49	%		13.78	%		13.81	%		8.49	%		8.46	%		10.63	%		14.31	%
Return on average tangible common equity (1)(3)(11)		20.53	%		21.50	%		21.02	%		18.04	%		15.81	%		13.86	%		17.39	%
Noninterest income as a % of revenue		59.54	%		57.61	%		57.73	%		60.36	%		62.54	%		63.78	%		60.52	%
Efficiency ratio (4)		71.97	%		72.68	%		73.80	%		75.36	%		81.12	%		77.70	%		73.87	%
Average Balances
Loans (5)	$	1,727,873		$	1,642,405		$	1,677,885		$	1,475,042		$	1,345,208		$	1,124,601		$	994,047
Investment securities		255,060			260,276			255,247			286,313			279,992			183,103			259,408
Assets		2,190,446			2,098,596			2,129,406			2,001,503			1,937,551			1,530,973			1,414,315
Deposits (6)		1,787,943			1,750,661			1,766,951			1,664,022			1,666,791			1,295,986			1,186,245
Short-term borrowings		99,702			79,536			86,851			72,445			5,059			12,599			29,007
Long-term debt		58,810			58,812			58,813			58,803			65,095			23,481			21,562
Stockholders' equity (7)		205,785			182,407			187,341			176,779			168,039			178,087			163,301
Period End Balances
Loans (8)	$	1,713,452		$	1,705,780		$	1,701,850		$	1,574,474		$	1,366,952		$	1,126,921		$	1,095,458
Allowance for loan losses		(21,246	)		(19,869	)		(22,174	)		(16,564	)		(15,615	)		(14,688	)		(17,063	)
Investment securities		256,252			250,519			254,878			274,411			278,911			192,343			206,101
Assets		2,207,129			2,175,885			2,179,070			2,136,081			2,050,045			1,744,324			1,487,290
Deposits (9)		1,753,365			1,788,534			1,775,096			1,834,962			1,785,209			1,458,021			1,262,168
Long-term debt		58,808			58,823			58,824			58,819			58,813			70,744			21,494
Total stockholders' equity (7)		213,765			185,367			196,954			179,594			168,251			182,282			170,644
Capital Ratios
Common equity tier 1		8.90	%		7.76	%		8.43	%		7.83	%		7.74	%		10.92	%		N/A
Tier 1 capital		9.34	%		8.20	%		8.87	%		8.29	%		8.23	%		12.33	%		11.76	%
Total capital		13.14	%		12.06	%		12.86	%		12.17	%		12.29	%		17.01	%		13.02	%
Tier 1 leverage		8.08	%		7.07	%		7.51	%		7.07	%		6.85	%		10.85	%		10.07	%
Tangible common equity / tangible assets (10)		7.69	%		6.28	%		6.91	%		6.01	%		5.44	%		8.18	%		8.65	%
Tangible common equity per common share (10)	$	12.02		$	9.68		$	10.68		$	9.14		$	7.99		$	10.50		$	9.49
Dividend payout ratio		26.67	%		29.21	%		28.82	%		44.82	%		43.97	%		34.71	%		25.68	%
Asset Quality Ratios
Net charge-offs (recoveries) to average loans (11)		0.58	%		0.28	%		0.18	%		0.16	%		0.16	%		0.58	%		(0.06	)%
Nonperforming assets to total assets		0.23	%		0.22	%		0.33	%		0.30	%		0.47	%		0.60	%		0.41	%
Nonperforming loans to total loans		0.27	%		0.27	%		0.41	%		0.37	%		0.56	%		0.85	%		0.33	%
Allowance for loan losses to total loans		1.24	%		1.16	%		1.30	%		1.05	%		1.14	%		1.30	%		1.56	%
Allowance for loan losses to nonperforming loans		459.57	%		430.53	%		318.45	%		282.04	%		205.03	%		153.87	%		473.58	%
Other Data
Assets under administration	$	27,854,052		$	27,994,784		$	25,854,605		$	28,220,246		$	25,030,504		$	17,435,446		$	15,513,220
Assets under management		5,260,233			4,749,725			4,584,359			3,848,085			3,379,787			2,619,850			2,504,298
Mortgage originations		371,651			387,611			779,708			867,253			1,065,132			986,979			729,913

(1): Excluding a one-time $4.8 million expense related to the revaluation of our deferred tax assets in 2017, our net income, ROAA, ROAE and ROATCE would have been $19.8 million, 0.99%, 11.21% and 18.04%, respectively. These adjusted metrics

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represent non-GAAP financial measures. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

(2): Net interest margin (tax equivalent basis) is a ratio of net interest income calculated on a tax equivalent basis excluding goodwill and identifiable intangible assets to average earning assets and represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."
(3): Return on average tangible common equity is a ratio of net income calculated to exclude intangible amortization to average tangible common equity excluding goodwill and other intangible assets and represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."
(4): Efficiency ratio provides a ratio of operating expenses to operating income. It excludes intangible amortization while adding a fully-taxable equivalent adjustment. The efficiency ratio represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."
(5): Includes loans held for branch sale.
(6): Includes deposits held for sale.
(7): Includes ESOP-owned shares.
(8): Excludes loans held for branch sale.
(9): Excludes deposits held for sale.
(10): Tangible common equity per share and the tangible common equity to tangible asset ratio exclude goodwill and identifiable intangible assets and represent non-GAAP financial measures. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."
(11): Ratios have been annualized for the interim periods.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. The material risks and uncertainties that management believes affect us are described below. Before you decide to invest, you should carefully review and consider the risks described below, together with all other information included in this prospectus. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects. As a result, the trading price of our common stock could decline, and you could experience a partial or complete loss of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See "Cautionary Note Regarding Forward-Looking Statements."

Risks Related to Our Business

Credit Risks

Our business depends on our ability to manage credit risk.

As a bank, our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely manner, or may present inaccurate or incomplete information to us, as well as risks relating to the value of collateral. To manage our credit risk, we must, among other actions, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or our inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

We establish and maintain our allowance for loan losses at a level that management considers adequate to absorb probable loan losses based on an analysis of our loan portfolio and current market environment. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us at such time. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a

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variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market area. The actual amount of loan losses is affected by, among other things, changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

As of June 30, 2019, our allowance for loan losses as a percentage of total loans was 1.24% and as a percentage of total nonperforming loans was 459.57%. Although management believes that the allowance for loan losses was adequate on such date to absorb probable losses on existing loans that may become uncollectible, losses in excess of the existing allowance will reduce our net income and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. We may also be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management's assessment that the allowance is inadequate or as required by our banking regulators. Our banking regulators periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition, in June 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting standard that will replace the current approach under accounting principles generally accepted in the United States, or GAAP, for establishing the allowance for loan losses, which generally considers only past events and current conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the collectability of financial assets. The new standard is expected to generally result in increases to allowance levels and will require the application of the revised methodology to existing financial assets through a one-time adjustment to retained earnings upon initial effectiveness. As an emerging growth company, this standard will be effective for us for fiscal years and interim periods beginning after December 15, 2021, although FASB recently announced its intention to consider delaying the required implementation of this new accounting standard.

A decline in the business and economic conditions in our market areas could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our business activities and credit exposure, including real estate collateral for many of our loans, are concentrated in North Dakota, Minnesota and Arizona, although we also pursue business opportunities nationally. As of June 30, 2019, 95.7% of the loans in our loan portfolio were made to borrowers who live in or conduct business in those states. This concentration imposes risks from lack of geographic diversification. Weak economic conditions in North Dakota, Minnesota and Arizona may affect our business, financial condition, results of operations and growth prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio. Weak economic conditions are characterized by, among other indicators, state and local government deficits, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial

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activity. Any regional or local economic downturn that affects North Dakota, Minnesota or Arizona or existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated. Further, a general economic slowdown could decrease the value of the AUA and AUM of our retirement and benefit services and wealth management businesses resulting in lower fee income, and clients could potentially seek alternative investment opportunities with other providers, which could also result in lower fee income to us. Our business is also significantly affected by monetary, trade and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity, as well as environmental factors, could impair the value of collateral securing our real estate loans and result in loan and other losses.

At June 30, 2019, approximately 64.6% of our total loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. The repayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns that can lead to (i) declines in the rents and, therefore, in the cash flows generated by those real properties on which the borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it more difficult for the borrowers to sell those real properties for amounts sufficient to repay their loans in full, and (iii) job losses of residential home buyers, which makes it more difficult for these borrowers to fund their loan payments. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses or our ability to sell those loans on the secondary market. Such declines and losses would have a material adverse effect on our business, financial condition, results of operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses, which would have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, adverse weather events, including tornados, wildfires, flooding, and mudslides, can cause damage to the property pledged as collateral on loans, which could result in additional losses upon a foreclosure.

In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property's value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an

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environmental hazard could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

Commercial and industrial loans represented 29.9% of our total loan portfolio at June 30, 2019. These loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment of such loans is often more sensitive than other types of loans to the general business climate and economy. Accordingly, a challenging business and economic environment may increase our risk related to commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers' ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers' ability to make repayment from the cash flow of the commercial venture. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our loan portfolio has a large concentration of commercial real estate loans, which involve risks specific to real estate values and the health of the real estate market generally.

As of June 30, 2019, we had $469.4 million of commercial real estate loans, consisting of $360.6 million of loans secured by nonfarm nonresidential properties, $71.4 million of loans secured by multifamily residential properties, $26.6 million of construction and land development loans and $10.8 million of loans secured by farmland. Commercial real estate loans represented 27.4% of our total loan portfolio and 174.4% of the Bank's total capital at June 30, 2019. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions. Adverse developments affecting real estate values in our market areas could increase the credit risk associated with our loan portfolio. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the full value of the collateral that we anticipated at the time of originating the loan, which could force us to take charge-offs or require us to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Construction and land development loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

Construction and land development loans comprised approximately 1.6% of our total loan portfolio as of June 30, 2019. Such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction and land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

Nonperforming assets take significant time to resolve and adversely affect our net interest income.

As of June 30, 2019, our nonperforming loans (which consist of nonaccrual loans and loans past due 90 days or more) totaled $4.6 million, or 0.27% of our total loan portfolio, and our nonperforming assets (which consist of nonperforming loans, foreclosed assets and other real estate owned) totaled $5.0 million, or 0.23% of total assets. In addition, we had $11.9 million in accruing loans that were 31-89 days delinquent as of June 30, 2019.

Our nonperforming assets adversely affect our net interest income in various ways. We do not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our net income and returns on assets and equity. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and foreclosed assets also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management, which increases our loan administration costs and adversely affects our efficiency ratio, and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our high concentration of large loans to certain borrowers may increase our credit risk.

We have developed relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of June 30, 2019, our 10 largest borrowing relationships accounted for approximately 5.5% of our total loan portfolio. We

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have established an informal, internal limit on loans to one borrower, principal or guarantor, but we may, under certain circumstances, consider going above this internal limit in situations where management's understanding of the industry, the borrower's business and the credit quality of the borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, or personal circumstances, such as divorce or death, our nonaccruing loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair their ability to repay their loans.

We lend to small to midsized businesses, which generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair their ability to repay their loans. In addition, the success of a small and midsized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition, results of operations and growth prospects may be materially adversely affected.

Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ significantly from our foreclosed asset fair value appraisals.

As of June 30, 2019, we had $381 thousand of foreclosed assets, which consisted of properties that we obtained through foreclosure. Assets acquired through loan foreclosure are included in other assets and are initially recorded at estimated fair value less estimated selling costs. The estimated fair value of foreclosed assets is evaluated regularly and any decreases in value along with holding costs, such as taxes, insurance and utilities, are reported in noninterest expense.

In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our foreclosed asset disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales and other estimates used to determine the fair value of our foreclosed assets.

Our exposure to home equity lines of credit may increase the potential for loss.

Our mortgage loan portfolio consists, in part, of home equity lines of credit. A large portion of home equity lines of credit are originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary market, which we typically do not service if the loan is sold. By not servicing the first mortgage loans, we are unable to track the delinquency status

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which may indicate whether such loans are at risk of foreclosure by others. In addition, home equity lines of credit are initially offered as "revolving" lines of credit whereby the borrowers are only required to make scheduled interest payments during the initial terms of the loans, which is generally five years. Thereafter, the borrowers no longer have the ability to make principal draws from the lines and the loans convert to a fully-amortizing basis, requiring scheduled principal and interest payments sufficient to repay the loans within a certain period of time, which is generally 10 years. The conversion of a home equity line of credit to a fully amortizing basis presents an increased level of default risk to us since the borrower no longer has the ability to make principal draws on the line, and the amount of the required monthly payment could substantially increase to provide for scheduled repayment of principal and interest.

Operational, Strategic and Reputational Risks

Noninterest income represents a significant portion of our total revenue and may be negatively impacted by changes in economic or market conditions and competition.

A significant portion of our revenue results from fee-based services provided by our retirement and benefit services business. This contrasts with many other community and regional banks that rely more heavily on interest-based sources of revenue, such as loans and investment securities. For the year ended December 31, 2018, noninterest income represented approximately 57.7% of our total revenue, a significant portion of which is derived from our retirement and benefit services business. For the six months ended June 30, 2019, noninterest income represented approximately 59.5% of our total revenue. This fee income business presents special risks not borne by other institutions that focus exclusively on banking. The level of these fees is influenced by several factors, including the number of plans and participants we provide retirement, advisory and other services for, the level of transactions within the plans, and the asset values of the plans whose fees are earned based on the level of assets in the plans. If we are unable to maintain our number of plans, participants and AUA and AUM at historical or greater levels, our fee income derived from this business may decline. For example, in a typical year we expect to experience outflows in AUA and AUM due to withdrawals, client turnover, plan terminations, mergers and acquisition activity. In 2018, we experienced outflows of $5.0 billion in our retirement and benefit services division partially offset by inflows of $4.6 billion.

In addition, economic, market or other factors that reduce the level or rates of savings in or with our clients, either through reductions in financial asset valuations or through changes in investor preferences, could materially reduce our fee revenue. The financial markets and businesses operating in the securities industry are highly volatile (meaning that performance results can vary greatly within short periods of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are beyond our control. We cannot assure you that broad market performance will be favorable in the future. Declines in the financial markets or a lack of sustained growth may result in a corresponding decline in our performance and may adversely affect the value of the assets that we manage. A general economic slowdown could decrease the value of the AUA and AUM in our retirement and benefit services and wealth management businesses and result in clients potentially seeking alternative investment opportunities with other providers, which could result in lower fee income to our Company.

Even when economic and market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our asset managers and the

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particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. In addition, our management contracts generally provide for fee payments for wealth management and trust services based on the market value of AUM. Because most contracts provide for a fee based on market values of securities, fluctuations in the underlying securities values may have a material adverse effect on our revenue. Fee compression due to competitive pressures has resulted in and continues to result in significant pressure to reduce the fees we charge for our services in both our retirement and benefit services and wealth management businesses.

We may not be successful in implementing our organic growth strategy, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Part of our business strategy is to focus on organic growth, which includes leveraging our business lines across our entire client base, enhancing brand awareness and building our infrastructure. The success of our organic growth strategy depends on our ability to increase loans, deposits, AUM and AUA at acceptable risk levels without incurring offsetting increases in noninterest expense. We may not be successful in generating organic growth if we fail to effectively execute our integrated One Alerus strategy or as a result of other factors, including delays in introducing and implementing new products and services and other impediments resulting from regulatory oversight or lack of qualified personnel at our office locations. In addition, the success of our organic growth strategy will depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in our primary market areas. Failure to adequately manage the risks associated with our anticipated organic growth could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition to our organic growth strategy, we intend to expand our business by acquiring other banks and financial services companies, but we may not be successful in doing so, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.

While a key element of our business strategy is to grow our banking franchise and increase our market share through organic growth, we intend to take advantage of opportunities to acquire other banks and financial services companies, including wealth management and retirement administration businesses, as such opportunities present themselves. Although we intend to continue to grow our business through organic growth and strategic acquisitions, because certain of our market areas are comprised of mature, rural communities with limited population growth, we anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy. However, we may not be able to identify suitable acquisition targets or even if we do, we may not succeed in seizing such opportunities when they arise or in integrating any such banks or financial service companies within our existing business framework. In addition, even if suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may have greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive prices. Our ability to execute on acquisition opportunities may require us to raise additional capital and to increase our capital position to support the growth of our franchise. It will also depend on market conditions over which we have no control. Moreover,

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certain acquisitions may require the approval of our bank regulators, and we may not be able to obtain such approvals on acceptable terms, if at all.

If we pursue additional acquisitions, it may expose us to financial, execution and operational risks that could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Since 2000, we have experienced significant growth, both organically and through acquisitions of banks and other financial service providers, including wealth management and retirement administration businesses. We plan to continue to grow our business by executing additional strategic acquisitions of all or parts of other banks or financial institutions or through the hiring of teams of employees that fit within our overall strategy and that we believe make financial and strategic sense. These acquisitions may result in us entering new markets.

Although we do not have any current plans, arrangements or understandings to make any additional acquisitions, if we grow through acquisitions, it may expose us to financial, execution and operational risks that could have a material adverse effect on our business, financial position, results of operations and growth prospects. Acquiring other banks and financial service providers involve risks commonly associated with acquisitions, including:

•: potential exposure to unknown or contingent liabilities of the banks and businesses we acquire;
•: exposure to potential asset and credit quality issues of the acquired bank or related business;
•: difficulty and expense of integrating the operations, culture and personnel of banks and businesses we acquire, including higher than expected deposit attrition;
•: potential disruption to our business;
•: potential restrictions on our business resulting from the regulatory approval process;
•: an inability to realize the expected revenue increases, costs savings, market presence or other anticipated benefits;
•: potential diversion of our management's time and attention; and
•: the possible loss of key employees and clients of the banks and businesses we acquire.

In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. If we hire a new team of employees, we may incur additional expenses relating to their compensation without any guarantee that such new team will be successful in generating new business. In addition, if we later determine that the value of an acquired business has decreased and that the related goodwill is impaired, an impairment of goodwill charge to earnings would be recognized.

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Acquisitions involve inherent uncertainty and we cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our retirement and benefit services business relies on acquisitions to maintain and grow our AUA.

In 2018 and 2017, our retirement and benefit services business experienced outflows of AUA and AUM of $5.0 billion and $4.8 billion, respectively, due to withdrawals, client turnover, plan terminations, mergers and acquisition activity. For the six months ended June 30, 2019, we experienced outflows of $2.6 billion or 9.5 percent. We believe this level of runoff is typical in the industry. To maintain and grow this business, we believe we need to be an active acquirer and seek to complete acquisitions of retirement administration providers if we are able to find quality acquisition opportunities. If we are unable to source a pipeline of potential acquisitions of companies that we determine are a good strategic fit for our Company, our retirement and benefit services business may fail to grow or even shrink, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We have a concentration of large clients in our retirement and benefit services business, and if one of these clients were to terminate their business relationship with us or be acquired by another organization, it could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

For the year ended December 31, 2018, our 10 largest client relationships accounted for approximately 8.9% of the revenue attributable to our retirement and benefit services business. For the six months ended June 30, 2019, our 10 largest client relationships accounted for approximately 8.6% of this revenue. During a typical year, our retirement and benefit services business loses clients due to plan terminations, primarily as a result of merger and acquisition activity. If any one of these larger clients terminates their business relationship with us, either voluntarily or as a result of being acquired by another organization, it could decrease the revenue of this business line and have a material adverse effect on our business, financial condition, results of operations and growth prospects.

If we are unable to continue to originate residential real estate loans and sell them into the secondary market for a profit, our noninterest income could decrease.

We derive a portion of our noninterest income from the origination of residential real estate loans and the subsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential real estate loans at historical or greater levels, our residential real estate loan volume would decrease, which could decrease our earnings. A rising interest rate environment, general economic conditions, market volatility or other factors beyond our control could adversely affect our ability to originate residential real estate loans. Mortgage banking income is highly influenced by the level and direction of mortgage interest rates and real estate and refinancing activity. In a lower interest rate environment, the demand for mortgage loans and refinancing activity will tend to increase. This has the effect of increasing fee income, but could adversely impact the estimated fair value of our Company's mortgage servicing rights as the rate of loan prepayments increase. In a higher interest rate environment, the demand for mortgage loans and refinancing activity will generally be lower. This has the effect of decreasing fee income opportunities.

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The financial services industry is experiencing an increase in regulations and compliance requirements related to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase and we are unable to make technology upgrades, our ability to originate mortgage loans will be reduced or eliminated. Additionally, we sell a large portion of our residential real estate loans to third party investors, and rising interest rates could negatively affect our ability to generate suitable profits on the sale of such loans. If interest rates increase after we originate the loans, our ability to market those loans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue we generate from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.

In addition, a prolonged period of illiquidity in the secondary mortgage market, and an increase in interest rates, could reduce the demand for residential mortgage loans and increase investor yield requirements for those loans. As a result, we may be at higher risk of retaining a larger portion of mortgage loans than in other environments until they are sold to investors. Our ability to retain residential mortgage loans is limited and could result in a reduction of loan production volumes, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us, our clients or third parties with whom we interact, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks and malware or other cyber-attacks.

In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients and employees and subjecting them to potential fraudulent activity. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, some of our clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems maintained by us and certain third-party partners, such as our online

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banking, mobile banking, record keeping or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third party partners' inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We depend on information technology and telecommunications systems, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. The risks resulting from use of these systems result from a variety of factors, both internal and external. We are vulnerable to the impact of failures of our systems to operate as needed or intended. Such failures could include those resulting from human error, unexpected transaction volumes, or overall design or performance issues.

We outsource to third parties many of our major systems, such as data processing and mobile and online banking. In addition, we recently partnered with a leading financial technology company to create an online account portal that integrates our diverse product applications into a user-friendly experience for our consumer clients. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of client business or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation.

It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to

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replace them, it may be at higher cost or result in the loss of clients. Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above, and the cyber security measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.

Because financial entities and technology systems are becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

Uncertainty relating to the London Inter-Bank Offered Rate ("LIBOR") calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

Regulators and law enforcement agencies in a number of countries are conducting civil and criminal investigations into whether the banks that contribute to the British Bankers' Association ("BBA") in connection with the calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements, we may incur additional expenses in effecting the transition, and we may be subject to disputes or litigation with clients over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations. As of June 30, 2019, approximately $366.0 million of our outstanding loans had interest rates tied to LIBOR market rates.

Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages that we have sold into the secondary market may require us to increase our financial statement reserves in the future.

We engage in the origination and sale of residential real estate loans into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations and warranties vary based on the nature of the transaction and the purchaser's or insurer's requirements but generally

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pertain to the ownership of the mortgage loan, the real property securing the loan and compliance with applicable laws and applicable lender and government-sponsored entity underwriting guidelines in connection with the origination of the loan. While we believe our mortgage lending practices and standards to be adequate, we may receive repurchase or indemnification requests in the future, which could be material in volume. If that were to happen, we could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any increases we might have to make to our reserves could have a material adverse effect on our business, financial position, results of operations and growth prospects.

We are highly dependent on our executive management team, and the loss of any of our senior executive officers or other key employees, or our inability to attract and retain qualified personnel, could harm our ability to implement our strategic plan and impair our relationships with clients.

Our success is dependent, to a large degree, upon the continued service and skills of our executive management team, which consists of Randy Newman, our Chairman, President and Chief Executive Officer, Katie Lorenson, our Chief Financial Officer, Ann McConn, our Chief Business Officer, Kris Compton, our Chief Strategy Officer and Karin Taylor, our Chief Risk Officer. Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within our market areas. The loss of any of the members of our executive management team or any of our other key personnel, including our client relationship managers, could have an adverse impact on our business and growth because of their skills, years of industry experience, knowledge of our market areas, the difficulty of finding qualified replacement personnel and any difficulties associated with transitioning of responsibilities to any new members of the executive management team. As such, we need to continue to attract and retain key personnel and to recruit qualified individuals who fit our culture to succeed existing key personnel to ensure the continued growth and successful operation of our business. Leadership changes may occur from time to time, and except as noted below, we cannot predict whether significant retirements or resignations will occur or whether we will be able to recruit additional qualified personnel. Kris Compton, our Chief Strategy Officer, has advised us that she is planning to retire from our Company at the end of 2019. As part of our succession plan, we intend to fill the vacated position by identifying a pool of internal and external candidates and ultimately selecting the most qualified individual. But we may be unsuccessful in finding a qualified candidate to replace Ms. Compton, which could negatively impact our Company.

Competition for senior executives and skilled personnel in the financial services industry is intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In addition, our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and regulations. The loss of the services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable succession plan could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Our ability to retain and recruit employees is critical to the success of our business strategy and any failure to do so could impair our customer relationships and adversely affect our business, financial condition, results of operations and growth prospects.

Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of our employees. If we lose the services of any of our employees, including successful employees employed by banks or other businesses that we may acquire, to a new or existing competitor or otherwise, we may not be able to retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services.

Our success and growth strategy also depends on our continued ability to attract and retain experienced employees for all of our business lines. We may face difficulties in recruiting and retaining personnel of our desired caliber, including as a result of competition from other financial institutions. Competition for high quality personnel is strong and we may not be successful in attracting or retaining the personnel we require. In particular, many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before we are able to determine whether a new employee will be profitable or effective in his or her role. If we are unable to attract and retain a successful customer development and management team or if our customer development and management team fails to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition, results of operations and growth prospects may be negatively affected.

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our stock.

We rely, in part, on our reputation to attract clients and retain our client relationships. Damage to our reputation could undermine the confidence of our current and potential clients in our ability to provide high-quality financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions. In particular, our ability to attract and retain clients and employees could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our business prospects. These issues include, but are not limited to, legal and regulatory requirements; privacy; client and other third-party fraud; properly maintaining and safeguarding client and employee personal information; money-laundering; illegal or fraudulent sales practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification and disclosure of the legal, reputational, credit, liquidity, and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines, and penalties and cause us to incur related costs and expenses. In addition, our businesses are dependent on the integrity of our relationship, asset managers and other employees. If a relationship manager, asset manager or other employee were to misappropriate any client funds or client information, the reputation of our businesses could be negatively affected, which may result in the loss of accounts and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described in this prospectus, but also on our success in identifying and appropriately addressing issues that may arise in the areas described above. Maintaining our reputation also depends on our ability to successfully prevent third parties from infringing on the "Alerus" brand and associated trademarks and our other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our use of third-party vendors and our other ongoing third-party business relationships is subject to increasing regulatory requirements and attention.

Our use of third party vendors, including the financial technology company we recently partnered with to create a customer portal, for certain information systems is subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulations require us to enhance our due diligence, ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for client remediation, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving clients, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in our operations. We may experience operational challenges as we implement these new technology enhancements, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our clients.

In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws.

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We expect that new technologies and business processes applicable to the financial services industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition results of operations and growth prospects.

Our business and operations may be adversely affected in numerous and complex ways by weak economic conditions and global trade.

Our businesses and operations, which primarily consist of lending money to clients in the form of commercial and residential mortgage loans, borrowing money from clients in the form of deposits and savings accounts, investing in securities, and providing wealth management, trust and fiduciary and recordkeeping services, are sensitive to general business and economic conditions in the United States. If the United States economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium- and long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries and weakening global trade due to increased anti-globalization sentiment and recent tariff activity could affect the stability of global financial markets, which could hinder the economic growth of the United States. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity or depressed prices in the secondary market for loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates remaining at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. Further, a general economic slowdown could decrease the value of our AUA and AUM resulting in clients potentially seeking alternative investment opportunities with other providers, which could result in lower fee income. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable. Adverse economic conditions and government policy responses to such conditions could have a

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material adverse effect on our business, financial condition, results of operations and growth prospects.

We depend on the accuracy and completeness of information about clients and counterparties.

In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an ongoing basis, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those clients or counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

New lines of business, products, product enhancements or services may subject us to additional risks.

From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources, although we may not assign the appropriate level of resources or expertise necessary to make these new lines of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the successful implementation of a new line of business or offerings of new products, product enhancements or services. Further, any new line of business, product, product enhancement or service or system conversion could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We face intense competition from other banks and financial services companies that could hurt our business.

We operate in the highly competitive financial services industry and face significant competition for clients from financial institutions located both within and beyond our market areas. Overall, we compete with national commercial banks, regional banks, private banks, mortgage companies, online lenders, savings banks, credit unions, non-bank financial services companies, other financial institutions, including investment advisory and wealth management firms, financial technology companies and securities brokerage firms, operating within or near the areas we serve. Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

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In our banking business, we may not be able to compete successfully with other financial institutions in our markets, particularly with larger financial institutions that have significantly greater resources than us, and we may have to pay higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new employees, resulting in lower net interest margins and reduced profitability. In addition, increased lending activity of competing banks has also led to increased competitive pressures on loan rates and terms for high-quality credits.

Competition in the retirement and benefit services and wealth management businesses is especially strong in our geographic market areas because there are numerous well-established, well-resourced, well-capitalized, and successful investment management, wealth advisory and wealth management and trust firms in these areas. In addition, the record keeping and administration industry is dominated by a small number of larger institutions that may charge fees that are lower than we charge for similar services. Our ability to successfully attract and retain retirement and benefit services and wealth management clients is dependent upon our ability to compete with competitors' investment, advisory, fiduciary and recordkeeping products and services, levels of investment performance and marketing and distribution capabilities. If we are unable to compete effectively with other banking or other financial services businesses, we could find it more difficult to attract new and retain existing clients and our noninterest income could decline, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We originate, sell and service residential mortgage loans. Our mortgage business faces vigorous competition from banks and other financial institutions, including larger financial institutions and independent mortgage companies. Our mortgage business competes on a number of factors including customer service, quality and range of products and services offered, price, reputation, interest rates, closing process and duration, and loan origination fees, and the ability to attract and retain skilled mortgage origination professionals is critical to our mortgage origination business. Changes in interest rates and pricing decisions by our loan competitors affect demand for our residential mortgage loan products, the revenue realized on the sale of loans and revenues received from servicing such loans for others, ultimately reducing our noninterest income. In addition, if we are unable to attract and retain enough skilled employees, our mortgage origination volume may decline.

Our business and operations may be adversely affected in numerous and complex ways by external business disruptors in the financial services industry.

The financial services industry is undergoing rapid change, as technology enables traditional banks to compete in new ways and non-traditional entrants to compete in certain segments of the banking market, in some cases with reduced regulation. As client preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems, online lending and low-cost investment advisory services. New entrants may use new technologies, advanced data and analytic tools, lower cost to serve, reduced regulatory burden or faster processes to challenge traditional banks. For example, new business models have been observed in retail payments, consumer and commercial lending, foreign exchange and low-cost investment advisory services. While we closely monitor business disruptors and seek to adapt to changing technologies, matching the pace of innovation exhibited by new and differently situated competitors may require us and policy-makers to adapt at a greater pace. Because the financial services industry is experiencing

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rapid changes in technology, our future success will depend in part on our ability to address our clients' needs by using technology. Client loyalty can be influenced by a competitor's new products, especially offerings that could provide cost savings or a higher return to the client.

The investment management contracts we have with our clients are terminable without cause and on relatively short notice by our clients, which makes us vulnerable to short-term declines in the performance of the securities under our management.

Like most investment advisory and wealth management businesses, the investment advisory contracts we have with our clients are typically terminable by the client without cause upon less than 30 days' notice. As a result, even short-term declines in the performance of the securities we manage, which can result from factors outside our control, such as adverse changes in market or economic conditions or the poor performance of some of the investments we have recommended to our clients, could lead some of our clients to move assets under our management to other asset classes such as broad index funds or treasury securities, or to investment advisors which have investment product offerings or investment strategies different than ours. Therefore, our operating results are heavily dependent on the financial performance of our investment portfolios and the investment strategies we employ in our investment advisory businesses and even short-term declines in the performance of the investment portfolios we manage for our clients, whatever the cause, could result in a decline in AUM and a corresponding decline in investment management fees, which would adversely affect our results of operations.

Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could significantly impact our business.

Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our wealth management business is dependent on asset managers to produce investment returns and financial advisors to solicit and retain clients, and the loss of a key asset manager or financial advisor could adversely affect our wealth management business.

We rely on our asset managers to produce investment returns and financial advisors to advise clients of our wealth management business. We believe that investment performance is an important factor for the growth of our AUM. Poor investment performance could impair our revenues and growth because existing clients might withdraw funds in favor of better performing products, which would result in lower investment management fees, or our ability to attract funds from existing and new clients might diminish.

The market for asset managers and financial advisors is extremely competitive and is increasingly characterized by frequent movement of these types of employees among different firms. In addition, our asset managers and financial advisors often have regular direct contact with our clients, which can lead to a strong client relationship based on the client's trust in that individual manager or advisor. The loss of a key asset manager or financial advisor could jeopardize our relationships with our clients and lead to the loss of client accounts. Losses of

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such accounts could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We may be adversely affected by the soundness of certain securities brokerage firms.

At the end of 2018, we made the decision to no longer provide custodial services for our clients through our broker-dealer subsidiary. Instead, client investment accounts are maintained under custodial arrangements with large, well established securities brokerage firms or bank institutions that provide custodial services, either directly or through arrangements made by us with those firms. As a result, the performance of, or even rumors or questions about the integrity or performance of, any of those firms could adversely affect the confidence of our clients in the services provided by those firms or otherwise adversely impact their custodial holdings. Such an occurrence could negatively impact our ability to retain existing or attract new clients and, as a result, could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Liquidity and Funding Risks

Liquidity risks could affect our operations and jeopardize our business, financial condition, results of operations and growth prospects.

Liquidity is essential to our business. Liquidity risk is the risk that we will not be able to meet our obligations, including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and from other sources could have a substantial negative effect on our liquidity.

Our most important source of funds consists of our client deposits, which can decrease for a variety of reasons, including when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. Our future growth will largely depend on our ability to maintain and grow a strong deposit base and our ability to retain our largest retirement and benefit services and wealth management clients, many of whom are also depositors. If clients, including our retirement and benefit services and wealth management clients, move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, which would require us to seek other funding alternatives, including increasing our dependence on wholesale funding sources, in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

Additionally, we access collateralized public funds, which are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which reduces standby liquidity by restricting the potential liquidity of the pledged collateral. As of June 30, 2019, we had pledged $129.4 million of investment securities for this purpose, which represented approximately 50.5% of our total securities portfolio. If we are unable to pledge sufficient collateral to secure public funding, we may lose access to this source of liquidity that we have historically relied upon. In addition, the availability of and fluctuations in these funds depends on the individual municipality's fiscal policies and cash flow needs.

Other primary sources of funds consist of cash from operations, investment security maturities and sales and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by repurchase agreements and the ability to borrow

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from the Federal Reserve and the Federal Home Loan Bank of Des Moines, or FHLB. We may also borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. There is also the potential risk that collateral calls with respect to our repurchase agreements could reduce our available liquidity.

Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including originating loans and investing in securities, or to fulfill obligations such as paying our expenses, repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We may not be able to maintain a strong core deposit base or other low-cost funding sources.

We depend primarily on core deposits from our clients, which consist of noninterest bearing deposits, interest bearing checking accounts, certificates of deposit less than $250,000 and money market savings accounts, as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to maintain and grow this strong, core deposit base and our ability to retain our retirement and benefit and wealth management clients, many of whom are also depositors. Deposit and account balances can decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. If clients, including our retirement and benefit and wealth management clients, move money out of bank deposits or money market accounts and into investments (or similar deposit products at other institutions that may provide a higher rate of return), we could lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

We supplement our core deposit funding with non-core, short-term funding sources, including FHLB advances and fed funds purchased. As of June 30, 2019, we had approximately $6.4 million of secured fed funds purchased from the FHLB and no unsecured fed funds purchased. Our maximum borrowing capacity from the FHLB is based on the amount of mortgage and commercial loans we can pledge. As of June 30, 2019, our advances from the FHLB were collateralized by $865.5 million of real estate loans. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we may lose access to this source of liquidity. If we are unable to access any of these types of funding sources or if our costs related to them increases, our liquidity and ability to support demand for loans could be materially adversely affected.

Our high concentration of large depositors may increase our liquidity risk.

We have developed relationships with certain individuals and businesses that have resulted in a concentration of large deposits from a small number of clients. As of June 30, 2019, our 10 largest depositor relationships accounted for approximately 12.1% of our total deposits. This high concentration of depositors presents a risk to our liquidity if one or more of them decides to change its relationship with us and to withdraw all or a significant portion of their accounts. If such an event occurs, we may need to seek out alternative sources of funding that may not be

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on the same terms as the deposits being replaced, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our liquidity is largely dependent on dividends from the Bank.

The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow, including cash flow to pay principal and interest on our debt, comes from dividends the Company receives from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. As of June 30, 2019, the Bank had the capacity to pay the Company a dividend of up to $44.2 million without the need to obtain prior regulatory approval. Also, the Company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service our debt, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our business, financial condition, results of operations and growth prospects, as well as our ability to maintain regulatory compliance, would be adversely affected.

We face significant capital and other regulatory requirements as a financial institution. Although management believes that funds raised in this offering will be sufficient to fund operations and growth initiatives for at least the next 18 months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. We do not have any current plans, arrangements or understandings to make any additional acquisitions.

In addition, our Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, our credit ratings, our ability to maintain a listing on Nasdaq and our financial condition and performance. If we fail to maintain an investment grade credit rating, it may adversely impact our ability to raise capital or incur additional debt. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business, financial condition, results of operations and growth prospects would be materially and adversely affected.

We may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.

Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty

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may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries with which we interact on a daily basis or key funding providers such as the FHLB, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We receive substantial deposits and AUM as a result of referrals by professionals, such as attorneys, accountants, and doctors, and such referrals are dependent upon the continued positive interaction with and financial health of those referral sources.

Many of our deposit clients and clients of our wealth management business are individuals involved in professional vocations, such as lawyers, accountants, and doctors. These clients are a significant source of referrals for new clients in both the deposit and wealth management areas. If we fail to adequately serve these professional clients with our deposit services, lending, wealth management products and other services, this source of referrals may diminish, which could have a negative impact on our financial results. Further, if the economy in the geographic areas that we serve is negatively impacted, the amount of deposits and services that these professional individuals will utilize and the number of referrals that they will make may decrease, which may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Legal, Accounting and Compliance Risks

Our risk management framework may not be effective in mitigating risks or losses to us.

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and it may not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations and growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events.

Our accounting policies and methods are fundamental to the way we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management's judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different

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conditions or using different assumptions or estimates. If our underlying assumptions or estimates prove to be incorrect, it could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our risk management processes, internal controls, disclosure controls and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Changes in accounting policies or standards could materially impact our financial statements.

From time to time, the FASB or the Securities and Exchange Commission, or SEC, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, or apply an existing standard differently, in each case resulting in our needing to revise or restate prior period financial statements.

The obligations associated with being a public company will require significant resources and management attention, which may divert time and attention from our business operations.

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. We anticipate that these costs will materially increase our general and administrative expenses, which will negatively affect our efficiency ratio. Further, the need to establish the corporate infrastructure demanded of a public company may divert management's attention from implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and improving our business, results of operations and financial condition.

As an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an exemption from the requirement to obtain an attestation from our auditors on management's assessment of our internal control over financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them.

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The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional information we are required to disclose as a publicly listed company.

As a result of becoming a publicly listed company, we will be subject to the heightened financial reporting standards under GAAP and SEC rules, including more extensive levels of disclosure. Complying with these standards requires enhancements to the design and operation of our internal control over financial reporting as well as additional financial reporting and accounting staff with appropriate training and experience in GAAP and SEC rules and regulations.

If we are unable to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the Nasdaq Capital Market, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Even if we are able to report our financial statements accurately and in a timely manner, any failure in our efforts to implement the improvements or disclosure of material weaknesses in our future filings with the SEC could cause our reputation to be harmed and our stock price to decline significantly.

In addition, the JOBS Act provides that, so long as we qualify as an emerging growth company, we will be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which would require that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. We may take advantage of this exemption so long as we qualify as an emerging growth company.

Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

Our business is subject to increased litigation and regulatory risks because of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. This focus has only intensified since the financial crisis, with regulators and prosecutors focusing on a variety of financial institution practices and requirements, including foreclosure practices, compliance with applicable consumer protection laws, classification of "held for sale" assets and compliance with anti-money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, or U.S. Treasury.

In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our current or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. We may also, from time to time, be the subject of subpoenas,

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requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our current or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Moreover, U.S. authorities have been increasingly focused on "conduct risk," a term that is used to describe the risks associated with behavior by employees and agents, including third-party vendors, that could harm clients, consumers, investors or the markets, such as failures to safeguard consumers' and investors' personal information, failures to identify and manage conflicts of interest and improperly creating, selling and marketing products and services. In addition to increasing compliance risks, this focus on conduct risk could lead to more regulatory or other enforcement proceedings and litigation, including for practices which historically were acceptable but are now receiving greater scrutiny. Further, while we take numerous steps to prevent and detect conduct by employees and agents that could potentially harm clients, investors or the markets, such behavior may not always be deterred or prevented. Banking regulators have also focused on the overall culture of financial services firms. In addition to regulatory restrictions or structural changes that could result from perceived deficiencies in our culture, such focus could also lead to additional regulatory proceedings.

If the goodwill that we recorded in connection with our recent acquisitions becomes impaired, it could have a negative impact on our financial condition and results of operations.

As of June 30, 2019, we had goodwill of $27.3 million, or 12.8% of our total stockholders' equity, including ESOP-owned shares. The excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has occurred. In testing for impairment, we conduct a qualitative assessment, and we also estimate the fair value of net assets based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to extensive regulation, and the regulatory framework that applies to us, together with any future legislative or regulatory changes, may significantly affect our operations.

The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, clients, federal deposit insurance funds and the banking system as a whole, not for the protection of our

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stockholders. Our Company is subject to supervision and regulation by the Federal Reserve, and the Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency, or OCC, and the FDIC. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of us and our Bank, restrictions on dividends and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take certain actions, or restrict us from taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Since the financial crisis, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, drastically revised the laws and regulations under which we operate. As an institution with less than $10 billion in assets, certain elements of the Dodd-Frank Act have not been applied to us and provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, or Regulatory Relief Act, are intended to result in meaningful regulatory relief for community banks and their holding companies. While we endeavor to maintain safe banking practices and controls beyond the regulatory requirements applicable to us, our internal controls may not match those of larger banking institutions that are subject to increased regulatory oversight.

Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. This increased regulatory burden has resulted and may continue to result in increased costs of doing business and may in the future result in decreased revenues and net income, reduce our ability to compete effectively to attract and retain clients, or make it less attractive for us to continue providing certain products and services. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Recent political developments, including the change in administration in the United States, have increased additional uncertainty to the implementation, scope and timing of regulatory reforms.

Our retirement and benefit services and wealth management businesses are highly regulated, and the regulators have the ability to limit or restrict our activities and impose fines or suspensions on the conduct of our business.

Our retirement and benefit services and wealth management businesses are highly regulated, primarily at the federal level. The failure of any of our businesses that provide investment management or wealth management and trust services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions. We are also subject to the provisions and regulations of the Employee Retirement Income Security Act of 1974, or ERISA, to the extent that we act as a "fiduciary" under ERISA with respect to certain

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of our clients. ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain other related parties) to such plans. Changes in these laws or regulations could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We may be subject to claims and litigation relating to our fiduciary responsibilities.

Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our clients and others. From time to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability or our reputation could be damaged. Either of these results may adversely impact demand for our products and services or otherwise have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We operate in an environment that imposes income taxes on our operations at both the federal and state levels to varying degrees. We engage in certain strategies to minimize the impact of these taxes. Consequently, any change in tax laws or regulations, or new interpretation of an existing law or regulation, could significantly alter the effectiveness of these strategies.

The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax asset is measured by applying currently-enacted income tax rates to the accounting period during which the tax benefit is expected to be realized. As of June 30, 2019, our net deferred tax asset was $7.6 million.

On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, was signed into law. The act includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, which took effect on January 1, 2018. The reduction in the federal corporate income tax rate resulted in an impairment of our net deferred tax asset based on our revaluation of the future tax benefit of these deferrals using the lower tax rate. We recorded this impairment as an additional expense of $4.8 million in the fourth quarter of 2017.

In addition, the Tax Cuts and Jobs Act contains several provisions that will affect the tax consequences of home ownership and related borrowing. We cannot predict what impact, if any, the Tax Cuts and Jobs Act will have on our mortgage lending business or the value of homes securing mortgages or other loans, but any decrease in mortgage lending, decrease in home values, or early repayment of mortgage loans caused by changes to the tax code as a result of the Tax Cuts and Jobs Act could have a material adverse effect on our earnings and capital.

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There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.

Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

We are subject to stringent capital requirements.

Banking institutions are required to hold more capital as a percentage of assets than most industries. In the wake of the global financial crisis, our capital requirements increased, both in the amount of capital we must hold and in the quality of the capital to absorb losses. Holding high amounts of capital compresses our earnings and constrains growth. In addition, the failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs and our ability to make acquisitions and result in a material adverse effect on our business, financial condition, results of operations and growth prospects.

Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The Federal Reserve and the OCC periodically examine us, including our operations and our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The Community Reinvestment Act of 1977, or CRA, requires the Bank, consistent with safe and sound operations, to ascertain and meet the credit needs of its entire community, including low and moderate-income areas. Our failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us, including applications for branch openings or relocations and applications to acquire, merge or consolidate with

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another banking institution or holding company. In addition, the CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution's compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also challenge an institution's performance under fair lending laws in private class action litigation. In addition, new regulations, increased regulatory reviews or changes in the structure of the secondary mortgage markets which we utilize to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business. Any of the actions described above could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could result in fines or sanctions against us.

The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file reports such as suspicious activity and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of any financial institution we acquire in the future are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisitions.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things (i) imposes certain limitations on our ability to share nonpublic personal information about our clients with nonaffiliated third parties, (ii) requires that we provide certain disclosures to clients about our information collection, sharing and security practices and afford clients the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities and the sensitivity of client information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission and the Consumer Financial Protection Bureau, or CFPB, as well as at the state level, such as with regard to mobile applications.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve expects a financial holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve's policy on serving as a source of financial strength. Under the "source of strength" doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, the

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bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution's general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by our Company to make a required capital injection becomes more difficult and expensive and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer protection laws, may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations but, with respect to institutions of our size, does not have primary examination and enforcement authority with respect to such laws and regulations. The authority to examine depository institutions with $10.0 billion or less in assets, like us, for compliance with federal consumer laws remains largely with our primary federal regulator, the OCC. However, the CFPB may participate in examinations of smaller institutions on a "sampling basis" and may refer potential enforcement actions against such institutions to their primary regulators. In some cases, regulators such as the Federal Trade Commission and the Department of Justice also retain certain rulemaking or enforcement authority, and we also remain subject to certain state consumer protection laws. As an independent bureau within the Federal Reserve, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions. We are expected to monitor and respond to these complaints, including those that we deem frivolous, and doing so may require management to reallocate resources away from more profitable endeavors.

The level of our commercial real estate portfolio may subject us to heightened regulatory scrutiny.

The federal banking regulators have issued guidance regarding concentrations in commercial real estate lending directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. As of June 30, 2019, our commercial real estate loans represented 174.4% of the Bank's total capital, and as of such date, we were not deemed to have a concentration in commercial real estate lending under applicable regulatory guidelines. We may, at some point, be considered to have a concentration in the future, or our risk management practices may be found to be deficient, which could result in increased reserves and capital costs, as well as potential regulatory enforcement actions, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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Market and Interest Rate Risks

Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings.

Fluctuations in interest rates may negatively affect our business and may weaken demand for some of our products. Our earnings and cash flows are dependent, in part, on our net interest income, which is the difference between the interest income that we earn on interest earning assets, such as loans and investment securities, and the interest expense that we pay on interest bearing liabilities, such as deposits and borrowings. Changes in interest rates might also impact the values of equity and debt securities under management and administration by our retirement and benefit services and wealth management businesses which may have a negative impact on our fee income. Additionally, changes in interest rates also affect our ability to fund our operations with client deposits and the fair value of securities in our investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our interest earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest-bearing liabilities. We cannot control or accurately predict changes in market rates of interest. If short-term interest rates remain at the current low levels for a prolonged period, and if longer term interest rates fall, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This could have a material adverse effect on our net interest income and our results of operations.

Interest rates are volatile and highly sensitive to many factors that are beyond our control, such as economic conditions and policies of various governmental and regulatory agencies, and, in particular U.S. monetary policy. For example, we face uncertainty regarding the interest rate risk, and resulting effect on our portfolio, that could result when the Federal Reserve reduces the amount of securities it holds on its balance sheet. In recent years, it has been the policy of the Federal Reserve to maintain interest rates at historically low levels through a targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. As a result, yields on securities we have purchased, and market rates on the loans we have originated, have generally been at levels lower than were available prior to the financial crisis. Consequently, the average yield on our interest-earning assets has generally decreased during the current low interest rate environment. If a low interest rate environment persists, we may be unable to increase our net interest income.

In addition, we could be prevented from increasing the interest rates we charge on loans or from reducing the interest rates we offer on deposits and money market savings accounts due to "price" competition from other banks and financial institutions with which we compete. As of June 30, 2019, we had $506.0 million of noninterest bearing deposit accounts and $1.1 billion of non-maturity interest bearing deposit accounts. Interest rates for interest bearing accounts have been at historically low levels in recent periods due to market conditions, although banks and financial institutions are starting to increase rates in response to recent increases by the Federal Reserve in the targeted fed funds rate and market competition. We do not know what market rates will eventually be, especially if the Federal Reserve pauses its interest rate increases or cuts

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its target interest rate in the near term. We have started to offer higher interest rates to maintain current clients or attract new clients, and as a result, our interest expense has increased in recent periods and may increase further, perhaps materially. If we fail to offer interest in a sufficient amount to keep these non-maturity deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or risk slowing our future asset growth.

We could recognize losses on securities held in our securities portfolio, particularly if interest rates continue to increase or economic and market conditions deteriorate.

As of June 30, 2019, the fair value of our securities portfolio was approximately $256.3 million, or 11.6% of our total assets. Factors beyond our control can significantly influence and cause potential adverse changes to the fair value of securities in our portfolio. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing factors, as well as changing economic and market conditions and other factors, could cause other-than-temporary impairments and realized or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments, which could subsequently prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any collateral underlying the security and whether and the extent to which the principal and interest on the security will ultimately be paid in accordance with its payment terms.

Monetary policies and regulations of the Federal Reserve could adversely affect our operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks' reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition, results of operations and growth prospects cannot be predicted.

Risks Related to this Offering and an Investment in Our Common Stock

An active, liquid trading market for our common stock does not currently exist and may not develop after this offering, and as a result, you may not be able to sell your common stock at or above the public offering price, or at all.

Prior to this offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "ALRS." Trading on the OTCQX marketplace

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has been infrequent and in limited volume. Although we have applied to list our shares of common stock on Nasdaq in connection with this offering, an active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.

The price of our common stock could be volatile following this offering, and you could lose some or all of your investment as a result.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The market price of our common stock following this offering may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

•: actual or anticipated variations in our quarterly results of operations;
•: recommendations or research reports about us or the financial services industry in general published by securities analysts;
•: the failure of securities analysts to cover, or continue to cover, us after this offering;
•: operating and stock price performance of other companies that investors or analysts deem comparable to us;
•: news reports relating to trends, concerns and other issues in the financial services industry;
•: perceptions in the marketplace regarding us, our competitors or other financial institutions;
•: future sales of our common stock;
•: departures of members of our executive management team or other key personnel;
•: new technologies used, or services offered, by competitors;
•: significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
•: the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve;
•: changes or proposed changes in laws or regulations, or differing interpretations of existing laws and regulations, affecting our business, or enforcement of these laws and regulations;

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•: litigation and governmental investigations; and
•: geopolitical conditions such as acts or threats of terrorism or military conflicts.

If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

In addition, the stock market and, in particular, the market for financial institution stocks have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. If the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, results of operations or growth prospects. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.

An investment in our common stock is not an insured deposit and is subject to risk of loss.

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, the deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this prospectus, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

Our dividend policy may change.

Although we have historically paid dividends to our stockholders and currently intend to maintain or increase our current dividend levels in future quarters, we have no obligation to continue doing so and may change our dividend policy at any time without notice to our stockholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Further, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to our common stockholders.

In addition, we are a financial holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank and financial holding companies should generally pay dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the organization's expected future needs, asset quality and financial condition.

We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive regulatory approval or if its earnings are not sufficient to make dividend payments to us while

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maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.

If equity research analysts do not publish research reports about us, or if they publish reports but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.

The trading market for our common stock could be affected by whether equity research analysts publish research reports about us and our business. We cannot predict at this time whether any research analysts will publish research reports on us and our common stock. If one or more equity analysts cover us and our common stock and publish research reports about us, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

If any of the analysts who elects to cover us downgrades our stock, our stock price could decline rapidly. If any of these analysts ceases to cover us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid and more volatile.

Future sales of our common stock in the public market, including by our current stockholders, could lower our stock price, and any increase in shares issued as part of our equity-based compensation plans or for other purposes may dilute your ownership in us.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock available for sale after completion of this offering or from the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate. Upon completion of this offering, we will have a total of outstanding shares of common stock, assuming the underwriters do not exercise their option to purchase additional shares. Of the outstanding shares, the shares sold in this offering (or shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased or held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the certain limitations imposed by the securities laws. The remaining shares outstanding that are not sold in this offering are restricted securities as defined under Rule 144 subject to certain restrictions on resale.

In connection with this offering, we, our directors and executive officers have agreed with the underwriters not to offer, pledge, sell or otherwise dispose of or hedge any shares of our common stock, subject to certain exceptions, for a 180-day period following the date of this prospectus, without the prior consent of the underwriters. The underwriters may, at any time, release us or any of the others from this lock-up agreement and allow us or them to sell shares of our common stock within this 180-day period. In addition, any shares purchased by our directors and executive officers through the reserved share program described in this prospectus are subject to the same 180-day lockup period.

Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in a public market, subject, in the case of shares not sold in this offering, to certain restrictions on resale under Rule 144 or registration under the Securities Act, and, in the

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case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144 or registration under the Securities Act.

We cannot predict the size of future issuances or sales of our common stock or the effect, if any, that future issuances or sales of shares of our common stock may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline or to be more volatile.

In addition, immediately following this offering, we intend to file a registration statement on Form S-8 registering under the Securities Act the shares of common stock reserved for issuance as incentive awards issued under our equity incentive plans. If a large number of shares are sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.

We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.

We intend to use the net proceeds generated by this offering to support our growth and for other general corporate purposes, which may include, but is not limited to, the repayment or refinancing of debt, maintenance of our required regulatory capital levels and the funding of potential future acquisition opportunities. We do not currently have any specific plans for the net proceeds and do not have any current plans, arrangements or understandings to make any acquisitions. Our management has broad discretion over how these proceeds are to be used and could spend the proceeds in ways with which you may not agree. In addition, we may not end up using the net proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the net proceeds, and we cannot predict how long it will take to deploy the net proceeds. Investing the net proceeds in securities until we are able to deploy the proceeds will provide lower yields than we generally earn on loans, which could have an adverse effect on our profitability.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price is substantially higher than the tangible book value per share of our common stock immediately following this offering. As a result of this offering and the termination of the repurchase liability under our ESOP, if you purchase shares in this offering, you will experience immediate and substantial dilution in tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of the offering to be $ per common share, representing the difference between the public offering price of $ per common share (the mid-point of the range set forth on the cover page of this prospectus) and our adjusted tangible book value of $ per common share as of June 30, 2019, after giving effect to the termination of the repurchase liability under our ESOP and this offering. Accordingly, if we were liquidated at our adjusted tangible book value, you would not receive the full amount of your investment.

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We are an emerging growth company within the meaning of the Securities Act and because we have decided to take advantage of certain exemptions from various reporting and other requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

For as long as we remain an emerging growth company, as defined in the JOBS Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, being permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the FASB or the SEC, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the first fiscal year in which (A) the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) we have been a public reporting company under the Exchange Act for at least twelve calendar months and (C) we have filed at least one annual report on Form 10-K.

Because we have elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth company, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, financial results or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Future issuances of common stock could result in dilution, which could cause our common stock price to decline.

We are generally not restricted from issuing additional shares of stock, up to the 30,000,000 shares of common stock and 2,000,000 shares of preferred stock authorized in our certificate of incorporation, which in each case could be increased by a vote of the holders of a majority of our shares of common stock. We may issue additional shares of our common stock in the future

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pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Although there are currently no shares of our preferred stock issued and outstanding, our certificate of incorporation authorizes us to issue up to 2,000,000 shares of one or more series of preferred stock. Our board of directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our stockholders may impede a takeover of us and prevent a transaction perceived to be favorable to our stockholders.

The holders of our debt obligations and preferred stock, if any, will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.

In any liquidation, dissolution or winding up of the Company, our common stock would rank junior in priority to all claims of debt holders against us and claims of all of our outstanding shares of preferred stock. As of June 30, 2019, we had $50.0 million of subordinated notes payable and $10.0 million of junior subordinated debentures outstanding. We do not currently have any shares of preferred stock outstanding. As a result, holders of our common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of our obligations to our debt holders have been satisfied and holders of senior equity securities, including any preferred shares, if any, have received any payment or distribution due to them.

Certain banking laws and certain provisions of our certificate of incorporation and bylaws may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. In general, acquisitions of 10% or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock following completion of this offering, generally creates a rebuttable presumption that the acquirer "controls" the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank.

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There are also provisions in our certificate of incorporation and bylaws that could have the effect of delaying, deferring or discouraging another party from acquiring control of us, even if such acquisition would be viewed by our stockholders to be in their best interests. These include supermajority stockholder voting thresholds and requirements relating to stockholder meetings and nominations or proposals. Upon the completion of this offering, we will also be subject to a statutory antitakeover provision included in the General Corporation Law of the State of Delaware, or DGCL. In addition, our board of directors is authorized under our certificate of incorporation to issue shares of preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without stockholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.

Our certificate of incorporation has an exclusive forum provision, which could limit a stockholder's ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation has an exclusive forum provision providing that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of our directors, officers, employees or agents; (iii) any action asserting a claim arising pursuant to the DGCL, our certificate of incorporation or our bylaws; or (iv) any action asserting a claim that is governed by the internal affairs doctrine. However, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, there is uncertainty as to whether a court would enforce such a provision, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

Our stockholders approved this provision at our annual stockholders' meeting held on May 13, 2014. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our certificate of incorporation. The exclusive forum provision, if enforced, may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current views with respect to, among other things, future events and our business, financial condition, results of operations and growth prospects. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" or the following:

•: our ability to successfully manage credit risk;
•: our ability to maintain an adequate level of allowance for loan losses;
•: business and economic conditions generally and in the financial services industry, nationally and within our market areas;
•: the overall health of the local and national real estate market;
•: concentrations within our loan portfolio;
•: the level of nonperforming assets on our balance sheet;
•: our ability to implement our organic and acquisition growth strategies;
•: the impact of economic or market conditions on our fee-based services;
•: our ability to continue to grow our retirement and benefit services business;
•: our ability to continue to originate a sufficient volume of residential mortgages;
•: the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;
•: interruptions involving our information technology and telecommunications systems or third-party servicers;

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•: potential losses incurred in connection with mortgage loan repurchases;
•: the composition of our executive management team and our ability to attract and retain key personnel;
•: our ability to maintain our reputation;
•: rapid technological change in the financial services industry;
•: increased competition in the financial services industry;
•: our ability to successfully manage liquidity risk;
•: our ability to raise additional capital to implement our business plan;
•: the effectiveness of our risk management framework;
•: the costs and obligations associated with being a public company;
•: the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject;
•: potential impairment to the goodwill we recorded in connection with our past acquisitions;
•: the extensive regulatory framework that applies to us;
•: the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, and their application by our regulators;
•: interest rate risks associated with our business;
•: fluctuations in the values of the securities held in our securities portfolio;
•: governmental monetary and fiscal policies;
•: material weaknesses in our internal control over financial reporting; and
•: our success at managing the risks involved in the foregoing items.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward-looking statements in this prospectus. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares), based on an assumed public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus. Each $1.00 increase or decrease in the assumed public offering price of $ per share would increase or decrease the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, by approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares).

We intend to initially retain the net proceeds we will receive from this offering in the Company. We intend to use the net proceeds from this offering to support our organic growth and for general corporate purposes, which may include, but is not limited to, the repayment or refinancing of debt, maintenance of our required regulatory capital levels and the funding of potential future acquisition opportunities. We do not currently have any specific plans for the net proceeds and do not have any current plans, arrangements or understandings to make any acquisitions. Our management will retain broad discretion to allocate the net proceeds of this offering, and the precise amounts and timing of our use of the net proceeds will depend upon market conditions, among other factors. Until we deploy the proceeds of this offering for the uses described above, we expect to hold such proceeds in short-term investments.

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DIVIDEND POLICY

General

It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to maintain or increase our current dividend levels in future quarters. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our stockholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.

The following table shows recent quarterly dividends on our common stock during the periods indicated:

Quarterly Period	Amount Per Share		Payment Date

Second Quarter 2019	$	0.14	July 12, 2019
First Quarter 2019	$	0.14	April 12, 2019
Fourth Quarter 2018	$	0.14	January 11, 2019
Third Quarter 2018	$	0.13	October 12, 2018
Second Quarter 2018	$	0.13	July 13, 2018
First Quarter 2018	$	0.13	April 13, 2018
Fourth Quarter 2017	$	0.12	January 12, 2018
Third Quarter 2017	$	0.12	October 13, 2017
Second Quarter 2017	$	0.12	July 14, 2017
First Quarter 2017	$	0.12	April 14, 2017

Dividend Restrictions

As a Delaware corporation, we are subject to certain restrictions on dividends under the DGCL. In general, a Delaware corporation may only pay dividends either out of surplus (as defined and computed in accordance with the provisions of the DGCL) or out of the current or the immediately preceding year's net profits. Surplus is defined as the excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a corporation's assets can be measured in a number of ways and may not necessarily equal their book value.

Under the terms of our subordinated notes issued in December of 2015, and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes, excluding any dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, any class of our common stock and any declaration of a non-cash dividend in connection with the implementation of a stockholders' rights plan. In addition, under the terms of our junior subordinated debentures issued to our two statutory trusts, we are not permitted to pay dividends on our capital stock if an event of default occurs under the terms of the debentures, we are otherwise in default with respect to our payment obligations or we have elected to defer interest payments on the debentures.

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In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. See "Supervision and Regulation—Supervision and Regulation of the Company—Dividend Payments." Because we are a holding company and do not engage directly in business activities of a material nature, our ability to pay dividends to our stockholders depends, in large part, upon our receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal banking laws, regulations and policies. See "Supervision and Regulation—Supervision and Regulation of the Bank—Dividend Payments."

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MARKET FOR OUR COMMON STOCK

Prior to this offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "ALRS." Although our shares were quoted on the OTCQX Marketplace, because trading on the OTCQX Marketplace has been infrequent and limited in volume, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in a more liquid market. As of July 31, 2019, there were approximately 237 record holders of our common stock and an estimated 1,003 beneficial holders of our common stock.

The following table sets forth the high and low reported sales prices for our common stock for each quarter for the years ended December 31, 2018 and 2017 and for the first and second quarter of 2019. These reported sales prices represent trades that were either quoted on the OTCQX Marketplace or reported to the Company's stock transfer agent, and do not include retail markups, markdowns or commissions, and do not necessarily reflect actual transactions.

Quarterly Period	High		Low

Second Quarter 2019	$	19.50	$	18.70
First Quarter 2019	$	20.00	$	19.00
Fourth Quarter 2018	$	24.25	$	19.21
Third Quarter 2018	$	26.50	$	24.00
Second Quarter 2018	$	26.90	$	23.60
First Quarter 2018	$	23.90	$	20.60
Fourth Quarter 2017	$	20.75	$	20.10
Third Quarter 2017	$	20.58	$	19.18
Second Quarter 2017	$	19.74	$	18.61
First Quarter 2017	$	19.00	$	16.50

We have applied to list our common stock on the Nasdaq Capital Market under the symbol "ALRS." However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See "Underwriting" beginning on page 202 for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

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CAPITALIZATION

The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis as of June 30, 2019:

•: on an actual basis;
•: on a pro forma basis after giving effect to the termination of the repurchase liability under our ESOP; and
•: on a pro forma as adjusted basis after giving effect to (1) the termination of the repurchase liability under our ESOP and (2) the net proceeds from the sale of shares (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed public offering price of $ per share, which is the midpoint of the price range on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses.

You should read the following table in conjunction with the sections titled "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

	As of June 30, 2019

	Actual		Pro Forma		Pro Forma As Adjusted
	(dollars in thousands)
Long-Term Debt:
Subordinated notes payable	$	49,594	$	49,594	$	49,594
Junior subordinated debentures		8,448		8,448		8,448
Finance lease liability		766		766		766

Total Long-Term Debt	$	58,808	$	58,808	$	58,808



Commitments and contingent liabilities: ESOP-owned shares		34,494		—		—

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	As of June 30, 2019

	Actual			Pro Forma			Pro Forma As Adjusted
	(dollars in thousands)
Stockholders' Equity:
Common Stock—$1.00 par value
Common Stock—authorized 30,000,000; issued and outstanding 13,816,050 actual and pro forma and pro forma as adjusted		13,816			13,816
Preferred Stock—$1.00 par value—authorized 2,000,000; issued and outstanding -0- actual, pro forma and pro forma as adjusted		—			—			—
Additional Paid-In Capital		28,676			28,676
Retained Earnings		169,788			169,788			169,788
Accumulated Other Comprehensive Income (Loss)		(1,485	)		(1,485	)		(1,485	)

Total Stockholders' Equity	$	213,765		$	213,765		$
Less: ESOP-owned shares		34,494			—			—

Total Stockholders' Equity, net of ESOP-owned shares	$	179,271		$	213,765		$



Total Capitalization	$	272,574		$	272,574		$



Capital Ratios: (1)
Common Equity Tier 1 Capital Ratio		8.90	%		8.90	%			%
Tier 1 Risk-Based Capital Ratio		9.34	%		9.34	%			%
Total Risk-Based Capital Ratio		13.14	%		13.14	%			%
Leverage Ratio		8.08	%		8.08	%			%
Tangible Common Equity to Tangible Assets (2)		7.69	%		7.69	%			%

(1): Capital ratios are calculated in accordance with regulatory guidance and include ESOP-owned shares in common equity.
(2): Tangible Common Equity to Tangible Assets is a non-GAAP financial measure. For more information on this financial measure, including a reconciliation to the most directly comparable financial measure, see "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

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DILUTION

If you purchase shares of our common stock in this offering, your ownership interest will experience immediate book value dilution to the extent the public offering price per share exceeds our net tangible book value per share immediately after this offering. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of common stock outstanding.

Our net tangible book value at June 30, 2019, was $166.1 million, or $12.02 per share based on the total number of shares of common stock outstanding as of such date, including ESOP-owned shares. After giving effect to the termination of the repurchase liability under our ESOP and our sale of shares of common stock in this offering at an assumed public offering price of $ per share, which is the midpoint of the estimated price range on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value at June 30, 2019, would have been approximately $ million, or $ per share. Therefore, under those assumptions this offering would result in an immediate increase of $ in the net tangible book value per share to our existing stockholders, and immediate dilution of $ in the net tangible book value per share to investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis:


Assumed public offering price per share			$
Net tangible book value per share at June 30, 2019, after the termination of the repurchase liability under our ESOP	$	12.02
Increase in net tangible book value per share attributable to this offering	$

As adjusted net tangible book value per share after this offering and the termination of the repurchase liability under our ESOP			$

Dilution in net tangible book value per share to new investors			$

A $1.00 increase (or decrease) in the assumed public offering price of $ per share, which is the midpoint of the estimated price range on the cover of this prospectus, would increase (or decrease) our net tangible book value by $ million, or $ per share, and decrease (or increase) the dilution to new investors by $ per share, assuming no change to the number of shares of common stock offered by us as set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses.

If the underwriters exercise in full their option to purchase additional shares of common stock, the as adjusted net tangible book value after giving effect to this offering and the termination of the repurchase liability under our ESOP would be $ per share. This represents an increase in net tangible book value of $ per share to existing stockholders and a decrease of dilution of $ per share to new investors.

The following table sets forth information, as of June 30, 2019, regarding the shares of common stock issued to, and consideration paid by, the existing holders of shares of common stock and the shares of common stock to be issued to, and consideration to be paid by, investors in this offering at an assumed public offering price of $ per share, which is the midpoint

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of the estimated price range on the cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses.

						Total consideration

	Shares purchased					Total consideration
	Shares purchased					Amount (in thousands)					Average price per share
	Number		Percent			Amount (in thousands)		Percent			Average price per share
Existing stockholders		13,816,050			%	$	42,492			%	$	3.08
Investors in this offering

Total				100.0	%	$			100.0	%	$

The table above excludes:

•: 289,564 shares of unvested restricted stock;
•: 84,477 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objectives are achieved; and
•: 1,112,681 additional shares of common stock reserved for future issuance under our equity incentive plans.

To the extent that any outstanding unvested restricted stock or restricted stock units vest or other equity awards are issued under our incentive plans, investors participating in this offering will experience further dilution.

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GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

Some of the financial measures included in this prospectus are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include the ratio of tangible common equity to tangible assets, tangible common equity per share, return on average tangible common equity, net interest margin (tax equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. Management calculates: (i) tangible common equity as total common stockholders' equity, including ESOP-owned shares, less goodwill and other intangible assets; (ii) tangible common equity per share as tangible common equity divided by shares of common stock outstanding; (iii) tangible assets as total assets, less goodwill and other intangible assets; (iv) return on average tangible common equity as net income adjusted for intangible amortization net of tax, divided by average tangible common equity; (v) net interest margin (tax equivalent) as net interest income plus a tax equivalent adjustment, divided by average earning assets; and (vi) efficiency ratio as noninterest expense less intangible amortization expense, divided by net interest income plus noninterest income plus a tax equivalent adjustment.

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. These non-GAAP financial measures should not be considered in isolation or as a substitute for total stockholders' equity, total assets, book value per share, ROAA, ROAE, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP.

	As of and for the Six Months Ended

	As of and for the Six Months Ended						As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			2018			2017			2016			2015			2014
Tangible common equity to tangible assets
Total common stockholders' equity	$	213,765		$	185,367		$	196,954		$	179,594		$	168,251		$	162,282		$	150,644
Less: Goodwill		27,329			27,329			27,329			27,329			27,329			3,683			3,264
Less: Other intangible assets		20,372			24,719			22,473			27,111			32,729			17,606			20,765

Tangible common equity (a)		166,064			133,319			147,152			125,154			108,193			140,993			126,615
Total assets		2,207,129			2,175,885			2,179,070			2,136,081			2,050,045			1,744,324			1,487,290
Less: Goodwill		27,329			27,329			27,329			27,329			27,329			3,683			3,264
Less: Other intangible assets		20,372			24,719			22,473			27,111			32,729			17,606			20,765

Tangible assets (b)		2,159,428			2,123,837			2,129,268			2,081,641			1,989,987			1,723,035			1,463,261

Tangible common equity to tangible assets (a)/(b)		7.69	%		6.28	%		6.91	%		6.01	%		5.44	%		8.18	%		8.65	%

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	As of and for the Six Months Ended

	As of and for the Six Months Ended						As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			2018			2017			2016			2015			2014
Tangible common equity per common share
Total stockholders' equity	$	213,765		$	185,367		$	196,954		$	179,594		$	168,251		$	162,282		$	150,644
Less: Goodwill		27,329			27,329			27,329			27,329			27,329			3,683			3,264
Less: Other intangible assets		20,372			24,719			22,473			27,111			32,729			17,606			20,765

Tangible common equity (c)		166,064			133,319			147,152			125,154			108,193			140,993			126,615
Common shares outstanding (d)		13,816			13,778			13,775			13,699			13,534			13,434			13,346

Tangible common equity per common share (c)/(d)	$	12.02		$	9.68		$	10.68		$	9.14		$	7.99		$	10.50		$	9.49



Return on average tangible common equity
Net income	$	14,784		$	12,463		$	25,866		$	15,001		$	14,036		$	17,010		$	20,705
Less: Preferred stock dividends		—			—			—			—			25			200			200
Add: Intangible amortization expense (net of tax)		1,660			1,890			3,664			3,655			4,553			2,840			2,740
Remeasurement due to tax reform		—			—			—			4,818			—			—			—

Net income, excluding intangible amortization (e)		16,444			14,353			29,530			23,474			18,564			19,650			23,245
Average total equity		205,785			182,407			187,341			176,779			168,039			178,087			163,301
Less: Average preferred stock		—			—			—			—			2,514			20,000			20,000
Less: Average goodwill		27,329			27,329			27,329			27,329			25,698			2,365			1,089
Less: Average other intangible assets (net of tax)		16,912			20,459			19,522			19,358			22,372			13,978			8,525

Average tangible common equity (f)		161,544			134,619			140,490			130,092			117,455			141,744			133,687

Return on average tangible common equity (e)/(f) (1)		20.53	%		21.50	%		21.02	%		18.04	%		15.81	%		13.86	%		17.39	%



Net interest margin (tax equivalent)
Net interest income	$	37,411		$	37,042		$	75,224		$	67,670		$	62,940		$	52,870		$	51,078
Tax equivalent adjustment		176			235			462			865			599			456			472

Tax equivalent net interest income (g)		37,587			37,276			75,686			68,535			63,539			53,326			51,550
Average earnings assets (h)		2,028,685			1,938,980			1,960,723			1,824,287			1,750,104			1,399,587			1,297,657

Net interest margin (tax equivalent) (g)/(h) (1)		3.74	%		3.88	%		3.86	%		3.76	%		3.63	%		3.81	%		3.97	%

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	As of and for the Six Months Ended

	As of and for the Six Months Ended						As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			As of and for Years Ended December 31,
(dollars and shares in thousands, except per share data)	June 30, 2019			June 30, 2018			2018			2017			2016			2015			2014
Efficiency ratio
Noninterest expense	$	68,775		$	66,078		$	136,325		$	134,920		$	143,792		$	118,134		$	100,115
Less: Intangible amortization expense		2,101			2,392			4,638			5,623			7,005			4,361			4,196

Adjusted noninterest expense (i)		66,674			63,686			131,687			129,297			136,787			113,773			95,919

Net interest income		37,411			37,042			75,224			67,670			62,940			52,870			51,078
Noninterest income		55,058			50,350			102,749			103,045			105,089			93,105			78,306
Tax equivalent adjustment		176			235			462			865			599			456			472

Total tax equivalent revenue (j)		92,645			87,626			178,435			171,580			168,628			146,431			129,856

Efficiency ratio (i)/(j)		71.97	%		72.68	%		73.80	%		75.36	%		81.12	%		77.70	%		73.87	%



Adjusted net income and ratios for 2017 tax reform
Net Income										$	15,001
Remeasurement due to tax reform											4,818

Adjusted net income (k)										$	19,819



Average assets (l)										$	2,001,503
Average equity (m)											176,779
Adjusted return on average assets (excluding the remeasurement due to tax reform) (k)/(l)											0.99	%



Adjusted return on average equity (excluding the remeasurement due to tax reform) (k)/(m )											11.21	%

(1): Rates have been annualized for the interim periods.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the "Selected Historical Consolidated Financial Data" and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. 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 prospectus, may cause actual results to differ materially from those projected in the forward-looking statements. We assume no obligation to update any of these forward-looking statements.

Overview

Our primary banking market areas are the states of North Dakota, Minnesota, specifically, the Twin Cities MSA, and Arizona, specifically, the Phoenix MSA. In addition to our offices located in our banking markets, our retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota and New Hampshire.

Our business model produces strong financial performance and a diversified revenue stream, which has helped us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.

As of June 30, 2019, we had $2.2 billion of total assets, $1.8 billion of total deposits and total stockholders' equity of $213.8 million, including ESOP-owned shares. In addition, as of June 30, 2019, we had $27.9 billion of AUA and $5.3 billion of AUM. For the year ended December 31, 2018, we achieved a ROAA, ROAE and ROATCE, of 1.21%, 13.81% and 21.02%, respectively. For the six months ended June 30, 2019, we achieved an annualized ROAA, ROAE and ROATCE of 1.36%, 14.49% and 20.53%, respectively.

Factors Affecting Comparability

Acquisitions

Our Company has completed 23 acquisitions in the last 33 years. In January 2016, our Company completed two of the largest acquisitions in the history of our Company.

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Beacon Bank

On January 15, 2016, our Company acquired Beacon Bank, or Beacon, and its five branches, three located in the southwestern suburbs of Minneapolis, Minnesota and two in Duluth, Minnesota. This transaction significantly expanded our presence in the Twin Cities, MSA. Our Company assumed $327.4 million of deposits and other liabilities, including $10.0 million of trust preferred securities, and purchased $350.6 million in cash, securities, loans, and other assets. As part of the transaction, our Company allocated $18.9 million to goodwill and $3.8 million to a core deposit intangible. The core deposit intangible is being amortized over the estimated life of five years, resulting in an annualized intangible amortization expense of $759 thousand, while the goodwill is not subject to amortization.

Alliance Benefit Group North Central States, Inc.

On January 1, 2016, our Company acquired Alliance Benefit Group North Central States, Inc., or ABGNCS, with locations in Albert Lea and Eden Prairie, Minnesota. The purchase, consisting of approximately 900 retirement plans with more than 75,000 retirement participants, grew our Company's retirement division by $6.0 billion in retirement and individual asset managed and administrated accounts. The transaction also added payroll and HSA administration to the suite of solutions our Company is able to provide to its clients nationwide. As part of the transaction, $4.8 million was allocated to goodwill and $17.9 million to an identified customer intangible, based on the estimated value as of the acquisition date. The identified customer intangible is being amortized over the estimated life of ten years, resulting in an annualized intangible amortization expense of $1.8 million, while the goodwill is not subject to amortization.

Preferred Stock Redemption

On February 16, 2016, we redeemed $20.0 million of Small Business Lending Fund, or SBLF, preferred stock, which had been outstanding since August 8, 2011. The SBLF preferred stock had a dividend rate of 1.0 percent that was scheduled to reset to 9.0 percent on February 18, 2016. The SBLF preferred stock qualified as Tier 1 capital for regulatory purposes.

Loss Share Termination

On October 24, 2018, our Company entered into a termination agreement with the FDIC that terminated both the Single Family Shared-Loss Agreement as well as the Commercial and Other Assets Shared-Loss Agreement. Our Company agreed to pay the FDIC $3.0 million. All rights and obligations of the parties under these loss share agreements, including the claw-back provisions, terminated effective October 24, 2018. As a result, all recoveries, gains, charge-offs, losses and expenses related to assets previously covered under loss share agreements are recognized entirely by our Company from the date of termination. A gain of $220.0 thousand was recognized upon termination and was included in other noninterest income in the consolidated financial statements.

Primary Factors Used to Evaluate the Results of Operations

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our consolidated balance sheet and income statement as well as various financial ratios

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that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, noninterest income and noninterest expense.

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-sale securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (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 we earn on interest-earning assets or pay on interest-bearing liabilities.

Noninterest Income

Noninterest income primarily consists of the following:

•: Our retirement and benefit services business, which includes retirement plan administration, retirement plan investment advisory, HSA, ESOP, payroll and other benefit services, is our Company's largest source of noninterest income. Over half of our 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 management includes personal trust, investment and brokerage services. Our 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 our clients.
•: Other noninterest income consists of debit card interchange income, income earned on the growth of the cash surrender value of life insurance policies we hold on certain key employees, loan servicing income net of the related amortization, and any other income

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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:

•: Compensation and employee 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 our 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 we occupy.
•: 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. We believe our technology spending enhances the efficiency of our employees and enables us to provide outstanding service to our clients. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of employees, clients and volume of transactions we have and the level of service we require from our third-party technology vendors.
•: 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 are amortized on a straight-line 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 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 we pay 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 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 our business activities and needs.

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Operating Segments

We measure the overall profitability of business operations based on income before income tax. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within banking, retirement and benefit services, wealth management, and mortgage. We measure the profitability of each segment based on the direct allocations of expense as we believe it better approximates the contribution generated by our reportable operating segments. All indirect overhead allocations and income tax expense is allocated to corporate administration. A description of each segment is provided in Note 21 (Segment Reporting) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

Primary Factors Used to Evaluate our Balance Sheet

The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production of assets.

We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.

We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our allowance for loan losses, the diversification and quality of loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and other factors.

We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans (excluding loans held for sale), the level of total loans (excluding loans held for sale) as a percentage of total assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. During the first quarter of 2015, the Bank adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which was subject to a multi-year phase-in period. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, the Common Equity Tier 1 Capital ratio, and revised the adequately and well capitalized thresholds. In addition, Basel III established a new capital conservation buffer of 2.5% of risk-weighted assets, which was phased-in over a four-year period beginning January 1, 2016. At June 30, 2019, our Bank capital ratios exceeded the current well capitalized regulatory requirements established under Basel III. As of June 30, 2019, the consolidated Company was below $3.0 billion in total assets and therefore retained the benefits available to us under the Small Bank Holding Company Policy Statement including not being subject to consolidated capital ratios. However, one of the qualifications for this treatment is that our Company must not have a material amount of securities registered with the SEC. As a result of the offering, we will have a material amount of shares registered with the SEC and will no longer meet the qualifications of the Small Bank Holding Company Policy Statement. See Note 25 (Regulatory Matters) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

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Critical Accounting Policies

As a result of the complex and dynamic nature of our 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 our 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 are discussed below.

Investment securities —Investment securities can be classified as trading, available-for-sale, and equity. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management's intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive income or loss, as a separate component of stockholders' equity, and do not affect earnings until realized. The fair values of investment securities are generally determined by reference to quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility. Investment securities with significant declines in fair value are evaluated to determine whether they should be considered other-than-temporarily impaired. An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an other-than-temporary impairment write-down is recorded in current earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided we do not intend to sell the underlying debt security, and it is not likely that we will be required to sell the debt security prior to recovery of the full value of its amortized cost basis.

Allowance for loan losses —The allowance for loan losses reflects management's best estimate of probable loan losses in our loan portfolio. Determination of the allowance for loan losses is inherently subjective. It requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, appraisal values of underlying collateral for collateralized loans, and the amount of estimated losses on pools of homogeneous loans which is based on historical loss experience, expected duration and consideration of current economic trends, all of which may be susceptible to significant change.

Intangible assets —As a result of acquisitions, we carry goodwill and identifiable intangible assets. 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. Core deposits and other identifiable intangible assets are amortized to expense over their estimated useful lives. The determination of whether or not impairment exists is based upon 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

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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 and identifiable intangible assets could have a material impact on our results of operations.

Income taxes —Income tax expense or benefit is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Interest and penalties related to income tax matters are recognized in income tax expense.

On December 22, 2017, the U.S government enacted the Tax Cuts and Jobs Act, a comprehensive tax legislation, which reduced the federal income tax rate for C corporations from 35% to 21%, effective January 1, 2018. As a result of the reduction in the U.S corporate income tax rate from 35% to 21%, we re-measured our deferred tax assets and recognized $4.8 million of tax expense in the Consolidated Statement of Income for the year ended December 31, 2017. See Note 20 (Income Taxes) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

A summary of the accounting policies used by management is disclosed in Note 1 (Significant Accounting Policies) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

Results of Operations—Six Months Ended June 30, 2019 and 2018

Overview

For the six months ended June 30, 2019, we had net income of $14.8 million, or $1.05 per diluted common share, compared to $12.5 million, or $0.89 per diluted common share, for the six months ended June 30, 2018. Net interest income increased to $37.4 million for the six months ended June 30, 2019, compared to $37.0 million for the six months ended June 30, 2018. The provision for loan losses was $4.0 million for the six months ended June 30, 2019, compared to $5.6 million for the same period in 2018. Noninterest income increased $4.7 million to $55.1 million for the six months ended June 30, 2019, compared to $50.4 million for the same period in 2018, and total noninterest expense increased $2.7 million to $68.8 million for the six months ended June 30, 2019, as compared to $66.1 million for the same period in 2018.

Net Income

We had net income of $14.8 million, or $1.05 per diluted common share, for the six months ended June 30, 2019, compared to $12.5 million, or $0.89 per diluted common share, for the six months ended June 30, 2018. The increase of $2.3 million in net income in the first six months of 2019 primarily reflects an increase of $369 thousand in net interest income and an increase of $4.7 million in noninterest income, offset by an increase of $2.7 million in noninterest expense,

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a $1.5 million decrease in provision for loan losses and an increase in income tax expense of $1.6 million.

Net Interest Income—Fully Taxable Equivalent

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. We had net interest income of $37.4 million and $37.0 million for the six months ended June 30, 2019 and 2018, respectively. The six months ended June 30, 2019 included a $4.5 million increase in interest income as well as a $4.1 million increase in interest expense, compared to the same period in 2018. The increase in interest income was primarily driven by an increase of $4.3 million in interest and fees on loans, whereas the increase in interest expense was primarily driven by an increase of $3.6 million in deposit interest expense and an increase of $540 thousand in interest expense on other borrowed funds. The change in interest and fees on loans for the six months ended June 30, 2019 compared to the same period 2018 was driven by a combination of growth in total loans and by higher interest rates. The increase in deposit interest expense during the six months ended June 30, 2019 was primarily due to higher average rates paid on deposits as a result of the increase in the target federal fund rate, as well as an increase in total deposits compared to the same period in 2018.

Our net interest margin (on a fully tax equivalent, or FTE, basis) for the six months ended June 30, 2019 was 3.74%, compared to 3.88% for the same period in 2018. The decrease of 14 basis points was primarily a result of higher average yield on total loans offset by an increased cost of funds compared to the same period in 2018. For the six months ended June 30, 2019 and 2018, the average yield on total loans was 5.01% and 4.77%, respectively. For the six months ended June 30, 2019 and 2018, the cost of interest bearing liabilities was 1.30% and 0.77%, respectively.

The following tables set forth information related to our average balance sheet, average yields on assets, and average rates of liabilities for the periods indicated. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We 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

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to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

	For the six months ended June 30,

	2019								2018
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rate/ Yield (4)			Average Balance			Interest Income/ Expense		Average Rate/ Yield (4)
Assets
Interest bearing deposits with banks	$	12,865		$	150		2.35	%	$	8,233		$	77		1.89	%
Investment securities		255,060			3,223		2.55	%		260,276			3,138		2.43	%
Loans held for sale		23,079			386		3.37	%		19,088			277		2.93	%
Loans
Commercial:
Commercial and industrial		485,533			13,310		5.53	%		476,764			11,915		5.04	%
Real estate construction		32,079			905		5.69	%		39,792			1,141		5.78	%
Commercial real estate		480,135			11,728		4.93	%		477,517			11,298		4.77	%

Total commercial		997,747			25,943		5.24	%		994,073			24,354		4.94	%
Consumer
Residential real estate first mortgage		447,006			9,425		4.25	%		371,368			7,532		4.09	%
Residential real estate junior lien		188,076			5,417		5.81	%		192,594			5,102		5.34	%
Other revolving and installment		95,044			2,169		4.60	%		84,370			1,821		4.35	%

Total consumer		730,126			17,011		4.70	%		648,332			14,455		4.50	%

Total loans (1)		1,727,873			42,954		5.01	%		1,642,405			38,809		4.77	%

Federal Reserve/FHLB Stock		9,808			252		5.18	%		8,978			207		4.65	%

Total earning assets		2,028,685			46,965		4.67	%		1,938,980			42,508		4.42	%
Cash and due from banks		25,525								26,201
Allowance for loan losses		(22,586	)							(18,052	)
Goodwill & other intangibles		48,736								53,226
Premises and equipment		31,702								21,206
Other assets		78,384								77,035

Total assets	$	2,190,446							$	2,098,596



Liabilities and Stockholders' Equity
Interest-bearing demand deposits (2)	$	422,309		$	893		0.43	%	$	412,163		$	468		0.23	%
Money market and savings deposits (2)		689,508			4,057		1.19	%		618,351			1,510		0.49	%
Time deposits (2)		181,990			1,347		1.49	%		196,329			713		0.73	%
Short-term borrowings		99,702			1,265		2.56	%		79,536			756		1.92	%
Long-term debt		58,810			1,816		6.23	%		58,812			1,785		6.12	%

Total interest bearing liabilities (2)		1,452,319			9,378		1.30	%		1,365,191			5,232		0.77	%

Non-interest bearing deposits		494,136								523,818
Other liabilities		38,206								27,180
Stockholders' equity		205,785								182,407

Total liabilities and stockholders' equity	$	2,190,446							$	2,098,596



Net interest income (3)				$	37,587							$	37,276



Net interest rate spread (4)							3.37	%							3.65	%
Net interest rate margin (4)							3.74	%							3.88	%
Fully tax-equivalent adjustment				$	176							$	235

(1): Includes loans held for branch sale.
(2): Includes deposits held for sale.
(3): Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent.
(4): Rates have been annualized for the interim periods.

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Rate/Volume Analysis

The tables below present the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous year's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

	Six Months Ended June 30, 2019 to 2018 Change Due to

(dollars in thousands)	Volume			Rate			Net
Interest earning assets
Interest bearing deposits with banks	$	43		$	30		$	73
Federal funds sold		—			—			—
Investment securities		(63	)		148			85
Loans held for sale		58			51			109
Loans
Commercial:
Commercial and industrial		219			1,176			1,395
Real estate construction		(221	)		(15	)		(236	)
Commercial real estate		62			368			430

Total commercial		60			1,529			1,589
Consumer
Residential real estate first mortgage		1,534			359			1,893
Residential real estate junior lien		(120	)		435			315
Other revolving and installment		230			118			348

Total consumer		1,645			911			2,556

Total loans (1)		1,705			2,440			4,145

Federal Reserve/FHLB Stock		19			26			45

Total interest income		1,762			2,695			4,457
Interest bearing liabilities
Interest-bearing demand deposits (2)		12			413			425
Money market and savings deposits (2)		174			2,373			2,547
Time deposits (2)		(52	)		686			634
Short-term borrowings		192			317			509
Long-term debt		—			31			31

Total interest expense		325			3,821			4,146

Change in net interest income	$	1,437		$	(1,126	)	$	311

(1): Includes loans held for sale.
(2): Includes deposits held for sale.

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Provision for Loan Losses

We establish an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income. Management reviews the loan portfolio on a quarterly basis to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

The provision for loan losses was $4.0 million for the six months ended June 30, 2019, compared to $5.6 million for the same period in 2018. The decrease in provision for loan losses was primarily due to a decrease in classified assets.

The provision for loan losses on off-balance sheet items, a component of "other expense" in our Consolidated Statements of Income, reflects management's assessment of the adequacy of the allowance for loan losses on lending-related commitments. See "Financial Condition—Allowance for Loan Losses."

Noninterest Income

Our noninterest income includes four primary types: (1) retirement and employee benefit services; (2) wealth management services, comprised of trust services, investment products and services and asset management services; (3) mortgage products and services; and (4) general banking services related to loans, deposits and other core client activities typically provided through the branch network and electronic banking channels.

	For the six months ended June 30,

(dollars in thousands)	2019		2018
Retirement and benefit services	$	30,835	$	31,337
Wealth management		7,489		7,263
Mortgage (1)		11,604		8,233
Service charges on deposit accounts		874		891
Investment security gains (losses) (1)		309		106
Other
Interchange fees		974		1,010
Bank-owned life insurance income (1)		396		400
Misc. transactional fees		569		512
Other noninterest income		2,008		598

Total noninterest income	$	55,058	$	50,350

(1): Not within the scope of ASC 606

Total noninterest income increased $4.7 million to $55.1 million for the six months ended June 30, 2019, compared to $50.4 million for the same period in 2018. The increase in noninterest income was primarily due to an increase in mortgage division revenue driven by the transition to mandatory delivery of mortgage loans to the secondary market partially offset by a $16.0 million decrease in mortgage originations. Other noninterest income increased $1.4 million as we realized a $1.5 million gain on the sale of our Duluth branch. This increase was partially

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offset by a decrease in retirement and benefits revenue of $502 thousand, mostly attributable to market volatility and outflows outpacing inflows for assets under administration.

Noninterest income as a percent of total operating revenue, which consists of net interest income plus noninterest income, was 59.5% for the six months ending June 30, 2019, an increase of 1.9% from 57.6% for the same period in 2018. The increase in 2019 was due to a 9.4% increase in noninterest income and a 1.0% increase in net interest income.

See "—Segment Reporting" for additional discussion of our business lines.

Noninterest Expense

The following table presents noninterest expense for the six months ended June 30, 2019 and 2018.

	For the six months ended June 30,

(dollars in thousands)	2019		2018
Salaries and incentives	$	34,956	$	33,033
Employee benefits		10,588		9,292
Occupancy and equipment expense		5,386		5,517
Business services, software and technology expense		7,820		6,736
Intangible amortization expense		2,101		2,392
Professional fees and assessments		2,095		2,106
Marketing and business development		1,134		1,583
Supplies and postage		1,396		1,291
Travel		900		870
Mortgage and lending expenses		1,215		1,160
Other		1,184		2,098

Total noninterest expense	$	68,775	$	66,078

Total noninterest expense increased $2.7 million to $68.8 million for the six months ended June 30, 2019, as compared to $66.1 million for the same period in 2018. The increase in noninterest expense was primarily due to an increase in salaries and incentives and employee benefits of $3.2 million, and an increase in business services, software and technology expense of $1.1 million. The increase in salaries and incentives and employee benefits between periods was the result of an increase of 17, on average, full-time equivalent employees along with an increased cost of health insurance benefits. The increase in technology related expenses was related to the continued investments related to our new client relationship manager software and digital delivery of solutions to clients. These increases were partially offset by decreases of $914 thousand in other expenses, $449 thousand in marketing and business development expense, and $291 thousand in intangible amortization expense.

Income Taxes

Income tax expense is an estimate based on the amount we expect to owe the respective taxing authorities, plus the impact of deferred tax items. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes,

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management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial and regulatory guidance in the context of our tax position. If the final resolution of taxes payable differs from our estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.

During the six months ended June 30, 2019, we recognized income tax expense of $4.9 million on $19.7 million of pre-tax income resulting in an effective tax rate of 24.87%, compared to the same period in 2018, in which we recognized an income tax expense of $3.3 million on $15.8 million of pre-tax income, resulting in an effective tax rate of 20.94%. The increase in the effective tax rate was primarily due to a reduction in excess tax benefits from stock-based compensation for the six months ended June 30, 2019 as compared to the same period in 2018.

Results of Operations—Years Ended December 31, 2018, 2017 and 2016

Overview

We had net income of $25.9 million, or $1.84 per diluted common share, in 2018, compared to $15.0 million, or $1.07 per diluted common share, for 2017, and $14.0 million, or $1.00 per common share, for 2016. Our financial performance in 2017 included the recording of $6.2 million of additional income tax expense related to deferred tax assets, $4.8 million of which related to the re-measurement of the deferred tax assets as a result of the Tax Cuts and Jobs Act and $1.4 million of which was a deferred tax impairment related to a bank acquisition in 2014. Also in 2017, we incurred $1.6 million of professional fees related to litigation and $520.0 thousand of additional expense related to branch closures. Our financial results in 2016 included $3.4 million of expenses related to two acquisitions we completed in the first quarter of the year and $1.5 million of expenses related to the closure of three bank branch offices. The intangible amortization expense for the years ending December 31, 2018, 2017, and 2016 was $4.6 million, $5.6 million, and $7.0 million, respectively.

Net Income

Net income for the year ended December 31, 2018 was $25.9 million, or $1.84 per diluted common share, compared to $15.0 million, or $1.07 per diluted common share, for the year ended December 31, 2017. The increase of $10.9 million, or 72.4%, in net income in 2018 was primarily driven by a $10.3 million decrease in income taxes, as a result of the impact from the Tax Cuts and Jobs Act. Other contributing factors included a $7.6 million increase in net interest income offset by increases of $5.3 million in provision for loan losses and $1.4 million in noninterest expense primarily due to continued investments in talent and technology.

Net income for the year ended December 31, 2017 was $15.0 million, or $1.07 per diluted common share, compared to $14.0 million, or $1.00 per diluted common share, for the year ended December 31, 2016. The increase of $1.0 million, or 6.9%, in net income in 2017 was primarily driven by a $4.7 million increase in net interest income in addition to an $8.9 million decrease in noninterest expense and partially offset by a $10.4 million increase in income taxes. The decrease in noninterest expense was primarily driven by $5.0 million of expenses related to acquisitions and branch closures incurred in 2016, partially offset by $1.6 million of professional litigation expenses incurred in 2017. The increase in income taxes for 2017 included $4.8 million related to the re-measurement of deferred tax assets as a result of the Tax Cuts and Jobs Act and $1.4 million deferred tax impairment related to a 2014 bank acquisition.

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Net Interest Income—Fully Taxable Equivalent

Net interest income (with nontaxable income converted to a FTE basis) totaled $75.7 million in 2018, an increase of $7.2 million, or 10.4%, from the prior year. The increase was a result of a $202.8 million, or 13.8%, increase in average total loans and an 18 basis point increase in the average yield on total loans, partially offset by a $77.1 million increase in average interest-bearing liabilities, and a 29 basis point increase in the average rate on interest-bearing liabilities. The increase in interest expense on deposits of $3.5 million was primarily due to an increase in certain product rates in response to the increase in the federal funds rate during 2018. The rate on short term borrowings increased 88 basis points to 2.18% in 2018, primarily due to four federal funds rate increases in 2018.

In 2018, the net interest margin increased 10 basis points to 3.86% from the 3.76% reported in 2017. The increase was attributable to a 31 basis point increase in the earning-asset yield, partially offset by a 29 basis point increase in the cost of interest-bearing liabilities. The 4.81% yield on loans increased 18 basis points in 2018 from 4.63% in 2017. The yield on investments, including interest-bearing deposits with banks, increased from 2.33% in 2017 to 2.61% in 2018. The cost of interest-bearing liabilities was 0.90% during 2018 as compared to 0.61% for 2017. The increased cost primarily reflects the increase in the average rate paid on interest-bearing deposits in 2018. The increase of interest expense related to short-term borrowings was $1.0 million higher in 2018 at $1.9 million compared to $900.0 thousand in 2017 primarily based on an increase in FHLB advances.

In 2017, the net interest margin increased 13 basis points to 3.76% from the 3.63% reported in 2016. The increase was attributable to a 16 basis point increase in the earning-asset yield, partially offset by a seven basis point increase in the cost of interest-bearing liabilities. The 4.63% yield on loans decreased slightly in 2017 from 4.65% in 2016. The yield on investments, including interest-bearing deposits with banks, increased from 1.89% in 2016 to 2.33% in 2017. The cost of interest-bearing liabilities was 0.61% during 2017 as compared to 0.54% for 2016. The increased cost primarily reflects the increase in rate paid on short-term borrowings along with a higher average balance.

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to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

	For the years ended December 31,

	2018								2017								2016
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rate/ Yield			Average Balance			Interest Income/ Expense		Average Rate/ Yield			Average Balance			Interest Income/ Expense		Average Rate/ Yield
Assets
Interest-bearing deposits with banks	$	8,336		$	166		1.99	%	$	39,045		$	379		0.97	%	$	84,667		$	429		0.51	%
Federal funds sold		—			—		—			—			—		—			654			1		0.15	%
Investment securities		255,247			6,705		2.63	%		286,313			7,189		2.51	%		279,992			6,454		2.31	%
Loans held for sale		19,255			607		3.15	%		23,887			609		2.55	%		39,583			1,152		2.91	%
Loans
Commercial
Commercial and industrial		483,182			25,019		5.18	%		449,901			21,449		4.77	%		446,614			20,281		4.54	%
Real estate construction		39,024			2,161		5.54	%		44,492			2,243		5.04	%		39,423			1,996		5.06	%
Commercial real estate		475,778			22,853		4.80	%		464,688			21,667		4.66	%		414,509			20,067		4.84	%

Total commercial		997,984			50,033		5.01	%		959,081			45,359		4.73	%		900,546			42,344		4.70	%
Consumer
Residential real estate first mortgage		400,458			16,420		4.10	%		243,655			10,464		4.29	%		182,081			7,899		4.34	%
Residential real estate junior lien		190,838			10,305		5.40	%		188,420			9,026		4.79	%		177,387			8,922		5.03	%
Other revolving and installment		88,605			3,929		4.43	%		83,886			3,476		4.14	%		85,194			3,340		3.92	%

Total consumer		679,901			30,654		4.51	%		515,961			22,966		4.45	%		444,662			20,161		4.53	%

Total loans (1)		1,677,885			80,687		4.81	%		1,475,042			68,325		4.63	%		1,345,208			62,505		4.65	%

Total earning assets		1,960,723			88,165		4.50	%		1,824,287			76,502		4.19	%		1,750,104			70,541		4.03	%
Cash and due from banks		27,111								26,190								28,186
Allowance for loan losses		(19,643	)							(15,818	)							(15,937	)
Goodwill & other intangibles		52,040								57,110								60,116
Premises and equipment		21,315								22,929								25,519
Other assets		87,860								86,805								89,563

Total assets	$	2,129,406							$	2,001,503							$	1,937,551



Liabilities and Stockholders' Equity
Interest-bearing demand deposits (2)	$	405,512		$	1,034		0.25	%	$	336,876		$	408		0.12	%	$	301,047		$	310		0.10	%
Money market and savings deposits (2)		626,041			3,950		0.63	%		619,687			1,627		0.26	%		670,932			1,457		0.22	%
Time deposits (2)		206,846			2,008		0.97	%		219,164			1,485		0.68	%		251,359			1,618		0.64	%
Short-term borrowings		86,851			1,896		2.18	%		72,445			943		1.30	%		5,059			21		0.42	%
Long-term debt		58,813			3,591		6.11	%		58,803			3,504		5.96	%		65,095			3,596		5.52	%

Total interest bearing liabilities		1,384,063			12,479		0.90	%		1,306,975			7,967		0.61	%		1,293,492			7,002		0.54	%

Noninterest-bearing deposits (2)		528,552								488,295								443,453
Other liabilities		29,450								29,454								32,567
Stockholders' equity		187,341								176,779								168,039

Total liabilities and stockholders' equity	$	2,129,406							$	2,001,503							$	1,937,551



Net interest income (3)				$	75,686							$	68,535							$	63,539



Net interest rate spread (3)							3.59	%							3.58	%							3.49	%
Net interest rate margin (3)							3.86	%							3.76	%							3.63	%
Fully tax-equivalent adjustment				$	462							$	865							$	599

(1): Includes loans held for sale
(2): Includes deposits held for sale
(3): Fully tax-equivalent adjustment was calculated utilizing a marginal income tax rate of 21.0 percent for 2018 and 35.0 percent for years prior to 2018.

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Rate/Volume Analysis

The tables below presents the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous year's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year 2018 to 2017 Change Due to									Year 2017 to 2016 Change Due to

(dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income
Interest bearing deposits with banks	$	(298	)	$	85		$	(213	)	$	(231	)	$	181		$	(50	)
Federal funds sold		—			—			—			(1	)		—			(1	)
Investment securities		(780	)		296			(484	)		146			589			735
Loans held for sale		(118	)		116			(2	)		(457	)		(86	)		(543	)
Loans
Commercial
Commercial and industrial		1,587			1,983			3,570			147			1,021			1,168
Real estate construction		(276	)		194			(82	)		257			(10	)		247
Commercial real estate		517			669			1,186			2,429			(829	)		1,600

Total commercial		1,828			2,846			4,674			2,833			182			3,015
Consumer
Real estate 1 - 4 family first mortgage		6,734			(778	)		5,956			2,671			(106	)		2,565
Real estate 1 - 4 family junior mortgage		116			1,163			1,279			555			(451	)		104
Other revolving and installment		196			257			453			(51	)		187			136

Total consumer		7,046			642			7,688			3,175			(370	)		2,805

Total loans (1)		8,874			3,488			12,362			6,008			(188	)		5,820

Total interest income	$	7,678		$	3,985		$	11,663		$	5,465		$	496		$	5,961



Interest expense
Interest-bearing demand deposits (2)	$	83		$	543		$	626		$	37		$	61		$	98
Money market and savings deposits (2)		17			2,306			2,323			(111	)		281			170
Time deposits (2)		(83	)		606			523			(207	)		74			(133	)
Short term borrowings		188			765			953			280			642			922
Long term debt		1			86			87			(348	)		256			(92	)

Total interest expense		206			4,306			4,512			(349	)		1,314			965

Increase (decrease) in net interest income	$	7,472		$	(321	)	$	7,151		$	5,814		$	(818	)	$	4,996

(1): Includes loans held for sale
(2): Includes deposits held for sale

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Provision for Loan Losses

The provision for loan losses was $8.6 million for the year ended December 31, 2018, compared to $3.3 million for the year ended December 31, 2017. The increase of $5.3 million in provision for loan losses in 2018 was primarily due to $3.3 million more provision related to the increase in criticized loan balances, $0.9 million more provision for specific reserves on impaired loans, $0.7 million more provision for net charge-offs and $0.4 million for pass rated credits due to loan growth.

The provision for loan losses was $3.3 million for the year ended December 31, 2017, compared to $3.1 million for the year ended December 31, 2016. The provision for loan losses remained flat year-over-year as credit quality was stable and net charge offs were consistent with $2.3 million in 2017 and $2.1 million in 2016.

Noninterest Income

	For the years ended December 31,

(dollars in thousands)	2018		2017			2016
Retirement and benefit services	$	63,316	$	62,390		$	57,804
Wealth management		14,900		13,953			12,640
Mortgage (1)		17,630		19,748			26,528
Service charges on deposit accounts		1,808		1,854			1,916
Investment security gains (losses) (1)		85		(13	)		(24	)
Other
Interchange fees		2,005		1,997			2,025
Bank-owned life insurance income (1)		803		820			991
Misc transactional fees		1,106		1,070			1,071
Other noninterest income		1,096		1,226			2,138

Total noninterest income	$	102,749	$	103,045		$	105,089

(1): Not within the scope of ASC 606.

Total noninterest income decreased by $296 thousand, or 0.3%, to $102.7 million in 2018 as compared to 2017. Retirement and benefit services noninterest income for 2018 was $63.3 million, an increase of $926 thousand, or 1.5%, from the prior year, due to the combination of expanded business activities from the acquisition of ABGNCS in 2016 and new client generation. Wealth management noninterest income for 2018 was $14.9 million, an increase of $947 thousand from the prior year. The increase was due to organic growth and through leveraging synergies by retaining terminated retirement and benefit services participants. Mortgage noninterest income for 2018 was $17.6 million, a decrease of $2.1 million or 10.7% from the prior year level. The decrease was primarily driven by a corresponding decrease in

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origination volume. Mortgage originations for 2018 of $779.7 million decreased $87.3 million or 10.1% as a result of higher home mortgage rates throughout the year.

Total noninterest income decreased by $2.0 million, or 1.9%, to $103.0 million in 2017 as compared to 2016. The decrease was comprised of a $6.8 million decrease in mortgage noninterest income, partially offset by $4.6 million of increased retirement and benefit services noninterest income and $1.3 million of increased wealth management noninterest income. The decrease in mortgage noninterest income was correlated to a decrease in mortgage originations of $198.1 million or 18.6% year over year. The increase in retirement and benefit services and wealth management noninterest income was primarily driven by an increase in AUA and AUM as a result of asset appreciation due to general stock market increases.

Noninterest income as a percent of total operating revenue, which consists of net interest income plus noninterest income, was 57.7% in 2018, down 2.7% from the prior year. The decrease in 2018 was due to an 11.2% increase in net interest income, while noninterest income decreased 0.3%. The 2.1% decrease in this ratio from 2016 to 2017 was driven by a 1.9% decrease in noninterest income, primarily the result of decreased mortgage revenue, while net interest income increased 7.5%.

Noninterest Expense

The following table presents noninterest expense for the years ended December 31, 2018, 2017, and 2016.

	For the years ended December 31,

(dollars in thousands)	2018		2017		2016
Salaries and incentives	$	69,403	$	67,576	$	70,359
Employee benefits and taxes		17,866		16,490		15,888
Occupancy and equipment expense		11,086		10,892		11,736
Business services, software and technology expense		14,525		12,976		14,510
Intangible amortization		4,638		5,623		7,005
Professional fees and assessments		5,098		6,158		6,301
Marketing and business development		3,459		3,271		3,237
Supplies and postage		2,737		2,609		2,930
Travel		1,738		1,530		1,721
Mortgage and lending expenses		2,153		2,235		2,439
Other		3,622		5,560		7,666

Total noninterest expense	$	136,325	$	134,920	$	143,792

Total noninterest expense increased $1.4 million to $136.3 million for the year ended December 31, 2018, from $134.9 million for 2017. The increase in noninterest expense was primarily due to an increase in salaries and incentives of $1.8 million resulting from the addition of 38 full-time equivalent employees in 2018. Employee benefits and taxes increased $1.4 million due in part to the increased number of employees and an increase in health insurance costs of $690 thousand. Business services, software, and technology expense increased $1.5 million as our Company invested in a new client relationship manager software and digital

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delivery of solutions to clients. Amortization expense decreased $1.0 million to $4.6 million as a result of past acquisitions being fully amortized during the year. Professional fees and assessments decreased $1.1 million due to legal expenses in 2017 related to litigation and a settlement of the related litigation of $330 thousand received in 2018. Other noninterest expense decreased $1.9 million during 2018 due to expense accruals of $450.0 thousand in 2017 for litigation, which were reversed in 2018. In addition, the true-up liability for the loans covered under the loss share agreement with the FDIC was $3.2 million in 2017 and in 2018 the loss share agreement was terminated for $220 thousand less than the amount recorded as payable to the FDIC. Finally, there was $520 thousand of branch closure expenses recognized in 2017 and no expenses related to branch closures in 2018.

Total noninterest expense decreased $8.9 million to $134.9 million for the year ended December 31, 2017, as compared to the prior year. The decreases were primarily due to the merger expenses of the 2016 acquisitions of ABGNCS and Beacon. The decreases included a $2.8 million decrease in salaries and incentives, a result of lower mortgage incentives payments due to lower mortgage originations, as well as fewer employees following the integration of our Company's prior acquisitions. Occupancy and equipment expense decreased $844 thousand primarily the result of the closure of three branch offices in 2016 and the consolidation of office space accumulated in previous acquisitions. There was a $1.5 million decrease in business services, software, and technology expense related to the integration of the ABGNCS and Beacon acquisitions. Intangible amortization decreased $1.4 million primarily as a result of past acquisitions being fully amortized during the year. Other noninterest expenses decreased $2.1 million in 2017 as our Company realized efficiencies resulting from the integration of the acquisitions. In addition, 2016 included the loss on sale of branch offices of $1.1 million compared to no such losses in 2017.

Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other things, the Tax Cuts and Jobs Act lowered the corporate tax rate to 21% from the existing maximum rate of 35.0%, effective for tax years including or commencing January 1, 2018. ASC 740, Income Taxes, requires existing deferred tax assets and liabilities to be measured at the enacted tax rate expected to be applied when the temporary differences are to be realized or settled. Thus, as of the date of enactment, deferred taxes were re-measured based upon the new 21% tax rate. The change in tax rate resulted in a deferred tax expense of $4.8 million from the write-down of the net deferred tax assets. The effect of this change in tax law was recorded as a component of the income tax provision including those deferred assets and liabilities that were established through a financial statement component other than continuing operations.

The effective tax rate for 2018 was 21.7% compared to 53.1% in 2017 and 33.8% in 2016. The increase in the effective rate for 2017 was primarily attributable to one-time expenses from the revaluation of net deferred tax assets related to the enactment of the Tax Cuts and Jobs Act in addition to a $1.4 million impairment of deferred tax assets related to loans acquired in 2014 that we were unable to recognize certain tax benefits.

Segment Reporting

We determine reportable segments based on the significance of the services offered, the significance of those services to our financial condition and operating results, and our regular review of the operating results of those services. We have four operating segments—banking, retirement and benefit services, wealth management, and mortgage. These segments are

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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 noninterest expense before indirect overhead allocations. Corporate administration includes the indirect overhead and is set forth in the table below along with income tax expense and the consolidated net income. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes. Certain reclassification adjustments have been made between corporate administration and the various lines of business for consistency in presentation.

The following tables presents key metrics related to our segments as of and for the dates presented:

	As of and for the six months ended June 30,

(dollars in thousands)	Banking		Retirement and benefit services		Wealth management		Mortgage			Corporate administration			Consolidated
2019
Net interest income	$	38,794	$	—	$	—	$	434		$	(1,817	)	$	37,411
Provision for loan losses		4,017		—		—		—			—			4,017
Noninterest income		3,578		30,835		7,489		11,604			1,552			55,058
Noninterest expense		20,080		17,591		4,101		9,928			17,075			68,775

Net income before taxes	$	18,275	$	13,244	$	3,388	$	2,110		$	(17,340	)	$	19,677



Total assets	$	2,112,373	$	39,787	$	3,407	$	44,668		$	6,894		$	2,207,129
Assets under management		—		2,598,407		2,661,826		—			—			5,260,233
Assets under administration		—		27,771,440		82,612		—			—			27,854,052
2018
Net interest income	$	38,392	$	—	$	30	$	405		$	(1,785	)	$	37,042
Provision for loan losses		5,550		—		—		—			—			5,550
Noninterest income		3,449		31,337		7,263		8,233			68			50,350
Noninterest expense		19,374		18,390		3,993		8,954			15,367			66,078

Net income before taxes	$	16,917	$	12,947	$	3,300	$	(316	)	$	(17,084	)	$	15,764



Total assets	$	2,103,473	$	35,083	$	2,827	$	36,055		$	(1,553	)	$	2,175,885
Assets under management		—		2,077,383		2,672,342		—			—			4,749,725
Assets under administration		—		27,910,908		83,876		—			—			27,994,784

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	As of and for the year ended December 31,

(dollars in thousands)	Banking		Retirement and Benefit Services		Wealth Management		Mortgage		Corporate Administration			Consolidated
2018
Net interest income	$	77,919	$	—	$	62	$	834	$	(3,591	)	$	75,224
Provision for loan losses		8,599		—		—		11		—			8,610
Noninterest income		6,921		63,316		14,900		17,630		(18	)		102,749
Noninterest expense		42,605		36,414		6,824		17,199		33,283			136,325

Net income before taxes	$	33,636	$	26,902	$	8,138	$	1,254	$	(36,892	)	$	33,038



Total assets	$	2,120,249	$	41,492	$	3,235	$	14,600	$	(506	)	$	2,179,070
Assets under management		—		2,034,674		2,549,685		—		—			4,584,359
Assets under administration		—		25,777,475		77,130		—		—			25,854,605
2017
Net interest income	$	70,377	$	—	$	57	$	740	$	(3,504	)	$	67,670
Provision for loan losses		3,280		—		—		—		—			3,280
Noninterest income		7,180		62,390		13,953		19,748		(226	)		103,045
Noninterest expense		35,996		41,977		7,640		17,448		31,859			134,920

Net income before taxes	$	38,281	$	20,413	$	6,370	$	3,040	$	(35,589	)	$	32,515



Total assets	$	2,078,013	$	38,118	$	2,718	$	18,669	$	(1,437	)	$	2,136,081
Assets under management		—		1,238,405		2,609,681		—		—			3,848,086
Assets under administration		—		28,127,960		92,285		—		—			28,220,245
2016
Net interest income	$	64,990	$	—	$	54	$	1,302	$	(3,406	)	$	62,940
Provision for loan losses		3,060		—		—		—		—			3,060
Noninterest income		6,895		57,804		12,640		26,528		1,222			105,089
Noninterest expense		34,314		44,479		8,498		22,275		34,226			143,792

Net income before taxes	$	34,511	$	13,325	$	4,196	$	5,555	$	(36,410	)	$	21,177



Total assets	$	1,969,232	$	47,467	$	3,319	$	31,671	$	(1,644	)	$	2,050,045
Assets under management		—		1,158,340		2,221,447		—		—			3,379,787
Assets under administration		—		24,952,959		77,545		—		—			25,030,504

For additional financial information on our segments see Note 21 (Segment Reporting) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

Banking

The banking segment offers a complete line of loan, deposit, cash management, and treasury services through 17 offices in North Dakota, Minnesota, and Arizona. These products and services are supported through various digital applications. The majority of our assets and liabilities are on the banking segment balance sheet.

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The banking segment reported net income before taxes and indirect allocations of $18.3 million for the six months ended June 30, 2019, an increase of $1.4 million compared to the six months ended June 30, 2018. Net interest income increased $402 thousand to $38.8 million for the six months ended June 30, 2019. Noninterest expense also increased $706 thousand or 3.6% to $20.1 million for the six months ended June 30, 2019.

The banking segment reported net income before taxes and indirect allocations of $33.6 million for 2018, a decrease of $4.6 million compared to the prior period due to a $5.3 million increase in provision expense. Net interest income increased $7.5 million as average loans grew $202.8 million from $1.5 billion to $1.7 billion and average deposits increased $102.9 million from $1.7 billion to $1.8 billion during the period. Noninterest expense rose 18.4% or $6.6 million in 2018 compared to 2017, primarily due to the intercompany expense of $6.3 million which is allocated to the mortgage and retirement and benefit services segments for the residential real estate loans and deposit balances delivered to the Bank's balance sheet.

The banking segment reported net income before taxes and indirect allocations of $38.3 million for 2017 compared to net income before taxes of $34.5 million for 2016, an increase of $3.8 million due to a $5.4 million increase in net interest income. Net interest income increased 8.3% as a result of a 9.7% increase in the average loans outstanding. Noninterest income, provision for loan losses, and noninterest expense were comparable for the full years of 2017 and 2016. Average loans increased $129.8 million and average deposits were relatively flat for the year.

Retirement and Benefit Services

Retirement and benefit services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; ESOP trustee, recordkeeping and administration; investment fiduciary services to retirement plans; HSA, flex spending account, and government health insurance program recordkeeping and administration services to employers; payroll and human resource information system services for employers. The division services approximately 6,700 retirement plans and more than 355,000 plan participants. In addition, the division employs nearly 300 professionals, and operates within our banking markets as well as Albert Lea, Minnesota, Lansing, Michigan, Manchester, New Hampshire and 13 satellite offices.

The retirement and benefit services segment reported net income before taxes and indirect allocations of $13.2 million for the six months ended June 30, 2019, an increase of $297 thousand from the $12.9 million for the six months ended June 30, 2018. Revenue of $30.8 million, comprised of $14.5 million in asset based revenue and $16.3 million in participant and transaction revenues, was down $502 thousand or 1.6% primarily due to a decline in asset based revenue of $632 thousand or 4.2%. The decline in the asset based revenue was the result of fee compression and an ongoing shift from asset based fees to participant and transaction based fees. Noninterest expense declined $799 thousand or 4.3% due to the reduction in allocation expense of $1.2 million, as the division was credited for sourcing deposits which are being held on the banking division's balance sheet, partially offset by a $789 thousand increase in personnel expenses.

The retirement and benefit services segment reported net income before taxes and indirect allocations of $26.9 million for 2018, an increase of $6.5 million from the $20.4 million of net income before taxes and indirect allocations earned in 2017. Revenue of $63.3 million included $30.4 million of asset based revenue and $32.9 million of participant and transaction revenues,

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and increased $926 thousand or 1.5% due to a $1.2 million decline in asset based revenues and $2.1 million increase in participant and transaction revenues. The shifts in revenue are the result of fee compression and an ongoing shift from asset based fees to participant and transaction based fees. Noninterest expense declined $5.6 million or 13.3%. The reduction in expense was due to a $3.2 million decline in allocation expense as the division is credited for sourcing deposits which are being held on the banking division's balance sheet. Personnel related expenses also decreased by $1.4 million and intangible amortization expense decreased by $1.0 million.

The retirement and benefit services segment reported net income before taxes and indirect allocations of $20.4 million for 2017, an increase of $7.1 million from the $13.3 million net income before taxes and indirect allocations earned in 2016. Revenue of $62.4 million included $31.6 million of asset based revenue and $30.8 million of participant and transaction revenues, and increased $4.6 million due to increases in asset based revenues as transaction and participant based revenue was stable between the periods. Noninterest expense for 2017 was $42.0 million as compared to $44.5 million for 2016, a decrease of $2.5 million or 5.6%. The decrease included a reduction in intangible amortization expense of $1.4 million and decreases in personnel expense, occupancy, consulting and software as a result of integrating the 2016 acquisition of ABGNCS.

The following tables present changes in the AUA and AUM for our retirement and benefit services segment for the periods presented.

	For the six months ended June 30,

(dollars in thousands)	2019			2018
AUA & AUM balance beginning of period	$	27,812,149		$	29,366,365
Inflows (1)		2,222,252			2,112,053
Outflows (2)		(2,648,766	)		(2,193,242	)
Market impact (3)		2,984,212			703,115

AUA & AUM balance end of period	$	30,369,847		$	29,988,291



Yield (4)(5)		0.21	%		0.21	%

(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.

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(5): Ratio has been annualized for interim periods.

	For the twelve months ended December 31,

(dollars in thousands)	2018			2017
AUA & AUM balance beginning of period	$	29,366,365		$	26,111,299
Inflows (1)		4,637,646			4,816,574
Outflows (2)		(4,981,204	)		(4,822,892	)
Market impact (3)		(1,210,658	)		3,261,384

AUA & AUM balance end of period	$	27,812,149		$	29,366,365



Yield (4)		0.22	%		0.22	%

(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.

AUA and AUM for the retirement and benefit services segment were $30.4 billion at June 30, 2019, an increase of $2.6 billion compared to the total at December 31, 2018. The increase was primarily driven by an increase of $3.0 billion related to the market impact and partially offset by outflows outpacing inflows. AUA and AUM were $27.8 billion at December 31, 2018, a decrease of $1.6 billion compared to the total at December 31, 2017. The decrease was the result of a $1.2 billion decline related to the market impact and a $343.6 million decrease due to outflows exceeding inflows for the twelve months ended December 31, 2018.

Wealth Management

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

Wealth management reported net income before taxes and indirect allocations of $3.4 million for the six months ended June 30, 2019, an increase of $88 thousand from the $3.3 million reported for the six months ended June 30, 2018. Revenue within our wealth management division is comprised primarily of revenue earned from managing the assets of clients. In the first six months of 2019, approximately 95% or $7.2 million of the revenue attributed to the division was driven by AUM while 5% or $338 thousand of the revenue attributed to the division was driven by annuity earnings and fees related to transactions and administration.

Wealth management noninterest income for 2018 was $14.9 million, an increase of $947 thousand from the prior year. Net income before taxes of $8.1 million increased $1.8 million compared to net income of $6.4 million in 2017. The increase was due to the additional clients generated by both organic growth and through leveraging synergies of retirement and benefit services. Wealth management noninterest expense of $6.8 million decreased $816 thousand from 2017 primarily due to intercompany allocations.

Wealth management reported net income before taxes of $6.4 million on revenue of $14.0 million 2017 as compared to net income before taxes of $4.2 million on revenue of $12.6 million for 2016. Noninterest expense for 2017 was $7.6 million as compared to

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$8.5 million for 2016, a decrease of 10.1%. AUM, including brokerage, increased 17.5% from $2.2 billion to $2.6 billion during the year.

The following tables present changes in the AUM for our wealth management segment, disaggregated by product, for the periods presented.

	For the six months ended June 30,

(dollars in thousands)	2019			2018
Dimension balance beginning of period	$	1,276,905		$	1,369,580
Inflows (1)		116,637			103,511
Outflows (2)		(97,601	)		(101,047	)
Market impact (3)		141,859			(32,763	)

Dimension balance end of period	$	1,437,800		$	1,339,281



Yield (4)(5)		0.56	%		0.56	%
Blue Print balance beginning of period	$	348,605		$	334,648
Inflows (1)		51,024			50,491
Outflows (2)		(29,856	)		(29,204	)
Market impact (3)		48,531			(4,531	)

Blue Print balance end of period	$	418,304		$	351,404



Yield (4)(5)		0.99	%		0.97	%
Trust balance beginning of period	$	226,305		$	222,738
Inflows (1)		72,323			172,717
Outflows (2)		(68,403	)		(190,179	)
Market impact (3)		(6,844	)		35,257

Trust balance end of period	$	223,381		$	240,533



Yield (4)(5)		0.64	%		0.64	%
Total Wealth Management balance beginning of period	$	1,851,815		$	1,926,966
Inflows (1)		239,984			326,719
Outflows (2)		(195,860	)		(320,430	)
Market impact (3)		183,546			(2,037	)

Total Wealth Management balance end of period (6)	$	2,079,485		$	1,931,218



Yield (4)(5)(7)		0.65	%		0.64	%

(1): Inflows include new account assets, contributions, dividends and interest.
(2): Outflows include closed account assets, withdrawals and client fees.
(3): Market impact reflects gains and losses on portfolio investments.
(4): Wealth management noninterest income divided by simple average ending balances.
(5): Ratio has been annualized for interim periods.
(6): Total wealth management does not include brokerage assets of $665.0 million and $825.0 million for the periods ending June 30, 2019 and 2018, respectively.
(7): Yield does not include brokerage revenue of $1.0 million and $1.2 million for the six months ending June 30, 2019 and 2018, respectively.

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	For the twelve months ended December 31,

(dollars in thousands)	2018			2017
Dimension balance beginning of period	$	1,369,580		$	1,148,464
Inflows (1)		218,171			520,283
Outflows (2)		(199,187	)		(422,156	)
Market impact (3)		(111,659	)		122,989

Dimension balance end of period	$	1,276,905		$	1,369,580



Yield (4)		0.57	%		0.55	%
Blueprint balance beginning of period	$	334,648		$	260,374
Inflows (1)		104,643			85,492
Outflows (2)		(55,938	)		(42,325	)
Market impact (3)		(34,748	)		31,107

Blueprint balance end of period	$	348,605		$	334,648



Yield (4)		1.04	%		1.03	%
Trust balance beginning of period	$	222,738		$	215,154
Inflows (1)		251,327			216,880
Outflows (2)		(297,514	)		(174,838	)
Market impact (3)		49,754			(34,458	)

Trust balance end of period	$	226,305		$	222,738



Yield (4)		0.65	%		0.73	%
Total Wealth Management balance beginning of period	$	1,926,966		$	1,623,992
Inflows (1)		574,141			822,655
Outflows (2)		(552,639	)		(639,319	)
Market impact (3)		(96,653	)		119,638

Total Wealth Management balance end of period (5)	$	1,851,815		$	1,926,966



Yield (4)(6)		0.66	%		0.66	%

(1): Inflows include new account assets, contributions, dividends and interest.
(2): Outflows include closed account assets, withdrawals and client fees.
(3): Market impact reflects gains and losses on portfolio investments.
(4): Wealth management noninterest income divided by simple average ending balances.
(5): Total wealth management does not include brokerage assets of $775.0 million for the years ending December 31, 2018 and 2017.
(6): Yield does not include brokerage revenue of $2.4 million and $2.3 million for the years ending December 31, 2018 and 2017, respectively.

AUM for the wealth management segment was $2.1 billion, excluding $665.0 million of brokerage assets, at June 30, 2019, an increase of $227.7 million compared to the total at December 31, 2018. The increase was primarily driven by an increase of $183.5 million related to the market impact, in addition to inflows exceeding outflows by $44.2 million. AUM was $1.9 billion, excluding brokerage assets of $775.0 million, at December 31, 2018, a decrease of $75.1 million compared to the total at December 31, 2017. The decrease was the result of a

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$96.7 million decline related to the market impact and partially offset by a $21.5 increase due to inflows exceeding outflow flows for the twelve months ended December 31, 2018.

Mortgage

The mortgage division offers first and second mortgage loans through a centralized mortgage unit in Minneapolis, Minnesota as well as through the banking office locations.

Mortgage reported net income before taxes and indirect allocations of $2.1 million for the six months ended June 30, 2019, an increase of $2.4 million from the net loss of $316 thousand reported for the six months ended June 30, 2018. Noninterest income for the six months ended June 30, 2019 of $11.6 million increased $3.4 million from the same period in 2018. The increase was primarily driven by the transition to mandatory delivery of mortgages into the secondary market. Mortgage originations for the six months ending June 30, 2019 of $371.7 million decreased $16.0 million or 4.1%, from the same period in 2018.

Mortgage noninterest income for 2018 of $17.6 million decreased $2.1 million or 10.7% from the prior year level. The decrease was primarily driven by a corresponding decrease in origination volume. Mortgage originations for 2018 of $779.7 million decreased $87.3 million or 10.1% year over year. Mortgage noninterest expense for 2018 decreased $249 thousand or 1.4% from the prior year. The decrease consisted of lower incentive compensation and various lending expenses correlated to the decline in origination volume offset by additional investments in talent and technology.

The mortgage division reported net income before taxes of $3.0 million on revenue of $20.5 million for 2017 compared to net income before taxes of $5.6 million on revenue of $27.8 million for 2016. Mortgage originations for 2017 were $867.3 million as compared to $1.1 billion in 2016. Net interest income is generated from the loans held for sale portfolio, while noninterest income is primarily from the gain on sale of mortgage loans. During 2017, we retained a higher volume of loans on balance sheet, $176.6 million, compared to the $48.7 million retained in 2016. This resulted in lower noninterest income for mortgage, but higher net interest income for the banking business line. Noninterest expense decreased from $22.3 million to $17.4 million, or 21.7%, during the year on lower commission expense due to lower volumes, and the deferral of loan origination expenses associated with loans held in the banking segment's portfolio.

Financial Condition

Overview

Total assets were $2.2 billion at June 30, 2019, an increase of $28.1 million compared to $2.2 billion at December 31, 2018. The increase in total assets was primarily due to increases of $30.1 million in loans held for sale, $11.6 million in loans, $3.5 million in available-for-sale investment securities, and $4.3 million in cash and due from banks, offset by a reduction in loans held for branch sale of $32.0 million. In addition we recognized an operating lease right-of-use asset which totaled $9.4 million at June 30, 2019. The increase in loans held for sale was primarily due to seasonally higher loan originations. The increase in loans was primarily driven by growth in our commercial real estate and commercial and industrial portfolios. The increase in the securities available-for-sale was a result of management's decision to extend the duration while increasing the portfolio yield and harvesting gains on lower yielding and shorter duration securities. The increase in cash and cash equivalents was primarily due to an increase

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in cash balances held with the Federal Reserve Bank. We maintain a cash balance at the Federal Reserve and manage this liquidity balance on a daily basis as required, and may have significant cash balance fluctuations in the ordinary course of business based on inflows and outflows from changing loan totals, investment activity, and deposit flows.

Total assets were $2.2 billion at December 31, 2018, an increase of $43.0 million compared to $2.1 billion at December 31, 2017. The increase was primarily due to an increase of $127.4 million in total loans, offset by an increase of $5.6 million in the allowance for loan losses, partially offset by a decrease of $81.3 million in cash and due from banks, a $16.8 million decrease in securities available-for-sale, and a $4.6 million decrease in other intangible assets. The increase in loans was primarily driven by growth in the residential mortgage portfolio of $92.9 million as well as an increase of $30.1 million in the commercial and industrial portfolio. The decrease in cash and due from bank and securities available-for-sale reflects management's decision to invest in higher yielding assets.

Total assets were $2.1 billion at December 31, 2017, an increase of $86.0 million from $2.1 billion at December 31, 2016. The increase was primarily due to an increase of $207.5 million in total loans, partially offset by an $85.4 million decrease cash and due from banks, a $17.1 million decrease in loans held for sale, and a $5.6 million decrease in other intangible assets. The increase in loans was primarily driven by a $163.1 million increase in the residential mortgage portfolio and a $53.3 million increase in the commercial real estate portfolio.

Investment Securities

The following table presents the amortized cost and fair value of our investment securities portfolio as of June 30, 2019 and as of December 31, 2018, 2017 and 2016:

					December 31,

	June 30, 2019				2018				2017				2016
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Trading	$	—	$	—	$	1,539	$	1,539	$	1,945	$	1,945	$	1,959	$	1,959
Available-for-sale
U.S. Treasury and agencies		21,838		21,833		19,364		19,142		19,086		18,944		20,261		20,092
Obligations of state and political agencies		48,770		49,064		67,662		66,387		74,803		74,475		73,998		71,952
Mortgage backed securities
Residential Agency		147,482		149,109		129,906		126,998		149,373		148,630		148,560		148,032
Commercial		25,390		25,427		29,050		28,767		14,432		14,211		23,279		23,111
Asset backed securities		174		179		398		399		530		541		722		740
Corporate bonds		8,084		8,108		8,602		8,481		10,212		10,220		7,319		7,267

Total available-for-sale		251,738		253,720		254,982		250,174		268,436		267,021		274,139		271,194
Equity		2,532		2,532		3,165		3,165		5,445		5,445		5,758		5,758

Total investment securities	$	254,270	$	256,252	$	259,686	$	254,878	$	275,826	$	274,411	$	281,856	$	278,911

The composition of our investment securities portfolio reflects our 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

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investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral.

At June 30, 2019 total investment securities were $256.3 million compared to $254.9 million at December 31, 2018. Investment securities as a percentage of total assets were 11.6% and 11.7%, as of June 30, 2019 and December 31, 2018, respectively.

At December 31, 2018, total investment securities were $254.9 million, or 11.7% of total assets, compared to $274.4 million, or 12.8% of total assets, at December 31, 2017. The $19.5 million decrease in securities from December 31, 2017 to December 31, 2018, primarily reflected decreases in obligations of state and political subdivisions and mortgage backed residential agency securities. Securities with a carrying value of $149.0 million and $166.9 million were pledged at December 31, 2018 and December 31, 2017, respectively, to secure public deposits and for other purposes required or permitted by law.

The net pre-tax unrealized market value gain on the available-for-sale investment portfolio as of June 30, 2019 was $2.0 million, as compared to a $4.8 million loss as of December 31, 2018. This increase is indicative of the interest rate movements during the first six months and the changes in the size and composition of the portfolio.

The net pre-tax unrealized market value loss on the available-for-sale investment portfolio as of December 31, 2018 was $4.8 million, as compared to $1.4 million one year earlier. This decrease is indicative of the interest rate movements during the respective time periods and the changes in the size and composition of the portfolio.

The investment portfolio is principally composed of U.S. Treasury debentures, U.S. Agency mortgage-backed pass-throughs, U.S. Agency CMOs and municipal bonds. The portfolio does not include any private label mortgage-backed securities, or MBS, or private label collateralized mortgage obligations.

As of June 30, 2019, the Bank held 104 tax-exempt state and local municipal securities totaling $41.6 million. As of December 31, 2018, the Bank held 127 tax-exempt state and local municipal securities totaling $58.5 million. Other than the aforementioned investments, at June 30, 2019 and December 31, 2018, 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, including ESOP-owned shares.

At June 30, 2019 and December 31, 2018, all of the available-for-sale debt securities in an unrealized loss position were investment grade. During the six months ended June 30, 2019 and the year ended December 31, 2018, we evaluated all of our debt securities for credit impairment and determined there were no credit losses evident and we did not record any other-than-temporary impairment. At June 30, 2019 and December 31, 2018, our evaluation of other investment securities with continuous unrealized losses indicated that there were no losses evident. Furthermore, we do not intend to sell and it is more likely than not that we will not be required to sell these debt securities before the anticipated recovery of the amortized cost basis.

Periodic reviews are conducted to identify and evaluate each investment that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the current estimated fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

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The securities available-for-sale presented in the following table are reported at fair value and by contractual maturity as of June 30, 2019 and December 31, 2018. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential MBS and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis.

	Maturity as of June 30, 2019

	One year or less					One to five years					Five to ten years					After ten years
(dollars in thousands)	Fair Value		Average Yield			Fair Value		Average Yield			Fair Value		Average Yield			Fair Value		Average Yield
Available-for-sale
U.S. Treasury and agencies	$	—		0.00	%	$	9,952		1.52	%	$	5,934		3.35	%	$	5,947		2.93	%
Obligations of state and political agencies		2,782		1.00	%		22,466		1.48	%		14,772		2.10	%		9,044		2.90	%
Mortgage backed securities
Residential Agency		17		4.44	%		4,304		2.39	%		54,334		2.56	%		90,454		2.84	%
Commercial		—		—	%		2,386		2.81	%		9,043		2.37	%		13,998		2.70	%
Asset backed securities		2		2.94	%		—		—	%		—		—	%		177		5.47	%
Corporate bonds		999		2.14	%		7,109		2.58	%		—		—	%		—		—	%

Total available-for-sale	$	3,800		1.31	%	$	46,217		1.81	%	$	84,083		2.51	%	$	119,620		2.84	%

	Maturity as of December 31, 2018

	One year or less					One to five years					Five to ten years					After ten years
(dollars in thousands)	Fair Value		Average Yield			Fair Value		Average Yield			Fair Value		Average Yield			Fair Value		Average Yield
Available-for-sale
U.S. Treasury and agencies	$	—		0.00	%	$	9,796		1.52	%	$	2,000		2.86	%	$	7,346		2.69	%
Obligations of state and political agencies		3,970		1.38	%		24,526		1.95	%		28,153		2.67	%		9,739		3.55	%
Mortgage backed securities Residential Agency		26		3.40	%		6,225		2.04	%		48,757		2.57	%		71,989		2.65	%
Commercial		—		—	%		2,682		2.94	%		10,235		2.39	%		15,851		2.67	%
Asset backed securities		2		3.15	%		—		—	%		—		—	%		397		5.83	%
Corporate bonds		989		2.14	%		7,491		2.57	%		—		—	%		—		—	%

Total available-for-sale	$	4,987		1.54	%	$	50,720		2.02	%	$	89,145		2.59	%	$	105,322		2.75	%

Loans

On January 15, 2019, we announced an agreement to sell our branch offices located in Duluth, Minnesota, including loans attributable to those offices, to another financial institution.

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These loans were classified as held for branch sale in our consolidated financial statements. The transaction closed on April 26, 2019.

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

Commercial and industrial loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, retail shopping centers and apartment buildings, as well as commercial real estate construction loans that are offered to builders and developers.

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. Residential real estate 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.

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Loans outstanding, by type, as of the dates presented are as follows:

	As of June 30,			As of December 31,

(dollars in thousands)	2019			2018			2017			2016			2015			2014
Commercial
Commercial and industrial	$	513,120		$	510,706		$	480,595		$	472,449		$	420,948		$	399,767
Real estate construction		26,584			18,965			22,348			35,174			16,780			20,544
Commercial real estate		442,797			439,963			444,857			391,533			273,825			270,314

Total commercial		982,501			969,634			947,800			899,156			711,553			690,625
Consumer
Residential real estate first mortgage		452,049			448,143			348,964			202,217			170,663			167,177
Residential real estate junior lien		185,209			188,855			195,103			178,795			163,348			157,921
Other revolving and installment		93,693			95,218			82,607			86,784			81,357			79,735

Total consumer		730,951			732,216			626,674			467,796			415,368			404,833

Total loans	$	1,713,452		$	1,701,850		$	1,574,474		$	1,366,952		$	1,126,921		$	1,095,458



Percent Of Loans By Type
Commercial
Commercial and industrial		29.9	%		30.0	%		30.5	%		34.6	%		37.4	%		36.5	%
Real estate construction		1.6	%		1.1	%		1.4	%		2.6	%		1.5	%		1.8	%
Commercial real estate		25.8	%		25.9	%		28.3	%		28.6	%		24.3	%		24.7	%

Total commercial		57.3	%		57.0	%		60.2	%		65.8	%		63.2	%		63.0	%
Consumer
Residential real estate first mortgage		26.4	%		26.3	%		22.2	%		14.8	%		15.1	%		15.3	%
Residential real estate junior lien		10.8	%		11.1	%		12.4	%		13.1	%		14.5	%		14.4	%
Other revolving and installment		5.5	%		5.6	%		5.2	%		6.3	%		7.2	%		7.3	%

Total consumer		42.7	%		43.0	%		39.8	%		34.2	%		36.8	%		37.0	%

Total loans		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Total loans outstanding of $1.7 billion as of June 30, 2019, increased $11.6 million, or 0.7%, from December 31, 2018. The increase in total loans was represented by increases in our commercial and industrial loans of $2.4 million, commercial real estate loans of $10.5 million, and residential real estate loans of $260 thousand.

Total loans outstanding of $1.7 billion as of December 31, 2018 increased $127.4 million, or 8.1%, from December 31, 2017. The increase in total loans represented increases in residential real estate loans of $92.9 million and commercial and industrial loans of $30.1 million.

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Total loans outstanding of $1.6 billion as of December 31, 2017 increased $207.5 million, or 15.2%, compared to December 31, 2016. The growth was primarily the result of the retention of single family mortgage loans originated through the mortgage division and organic growth in the commercial loan portfolios.

Our loan portfolio is highly diversified. The goal of the overall portfolio mix is to retain balance with approximately one third of the portfolio in each of the commercial and industrial, commercial real estate, and residential real estate categories. As of June 30, 2019, approximately 42.7% of loans outstanding were made to consumers borrowing on a residential mortgage, installment, or line of credit basis. The commercial lending portfolio is also broadly diversified by industry type as demonstrated by the following distributions at June 30, 2019: real estate (28%), retail trade (11%), wholesale trade (11%), finance & insurance (10%), construction (9%), healthcare (6%), manufacturing (5%), professional services (4%), agricultural (4%), transportation (3%), restaurant & lodging (2%), real estate construction (1%), and administrative and support (1%). A variety of other industries with less than a 1% share of the total portfolio comprise the remaining 5%. The loan portfolio is also diversified by market distribution with 51.8% of the portfolio in the Twin Cities MSA, 39.7% in the eastern North Dakota cities of Grand Forks and Fargo and 8.5% in the Arizona market, as of June 30, 2019.

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of our fixed rate residential loans, along with some of our adjustable rate mortgages are sold to other financial institutions with which we have established a correspondent lending relationship.

The consumer mortgage loans have minimal direct exposure to subprime mortgages as the loans are underwritten to conform to secondary market standards. As of June 30, 2019, the residential mortgage portfolio is comprised of fixed rate (62.8%) and adjustable rate (37.2%) residential lending. Volume in this portion of the loan portfolio has been strong over the last few years due to low long-term interest rates and comparatively stable real estate valuations in our primary markets. We made a strategic decision to add duration to the balance sheet to reduce asset sensitivity and increase interest income. As of June 30, 2019, consumer mortgages remained relatively flat at $637.3 million. Consumer mortgages increased $92.9 million, or 17.1%, in 2018. Consumer mortgages increased $163.0 million, or 42.8%, in 2017. Market interest rates, expected duration, and our overall interest rate sensitivity profile continue to be the most significant factors in determining whether we choose to retain versus sell portions of new consumer mortgage generation.

The combined total of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and dealer floor plan financing is characterized as business lending activity. As of June 30, 2019, the business lending portfolio was $982.5 million, an increase from $969.6 million as of December 31, 2018. The business lending portfolio increased $21.8 million, or 2.3%, in 2018. The portfolio increased $48.6 million, or 5.4%, in 2017. Highly competitive conditions continue to prevail in the small and middle market commercial segments in which we primarily operate. We maintain a commitment to generating growth in our business portfolio in a manner that adheres to our twin goals of maintaining strong asset quality and producing profitable margins. We continue to invest in additional personnel, technology, and business development resources to further strengthen our capabilities in this important product category.

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The following tables shows the maturities and type of interest rates for the loan portfolio as of June 30, 2019 and December 31, 2018:

June 30, 2019 (dollars in thousands)	One year or less		After one but within five years		After five years		Total

Commercial
Commercial and industrial	$	214,783	$	221,930	$	76,407	$	513,120
Real estate construction		6,388		13,104		7,092		26,584
Commercial real estate		37,308		230,861		174,628		442,797

Total commercial		258,479		465,895		258,127		982,501
Consumer
Residential real estate first mortgage		17,188		22,547		412,314		452,049
Residential real estate junior lien		19,004		91,804		74,401		185,209
Other revolving and installment		14,578		56,477		22,638		93,693

Total consumer		50,770		170,828		509,353		730,951

Total	$	309,249	$	636,723	$	767,480	$	1,713,452



Sensitivity of loans to changes in interest rates
Fixed interest rates			$	475,625	$	520,713
Floating interest rates				161,098		246,767

Total			$	636,723	$	767,480

December 31, 2018 (dollars in thousands)	One year or less		After one but within five years		After five years		Total

Commercial
Commercial and industrial	$	198,638	$	244,120	$	67,948	$	510,706
Real estate construction		2,637		6,370		9,958		18,965
Commercial real estate		31,178		230,843		177,942		439,963

Total commercial		232,453		481,333		255,848		969,634
Consumer
Residential real estate first mortgage		14,578		21,566		411,999		448,143
Residential real estate junior lien		16,453		97,470		74,932		188,855
Other revolving and installment		13,522		55,368		26,328		95,218

Total consumer		44,553		174,404		513,259		732,216

Total loans	$	277,006	$	655,737	$	769,107	$	1,701,850



Sensitivity of loans to changes in interest rates
Fixed interest rates			$	487,250	$	518,789
Floating interest rates				168,487		250,318

Total			$	655,737	$	769,107

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As of June 30, 2019, 62.3% of the loan portfolio bears interest at fixed rates and 37.7% at floating rates. The expected life of our 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

Our 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. We strive to identify potential problem loans early, take necessary charge-offs promptly, and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Management performs ongoing, internal reviews of any problem credits and continually assesses the adequacy of the allowance. We utilize an internal lending division, Special Credit Services, to develop and implement strategies for the management of individual nonperforming loans.

Nonperforming assets consist of loans 90 days or more past due, nonaccrual loans, foreclosed assets and other real estate owned. We do not consider performing troubled debt restructurings, or TDRs, to be nonperforming assets, but they are included as part of impaired assets. The level of nonaccrual loans is an important element in assessing asset quality. Loans are classified as nonaccrual when principal or interest is in default for 90 days or more, unless in the opinion of management, the loan is well secured and in the process of collection. Exclusive of any delinquency, a loan will be placed in nonaccrual when there is deterioration in the financial condition of the borrower and full payment of principal and interest is not expected.

A loan is categorized as a TDR if a concession is granted, such as to provide for the reduction of either interest or principal due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than market and other modification of terms including forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received.

Credit Quality Indicators

Loans are categorized into risk 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. We analyze loans individually by classifying the loans as to credit risk. This analysis includes nonhomogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on an annual basis. The following definitions are used for risk ratings:

Pass. Higher quality loans that do not fit any of the other categories described below. This category includes loans risk rated with the following ratings: minimal credit risk, modest credit risk, average credit risk, acceptable credit risk, acceptable with risk and management attention.

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Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position.

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

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

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Pass and criticized loans as of June 30, 2019 and December 31, 2018, 2017 and 2016 were as follows:

			Criticized

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2019
Commercial
Commercial and industrial	$	473,145	$	10,695	$	29,280	$	—	$	513,120
Real estate construction		25,288		286		1,010		—		26,584
Commercial real estate		413,237		4,491		25,069		—		442,797

Total commercial		911,670		15,472		55,359		—		982,501
Consumer
Residential real estate first mortgage (1)		452,044		—		5		—		452,049
Residential real estate junior lien (1)		183,735		—		1,474		—		185,209
Other revolving and installment (1)		93,693		—		—		—		93,693

Total consumer		729,472		—		1,479		—		730,951

Total	$	1,641,142	$	15,472	$	56,838	$	—	$	1,713,452



December 31, 2018
Commercial
Commercial and industrial	$	459,565	$	12,055	$	37,523	$	1,563	$	510,706
Real estate construction		17,910		—		1,055		—		18,965
Commercial real estate		407,178		6,304		26,481		—		439,963

Total commercial		884,653		18,359		65,059		1,563		969,634
Consumer
Residential real estate first mortgage (1)		448,124		—		19		—		448,143
Residential real estate junior lien (1)		186,370		—		2,485		—		188,855
Other revolving and installment (1)		95,218		—		—		—		95,218

Total consumer		729,712		—		2,504		—		732,216

Total Loans	$	1,614,365	$	18,359	$	67,563	$	1,563	$	1,701,850



December 31, 2017
Commercial
Commercial and industrial	$	455,941	$	12,722	$	11,000	$	932	$	480,595
Real estate construction		18,880		2,689		779		—		22,348
Commercial real estate		414,622		10,474		19,761		—		444,857

Total commercial		889,443		25,885		31,540		932		947,800
Consumer
Residential real estate first mortgage (1)		348,718		178		68		—		348,964
Residential real estate junior lien (1)		192,459		242		2,402		—		195,103
Other revolving and installment (1)		82,584		—		23		—		82,607

Total consumer		623,761		420		2,493		—		626,674

Total Loans	$	1,513,204	$	26,305	$	34,033	$	932	$	1,574,474



December 31, 2016
Commercial
Commercial and industrial	$	454,730	$	7,886	$	9,833	$	—	$	472,449
Real estate construction		32,390		—		2,784		—		35,174
Commercial real estate		361,655		7,243		22,635		—		391,533

Total commercial		848,775		15,129		35,252		—		899,156
Consumer
Residential real estate first mortgage (1)		200,707		—		1,510		—		202,217
Residential real estate junior lien (1)		175,567		120		3,108		—		178,795
Other revolving and installment (1)		86,751		—		33		—		86,784

Total consumer		463,025		120		4,651		—		467,796

Total Loans	$	1,311,800	$	15,249	$	39,903	$	—	$	1,366,952

(1): The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of consumer loans.

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

	As of June 30,		As of December 31,

(dollars in thousands)	2019		2018		2017		2016		2015		2014
Nonaccrual loans
Commercial
Commercial and industrial	$	2,056	$	3,578	$	3,193	$	2,866	$	6,169	$	572
Real estate construction		—		—		61		751		—		—
Commercial real estate		1,439		1,517		—		149		2,552		1,844

Total commercial		3,495		5,095		3,254		3,766		8,721		2,416
Consumer
Residential real estate first mortgage		387		1,262		662		1,087		—		139
Residential real estate junior lien		733		584		1,873		2,590		825		1,028
Other revolving and installment		8		22		84		173		—		20

Total consumer		1,128		1,868		2,619		3,850		825		1,187

Total nonaccrual loans (1)		4,623		6,963		5,873		7,616		9,546		3,603
Foreclosed assets		—		35		37		196		35		11
Other real estate owned		381		169		446		1,721		842		2,478

Total nonperforming assets	$	5,004	$	7,167	$	6,356	$	9,533	$	10,423	$	6,092



Performing troubled debt restructurings
Commercial
Commercial and industrial	$	801	$	596	$	—	$	324	$	330	$	338
Commercial real estate		212		218		228		239		—		777

Total commercial		1,013		814		228		563		330		1,115
Consumer
Residential real estate junior lien		8		9		12		13		15		—

Total consumer		8		9		12		13		15		—

Total performing troubled debt restructurings	$	1,021	$	823	$	240	$	576	$	345	$	1,115



Loans 90 days or more past due and still accruing	$	28	$	—	$	—	$	48	$	1,605	$	392

(1): Nonaccrual loans included nonperforming TDRs of $0.2 million, $0.2 million, $0.7 million, $1.5 million, $1.1 million, and $1.3 million at the respective dates indicated above.

Interest income lost on nonaccrual loans approximated $0.1 million for the six months ended June 30, 2019. There was no interest income included in net income related to nonaccrual loans for the six months ended June 30, 2019.

Interest income lost on nonaccrual loans approximated $0.3 million, $0.2 million, and $0.7 million for the years ended December 31, 2018, 2017, and 2016, respectively. There was no interest income included in net income related to nonaccrual loans for the years ended December 31, 2018, 2017, and 2016.

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Allowance for Loan Losses

The allowance for loan losses is maintained at a level management believes is sufficient to absorb incurred losses in the loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio and other factors. 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.

The allowance for loan losses represents management's assessment of probable credit losses inherent in the loan portfolio. The allowance for loan losses consists of specific components, based on individual evaluation of certain loans, and general components for homogeneous pools of loans with similar risk characteristics.

Impaired loans include loans placed on nonaccrual status and TDRs. Loans are considered impaired when, based on current information and events, it is probable that all amounts due, in accordance with the original contractual terms of the loan agreement, will not be collected. When determining if all amounts due in accordance with the original contractual terms of the loan agreement will be collected, the borrower's overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral, are taken into consideration. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All impaired loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent.

The allowance for non-impaired loans is based on historical losses adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history over the most recent five years. This actual loss experience is adjusted for economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment. These portfolio segments include commercial and industrial, real estate construction, commercial real estate, residential real estate first mortgage, residential real estate junior liens, and other revolving and installment.

In the ordinary course of business, we enter 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

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is located under accrued expenses and other liabilities on the Consolidated Balance Sheets. The provision for unfunded commitments was a reversal of $536 thousand for the six months ended June 30, 2019. The provision for unfunded commitments was $540 thousand for the year ended December 31, 2018, compared to $100 thousand for the year ended December 31, 2017.

The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented.

	For the six months ended June 30,						For the years ended December 31,

(dollars in thousands)	2019			2018			2018			2017			2016			2015			2014
Balance—beginning of period	$	22,174		$	16,564		$	16,564		$	15,615		$	14,688		$	17,063		$	16,838
Commercial loan charge-offs
Commercial and Industrial		(4,951	)		(2,654	)		(3,123	)		(3,287	)		(1,629	)		(6,906	)		(481	)
Real estate construction		(1	)		(60	)		(60	)		—			(1,655	)		—			(4	)
Commercial real estate		—			—			(600	)		—			(43	)		(400	)		(79	)

Total commercial loan charge-offs		(4,952	)		(2,714	)		(3,783	)		(3,287	)		(3,327	)		(7,306	)		(564	)
Consumer loan charge-offs
Real estate 1-4 family first mortgage		—			(29	)		(29	)		—			—			(5	)		(1	)
Real estate 1-4 family junior mortgage		(134	)		(86	)		(133	)		(1,124	)		(829	)		(596	)		(267	)
Other revolving and installment		(482	)		(137	)		(308	)		(429	)		(280	)		(270	)		(188	)

Total consumer loan charge-offs		(616	)		(252	)		(470	)		(1,553	)		(1,109	)		(871	)		(456	)

Total loan charge-offs		(5,568	)		(2,966	)		(4,253	)		(4,840	)		(4,436	)		(8,177	)		(1,020	)

Commercial loan recoveries
Commercial and Industrial		293			383			750			930			1,084			233			988
Real estate construction		2			2			2			279			587			697			128
Commercial real estate		150			39			81			73			188			166			201

Total commercial recoveries		445			424			833			1,282			1,859			1,096			1,317
Consumer loan recoveries
Real estate 1-4 family first mortgage		—			—			—			103			211			10			70
Real estate 1-4 family junior mortgage		83			179			207			872			94			287			113
Other revolving and installment		95			118			213			252			139			209			145

Total consumer loan recoveries		178			297			420			1,227			444			506			328

Total loan recoveries		623			721			1,253			2,509			2,303			1,602			1,645

Net loan (charge-offs) recoveries		(4,945	)		(2,245	)		(3,000	)		(2,331	)		(2,133	)		(6,575	)		625

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	For the six months ended June 30,						For the years ended December 31,

(dollars in thousands)	2019			2018			2018			2017			2016			2015			2014
Commercial loan provision
Commercial and Industrial		4,225			4,706			6,911			3,244			507			6,574			769
Real estate construction		72			110			(35	)		(416	)		1,304			(1,656	)		791
Commercial real estate		(664	)		1,530			1,889			352			269			(1,223	)		(1,632	)

Total commercial loan provision		3,633			6,346			8,765			3,180			2,080			3,695			(72	)
Consumer loan provision
Real estate 1-4 family first mortgage		(1	)		104			(226	)		182			(328	)		60			148
Real estate 1-4 family junior mortgage		(44	)		(165	)		(171	)		247			453			505			515
Other revolving and installment		387			3			(24	)		276			16			11			188

Total consumer loan provision		342			(58	)		(421	)		705			141			576			851

Unallocated provision expense		42			(738	)		266			(605	)		839			(71	)		(1,179	)

Total loan loss provision		4,017			5,550			8,610			3,280			3,060			4,200			(400	)

Balance—end of period	$	21,246		$	19,869		$	22,174		$	16,564		$	15,615		$	14,688		$	17,063



Allowance for loan losses as a percentage of total loans at end of period		1.24	%		1.16	%		1.30	%		1.05	%		1.14	%		1.30	%		1.56	%
Net loan charge-offs (recoveries) as a percentage of average loans		0.58	%		0.28	%		0.18	%		0.16	%		0.16	%		0.58	%		(0.06	)%

The allowance for loan losses was $21.2 million at June 30, 2019, compared to $22.2 million at December 31, 2018. The $928 thousand decrease in the allowance for loan losses was due to additional provision for loan losses of $4.0 million offset by net loan charge-offs of $4.9 million. The level of nonperforming loans to total loans at June 30, 2019 was 0.27%, compared to 0.41% at December 31, 2018. The allowance for loan losses to total loans was 1.24% at June 30, 2019, compared to 1.30% at December 31, 2018.

The allowance for loan losses was $22.2 million at December 31, 2018, compared to $16.6 million at December 31, 2017. The $5.6 million increase in the allowance for loan losses year over year was due to additional provision for loan losses of $5.3 million. Net loan charge-offs as a percentage of average loans remained consistent with prior periods at 0.18% in 2018 compared to 0.16% in 2017 and 2016. The level of nonperforming assets to total loans was also stable at 0.42% as of December 31, 2018, compared to 0.40% and 0.70% at December 31, 2017 and 2016, respectively. The additional provision for loan losses increased the allowance to loan losses to total loans to 1.30% at December 31, 2018, compared to 1.05% and 1.14%, at December 31, 2017 and 2016, respectively.

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The following tables present the allocation of the allowance for loan losses as of the dates presented.

(dollars in thousands)	Allocated Allowance

June 30, 2019
Balance at end of period applicable to:
Commercial and industrial	$	11,694	29.9	%
Real estate construction		323	1.6	%
Commercial real estate		5,765	25.8	%
Residential real estate first mortgage		1,155	26.4	%
Residential real estate junior lien		710	10.8	%
Other revolving and installment		380	5.5	%
Unallocated		1,219	0.0	%

Total loans	$	21,246	100.00	%



December 31, 2018
Balance at end of period applicable to:
Commercial and industrial	$	12,127	30.0	%
Real estate construction		250	1.1	%
Commercial real estate		6,279	25.9	%
Residential real estate first mortgage		1,156	26.3	%
Residential real estate junior lien		805	11.1	%
Other revolving and installment		380	5.6	%
Unallocated		1,177	0.0	%

Total loans	$	22,174	100.0	%



December 31, 2017
Balance at end of period applicable to:
Commercial and industrial	$	7,589	30.5	%
Real estate construction		343	1.4	%
Commercial real estate		4,909	28.3	%
Residential real estate first mortgage		1,411	22.2	%
Residential real estate junior lien		902	12.4	%
Other revolving and installment		499	5.2	%
Unallocated		911	0.0	%

Total loans	$	16,564	100.0	%



December 31, 2016
Balance at end of period applicable to:
Commercial and industrial	$	6,509	34.6	%
Real estate construction		674	2.6	%
Commercial real estate		4,484	28.6	%
Residential real estate first mortgage		1,037	14.8	%
Residential real estate junior lien		907	13.1	%
Other revolving and installment		488	6.3	%
Unallocated		1,516	0.0	%

Total loans	$	15,615	100.0	%

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(dollars in thousands)	Allocated Allowance

December 31, 2015
Balance at end of period applicable to:
Commercial and industrial	$	6,740	37.4	%
Real estate construction		245	1.5	%
Commercial real estate		4,070	24.3	%
Residential real estate first mortgage		1,242	15.1	%
Residential real estate junior lien		1,189	14.5	%
Other revolving and installment		525	7.2	%
Unallocated		677	0.0	%

Total loans	$	14,688	100.0	%



December 31, 2014
Balance at end of period applicable to:
Commercial and industrial	$	6,700	36.4	%
Real estate construction		1,329	1.9	%
Commercial real estate		5,527	24.7	%
Residential real estate first mortgage		1,192	15.3	%
Residential real estate junior lien		994	14.4	%
Other revolving and installment		575	7.3	%
Unallocated		746	0.0	%

Total loans	$	17,063	100.0	%

Goodwill and Other Intangible Assets

Goodwill was unchanged at $27.3 million as of June 30, 2019, December 31, 2018 and December 31, 2017. Other intangible assets decreased $2.1 million, or 9.3%, to $20.4 million at June 30, 2019, compared to December 31, 2018, due to scheduled amortization. The changes in

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intangible assets by reporting segment for the six months ended June 30, 2019 and the year ended December 31, 2018 are summarized as follows:

	As of and for the six months ended June 30, 2019

(dollars in thousands)	Banking			Retirement and Benefit Services			Wealth Management		Mortgage		Corporate Administration		Consolidated
Beginning balance:
Goodwill	$	20,131		$	7,198		$	—	$	—	$	—	$	27,329
Identifiable customer intangibles		—			20,772			—		—		—		20,772
Core deposit intangible assets		1,701			—			—		—		—		1,701

Total		21,832			27,970			—		—		—		49,802
Additions:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			—			—		—		—		—
Core deposit intangible assets		—			—			—		—		—		—

Total		—			—			—		—		—		—
Amortization:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			(1,601	)		—		—		—		(1,601	)
Core deposit intangible assets		(500	)		—			—		—		—		(500	)

Total		(500	)		(1,601	)		—		—		—		(2,101	)
Impairment:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			—			—		—		—		—
Core deposit intangible assets		—			—			—		—		—		—

Total		—			—			—		—		—		—
Ending balance:
Goodwill		20,131			7,198			—		—		—		27,329
Identifiable customer intangibles		—			19,171			—		—		—		19,171
Core deposit intangible assets		1,201			—			—		—		—		1,201

Total	$	21,332		$	26,369		$	—	$	—	$	—	$	47,701

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	As of and for the year ending December 31, 2018

(dollars in thousands)	Banking			Retirement and Benefit Services			Wealth Management		Mortgage		Consolidated
Beginning balance:
Goodwill	$	20,131		$	7,198		$	—	$	—	$	27,329
Identifiable customer intangibles		—			24,411			—		—		24,411
Core deposit intangible assets		2,700										2,700

Total		22,831			31,609			—		—		54,440
Additions:
Goodwill		—			—			—		—		—
Identifiable customer intangibles		—			—			—		—		—
Core deposit intangible assets		—			—			—		—		—

Total		—			—			—		—		—
Amortization:
Goodwill		—			—			—		—		—
Identifiable customer intangibles		—			(3,639	)		—		—		(3,639	)
Core deposit intangible assets		(999	)		—			—		—		(999	)

Total		(999	)		(3,639	)		—		—		(4,638	)
Impairment:
Goodwill		—			—			—		—		—
Identifiable customer intangibles		—			—			—		—		—
Core deposit intangible assets		—			—			—		—		—

Total		—			—			—		—		—
Ending balance:
Goodwill		20,131			7,198			—		—		27,329
Identifiable customer intangibles		—			20,772			—		—		20,772
Core deposit intangible assets		1,701			—			—		—		1,701

Total	$	21,832		$	27,970		$	—	$	—	$	49,802

See Note 8 (Goodwill and Other Intangible Assets) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

Deposits

Total deposits decreased $21.7 million or 1.2% to $1.8 billion at June 30, 2019 as compared to December 31, 2018. The decrease was due to a decrease in noninterest bearing transaction accounts of $44.6 million offset by an increase in interest bearing transaction accounts of $10.1 million. Total deposits represented 88.0% of total liabilities as of June 30, 2019. Total deposits remained relatively unchanged at $1.8 billion at each of December 31, 2018, 2017, and 2016. Total deposits represented 89.6%, 93.8%, and 94.9% of total liabilities at each year end respectively.

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Deposits decreased $59.9 million between 2018 and 2017. The decrease was due to temporary deposits on the balance sheet held for terminated plans from the retirement division. Time deposits decreased $33.7 million during 2018, as we allowed higher rate single service accounts to roll off the balance sheet. Non-public, core deposits are frequently considered to be a bank's most attractive source of funding because they are generally stable, do not need to be collateralized, carry a relatively low rate, generate solid fee income and provide a strong client base for which a variety of loan, deposit, and other financial service-related solutions can be provided. Our Company's funding composition continues to benefit from a high level of non-public, core deposits, which increased $35.0 million or 2.7% in 2018. This increase included $11.1 million or 11.9% of growth in the HSA portfolio which carries an average cost of 0.16%.

Interest-bearing deposit costs were 0.98% and 0.44% for the six months ended June 30, 2019 and 2018, respectively. Interest-bearing deposit costs were 0.56%, 0.30%, and 0.28%, for the years ended December 31, 2018, 2017, and 2016, respectively. The increases in recent periods in interest-bearing deposit costs have been impacted by the changing mix of deposit types, as well as by the increasing interest rate environment.

We compete 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, which results in net interest margin expansion and projections of an increase in net interest income. The mix of average deposits has been changing throughout the last several years. The weighting of core funds (noninterest checking, interest checking, savings, and money market accounts) has increased, while time deposits' weighting has decreased. This change in deposit mix reflects our focus on expanding core account relationships and customers' preference for unrestricted accounts in the low interest rate environment.

On January 15, 2019, we announced an agreement to sell our branch offices located in Duluth, Minnesota, including deposits attributable to those offices, to another financial institution. These deposits were classified as held for sale in our consolidated financial statements. The transaction closed on April 26, 2019.

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The following table details composition and percentage composition of our deposit portfolio by category for the periods indicated.

(dollars in thousands)	Average Balance

For the six months ended June 30, 2019
Noninterest-bearing demand deposits	$	494,136	27.6	%	0.00	%
Interest-bearing demand deposits		422,309	23.6	%	0.43	%
Money market and savings deposits		689,508	38.6	%	1.19	%
Time deposits		181,990	10.2	%	1.49	%

Total deposits (1)	$	1,787,943	100.0	%	0.71	%



For the year ended December 31, 2018
Noninterest-bearing demand deposits	$	528,552	29.9	%	0.00	%
Interest-bearing demand deposits		405,512	22.9	%	0.25	%
Money market and savings deposits		626,041	35.5	%	0.63	%
Time deposits		206,846	11.7	%	0.97	%

Total deposits (1)	$	1,766,951	100.0	%	0.56	%



For the year ended December 31, 2017
Noninterest-bearing demand deposits	$	488,295	29.3	%	0.00	%
Interest-bearing demand deposits		336,876	20.3	%	0.12	%
Money market and savings deposits		619,687	37.2	%	0.26	%
Time deposits		219,164	13.2	%	0.68	%

Total deposits	$	1,664,022	100.0	%	0.30	%



For the year ended December 31, 2016
Noninterest-bearing demand deposits	$	443,453	26.6	%	0.00	%
Interest-bearing demand deposits		301,047	18.1	%	0.10	%
Money market and savings deposits		670,932	40.3	%	0.22	%
Time deposits		251,359	15.0	%	0.64	%

Total deposits	$	1,666,791	100.0	%	0.28	%

(1): Includes deposits held for sale

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The following table shows the contractual maturity of time deposits, including certificate of deposit account registry services, or CDARS, and IRA deposits of $100 thousand and over, that were outstanding as of the date presented.

(dollars in thousands)	June 30, 2019		December 31, 2018

Maturing in:
3 months or less	$	24,759	$	24,856
3 months to 6 months		42,335		37,129
6 months to 1 year		11,493		8,260
1 year or greater		13,337		13,767

Total	$	91,924	$	84,012

Borrowings and Subordinated Debt

We utilize both short-term and long-term borrowings as part of our asset/liability management and funding strategies. Short-term borrowings consists of FHLB advances and federal funds purchased. Short-term borrowings were $141.4 million at June 30, 2019, an increase of $48.0 million from $93.5 million at December 31, 2018. Short-term borrowings were $93.5 million at December 31, 2018, an increase of $63.5 million from $30.0 million at December 31, 2017. FHLB advances were secured by specific investment securities and real estate loans with a carrying amount of approximately $834.6 million and $414.0 million at December 31, 2018 and 2017, respectively. See Note 12 (Short-Term Borrowings) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

Long-term debt is utilized to fund longer term assets and as a source of regulatory capital. At June 30, 2019, we had $50.0 million of outstanding subordinated notes. The notes currently bear interest at a fixed rate of 5.75% per year, payable semi-annually through December 30, 2020, and then convert automatically to floating rate notes that reset quarterly to an interest rate equal to the three-month London Interbank Offered Rate plus 412 basis points. The notes mature on December 30, 2025, and we have the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 30, 2020 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 $8.4 million as of June 30, 2019, remaining relatively flat from December 31, 2018, and were $8.4 million as of December 31, 2018, an increase of $0.1 million, or 1.2%, from $8.3 million at December 31, 2017. The increase was due to purchase accounting amortization on the junior subordinated notes assumed in the Beacon acquisition. See Note 10 (Long-Term Debt) of the Company's audited consolidated financial statements included elsewhere in this prospectus.

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Selected financial information pertaining to the components of our short-term borrowings as of the dates indicated is as follows:

	As of and for the six months ended June 30,						As of and for the years ended December 31,

(dollars in thousands)	2019			2018			2018			2017			2016
Securities sold under agreements to repurchase
Outstanding at period-end	$	—		$	—		$	—		$	—		$	729
Average daily balance		—			—			—			28			3,141
Maximum month-end balance		—			—			—			—			8,174
Weighted-average rate
During period		0.00	%		0.00	%		0.00	%		0.54	%		0.34	%
End of period		0.00	%		0.00	%		0.00	%		0.00	%		0.54	%
Fed funds purchased
Outstanding at period-end	$	6,445		$	112,260		$	93,460		$	—		$	—
Average daily balance	$	93,238		$	79,371			86,768			33,348			1,918
Maximum month-end balance	$	139,605		$	112,260			112,260			131,630			5,000
Weighted-average rate
During period		2.59	%		1.91	%		2.18	%		1.33	%		0.53	%
End of period		2.50	%		2.10	%		2.63	%		0.00	%		0.00	%
FHLB short-term advances
Outstanding at period-end	$	135,000		$	—		$	—		$	30,000		$	—
Average daily balance	$	6,464		$	166			82			39,069			—
Maximum month-end balance		135,000			—			—			120,000			—
Weighted-average rate
During period		2.17	%		2.88	%		1.42	%		1.28	%		0.00	%
End of period		2.40	%		0.00	%		0.00	%		1.42	%		0.00	%

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Capital Resources

The following table summarizes the changes in our stockholders' equity for the periods indicated.

	For the six months ended June 30,			For the years ended December 31,

(dollars in thousands)	2019			2018			2017			2016
Beginning balance	$	196,954		$	179,594		$	168,251		$	182,282
Net income		14,784			25,866			15,001			14,036
Other comprehensive income (loss)		5,086			(2,541	)		979			(2,987	)
Common stock repurchased		(106	)		(356	)		(294	)		(357	)
Common stock issued		—			—			1,448			—
Common stock dividends		(3,948	)		(7,456	)		(6,729	)		(6,163	)
Stock-based compensation expense		995			1,847			938			1,465
Preferred stock dividends		—			—			—			(25	)
Preferred stock redemption		—			—			—			(20,000	)

Ending Balance	$	213,765		$	196,954		$	179,594		$	168,251

Total stockholders' equity, including ESOP-owned shares, was $213.8 million at June 30, 2019, compared to $197.0 million at December 31, 2018, $179.6 million at December 31, 2017, and $168.3 million at December 31, 2016. The increase in each period was primarily the result of current period's earnings less dividend payments to common stockholders, and the market value change, net of the related tax impact, in the investment portfolio.

We strive to maintain an adequate capital base to support our 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 our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our 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. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.

During the first quarter of 2015, regulations implementing the Basel III regulatory capital framework and the Dodd-Frank Act became effective, which include requirements that were subject to a multi-year phase-in period. These rules modified the calculation of the various capital ratios, added a new ratio, the Common Equity Tier 1 Capital ratio, and revised the adequately and well capitalized thresholds. As of January 1, 2019, the rules require us to maintain a capital conservation buffer of common equity capital that exceeds by more than 2.5% the minimum risk weighted asset ratios. The capital conservation buffer requirement was 1.875%, 1.250%, and 0.625% as of December 31, 2018, 2017, and 2016, respectively, which is not reflected in the tables below.

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At June 30, 2019 and December 31, 2018, we met all the capital adequacy requirements to which we were subject.

The tables below set forth the actual capital amounts and ratios for the Company and the Bank as of the dates indicated, as well as the regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework.

	Actual					Minimum Capital					Minimum to be Well Capitalized Under Prompt Corrective Action

(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019
Common equity tier 1
Consolidated	$	165,840		8.90	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		221,219		11.90	%		83,682		4.50	%		120,874		6.50	%
Tier 1 capital
Consolidated		173,978		9.34	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		221,219		11.90	%		111,576		6.00	%		148,767		8.00	%
Total capital
Consolidated		244,818		13.14	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		242,465		13.04	%		148,767		8.00	%		185,959		10.00	%
Tier 1 leverage
Consolidated		173,978		8.08	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		221,219		10.29	%		86,034		4.00	%		107,542		5.00	%
December 31, 2018
Common equity tier 1
Consolidated	$	151,745		8.43	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		204,680		11.39	%		80,866		4.5	%		116,806		6.5	%
Tier 1 capital
Consolidated		159,774		8.87	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		204,680		11.39	%		107,821		6.0	%		143,761		8.0	%
Total capital
Consolidated		231,510		12.86	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		226,854		12.62	%		143,806		8.0	%		179,758		10.0	%
Tier 1 leverage
Consolidated		159,774		7.51	%		N/A		N/A			N/A		N/A
Alerus Financial, N.A.		204,680		9.63	%		85,018		4.0	%		106,272		5.0	%
December 31, 2017
Common equity tier 1
Consolidated	$	133,149		7.83	%		76,522		4.5	%		N/A		N/A
Alerus Financial, N.A.		187,115		11.01	%		76,478		4.5	%		110,468		6.5	%
Tier 1 capital
Consolidated		141,037		8.29	%		102,077		6.0	%		N/A		N/A
Alerus Financial, N.A.		187,115		11.01	%		101,970		6.0	%		135,960		8.0	%
Total capital
Consolidated		207,101		12.17	%		136,139		8.0	%		N/A		N/A
Alerus Financial, N.A.		203,679		11.99	%		135,899		8.0	%		169,874		10.0	%
Tier 1 leverage
Consolidated		141,037		7.07	%		79,795		4.0	%		N/A		N/A
Alerus Financial, N.A.		187,115		9.40	%		79,623		4.0	%		99,529		5.0	%

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. The following table presents our contractual obligations as of June 30, 2019.

	Contractual maturities as of June 30, 2019

(dollars in thousands)	Less than one year		One to three years		Three to five years		Over five years		Total
Operating lease obligations	$	2,375	$	3,190	$	2,600	$	2,647	$	10,812
Time deposits		146,171		24,076		7,029		6,113		183,389
Short-term borrowings		141,445		—		—		—		141,445
Subordinated notes payable		—		—		—		49,594		49,594
Junior subordinated debenture (Trust I)		—		—		—		3,379		3,379
Junior subordinated debenture (Trust II)		—		—		—		5,069		5,069
Finance lease liability		251		502		105		—		858

Off-Balance Sheet Arrangements

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

A summary of the contractual amounts of our exposure to off-balance sheet agreements is as follows:

(dollars in thousands)	June 30, 2019

Commitments to extend credit	$	530,492
Standby letters of credit		8,379

Total	$	538,871

Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our 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 our operations, and capital expenditures. Liquidity is monitored and closely managed by our asset and liability committee,

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or 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 we have 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.

At June 30, 2019, we had on balance sheet liquidity of $165.1 million, compared to $152.1 million at December 31, 2018 and $195.0 million at December 31, 2017. On balance sheet liquidity includes total due from banks, federal funds sold, interest-bearing deposits with banks, unencumbered securities available-for-sale and over collateralized securities pledging position.

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 June 30, 2019, we had $6.4 million of outstanding fed funds purchased from the FHLB, which were secured by a blanket lien on $865.5 million of real estate-related loans. Based on this collateral we are eligible to borrow up to an additional $409.8 million. In addition, we can borrow up to $87.0 million through the unsecured lines of credit we have established with four other banks.

In addition, because the Bank is "well capitalized," we can accept wholesale deposits up to 20.0% of total assets based on current policy limits. Management believed that we had adequate resources to fund all of our commitments as of June 30, 2019 and December 31, 2018.

Our primary sources of liquidity include liquid assets, as well as unencumbered securities that can be used to collateralize additional funding. At June 30, 2019, we had $44.9 million of cash and cash equivalents of which $11.6 million are interest-earning 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 we 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.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the

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amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. The Bank's board of directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

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

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

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

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

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

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The estimated impact on our net interest income as of June 30, 2019 and December 31, 2018, assuming immediate parallel moves in interest rates is presented in the table below.

	June 30, 2019						December 31, 2018

	Following 12 months			Following 24 months			Following 12 months			Following 24 months
+400 basis points		–2.2	%		6.8	%		0.4	%		10.7	%
+300 basis points		–1.6	%		5.4	%		0.3	%		8.7	%
+200 basis points		–1.0	%		3.9	%		0.2	%		6.6	%
+100 basis points		–0.3	%		2.7	%		0.3	%		4.8	%
–100 basis points		–4.6	%		–8.7	%		–5.2	%		–6.7	%
–200 basis points		–7.0	%		–15.5	%		–9.6	%		–16.4	%

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

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

The table below presents the change in the economic value of equity as of June 30, 2019 and December 31, 2018, assuming immediate parallel shifts in interest rates.



+400 basis points	6.2	%	4.9	%
+300 basis points	6.0	%	4.8	%
+200 basis points	5.2	%	4.0	%
+100 basis points	3.8	%	2.8	%
–100 basis points	–19.5	%	–15.9	%
–200 basis points	–48.3	%	–36.8	%

Operational Risk

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

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Compliance Risk

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

Strategic and/or Reputation Risk

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

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BUSINESS

Company Overview

As of June 30, 2019, we had $2.2 billion of total assets, $27.9 billion of AUA and $5.3 billion of AUM. For the year ended December 31, 2018, we achieved a ROAA, ROAE, and a ROATCE, of 1.21%, 13.81% and 21.02%, respectively. For the six months ended June 30, 2019, we achieved an annualized ROAA, ROAE and ROATCE of 1.36%, 14.49% and 20.53%, respectively.

Our business model produces strong financial performance and a diversified revenue stream, which has helped us establish a brand and culture yielding both a loyal client base and passionate and dedicated employees. We believe our client-first and advice-based philosophy, diversified business model and history of high performance and growth distinguishes us from other financial service providers. We generate a majority of our overall revenue from noninterest income, which is driven primarily by our retirement and benefit services, wealth management and mortgage business lines. The remainder of our revenue consists of net interest income, which we derive from offering our traditional banking products and services.

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of North Dakota. In addition to our offices located in our banking markets, our retirement and benefit services business administers plans in all 50 states through offices located in Michigan, Minnesota and New Hampshire.

Our History and Growth

A summary of our asset growth during the past five years and timeline of our milestones and growth since 2000 are shown below:

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Our Business Model and Products and Services

General

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clients more meaningfully and generate long-term value for our Company. The primary components of One Alerus are:

•: providing proactive advice to clients;
•: offering an integrated client-access portal (My Alerus);
•: seeking additional ways to improve the client experience;
•: leveraging synergistic growth opportunities; and
•: focusing on process reinvention and efficiency.

Through One Alerus, we strive to provide each client with a primary point of contact—a trusted advisor—who takes the time to develop an in-depth understanding of the client's needs and goals. Our advisors work holistically with clients in a guidance-based manner to proactively help them with their financial decisions. Our products and services include traditional bank offerings such as checking accounts, debit cards, savings accounts, personal and business loans, credit cards, online banking, mobile banking / wallet, private banking, deposit and payment solutions and mortgages, as well as fee income services such as IRAs, 401(k) rollovers, retirement planning, employer-sponsored plans, employee stock ownership plans, payroll and HSA/FSA administration, government health insurance program services and wealth management services such as advisory, investment management and trust and fiduciary services. The advisor is equipped to tailor this diverse set of products and services to each client's unique goals and is empowered to reach across our organization to bring the client in contact with product specialists as needed. One Alerus bridges the gaps between our business units with a focus on client advocacy. We believe the One Alerus initiative will enable us to achieve future organic growth by leveraging our existing client base and help us continue to provide strong returns to our stockholders.

The trusted advisor relationship is supported and enhanced through an integrated client-access portal we call "My Alerus." By collaborating with a key technology partner, we have integrated the diverse client applications of our full product suite into a unified system and layered in new technology to bring a client's entire financial picture into one view. For example, a client who has multiple products with our Company, such as banking accounts, a mortgage, wealth management accounts, a retirement account, and a health benefit account, can now access all of these accounts online and effect transactions via one, single login through My Alerus. Instead of being forced to use different usernames and passwords for each system, we've created a single login dashboard to access the most used information on client accounts and coupled that with the ability to link into more detailed information within each transaction system (banking, retirement, and benefits, wealth management and mortgage). Our clients can further personalize their dashboard by integrating or linking financial accounts held at other institutions into My Alerus. Once our clients have integrated or linked all of their financial information, the data can be used to create a custom financial fitness score to help clients save for emergencies, plan for retirement, manage their debt, optimize health savings and protect them from unexpected events with insurance. We plan to provide all of our clients with access to My Alerus by the end of 2019.

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Through our four business lines, we offer a diverse set of financial services and solutions to serve the needs of our consumer and business clients, as shown below:

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Banking

Lending. Through our relationship-oriented lending approach, our strategy is to offer a broad range of customized commercial and consumer lending products for the personal investment and business needs of our clients. Our commercial lending products include commercial loans, business term loans and lines of credit for a diversified mix of small and midsized businesses. We offer both owner occupied and non-owner occupied commercial real estate loans, as well as construction and land development loans. Our consumer lending products include residential first mortgage loans. In addition to originating these loans for our own portfolio, we originate and sell, servicing-released, whole loans in the secondary market. Our mortgage loan sales activities are primarily directed at originating single family mortgages, which generally conform to Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guidelines and are delivered to the investor shortly after funding. Additionally, we offer installment loans and lines of credit, typically to facilitate investment opportunities for consumer clients whose financial characteristics support the request. We also provide clients loans collateralized by cash and marketable securities.

As of June 30, 2019, our loan portfolio contained a balanced and diverse mix of loans, as shown below:


CONCENTRATION BY TYPE*		CONCENTRATION BY INDUSTRY

*: Call Report data as of 6/30/2019

Our loan portfolio includes commercial and industrial loans, commercial real estate loans, consumer loans, which include residential real estate loans, indirect auto loans and other consumer loans, and a small amount of agricultural loans. The principal risk associated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower and the borrower's market or industry. We underwrite for strong cash flow, multiple sources of repayment, adequate collateral, borrower experience and backup guarantors. Attributes of the relevant business market or industry include the competitive environment, client and supplier availability, the threat of substitutes and barriers to entry and exit.

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Commercial and industrial loans totaled $513.1 million, or 29.9% of our total loan portfolio, as of June 30, 2019. In addition to commercial and industrial loans, this portfolio also includes loans to finance agriculture as well as loans to public entities. This portfolio includes a mix of working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. These loans are underwritten on the basis of the borrower's ability to service the debt from income, with maturities tied to the underlying life of the collateral. We generally take a lien on all business assets, including, among other things, available real estate, accounts receivable, inventory and equipment and generally obtain personal guarantees from the principals. Our commercial and industrial loans generally have variable interest rates and terms that typically range from 1 to 15 years. Fixed-rate commercial and industrial loan maturities are generally short-term, with 5 to 10-year maturities, including periodic interest rate resets. As of June 30, 2019, the average maturity on our commercial and industrial portfolio was 3.7 years with a weighted average remaining maturity of 2.7 years. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses.

Commercial real estate loans totaled $469.4 million, or 27.4% of our total loan portfolio, as of June 30, 2019. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. We also make loans to finance the construction of residential and non-residential properties. Construction and land development loans generally are collateralized by first liens on real estate and generally have floating interest rates. Commercial real estate lending typically involves higher loan principal amounts and the repayment is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. We require our commercial real estate loans to be secured by well-managed property with adequate margins and generally obtain a guaranty from responsible parties who have outside cash flows, experience or other assets. Our commercial real estate loans are generally secured by properties used for business purposes such as office buildings, industrial facilities and retail facilities and loan amounts generally do not exceed 75.0% of the property's appraised value for both owner occupied and non-owner occupied. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.

Agricultural loans totaled $35.2 million, or 2.1% of our total loan portfolio, as of June 30, 2019, and are included in our commercial and industrial loan portfolio. Historically, agriculture loans have represented a small portion of our loan portfolio, and we do not expect significant growth in this segment.

Consumer loans totaled $731.0 million, or 42.7% of our total loan portfolio, as of June 30, 2019. This portfolio includes 1-4 family residential mortgage loans, indirect auto loans and other consumer loans. Our 1-4 family residential loan portfolio consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. While we typically originate loans with adjustable rates and maturities up to 30 years, as of June 30, 2019, the average maturity on our 1-4 family portfolio was 12.9 years with a weighted average remaining maturity of 18.5 years. Such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Non-real estate consumer loans include secured and unsecured

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installment loans and lines of credit. This segment of the portfolio totaled $93.7 million as of June 30, 2019, of which $65.8 million were indirect auto loans.

The loan fees, interest rates, and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions. The loans are secured by the real estate, and appraisals are obtained to support the loan amount at origination. Loans collateralized by 1-4 family residential real estate generally are originated in amounts of no more than 80% of appraised value. Generally, our loans conform to Federal National Mortgage Association and Federal Home Loan Mortgage Corporation underwriting guidelines and conform to internal policies for debt-to-income or free cash flow levels. We retain a valid lien on real estate, obtain a title insurance policy that insures that the property is free from encumbrances and require hazard insurance.

Our focus for mortgage lending is to originate high-quality loans to drive growth in our mortgage loan portfolio. Our mortgage strategy includes attracting new loan clients with our mortgage loan products and services, which we believe will provide an opportunity to bring in well-qualified prospects, and to offer to clients other products and services across our business lines. We believe that this process will enable us to generate additional revenue, increase client retention, and provide products that benefit our clients. We have developed a scalable platform, including loan processing, underwriting and closings, for both secondary sales and origination of 1-4 family residential mortgages maintained in the portfolio and believe we have significant opportunities to grow this business.

As of June 30, 2019, our 10 largest borrowing relationships accounted for approximately 5.5% of our total loan portfolio. We have established an informal, internal limit on loans to one borrower, principal or guarantor, but we may, under certain circumstances, consider going above this internal limit in situations where management's understanding of the industry, the borrower's business and the credit quality of the borrower are commensurate with the increased size of the loan.

Most of our lending activity and credit exposure, including real estate collateral for many of our loans, are concentrated in North Dakota, Minnesota and Arizona, as approximately 95.7% of the loans in our loan portfolio were made to borrowers who live or conduct business in those states. The geographic concentration subjects the loan portfolio to the general economic conditions within North Dakota, Minnesota and Arizona. The risks created by such concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses was adequate to cover incurred losses in our loan portfolio as of June 30, 2019. We focus on lending to borrowers across a diverse range of industries and property types and have limited exposure to the oil and gas industry in North Dakota, with only 0.01% of our loans made to borrowers operating in that industry.

We have historically been a net seller of loan participations to other banks. As of June 30, 2019, we had $126.5 million of loan participations sold to approximately 12 different banks. We service the loan participations we sell and receive a servicing fee of approximately 0.42% of the aggregate principal balance of the loan. We expect to continue to sell loan participations as a means of diversifying our credit exposure to larger borrowers. As our lending limit increases, including as a result of capital raised in this offering, we may retain a greater percentage of the larger loans we originate. We do not generally seek to purchase loan participations from other banks. At June 30, 2019, we had 10 loan participations purchased totaling $5.3 million.

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Deposits. We provide a broad range of deposit products and services, including demand deposits, interest-bearing transaction accounts, money market accounts, time and savings deposits and certificates of deposit. Core deposits, which consist of noninterest bearing deposits, interest-bearing checking accounts, certificates of deposit less than $250,000 and money market accounts, provide our major source of funds from individuals, businesses and local governments. As of June 30, 2019, core deposits totaled $1.7 billion or 94.7% of our total deposits. We also recently developed an HSA deposit program to attract additional low cost deposits. During the fourth quarter of 2017, we added $92.5 million of HSA deposits to the Bank. We acquired the servicing business relating to these accounts in our acquisition of ABGNCS in 2016, and were able to move them to the Bank from an existing custody arrangement with a third party bank.

Other than client deposits obtained through our locations that choose to use the CDARS program, we do not accept brokered deposits as a source of funding. We offer a range of treasury management products, including electronic receivables management, remote deposit capture, cash vault services, merchant services and other cash management services. Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from depositors located in our geographic footprint, and we believe that we have attractive opportunities to capture additional deposits in our markets. In order to attract and retain deposits, we rely on providing quality service, offering a suite of consumer and commercial products and services and introducing new products and services that meet our clients' needs as they evolve. In addition, we intend to attract additional low cost deposits through various internal synergies, including the roll-out of our newly developed HSA deposit program.

As of June 30, 2019, our deposit portfolio contained a balanced and diverse mix of deposits, as shown below:

As of June 30, 2019, our 10 largest depositor relationships accounted for approximately 12.1% of our total deposits. This high concentration of depositors presents a risk to our liquidity if one or more of them decides to change its relationship with us and to withdraw all or a significant portion of their accounts.

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Retirement and Benefit Services

Our retirement and benefit services business offers retirement plan administration and investment advisory services, ESOP fiduciary services, payroll, HSA and other benefit services to clients on a nationwide basis. A breakdown of these services is as follows:

•: Advisory. We provide investment fiduciary services to retirement plans
•: Retirement. We provide recordkeeping and administration services to qualified retirement plans
•: ESOPs. We provide trustee, recordkeeping and administration services to employee stock ownership plans
•: Health and Welfare. We provide HSA, FSA and government health insurance program recordkeeping and administration services to employers
•: Payroll. We provide payroll and human resource information system services to employers

For the six months ended June 30, 2019, the revenue mix of our retirement and benefit services business is shown below (dollars in thousands):

As of June 30, 2019, our retirement and benefit services business had approximately $2.6 billion and $27.8 billion of AUM and AUA, respectively. In 2018, we provided services to 355,078 plan participants and 6,738 plans.

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Wealth Management

Our wealth management business offers advisory and planning, investment management and trust and fiduciary services to clients. A breakdown of these services is as follows:

For the six months ended June 30, 2019, the revenue mix of our wealth management business is shown below (dollars in thousands):

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As of June 30, 2019, our wealth management business had approximately $2.7 billion of AUA and AUM as shown below (dollars in thousands):

Our wealth management division offers two unique types of accounts called Dimension and Blueprint accounts, which are primarily targeted toward IRA and agency account relationships. A Dimension account is a proprietary, separately managed account designed for individual investors, foundations, endowments and institutions with assets typically greater than $500 thousand. Dimension accounts use actively managed portfolios consisting of individual securities, mutual funds, and exchange traded funds selected and monitored by Alerus Financial, N.A. A Blueprint account uses a series of models that are designed to help investors gain exposure to a diversified, risk-based asset allocation. Portfolios in these accounts are comprised of mutual funds run by consistent, low-cost fund managers, with Alerus Financial, N.A. conducting initial and ongoing fund monitoring of the model allocations and rebalancing the portfolios on a regular basis.

Mortgage

Our mortgage business offers first and second mortgage loans through a centralized mortgage unit located in Minneapolis, Minnesota, as well as through our banking office locations. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In 2018, approximately 83.0% of the loans made by our mortgage division were for the purchase of a residential property, compared to 17.0% for the refinance of an existing mortgage. We source most of our residential mortgage loans from the Twin Cities MSA, and for the year ended December 31, 2018, approximately 89.5% of the total mortgage loans were attributable to that market, compared to 7.7% attributable to the North Dakota market and 2.3% attributable to the Phoenix MSA. We believe there is an opportunity to expand our mortgage loan pipeline in these other markets, especially in the Phoenix MSA. Although we originate loans for our own portfolio, we also conduct mortgage banking activities in which we originate and sell, servicing-released, whole loans in the secondary market. Typically, loans with a fixed interest rate of greater than 10 years are available-for-sale and sold on the secondary market. Our mortgage banking loan sales activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The

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amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of June 30, 2019, we had mortgage loans held for sale of $44.6 million from the residential mortgage loans we originated. For the year ended December 31, 2018, we had net proceeds of $627.2 million on mortgage loans sold into the secondary market, which we originated.

Our Growth Strategy

Leverage our existing client base. We believe our most significant opportunity for continued growth is within our existing client base, consisting of nearly 50,000 consumers, over 10,000 businesses and over 355,000 retirement plan participants. The diversified nature of our business allows us to leverage our business lines across our expansive client base and find synergies that are unavailable to traditional banking organizations. The success of our organic growth lies with our integrated One Alerus strategy. For example, through our recently formalized "National Market," we intend to further diversify services offered to our retirement plan participants by deepening each relationship, primarily by offering our mortgage and wealth management products, as well as by attracting low cost deposits through our newly-developed HSA deposit program and other initiatives. We believe our adoption of digital trends and investments in technology have allowed us to reach this nationwide participant client base without a physical presence in a manner not previously achievable. Further, we intend to deploy our recently acquired and expanded services that are highly complementary to our retirement plan business—including payroll, HSAs, FSAs and government health insurance program services—to our existing business client base. Additionally, we began offering a competitive money market product as a fund option for clients with retirement plans, allowing us to bring value to clients while growing our deposit base in a new way. We believe that these new products will play a key role in driving organic growth across our Company.

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Our Competitive Strengths

Highly diversified revenue stream. Over 50% of our revenue stream is derived from noninterest income, primarily generated by our retirement and benefit services, wealth management and mortgage business lines. As a highly-diversified financial services company, we are not only well positioned to succeed in volatile interest rate environments, but also have enhanced avenues for growth and expansion in varying market cycles. We believe these revenue streams allow for stronger and more consistent core earnings levels, and as part of our ongoing strategy, we will strive to maintain our noninterest income percentage at or in excess of current levels. Our retirement and benefits services business serves clients in all 50 states, and we recently formalized a "National Market" with a separately appointed National Market President to track clients that reside outside of our banking markets. As of June 30, 2019, the AUM, AUA

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and deposits attributable to the National Market were $3.0 billion, $20.7 billion and $326.3 million, respectively, representing approximately 56.4%, 74.2% and 18.6%, respectively, of our total AUM, AUA and deposits as of that date.

•: Randy L. Newman, our Chairman, President and Chief Executive Officer, leads our management team and has spent 38 years with our Company. Randy joined us in 1981 and became our President in 1987 and Chief Executive Officer in 1995.
•: Katie A. Lorenson, our Executive Vice President and Chief Financial Officer, joined us in December 2017. Katie is a seasoned executive with extensive experience overseeing financial service organizations, most recently serving as Chief Financial Officer of MidWestOne Financial Group, Inc., an SEC-reporting company.
•: Ann M. McConn, our Executive Vice President and Chief Business Officer, has spent 17 years with our Company. Ann assumed her current role in 2017, which has her overseeing our business development efforts and operations, and she previously served as the executive director of retirement, benefits and wealth management and as Fargo Market President. Ann has over 30 years of experience in the financial industry.
•: Kris E. Compton, our Executive Vice President and Chief Strategy Officer, has spent 44 years with our Company. Prior to becoming Chief Strategy Officer in 2017, Kris held a variety of roles within our Company and Bank, including Chief Operating Officer, Human Resource Manager and Marketing Director.
•: Karin M. Taylor, our Executive Vice President and Chief Risk Officer, joined us in November 2018. Karin has 29 years of industry experience, including in the area of risk management. She most recently served as Chief Risk Officer for MidWestOne Bank, the subsidiary of MidWestOne Financial Group, Inc., an SEC-reporting company.

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comprehensive financial services relationship, is a better fit for high-growth metropolitan areas. The median household income in the Twin Cities MSA, our largest market, is over 25% higher than the national average and is expected to grow over 10% from 2019 to 2024. The Phoenix MSA also has attractive demographics, including a large number of households with income in excess of $100,000 and projected population growth of over 10% during the same five year period. Additionally, the projected population growth from 2019 to 2024 in North Dakota is expected to outpace the national average. Not only does our diversified presence provide expanded opportunities for growth, we believe it offers us the additional protection to withstand a downturn in any particular geographic region. With our current team and infrastructure, we feel that we continue to have significant organic growth opportunities in our current markets.

Our Banking Market Areas

Our primary banking market areas are the states of North Dakota, Minnesota, specifically, the Twin Cities MSA, and Arizona, specifically, the Phoenix MSA. Our bank branch expansion into the Twin Cities MSA in 2007 and the Phoenix MSA in 2009 was an intentional part of our strategic plan to diversify our geographic footprint and expand into metropolitan markets outside of North Dakota. As part of our strategic plan, in addition to expansion in our current market areas, we may further diversify our markets through entry into other large metropolitan markets.

The table below provides our deposit market share and demographic information for each of our markets.

	Deposit Market Share*						Total Population				Demographics

Market	Deposits in Market ($000s)		Market Share (%)		Market Rank (#)		2019 Population (#)		'19 - '24 Proj. Pop. Chg. (%)		Median HH Income ($)		'19 - '24 Proj. HH Income Chg. (%)		% of HH w/ Income > $100K (%)		Unempl. Rate (%)
MSAs
Minneapolis-St. Paul-Bloomington, MN-WI		767,156		0.4		13		3,656,503		4.6		80,054		10.7		39.2		3.0
Grand Forks, ND-MN		615,201		21.7		1		102,920		3.4		55,368		6.5		24.1		2.7
Fargo, ND-MN		323,662		4.2		6		247,440		7.2		64,267		7.7		27.8		2.4
Phoenix-Mesa-Scottsdale, AZ		67,008		0.1		43		4,864,483		7.0		64,145		10.4		29.5		4.2

United States of America								329,236,175		3.6		63,174		8.8		29.7		3.6

Source: S&P Global Market Intelligence; demographic data is from a report issued by Claritas, LLC in June 2018, based primarily on US Census data from 2000 and 2010; unemployment data is as of May 2019

*: Data as of June 30, 2018 per the FDIC's Summary of Deposits; $151.5 million of the deposits included for the Grand Forks, North Dakota market and $102.9 million of the deposits included for the Twin Cities MSA market are attributable to our National Market. See "—Our National Market."

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North Dakota

The State of North Dakota's economy has strengthened in recent periods as a result of the discovery of the Bakken oil region, which produces over 1.25 million barrels of oil per day. North Dakota has one of the lowest unemployment rates in the country—2.3% as of May 2019. We believe this market is rich in low-cost, core deposits, which we can use to fund loans in our higher growth metropolitan markets. North Dakota had total deposits of $27.8 billion as of June 30, 2018, and ranks as the 45 ^th largest State in total deposits, based on FDIC data.

The State of North Dakota also features one of the only state-owned banks in the nation, the Bank of North Dakota, which offers services, many of which are similar to those offered by a correspondent bank, only to banks like ours that are headquartered in the state. The Bank of North Dakota expands our lending capacity by purchasing participations from the Bank. In addition, the Bank of North Dakota offers us additional financing options such as bank stock loans and lines of credit at competitive rates. Finally, the Bank of North Dakota enables state banks to take deposits and manage funds for municipal and county governments without meeting collateral requirements, which are waived by a letter of credit from the Bank of North Dakota.

Our corporate headquarters, which is a full-service banking office located at 401 Demers Avenue, Grand Forks, North Dakota 58201, serves the North Dakota market along with three other full-service banking offices located in Grand Forks, North Dakota, three full-service banking offices located in Fargo and West Fargo, North Dakota, and one full-service banking office located in Northwood, North Dakota. As of June 30, 2019, total loans and deposits attributable to these offices were $680.0 million and $779.5 million, respectively, representing approximately 39.7% and 44.4%, respectively, of our overall loan and deposit portfolios. For the six months ended June 30, 2019, we originated $28.0 million of residential mortgage loans, or 7.5% of our total residential mortgage loans, in North Dakota. AUM and AUA attributable to our offices located in North Dakota were $2.0 billion and $2.7 billion, respectively, as of June 30, 2019, representing approximately 37.8% and 9.6%, respectively of our total AUM and AUA as of that date.

Minnesota

The Twin Cities MSA, which had total deposits of $184.8 billion as of June 30, 2018, ranks as the 15th largest metropolitan statistical area in the United States in total deposits and the third largest metropolitan statistical area in the Midwest in total deposits, based on FDIC data. The Twin Cities MSA is defined by attractive market demographics, including strong household incomes, dense populations, low unemployment and the presence of a diverse group of large and small businesses. As of January 1, 2019, the Twin Cities MSA ranked third in median household income in the Midwest and sixth in the nation, when compared to the top 20 metropolitan statistical areas by population size in each area, based on data available on S&P Global Market Intelligence. The population in the Twin Cities MSA was approximately 3.7 million as of January 1, 2019, making it the third largest metropolitan statistical area in the Midwest and 16th largest metropolitan statistical area in the United States. The low unemployment rate of 3.0%, as of May 2019, and the significant presence of national and international businesses make the Twin Cities MSA one of the most economically vibrant and diverse markets in the country.

We serve the Minnesota market through six full-service banking offices, one loan and deposit production office and one residential mortgage office, all located in the Twin Cities

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MSA. As of June 30, 2019, total loans and deposits attributable to these offices were $887.7 million and $579.8 million, respectively, representing approximately 51.8% and 33.1%, respectively, of our overall loan and deposit portfolios. In addition, we originate a significant portion of our residential mortgage loans in this market. For the six months ended June 30, 2019, we originated $337.3 million of residential mortgage loans, or 90.8% of our total residential mortgage loans, in the Twin Cities MSA. AUM and AUA attributable to our offices located in the Twin Cities MSA were $255.9 million and $4.5 billion, respectively, as of June 30, 2019, representing approximately 4.8% and 16.2%, respectively, of our total AUM and AUA as of that date.

Arizona

The Phoenix MSA is a large and growing market, with a total population of approximately 4.9 million as of January 1, 2019, making it the 11 ^th largest metropolitan statistical area in the United States. The population of the Phoenix MSA is expected to increase over 7% from 2019 to 2024. The Phoenix MSA had total deposits of $100.6 billion as of June 30, 2018, and ranks as the 24 ^th largest metropolitan statistical area in the United States in total deposits, based on FDIC data. Based on U.S. Bureau of Labor Statistics as of May 2019, the unemployment rate in the Phoenix MSA was 4.2%. The Phoenix MSA is defined by attractive market demographics, including a large number of high net worth households, dense populations, low unemployment and the presence of a diverse group of small-to-medium sized businesses. As of January 1, 2019, the Phoenix MSA had a median household income of $64,145, and 29.5% of households had income in excess of $100,000, based on data available on S&P Global Market Intelligence.

We serve the Arizona market through our full-service banking offices located in Scottsdale and Mesa, Arizona. As of June 30, 2019, total loans and deposits attributable to these offices were $145.7 million and $67.7 million, respectively, representing approximately 8.5% and 3.9%, respectively, of our overall loan and deposit portfolios.

Our National Market

Our retirement and benefit services business serves clients in all 50 states. We offer retirement and benefit services at all of our banking offices located in our three primary market areas. In addition, we operate two retirement and benefits services offices in Minnesota, two in Michigan and one in New Hampshire. To help us track retirement and benefit services business clients that reside outside of our banking markets, we recently formalized a "National Market" with a separately appointed National Market President to oversee the development of the market's client base. AUM, AUA, and deposits attributable to the National Market were $3.0 billion, $20.7 billion and $326.3 million, respectively, as of June 30, 2019, representing approximately 56.4%, 74.2% and 18.6%, respectively of our total AUM, AUA, and deposits as of that date. No loans were attributable to the National Market as of June 30, 2019.

Competition

The financial services industry is highly competitive, and we compete in a number of areas, including commercial and consumer banking, residential mortgages, wealth advisory, investment management, trust and record-keeping among others. We compete with other bank and nonbank institutions located within our market areas, along with competitors situated regionally, nationally and others with only an online presence. These include large banks and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking companies, business leasing and finance companies, all actively engaged in providing

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various types of loans and other financial services. We also face growing competition from online businesses with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment services providers. Competition involves efforts to retain current clients, obtain new loans, deposit and advisory services, increase the scope and type of services offered, and offer competitive interest rates paid on deposits, charged on loans, or charged for advisory services. We believe our integrated and high-touch service offering, along with our sophisticated relationship-oriented approach sets us apart from our competitors.

Employees

As of June 30, 2019, we had 792 full-time equivalent employees. None of our employees is a party to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

Properties

Our corporate headquarters are located at 401 Demers Avenue, Grand Forks, North Dakota 58201. In addition to our corporate headquarters, which includes a full service banking office, we operate three other full-service banking offices located in Grand Forks, North Dakota, three full-service banking offices located in Fargo and West Fargo, North Dakota, one full-service banking office located in Northwood, North Dakota, six full-service banking offices, one loan and deposit production office and one residential mortgage office located in the Twin Cities MSA, one full-service banking office located in Phoenix, Arizona, and one full-service banking office located in Mesa, Arizona. We offer retirement and benefits, wealth management and mortgage products and services at all of our full-service banking offices. In addition, we operate two retirement and benefit services offices in Minnesota, two in Michigan and one in New Hampshire. We monitor client behavior and interactions with our banking and other offices, and in recent periods, we have shifted financial resources away from physical locations to technology solutions, as client demands continue to change. In 2016, we closed two bank branches in Fargo, North Dakota, and one in the Twin Cities MSA, and we also remodeled several locations to use space in a more efficient manner.

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Additional information regarding our locations is set forth below.

Address Office Locations:		Ownership

1640 South Stapley Drive, Suite 105, Mesa, Arizona 82504		Leased
17045 North Scottsdale Road, Scottsdale, Arizona 85255		Owned
755 West Big Beaver Road, Suite 400, Troy, Michigan 48084		Leased
3001 Coolidge Road, Suite 105, East Lansing, Michigan 48823		Leased
7890 Mitchell Road, Eden Prairie, Minnesota 55344		Leased
409 Second Street, Excelsior, Minnesota 55331		Leased
120 South 6th Street, Suite 200, Minneapolis, Minnesota 55402		Leased
11100 Wayzata Boulevard, Suite 570, Minnetonka, Minnesota 55305		Leased
990 Helena Street North, Oakdale, Minnesota 55128		Owned
19765 Highway 7, Shorewood, Minnesota 55331		Owned
7650 Edinborough Way, Suite 645, Edina, Minnesota 55435		Leased
6 Pine Tree Drive, Suite 330, Arden Hills, Minnesota 55112		Leased
2 Pine Tree Drive, Suite 304A & 400, Arden Hills, Minnesota 55112		Leased
201 East Clark Street, Albert Lea, Minnesota 56007		Leased
2 Bedford Farms Drive, Suite 220, Bedford, New Hampshire 03110		Leased
51 Broadway, Suite 570, Fargo, North Dakota 58102		Leased
3137 32nd Avenue South, Fargo, North Dakota 58103		Owned
3170 43rd Street South, Suite 100, Fargo, North Dakota 58104		Leased
401 Demers Avenue, Grand Forks, North Dakota 58201		Leased
2300 South Columbia Road, Grand Forks, North Dakota 58201		Owned
1750 32nd Avenue South, Grand Forks, North Dakota 58201		Leased
516 Demers Avenue, Grand Forks, North Dakota 58201		Owned
503 Washington Ave, Northwood, North Dakota 58267		Owned
901 13th Avenue East, West Fargo, North Dakota 58078		Owned

Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business, financial condition, results of operations, cash flows or growth prospects. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.

Corporate Information

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MANAGEMENT

Board of Directors

Our board of directors currently consists of eight members. We expect all of our existing directors to continue to comprise our board of directors following the completion of this offering. Our certificate of incorporation provides that our board is authorized to have not less than five nor more than 12 directors. The number of directors may be changed only by resolution of our board within the range set forth in our certificate of incorporation.

The following table sets forth information as of the date of this prospectus regarding the members of our board of directors.

Name	Age	Position	Director Since

Randy L. Newman	65	Chairman, Chief Executive Officer and President	1988
Karen M. Bohn	65	Director	1999
Lloyd G. Case	73	Director	2005
Daniel E. Coughlin	57	Director	2016
Kevin D. Lemke	66	Director	1994
Michael S. Mathews	47	Director	2019
Sally J. Smith	61	Director	2007
Galen G. Vetter	67	Director	2013

The following is a brief discussion of the business and banking background and experience of each of our directors for at least the past five years. The biographies contain information regarding the person's experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director. No director has any family relationship, as defined in Item 401 of Regulation S-K, with any other director or with any of our executive officers.

Randy L. Newman. Mr. Newman serves as Chairman, Chief Executive Officer and President of our Company and Bank. He has served as a director of the Bank since 1987 and a director of the Company since 1988. Mr. Newman joined Alerus Financial, formerly First National Bank North Dakota in 1981, and became its President in 1987 and Chief Executive Officer in 1995. Prior to joining Alerus Financial, he taught Corporate Finance and Business Strategy courses at the University of North Dakota. He was a director of the FHLB of Des Moines from 1999-2007. Mr. Newman served as a Class A Director of the Federal Reserve Bank of Minneapolis from 2012-2018. Mr. Newman received his BSBA in 1975 and his MBA in 1979 from the University of North Dakota.

Karen M. Bohn. Ms. Bohn, a director of the Company since 1999, is the current President of Galeo Group, LLC. She also currently serves on the board of directors of OtterTail Corporation, Ameriprise Certificate Corporation and RiverSource Life Insurance Company. Prior to forming Galeo Group, she served for more than 20 years in executive roles at Piper Jaffray Companies Inc. She was Chief Administrative Officer at Piper Jaffray, overseeing corporate communications, community affairs, government relations, human resources, office services, strategic and operational planning, and retirement plans. She also served as President of Piper Jaffray Companies Foundation, and as president of Piper Trust Company. Ms. Bohn studied at the Securities Industry Institute of The Wharton School, University of Pennsylvania in

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Philadelphia. She received her bachelor's and master's degrees from the University of North Dakota in Grand Forks.

Lloyd G. Case. Mr. Case has served as a director of the Company since 2005. Mr. Case spent more than 30 years with Forum Communication Company, holding multiple executive roles during his tenure. He currently serves on the board of directors of Forum Communications and served as President and Chief Executive Officer from 2010 until his retirement in 2014. Prior to that, he served as Chief Financial Officer and Vice President of the company's Newspapers division. He has held membership on numerous boards of directors and associations involved in industries such as accounting, media, health care, and nonprofit, including service on the board of Forum Communications. Mr. Case is a 1971 graduate of the University of North Dakota and holds a CPA designation (inactive).

Daniel E. Coughlin. Mr. Coughlin has served as a director of the Company since 2016. He served as the Managing Director and Co-Head of the Financial Services practice at Raymond James & Associates from 2011 until his retirement in 2014. Beginning in 2001, Mr Coughlin served as Chairman and CEO of Howe Barnes Hoefer & Arnett prior to its 2011 merger with Raymond James and served eight additional years with Howe Barnes Hoefer & Arnett in various capacities. Mr. Coughlin also spent seven years with the Federal Reserve Bank of Chicago where he assessed the competitive implications of bank mergers and acquisitions. A 35-year industry veteran, Mr. Coughlin possesses vast knowledge and experience in areas such as strategic planning, risk management, mergers and acquisitions, and capital formation.

Kevin D. Lemke. Mr. Lemke, a director of the Company since 1994, has been the President and owner of Virtual Systems, Inc. since 1994. He is the former owner and information systems director of ComputerLand of Grand Forks. He is also an investor with RAIN Source Capital, which focuses on growing private companies through a community-based system of investors, capital, and expertise. Mr. Lemke earned a Bachelor of Science degree in mathematics and computer science, magna cum laude, from the University of North Dakota in 1975. Mr. Lemke also holds a certificate in data processing and computer programming from the Institute for Certification of Computer Professionals.

Michael S. Mathews. Mr. Mathews, a director of the Company since 2019, has served as Chief Information Officer of Deluxe Corporation since 2013. In addition to leadership roles with UnitedHealth Group and Merrill Lynch, Mr. Mathews also founded and built his own management consulting business, The Infology Group, Inc., which he later transitioned to key partners. Mr. Mathews holds a bachelor's degree in business administration, marketing and decision sciences from Miami University. In 2018, he was honored as a CIO of the year Orbie award finalist. Mr. Mathews currently serves as chair of the board of directors for the Twin Cities CIO Leadership Association, and is also a member of the board of directors for Genesys Works.

Sally J. Smith. Ms. Smith, a director of the Company since 2007, is the former Chief Executive Officer and President of Buffalo Wild Wings. She served as Chief Executive Officer from 1996 to 2018, as a director from 1996 to 2018, and was the company's Chief Financial Officer from 1994 to 1996. Prior to joining Buffalo Wild Wings, she was the Chief Financial Officer of Dahlberg, Inc., the manufacturer and franchisor of Miracle-Ear hearing aids, from 1983 to 1994. Ms. Smith began her career with KPMG LLP, an international accounting and auditing firm. Ms. Smith holds a CPA license (inactive). She serves on the board of directors for, and is past chair of, the National Restaurant Association. She also serves on board of directors of Hormel Foods, Allina Health Systems, Marvin Windows and Digi International Inc.

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Galen G. Vetter. Mr. Vetter has served as a director of the Company since 2013. Mr. Vetter has varied and broad board of director experience, having served on over a dozen boards over the past three decades. He is a retired CPA with an extensive background including numerous executive level positions at Franklin Templeton Investments and RSM US LLP. Mr. Vetter's roles at RSM included Partner In-Charge of the Upper Midwest Region and National Executive Partner, with leadership responsibilities for financial management, information technology, and development of professional services industry practices. As CFO and Senior Vice President at Franklin Templeton Mr. Vetter's responsibilities included oversight of accounting, financial compliance and filings in dozens of counties for over four hundred funds. He also was the executive sponsor for global internal controls and risk management for the Franklin Templeton Funds. Mr. Vetter retired in 2012. Mr. Vetter currently serves as an advisory board member for Land O'Lakes, Inc. Mr. Vetter holds a Bachelor of Science degree with an accounting emphasis from the University of Northern Iowa.

Executive Officers

The following table sets forth information as of the date of this prospectus regarding our executive officers:

Name	Age	Position

Randy L. Newman	65	Chairman, Chief Executive Officer and President
Katie A. Lorenson	39	Executive Vice President and Chief Financial Officer
Ann M. McConn	59	Executive Vice President and Chief Business Officer
Kris E. Compton	64	Executive Vice President and Chief Strategy Officer
Karin M. Taylor	51	Executive Vice President and Chief Risk Officer

The business and banking background and experience of each of our executive officers, other than Mr. Newman who also serves as a director, for at least the past five years is set forth below. Ms. Compton and Ms. McConn are sisters-in-law. Other than this relationship, no executive officer has any family relationship, as defined in Item 401 of Regulation S-K, with any other executive officer or any of our current directors. There are no arrangements or understandings between any of the officers and any other person pursuant to which he or she was selected as an officer.

Katie A. Lorenson. Ms. Lorenson joined Alerus as Chief Financial Officer in December 2017. Ms. Lorenson is a seasoned executive with extensive experience overseeing financial service organizations, most recently serving as CFO at MidWestOne Financial Group, Inc. She previously served as CFO for Central Bancshares, which was acquired by MidWestOne Financial Group, Inc. in 2015. Prior to these roles, Ms. Lorenson served as Manager on the Financial Institutions Team for RSM (McGladrey & Pullen).

Ann M. McConn. Ms. McConn serves as Executive Vice President and Chief Business Officer, overseeing our Company's business development efforts and operations in the areas of banking, mortgage, retirement and benefit services, and wealth management. She assumed her current role in 2017. Ms. McConn has more than 30 years of experience in the financial services industry. She joined Alerus in 2002 and previously served as the company's executive director of retirement, benefits, and wealth management, and as Fargo Market President. Her past experience includes roles as vice president of financial services and wealth management, and senior vice president of trust and investments at another financial institution. She also

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previously served as a trust investment officer at First National Bank North Dakota (today known as Alerus).

Kris E. Compton. Ms. Compton serves as Chief Strategy Officer and sets our Company's direction with respect to the development and alignment of strategic and business planning efforts, leadership development programs, and human and information resource management initiatives. Prior to becoming Chief Strategy Officer in 2017, Ms. Compton held a variety of roles within Alerus over the course of a 40-plus-year career, including Chief Operating Officer, human resource manager, and marketing director. Ms. Compton received her undergraduate degree from the University of North Dakota and began her banking career immediately after graduation. She has been with Alerus since 1975. Ms. Compton has advised us that she is planning to retire from our Company at the end of 2019. As part of our succession plan, we intend to fill the vacated position by identifying a pool of internal and external candidates and ultimately selecting the most qualified individual.

Karin M. Taylor. Ms. Taylor joined Alerus as Chief Risk Officer in November 2018. Ms. Taylor brings 28 years of industry experience with her, including in the area of risk management. She most recently served as Chief Risk Officer at MidWestOne Bank and prior as Chief Risk Officer for Central Bank, which was acquired by MidWestOne Financial Group, Inc. in 2015. Prior to these roles, Ms. Taylor served as Director of Risk Management Consulting at RSM McGladrey. Ms. Taylor received a Bachelor's of Art degree from St. Olaf College and also graduated with honors from the Graduate School of Banking in 2018.

Director Independence

Under the rules of the Nasdaq Stock Market, independent directors must comprise a majority of our board of directors within one year of our listing date. The rules of the Nasdaq Stock Market, as well as those of the SEC, also impose several other requirements with respect to the independence of our directors.

Our board of directors has evaluated the independence of its members based upon the rules of the Nasdaq Stock Market and the SEC. Applying these standards, and based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has affirmatively determined that, with the exception of Mr. Newman, each of our current directors is an independent director, as defined under the applicable rules. The board determined that Mr. Newman does not qualify as an independent director because he is an executive officer of our Company and Bank. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director, and the matters discussed under "Certain Relationships and Related Party Transactions."

Board Leadership Structure

Our board of directors does not have a formal policy requiring the separation of the roles of Chairman of the Board and Chief Executive Officer. It is our directors' view that rather than having a rigid policy, the board of directors, with the advice and assistance of the nominating and corporate governance committee, and upon consideration of all relevant factors and circumstances, will determine, as and when appropriate, whether the two offices should be separate. The positions of Chairman and Chief Executive Officer have been combined and are

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held by Mr. Newman. We believe this board leadership structure is the most appropriate because of the efficiencies achieved in having the role of Chairman and Chief Executive Officer combined, and because the detailed knowledge of our day-to-day operations and business that the Chief Executive Officer possesses greatly enhances the decision-making processes of the board of directors as a whole. As noted above, Mr. Newman is not currently considered to be "independent" according to Nasdaq rules.

Because the Chairman of the Board is not an independent director, our board of directors has a separate lead independent director. Currently, Mr. Coughlin serves as our lead independent director. The lead independent director assists the board in practicing effective corporate governance, serves as chairperson of the independent director sessions and chairs board meetings during any meetings or portions of meetings if Mr. Newman is absent. Consistent with Nasdaq listing requirements, the independent directors will regularly have the opportunity to meet without Mr. Newman present.

Board Committees

The standing committees of our board of directors consist of an audit committee, a compensation committee, a nominating and corporate governance committee and a risk committee. The responsibilities of these committees are described below. Our board of directors may also establish such other committees as it deems appropriate, in accordance with applicable law and regulations and our corporate governance documents. The following table summarizes the membership of each of the committees of the board of directors upon completion of the offering:

Director Name	Audit Committee	Compensation Committee	Nominating and Corporate Governance Committee	Risk Committee

Karen M. Bohn	X		Chair
Lloyd G. Case	X		X
Daniel E. Coughlin		X		Chair
Kevin D. Lemke		Chair		X
Michael S. Mathews		X		X
Sally J. Smith		X		X
Galen G. Vetter	Chair		X

Audit Committee. Our audit committee is composed solely of members who satisfy the applicable independence, financial literacy and other requirements of the Nasdaq Stock Market and SEC for audit committees.

Our audit committee has adopted a written charter, which sets forth the committee's duties and responsibilities. The current charter of the audit committee will be available on our website at www.alerus.com upon completion of this offering. As described in its charter, our audit committee has responsibility for, among other things:

•: selecting and reviewing the performance of our independent auditors and approving, in advance, all engagements and fee arrangements;

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•: reviewing the independence of our independent auditors;
•: meeting with management, the internal auditors and the independent auditors to review the effectiveness of our system of internal control and internal audit procedures;
•: reviewing our earnings releases and reports filed with the SEC;
•: reviewing reports of bank regulatory agencies and monitoring management's compliance with recommendations contained in those reports;
•: reviewing and approving transactions for potential conflicts of interest under our Company's conflict of interest policy; and
•: handling such other matters that are specifically delegated to the audit committee by our board of directors from time to time.

Compensation Committee. Our compensation committee is composed solely of members who satisfy the applicable independence requirements of the Nasdaq Stock Market and SEC for compensation committees.

Our compensation committee has adopted a written charter, which sets forth the committee's duties and responsibilities. The current charter of the compensation committee will be available on our website at www.alerus.com upon completion of this offering. As described in its charter, our compensation committee has responsibility for, among other things:

•: reviewing, monitoring and approving our overall compensation structure, policies and programs (including benefit plans) and assessing whether the compensation structure establishes appropriate incentives for our executive officers and other employees and meets our corporate objectives;
•: determining the annual compensation of our Chief Executive Officer;
•: determining stock ownership guidelines for the Chief Executive Officer, directors and other executive officers and monitoring compliance with such guidelines;
•: overseeing the administration of our equity plans and other incentive compensation plans and programs and making recommendations to our board of directors relating to these matters;
•: preparing the compensation committee report required by SEC rules to be included in our annual report; and
•: handling such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee is composed solely of members who satisfy the applicable independence requirements of the Nasdaq Stock Market for nominating and corporate governance committees.

Our nominating and corporate governance committee has adopted a written charter, which sets forth the committee's duties and responsibilities. The current charter of the nominating and

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corporate governance committee will be available on our website at www.alerus.com upon completion of this offering. As described in its charter, our nominating and corporate governance committee has responsibility for, among other things:

•: recommending persons to be selected by our board of directors as nominees for election as directors or to fill any vacancies on our board of directors;
•: developing and recommending to the board of directors a set of corporate governance guidelines applicable to our Company and reviewing these guidelines at least once a year;
•: reviewing the board of director's committee structure and composition and making recommendations to the board of directors regarding the appointment of directors to serve as members of each committee and committee chairmen annually; and
•: handling such other matters that are specifically delegated to the nominating and corporate governance committee by our board of directors from time to time.

In carrying out its nominating function, the nominating and corporate governance committee will develop qualification criteria for all potential director nominees, including incumbent directors, board nominees and stockholder nominees included in the proxy statement. We expect these criteria will include the following attributes:

•: integrity and high ethical standards in the nominee's professional life;
•: sufficient educational and professional experience, business experience or comparable service on other boards of directors to qualify the nominee for service to the board;
•: evidence of leadership and sound judgment in the nominee's professional life;
•: a willingness to abide by any published code of ethics for our Company;
•: a willingness and ability to devote sufficient time to carrying out the duties and responsibilities required of a board member; and
•: diversity of viewpoints, background, experience and other demographics.

The committee also evaluates potential nominees to determine if they have any conflicts of interest that may interfere with their ability to serve as effective board members and to determine whether they are "independent" in accordance with Nasdaq Stock Market rules (to ensure that, at all times, at least a majority of our directors are independent).

Prior to nominating an existing director for re-election to the board, the committee will consider and review the following attributes with respect to each existing director:

•: board and committee attendance and performance;
•: age and length of board service;
•: experience, skills and contributions that the existing director brings to the board;

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•: independence and any conflicts of interest; and
•: any significant change in the director's professional status or work experience, including the attributes considered for initial board membership.

Risk Committee. Our risk committee is composed solely of members who are independent from management of our Company and Bank. Our risk committee is composed solely of members who are independent in accordance with the requirements of Rule 10A-3 of the Exchange Act, subject to the exceptions provided in Rule l0A-3(b) of the Exchange Act, and independent in accordance with the rules of the Nasdaq Stock Market, subject to the exceptions provided in Nasdaq Rule 5615(b). Our risk committee has adopted a written charter, which sets forth the committee's duties and responsibilities. The current charter of the risk committee will be available on our website at www.alerus.com upon completion of this offering. As described in its charter, our risk committee has responsibility for, among other things:

•: overseeing management's establishment of a risk management vision and annually approving our Company's risk appetite statement;
•: annually reviewing and approving our Company's overall risk management framework;
•: annually reviewing and approving our Company's general enterprise risk policy;
•: reviewing management reports summarizing our Company's enterprise level risk profile; and
•: handling such other matters that are specifically delegated to the risk committee by our board of directors from time to time.

Board Oversight of Risk Management

Our board of directors believes that effective risk management and control processes are critical to our safety and soundness, our ability to predict and manage the challenges that we face and, ultimately, our long-term corporate success. Our board of directors, both directly and through its committees, is responsible for overseeing our risk management processes, with each of the committees of our board of directors assuming a different and important role in overseeing the management of the risks we face.

The risk committee of our board of directors oversees our enterprise-wide risk management framework and corporate risk function, which establishes our overall risk appetite and risk management strategy and enables our management to understand, manage and report on the risks we face. Our risk committee also reviews and oversees policies and practices established by management to identify, assess, measure and manage key risks we face, including the risk appetite metrics and risk appetite statement developed by management and approved by the risk committee. The audit committee of our board of directors is responsible for overseeing risks associated with financial matters (particularly financial reporting, accounting practices and policies, disclosure controls and procedures and internal control over financial reporting). The compensation committee of our board of directors has primary responsibility for risks and exposures associated with our compensation policies, plans and practices, regarding both executive compensation and the compensation structure generally. In particular, our compensation committee reviews our incentive compensation arrangements to ensure these programs are consistent with applicable laws and regulations, including safety and soundness

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requirements, and do not encourage imprudent or excessive risk-taking by our employees. The nominating and corporate governance committee of our board of directors oversees risks associated with the independence of our board of directors and potential conflicts of interest.

Our executive management team is responsible for implementing and reporting to our board of directors regarding our risk management processes, including by assessing and managing the risks we face, including strategic, operational, regulatory, investment and execution risks, on a day-to-day basis. Our executive management team is also responsible for creating and recommending to our board of directors for approval appropriate risk appetite metrics reflecting the aggregate levels and types of risk we are willing to accept in connection with the operation of our business and pursuit of our business objectives.

The role of our board of directors in our risk oversight is consistent with our leadership structure, with the members of our executive management team having responsibility for assessing and managing our risk exposure, and our board of directors and its committees providing oversight in connection with those efforts. We believe this division of risk management responsibilities presents a consistent, systemic and effective approach for identifying, managing and mitigating risks throughout our operations.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee will be or has been an officer or employee of our Company. None of our executive officers serves or has served as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.

Code of Business Conduct and Ethics

Upon completion of this offering, our board of directors will adopt a code of business conduct and ethics that applies to all of our directors and employees. The code will set forth the standard of ethics that we expect all of our directors and employees to follow. Upon completion of this offering, our code of business conduct and ethics will be available on our website at www.alerus.com. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website, as well as any other means required by Nasdaq Stock Market rules.

Corporate Governance Guidelines

Upon completion of this offering, our board of directors will adopt a set of corporate governance guidelines to assist our board of directors in the exercise of its fiduciary duties and to promote the effective functioning of our board and its committees. Upon the completion of this offering, our corporate governance guidelines will be available on our website at www.alerus.com.

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EXECUTIVE COMPENSATION

As an emerging growth company under the JOBS Act, we have opted to comply with the executive compensation disclosure rules applicable to "smaller reporting companies" as such term is defined in the rules promulgated under the Securities Act, which permit us to limit reporting of compensation disclosure to our principal executive officer and our two other most highly compensated executive officers, which are referred to as our "named executive officers."

The compensation reported in the Summary Compensation Table below is not necessarily indicative of how we will compensate our named executive officers in the future. We will continue to review, evaluate and modify our compensation framework to maintain a competitive total compensation package. As such, and as a result of our becoming a publicly traded company, the compensation program following this offering could vary from our historical practices.

Our named executive officers for 2018 are:

•: Randy Newman, Chairman, President and Chief Executive Officer;
•: Dan Cheever, (former) Executive Vice President and Chief Financial Officer; and
•: Kris Compton, Executive Vice President and Chief Strategy Officer.

Mr. Cheever retired from our Company on December 31, 2018, in the planned succession of our Chief Financial Officer position. Katie Lorenson now serves as our Chief Financial Officer.

Summary Compensation Table

The following table sets forth information regarding the compensation paid, awarded to, or earned for our fiscal years ended December 31, 2018 and 2017 for each of our named executive officers.

Name and Principal Position

Randy Newman	2018	550,000	532,500	394,344	46,261	134,625	1,657,730
President &	2017	515,000	257,500	386,250	39,313	134,025	1,332,088
Chief Executive Officer
Dan Cheever	2018	325,000	195,000	163,115	—	26,625	709,740
(former) Executive Vice President &	2017	325,000	97,500	170,625	—	26,025	619,150
Chief Financial Officer
Kris Compton	2018	325,000	195,000	163,115	1,779	54,845	739,739
Executive Vice President &	2017	325,000	97,500	170,625	1,563	61,745	656,433
Chief Strategy Officer

(1): Amounts reflect base salary earned in each fiscal year.
(2): The amounts set forth in the "Stock Awards" column reflect the aggregate grant date fair value of stock awards for the years ended December 31, 2018 and 2017 in accordance with FASB ASC Topic 718. The amounts reflected assume a target level of performance as that was the probable outcome at the time of grant. The amounts reflected for 2018 represent two separate awards both granted on February 22, 2018, and are based on a fair market value of $22.80 per share. One award is subject to a five-year performance-based vesting schedule and the other award is subject to a three-year performance-based vesting schedule. In the instance of performance at a maximum level, the 2018 awards subject to the three-year vesting schedule have the following values: Mr. Newman: $412,500; and Mr. Cheever and Ms. Compton: $146,250. In the instance of performance at a maximum level, the 2018 awards subject to the five-year vesting schedule have the following values: Mr. Newman: $321,875; and Mr. Cheever and

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Ms. Compton: $121,875. The amounts reflected for 2017 represent awards granted on February 23, 2017, and are based on a fair market value of $17.00 per share. The 2017 awards are subject to a five-year performance-based vesting schedule.

(3): Amounts reflect annual cash incentive awards earned pursuant to the Alerus Financial Short-Term Incentive Plan.
(4): Amounts reflect "above market earnings," as determined in accordance with the applicable proxy disclosure rules, credited under the Deferred Compensation Plan for Executives.
(5): "All Other Compensation" for the named executive officers during 2018 is summarized below.

Name

Randy Newman	54,000	12,375	8,250	—	60,000	134,625
Dan Cheever	6,000	12,375	8,250	—	—	26,625
Kris Compton	33,300	12,375	8,250	920	—	54,845

(i): Amounts reflect an annual automobile allowance of $6,000 for Messrs. Newman and Cheever and $4,800 for Ms. Compton, as well as a Minneapolis housing allowance of $48,000 for Mr. Newman and $28,500 for Ms. Compton.
(ii): Amounts reflect Company contributions under the 401(k) Plan with respect to 2018.
(iii): Amounts reflect Company contributions under the ESOP with respect to 2018.
(iv): Amounts reflect Company premiums for the Supplemental Disability Plan.
(v): Amounts reflect Company contributions to the Deferred Compensation Plan for Executives with respect to the 2018 calendar year. The contributions are immediately fully vested.

General

We compensate our named executive officers through a combination of base salary, annual incentive bonus, equity awards, and other benefits including perquisites. Our compensation committee believes our executive compensation practices should attract, motivate, and retain key talent, while also tying pay to performance to promote stockholder value and core Alerus values. Each element of compensation is designed to achieve a specific purpose and to contribute to a total package that is competitive with similar packages provided by other institutions that compete for the services of individuals like our named executive officers.

Base Salary

When setting the base salary of each named executive officer for 2018, the committee considered a variety of considerations, including: salaries offered by members of our peer group as set forth in information provided by our external compensation consultant, Compensation Advisors, which is a member of Meyer-Chatfield Group; a Company risk assessment; and internal pay equity considerations. On an annual basis, the compensation committee reviews base salaries of our named executive officers. The committee, without the involvement of any of our named executive officers, determines the base salary for Mr. Newman. With respect to our other named executive officers, the committee, while overseeing the process and having the authority to override any compensation decisions, has historically allowed Mr. Newman latitude in establishing base salaries.

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Annual Incentive Bonus

Our named executive officers are eligible to receive an annual cash bonus under the Alerus Financial Short-Term Incentive Plan, or STIP. The STIP is a performance-based incentive plan under which the compensation committee establishes a target bonus, which is intended as an incentive to drive Company performance, for the named executive officers as a percentage of annual base salary and pays out based upon individual and Company performance.

As provided under the terms of the STIP, the committee establishes Company and individual performance metrics for each named executive officer no later than February for the respective year. Company performance and individual performance account for 80% and 20% of target bonuses, respectively. The individual performance portion varies among each executive and involves specific areas of accountability and special projects for the year, while the Company performance portion is comprised of specific Company performance metrics. In 2018, the committee selected net income, revenue, and efficiency ratio as Company performance metrics.

To protect our stockholders, the committee also sets a "Minimum Acceptable Return," or MAR, which is expressed as a minimum earnings per share target for the performance period. The Company must meet or exceed the MAR in order for any executive to earn the portion of his or her bonus allocated to Company performance. Although not conditioned upon achieving the MAR, the committee may withhold the individual portion if Company performance is unacceptable.

Fifteen percent of each dollar over the MAR is set aside in an incentive pool from which bonuses are paid. Bonuses are earned and adjusted when warranted based upon the level of attainment of applicable performance measures. Our named executive officers are limited to a maximum award of 150% of the target bonus, as determined based upon actual performance.

The following table sets forth the parts of each named executive officer's target bonus in 2018.

				Company Performance (80%)

Participant	Target Bonus (as % of salary)			Net Income (40%)			Efficiency Ratio (20%)			Revenue (20%)			Individual Performance (20%)
Randy Newman		50	%		20	%		10	%		10	%		10	%
Dan Cheever		35	%		14	%		7	%		7	%		7	%
Kris Compton		35	%		14	%		7	%		7	%		7	%

Equity Awards

Our named executive officers are eligible for long-term equity incentive awards under the Alerus Financial Long-Term Incentive Plan, or LTIP. The compensation committee restructured the LTIP beginning with the 2018 calendar year. The 2018 LTIP is a performance-based equity incentive plan under which the compensation committee may award selected participants, including our named executive officers, with restricted stock units consistent with the terms of our 2019 Equity Incentive Plan, and previously, our 2009 Stock Plan. Awards vest over time based upon qualifying time and performance considerations, as set forth in each award agreement. In the event of a termination of employment due to death, disability, or retirement (defined as at least age 60 with 10 years of service), the LTIP provides for automatic vesting of the award at the target level of achievement. Dividend equivalents are accrued with respect to the awards at a target level of achievement and will be paid at the time of vesting.

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The compensation committee believes that granting equity awards to our named executive officers enhances performance consistent with our corporate strategic values, focuses our executives on long-term performance results consistent with the Company's long-term strategic plan, strengthens the link between executive pay and performance through utilization of measurable Company and individual goals, and also strengthens the link between executives and our stockholders by creating a shared interest in the Company's growth. The compensation committee establishes a target award for each participant which, for our named executive officers, is stated as a percentage of annual base salary. Our award agreements provide that, upon the expiration of a three-year performance period, participants will vest in a portion of the award relative to the Company's level of attainment of its target cumulative net income goal. The payout is determined by linear interpolation of the award based upon our level of attainment of the goal, subject to a minimum threshold of 80% and a maximum of 120%, at which level the participant is eligible for 150% of the award.



Minimum	80	%	50	%
Target	100	%	100	%
Maximum	120	%	150	%

In 2018, the target awards were: 50% for Mr. Newman, and 30% for Mr. Cheever and Ms. Compton. The terms of the 2009 Stock Plan are described in more detail below.

Prior to 2018, LTIP awards were granted in the form of restricted stock based on the Company's attainment of a pre-established level of total stockholder return. Upon achievement of a minimum total stockholder return goal of 6%, as measured with respect to calendar year 2017, the named executive officers became eligible to receive an award of restricted stock pursuant to our 2009 Stock Plan. The awards with respect to attainment of the 2017 total stockholder return goal were granted in early 2018. The awards are subject to vesting over a five-year performance period. The payout is determined by linear interpolation of the award based upon our level of attainment of the target goal. Based on the Company's performance the award may be reduced to zero or increased to a maximum of 125% of the award. During the vesting period, dividends are paid quarterly based on a target level of achievement. There is no adjustment to the amount of dividends accrued if actual performance is above or below target. For the 2017 awards granted in early 2018, the target awards were: 50% for Mr. Newman, and 30% for Mr. Cheever and Ms. Compton.

Deferred Compensation

Under the Alerus Financial Corporation Deferred Compensation Plan for Executives, our named executive officers may voluntarily defer a portion of their annual cash compensation, subject to the limit established by the Company. Elective deferrals are subject to earnings as set forth in the Plan, but are not matched by the Company. The Plan also provides discretion to the Company to make a separate contribution to the accounts. In 2018, only Mr. Newman received a Company contribution, and no named executive officers elected to defer compensation. In 2017 and 2018, as established by the compensation committee, participant accounts were credited with earnings equal to the Company's subordinate note debt rate, which was equal to 5.75%. Beginning in 2019, accounts will be credited with earnings at the prime rate of interest as published by The Wall Street Journal.

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Benefits and Other Perquisites

Our named executive officers are eligible to participate in the same benefit plans available to all of our full-time employees, including medical, dental, vision, life, disability and accidental death insurance. We also have a severance pay policy, under which we may offer severance pay to terminated employees on a discretionary basis.

We also provide our employees, including our named executive officers, with several retirement benefits. Our retirement plans are designed to assist our employees with planning for and securing appropriate levels of income during retirement. We believe these plans help us attract and retain quality employees, including executives, by offering benefits similar to those offered by our competitors.

Alerus Financial Corporation Safe Harbor 401(k) Plan. The Alerus Financial Corporation Safe Harbor 401(k) Plan, or 401(k) Plan, is designed to provide retirement benefits to all eligible full-time and part-time employees of the Company. The 401(k) Plan provides employees with the opportunity to save for retirement on a tax-favored basis. Named executive officers, all of whom were eligible during 2018, may elect to participate in the 401(k) Plan on the same basis as all other employees. Employees may defer into the 401(k) Plan a portion of their annual compensation equal to the applicable IRS limit. We currently provide a safe harbor matching contribution on behalf of each eligible participant equal to 100% of employee contributions on the first 3% of employee compensation and 50% of employee contributions on the next 3% of employee compensation. The Company match is contributed in the form of cash and is invested according to the employee's current investment allocation. The Company may also make a discretionary matching contribution up to 4% of each eligible employee's compensation, but we did not do so in 2017 or 2018.

Alerus Financial Corporation Employee Stock Ownership Plan. The ESOP is designed to reward eligible employees who complete a minimum number of service hours with an additional tax-qualified retirement benefit and an ownership interest in the Company. Each year, the Company may elect to make a contribution of cash or stock to the ESOP, which eligible employees, including our named executive officers, equally share in proportion to an eligible portion of their total annual compensation. For 2018, the Company elected to contribute 3% of employee compensation to the ESOP, of which the named executive officers received pro rata shares.

Health and Welfare Benefits. Our named executive officers are eligible to participate in our standard health and welfare benefits program, which offers a choice of medical, dental, vision, life, disability and accidental death insurance. Other than our Supplemental Disability Plan, we do not provide the named executive officers with any health and welfare benefits that are not generally available to our other employees.

Supplemental Disability Plan. Our standard long-term disability plan covers 60% of our employee's monthly income, up to $300,000 of annual compensation. We split this premium evenly with participating employees. For employees with annual compensation exceeding $300,000, we make available a Supplemental Disability Plan, which allows them to purchase additional coverage at 60% or 75% of their total annual compensation. Nonexecutives pay the entire premium for supplemental coverage. We split the premium for the 60% coverage level with participating executives, who pay the incremental additional cost if electing the 75% coverage level.

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Perquisites. We provide our named executive officers with certain perquisites that we believe are reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. The compensation committee periodically reviews the levels of perquisites and other personal benefits provided to named executive officers. Based on this periodic review, perquisites are awarded or adjusted on an individual basis. The perquisites received by our named executive officers in 2018 consisted of an automobile allowance and, with respect to Mr. Newman and Ms. Compton, a housing allowance.

Executive Severance Agreements

In the fall of 2017, we entered into severance agreements with each of our named executive officers, which are separate from the general severance policy described above. The agreements with our named executive officers generally set forth the duties and obligations of each party in the event of a termination of employment and provide us with a measure of protection by obligating the named executive officers to abide by the terms of certain restrictive covenants during the terms of their employment and thereafter for a specified period of time.

Each of our severance agreements provides for an initial term of two years, with automatic renewal for an additional day on each day after the effective date, such that the agreement term is two years at all times. Either party may elect nonrenewal upon notice of one hundred and twenty days prior to termination. In the event of a change in control, the agreements automatically terminate on the second anniversary of the change in control.

In the event the Company terminates a named executive officer for any reason other than for cause prior to a change in control, the Company must provide a severance payment in 12 monthly increments equal to the sum of (i) 100% of annual base salary; (ii) the average of the named executive officer's three most recent annual bonuses; and (iii) twelve months of the Company's portion of premiums for health, disability, and life insurance policies in which the executive was entitled to participate immediately prior to the termination. In the event of a termination within a 24-month period following a change in control by the Company without cause or by the named executive officer for a Good Reason, as defined in each agreement, the Company must provide a severance payment in a lump sum equal to twice the amount described above.

Each named executive officer is subject to a confidentiality provision for 24 months following termination of employment, which prohibits disclosure and use in any way of the Company's trade secrets, confidential information, customer lists, and other types of proprietary information. Our obligation to pay any severance is also conditioned upon the execution by the named executive officer of a general release and waiver of any and all claims with respect to his or her employment with the Company. In addition, the agreements contain a modified 280G cutback provision, which provides for automatic reduction of payments if such reduction would result in a better net-after-tax result for the named executives officers after taking into account the impact of the golden parachute excise tax of the Code.

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Outstanding Equity Awards at Fiscal Year End

The following table provides information about outstanding equity awards held by our named executive officers as of December 31, 2018.

Name

Randy Newman	79,373	1,620,796
Kris Compton	29,704	606,555

(1): The awards vest based on the Company's attainment of pre-established performance goals as measured over a specified performance period generally spanning three or five years from the date of grant. If the executive's employment ends due to retirement at or after age 60 with at least 10 years of service, death, or disability, upon such termination the executive shall become vested at the target level of performance.
(2): The market value of the shares as reported here is based on a 20-day weighted average value per share of $20.42 calculated as of December 31, 2018.
(3): Dan Cheever had no outstanding equity awards as of December 31, 2018.

Equity Award Plans

All outstanding stock awards were made under our 2009 Stock Plan for executive officers and employees and stock retainer awards for non-employee directors were issued under our Stock Grant Plan for Non-Employee Directors. It is anticipated that future awards will be made under our 2019 Equity Incentive Plan, which was approved by our board of directors on February 21, 2019 (subject to stockholder approval) and approved by our stockholders on May 6, 2019. Each plan is described in more detail below.

2009 Stock Plan

General. Under the 2009 Stock Plan, the compensation committee was permitted to grant a wide variety of equity awards, including stock options, stock appreciation rights, or SARs, restricted stock, and restricted stock units, in such forms and amounts as it deemed appropriate to accomplish the goals of the plan. The committee has found equity awards to be an effective means to attract, retain, and reward executives who contribute to the long-term financial success of the Company, and to align their interests with those of the Company's stockholders. Therefore, the plan allowed the committee to make equity awards to encourage our named executive officers to stay with and maximize the performance of the Company over the long term, and to discourage excessive focus on short-term metrics at the expense of our long-term health.

Among other powers, the plan provided the committee with broad discretion to determine the amounts, conditions, and restrictions of each award, and to adjust awards as necessary. As adjusted for a three-for-one stock split, 1,350,000 shares were available for issuance. Shares that were forfeited, subject to options that were cancelled or expired prior to exercise, withheld in connection with satisfaction of tax obligations, used by participants for payment of purchase price, or otherwise subject to an award that was terminated, became available for reissuance under the plan. Shares vested, became exercisable and contained such other terms and

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conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan provided that each annual award must have time-based and performance-based vesting components. The plan provided for acceleration of vesting upon a change in control. As of December 31, 2018, 599,055 shares remained available for issuance. Following the approval of our 2019 Equity Incentive Plan by our stockholders on May 6, 2019, no additional awards may be granted under our 2009 Stock Plan.

Eligibility. The compensation committee determined which employees, officers, directors, consultants, and independent contractors were eligible for participation in the plan. Participation in one plan does not guarantee participation in other incentive plans in the future.

Change in Control. Unless otherwise provided in an award agreement, upon the occurrence of a change in control of the Company all outstanding awards under the plan will vest and become fully exercisable.

Amendment and Termination. The plan will remain in effect as long as any awards under it are outstanding; provided, however, that no awards may be granted after the ten-year anniversary of the effective date of the plan. The plan allows the board of directors at any time to amend, alter, suspend, discontinue, and terminate the plan.

Stock Grant Plan for Non-Employee Directors

General. The Alerus Financial Corporation Stock Grant Plan for Non-Employee Directors allowed the Company to grant shares of our common stock to non-employee directors of the Company and its subsidiaries as an annual retainer payment. The plan aimed to enhance the Company's ability to attract and retain the services of non-employee directors by compensating them for contributing to the Company's long-term financial success and to encourage such non-employee directors to accumulate ownership in the Company to further align their interests with those of our stockholders.

As adjusted for a three-for-one stock split, 180,000 shares were authorized for issuance under the plan. Pursuant to the terms of the plan, each non-employee director of the Company or a subsidiary received an annual grant of 1,800 shares of our common stock effective as of the date of our annual stockholder meeting. All shares granted under the plan were immediately vested on the grant date. The plan may be terminated by the board of directors at any time. As of December 31, 2018, 25,825 shares remained available for issuance under the plan.

2019 Equity Incentive Plan

General. The 2019 Equity Incentive Plan, which became effective on May 6, 2019, the date the plan was approved by our stockholders, allows the compensation committee may grant a wide variety of equity awards, including stock options, SARs, restricted stock, and restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. The committee has found equity awards to be an effective means to attract, retain, and reward executives who contribute to the long-term financial success of the Company, and to align their interests with those of the Company's stockholders. Therefore, the plan allows the committee to make equity awards to encourage our named executive officers to stay with and maximize the performance of the Company over the long term, and to discourage excessive focus on short-term metrics at the expense of our long-term health.

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Among other powers, the plan provides the committee with broad discretion to determine the amounts, conditions, and restrictions of each award, and to adjust awards as necessary. Up to 1,100,000 shares are available for issuance, all of which remain available. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award.

Eligibility. The compensation committee determines which employees, officers, directors, consultants, and independent contractors are eligible for participation in the plan. Participation in one plan does not guarantee participation in other incentive plans in the future.

Options. The compensation committee may grant incentive and non-qualified stock options to purchase stock at an exercise price determined under the award. Each stock option must be granted pursuant to an award agreement setting forth the terms and conditions of the individual award. Awards of stock options may expire no later than 10 years from the date of grant (and no later than five years from the date of grant in the case of a 10% stockholder with respect to an incentive stock option).

The exercise price of an option generally may not be less than the fair market value of Company common stock on the date the option is granted. In addition, the exercise price of an incentive stock option granted to a 10% stockholder may not be less than 110% of the fair market value of the stock on the date the option is granted. The exercise price of an option may, however, be higher or lower than the grant date fair market value for an option granted in replacement of an existing award which was granted under the 2009 Stock Plan or that is held by an employee, director or service provider of a third party that is acquired by the Company or one of its subsidiaries. The exercise price of an option may not be decreased after the date of grant nor may an option be surrendered to the Company as consideration for the grant of a replacement option with a lower exercise price, except as approved by the Company's stockholders, as adjusted for corporate transactions, or in the case of options granted in replacement of existing awards granted under a predecessor plan.

Options awarded under the 2019 Equity Incentive Plan will be exercisable in accordance with the terms established by the compensation committee. Any incentive stock option granted under the 2019 Equity Incentive Plan that fails to continue to qualify as an incentive stock option will be deemed to be a non-qualified stock option and the compensation committee may unilaterally modify any incentive stock option to disqualify it as an incentive stock option. The full purchase price of each share of stock purchased upon the exercise of any option must be paid at the time of exercise of the option. Except as otherwise determined by the compensation committee, the purchase price of an option may be paid (i) in cash; (ii) by personal, certified or cashiers' check; (iii) in shares of the Company's common stock (valued at fair market value as of the day of exercise) either via attestation or actual delivery; (iv) by other property deemed acceptable by the compensation committee; (v) by irrevocably authorizing a third party to sell shares of the Company's common stock and remit a sufficient portion of the proceeds to the Company to satisfy the exercise price and any tax withholding resulting from such exercise price; (vi) by payment through a net exercise such that, without the payment of any funds, the

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participant may exercise the option and receive the net number of shares equal in value to the number of shares as to which the option is exercised, multiplied by a fraction, the numerator of which is the fair market value less the exercise price, and the denominator of which is the fair market value; or (vii) by any combination of the foregoing.

Stock Appreciation Rights. SARs entitle the participant to receive cash or stock equal in value to, or based on the value of, the amount by which the fair market value of a specified number of shares on the exercise date exceeds an exercise price established by the compensation committee. The exercise price for a SAR may not be less than the fair market value of the stock on the date the SAR is granted, provided, however, that the exercise price may be higher or lower than fair market value for a SAR granted in replacement of an existing award held by an employee or director of, or service provider to, a third party that is acquired by the Company or one of its subsidiaries. SARs shall be exercisable in accordance with the terms established by the compensation committee.

Stock Awards. A stock award is a grant of shares of the Company's common stock or a right to receive shares of the Company's common stock, an equivalent amount of cash or a combination thereof in the future. Such awards may include, but are not be limited to, bonus shares, stock units, performance shares, performance units, restricted stock, restricted stock units or any other equity-based award as determined by the compensation committee. The specific performance measures, performance objectives or period of service requirements are set by the compensation committee in its discretion.

Cash Incentive Awards. A cash incentive award is the grant of a right to receive a payment of cash, or the Company's common stock having a value equivalent to the cash otherwise payable, determined on an individual basis or as an allocation of an incentive pool that is contingent on the achievement of performance objectives established by the compensation committee. The compensation committee may grant cash incentive awards that may be contingent on achievement of a participant's performance objectives over a specified period established by the compensation committee. The grant of cash incentive awards may also be subject to such other conditions, restrictions and contingencies, as determined by the compensation committee.

Change in Control. Unless otherwise provided in an award agreement, upon the occurrence of a change in control of the Company (as defined in the 2019 Equity Incentive Plan), all stock options and SARs under the 2019 Equity Incentive Plan then held by the participant will become fully exercisable immediately, and all stock awards and cash incentive awards will become fully earned and vested immediately, if the 2019 Equity Incentive Plan is not an obligation of the successor entity following a change in control or the 2019 Equity Incentive Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control.

If vesting of an outstanding award is conditioned upon the achievement of performance measures, then if, at the time of the change in control, the established performance measures are less than 50% attained, then such award shall become vested and exercisable on a fractional basis with the numerator being the percentage of attainment and the denominator being 50% upon the change in control and if, at the time of the change in control, the performance measures are at least 50% attained, then such award shall become fully earned and vested immediately upon the change in control.

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In the event an award constitutes "deferred compensation" for purposes of Section 409A of the Code, and the settlement or distribution of benefits under such award are triggered by a change in control, such settlement or distribution will be subject to the change in control also constituting a "change in control event" under Section 409A of the Code.

Forfeiture. Unless specifically provided to the contrary in an award agreement, upon notification of termination of employment for cause, any outstanding award held by the participant will terminate immediately, the award will be forfeited and the participant will have no further rights thereunder.

Further, except as otherwise provided by the compensation committee, if a participant breaches a non-competition, non-solicitation, non-disclosure, non-disparagement or other restrictive covenant in any agreement between the participant and the Company or a subsidiary, whether before or after the participant's termination of service, the participant will forfeit or pay the following to the Company:

•: All outstanding awards granted to the participant under the 2019 Equity Incentive Plan, including awards that have become vested or exercisable;
•: Any shares held by the participant in connection with the 2019 Equity Incentive Plan that were acquired after the participant's termination of service and within the 12-month period immediately preceding the participant's termination of service;
•: The profit realized by the participant from the exercise of any stock options and SARs that the participant exercised after the participant's termination of service and within the 12-month period immediately preceding the participant's termination of service; and
•: The profit realized by the participant from the sale or other disposition of any shares received by the participant in connection with the 2019 Equity Incentive Plan after the participant's termination of service and within the 12-month period immediately preceding the participant's termination of service, where such sale or disposition occurs in such similar time period.

Clawback. All awards are subject to potential cancellation, recoupment, rescission, payback or other similar action in accordance with any applicable Company clawback policy or any applicable law, whether such policy or laws are adopted before or after the grant of the award.

Amendment and Termination. The 2019 Equity Incentive Plan will remain in effect as long as any awards under it are outstanding; provided, however, that no awards may be granted after the 10-year anniversary of the effective date of the 2019 Equity Incentive Plan. The Board may at any time amend or terminate the 2019 Equity Incentive Plan or any award granted under the 2019 Equity Incentive Plan, provided that no amendment or termination may impair the rights of any participant without the participant's written consent. The Board may not amend any provision of the 2019 Equity Incentive Plan to materially increase the original number of shares that may be issued under the 2019 Equity Incentive Plan (other than as provided in the 2019 Equity Incentive Plan), materially increase the benefits accruing to a participant, or materially modify the requirements for participation in the 2019 Equity Incentive Plan, without approval of stockholders. However, the compensation committee may amend the 2019 Equity Incentive Plan or any award agreement at any time, retroactively or otherwise, to ensure that the 2019 Equity Incentive Plan complies with current or future law without stockholder approval, and the compensation committee may unilaterally amend the 2019 Equity Incentive Plan and any

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outstanding award, without participant consent, in order to avoid the application of, or to comply with, Section 409A of the Code, and applicable regulations and guidance thereunder.

Tax Considerations.

Section 162(m) of the Code. Under Section 162(m) of the Code, a U.S. income tax deduction for a publicly held corporation generally will be unavailable for annual compensation in excess of $1 million paid in any calendar year to a "covered employee" (the principal executive officer, principal financial officer, and the next three most highly compensated executive officers whose compensation is required to be reported to stockholders in the Company's annual proxy statement). Any individual who is deemed to be a covered employee for tax years beginning after December 31, 2016 will continue to be a covered employee for all future periods. However, in the case of a corporation that becomes a publicly held corporation in connection with an initial public offering, the $1 million per year deduction limit does not apply during a limited "transition period" to any remuneration paid pursuant to a compensation plan that existed during the period in which the corporation was not publicly held, if the prospectus accompanying the initial public offering disclosed information concerning those plans that satisfied all applicable securities laws then in effect.

To the extent necessary and as available, the Company intends to rely on the transition relief described in the immediately preceding paragraph in connection with awards under each of the plans until the earliest of the four following events with respect to each plan: (i) the expiration of such plan; (ii) the material modification of such plan; (iii) the issuance of all stock and other compensation that has been allocated under such plan; or (iv) the first meeting of the Company's stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering of the Company's common stock occurs.

U.S. Federal Income Tax Treatment. Under present U.S. federal income tax laws, awards granted under the plans generally should have the following tax consequences:

Non-Qualified Stock Options. The grant of a non-qualified option generally will not result in taxable income to the participant. The participant generally will realize ordinary income at the time of exercise in an amount equal to the excess of the fair market value of the shares acquired over the exercise price for those shares and the Company will be entitled to a corresponding deduction. Gains or losses realized by the participant upon disposition of such shares generally will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of exercise.

Special provisions of the Code apply to the acquisition of shares under a nonqualified stock option if the shares acquired are subject to substantial risk of forfeiture. If these restrictions apply, the participant generally will not recognize any taxable income at the time of exercise but only when the risk lapses. The Internal Revenue Service has determined that neither a company insider trading policy nor the Rule 10b-5 antifraud rules constitute a substantial risk of forfeiture. The short-swing profit limitations of Section 16 of the Exchange Act may constitute a substantial risk of forfeiture in certain instances. Participants may elect to be taxed in the year they acquire the shares that are subject to a substantial risk of forfeiture by making a Section 83(b) election within 30 days of exercise. Elections under Section 83(b) are described further below.

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The exercise of an option by delivering previously acquired shares generally will be treated as a non-taxable, like-kind exchange of the number of shares surrendered and the identical number of shares received under the option. The number of shares generally will take the same basis and, for capital gain purposes, the same holding period as the shares that are given up. The value of the shares received upon such an exchange that is in excess of the value given up generally will constitute ordinary income to the participant at the time of the exercise. The excess shares generally will have a new holding period for capital gain purposes and a basis equal to the value of such shares determined at the time of exercise.

Incentive Stock Options. The grant of an incentive stock option generally will not result in taxable income to the participant. The exercise of an incentive stock option generally will not result in taxable income to the participant provided that the participant was, without a break in service, an employee of the Company or a subsidiary during the period beginning on the date of the grant of the option and ending on the date three months prior to the date of exercise (one year prior to the date of exercise if the participant is disabled, as that term is defined in the Code).

The excess of the fair market value of the shares at the time of the exercise of an incentive stock option over the exercise price generally will be an adjustment that is included in the calculation of the participant's alternative minimum taxable income for the tax year in which the incentive stock option is exercised. For purposes of determining the participant's alternative minimum tax liability for the year of disposition of the shares acquired pursuant to the incentive stock option exercise, the participant generally will have a basis in those shares equal to the fair market value of the shares at the time of exercise.

If the participant does not sell or otherwise dispose of the shares within two years from the date of the grant of the incentive stock option or within one year after the transfer of such stock to the participant, then, upon disposition of such shares, any amount realized in excess of the exercise price generally will be taxed to the participant as capital gain. A capital loss generally will be recognized to the extent that the amount realized is less than the exercise price.

If the foregoing holding period requirements are not met, the participant will generally realize ordinary income at the time of the disposition of the shares, in an amount equal to the lesser of (i) the excess of the fair market value of the shares on the date of exercise over the exercise price, or (ii) the excess, if any, of the amount realized upon disposition of the shares over the exercise price and the Company generally will be entitled to a corresponding deduction. If the amount realized exceeds the value of the shares on the date of exercise, any additional amount will be capital gain. If the amount realized is less than the exercise price, the participant generally will recognize no income, and a capital loss generally will be recognized equal to the excess of the exercise price over the amount realized upon the disposition of the shares.

Stock Appreciation Rights. The grant of a SAR generally will not result in taxable income to the participant. Upon exercise of a SAR, the fair market value of shares received generally will be taxable to the participant as ordinary income and the Company will be entitled to a corresponding deduction. Gains and losses realized by the participant upon disposition of any such shares generally will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of exercise.

Stock Awards. A participant who has been granted a stock award, including a restricted stock award, generally will not realize taxable income at the time of grant, provided that the stock subject to the award is not delivered at the time of grant, or if the stock is delivered, it is

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subject to restrictions that constitute a "substantial risk of forfeiture" for U.S. federal income tax purposes and the participant has not filed a Code Section 83(b) election to be taxed at the time of grant. Upon the later of delivery or vesting of shares subject to an award (or the filing of a Code Section 83(b) election), the participant generally will realize ordinary income in an amount equal to the then fair market value of those shares and the Company will be entitled to a corresponding deduction. Gains or losses realized by the participant upon disposition of such shares generally will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of delivery or vesting (or the filing of a Code Section 83(b) election). Dividends paid to the participant during the restriction period, if so provided, generally will also be compensation income to the participant and the Company will be entitled to a corresponding deduction. In the case of stock awards settled in cash, the participant generally will realize taxable income at the time the cash is distributed and the Company will be entitled to a corresponding deduction.

In lieu of the treatment described above, a participant that receives a restricted stock award may elect immediate recognition of income under Code Section 83(b). The election must be made within 30 days of grant. In such event, the participant will recognize as income the fair market value of the restricted stock at the time of grant (determined without regard to any restrictions other than restrictions that by their terms will never lapse), and the Company generally will be entitled to a corresponding deduction. If the election is made, the holding period of the shares will begin on the grant date. Dividends paid with respect to shares as to which a proper Code Section 83(b) election has been made will not be deductible to the Company. If a Code Section 83(b) election is made and the restricted stock is subsequently forfeited, the participant generally will not be entitled to any offsetting tax deduction.

Restricted Stock Unit Awards. In general, the grant of restricted stock units will not be a taxable event to the participant and will not result in a deduction for the Company. When the restrictions applicable to the restricted stock units lapse, and the awards are settled, a participant generally will recognize ordinary income at that time. The amount of ordinary income so recognized will be the fair market value of the common stock at the time the income is recognized, determined without regard to any restrictions other than restrictions that by their terms will never lapse. This amount is generally deductible for federal income tax purposes by the Company. Gains or losses realized by the participant upon disposition of such shares generally will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of settlement. The holding period for this purpose will begin on the date following the date the units are settled and shares are delivered to the participant.

Cash Incentive Awards. A participant who has been granted a cash incentive award generally will not realize taxable income at the time of grant, provided that no cash is actually paid at the time of grant. Upon the payment of any cash in satisfaction of the cash incentive award, the participant generally will realize ordinary income in an amount equal to the cash award received and the Company will be entitled to a corresponding deduction.

Withholding of Taxes. All issuances of stock under the 2009 Stock Plan and 2019 Equity Incentive Plan are subject to withholding of all applicable taxes and the compensation committee may condition the delivery of any shares or other benefits under the two plans on satisfaction of the applicable withholding obligations. Except as otherwise provided by the compensation committee, such withholding obligations generally may be satisfied through payment by the participant in cash or check, or through the surrender of shares of Company stock that the participant already owns or through the surrender of shares of Company stock to

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which the participant is otherwise entitled the plan. To the extent shares of Company stock are withheld from an award upon vesting, such shares may not be used to satisfy more than the maximum individual statutory tax rate for each applicable tax jurisdiction with respect to awards under the 2019 Equity Incentive Plan.

Change in Control. Any acceleration of the vesting or payment of awards under the plans in the event of a change in control in the Company may cause part or all of the consideration involved to be treated as an "excess parachute payment" under Section 280G of the Code, which may subject the participant to a 20% excise tax and preclude deduction by the Company.

Net Investment Income. Capital gains realized by a participant on any disposition of shares acquired under the plans, and any dividends paid with respect to such shares, will be "net investment income" for purposes of the Medicare tax on net investment income that became effective on January 1, 2013.

Director Compensation

We compensated our non-employee directors in 2018 with an annual retainer and additional fees for meeting attendance and service as committee chair or lead director. Our annual retainer consisted of a cash payment of $20,000 and a grant of immediately and fully vested Company shares with a grant date value equal to $35,000. Messrs. Gershman, Vetter, Lemke and Coughlin and Ms. Bohn each received an additional retainer of $6,000 for serving as Lead Director and committee chairs, respectively. Non-employee directors also receive $3,000 for attending each quarterly meeting of the Board and the annual risk oversight meeting, and also $1,000 for attending each quarterly committee meeting. In the instance of special meetings, directors receive $1,000 for meetings of three hours or less, and $2,000 for meetings longer than three hours. Mr. Newman, who serves as Chairman of the Board, does not receive fees for his service on the Board or meeting attendance.

The following table sets forth information regarding 2018 compensation for each of our non-employee Directors.

Name

Harold Gershman (2)	58,000	35,000	28,290	113,290
James Karley (3)	15,000	—	22,059	34,059
Kevin Lemke	57,000	35,000	8,643	93,643
Karen Bohn	68,000	35,000	—	85,000
Lloyd Case	57,000	35,000	14,654	93,654
Sally Smith	53,000	35,000	13,142	92,142
Galen Vetter	66,000	35,000	7,122	92,122
Daniel Coughlin	61,000	35,000	3,970	88,970
Michael Mathews (4)	—	—	—	—

(1): Directors may elect to defer up to 100% of their annual cash fees under the terms of the Alerus Financial Corporation Deferred Compensation Plan for Directors. Elective deferrals are subject to earnings as set forth in the plan, but are otherwise not matched by the Company. The following directors elected to defer fees under the plan

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in 2018: Messrs. Gershman, Case, Vetter and Coughlin and Ms. Smith. Amounts reported here reflect "above market earnings," as determined in accordance with the applicable proxy disclosure rules, credited under the Deferred Compensation Plan for Directors.

(2): Mr. Gershman retired from our board of directors in May 2019.
(3): Mr. Karley retired from our board of directors in May 2018.
(4): Mr. Mathews joined our board of directors on January 1, 2019.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock, as of July 31, 2019, and as adjusted to reflect the completion of the offering, by:

•: each stockholder known by us to beneficially own more than 5% of our outstanding common stock;
•: each of our named executive officers;
•: each of our directors; and
•: all of our directors and executive officers as a group.

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting of securities, or to dispose or direct the disposition of securities, or has the right to acquire such powers within 60 days, including any right to acquire such securities (i) through the exercise of any option, warrant or right, (ii) through the conversion of a security, (iii) pursuant to the power to revoke a trust, discretionary account or similar arrangement or (iv) pursuant to the automatic termination of a trust, discretionary account or similar arrangement. For purposes of calculating each person's percentage ownership, common stock issuable pursuant to options exercisable within 60 days are included as outstanding and beneficially owned for that person or group, but are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each person identified in the table has sole voting and investment power over all of the shares shown opposite such person's name.

The percentage of beneficial ownership is based on 14,095,656 shares of our common stock outstanding as of July 31, 2019, and shares to be outstanding after the completion of this offering (or shares if the underwriters exercise in full their option to purchase additional shares). Information presented assumes no participation by the 5% or greater stockholders, directors or officers in the reserved share program.

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Except as otherwise indicated, the address for each stockholder listed in the table below is: c/o Alerus Financial Corporation, 401 Demers Avenue, Grand Forks, North Dakota 58201.

						After this Offering

	Prior to this Offering					If Underwriters' Purchase Option is Not Exercised				If Underwriters' Purchase Option is Exercised in Full
	Shares Beneficially Owned (1)					Shares Beneficially Owned				Shares Beneficially Owned
Name	#		%			#	%			#	%
5% stockholders:
ESOP		1,307,439		9.3	%				%				%
Lyle Johnson (2)		822,362		5.8	%
Margaret Johnson (3)		822,362		5.8	%
Randy L. Newman (4)		719,559		5.1	%				%				%
Directors and named executive officers:
Randy L. Newman (4)		719,559		5.1	%				%				%
Dan Cheever (5)		28,395		*				*				*
Katie A. Lorenson (6)		9,790		*				*				*
Kris E. Compton (7)		282,505		2.0	%				%				%
Karen M. Bohn		41,675		*					%				%
Lloyd G. Case		38,661		*				*				*
Daniel E. Coughlin (8)		25,130		*					%				%
Kevin D. Lemke (9)		94,659		*				*				*
Michael S. Mathews		2,104		*				*				*
Sally J. Smith		87,665		*				*				*
Galen G. Vetter (10)		26,179		*				*				*
All directors and executive officers as a group (12 persons) (11)		1,393,263		9.9	%				%				%

*: Indicates one percent or less.
(1): Beneficial ownership includes shares of unvested restricted stock that stockholders are entitled to vote but does not include 89,356 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objectives are achieved.
(2): Reflects shares owned by Mr. Johnson based on the Company's stock records; includes 485,000 shares held jointly with Mr. Johnson's spouse, Margaret Johnson, and 238,416 shares held by Mr. Johnson's spouse. Mr. Johnson's address in the Company's stock records is: PO Box 808, Highway 32 South, Walhalla, North Dakota 58282.
(3): Reflects shares owned by Ms. Johnson based on the Company's stock records; includes 485,000 shares held jointly with Ms. Johnson's spouse, Lyle Johnson, and 98,946 shares held by Ms. Johnson's spouse. Ms. Johnson's address in the Company's stock records is: PO Box 808, Highway 32 South, Walhalla, North Dakota 58282.
(4): Includes 54,394 shares of unvested restricted stock, 83,842 shares held in the ESOP and 166,905 shares held by Mr. Newman's spouse. Excludes 26,397 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objective are achieved. A total of 166,905 shares are pledged as security for indebtedness.

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(5): Mr. Cheever retired from our Company on December 31, 2018, in the planned succession of our Chief Financial Officer position.
(6): Includes 9,790 shares of unvested restricted stock.
(7): Includes 20,133 shares of unvested restricted stock and 65,227 shares held in the ESOP. Also includes a total of 52,140 shares held by Ms. Compton's spouse, including 11,252 shares held individually, 400 shares of unvested restricted stock and 40,488 shares held in the ESOP. Excludes 9,180 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objective are achieved.
(8): Includes 17,356 shares held jointly with Mr. Coughlin's spouse.
(9): Includes 19,000 shares held by Mr. Lemke as trustee of the Doreen D. Lemke Testamentary Family Trust.
(10): Includes 438 shares held by Mr. Vetter's spouse and 1,562 shares held by Vetter Community Resource, LLC, an entity that is 50% owned by Mr. Vetter and 50% owned by his spouse.
(11): Includes 114,594 shares of unvested restricted stock and 198,856 shares held in the ESOP. Does not include 89,356 shares underlying performance based restricted stock units that are subject to vesting to the extent performance objective are achieved. A total of 166,905 shares are pledged as security for indebtedness.

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DESCRIPTION OF CAPITAL STOCK

The following is a summary of the material rights of our capital stock and related provisions of our third amended and restated certificate of incorporation, or certificate of incorporation, and our second amended and restated bylaws, or bylaws. The following description of our capital stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which we have included as exhibits to the registration statement of which this prospectus is a part. We urge you to read these documents for a more complete understanding of stockholder rights.

General

Our certificate of incorporation authorizes the issuance of up to 30,000,000 shares of common stock, par value $1.00 per share, and up to 2,000,000 shares of preferred stock, par value $1.00 per share. At June 30, 2019, 13,816,050 shares of our common stock were issued and outstanding and held by approximately 229 stockholders of record, and no shares of preferred stock were issued and outstanding.

Common Stock

Governing Documents. Holders of shares of our common stock have the rights set forth in our certificate of incorporation, our bylaws and the DGCL.

Dividends and Distributions. The holders of our common stock are entitled to share equally in any dividends that our board of directors may declare from time to time out of funds legally available for dividends, subject to limitations under the DGCL and any preferential rights of holders of any then outstanding shares of preferred stock.

Ranking. Our common stock ranks junior to all other securities and indebtedness of the Company with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company.

Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of our common stock are entitled to share equally, on a per share basis, in all of our assets available for distribution, after payment to creditors and subject to any prior distribution rights granted to holders of any then outstanding shares of preferred stock.

No Conversion Rights. Our common stock is not convertible into any other shares of our capital stock.

No Preemptive Rights. Holders of our common stock do not have any preemptive rights.

Voting Rights. The holders of our common stock are entitled to one vote per share on any matter to be voted on by the stockholders. The holders of our common stock are not entitled to cumulative voting rights with respect to the election of directors. A plurality of the shares voted shall elect all of the directors then standing for election at a meeting of stockholders at which a quorum is present.

No Redemption. We have no obligation or right to redeem our common stock.

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Stock Exchange Listing. We have applied to list our common stock on the Nasdaq Capital Market under the symbol "ALRS."

Preferred Stock

Subject to limitations under the DGCL, our board of directors is authorized to issue, from time to time and without stockholder approval, up to an aggregate of 2,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions of the shares of each such series, including the dividend rights, conversion rights, voting rights, redemption rights (including sinking fund provisions), liquidation preferences and the number of shares constituting any series. The issuance of preferred stock with voting and conversion rights could adversely affect the voting power of the holders of shares of our common stock.

Anti-Takeover Considerations and Special Provisions of Our Certificate of Incorporation, Bylaws and Applicable Law

Applicable law and certain provisions of our certificate of incorporation and bylaws could have the effect of delaying, deferring or discouraging another party from acquiring control of us, even if such acquisition would be viewed by our stockholders to be in their best interests. We believe that these provisions are beneficial because they encourage negotiation with our board of directors, which could result in improved terms of any unsolicited proposal.

Delaware Law. The Company is subject to Section 203 of the DGCL. Subject to certain exceptions, Section 203 of the DGCL prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an "interested stockholder" (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless: (i) prior to such time the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock of such corporation outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (A) by persons who are directors and also officers of such corporation and (B) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders (and not by written consent) by the affirmative vote of at least 66 ² / 3 % of the outstanding voting stock of such corporation not owned by the interested stockholder.

Federal Banking Law. The ability of a third party to acquire our stock is also limited under applicable U.S. banking laws, including regulatory approval requirements. The Bank Holding Company Act of 1956, as amended, or BHCA, requires any "bank holding company" to obtain the approval of the Federal Reserve before acquiring, directly or indirectly, more than 5% of our outstanding common stock. Federal law also prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is conclusively presumed to

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exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Approval of a Change in Control. Our certificate of incorporation includes a provision that makes it more difficult to complete a merger, sale or transfer of control of our Company. Article V, Section 6 requires the affirmative vote of the holders of at least 75% of the voting stock of the Company to approve such a transaction if more than 25% of the board of directors recommends against voting to approve the transaction.

Special Meetings of Stockholders. Our bylaws provide that special meetings of our stockholders may be called only by our Chairman, our Chief Executive Officer, our President, our Secretary or at the request of a majority of our board of directors or by holders of shares entitled to cast not less than 25% of the votes at the meeting.

Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws contain an advance notice provision regarding director nominations and other stockholder proposals. Generally, to be timely, notice of director nominations and other stockholder proposals must be received by our Secretary not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information required to be provided by our bylaws.

Issuance of Blank Check Preferred Stock. The board of directors is authorized to issue, without further action by our stockholders, up to 2,000,000 shares of preferred stock with rights and preferences designated from time to time by the board of directors as described above under "Description of Capital Stock—Preferred Stock." The existence of authorized but unissued shares of preferred stock may enable the board of directors to render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise.

Sole and Exclusive Forum

Our certificate of incorporation provides that, unless the Company consents in writing to the selection of an alternative forum, the Delaware Court of Chancery shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or its stockholders, (iii) any action asserting a claim pursuant to the DGCL, our certificate of incorporation or our bylaws or (iv) or any action asserting a claim governed by the internal affairs doctrine. However, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, there is uncertainty as to whether a court would enforce such a provision, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

Our stockholders approved this provision at our annual stockholders' meeting held on May 13, 2014. Any person purchasing or otherwise acquiring any interest in any shares of our

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capital stock shall be deemed to have notice of and to have consented to this provision of our certificate of incorporation. This choice of forum provision, if enforced, may have the effect of discouraging lawsuits against us and our directors, officers, employees and agents. The enforceability of similar choice of forum provisions in other companies' charter documents has been challenged in legal proceedings, and it is possible that, in connection with one or more actions or proceedings described above, a court could find the provision of our bylaws to be inapplicable or unenforceable.

Limitation on Liability and Indemnification of Officers and Directors

The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors' fiduciary duties. Our certificate of incorporation and bylaws include a provision that eliminates the personal liability of directors for monetary damages for breach of fiduciary duty as a director, except:

•: for breach of duty of loyalty;
•: for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law;
•: under Section 174 of the DGCL (unlawful dividends or unlawful stock repurchases or redemptions); or
•: for transactions from which the director derived an improper personal benefit.

Our certificate of incorporation and bylaws provide that we must indemnify our directors and officers to the fullest extent authorized by the DGCL, subject to the limits of applicable federal banking laws and regulations. We are expressly authorized to, and do, carry directors' and officers' insurance providing coverage for our directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and executive directors.

The limitation on liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "ALRS." Future sales of substantial amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect market prices prevailing from time to time. Further, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.

Upon completion of this offering, shares of common stock will be outstanding. Of these shares, shares of our common stock (or shares if the underwriters exercise in full their option to purchase additional shares) sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining shares of our common stock outstanding are "restricted shares" as defined in Rule 144. Restricted shares may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. As a result of the contractual 180-day lock-up period described below, the shares subject to lock-up agreements will be available for sale in the public market only after 180 days from the date of this prospectus (generally subject to resale limitations).

Rule 144

In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, the sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, the sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of the following:

•: 1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or
•: the average weekly trading volume of our common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale;

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale and notice provisions of Rule 144 to the extent applicable.

Registration Statement on Form S-8

In connection with or as soon as practicable following the completion of this offering, we intend to file a registration statement with the SEC on Form S-8 to register an aggregate of approximately 2,450,000 shares of our common stock reserved for future issuance under our

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2009 Stock Plan and our 2019 Equity Incentive Plan, as described further under "Executive Compensation—Equity Award Plans." That registration statement will become effective upon filing and shares of common stock covered by such registration statement will be eligible for sale in the public market immediately after the effective date of such registration statement (unless held by affiliates) subject to the lock-up agreements described below.

Lock-up Agreements

The Company and each of our directors and executive officers have agreed, subject to certain limited exceptions, not to offer, pledge, sell, contract to sell, grant any option to purchase, or otherwise dispose of our common stock or any securities convertible into or exchangeable or exercisable for common stock, or to enter into any hedge or other arrangement or any transaction that transfers, directly or indirectly, the economic consequence of ownership of the shares of our common stock, in each case for a period of 180 days after the date of this prospectus, without the prior written consent of Raymond James & Associates, Inc. on behalf of the underwriters. See "Underwriting—Lock-up Agreements." The underwriters do not have any present intention or arrangement to release any shares of our common stock subject to lock-up agreements prior to the expiration of the 180-day lock-up period.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to the compensation arrangements with directors and executive officers described in "Executive Compensation" above, the following is a description of transactions since January 1, 2016, to which we have been a party in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or beneficial holders of more than five percent of any class of our voting securities, or their immediate family members or entities affiliated with them, had or will have a direct or indirect material interest.

Ordinary Banking Relationships

Our directors, officers, certain of our beneficial owners of more than five percent of our common stock and their respective associates were clients of and had transactions with us in the past, and additional transactions with these persons are expected to take place in the future. All outstanding loans and commitments to lend with these persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company or the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. All such loans are approved by the Bank's board of directors in accordance with applicable bank regulatory requirements. Similarly, all certificates of deposit and depository relationships with these persons were made in the ordinary course of business and involved substantially the same terms, including interest rates, as those prevailing at the time for comparable depository relationships with persons not related to the Company or the Bank.

Other Related Party Transactions

Bill Carlson is the brother-in-law of Randy Newman, our Chairman, Chief Executive Officer and President, and is employed by the Bank as a Lead Business Advisor. Mr. Carlson is not an executive officer of the Company. During 2018, 2017 and 2016, Mr. Carlson's total compensation was approximately $177,972, $170,360, and $178,964, respectively.

Mike Compton is the husband of Kris Compton, our Executive Vice President and Chief Strategy Officer, and is employed by the Bank as a Lead Business Advisor. Mr. Compton is not an executive officer of the Company. During 2018, 2017 and 2016, Mr. Compton's total compensation was approximately $154,377, $166,177, and $152,504, respectively.

Policies and Procedures Regarding Related Party Transactions

Transactions by the Company or the Bank with related parties, including those described above, are subject to a formal written policy, as well as regulatory requirements and restrictions. These requirements and restrictions include Sections 23A and 23B of the Federal Reserve Act (which govern certain transactions by the Bank with its affiliates) and the Federal Reserve's Regulation O (which governs certain loans by the Bank to its executive officers, directors and principal stockholders). We have adopted policies to comply with these regulatory requirements and restrictions.

In addition, prior to completion of this offering, our board of directors will adopt a written policy governing the approval of related party transactions that complies with all applicable requirements of the SEC and the Nasdaq Stock Market concerning related party transactions. Related party transactions are transactions in which we are a participant, the amount involved

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exceeds $120,000 and a related party has or will have a direct or indirect material interest. Related parties of the Company include directors (including nominees for election as directors), executive officers, five percent stockholders and the immediate family members of these persons. Our audit committee, in consultation with management and outside counsel, as appropriate, will review potential related party transactions to determine if they are subject to the policy. If so, the transaction will be referred to the audit committee for approval. In determining whether to approve a related party transaction, the audit committee will consider, among other factors, the fairness of the proposed transaction, the direct or indirect nature of the related party's interest in the transaction, the appearance of an improper conflict of interests for any director or executive officer taking into account the size of the transaction and the financial position of the related party, whether the transaction would impair an outside director's independence, the acceptability of the transaction to our regulators and the potential violations of other corporate policies. Upon completion of this offering, our Related Party Transactions Policy will be available on our website at www.alerus.com, as an annex to our Corporate Governance Guidelines.

Reserved Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, existing stockholders, certain employees of the Company and the Bank and persons having relationships with us through a reserved share program. See "Underwriting—Reserved Share Program" for additional information regarding the reserved share program.

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SUPERVISION AND REGULATION

General

The Company and the Bank are extensively regulated under federal law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of applicable statutes and by the regulations and policies of various bank regulatory agencies, including our primary regulator, the Federal Reserve, and the Bank's primary regulator, the OCC, as well as the FDIC, as the insurer of our deposits, and the CFPB, as the regulator of consumer financial services and their providers. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by FASB, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. Treasury have an impact on our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments we may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, our ability to merge, consolidate and acquire, dealings with the Company's and the Bank's insiders and affiliates and our payment of dividends. In reaction to the global financial crisis and particularly following passage of the Dodd-Frank Act, we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically significant financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase. After the 2016 federal elections, momentum to decrease the regulatory burden on community banks gathered strength. In May 2018, the Regulatory Relief Act was enacted to modify or remove certain financial reform rules and regulations. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like us, and for large banks with assets of more than $50 billion. Many of these changes are intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make our capital requirements less complex. For a discussion of capital requirements, see "—The Role of Capital." It also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volker Rule's complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable to our operations, but the true impact remains difficult to predict until rulemaking is complete and the reforms are fully implemented.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally

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have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the continuing regulatory emphasis on our capital levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects their earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies, require more capital to be held in the form of common stock and disallow certain funds from being included in capital determinations. These standards represent regulatory capital requirements that are meaningfully more stringent than those in place previously.

Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of "capital" divided by "total assets." As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that holding companies must generally maintain capital like their bank subsidiaries and the proceeds of hybrid instruments, such as trust preferred securities, which banks could not hold as capital, have been excluded from capital. However, if such securities were issued prior to May 19, 2010, by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because we have assets of less than $15 billion, we are able to maintain our trust preferred proceeds as capital, but we will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel International Capital Accords. The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as "Basel I" adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance

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sheet exposures needed to be factored in the calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as "Basel II," for large or "core" international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as "advanced approaches" banks. The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This "standardized approach" increased the number of risk-weight categories and recognized risks well above the original 100% risk weighting. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the "Basel III Rule"). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than "small bank holding companies" who are relieved from compliance with the Basel III Rule. While holding companies with consolidated assets of less than $3 billion, like the Company, are considered small bank holding companies for this purpose, we will have a material amount of securities registered with the SEC following the offering and that will disqualify us from taking advantage of the policy statement. Banking organizations became subject to the rule on January 1, 2015 and all parts of it were fully phased-in as of January 1, 2019.

The Basel III Rule impacts the definitions of the various forms of capital used to calculate the ratios and how assets will be weighted for the purpose of calculating such ratios. It increased the required quantity and quality of capital and required more detailed categories of risk weighting of riskier, more opaque assets. For nearly every class of assets, the Basel III Rule requires a more complex, detailed and calibrated assessment of risk in the calculation of risk weightings.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications will change. For example, noncumulative perpetual preferred stock, which qualified as Tier 1 Capital under

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Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution's Common Equity Tier 1 Capital.

The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:

•: A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
•: An increase in the minimum required amount of Tier 1 Capital from 4% to 6% of risk-weighted assets;
•: A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and
•: A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer fully phased-in as of January 1, 2019. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered "adequately capitalized." Bank regulatory agencies uniformly encourage banks to hold more capital and be "well-capitalized" and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the Federal Reserve for the Company and the OCC for the Bank, in order to be well-capitalized, we must maintain:

•: A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
•: A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I);

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•: A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I); and
•: A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of June 30, 2019: (i) the Bank was not subject to a directive from the OCC to increase its capital; and (ii) the Bank was well-capitalized, as defined by OCC regulations. As of June 30, 2019, the Company had regulatory capital in excess of the Federal Reserve's requirements and met the Basel III Rule requirements to be well-capitalized.

Prompt Corrective Action. The concept of being "well-capitalized" is part of a regulatory regime that provides the federal banking regulators with broad power to take "prompt corrective action" to resolve the problems of undercapitalized institutions based on the capital level of each particular institution. The extent of the regulators' powers depends on whether the institution in question is "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

The Potential for Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided a potential Basel III "off-ramp" for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio," or CBLR, of between 8 and 10%. On November 21, 2018, the agencies proposed setting the CBLR at 9% of tangible equity to total assets for a qualifying bank to be well-capitalized. Under the proposal, a community banking organization would be eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The electing institution would not be required to calculate the existing risk-based and leverage capital requirements of the Basel III Rule and would not need to risk weight its assets for purposes of capital calculations.

We are in the process of considering the CBLR proposal and will await the final regulation to determine whether we will elect the framework.

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Supervision and Regulation of the Company

General. The Company, as the sole stockholder of the Bank, is a bank holding company. As a bank holding company, we are subject to regulation, supervision and enforcement by, the Federal Reserve under the BHCA. We are legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding the Company and the Bank as the Federal Reserve may require.

Acquisitions and Activities / Financial Holding Company Election. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see "—The Role of Capital."

The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be "so closely related to banking ... as to be a proper incident thereto." This authority would permit the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the U.S. Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. We have elected to operate as a financial holding company. In order to

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maintain our status as a financial holding company, both the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory CRA rating. If the Federal Reserve determines that either we or the Bank is not well-capitalized or well-managed, the Federal Reserve will provide a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any additional limitations on us as it deems appropriate. Furthermore, if non-compliance is based on the failure of the Bank to achieve a satisfactory CRA rating, we would not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control. Federal law prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. We have been subject to the complex consolidated capital requirements of the Basel III Rule since the U.S. federal banking agencies approved its implementation effective January 1, 2015. Only qualifying small bank holding companies were excluded from compliance with the Basel III Rule by virtue of the Federal Reserve's "Small Bank Holding Company Policy Statement." Prior to 2018, we did not meet the definition of a small bank holding company for this purpose; however, the Regulatory Relief Act expanded the category of holding companies that may rely on the policy statement by raising the maximum amount of assets they may hold from $1 billion to $3 billion, and the Federal Reserve issued an interim final rule, effective August 30, 2018, to bring the policy statement in line with the law. As a result, qualifying holding companies with assets of less than $3 billion are not subject to the capital requirements of the Basel III Rule and are deemed to be "well-capitalized." However, one of the qualifications for this treatment is that the holding company not have a material amount of securities registered with the SEC. As a result of the offering, we will have a material amount of shares registered with the SEC and will no longer meet the qualifications of the Small Bank Holding Company Policy Statement. For a discussion of capital requirements, see "—The Role of Capital" above.

Dividend Payments. Our ability to pay dividends to stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, we are subject to the limitations of the DGCL. The DGCL allows us to pay dividends only out of our surplus (as defined and computed in accordance with the provisions of the DGCL) or if we have no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to stockholders if: (i) the company's net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company's capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common

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Equity Tier 1 Capital attributable to the capital conservation buffer. See "—The Role of Capital" above.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Federal Securities Regulation. Our common stock will be registered with the SEC under the Exchange Act as a result of the offering. Consequently, we will be subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. It increased stockholder influence over boards of directors by requiring companies to give stockholders a nonbinding vote on executive compensation and so-called "golden parachute" payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company's proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

Supervision and Regulation of the Bank

General. The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of the Bank are insured by the deposit insurance fund, or DIF, to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category, and the Bank is a member of the Federal Reserve. As a national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks. Our defined business lines of banking, retirement and benefit services, wealth management and mortgage are each subject to that authority and are examined by the OCC. The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 40 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution's deposit insurance premiums paid to the DIF are calculated is based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.

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The reserve ratio is the DIF balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.36% as of September 30, 2018 (most recent available), exceeding the statutory required minimum reserve ratio of 1.35%. The FDIC will provide assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC has calculated the credit amounts and will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

FICO Assessments. In addition to paying basic deposit insurance assessments, FDIC-insured institutions must pay Financing Corporation, or FICO, assessments. FICO is a mixed-ownership governmental corporation chartered by the former FHLB Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019. FICO's authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay assessments to cover interest payments on FICO's outstanding obligations. The final FICO assessment was on the March 29, 2019 FDIC Quarterly Certified Statement Invoice.

Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment is calculated using a formula that considers the bank's size and its supervisory condition. During the year ended December 31, 2018, the Bank paid supervisory assessments to the OCC totaling $448 thousand. During the first six months of 2019, the Bank paid supervisory assessments to the OCC totaling $203 thousand.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see "—The Role of Capital" above.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio, or LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in U.S. Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in 2014 and have proposed the NSFR. While these rules do not,

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and will not, apply to the Bank, we continue to review our liquidity risk management policies in light of these developments.

Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank's board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank's year-to-date net income plus the bank's retained net income for the two preceding years. The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of June 30, 2019. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See "—The Role of Capital" above.

Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on "covered transactions" between the Bank and its "affiliates." The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of "covered transactions" and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal stockholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards / Risk Management. FDIC-insured institutions are expected to operate in a safe and sound manner. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of such institutions that address internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to operate in a safe and sound manner, the FDIC-insured institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by

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its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the FDIC-insured institution's rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Operating in an unsafe or unsound manner will also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, incentive compensation, third-party risk and cybersecurity are critical sources of operational risk that FDIC-insured institutions must address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.

Branching Authority. National banks headquartered in North Dakota, such as the Bank, have the same branching rights in North Dakota as banks chartered under North Dakota law, subject to OCC approval. North Dakota law grants North Dakota-chartered banks the authority to establish branches anywhere in the State of North Dakota, subject to receipt of all required regulatory approvals.

The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state lines without legal impediments. However, while Federal law permits state and national banks to merge with banks in other states, such mergers are subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Financial Subsidiaries. Under federal law and OCC regulations, national banks are authorized to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company and any activity that the Secretary of the U.S. Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank's outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial subsidiaries.

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Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

Transaction Account Reserves. Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2019, the first $16.3 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating between $16.3 million to $124.2 million, the reserve requirement is 3% of those transaction account balances; and for net transaction accounts in excess of $124.2 million, the reserve requirement is 10% of the aggregate amount of total transaction account balances in excess of $124.2 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.

Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank's record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank's effectiveness in meeting its CRAs. The Bank's latest CRA rating is "Satisfactory."

Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank's ability to share certain information with affiliates and non-affiliates for marketing or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance, or CRE Guidance,

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provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks' levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.

Based on the Bank's loan portfolio as of June 30, 2019, we do not exceed the 300% guideline for commercial real estate loans or the 100% guideline for construction and land development loans.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to regulate and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower's ability to repay, while also establishing a presumption of compliance for certain "qualified mortgages." The Regulatory Relief Act provided relief in connection with mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered to be qualified mortgages, if they are held in portfolio for the life of the loan.

We do not currently expect the CFPB's rules to have a significant impact on the Bank's operations, except for higher compliance costs.

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

The following is a summary of the material United States federal income tax consequences relevant to non-U.S. holders, as defined below, of the purchase, ownership and disposition of our common stock. The following summary is based on current provisions of the Code, U.S. Treasury regulations and judicial and administrative authority, all of which are subject to change, possibly with retroactive effect. This section does not consider any aspects of the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any U.S. federal estate or gift tax or state, local, estate or foreign tax consequences, nor does it address tax consequences to special classes of investors, including, but not limited to, tax-exempt or governmental organizations, insurance companies, banks or other financial institutions, "controlled foreign corporations," partnerships or other entities classified as partnerships for United States federal income tax purposes, dealers in securities or foreign currencies, persons liable for the alternative minimum tax, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, persons who have acquired our common stock as compensation or otherwise in connection with the performance of services, certain former citizens or long-term residents of the United States, or persons that will hold our common stock as a position in a hedging transaction, "straddle," "constructive sale," "conversion transaction" or other risk reduction transaction and holders who own or have owned (directly, indirectly, or constructively) five percent or more of our common stock (by vote or value). Tax consequences may vary depending upon the particular status of an investor. The summary is limited to non-U.S. holders who will hold our common stock as "capital assets" within the meaning of Section 1221 of the Code (generally, property held for investment). Each potential non-U.S. investor should consult its own tax advisor as to the United States federal (including any recent changes thereto), state, local, foreign, and any other tax consequences to their particular situation of the purchase, ownership and disposition of our common stock.

You are a "non-U.S. holder" for purposes of this discussion if you are a beneficial owner of our common stock for United States federal income tax purposes that is:

•: a nonresident alien individual, other than certain former citizens and residents of the United States subject to U.S. tax as expatriates;
•: a corporation (or other entity that is taxable as a corporation) not created or organized in the United States or under the laws of the United States or of any State (or the District of Columbia);
•: an estate whose income falls outside of the federal income tax jurisdiction of the United States, regardless of the source of such income; or
•: a trust that is not subject to United States federal income tax on a net income basis on income or gain from our shares.

If an entity or arrangement treated as a partnership for United States federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are treated as a partner in such an entity holding our common stock, you should consult your tax advisor as to the United States federal income tax consequences applicable to you.

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Distributions

Distributions with respect to our common stock will be treated as dividends when paid to the extent of our current and accumulated earnings and profits as determined for United States federal income tax purposes. Except as described below, if you are a non-U.S. holder of our shares, dividends paid to you are generally subject to withholding of United States federal income tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Even if you are eligible for a lower treaty rate, we and other payors will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividends paid to you, unless you have furnished to us or another payor, as applicable:

•: a valid IRS Form W-8BEN, W-8BEN-E, another applicable or successor variation of Form W-8 or an acceptable substitute form upon which you certify, under penalties of perjury, your status as a non-U.S. person and your entitlement to the lower treaty rate with respect to such payments; or
•: in the case of payments made outside the United States to an offshore account (generally, an account maintained by you at an office or branch of a bank or other financial institution at any location outside the United States), other documentary evidence establishing your entitlement to the lower treaty rate in accordance with U.S. Treasury regulations.

If you are eligible for a reduced rate of U.S. withholding tax under a tax treaty, you may obtain a refund of any amounts withheld in excess of that rate by timely filing a refund claim with the IRS.

If dividends paid to you are "effectively connected" with your conduct of a trade or business within the United States, and, if required by a tax treaty, the dividends are attributable to a permanent establishment that you maintain in the United States, we and other payors generally are not required to withhold tax from the dividends, provided that you have furnished to us or another payor a valid IRS Form W-8ECI or an acceptable substitute form upon which you represent, under penalties of perjury, that:

•: you are a non-U.S. person; and
•: the dividends are effectively connected with your conduct of a trade or business within the United States and are includible in your gross income.

"Effectively connected" dividends are generally taxed on a net income basis at rates applicable to United States citizens, resident aliens and domestic United States corporations. If you are a corporate non-U.S. holder, "effectively connected" dividends that you receive may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate, or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

Sale or Other Disposition of our Common Stock

If you are a non-U.S. holder, you generally will not be subject to United States federal income tax or subject to the discussion below under the headings "Information Reporting and Backup Withholding" and "Foreign Account Tax Compliance Act" or withholding tax on gain realized on the sale, exchange or other disposition of our common stock unless (i) you are an

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individual, you hold our shares as a capital asset, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist, (ii) the gain is "effectively connected" with your conduct of a trade or business in the United States, and the gain is attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition to subjecting you to United States taxation on a net income basis, or (iii) we are or have been a U.S. real property holding corporation for U.S. federal income tax purposes at any time within the shorter of the five-year period ending on the date of the disposition, and the non-U.S. holder's holding period and certain other conditions are satisfied. Gain that is effectively connected with the conduct of a trade or business in the Unites States generally will be subject to U.S. federal income tax, net of certain deductions, at regular U.S. federal income tax rates. If the non-U.S. holder is a foreign corporation, the branch profits tax described above also may apply to such effectively connected gain. An individual non-U.S. holder who is subject to U.S. federal income tax because the non-U.S. holder was present in the United States for 183 days or more during the year of sale or other disposition of our common stock will be subject to a flat 30% tax (or lower rate as specified by any applicable income tax treaty) on the gain derived from such sale or other disposition, which may be offset by U.S. source capital losses.

Information Reporting and Backup Withholding

Payment of dividends, and the tax withheld on those payments, are subject to information reporting requirements. These information reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable income tax treaty. Under the provisions of an applicable income tax treaty or agreement, copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides. U.S. backup withholding will generally apply on payment of dividends to non-U.S. holders unless such non-U.S. holders furnish to the payor a Form W-8BEN, W-8BEN-E (or other applicable or successor form), or otherwise establish an exemption and the payor does not have actual knowledge or reason to know that the holder is a U.S. person, as defined under the Code, that is not an exempt recipient.

Payment of the proceeds of a sale of our common stock within the United States or conducted through certain U.S.-related financial intermediaries is subject to information reporting and, depending on the circumstances, backup withholding, unless the non-U.S. holder, or beneficial owner thereof, as applicable, certifies that it is a non-U.S. holder on Form W-8BEN, W-8BEN-E (or other applicable or successor form), or otherwise establishes an exemption and the payor does not have actual knowledge or reason to know the holder is a U.S. person, as defined under the Code, that is not an exempt recipient.

The payment of proceeds of a sale of our common stock effected outside the United States by a non-U.S. holder to or through a foreign office of a broker generally will not be subject to backup withholding or related information reporting. If that broker is, however, for U.S. tax purposes, a United States person, a controlled foreign corporation, a foreign person 50% of more of whose gross income from all sources for certain periods is effectively connected with a trade or business within the United States, or a foreign partnership that is engaged in the conduct of a trade or business in the United States or that has one or more partners that are United States persons who in the aggregated hold more than 50% of the income or capital interests in the partnership, such information reporting requirements will apply (but backup withholding generally will not apply) unless that broker has documentary evidence in its files of such holder's status as a non-U.S. holder.

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Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules from a payment to a non-U.S. holder is allowable as a credit against the non-U.S. holder's United States federal income tax, which may entitle the non-U.S. holder to a refund, provided that the non-U.S. holder timely provides the required information to the IRS. Moreover, certain penalties may be imposed by the IRS on a non-U.S. holder who is required to furnish information but does not do so in the proper manner. Non-U.S. holders should consult their tax advisors regarding the application of backup withholding in their particular circumstances and the availability of and procedure for obtaining an exemption from backup withholding under current U.S. Treasury regulations.

Foreign Account Tax Compliance Act

Under Sections 1471 through 1474 of the Code and the U.S. Treasury regulations and administrative guidance promulgated thereunder, The Foreign Account Tax Compliance Act, or FATCA, imposes a 30% withholding tax on certain types of payments made to "foreign financial institutions" ("FFI") (as specifically defined under these rules), and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification requirements are satisfied.

As a general matter, FATCA imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of (but, importantly, see the further discussion of gross proceeds below), our common stock if paid to a foreign entity unless (i) in the case of a FFI, such institution enters into an agreement with the U.S. government to withhold on certain payments, and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are non-U.S. entities with U.S. owners), (ii) in the case of a non-financial foreign entity, such entity certifies that it does not have any "substantial United States owners" (as defined in the Code) or provides the applicable withholding agent with a certification identifying the direct and indirect substantial United States owners of the entity (in either case, generally on an IRS Form W-8BEN-E), or (iii) the FFI or non-financial foreign entity otherwise qualifies for an exemption from these rules and provides appropriate documentation (such as an IRS Form W-8BEN-E).

Different rules from those described above may apply to non-U.S. holders resident in jurisdictions that have entered into inter-governmental agreements with the United States.

The required withholding currently applies to dividends on our common stock. The U.S. Treasury Department and the IRS had previously announced that withholding on payments of gross proceeds from a sale or other disposition of certain financial instruments treated as providing for U.S. -source dividends or interests (such as our common stock) would only apply to payments made after December 31, 2018. However, under recently proposed regulations (the preamble to which specifies that taxpayers are permitted to rely on these proposed regulations pending finalization), no withholding will apply on payments of gross proceeds. If withholding is required under FATCA on a payment related to our common stock, investors that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) generally will be required to seek a refund or credit from the IRS to obtain the benefit of such exemption or reduction (provided that such benefit is available). Prospective investors should consult their tax advisors regarding the effect of FATCA in their particular circumstances.

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Non-U.S. holders are encouraged to consult with their tax advisors regarding the possible implications of the legislation on their investment in our common stock.

EACH POTENTIAL NON-U.S. INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE UNITED STATES FEDERAL (INCLUDING ANY RECENT CHANGES THERETO), STATE, LOCAL, FOREIGN, AND ANY OTHER TAX CONSEQUENCES TO THEIR PARTICULAR SITUATION OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.

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UNDERWRITING

We are offering the shares of our common stock described in this prospectus through the underwriters listed below for whom Raymond James & Associates, Inc., or Raymond James or the representative, is acting as sole representative of the underwriters listed below. We have entered into an underwriting agreement with Raymond James, as representative of the underwriters, dated , 2019, or the Underwriting Agreement. Subject to the terms and conditions of the Underwriting Agreement, each of the underwriters has agreed, severally and not jointly, to purchase the number of shares of common stock listed next to its name in the following table.

Underwriters		Number of Shares

Raymond James & Associates, Inc.
D.A. Davidson & Co.
Piper Jaffray & Co.

Total

The Underwriting Agreement provides that the underwriters' obligations to purchase the shares of common stock depend on the satisfaction of the conditions contained in the Underwriting Agreement, including (among other things):

•: the representations and warranties made by us to the underwriters are true;
•: there is no material adverse change in the financial markets; and
•: we deliver customary closing documents and legal opinions to the underwriters.

The underwriters are committed to purchase and pay for all of the shares of common stock being offered by this prospectus, if any such shares of common stock are purchased. However, the underwriters are not obligated to purchase or pay for the shares of common stock covered by the underwriters' over-allotment option described below, unless and until the underwriters exercise such option.

The shares of common stock are being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by the underwriters, subject to approval of certain legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel, or modify this offering and to reject orders in whole or in part.

We have applied to have our common stock listed on the Nasdaq Capital Market under the symbol "ALRS."

Over-Allotment Option

We have granted the underwriters an option, exercisable no later than 30 days after the date of this prospectus to purchase up to an aggregate of additional shares of common stock at the public offering price, less the underwriting discount set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments, if any, made in connection with the sale of the shares of our common stock offered by this prospectus. To the extent the option is exercised and the conditions of the Underwriting Agreement are

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satisfied, we will be obligated to sell to the underwriters, and the underwriters will be obligated to purchase, these additional shares of common stock.

Commissions and Expenses

The underwriters propose to offer the shares of our common stock directly to the public at the offering price set forth on the cover page of this prospectus and to certain securities dealers at the public offering price, less a concession not in excess of $ per share. We estimate that the total expenses of the offering, excluding the underwriting discount, will be approximately $ million and are payable by us. We have also agreed to reimburse the underwriters for certain fees and expenses incurred by them in connection with this offering, which may not exceed $150,000 if the offering closes, or $50,000 if the offering is not completed for out-of-pocket accountable, bona fide expenses actually incurred. We estimate that the maximum amount of such expenses will be $150,000. If all of the shares are not sold at the public offering price, the underwriters may change the offering price, concessions and other selling terms.

The following table shows the per share and total underwriting discount that we will pay to the underwriters and the proceeds we will receive before expenses. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.

	Per Share	Total Without Over- Allotment Exercise	Total With Over- Allotment Exercise

Public offering price	$	$	$
Underwriting discounts	$	$	$

Proceeds to us (before expenses)	$	$	$

Right of First Refusal

We have also granted Raymond James a certain right of first refusal to act as lead managing underwriter for any public offering, or exclusive placement agent for any private placement, of any securities of the Company by us for 12 months if the Company does not undertake the offering.

Reserved Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, certain existing stockholders, certain employees of the Company and the Bank, and other persons having relationships with us. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

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Lock-Up Agreements

We, and each of our executive officers and directors, have agreed, for the period beginning on and including the date of this prospectus through and including the date that is 180 days after the date of this prospectus, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or any securities convertible into or exchangeable or exercisable for common stock or file any registration statement under the Securities Act with respect to any of the foregoing, (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock, whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise, (iii) file or cause to be filed a registration statement (other than a registration statement on Form S-8 or Form S-4) with respect to the registration of any shares of common stock or securities convertible, exercisable or exchangeable into common stock or any other securities of the Company, or (iv) publicly disclose the intention to do any of the foregoing, in each case without the prior written consent of the representative on behalf of the underwriters.

The restrictions described in the preceding paragraph are subject to limited exceptions and will not apply with respect to (1) the issuance by us of common stock to the underwriters pursuant to the Underwriting Agreement, (2) any shares of common stock issued or issuable in connection with any merger, consolidation, joint venture, strategic alliance or other similar transaction with another company, provided that the recipient of such shares of common stock agrees to be bound in writing by an agreement of the same remaining duration and terms as described above, or (3) our issuance, exercise or related transfer of shares of our common stock, rights or options to purchase our common stock, granted pursuant to the 2009 Stock Plan or 2019 Equity Incentive Plan.

Raymond James may, in its sole discretion and at any time and from time to time, without notice, release all or any portion of the foregoing shares and other securities from the foregoing restrictions.

Pricing of the Offering; Listing

This is the initial public offering of our common stock. Prior to this offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "ALRS." Although our shares were quoted on the OTCQX Marketplace, because trading on the OTCQX Marketplace has been infrequent and limited in volume, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in a more liquid market. The initial public offering price will be negotiated among us and the underwriters. The factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, include the information set forth in this prospectus, our financial and operating performance, estimates of our business potential and earnings prospects and those of our industry in general, an assessment of management and the consideration of the above factors in relation to market valuation of companies in related businesses. The estimated public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock or that the common stock will trade in the public market at or above the initial offering price.

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Indemnity

We have agreed to indemnify the underwriters, and each of the persons who control one of the several underwriters, against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of these liabilities.

Stabilization

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M promulgated under the Exchange Act.

•: Stabilizing transactions permit bids to purchase shares of common stock so long as the stabilizing bids do not exceed a specified maximum.
•: Over-allotment transactions involve sales by the underwriter of shares of common stock in excess of the number of shares the underwriter is obligated to purchase. This creates a syndicate short position that may be either a covered short position or a naked short position. In a covered short position, the number of shares of common stock over-allotted by the underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising its over-allotment option and/or purchasing shares in the open market.
•: Syndicate covering transactions involve purchases of common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which it may purchase shares through exercise of the over-allotment option. If the underwriter sells more shares than could be covered by exercise of the over-allotment option and therefore has a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.
•: Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by that syndicate member is purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriter makes any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected in the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.

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Passive Market Making

In addition, in connection with this offering the underwriters and selected dealers, if any, who are qualified market makers on the Nasdaq Capital Market may engage in passive market making transactions in our common stock on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M promulgated under the Exchange Act during a period before the commencement of offers or sales of common stock and extending through the completion of the distribution of this offering. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the bid of the passive market maker, however, the bid must then be lowered when purchase limits are exceeded. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the common stock during a specified period and must be discontinued when that limit is reached. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions. The underwriters are not required to engage in passive market making and may end passive market making activities at any time.

Electronic Distribution

A prospectus in electronic format may be made available by e-mail or on the websites or through online services maintained by the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters' websites and any information contained on any other website maintained by the underwriters is not part of this prospectus, has not been approved or endorsed by the underwriters or us, and should not be relied upon by investors.

Affiliations

The underwriters and their affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing, valuation and brokerage activities. From time to time, the underwriters and/or their affiliates have directly and indirectly engaged, or may engage, in various financial advisory, investment banking and commercial banking services for us and our affiliates, for which they received, or may receive, customary compensation, fees and expense reimbursement.

In the ordinary course of their various business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and those investment and securities activities may involve securities and/or instruments of ours. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of those securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in those securities and instruments.

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Other Considerations

It is expected that delivery of the shares of our common stock will be made against payment therefor on or about the date specified on the cover page of this prospectus. Under Rule 15c6-1 promulgated under the Exchange Act trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise.

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LEGAL MATTERS

The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Barack Ferrazzano Kirschbaum & Nagelberg LLP, Chicago, Illinois. Squire Patton Boggs (US) LLP, Cincinnati, Ohio, is acting as counsel for the underwriters in connection with this offering.

EXPERTS

The audited consolidated financial statements of Alerus Financial Corporation and subsidiaries as of December 31, 2018, 2017 and 2016, and for each of the three years ended December 31, 2018 have been included herein in reliance upon the report of CliftonLarsonAllen LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to our common stock offered hereby. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits or schedules filed therewith. Some items are omitted in accordance with the rules and regulations of the SEC. For further information about us and our common stock that we propose to sell in this offering, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements or summaries in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract or document is filed as an exhibit to the registration statement, each statement or summary is qualified in all respects by reference to the exhibit to which the reference relates. Our filings with the SEC, including the registration statement, are available to you for free on the SEC's internet website at www.sec.gov.

Following the offering, we will become subject to the informational and reporting requirements of the Exchange Act and, in accordance with those requirements, will file reports and proxy and information statements and other information with the SEC. You will be able to inspect and copy these reports and proxy and information statements and other information at the addresses set forth above. We intend to furnish to our stockholders annual reports containing our audited consolidated financial statements certified by an independent registered public accounting firm.

We also maintain a website at www.alerus.com. Information on, or accessible through, our website is not part of this prospectus.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



*Audited Consolidated Financial Statements*
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2018, 2017 and 2016		F-4
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016		F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016		F-6
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017 and 2016		F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016		F-8
Notes to Consolidated Financial Statements		F-10
*Unaudited Consolidated Financial Statements*
Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018		F-65
Consolidated Statements of Income for the six months ended June 30, 2019 and 2018		F-66
Consolidated Statements of Comprehensive Income for the six months ended June 30, 2019 and 2018		F-67
Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2019 and 2018		F-68
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018		F-69
Notes to Unaudited Consolidated Financial Statements		F-71

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Alerus Financial Corporation and Subsidiaries
Grand Forks, North Dakota

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Alerus Financial Corporation and Subsidiaries (the "Company") as of December 31, 2018, 2017, and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, 2017, and 2016 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

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

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the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

CliftonLarsonAllen LLP

We have served as the Company's auditor since 2014.

Minneapolis, Minnesota
June 6, 2019

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Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets

At December 31, (dollars in thousands)	2018			2017			2016

Assets
Cash and cash equivalents	$	34,909		$	40,336		$	35,441
Interest-bearing deposits		5,742			81,662			171,926

Cash and due from banks		40,651			121,998			207,367
Investment securities
Trading		1,539			1,945			1,959
Available-for-sale		250,174			267,021			271,194
Equity, at fair value		3,165			5,445			5,758
Loans held for sale		14,486			17,938			35,063
Loans held for branch sale		32,031			—			—
Loans		1,701,850			1,574,474			1,366,952
Less: allowance for loan losses		(22,174	)		(16,564	)		(15,615	)

Net loans		1,679,676			1,557,910			1,351,337
Land, premises and equipment, net		21,743			21,229			24,262
Accrued interest receivable		7,645			6,817			5,919
Bank-owned life insurance		30,763			29,959			29,139
Goodwill		27,329			27,329			27,329
Other intangible assets		22,473			27,111			32,729
Servicing rights		4,623			4,686			4,777
Deferred income taxes, net		10,085			9,213			19,521
Other assets		32,687			37,480			33,691

Total assets	$	2,179,070		$	2,136,081		$	2,050,045



Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing transaction	$	550,640		$	619,333		$	554,490
Interest-bearing transaction		1,053,869			1,011,368			990,186
Time deposits		170,587			204,261			240,533

Total deposits		1,775,096			1,834,962			1,785,209
Deposits held for sale		24,197			—			—
Short-term borrowings		93,460			30,000			729
Long-term debt		58,824			58,819			58,813
Accrued expenses and other liabilities		30,539			32,706			37,043

Total liabilities		1,982,116			1,956,487			1,881,794
Commitments and contingent liabilities ESOP-owned shares		34,494			31,491			29,035
Stockholders' equity
Common stock, $1 par value, 30,000,000 shares authorized; 13,775,327, 13,699,066, and 13,534,375 issued and outstanding		13,775			13,699			13,534
Additional paid-in capital		27,743			26,040			23,882
Retained earnings		159,037			140,986			132,773
Accumulated other comprehensive income (loss)		(3,601	)		(1,131	)		(1,938	)

		196,954			179,594			168,251
Less: ESOP-owned shares		(34,494	)		(31,491	)		(29,035	)

Total stockholders' equity		162,460			148,103			139,216

Total liabilities and stockholders' equity	$	2,179,070		$	2,136,081		$	2,050,045

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

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Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Income

Year Ended December 31, (dollars and shares in thousands, except per share data)	2018		2017			2016

Interest Income
Loans, including fees	$	81,159	$	68,799		$	63,644
Investment securities
Taxable		4,670		4,773			4,584
Exempt from federal income taxes		1,234		1,356			1,089
Other		639		709			625

Total interest income		87,702		75,637			69,942
Interest Expense
Deposits		6,991		3,520			3,385
Short-term borrowings		1,896		942			11
Long-term debt		3,591		3,505			3,606

Total interest expense		12,478		7,967			7,002

Net interest income		75,224		67,670			62,940
Provision for loan losses		8,610		3,280			3,060

Net interest income after provision for loan losses		66,614		64,390			59,880
Noninterest Income
Retirement and benefit services		63,316		62,390			57,804
Wealth management		14,900		13,953			12,640
Mortgage banking		17,630		19,748			26,528
Service charges on deposit accounts		1,808		1,854			1,916
Net gains (losses) on investment securities		85		(13	)		(24	)
Other		5,010		5,113			6,225

Total noninterest income		102,749		103,045			105,089
Noninterest Expense
Compensation		69,403		67,576			70,359
Employee benefits		17,866		16,490			15,888
Occupancy and equipment expense		11,086		10,892			11,736
Business services, software and technology expense		14,525		12,976			14,510
Intangible amortization expense		4,638		5,623			7,005
Professional fees and assessments		5,098		6,158			6,301
Marketing and business development		3,459		3,271			3,237
Supplies and postage		2,737		2,609			2,930
Travel		1,738		1,530			1,721
Mortgage and lending expenses		2,153		2,235			2,439
Other		3,622		5,560			7,666

Total noninterest expense		136,325		134,920			143,792

Income before income taxes		33,038		32,515			21,177
Income tax expense		7,172		17,514			7,141

Net income		25,866		15,001			14,036

Less preferred stock dividends		—		—			25

Net income applicable to common stock	$	25,866	$	15,001		$	14,011



Earnings per common share	$	1.88	$	1.10		$	1.04
Diluted earnings per common share	$	1.84	$	1.07		$	1.00
Dividends declared per common share	$	0.53	$	0.48		$	0.44
Average common shares outstanding		13,763		13,653			13,495
Diluted average common shares outstanding		14,063		14,007			14,000

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

F-5

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

Year Ended December 31, (dollars in thousands)	2018			2017			2016

Net income	$	25,866		$	15,001		$	14,036
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on available-for-sale securities		(3,277	)		1,542			(4,721	)
Reclassification adjustment for losses (gains) realized in income		(116	)		—			17

Total other comprehensive income (loss), before tax		(3,393	)		1,542			(4,704	)

Income tax (expense) benefit related to items of other comprehensive income		852			(735	)		1,717

Other comprehensive income (loss), net of tax		(2,541	)		807			(2,987	)

Total comprehensive income	$	23,325		$	15,808		$	11,049

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

F-6

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

(dollars and shares in thousands)

	Preferred Stock			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			ESOP- Owned Shares			Total

Balance December 31, 2015	$	20		$	13,434		$	42,617		$	125,162		$	1,049		$	(28,128	)	$	154,154
Net income		—			—			—			14,036			—			—			14,036
Other comprehensive income (loss)		—			—			—			—			(2,987	)		—			(2,987	)
Common stock repurchased		—			(18	)		(102	)		(237	)		—			—			(357	)
Preferred stock dividends		—			—			—			(25	)		—			—			(25	)
Common stock dividends		—			—			—			(6,163	)		—			—			(6,163	)
Net change in fair value of ESOP shares		—			—			—			—			—			(907	)		(907	)
Stock-based compensation expense		—			20			1,445			—			—			—			1,465
Vesting of restricted stock		—			98			(98	)		—			—			—			—
Preferred stock redeemed		(20	)		—			(19,980	)		—			—			—			(20,000	)

Balance December 31, 2016		—			13,534			23,882			132,773			(1,938	)		(29,035	)		139,216
Net income		—			—			—			15,001			—			—			15,001
Other comprehensive income (loss)		—			—			—			172			807			—			979
Common stock repurchased		—			(16	)		(47	)		(231	)		—			—			(294	)
Common stock issued		—			64			1,384			—			—			(1,442	)		6
Common stock dividends		—			—			—			(6,729	)		—			—			(6,729	)
Net change in fair value of ESOP shares		—			—			—			—			—			(1,014	)		(1,014	)
Stock-based compensation expense		—			17			921			—			—			—			938
Vesting of restricted stock		—			100			(100	)		—			—			—			—

Balance December 31, 2017		—			13,699			26,040			140,986			(1,131	)		(31,491	)		148,103
Net income		—			—			—			25,866			—			—			25,866
Adjustment for adoption of ASU 2016-01		—			—			—			(71	)		71			—			—
Other comprehensive income (loss)		—			—			—			—			(2,541	)		—			(2,541	)
Common stock repurchased		—			(15	)		(53	)		(288	)		—			—			(356	)
Common stock dividends		—			—			—			(7,456	)		—			—			(7,456	)
Net change in fair value of ESOP shares		—			—			—			—			—			(3,003	)		(3,003	)
Stock-based compensation expense		—			11			1,836			—			—			—			1,847
Vesting of restricted stock		—			80			(80	)		—			—			—			—

Balance December 31, 2018	$	—		$	13,775		$	27,743		$	159,037		$	(3,601	)	$	(34,494	)	$	162,460

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

F-7

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended December 31, (dollars in thousands)	2018			2017			2016

Operating Activities
Net income	$	25,866		$	15,001		$	14,036
Adjustments to reconcile net income to net cash provided by operating activities
Deferred income taxes		(20	)		9,745			(3,044	)
Provision for loan losses		8,610			3,280			3,060
Provision for foreclosed asset losses		245			425			226
Depreciation and amortization		8,729			9,856			11,385
Stock-based compensation		1,847			938			1,465
Investment securities premium amortization		1,570			2,069			2,364
Increase in value of bank-owned life insurance		(804	)		(820	)		(831	)
Realized loss (gain) on forward sale derivatives		15			97			(81	)
Realized loss (gain) on rate lock commitments		(14	)		(70	)		135
Realized loss (gain) on sale of premises and equipment		(11	)		154			6
Realized loss (gain) on sale of foreclosed assets		(114	)		38			73
Realized loss (gain) on sale of investment securities		(129	)		—			17
Realized loss (gain) on servicing rights		(577	)		(743	)		(1,293	)
Net change in
Securities held for trading		406			14			(12	)
Loans held for sale		3,452			17,125			13,579
Accrued interest receivable		(828	)		(898	)		(1,089	)
Other assets		4,478			(1,693	)		308
Accrued expenses and other liabilities		832			(6,628	)		(6,315	)

Net cash provided by operating activities		53,553			47,890			33,989
Investing Activities
Proceeds from sales of investment securities available-for-sale		6,488			—			59,910
Proceeds from maturities of investment securities available-for-sale		35,082			42,257			42,806
Purchases of investment securities available-for-sale		(29,556	)		(38,226	)		(81,940	)
Net (increase) decrease in equity securities		2,280			313			(547	)
Net increase in loans		(163,156	)		(210,286	)		(38,884	)
Net cash paid for business combinations		—			—			(45,441	)
Payment to FDIC for termination of loss share agreements		(3,000	)		—			—
Proceeds from bank-owned life insurance		—			—			5,331
Purchases of premises and equipment		(3,753	)		(2,946	)		(1,684	)
Proceeds from sales of premises and equipment		11			2,390			404
Proceeds from sales of foreclosed assets		896			1,405			636

Net cash used by investing activities		(154,708	)		(205,093	)		(59,409	)

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

F-8

Table of Contents

Alerus Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

Year Ended December 31, (dollars in thousands)	2018			2017			2016

Financing Activities
Net increase (decrease) in deposits		(35,669	)		49,754			25,020
Net increase (decrease) in short-term borrowings		63,460			29,271			(6,847	)
Repayments of long-term debt		(171	)		(168	)		(25,000	)
Cash dividends paid on preferred stock		—			—			(25	)
Cash dividends paid on common stock		(7,456	)		(6,729	)		(6,163	)
Redemption of preferred stock		—			—			(20,000	)
Repurchase of common stock		(356	)		(294	)		(357	)

Net cash provided (used) by financing activities		19,808			71,834			(33,372	)

Net change in cash and due from banks		(81,347	)		(85,369	)		(58,792	)
Cash and due from banks at beginning of year		121,998			207,367			266,159

Cash and due from banks at end of year	$	40,651		$	121,998		$	207,367



Supplemental Cash Flow Disclosures
Loan collateral transferred to foreclosed assets	$	748		$	433		$	1,851
Unrealized gain (loss) on investment securities available-for-sale		(2,541	)		807			(2,987	)
Interest paid for the period		12,315			8,026			7,263
Income tax payments net of refunds received		5,347			13,074			1,612
Loans transferred to held for sale		32,031			—			—
Deposits transferred to held for sale		(24,197	)		—			—
Change in fair value of ESOP shares		3,003			1,014			907
Noncash assets acquired		—			—			335,830
Liabilities assumed		—			—			(328,748	)

Net noncash assets acquired		—			—			7,082
Cash and due from banks acquired		—			—			18,748

See Accompanying Notes to Consolidated Financial Statements
Alerus Financial Corporation

F-9

Table of Contents

Notes to Consolidated Financial Statement

NOTE 1 Significant Accounting Policies

Alerus Financial, N.A. (the "Bank"), the subsidiary bank, operates under a national charter and provides full banking services. As a national bank, the Bank is subject to regulation by the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation.

Policies which materially affect the determination of financial position, cash flows, and results of operations are summarized below.

Principles of Consolidation

The consolidated financial statements include the accounts of Alerus Financial Corporation and its subsidiaries in which Alerus Financial Corporation has a controlling interest. Significant intercompany balances and transactions have been eliminated in consolidation.

In the normal course of business, the Company may enter into a transaction with a variable interest entity ("VIE"). VIE's are legal entities whose investors lack the ability to make decisions about the entity's activities, or whose equity investors do not have the right to receive the residual returns of the entity. The applicable accounting guidance requires the Company to perform ongoing quantitative and qualitative analysis to determine whether it must consolidate any VIE. The Company does not have any ownership interest in or exert any control over any VIE, and thus no VIE's are included in the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, fair value of assets acquired and liabilities assumed upon completion of a business combination, valuation of deferred tax assets, and fair values of financial instruments.

Concentrations of Credit Risk

Substantially all of the Company's lending activities are with clients located within North Dakota, Minnesota, and Arizona. At December 31, 2018, 2017, and 2016 respectively, 30.0%, 30.5%, and 34.4% of the Company's loan portfolio consisted of commercial and industrial loans

F-10

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

that were not secured by real estate. The Company does not have any significant loan concentrations in any one industry or client. Note 6 discusses the Company's loan portfolio.

The Company invests in a variety of investment securities and does not have any significant concentrations in any one industry or to any one issuer. Note 5 discusses the Company's investment securities portfolio.

Cash and Due from Banks

For purposes of the consolidated statements of cash flows, cash and due from banks includes cash and cash equivalents, balances due from banks, federal funds sold, all of which have an original maturity within 90 days. Cash flows from loans and deposits are reported net.

Interest-bearing deposits in banks are carried at cost.

Investment Securities

Debt securities that are held for short-term resale are classified as trading securities and carried at estimated fair value, with increases and decreases in estimated fair value recognized in net gains (losses) on investment securities within the statements of income. Other marketable securities are classified as available-for-sale and are carried at estimated fair value. Realized gains (losses) on investment securities available-for-sale are included in net gains (losses) on investment securities and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains (losses) on sales of investment securities are determined using the specific identification method on the trade date. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

Declines in the estimated fair value of individual available-for-sale investment securities below their cost that are other than temporary, result in write-downs of the individual investment securities to their estimated fair value. The Company monitors the investment security portfolio for impairment on an individual security basis and has a process in place to identify investment securities that could potentially have a credit impairment that is other than temporary.

This process involves analyzing the length of time and the extent to which the estimated fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and near-term prospects of the issuer, expected cash flows, and the Company's intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. The ability to hold is determined by whether it is more likely than not that the Company will be required to sell the security before its anticipated recovery. A decline in value due to a credit event that is considered other than temporary is recorded as a loss in noninterest income.

Equity investments for which readily determinable values are unavailable are carried at cost in other assets on the consolidated balance sheet.

F-11

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

The Company has investments in certain partnerships for which the Company does not have a controlling interest. For these investments, the Company records its interest in other assets using the equity method with its portion of income or loss being recorded in noninterest income in the consolidated statements of income. The Company periodically evaluates these investments for impairment.

Loans Held for Sale/Branch Sale

Loans originated and intended for sale in the secondary market or loans transferred to held for branch sale are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains (losses) on loan sales are recorded in mortgage banking revenue on the consolidated statements of income. Refer to Note 28—Subsequent Events for additional details on loans held for branch sale.

Loans

Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Loans that management has the intent and ability to hold for the foreseeable future, until maturity, or pay-off, generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, and the allowance for loan losses. Loan fees received that are associated with originating or acquiring certain loans are deferred, net of costs, and amortized over the life of the loan as a yield adjustment to interest income.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest in considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses (allowance) is an estimate of loan losses inherent in the Company's loan portfolio. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses are charged-off against the allowance when the Company determines the loan balance to be uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to the allowance.

F-12

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

The allowance consists of three primary components, general reserves, specific reserves related to impaired loans, and unallocated reserves. The general component covers non-impaired loans and is based on historical losses adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent five years. This actual loss experience is adjusted for economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the original contractual interest rate, except that as a practical expedient, it may measure impairment based on an observable market price for the estimated fair value of the collateral if collateral dependent. A loan is collateral dependent if the repayment is expected to be provided solely by the underlying collateral.

Allowance allocations other than general and specific are included in the unallocated portion. While allocations are made for loans based upon historical loss analysis, the unallocated portion is designed to cover the uncertainty of how current economic conditions and other uncertainties may impact the existing loan portfolio. Factors to consider include national and state economic conditions such as unemployment or real estate lending values. The unallocated reserve addresses inherent probable losses not included elsewhere in the allowance for loan losses.

The Company maintains a separate general valuation allowance for each portfolio segment. These portfolio segments include commercial and industrial, real estate construction, commercial real estate, residential real estate first mortgage, residential real estate junior liens, and other revolving and installment with risk characteristics described as follows:

Commercial and Industrial: Commercial and industrial loans consist of all commercial and industrial loans as well as agricultural production and other commercial loans. Commercial and industrial loans generally possess a lower inherent risk of loss than real estate portfolio segments as these loans are generally underwritten based on the cash flows of the operating business. Repayment is provided by business cash flows and is influenced by economic trends such as unemployment rates and other key economic factors. Agricultural loans generally possess a lower inherent risk of loss than real estate portfolio segments for the same reasons as commercial and industrial loans. However, they generally possess greater volatility of risk due to commodity pricing, which can lead to cash flow and collateral shortfalls.

F-13

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

Real Estate Construction: Real estate construction loans generally possess a higher inherent risk of loss than commercial and retail real estate portfolio segments. Significant inherent risks are project completion, cost overruns, and adherence to construction schedule. Additionally, real estate values could significantly impact the credit quality of these loans.

Commercial Real Estate: Commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except real estate construction and agricultural land loans. Adverse economic developments such as high vacancy rates or decreasing real estate values may impact commercial real estate credit quality. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Risks associated with farmland include volatility of real estate values driven by commodity prices, among other economic trends.

Residential real estate first and junior liens: The degree of risk in residential mortgage lending depends primarily on the loan amount in relation to collateral value, the interest rate, and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than commercial real estate portfolio segments. Credit quality is impacted by unemployment rates and other key economic indicators.

Other Revolving and Installment: The consumer loan portfolio is primarily comprised of homogenous loans. Credit quality is impacted by unemployment rates and other key economic indicators.

Although management believes the allowance to be adequate, actual losses may vary from its estimates. On a quarterly basis, management reviews the adequacy of the allowance, including consideration of the relevant risks in the portfolio, current economic conditions, and other factors. If the board of directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.

Off-Balance Sheet Credit Related Financial Instruments

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. The Company establishes a reserve for unfunded commitments using historical loss data and utilization assumptions. This reserve is located under accrued expenses and other liabilities on the Consolidated Balance Sheets.

Land, Premises and Equipment, Net

Land is carried at cost. Other premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed on a straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains (losses) on dispositions are included in current operations.

F-14

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized, if lower.

Goodwill and Other Intangibles, Net

Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually. As part of its testing, the Company first assesses the qualitative factors to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company determines the estimated fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the estimated fair value of the goodwill with its carrying amount, and then measures impairment loss by comparing the estimated fair value of goodwill with the carrying amount of that goodwill.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting and appropriate control premium. At December 31, 2018, the Company believes it does not have any indications of potential impairment based on the estimated fair value of this reporting unit.

Intangible assets determined to have definite lives are amortized over the remaining useful lives. Intangible and other long-lived assets are reviewed for impairment whenever events occur or circumstances indicate that the carrying amount may not be recoverable.

Servicing Rights

Servicing rights are recognized as separate assets when rights are acquired through the sale of loans. Servicing rights are initially recorded at estimated fair value based on assumptions provided by a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of estimated fair value adjustments to capitalized mortgage servicing rights. Capitalized servicing rights are amortized into noninterest income in proportion to, and over the period of, the estimated future servicing income of the underlying loans.

Servicing rights are evaluated for impairment based upon the estimated fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that estimated fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of

F-15

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of servicing rights is netted against loan servicing fee income.

Impairment of Long-Lived Assets

The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset.

In the event such an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are reported at the lower of the carrying value of estimated fair value less estimated costs to sell.

Foreclosed Assets

Assets acquired through loan foreclosure are included in other assets and are initially recorded at estimated fair value less estimated selling costs. The estimated fair value of foreclosed assets is evaluated regularly and any decreases in value along with holding costs, such as taxes, insurance and utilities, are reported in noninterest expense.

Transfers of Financial Assets and Participating Interests

Transfers of financial assets are accounted for as sales when control over assets has been surrendered or in the case of loan participation, a portion of the asset has been surrendered and meets the definition of a "participating interest." Control over transferred assets is deemed to be surrendered when 1) the assets have been isolated from the Company, 2) the transferee obtains the rights to pledge or exchange the transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Should the transfer not meet these three criteria, the transaction is treated as a secured financing.

Loans serviced for others are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing.

Derivatives and Hedging Activities

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its clients.

F-16

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

Derivative instruments are reported in other assets or other liabilities at estimated fair value. Changes in a derivative's estimated fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

Deposits Held for Sale

Deposits held for sale are stated at the lower of cost or fair value on an aggregate basis. Refer to Note 28—Subsequent Events, for additional details on deposits held for sale.

Noninterest Income

Specific guidelines are established for recognition of certain noninterest income components related to the Company's consolidated financial statements. In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The material groups of noninterest income that this methodology is applied to are defined as follows:

Retirement and benefit services: Retirement and benefit services income is primarily comprised of fees earned from the administration of retirement plans, record-keeping, compliance services, payroll processing, health savings accounts, and flexible benefit plans. Fees are earned based on a combination of the market value of assets under administration and transaction based fees for services provided. Fees that are determined based on the market value of the assets under administration are generally billed monthly or quarterly in arrears and recognized monthly as the Company's performance obligations are met. Other transaction based fees are recognized monthly as the performance obligation is satisfied.

F-17

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Other related services are based on a fixed fee schedule and the revenue is recognized when the services are rendered, which is when the Company has satisfied its performance obligation.

Service charges on deposit accounts: Service charges on deposit accounts primarily consist of account analysis fees, monthly maintenance fees, overdraft fees, and other deposit account related fees. Overdraft fees and certain service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction. The consideration for analysis fees and monthly maintenance fees are variable as the fee can be reduced if the customer meets certain qualifying metrics. The Company's performance obligations are satisfied at the time of the transaction or over the course of a month.

Other noninterest income: Other noninterest income components include debit card interchange fees, bank-owned life insurance income and miscellaneous transactional fees. Income earned from these revenue streams is generally recognized concurrently with the satisfaction of the performance obligation.

Advertising Costs

Advertising costs are expensed as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be recognized if it is "more likely than not" that the deferred tax asset would not be realized.

These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.

The Company follows standards related to Accounting for Uncertainty in Income Taxes. These rules establish a higher standard for tax benefits to meet before they can be recognized in a Company's consolidated financial statements. The Company can recognize in financial statements the impact of a tax position taken, or expected to be taken, if it is more likely than not that the position will be sustained on an audit based on the technical merit of the position. See Note 20, Income Taxes for additional disclosures. The Company recognizes both interest and penalties as components of other operating expenses.

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 1 Significant Accounting Policies (Continued)

The amount of the uncertain tax position was not determined to be material. It is not expected that the unrecognized tax benefit will be material within the next 12 months. The Company did not recognize any interest or penalties in 2018, 2017, or 2016.

The Company files consolidated federal and state income tax returns. The Company is no longer subject to U.S. federal or state tax examinations by tax authorities for years before 2015.

Comprehensive Income

Recognized revenue, expenses, gains, and losses are included in net income. Certain changes in assets and liabilities, such as unrealized gains (losses) on investment securities available-for-sale, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

Stock Compensation Plans

Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the grant date estimated fair value of the equity or liability instruments issued. The grant date estimated fair value is determined using the 20 day weighted-average closing price of the Company's common stock. The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employee's service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Earnings per Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding plus outstanding non-vested restricted stock awards.

NOTE 2 New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Clients (Topic 606). ASU 2014-09 was effective for public business entities for interim and annual reporting periods beginning after December 15, 2017. The Company elected to early adopt ASU 2014-09 effective January 1, 2018, which had no material impact on the Company's financial reporting. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities and derivatives. The Company has performed an assessment of revenue streams that are within the scope of the standard. The assessment did not identify material changes to the timing or amount of revenue recognition as the Company's current practices are consistent with the standard.

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 2 New Accounting Pronouncements (Continued)

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting for those that result in consolidation of the investee) to be measured at estimated fair value with changes in estimated fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable estimated fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable estimated fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at estimated fair value; (3) eliminate the requirement to disclose the estimated fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the estimated fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the estimated fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at estimated fair value in accordance with the estimated fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU 2016-01 is effective for public business entities for interim and annual reporting periods beginning after December 15, 2017. The Company elected to adopt ASU 2016-01 effective January 1, 2018. The new guidance did not materially impact the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires the lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without a transfer of control, the lease is treated as a financing. If the lessor doesn't convey risks and rewards or control, an operating lease results. ASU 2016-02 is effective for public business entities for interim and annual reporting periods beginning after December 15, 2018. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, whether certain practical expedients available. Early adoption is permitted. The Company has elected to early adopt this standard as

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Notes to Consolidated Financial Statement (Continued)

NOTE 2 New Accounting Pronouncements (Continued)

of January 1, 2019, and has evaluated the impact of this new guidance and determined there will be a $10.5 million increase to both assets and liabilities on the Company's Consolidated Balance Sheets.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a new impairment model known as the current expected credit loss (CECL) which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the "incurred cost" approach under GAAP with an "expected loss" model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchase credit-impaired debt securities and loans. For public business entities that are US Securities and Exchange Commission filers, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. For all other public business entities ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2020. As an emerging growth company, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2021, although early adoption is permitted. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU included specific guidance on how to classify certain transactions in the statement of cash flows and reduced diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for public business entities for interim and annual reporting periods beginning after December 15, 2017. Entities were required to apply the guidance retrospectively unless it would have been impracticable to do, in which case the amendments could have been applied prospectively. Effective January 1, 2018 the Company early adopted the guidance retrospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its estimated fair value, not to exceed the carrying amount of goodwill. For public business entities that are US Securities and Exchange Commission filers, ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019. For all other public business entities ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020. As an emerging growth company, ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2021, although early adoption is permitted. The Company has evaluated impact of this new guidance and determined that it will not have a significant impact of the consolidated financial statements.

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Notes to Consolidated Financial Statement (Continued)

NOTE 2 New Accounting Pronouncements (Continued)

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual life of the security. ASU 2017-08 does not change the accounting for purchased callable debt securities held at a discount as the discount will continue to be accreted to maturity. ASU 2017-08 is effective for public business entities for the interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which ASU 2017-08 is adopted. The Company elected to early adopt this standard as of January 1, 2019, and has evaluated the provisions of ASU 2017-08 and determined there is no impact on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation, Scope of Modification Accounting. This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if any change in the value, vesting conditions or classification of the award occurs. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for all entities for interim and annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018. The update did not have a material impact on the Company's consolidated financial statements.

In February 2018, the FASB issued Accounting Standard Update (ASU) 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings and eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted the updated guidance effective January 1, 2017. This update did not have a significant impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU has been issued as part of a simplification initiative which will expand the scope of Topic 718 to include share-based payment transactions for the acquiring of goods and services from non-employees and expands the scope through the amendments to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for public business entities for interim and annual reporting periods beginning after December 15, 2018. The Company elected to early adopt ASU 2018-07 effective January 1, 2019, and has evaluated the provisions of ASU 2018-07 and determined there will be no significant impact on its consolidated financial statements.

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 2 New Accounting Pronouncements (Continued)

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds, and modifies certain disclosure requirements for estimated fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfer between Level 1 and Level 2 of the estimated fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 estimated fair value measurements. ASU 2018-13 is effective for all entities interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Entities are also allowed to elect for early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. The revised disclosure requirements will not have a material impact on the Company's consolidated financial statements.

NOTE 3 Business Combinations

On January 1, 2016, the Company acquired Alliance Benefit Group North Central States, Inc. (ABG) located in Albert Lea, Minnesota, for cash consideration of $23.4 million. The purchased assets and assumed liabilities were recorded at their respective acquisition date estimated fair values and identified intangible assets were recorded at estimated fair value. The purchase, consisting of approximately 900 retirement plans with more than 75,000 retirement participants, increased the Company's retirement services division by $6.0 billion in retirement and individual asset managed accounts. As part of the transaction, $17.9 million was allocated to an identified customer intangible and $4.8 million to goodwill.

On January 15, 2016 the Company acquired Beacon Bank (Beacon), with locations in Shorewood, Excelsior, Eden Prairie, and Duluth, Minnesota. The purchased assets and assumed

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 3 Business Combinations (Continued)

liabilities were recorded at their respective acquisition date estimated fair values as indicated in the following table:

(dollars in thousands)	As Recorded by Beacon		Fair Value Adjustments			As Recorded by The Company

Assets
Cash and cash equivalents	$	16,821	$	—		$	16,821
Fed funds sold		1,617		—			1,617
Securities		113,687		183			113,870
Loans		206,999		(1,867	)		205,132
Premises and equipment		3,626		(44	)		3,582
Foreclosed assets		851		—			851
Accrued interest receivable		747		—			747
Bank-owned life insurance		5,331		—			5,331
Core deposit intangible		—		3,794			3,794
Other assets		887		16			903

Total assets		350,566		2,082			352,648
Liabilities
Deposits		309,516		228			309,744
Long-term debt		15,000		(2,151	)		12,849
Other liabilities		2,895		41			2,936

Total liabilities		327,411		(1,882	)		325,529

Excess of assets over liabilities	$	23,155	$	3,964			27,119



Cash paid for Beacon							45,989

Total goodwill Recorded						$	18,870

NOTE 4 Restrictions on Cash and Due from Banks

Banking regulators require bank subsidiaries to maintain minimum average reserve balances, either in the form of vault cash or reserve balances held with central banks or other financial institutions. The amount of required reserve balances were approximately $9.1 million, $7.9 million, and $3.9 million at December 31, 2018, 2017, and 2016, respectively, and represent those required to be held at the Federal Reserve Bank. In addition to vault cash, the Company held balances at the Federal Reserve Bank and other financial institutions of $7.2 million, $83.5 million, and $173.7 million at December 31, 2018, 2017, and 2016, respectively, to meet these requirements. The balances are included in cash and due from banks on the Consolidated Balance Sheets.

F-24

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 5 Investment Securities

The amortized cost of investment securities and their estimated fair values, with gross unrealized gains (losses) at December 31, 2018, 2017, and 2016 are as follows:

	2018									2017									2016

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	19,364	$	—	$	(222	)	$	19,142	$	19,086	$	16	$	(158	)	$	18,944	$	20,261	$	1	$	(170	)	$	20,092
Obligations of state and political agencies		67,662		171		(1,446	)		66,387		74,803		437		(765	)		74,475		73,998		225		(2,271	)		71,952
Mortgage backed securities
Residential Agency		129,906		210		(3,118	)		126,998		149,373		643		(1,386	)		148,630		148,560		1,025		(1,553	)		148,032
Commercial		29,050		20		(303	)		28,767		14,432		12		(233	)		14,211		23,279		79		(247	)		23,111
Asset backed securities		398		5		(4	)		399		530		12		(1	)		541		722		18		—			740
Corporate bonds		8,602		—		(121	)		8,481		10,212		19		(11	)		10,220		7,319		—		(52	)		7,267

Total available-for-sale	$	254,982	$	406	$	(5,214	)	$	250,174	$	268,436	$	1,139	$	(2,554	)	$	267,021	$	274,139	$	1,348	$	(4,293	)	$	271,194

The amortized cost and estimated fair value of investment securities at December 31, 2018, 2017, and 2016 by contractual maturity are as follows:

	Securities Available-for-Sale

(dollars in thousands)	Amortized Cost		Fair Value
Balance at December 31, 2018
Due in one year or less	$	5,209	$	4,987
Due after one year through five years		51,538		50,720
Due after five year through ten years		91,058		89,145
Due after 10 years		107,177		105,322

Total	$	254,982	$	250,174



Balance at December 31, 2017
Due in one year or less	$	4,075	$	4,076
Due after one year through five years		48,955		48,598
Due after five year through ten years		94,102		93,772
Due after 10 years		121,304		120,575

Total	$	268,436	$	267,021



Balance at December 31, 2016
Due in one year or less	$	2,735	$	2,755
Due after one year through five years		43,057		42,785
Due after five year through ten years		72,072		71,409
Due after 10 years		156,275		154,245

Total	$	274,139	$	271,194

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 5 Investment Securities (Continued)

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

Investment securities with carrying value of $149.0 million, $166.9 million, and $192.2 million were pledged at December 31, 2018, 2017, and 2016, respectively, to secure public deposits and for other purposes required or permitted by law.

Proceeds from the sale of available-for-sale securities for the years ended December 31, 2018, 2017, and 2016 are displayed in the table below:

	Securities Available-for-Sale

(dollars in thousands)	2018			2017		2016
Proceeds	$	6,488		$	—	$	59,910
Realized Gains		144			—		83
Realized Losses		(15	)		—		(100	)

Information pertaining to investment securities with gross unrealized losses that are not deemed to be other-than-temporarily impaired at December 31, 2018, 2017, and 2016 aggregated by investment category and length of time that individual investment securities have been in a continuous loss position, follows:

	Less than 12 Months					Over 12 Months					Total

At December 31, 2018 (dollars in thousands)	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	(8	)	$	5,288	$	(214	)	$	11,598	$	(222	)	$	16,886
Obligations of state and political agencies		—			389		(1,446	)		55,770		(1,446	)		56,159
Mortgage backed securities
Residential Agency		(44	)		7,352		(3,074	)		112,293		(3,118	)		119,645
Commercial		(39	)		7,844		(264	)		9,741		(303	)		17,585
Asset backed securities		—			2		(4	)		155		(4	)		157
Corporate bonds		—			—		(121	)		8,481		(121	)		8,481

Total available-for-sale	$	(91	)	$	20,875	$	(5,123	)	$	198,038	$	(5,214	)	$	218,913

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 5 Investment Securities (Continued)

	Less than 12 Months					Over 12 Months					Total

At December 31, 2017 (dollars in thousands)	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	—		$	—	$	(158	)	$	12,400	$	(158	)	$	12,400
Obligations of state and political agencies		(298	)		21,860		(467	)		26,643		(765	)		48,503
Mortgage backed securities
Residential Agency		(772	)		86,442		(614	)		33,691		(1,386	)		120,133
Commercial		(26	)		1,776		(207	)		10,070		(233	)		11,846
Asset backed securities		(1	)		184		—			—		(1	)		184
Corporate bonds		(11	)		5,040		—			—		(11	)		5,040

Total available-for-sale	$	(1,108	)	$	115,302	$	(1,446	)	$	82,804	$	(2,554	)	$	198,106

	Less than 12 Months					Over 12 Months					Total

At December 31, 2016 (dollars in thousands)	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	(170	)	$	12,598	$	—		$	—	$	(170	)	$	12,598
Obligations of state and political agencies		(2,256	)		56,038		(15	)		306		(2,271	)		56,344
Mortgage backed securities
Residential Agency		(1,546	)		110,349		(7	)		1,024		(1,553	)		111,373
Commercial		(247	)		14,975		—			—		(247	)		14,975
Asset backed securities		—			54		—			—		—			54
Corporate bonds		(52	)		6,233		—			—		(52	)		6,233

Total available-for-sale	$	(4,271	)	$	200,247	$	(22	)	$	1,330	$	(4,293	)	$	201,577

At December 31, 2018, 2017, and 2016 all of the available-for-sale debt securities in an unrealized loss position were investment grade. During the years ended December 31, 2018, 2017, and 2016 the Company evaluated all of its debt securities for credit impairment and determined there were no credit losses evident and did not record any other-than-temporary impairment. At December 31, 2018, 2017, and 2016 the Company's evaluation of other investment securities with continuous unrealized losses indicated that there were no credit losses evident. Furthermore, the Company does not intend to sell and it is more likely than not that the Company will not be required to sell these debt securities before the anticipated recovery of the amortized cost basis.

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the current estimated fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses

The components of loans in the consolidated balance sheets and the associated allowance by impairment methodology at December 31, 2018, 2017, and 2016 are displayed in the following table:

	Recorded Investment						Allowance Allocation

(dollars in thousands)	Individually Evaluated		Collectively Evaluated		Total		Individually Evaluated		Collectively Evaluated		Unallocated		Total
December 31, 2018
Commercial
Commercial and industrial	$	3,945	$	506,761	$	510,706	$	2,059	$	10,068	$	—	$	12,127
Real estate construction		—		18,965		18,965		—		250		—		250
Commercial real estate		1,684		438,279		439,963		455		5,824		—		6,279

Total commercial		5,629		964,005		969,634		2,514		16,142		—		18,656
Consumer
Residential real estate first mortgage		352		447,791		448,143		—		1,156		—		1,156
Residential real estate junior lien		559		188,296		188,855		4		801		—		805
Other revolving and installment		20		95,198		95,218		20		360		—		380

Total consumer		931		731,285		732,216		24		2,317		—		2,341

Total	$	6,560	$	1,695,290	$	1,701,850	$	2,538	$	18,459	$	1,177	$	22,174



December 31, 2017
Commercial
Commercial and industrial	$	3,387	$	477,208	$	480,595	$	833	$	6,756	$	—	$	7,589
Real estate construction		61		22,287		22,348		—		343		—		343
Commercial real estate		—		444,857		444,857		—		4,909		—		4,909

Total commercial		3,448		944,352		947,800		833		12,008		—		12,841
Consumer
Residential real estate first mortgage		508		348,456		348,964		—		1,411		—		1,411
Residential real estate junior lien		1,862		193,241		195,103		41		861		—		902
Other revolving and installment		84		82,523		82,607		68		431		—		499

Total consumer		2,454		624,220		626,674		109		2,703		—		2,812

Total	$	5,902	$	1,568,572	$	1,574,474	$	942	$	14,711	$	911	$	16,564



December 31, 2016
Commercial
Commercial and industrial	$	3,366	$	469,083	$	472,449	$	296	$	6,406	$	—	$	6,702
Real estate construction		530		34,644		35,174		—		480		—		480
Commercial real estate		146		391,387		391,533		—		4,484		—		4,484

Total commercial		4,042		895,114		899,156		296		11,370		—		11,666
Consumer
Residential real estate first mortgage		1,087		201,130		202,217		—		1,126		—		1,126
Residential real estate junior lien		2,627		176,168		178,795		46		861		—		907
Other revolving and installment		67		86,717		86,784		42		358		—		400

Total consumer		3,781		464,015		467,796		88		2,345		—		2,433

Total	$	7,823	$	1,359,129	$	1,366,952	$	384	$	13,715	$	1,516	$	15,615

F-28

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

Changes in the allowance for years ended December 31, 2018, 2017, and 2016 are summarized in the following tables:

(dollars in thousands)	Beginning Balance		Provision for credit losses			Loan charge-offs			Loan recoveries		Ending Balance

Balance at December 31, 2018
Commercial
Commercial and industrial	$	7,589	$	6,911		$	(3,123	)	$	750	$	12,127
Real estate construction		343		(35	)		(60	)		2		250
Commercial real estate		4,909		1,889			(600	)		81		6,279

Total commercial		12,841		8,765			(3,783	)		833		18,656
Consumer
Residential real estate first mortgage		1,411		(226	)		(29	)		—		1,156
Residential real estate junior lien		902		(171	)		(133	)		207		805
Other revolving and installment		499		(24	)		(308	)		213		380

Total consumer		2,812		(421	)		(470	)		420		2,341

Unallocated		911		266			—			—		1,177

Total	$	16,564	$	8,610		$	(4,253	)	$	1,253	$	22,174



Balance at December 31, 2017
Commercial
Commercial and industrial	$	6,702	$	3,244		$	(3,287	)	$	930	$	7,589
Real estate construction		480		(416	)		—			279		343
Commercial real estate		4,484		352			—			73		4,909

Total commercial		11,666		3,180			(3,287	)		1,282		12,841
Consumer
Residential real estate first mortgage		1,126		182			—			103		1,411
Residential real estate junior lien		907		247			(1,124	)		872		902
Other revolving and installment		400		276			(429	)		252		499

Total consumer		2,433		705			(1,553	)		1,227		2,812

Unallocated		1,516		(605	)		—			—		911

Total	$	15,615	$	3,280		$	(4,840	)	$	2,509	$	16,564



Balance at December 31, 2016
Commercial
Commercial and industrial	$	6,740	$	507		$	(1,629	)	$	1,084	$	6,702
Real estate construction		244		1,304			(1,655	)		587		480
Commercial real estate		4,070		269			(43	)		188		4,484

Total commercial		11,054		2,080			(3,327	)		1,859		11,666
Consumer
Residential real estate first mortgage		1,243		(328	)		—			211		1,126
Residential real estate junior lien		1,189		453			(829	)		94		907
Other revolving and installment		525		16			(280	)		139		400

Total consumer		2,957		141			(1,109	)		444		2,433

Unallocated		677		839			—			—		1,516

Total	$	14,688	$	3,060		$	(4,436	)	$	2,303	$	15,615

F-29

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

The Company assigns a risk rating to all loans except pools of homogeneous loans and periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company's regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan. The Company's ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and Doubtful risk ratings. The risk ratings are defined as follows:

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

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

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well-defined weaknesses include a borrower's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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

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

The tables below provide a breakdown of outstanding commercial loans by risk category at December 31, 2018, 2017, and 2016. All criticized loans are subject to high levels of monitoring

F-30

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

by management. The Criticized category includes Special Mention, Substandard, and Doubtful categories which are defined by banking regulatory agencies.

			Criticized

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2018
Commercial
Commercial and industrial	$	459,565	$	12,055	$	37,523	$	1,563	$	510,706
Real estate construction		17,910		—		1,055		—		18,965
Commercial real estate		407,178		6,304		26,481		—		439,963

Total commercial		884,653		18,359		65,059		1,563		969,634
Consumer
Residential real estate first mortgage (1)		448,124		—		19		—		448,143
Residential real estate junior lien (1)		186,370		—		2,485		—		188,855
Other revolving and installment (1)		95,218		—		—		—		95,218

Total consumer		729,712		—		2,504		—		732,216

Total Loans	$	1,614,365	$	18,359	$	67,563	$	1,563	$	1,701,850



December 31, 2017
Commercial
Commercial and industrial	$	455,941	$	12,722	$	11,000	$	932	$	480,595
Real estate construction		18,880		2,689		779		—		22,348
Commercial real estate		414,622		10,474		19,761		—		444,857

Total commercial		889,443		25,885		31,540		932		947,800
Consumer
Residential real estate first mortgage (1)		348,718		178		68		—		348,964
Residential real estate junior lien (1)		192,459		242		2,402		—		195,103
Other revolving and installment (1)		82,584		—		23		—		82,607

Total consumer		623,761		420		2,493		—		626,674

Total Loans	$	1,513,204	$	26,305	$	34,033	$	932	$	1,574,474



December 31, 2016
Commercial
Commercial and industrial	$	454,730	$	7,886	$	9,833	$	—	$	472,449
Real estate construction		32,390		—		2,784		—		35,174
Commercial real estate		361,655		7,243		22,635		—		391,533

Total commercial		848,775		15,129		35,252		—		899,156
Consumer
Residential real estate first mortgage (1)		200,707		—		1,510		—		202,217
Residential real estate junior lien (1)		175,567		120		3,108		—		178,795
Other revolving and installment (1)		86,751		—		33		—		86,784

Total consumer		463,025		120		4,651		—		467,796

Total Loans	$	1,311,800	$	15,249	$	39,903	$	—	$	1,366,952

(1): The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of consumer loans

F-31

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

The following tables reflect the past due aging analysis of the loan portfolio at December 31, 2018, 2017, and 2016:

	Accruing

(dollars in thousands)	Current		30 - 89 Days Past Due		90 Days or More Past Due		Nonperforming		Total Loans
December 31, 2018
Commercial
Commercial and industrial	$	504,313	$	2,815	$	—	$	3,578	$	510,706
Real estate construction		18,965		—		—		—		18,965
Commercial real estate		438,446		—		—		1,517		439,963

Total commercial		961,724		2,815		—		5,095		969,634
Consumer
Residential real estate first mortgage		444,470		2,411		—		1,262		448,143
Residential real estate junior lien		187,502		769		—		584		188,855
Other revolving and installment		94,615		581		—		22		95,218

Total consumer		726,587		3,761		—		1,868		732,216

Total loans	$	1,688,311	$	6,576	$	—	$	6,963	$	1,701,850



December 31, 2017
Commercial
Commercial and industrial	$	476,210	$	1,192	$	—	$	3,193	$	480,595
Real estate construction		22,287		—		—		61		22,348
Commercial real estate		440,412		4,445		—		—		444,857

Total commercial		938,909		5,637		—		3,254		947,800
Consumer
Residential real estate first mortgage		347,941		361		—		662		348,964
Residential real estate junior lien		191,856		1,374		—		1,873		195,103
Other revolving and installment		82,002		521		—		84		82,607

Total consumer		621,799		2,256		—		2,619		626,674

Total loans	$	1,560,708	$	7,893	$	—	$	5,873	$	1,574,474



December 31, 2016
Commercial
Commercial and industrial	$	468,039	$	1,544	$	—	$	2,866	$	472,449
Real estate construction		34,423		—		—		751		35,174
Commercial real estate		391,278		106		—		149		391,533

Total commercial		893,740		1,650		—		3,766		899,156
Consumer
Residential real estate first mortgage		199,737		1,345		48		1,087		202,217
Residential real estate junior lien		174,741		1,464		—		2,590		178,795
Other revolving and installment		86,179		432		—		173		86,784

Total consumer		460,657		3,241		48		3,850		467,796

Total loans	$	1,354,397	$	4,891	$	48	$	7,616	$	1,366,952

F-32

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

Interest income foregone on nonaccrual loans approximated $0.3 million, $0.2 million, and $0.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.

The table below presents key information for impaired loans and interest income for the years ended December 31, 2018, 2017, and 2016, respectively. No interest income on impaired loans was recognized using the cash basis of accounting during the years ended December 31, 2018, 2017, and 2016.

	December 31, 2018										December 31, 2017										December 31, 2016

(dollars in thousands)	Recorded investment		Unpaid principal		Related allowance		Average recorded investment		Interest income		Recorded investment		Unpaid principal		Related allowance		Average recorded investment		Interest income		Recorded investment		Unpaid principal		Related allowance		Average recorded investment		Interest income
Loans with no related allowance for loan losses
Commercial
Commercial and industrial	$	1,285	$	1,422	$	—	$	1,595	$	35	$	1,152	$	1,152	$	—	$	1,676	$	89	$	2,175	$	2,175	$	—	$	2,757	$	127
Real estate construction		—		—		—		—		—		61		62		—		65		3		530		751		—		752		30
Commercial real estate		185		218		—		223		9		—		—		—		—		—		146		149		—		160		9
Consumer
Residential real estate first mortgage		352		504		—		533		—		508		591		—		620		37		1,087		1,087		—		1,102		50
Residential real estate junior lien		555		697		—		718		6		1,657		1,667		—		1,963		123		2,627		2,646		—		2,905		176
Other revolving and installment		1		2		—		3		—		8		8		—		10		—		1		3		—		3		—

Total	$	2,378	$	2,843	$	—	$	3,072	$	50	$	3,386	$	3,480	$	—	$	4,334	$	252	$	6,566	$	6,811	$	—	$	7,679	$	392



Loans with a related allowance for loan losses
Commercial
Commercial and industrial	$	2,660	$	2,752	$	2,059	$	3,163	$	—	$	2,043	$	2,043	$	796	$	2,605	$	148	$	1,191	$	1,191	$	296	$	1,292	$	68
Commercial real estate		1,499		1,517		455		1,558		—		192		228		37		234		9		—		—		—		—		—
Consumer
Residential real estate junior lien		4		4		4		4		—		205		302		41		317		18		—		74		46		78		4
Other revolving and installment		19		20		20		28		—		76		76		68		79		6		66		72		42		78		6

Total	$	4,182	$	4,293	$	2,538	$	4,753	$	—	$	2,516	$	2,649	$	942	$	3,235	$	181	$	1,257	$	1,337	$	384	$	1,448	$	78

Loans with a carrying value of $1.1 billion, $1.0 billion, and $717.9 million were pledged at December 31, 2018, 2017, and 2016, respectively, to secure public deposits, and for other purposes required or permitted by law.

Troubled Debt Restructurings

F-33

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 6 Loans and Allowance for Loan Losses (Continued)

reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

During 2018, there was one loan modified as a troubled debt restructuring as a result of adjusting the interest rate below current market levels. The balance at the time of restructuring was $1.0 million. For year ending December 31, 2018 the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there were no specific reserves for loans losses allocated to loans modified as troubled debt restructurings. During 2017, there were no loans that were modified as a troubled debt restructuring. During 2016, there was one loan that was modified as a troubled debt restructuring as a result of extending the amortization period. The loan is currently performing according to the modified terms and there were no specific reserves for loan losses allocated to loans modified as troubled debt restructurings. The loan amount is not significant to the consolidated financial statements.

The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

NOTE 7 Land, Premises and Equipment, Net

Components of land, premises and equipment at December 31, 2018, 2017, and 2016 are as follows:

(dollars in thousands)	2018			2017			2016

Land	$	4,663		$	4,663		$	4,844
Buildings and improvements		25,902			25,888			28,669
Assets under capital lease		2,657			2,657			2,657
Furniture, fixtures, and equipment		29,767			32,397			30,765

		62,989			65,605			66,935
Less accumulated depreciation		(41,246	)		(44,376	)		(42,673	)

Total	$	21,743		$	21,229		$	24,262

Depreciation expense for years ended December 31, 2018, 2017, and 2016 amounted to $3.2 million, $3.2 million, and $3.3 million, respectively.

Total rent expense for the years ended December 31, 2018, 2017, and 2016 amounted to $3.6 million, $3.6 million, and $3.7 million, respectively.

F-34

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 7 Land, Premises and Equipment, Net (Continued)

Pursuant to the terms of the noncancelable lease agreements in effect at December 31, 2018, pertaining to banking premises, future minimum rent commitments under various operating leases are as follows:

(dollars in thousands)	Amount

2019	$	3,609
2020		3,127
2021		2,333
2022		1,985
2023		1,421
Thereafter		1,158

Total	$	13,633

The annual minimum future rents due to the Company on non-cancelable operating leases at December 31, 2018 are as follows:

(dollars in thousands)	Amount

2019	$	267
2020		204
2021		196
2022		181
2023		106

Total	$	954

NOTE 8 Goodwill and Other Intangible Assets

The following is a summary of the Company's intangible assets.

At December 31, 2018 (dollars in thousands)	Estimated Life	Amortization Method	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Goodwill			$	27,329	$	—		$	27,329
Identifiable customer intangibles	9 years	Straight Line		55,744		(34,972	)		20,772
Core deposit intangibles	5 years	Straight Line		7,216		(5,515	)		1,701

Total			$	90,289	$	(40,487	)	$	49,802

F-35

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 8 Goodwill and Other Intangible Assets (Continued)

At December 31, 2017 (dollars in thousands)	Estimated Life	Amortization Method	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Goodwill			$	27,329	$	—		$	27,329
Identifiable customer intangibles	9 years	Straight Line		55,744		(31,333	)		24,411
Core deposit intangibles	5 years	Straight Line		7,216		(4,516	)		2,700

Total			$	90,289	$	(35,849	)	$	54,440

At December 31, 2016 (dollars in thousands)	Estimated Life	Amortization Method	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Goodwill			$	27,329	$	—		$	27,329
Identifiable customer intangibles	9 years	Straight Line		55,744		(26,713	)		29,031
Core deposit intangibles	5 years	Straight Line		7,216		(3,518	)		3,698

Total			$	90,289	$	(30,231	)	$	60,058

Aggregate amortization expense for the years ended December 31, 2018, 2017, and 2016 was $4.6 million, $5.6 million, and $7.0 million, respectively.

Estimated aggregate amortization expenses for each of the next five years and thereafter is as follows:

(dollars in thousands)	Amount

2019	$	4,081
2020		3,961
2021		3,266
2022		3,202
2023		3,202
Thereafter		4,761

Total	$	22,473

NOTE 9 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $591.6 million, $591.8 million, and $625.4 million at December 31, 2018, 2017, and 2016, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

F-36

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 9 Loan Servicing (Continued)

The balance of servicing rights included at December 31, 2018, 2017, and 2016 is $4.6 million, $4.7 million, and $4.8 million, respectively. Servicing rights of $0.6 million, $0.7 million and $1.3 million were capitalized in 2018, 2017, and 2016, respectively. Amortization of servicing rights was $0.7 million, $0.8 million, and $0.8 million in 2018, 2017, and 2016, respectively. Changes in estimated fair value of servicing rights arising from adjustments to valuation allowances are recognized in other noninterest expense were $(72) thousand, $14 thousand, and $(139) thousand in 2018, 2017, and 2016, respectively.

The amount of loan servicing obligations included in other liabilities is $92 thousand, $128 thousand, and $134 thousand as of December 31, 2018, 2017, and 2016, respectively.

The estimated fair value of loan servicing rights and obligations were determined using discount rates averaging 10.50% and prepayment speeds averaging 7.79%, 9.30%, and 8.44% as of December 31, 2018, 2017, and 2016, respectively.

NOTE 10 Other Assets

Other assets on the balance sheet consist of the following balances at December 31, 2018, 2017, and 2016:

(dollars in thousands)	2018		2017		2016

Federal Reserve Bank stock	$	2,675	$	2,675	$	2,675
Foreclosed assets		204		483		1,917
Prepaid expenses		5,163		6,448		2,863
Investments in partnerships		75		390		458
Trust fees receivable		11,724		15,883		18,575
Income tax refund receivable		2,379		3,902		—
Federal Home Loan Bank stock		6,875		4,281		3,245
Other assets		3,592		3,455		4,154

Total	$	32,687	$	37,480	$	33,691

Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost which is the expected recoverability of the par value. The investments are required to be maintained in order to be members of the Federal Reserve Bank and to obtain borrowings from the Federal Home Loan Bank.

F-37

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 11 Deposits

The components of deposits in the consolidated balance sheets at December 31, 2018, 2017, and 2016 are as follows:

(dollars in thousands)	2018		2017		2016

Noninterest-bearing transaction	$	550,640	$	619,333	$	554,490
Interest-bearing transaction
Savings accounts		53,971		50,794		48,371
Interest-bearing checking accounts		401,078		410,924		308,945
Money market savings		598,820		549,650		632,870
Time deposits		170,587		204,261		240,533

Total interest-bearing transactions		1,224,456		1,215,629		1,230,719

Total deposits	$	1,775,096	$	1,834,962	$	1,785,209

Certificates of deposit in excess of $250,000 totaled $27.5 million, $28.2 million, and $30.2 million at December 31, 2018, 2017, and 2016, respectively.

At December 31, 2018, the scheduled maturities of certificates of deposit are as follows:

(dollars in thousands)	Amount

2019	$	134,836
2020		11,599
2021		10,480
2022		4,145
2023		4,633
Thereafter		4,894

Total	$	170,587

F-38

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 12 Short-Term Borrowings

Short-term borrowings at December 31, 2018, 2017, and 2016 consisted of the following:

At December 31, (dollars in thousands)	2018			2017			2016

Securities sold under agreements to repurchase
Outstanding at period-end	$	—		$	—		$	729
Average daily balance		—			28			3,141
Maximum month-end balance		—			—			8,174
Weighted-average rate
During period		0.00	%		0.54	%		0.34	%
End of period		0.00	%		0.00	%		0.54	%
Fed funds purchased
Outstanding at period-end	$	93,460		$	—		$	—
Average daily balance		86,768			33,348			1,918
Maximum month-end balance		112,260			131,630			5,000
Weighted-average rate
During period		2.18	%		1.33	%		0.53	%
End of period		2.63	%		0.00	%		0.00	%
FHLB short-term advances
Outstanding at period-end	$	—		$	30,000		$	—
Average daily balance		82			39,069			—
Maximum month-end balance		—			120,000			—
Weighted-average rate
During period		1.42	%		1.28	%		0.00	%
End of period		0.00	%		1.42	%		0.00	%

F-39

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 13 Long-Term Debt

Long-term debt at December 31, 2018, 2017, and 2016 consisted of the following:

(dollars in thousands)	Face Value		Carrying Value		Interest Rate			Maturity Date	Call Date

2018
Subordinated notes payable	$	50,000	$	49,562	Fixed	5.75	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,000		3,357	Three-month LIBOR + 3.10%	5.92	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		5,035	Three-month LIBOR + 1.80%	4.59	%	9/15/2036	9/15/2011
Obligations under capital lease		2,700		870	Fixed	7.81	%	10/31/2022

Total	$	62,700	$	58,824

	Face Value		Carrying Value		Interest Rate			Maturity Date	Call Date

2017
Subordinated notes payable	$	50,000	$	49,500	Fixed	5.75	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,000		3,311	Three-month LIBOR + 3.10%	5.92	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		4,967	Three-month LIBOR + 1.80%	4.59	%	9/15/2036	9/15/2011
Obligations under capital lease		2,700		1,041	Fixed	7.81	%	10/31/2022

Total	$	62,700	$	58,819

	Face Value		Carrying Value		Interest Rate			Maturity Date	Call Date

2016
Subordinated notes payable	$	50,000	$	49,437	Fixed	5.75	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,000		3,267	Three-month LIBOR + 3.10%	5.92	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		4,899	Three-month LIBOR + 1.80%	4.59	%	9/15/2036	9/15/2011
Obligations under capital lease		2,700		1,210	Fixed	7.81	%	10/31/2022

Total	$	62,700	$	58,813

At December 31, 2018, 2017, and 2016 respectively, the Company had a $150 thousand, $150 thousand, and $10.7 million line of credit with the Federal Home Loan Bank. Bank of

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Notes to Consolidated Financial Statement (Continued)

NOTE 13 Long-Term Debt (Continued)

North Dakota letters of credit are collateralized by loans pledged to the Bank of North Dakota in the amount of $260.6 million, $296.4 million, and $197.9 million at December 31, 2018, 2017, and 2016, respectively. Outstanding letters of credit at December 31, 2018, 2017, and 2016 respectively, were $-0-, $10 million and $-0-.

The following schedule represents the future minimum lease payments under the capital lease together with the present value of the net minimum lease payments at December 31, 2018:

(dollars in thousands)	Amount

2019	$	251
2020		251
2021		251
2022		231
2023		7

Total minimum lease payments		991
Less amount representing interest		(121	)

Net minimum lease payments	$	870

NOTE 14 True-Up Liability

In connection with the Prosperan Bank acquisition in 2009, the Bank agreed to pay the FDIC, should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the loss sharing agreements (the "true-up liability"). This contingent consideration was classified as a liability within other liabilities on the Consolidated Balance Sheet and was re-measured at each reporting date until the contingency was resolved. At December 31, 2017 and 2016 respectively, the value of the true-up liability was $3.2 million and $2.9 million. Changes in the value of the liability were reported in other noninterest expense.

On October 24, 2018, the Company entered into a termination agreement with the FDIC that terminated both the Single Family Shared-Loss Agreement as well as the Commercial and Other Assets Shared-Loss Agreement. The Company agreed to pay the FDIC $3.0 million. All rights and obligations of the parties under these loss share agreements, including the claw-back provisions, terminated effective October 24, 2018. As a result, all recoveries, gains, charge-offs, losses and expenses related to assets previously covered under loss share agreements are recognized entirely by the Company from the date of termination.

NOTE 15 Financial Instruments with Off-Balance Sheet Risk

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Notes to Consolidated Financial Statement (Continued)

NOTE 15 Financial Instruments with Off-Balance Sheet Risk (Continued)

commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

At December 31, 2018, 2017 and 2016, the following financial instruments whose contract amount represents credit risk were approximately as follows:

(dollars in thousands)	2018		2017		2016

Commitments to extend credit	$	529,890	$	509,071	$	525,416
Standby letters of credit		8,852		9,255		8,620

Total	$	538,742	$	518,326	$	534,036

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

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

NOTE 16 Legal Contingencies

The Company may be subject to claims and lawsuits which may arise primarily in the ordinary course of business. It is the opinion of management, that if such claims are made, the disposition or ultimate resolution of the claims and lawsuits will not have a material adverse effect on the financial position of the Company.

NOTE 17 Stock Based Compensation Plan

Effective May 2009, the Company adopted the Alerus Financial Corporation 2009 Stock Award Plan (the 2009 Plan) providing for the grant of up to 1.4 million shares of its common stock to employees, officers, and directors pursuant to awards of non-qualified options, restricted stock, or other stock-based employee benefits.

The 2009 Plan provides for the granting of restricted stock at no cost to certain key employees. Shares of stock are issued to each employee immediately upon the grant of the award and the employee becomes entitled to all rights of a stockholder, unless such shares are forfeited under the plan.

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Notes to Consolidated Financial Statement (Continued)

NOTE 17 Stock Based Compensation Plan (Continued)

The restricted stock is subject to full or partial forfeiture, as defined, if the employee terminates employment with the Company within prescribed time periods (generally five to ten years) or violates any restrictions under their agreement. Restricted stock awards generally vest over a five to ten year period, but vesting may be accelerated or immediate due to death or disability of the employee or the occurrence of certain events relating primarily to significant changes in directors or ownership of the Company. Restricted stock awards are considered to represent an element of employee compensation and are charged to expense over the period earned. Compensation expense relating to stock awards under this plan was $1.2 million in 2018, $0.7 million in 2017, and $1.1 million in 2016.

On February 22, 2018, the Company granted 42,038 restricted stock units to officers. The restricted stock units vest, in the form of Company common stock, after three years based on the target performance metric associated with the award. The final award will be adjusted to reflect actual performance versus target performance, using a linear scale, with a threshold (minimum) of 50% award for 80% performance, and a maximum of 150% award for 120% performance. In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the 20 day weighted average trade price of the Company's common stock on the date of grant, which was $22.80 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company estimated that the most likely outcome is the achievement of the target level. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the year ended December 31, 2018 was $0.4 million.

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Notes to Consolidated Financial Statement (Continued)

NOTE 17 Stock Based Compensation Plan (Continued)

Amounts granted under the 2009 plan have been retroactively adjusted for all stock splits effected in the form of dividends. Activity in the stock plans for the years ended December 31, 2018, 2017, and 2016 is as follows:

	Number of Shares

	Available for Future Grant			Restricted Stock Awards
Balance—December 31, 2015		678,682			671,318
Restricted units awarded		(2,558	)		2,558
Restricted shares awarded		(52,050	)		52,050
Shares withheld for taxes		5,557			(5,557	)
Awards forfeited		31,283			(31,283	)

Balance—December 31, 2016		660,914			689,086
Restricted units awarded		(5,287	)		5,287
Restricted shares awarded		(51,576	)		51,576
Shares withheld for taxes		13,273			(13,273	)
Awards forfeited		55,134			(55,134	)

Balance—December 31, 2017		672,458			677,542
Restricted units awarded		(42,038	)		42,038
Restricted shares awarded		(45,764	)		45,764
Shares withheld for taxes		9,703			(9,703	)
Awards forfeited		4,696			(4,696	)

Balance—December 31, 2018		599,055			750,945

The number of unvested shares outstanding was 295,972, 335,092, and 440,511 respectively, at December 31, 2018, 2017, and 2016. The number of unvested units outstanding was 41,042 at December 31, 2018. There were no unvested units outstanding at December 31, 2017 and 2016.

Effective May 2009, the Company also adopted the Alerus Financial Corporation Stock Grant Plan for Non-Employee Directors (the Retainer Plan) providing for the issuance of up to 180,000 shares of its common stock to non-employee directors. The purpose of the Retainer Plan is to provide for payment for the annual retainer to directors in shares of Company common stock.

The number of shares to be issued is based on the retainer divided by the fair market value per share as of the grant date, as defined in Note 1. Upon the issuance of shares under this plan, the then current value of the shares is charged to expense. Compensation expense relating to stock awards under this plan was $0.3 million in 2018, $0.3 million in 2017, and $0.3 million in 2016.

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Notes to Consolidated Financial Statement (Continued)

NOTE 17 Stock Based Compensation Plan (Continued)

Activity in the Retainer Plan for the years ended December 31, 2018, 2017, and 2016 is as follows:

	Number of Shares

(dollars in thousands)	Available for Future Grant			Retainer Stock Awards
Balance—December 31, 2015		68,471			111,529
Retainer shares awarded		(17,829	)		17,829

Balance—December 31, 2016		50,642			129,358
Retainer shares awarded		(14,800	)		14,800

Balance—December 31, 2017		35,842			144,158
Retainer shares awarded		(10,017	)		10,017

Balance—December 31, 2018		25,825			154,175

NOTE 18 Employee Benefits

The Company maintains two employee retirement plans including an employee stock ownership plan (ESOP) and a defined contribution salary reduction plan (401k). The plans cover substantially all full-time employees upon satisfying prescribed eligibility requirements for age and length of service. Contributions to the ESOP are determined annually by the Board of Directors at their discretion and allocated to participants based on a percentage of annual compensation. Under the 401k, the Company contributes 100% of amounts deferred by employees up to 3% of eligible compensation and 50% of amounts deferred by employees between 3% and 6% of eligible compensation. Under the ESOP, corporate stock is transferred to the plan at market value on the date of transfer. Market value is established by a third party valuation. The Company treats these as outstanding shares, accordingly, dividends on these shares are charged to retained earnings. Retirement plan contributions are reflected under employee benefits in the income statement and for years ending December 31, 2018, 2017, and 2016 are as follows:

(dollars in thousands)	2018		2017		2016

Salary reduction plan	$	2,402	$	2,317	$	2,290
ESOP		1,665		1,684		1,444

Total	$	4,067	$	4,001	$	3,734



Total ESOP shares outstanding		1,334,372		1,393,395		1,337,999

Under Federal income tax regulations, the employer stock that is held by the plan and its participants is not readily tradable on an established market, or is subject to trading limitations and includes a put option. The put option is a right to demand that the Company buys shares of its stock distributed to participants for which there is no market. The put price is representative of the fair market value of the stock. Market value is established by a third party valuation. The

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Notes to Consolidated Financial Statement (Continued)

NOTE 18 Employee Benefits (Continued)

Company's ESOP repurchase obligation was $34 million, $31 million, and $29 million respectively, at December 31, 2018, 2017, and 2016.

NOTE 19 Noninterest Income

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in noninterest income. The following table presents the Company's noninterest income for the years ended December 31, 2018, 2017, and 2016.

(dollars in thousands)	2018		2017			2016

Noninterest Income
Retirement and benefit services	$	63,316	$	62,390		$	57,804
Wealth management		14,900		13,953			12,640
Mortgage banking (1)		17,630		19,748			26,528
Service charges on deposit accounts		1,808		1,854			1,916
Net gains (losses) on investment securities (1)		85		(13	)		(24	)
Other
Interchange fees		2,005		1,997			2,025
Bank owned life insurance income (1)		803		820			991
Misc transactional fees		1,106		1,070			1,071
Other noninterest income		1,096		1,226			2,138

Total	$	102,749	$	103,045		$	105,089

(1): Not within the scope of ASC 606

NOTE 20 Income Taxes

The components of income tax expense (benefit) for the years ended December 31, 2018, 2017, and 2016 are as follows:

(dollars in thousands)	2018			2017		2016

Federal
Current	$	5,801		$	6,646	$	9,093
Deferred		(49	)		2,975		(2,659	)

Federal income tax		5,752			9,621		6,434
State
Current		1,265			949		1,089
Deferred		155			734		(382	)

State income tax		1,420			1,683		707

Deferred tax impairment and statutory rate change		—			6,210		—

Total income tax expense	$	7,172		$	17,514	$	7,141

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Notes to Consolidated Financial Statement (Continued)

NOTE 20 Income Taxes (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018, 2017, and 2016 are as follows:

(dollars in thousands)	2018		2017			2016

Deferred Tax Assets
Allowance for loan losses	$	5,566	$	4,157		$	5,989
Employee compensation and benefit accruals		2,167		2,017			3,855
Expense accruals		740		1,701			2,356
Identifiable intangible amortization		3,351		3,392			4,711
Deferred loan fees		462		332			2,924
Net operating loss carry forwards		266		436			480
Nonaccrual loan interest		143		193			381
Unrealized gain on available-for-sale investment securities		1,207		379			1,114
Other		533		615			2,402

Total		14,435		13,222			24,212
Valuation allowance		—		(150	)		(167	)

Total deferred tax assets from temporary differences		14,435		13,072			24,045

Deferred Tax Liabilities
Accumulated depreciation		1,079		499			1,044
Goodwill and intangible amortization		1,443		1,120			1,110
Servicing assets		1,137		1,144			1,554
Prepaid expenses		644		1,051			806
Other		47		45			10

Total deferred tax liabilities from temporary differences		4,350		3,859			4,524

Net Deferred Tax Assets	$	10,085	$	9,213		$	19,521

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Notes to Consolidated Financial Statement (Continued)

NOTE 20 Income Taxes (Continued)

The reconciliation between applicable income taxes and the amount computed at the applicable statutory Federal tax rate for years ending December 31, 2018, 2017, and 2016 is as follows:

	2018						2017						2016

(dollars in thousands)	Amount			Percent of Pretax Income			Amount			Percent of Pretax Income			Amount			Percent of Pretax Income
Taxes at statutory federal income tax rate	$	6,938			21.0	%	$	11,380			35.0	%	$	7,412			35.0	%
Tax effect of:
Tax exempt income		(365	)		(1.1	)		(562	)		(1.7	)		(736	)		(3.4	)
State income taxes, net of federal benefits		1,399			4.2			1,414			4.3			(602	)		(2.8	)
Change in federal statutory tax rate		—			—			4,818			14.1			—			—
Deferred tax asset impairment		—			—			1,392			4.2			—			—
Nondeductible items and other		(800	)		(2.4	)		(928	)		(2.8	)		1,067			5.0

Applicable income taxes	$	7,172			21.7	%	$	17,514			53.1	%	$	7,141			33.8	%

On December 22, 2017 the U.S. Government enacted "To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," also known as the Tax Cuts and Jobs Act. This resulted in the corporate income tax rate being reduced from the 35% level to 21%. The Company adjusted the carrying value of the deferred tax assets using the new tax rate, which resulted in a charge to earnings in the fourth quarter of 2017. Impairment expense of $4.8 million was recorded. The Company was unable to recognize certain tax benefits related to loans acquired in 2014 and recorded an impairment expense of $1.4 million in 2017.

It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.

NOTE 21 Segment Reporting

The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company's financial statements, and management's regular review of the operating results of those services. The Company operates through four operating segments: Banking, Retirement and Benefit Services, Wealth Management, and Mortgage.

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Notes to Consolidated Financial Statement (Continued)

NOTE 21 Segment Reporting (Continued)

the table below. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes.

The following table presents key metrics related to our segments as of the dates presented:

Segment Reporting

Year ended December 31, (dollars in thousands)	Banking		Retirement and Benefit Services		Wealth Management		Mortgage		Corporate Administration			Consolidated

2018
Net interest income	$	77,919	$	—	$	62	$	834	$	(3,591	)	$	75,224
Provision for loan losses		8,599		—		—		11		—			8,610
Noninterest income		6,921		63,316		14,900		17,630		(18	)		102,749
Noninterest expense		42,605		36,414		6,824		17,199		33,283			136,325

Net income before taxes	$	33,636	$	26,902	$	8,138	$	1,254	$	(36,892	)	$	33,038



Total assets	$	2,120,249	$	41,492	$	3,235	$	14,600	$	(506	)	$	2,179,070

2017
Net interest income	$	70,377	$	—	$	57	$	740	$	(3,504	)	$	67,670
Provision for loan losses		3,280		—		—		—		—			3,280
Noninterest income		7,180		62,390		13,953		19,748		(226	)		103,045
Noninterest expense		35,996		41,977		7,640		17,448		31,859			134,920

Net income before taxes	$	38,281	$	20,413	$	6,370	$	3,040	$	(35,589	)	$	32,515



Total assets	$	2,078,013	$	38,118	$	2,718	$	18,669	$	(1,437	)	$	2,136,081

2016
Net interest income	$	64,990	$	—	$	54	$	1,302	$	(3,406	)	$	62,940
Provision for loan losses		3,060		—		—		—		—			3,060
Noninterest income		6,895		57,804		12,640		26,528		1,222			105,089
Noninterest expense		34,314		44,479		8,498		22,275		34,226			143,792

Net income before taxes	$	34,511	$	13,325	$	4,196	$	5,555	$	(36,410	)	$	21,177



Total assets	$	1,969,232	$	47,467	$	3,319	$	31,671	$	(1,644	)	$	2,050,045

Banking

The Banking division offers a complete line of loan, deposit, cash management, and treasury services through seventeen offices in North Dakota, Minnesota, and Arizona. These products and services are supported through web and mobile based applications. The majority of the Company's assets and liabilities are in the Banking segments' balance sheet.

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Notes to Consolidated Financial Statement (Continued)

NOTE 21 Segment Reporting (Continued)

Retirement and Benefit Services

Retirement and Benefit Services provides the following services nationally: recordkeeping and administration services to qualified retirement plans; ESOP trustee, recordkeeping, and administration; investment fiduciary services to retirement plans; health savings account, flex spending account, and Cobra recordkeeping and administration services to employers; payroll and HIRS services for employers. The division services approximately 6,738 retirement plans and more than 355,000 plan participants. In addition, the division employs nearly 273 professionals, and operates within the banking markets as well as in Albert Lea, Minnesota, Lansing, Michigan, Manchester, New Hampshire and 13 satellite offices.

Wealth Management

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

Mortgage

The mortgage division offers first and second mortgage loans through a centralized mortgage unit in Minneapolis, Minnesota as well as through the Banking office locations.

NOTE 22 Related Party Transactions

In the ordinary course of business, the Bank has granted loans to executive officers, directors, and their affiliates (related parties). These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with outsiders and are not considered to involve more than the normal risk of collectability. Loans outstanding both direct and indirect to related parties totaled $12.6 million at December 31, 2018, $19.9 million at December 31, 2017, and $20.5 million at December 31, 2016. New loans totaling $0.8 million, $7.3 million, and $25.2 million were made and $3.3 million, $7.9 million, and $12.2 million were repaid during the years ending December 31, 2018, 2017, and 2016, respectively.

Deposits from related parties held by the Company at December 31, 2018, 2017, and 2016 amounted to $5.6 million, $5.8 million, and $6.8 million, respectively.

NOTE 23 Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock. The Company redeemed 20,000 shares of Series A preferred stock in February 2016 that had previously been issued to the Secretary of the Treasury under the Small Business Lending Fund. At December 31, 2018, 2017, and 2016, there were no shares that were issued or outstanding.

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Notes to Consolidated Financial Statement (Continued)

NOTE 24 Derivative Instruments

The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company's goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of the interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rate risks.

Derivative instruments that are used as part of the Company's interest rate risk management strategy include interest rate swaps, futures contracts, and options contracts with indices that relate to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.

Interest rate options represent contracts that allow the holder of the option to (1) receive cash or (2) purchase, sell, or enter into a financial instrument at a specified price within a specified period of time. Certain of these contracts also provide the Company with the right to enter into interest-rate swaps and cap and floor agreements with the writer of the option.

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the estimated fair value gain in a derivative. When the estimated fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company and therefore, creates a repayment risk for the Company. When the estimated fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's credit committee.

The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement. Various derivatives, including interest rate, commodity, equity, credit, and foreign exchange contracts, are offered to clients but usually offset the exposure from such contracts by purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as freestanding derivatives. Free-standing derivatives also include derivatives entered into for risk management that do not otherwise qualify for hedge accounting, including domestic hedge derivatives.

The following table presents the total notional or contractual amounts and estimated fair values for derivatives not designated as hedging instruments that are recorded on the balance sheet in other assets or other liabilities. Customer accommodation, trading, and other

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Notes to Consolidated Financial Statement (Continued)

NOTE 24 Derivative Instruments (Continued)

free-standing derivatives are recorded on the balance sheet at fair value in trading assets or other liabilities at December 31, 2018, 2017, and 2016:

	2018 Fair Value						2017 Fair Value						2016 Fair Value

(dollars in thousands)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Free standing derivatives (economic hedges) Interest rate contracts	$	—	$	—	$	—	$	542	$	9	$	9	$	574	$	22	$	22

Customer accommodation, trading, and other contracts Interest rate contracts		36,814		12		7		38,964		8		1		13,885		105		72

Total			$	12	$	7			$	17	$	10			$	127	$	94

The gain (loss) recognized on derivatives instruments for years ended December 31, 2018, 2017, and 2016 was as follows:

		Amount of gain or (loss) recognized in income

Derivatives not designated as hedging instruments	Location of gain or loss recognized in income	Amount of gain or (loss) recognized in income
Derivatives not designated as hedging instruments	Location of gain or loss recognized in income	2018			2017			2016
Interest Rate Contracts	Other Noninterest Income (Expenses)	$	(2	)	$	(26	)	$	(54	)

NOTE 25 Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes at December 31, 2018, 2017, and 2016, the Bank has met all of the capital adequacy requirements to which it is subject.

On August 28, 2018, the Federal Reserve Board (the "Board") issued an interim final rule expanding the applicability of the Board's small bank holding company policy statement, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. The interim final rule raises the small bank holding company policy statement's asset threshold from $1 billion to $3 billion in total consolidated assets, and as result, our holding company was exempted from all regulatory guidelines, to which it previously had been subject, until such time as its consolidated assets exceed $3 billion. As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporation, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believe have changed in the Bank's category.

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Notes to Consolidated Financial Statement (Continued)

NOTE 25 Regulatory Matters (Continued)

Actual capital amounts and ratios for the Bank and the Company (consolidated) at December 31, 2018, 2017, and 2016 are presented in the following table:

											Minimum to be Well Capitalized Under Prompt Corrective Action

	Actual					Minimum Capital
At December 31, 2018 (dollars in thousands)	Actual					Minimum Capital
At December 31, 2018 (dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk weighted assets (CET 1)
Consolidated	$	151,745		8.43	%		N/A		N/A			N/A		N/A
Bank		204,680		11.39	%		80,866		4.5	%		116,806		6.5	%
Tier 1 capital to risk weighted assets
Consolidated		159,774		8.87	%		N/A		N/A			N/A		N/A
Bank		204,680		11.39	%		107,821		6.0	%		143,761		8.0	%
Total capital to risk weighted assets:
Consolidated		231,510		12.86	%		N/A		N/A			N/A		N/A
Bank		226,854		12.62	%		143,806		8.0	%		179,758		10.0	%
Tier 1 capital to average assets:
Consolidated		159,774		7.51	%		N/A		N/A			N/A		N/A
Bank		204,680		9.63	%		85,018		4.0	%		106,272		5.0	%

											Minimum to be Well Capitalized Under Prompt Corrective Action

	Actual					Minimum Capital
At December 31, 2017 (dollars in thousands)	Actual					Minimum Capital
At December 31, 2017 (dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk weighted assets (CET 1)
Consolidated	$	133,149		7.83	%	$	76,522		4.5	%		N/A		N/A
Bank		187,115		11.01	%		76,478		4.5	%		110,468		6.5	%
Tier 1 capital to risk weighted assets
Consolidated		141,037		8.29	%		102,077		6.0	%		N/A		N/A
Bank		187,115		11.01	%		101,970		6.0	%		135,960		8.0	%
Total capital to risk weighted assets:
Consolidated		207,101		12.17	%		136,139		8.0	%		N/A		N/A
Bank		203,679		11.99	%		135,899		8.0	%		169,874		10.0	%
Tier 1 capital to average assets:
Consolidated		141,037		7.07	%		79,795		4.0	%		N/A		N/A
Bank		187,115		9.40	%		79,623		4.0	%		99,529		5.0	%

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Notes to Consolidated Financial Statement (Continued)

NOTE 25 Regulatory Matters (Continued)

											Minimum to be Well Capitalized Under Prompt Corrective Action

	Actual					Minimum Capital
At December 31, 2016 (dollars in thousands)	Actual					Minimum Capital
At December 31, 2016 (dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk weighted assets (CET 1)
Consolidated	$	124,093		7.74	%	$	72,147		4.5	%		N/A		N/A
Bank		177,662		11.10	%		72,025		4.5	%		104,036		6.5	%
Tier 1 capital to risk weighted assets
Consolidated		131,822		8.23	%		96,104		6.0	%		N/A		N/A
Bank		177,662		11.10	%		96,034		6.0	%		128,045		8.0	%
Total capital to risk weighted assets:
Consolidated		196,875		12.29	%		128,153		8.0	%		N/A		N/A
Bank		193,276		12.07	%		128,103		8.0	%		160,129		10.0	%
Tier 1 capital to average assets:
Consolidated		131,822		6.85	%		76,976		4.0	%		N/A		N/A
Bank		177,662		9.25	%		76,827		4.0	%		96,034		5.0	%

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Bank normally restricts dividends to a lesser amount. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development (HUD) regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of December 31, 2018, 2017, and 2016 the Company was in compliance with HUD guidelines.

NOTE 26 Fair Value of Assets and Liabilities

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

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

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

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Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

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

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

Recurring Basis

The Company uses estimated fair value measurements to record estimated fair value adjustments to certain assets and liabilities and to determine estimated fair value disclosures. For additional information on how the Company measures estimated fair value refer to Note 1—Significant Accounting Policies.

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis at December 31, 2018, 2017, and 2016:

At December 31, 2018 (dollars in thousands)	Level 1		Level 2		Level 3		Total

Trading securities
U.S. treasury and government agencies	$	—	$	1,539	$	—	$	1,539



Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	19,142	$	—	$	19,142
Obligations of state and political agencies		—		66,387		—		66,387
Mortgage backed securities
Residential agency		—		126,998		—		126,998
Commercial		—		28,767		—		28,767
Asset backed securities		—		399		—		399
Corporate bonds		—		8,481		—		8,481
Equity securities		3,165		—		—		3,165

Total available-for-sale and equity securities	$	3,165	$	250,174	$	—	$	253,339



Other assets
Derivatives	$	—	$	12	$	—	$	12
Other liabilities
Derivatives	$	—	$	7	$	—	$	7

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

At December 31, 2017 (dollars in thousands)	Level 1		Level 2		Level 3		Total

Trading securities
U.S. treasury and government agencies	$	—	$	1,945	$	—	$	1,945



Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	18,944	$	—	$	18,944
Obligations of state and political agencies		—		74,475		—		74,475
Mortgage backed securities
Residential agency		—		148,630		—		148,630
Commercial		—		14,211		—		14,211
Asset backed securities		—		541		—		541
Corporate bonds		—		10,220		—		10,220
Equity securities		5,445		—		—		5,445

Total available-for-sale and equity securities	$	5,445	$	267,021	$	—	$	272,466



Other assets
Derivatives	$	—	$	17	$	—	$	17
Other liabilities
Derivatives	$	—	$	10	$	—	$	10

At December 31, 2016 (dollars in thousands)	Level 1		Level 2		Level 3		Total

Trading securities
U.S. treasury and government agencies	$	—	$	1,959	$	—	$	1,959



Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	20,092	$	—	$	20,092
Obligations of state and political agencies		—		71,952		—		71,952
Mortgage backed securities
Residential agency		—		148,032		—		148,032
Commercial		—		23,111		—		23,111
Asset backed securities		—		740		—		740
Corporate bonds		—		7,267		—		7,267
Equity securities		5,758		—		—		5,758

Total available-for-sale and equity securities	$	5,758	$	271,194	$	—	$	276,952



Other assets
Derivatives	$	—	$	127	$	—	$	127
Other liabilities
Derivatives	$	—	$	94	$	—	$	94

F-56

Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

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

Investment Securities

When available, the Company uses quoted market prices to determine the estimated fair value of investment securities; such items are classified in Level 1 of the estimated fair value hierarchy. For the Company's investment securities for which quoted prices are not available for identical investment securities in an active market, the Company determines estimated fair value utilizing vendors who apply matrix pricing for similar bonds for which no prices are observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Estimated fair values from these models are verified, where possible, against quoted prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, cannot be obtained, or cannot be corroborated, a security is generally classified as Level 3.

Derivatives

All of the Company's derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, estimated fair value is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, classify as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and forward contracts. Any remaining derivative estimated fair value measurements using significant assumptions that are unobservable are classified as Level 3. Level 3 derivatives include interest rate lock commitments written for residential mortgage loans that are held for sale.

Nonrecurring Basis

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

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

Net impairment losses related to nonrecurring estimated fair value measurements of certain assets for the years ended December 31, 2018, 2017, and 2016 consisted of the following:

	2018								2017								2016

(dollars in thousands)	Level 2		Level 3		Total		Losses		Level 2		Level 3		Total		Losses		Level 2		Level 3		Total		Losses
Loans held for sale	$	14,486	$	—	$	14,486	$	—	$	17,938	$	—	$	17,938	$	—	$	35,063	$	—	$	35,063	$	—
Loans held for branch sale		—		32,031		32,031		—		—		—		—		—		—		—		—		—
Impaired loans		—		4,022		4,022		2,538		—		4,960		4,960		942		—		7,439		7,439		384
Foreclosed assets		—		204		204		245		—		483		483		425		—		1,917		1,917		146
Servicing rights		—		4,623		4,623		—		—		4,686		4,686		—		—		4,777		4,777		—

Loans Held for Sale

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

On January 15, 2019, the Bank entered into an agreement with a third party to sell the loans of two branch locations in Duluth Minnesota, which totaled $32.0 million as of December 31, 2018. The estimated fair value in the table above is based on the agreed upon purchase price in the sales contract. The measurements are classified as Level 3. Refer to Note 28—Subsequent Events for additional information pertaining to the sale.

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

Impaired Loans

In accordance with the provisions of the loan impairment guidance, loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms are measured for impairment. Allowable methods for estimating fair value include using the estimated fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using a discounted cash flow method. The estimated fair value method requires obtaining a current independent appraisal of the collateral and applying a discount factor, if necessary, to the appraised value and including costs to the sell. Because many of these inputs are not observable, the measurements are classified as Level 3.

Foreclosed Assets

Foreclosed assets are recorded at estimated fair value based on property appraisals, less estimated selling costs, at the date of the transfer with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or estimated fair value, less estimated selling costs with changes in the estimated fair value or any impairment amount recorded in other noninterest expense. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.

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Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

Servicing Rights

Servicing rights do not trade in an active market with readily observable prices. Accordingly, the estimated fair value of servicing rights is determined using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Servicing rights are carried at lower of cost or market value, and therefore can be subject to estimated fair value measurements on a nonrecurring basis. Estimated fair value measurements of servicing rights use significant unobservable inputs and accordingly, are classified as Level 3. The Company obtains the estimated fair value of servicing rights from an independent third party pricing service and records the unadjusted estimated fair values in the financial statements.

The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values at December 31, 2018, 2017, and 2016, are as follows:

			2018								2017								2016

(dollars in thousands) Asset Type	Valuation Technique	Unobservable Input	Fair Value		Range			Weighted Average			Fair Value		Range			Weighted Average			Fair Value		Range			Weighted Average
Loans held for branch sale	Discounted cash flows	Sales contract		32,031			(1)			(1)		—		—			—			—		—			—
Impaired loans	Appraisal value	Property specific adjustment		4,022		N/A			N/A			4,960		N/A			N/A			7,439		N/A			N/A
Foreclosed assets	Appraisal value	Property specific adjustment		204		N/A			N/A			483		N/A			N/A			1,917		N/A			N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		4,623		104 - 211			130			4,686		119 - 239			155			4,777		113 - 253			140.6
		Discount rate				10.5	%		10.5	%				9.5	%		9.5	%				9.5	%		9.5	%

(1): The significant unobservable input related to the loans held for branch sale was the third party sales the Bank entered into on January 15, 2019.

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

The following disclosures represent financial instruments in which the ending balances at December 31, 2018, 2017, and 2016 are not carried at estimated fair value in their entirety on the consolidated balance sheets.

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

Cash and Due from Banks and Accrued Interest

The carrying amounts reported in the Consolidated Balance Sheets approximate those assets and liabilities estimated fair values.

Loans

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

Bank-Owned Life Insurance

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

Deposits

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

Deposits held for sale

On January 15, 2019, the Bank entered into an agreement with a third party to sell the deposits of two branch locations in Duluth Minnesota, which totaled $24.2 million as of December 31, 2018. The estimated fair value in the table below is based on the carrying value of the deposits less the premium the Company expects to receive in accordance with the sales contract when the transactions are expected to be completed in 2019. Refer to Note 28—Subsequent Events for additional information pertaining to the sale.

Short-Term Borrowings and Long-Term Debt

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

Off-Balance Sheet Credit-Related Commitments

Off-balance sheet credit related commitments are generally of short-term nature. The contract amount of such commitments approximates their estimated fair value since the

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Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.

The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments are as follows:

			Estimated Fair Value

At December 31, 2018 (dollars in thousands)	Carrying Amount		Estimated Fair Value
At December 31, 2018 (dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	40,651	$	40,651	$	—	$	—	$	40,651
Loans		1,679,676		—		—		1,663,401		1,663,401
Accrued interest receivable		7,645		7,645		—		—		7,645
Bank-owned life insurance		30,763		—		30,763		—		30,763
Financial Liabilities
Noninterest-bearing transaction	$	550,640	$	—	$	550,640	$	—	$	550,640
Interest-bearing transaction		1,053,869		—		1,053,869		—		1,053,869
Time deposits		170,587		—		—		172,616		172,616
Deposits held for sale		24,197		—		—		22,019		22,019
Short-term borrowings		93,460		93,460		—		—		93,460
Long-term debt		58,824		—		59,988		—		59,988
Accrued interest payable		720		720		—		—		720

			Estimated Fair Value

At December 31, 2017 (dollars in thousands)	Carrying Amount		Estimated Fair Value
At December 31, 2017 (dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	121,998	$	121,998	$	—	$	—	$	121,998
Loans		1,557,910		—		—		1,552,399		1,552,399
Accrued interest receivable		6,817		6,817		—		—		6,817
Bank-owned life insurance		29,959		—		29,959		—		29,959
Financial Liabilities
Noninterest-bearing transaction	$	619,333	$	—	$	619,333	$	—	$	619,333
Interest-bearing transaction		1,011,368		—		1,011,368		—		1,011,368
Time deposits		204,261		—		—		202,608		202,608
Short-term borrowings		30,000		30,000		—		—		30,000
Long-term debt		58,819		—		59,193		—		59,193
Accrued interest payable		557		557		—		—		557

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 26 Fair Value of Assets and Liabilities (Continued)

			Estimated Fair Value

At December 31, 2016 (dollars in thousands)	Carrying Amount		Estimated Fair Value
At December 31, 2016 (dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	207,367	$	207,367	$	—	$	—	$	207,367
Loans		1,351,337		—		—		1,342,792		1,342,792
Accrued interest receivable		5,919		5,919		—		—		5,919
Bank-owned life insurance		29,139		—		29,139		—		29,139
Financial Liabilities
Noninterest-bearing transaction	$	554,490	$	—	$	554,490	$	—	$	554,490
Interest-bearing transaction		990,186		—		990,186		—		990,186
Time deposits		240,533		—		—		240,416		240,416
Short-term borrowings		729		729		—		—		729
Long-term debt		58,813		—		59,193		—		59,193
Accrued interest payable		616		616		—		—		616

NOTE 27 Parent Company Only Financial Statements

The condensed financial statements of the Corporation (parent company only) are presented below. These statements should be read in conjunction with the Notes to the Consolidated Financial Statements

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Table of Contents

Notes to Consolidated Financial Statement (Continued)

NOTE 27 Parent Company Only Financial Statements (Continued)

Alerus Financial Corporation
Parent Company Condensed Balance Sheets

At December 31, (dollars in thousands)	2018			2017			2016

Assets
Cash and cash equivalents	$	8,207		$	7,205		$	4,647
Land, premises and equipment, net		433			549			664
Investment in subsidiaries		250,252			233,940			222,232
Deferred income taxes, net		933			906			1,111
Other assets		1,538			752			2,996

Total assets	$	261,363		$	243,352		$	231,650



Liabilities and Stockholders' Equity
Long-term debt	$	58,824		$	58,819		$	58,813
Accrued expenses and other liabilities		5,585			4,939			4,586

Total liabilities		64,409			63,758			63,399
Commitments and contingent liabilities ESOP-owned shares		34,494			31,491			29,035
Stockholders' equity		196,954			179,594			168,251
Less: ESOP-owned shares		(34,494	)		(31,491	)		(29,035	)

Total stockholders' equity		162,460			148,103			139,216

Total liabilities and stockholders' equity	$	261,363		$	243,352		$	231,650

Alerus Financial Corporation
Parent Company Condensed Statements of Income

Year Ended December 31, (dollars in thousands)	2018		2017		2016

Income
Dividends from subsidiaries	$	11,470	$	7,845	$	10,150
Other income		14		16		73

Total operating income		11,484		7,861		10,223
Expenses		5,964		5,038		5,808

Income before equity in undistributed income		5,520		2,823		4,415
Equity in undistributed income of subsidiaries		18,852		10,755		7,852

Income before income taxes		24,372		13,578		12,267
Income tax benefit		1,494		1,423		1,769

Net income	$	25,866	$	15,001	$	14,036

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Notes to Consolidated Financial Statement (Continued)

NOTE 27 Parent Company Only Financial Statements (Continued)

Alerus Financial Corporation
Parent Company Condensed Statements of Cash Flows

Year Ended December 31, (dollars in thousands)	2018			2017			2016

Operating activities
Net income	$	25,866		$	15,001		$	14,036
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries		(18,852	)		(10,755	)		(7,852	)
Depreciation and amortization		116			116			116
Stock-based compensation cost		370			315			315
Other, net		1,314			4,904			408

Net cash provided by operating activities		(17,052	)		(5,420	)		(7,013	)
Investing activities
Investment in bank subsidiary		—			—			(7,773	)
Acquisitions, net cash acquired		—			—			10,332

Net cash provided by investing activities		—			—			2,559
Financing activities
Cash dividends paid on preferred stock		—			—			(25	)
Cash dividends paid on common stock		(7,456	)		(6,729	)		(6,163	)
Redemption of preferred stock		—			—			(20,000	)
Repurchase of common stock		(356	)		(294	)		(357	)

Net cash provided by financing activities		(7,812	)		(7,023	)		(26,545	)

Change in cash and cash equivalents		1,002			2,558			(16,963	)
Cash and cash equivalents at beginning of period		7,205			4,647			21,610

Cash and cash equivalents at end of period	$	8,207		$	7,205		$	4,647

NOTE 28 Subsequent Events

On April 26, 2019, the Company completed the sale of its deposits and assets in Duluth, Minnesota to Frandsen Bank & Trust (FB&T). The loans and deposits associated with this transaction totaled $28.1 million and $19.4 million, respectively, as of April 26, 2019. The Company recognized a gain on sale of approximately $1.7 million. These loans and deposits are categorized as held for sale on the Consolidated Balance Sheets and totaled approximately $32.0 million and $24.2 million respectively, as of December 31, 2018. As part of the transaction FB&T assumed the Company's existing downtown Duluth branch located at 331 W Superior St. Additionally, the Company closed its Duluth Miller Hill branch, located at 1405 Miller Trunk Hwy.

Subsequent events have been evaluated through June 6, 2019, which is the date these financial statements were issued.

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Alerus Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(dollars and shares in thousands, except per share data)	June 30, 2019			December 31, 2018

Assets
Cash and cash equivalents	$	33,293		$	34,909
Interest-bearing deposits		11,627			5,742

Cash and due from banks		44,920			40,651
Investment securities
Trading		—			1,539
Available-for-sale		253,720			250,174
Equity, at fair value		2,532			3,165
Loans held for sale		44,616			14,486
Loans held for branch sale		—			32,031
Loans		1,713,452			1,701,850
Allowance for loan losses		(21,246	)		(22,174	)

Net loans		1,692,206			1,679,676
Land, premises and equipment, net		21,934			21,743
Operating lease right-of-use assets		9,364			—
Accrued interest receivable		7,818			7,645
Bank-owned life insurance		31,159			30,763
Goodwill		27,329			27,329
Other intangible assets		20,372			22,473
Servicing rights		4,300			4,623
Deferred income taxes, net		7,601			10,085
Other assets		39,258			32,687

Total assets	$	2,207,129		$	2,179,070



Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing transaction	$	506,021		$	550,640
Interest-bearing transaction		1,063,955			1,053,869
Time deposits		183,389			170,587

Total deposits		1,753,365			1,775,096
Deposits held for sale		—			24,197
Short-term borrowings		141,445			93,460
Long-term debt		58,808			58,824
Operating lease liabilities		9,891			—
Accrued expenses and other liabilities		29,855			30,539

Total liabilities		1,993,364			1,982,116

Commitments and contingent liabilities ESOP-owned shares		34,494			34,494
Stockholders' equity
Common stock, $1 par value, 30,000,000 shares authorized: 13,816,050 and 13,775,327 issued and outstanding		13,816			13,775
Additional paid-in capital		28,676			27,743
Retained earnings		169,788			159,037
Accumulated other comprehensive income (loss)		1,485			(3,601	)

		213,765			196,954
Less ESOP-owned shares		(34,494	)		(34,494	)

Total stockholders' equity		179,271			162,460

Total liabilities and stockholders' equity	$	2,207,129		$	2,179,070

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Consolidated Statements of Income (Unaudited)

	For the six month ended June 30,

(dollars and shares in thousands, except per share data)	2019		2018
Interest Income
Loans, including fees	$	43,285	$	39,018
Investment securities
Taxable		2,647		2,346
Exempt from federal income taxes		455		626
Other		401		284

Total interest income		46,788		42,274
Interest Expense
Deposits		6,296		2,691
Short-term borrowings		1,266		756
Long-term debt		1,815		1,785

Total interest expense		9,377		5,232

Net interest income		37,411		37,042
Provision for loan losses		4,017		5,550

Net interest income after provision for loan losses		33,394		31,492
Noninterest Income
Retirement and benefit services		30,835		31,337
Wealth management		7,489		7,263
Mortgage banking		11,604		8,233
Service charges on deposit accounts		874		891
Net gains (losses) on investment securities		309		106
Other		3,947		2,520

Total noninterest income		55,058		50,350
Noninterest Expense
Compensation		34,956		33,033
Employee benefits		10,588		9,292
Occupancy and equipment expense		5,386		5,517
Business services, software and technology expense		7,820		6,736
Intangible amortization expense		2,101		2,392
Professional fees and assessments		2,095		2,106
Marketing and business development		1,134		1,583
Supplies and postage		1,396		1,291
Travel		900		870
Mortgage and lending expenses		1,215		1,160
Other		1,184		2,098

Total noninterest expense		68,775		66,078

Income before income taxes		19,677		15,764
Income tax expense		4,893		3,301

Net income	$	14,784	$	12,463



Earnings per common share	$	1.07	$	0.91
Diluted earnings per common share	$	1.05	$	0.89
Dividends declared per common share	$	0.28	$	0.26
Average common shares outstanding		13,796		13,751
Diluted average common shares outstanding		14,089		14,056

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Consolidated Statements of Comprehensive Income (Unaudited)

	For the six months ended June 30,

(Dollars in thousands)	2019			2018
Net Income	$	14,784		$	12,463
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on available-for-sale securities		6,501			(4,845	)
Reclassification adjustment for losses (gains) realized in income		(289	)		96

Total other comprehensive income (loss), before tax		6,790			(4,749	)

Income tax expense (benefit) related to items of other comprehensive income		1,704			(1,192	)

Other comprehensive income (loss), net of tax		5,086			(3,557	)

Total comprehensive income	$	19,870		$	8,906

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Alerus Financial Corporation and Subsidiaries

Consolidated Statements in Changes of Stockholders' Equity (Unaudited)

(dollars in thousands)	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			ESOP- Owned Shares			Total

Balance at December 31, 2017	$	13,699		$	26,040		$	140,986		$	(1,131	)	$	(31,491	)	$	148,103
Net income		—			—			12,463			—			—			12,463
Adjustment for adoption of ASU 2016-01		—			—			(71	)		71			—			—
Other comprehensive income (loss)		—			—			—			(3,557	)		—			(3,557	)
Common stock repurchased		(9	)		(33	)		(180	)		—			—			(222	)
Common stock dividends		—			—			(3,657	)		—			—			(3,657	)
Net change in fair value of ESOP shares		—			—			—			—			—			—
Stock-based compensation expense		11			734			—			—			—			745
Vesting of restricted stock		77			(77	)		—			—			—			—

Balance at June 30, 2018	$	13,778		$	26,664		$	149,541		$	(4,617	)	$	(31,491	)	$	153,875



Balance at December 31, 2018	$	13,775		$	27,743		$	159,037		$	(3,601	)	$	(34,494	)	$	162,460
Net income		—			—			14,784			—			—			14,784
Other comprehensive income (loss)		—			—			—			5,086			—			5,086
Common stock repurchased		(5	)		(16	)		(85	)		—			—			(106	)
Common stock issued		—			—			—			—			—			—
Common stock dividends		—			—			(3,948	)		—			—			(3,948	)
Net change in fair value of ESOP shares		—			—			—			—			—			—
Stock-based compensation expense		13			982			—			—			—			995
Vesting of restricted stock		33			(33	)		—			—			—			—

Balance at June 30, 2019	$	13,816		$	28,676		$	169,788		$	1,485		$	(34,494	)	$	179,271

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Consolidated Statements of Cash Flows (Unaudited)

	For the six months ended June 30,

(dollars in thousands)	2019			2018
Operating Activities
Net income	$	14,784		$	12,463
Adjustments to reconcile net income to net cash provided (used) by operating activities
Deferred income taxes		780			(1,654	)
Provision for loan losses		4,017			5,550
Depreciation and amortization		4,208			4,331
Amortization and accretion of premiums/discounts on investment securities		559			832
Amortization of operating lease right-of-use assets		6			—
Stock-based compensation		995			745
Increase in value of bank-owned life insurance		(396	)		(400	)
Realized Loss (gain) on sale of branch		(1,544	)		—
Realized loss (gain) on forward sale derivatives		(7	)		21
Realized loss (gain) on rate lock commitments		12			(19	)
Realized loss (gain) on sale of foreclosed assets		(161	)		205
Realized loss (gain) on sale of investment securities		(289	)		96
Realized loss (gain) on servicing rights		(101	)		(279	)
Net change in:
Securities held for trading		1,539			38
Loans held for sale		(30,130	)		(17,878	)
Accrued interest receivable		(255	)		(545	)
Other assets		(6,268	)		1,538
Accrued expenses and other liabilities		(155	)		(1,806	)

Net cash provided (used) by operating activities		(12,406	)		3,238
Investing Activities
Proceeds from sales of investment securities available-for-sale		21,631			2,466
Proceeds from maturities of investment securities available-for-sale		18,801			18,868
Purchases of investment securities available-for-sale		(37,458	)		(5,342	)
Net (increase) decrease in equity securities		633			2,185
Net (increase) decrease in loans		(13,117	)		(133,955	)
Proceeds from sale of branch		10,379			—
Purchases of premises and equipment		(1,934	)		(1,864	)
Proceeds from sales of foreclosed assets		420			179

Net cash provided (used) by investing activities		(645	)		(117,463	)

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the six months ended June 30,

(dollars in thousands)	2019			2018
Financing Activities
Net increase (decrease) in deposits		(26,507	)		(46,428	)
Net increase (decrease) in short-term borrowings		47,985			82,260
Repayments of long-term debt		(104	)		(84	)
Cash dividends paid on common stock		(3,948	)		(3,657	)
Repurchase of common stock		(106	)		(222	)

Net cash provided (used) by financing activities		17,320			31,869

Net change in cash and due from banks		4,269			(82,356	)
Cash and due from banks at beginning of period		40,651			121,998

Cash and due from banks at end of period	$	44,920		$	39,642



Supplemental Cash Flow Disclosures
Cash paid for:
Interest	$	7,719		$	3,811
Income taxes		4,644			1,821
Non-cash information
Loan collateral transferred to foreclosed assets		491			404
Unrealized gain (loss) on investment securities available-for-sale		5,086			(3,557	)
Initial recognition of operating lease right-of-use assets		10,422			—
Initial recognition of operating lease liabilities		10,943			—
Change in fair value of ESOP shares		—			—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)
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Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Significant Accounting Policies

Alerus Financial Corporation is a financial holding company organized under the laws of Delaware. Alerus Financial Corporation and its subsidiaries (the "Company") is a diversified financial services company that provides commercial banking, mortgage banking, retirement and benefit plan administration, and wealth management services. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's principal operating subsidiary is Alerus Financial, N.A. (the "Bank"). Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year. The financial information as of December 31, 2018 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes elsewhere included in this filing.

Principles of Consolidation

The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Material estimates that are particularly susceptible to significant change in the near term include the valuation of investment securities, determination of the allowance for loan losses, valuation of reporting units for the purpose of testing goodwill and other intangible assets for impairment, valuation of deferred tax assets, and fair values of financial instruments.

NOTE 2 Recent Accounting Pronouncements

The following FASB Accounting Standards Updates ("ASUs") are divided into pronouncements which have been adopted by the Company since January 1, 2019, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of June 30, 2019.

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NOTE 2 Recent Accounting Pronouncements (Continued)

Adopted Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases." Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019. The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company's consolidated statements of condition. The new guidance requires these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 7 Leases for more information.

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NOTE 2 Recent Accounting Pronouncements (Continued)

this standard as of January 1, 2019, and has evaluated the provisions of ASU 2017-08 and determined there is no impact on its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities." This ASU's objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not currently utilize hedge accounting. As such, ASU No. 2017-12 did not impact the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU has been issued as part of a simplification initiative which will expand the scope of Topic 718 to include share-based payment transactions for the acquiring of goods and services from non-employees and expands the scope through the amendments to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for public business entities for interim and annual reporting periods beginning after December 15, 2018. The Company elected to early adopt ASU 2018-07 effective January 1, 2019, and has evaluated the provisions of ASU 2018-07 and determined there was no significant impact on its consolidated financial statements.

Pronouncements Not Yet Effective

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NOTE 2 Recent Accounting Pronouncements (Continued)

date for ASU 2016-13. Management will continue to monitor any new developments regarding this possible delay.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. This update is not expected to have a significant impact on the Company's consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief to provide entities with an option to irrevocably elect the fair value option applied on an instrument by instrument basis for eligible instruments. As an emerging growth company, these ASUs are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This update is not expected to have a significant impact on the Company's consolidated financial statements.

NOTE 3 Investment Securities

The amortized cost of investment securities and their estimated fair values, with gross unrealized gains (losses) at June 30, 2019 and December 31, 2018 are as follows:

	Balance at June 30, 2019									Balance at December 31, 2018

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	21,838	$	43	$	(48	)	$	21,833	$	19,364	$	—	$	(222	)	$	19,142
Obligations of state and political agencies		48,770		430		(136	)		49,064		67,662		171		(1,446	)		66,387
Mortgage backed securities
Residential Agency		147,482		1,990		(363	)		149,109		129,906		210		(3,118	)		126,998
Commercial		25,390		93		(56	)		25,427		29,050		20		(303	)		28,767
Asset backed securities		174		5		—			179		398		5		(4	)		399
Corporate bonds		8,084		25		(1	)		8,108		8,602		—		(121	)		8,481

Total available-for-sale	$	251,738	$	2,586	$	(604	)	$	253,720	$	254,982	$	406	$	(5,214	)	$	250,174

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 3 Investment Securities (Continued)

The amortized cost and estimated fair value of investment securities at June 30, 2019 and December 31, 2018 by contractual maturity are as follows:

	Securities Available-for-Sale

(dollars in thousands)	Amortized Cost		Fair Value
Balance at June 30, 2019
Due within one year or less	$	3,805	$	3,800
Due after one year through five years		46,223		46,217
Due after five years through ten years		83,304		84,083
Due after 10 years		118,406		119,620

Total	$	251,738	$	253,720



Balance at December 31, 2018
Due within one year or less	$	5,209	$	4,987
Due after one year through five years		51,538		50,720
Due after five years through ten years		91,058		89,145
Due after 10 years		107,177		105,322

Total	$	254,982	$	250,174

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

Investment securities with carrying value of $142.7 million and $149.0 million were pledged at June 30, 2019 and December 31, 2018, respectively, to secure public deposits and for other purposes required or permitted by law.

Proceeds from the sale of available-for-sale securities for the six months ended June 30, 2019 and 2018 are displayed in the table below:

	For the six months ended June 30,

Securities Available-for-sale (dollars in thousands)	For the six months ended June 30,
Securities Available-for-sale (dollars in thousands)	2019		2018
Proceeds	$	21,631	$	445
Realized gains		298		105
Realized losses		11		5

Information pertaining to investment securities with gross unrealized losses that are not deemed to be other-than-temporarily impaired at June 30, 2019 and December 31, 2018

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NOTE 3 Investment Securities (Continued)

aggregated by investment category and length of time that individual investment securities have been in a continuous loss position, follows:

	Less than 12 Months					Over 12 Months					Total

At June 30, 2019 (dollars in thousands)	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	—		$	—	$	(48	)	$	9,952	$	(48	)	$	9,952
Obligations of state and political agencies		—			—		(136	)		22,573		(136	)		22,573
Mortgage backed securities
Residential Agency		—			—		(363	)		45,717		(363	)		45,717
Commercial		(18	)		8,102		(38	)		6,434		(56	)		14,536
Asset backed securities		—			7		—			—		—			7
Corporate bonds		—			—		(1	)		2,001		(1	)		2,001

Total available-for-sale	$	(18	)	$	8,109	$	(586	)	$	86,677	$	(604	)	$	94,786

	Less than 12 Months					Over 12 Months					Total

At December 31, 2018 (dollars in thousands)	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury and agencies	$	(8	)	$	5,288	$	(214	)	$	11,598	$	(222	)	$	16,886
Obligations of state and political agencies		—			389		(1,446	)		55,770		(1,446	)		56,159
Mortgage backed securities
Residential Agency		(44	)		7,352		(3,074	)		112,293		(3,118	)		119,645
Commercial		(39	)		7,844		(264	)		9,741		(303	)		17,585
Asset backed securities		—			2		(4	)		155		(4	)		157
Corporate bonds		—			—		(121	)		8,481		(121	)		8,481

Total available-for-sale	$	(91	)	$	20,875	$	(5,123	)	$	198,038	$	(5,214	)	$	218,913

All of the available-for-sale debt securities in an unrealized loss position were investment grade. The Company evaluated all of its debt securities for credit impairment and determined there were no credit losses evident and did not record any other-than-temporary impairment. The Company's evaluation of other investment securities with continuous unrealized losses indicated that there were no credit losses evident. Furthermore, the Company does not intend to sell and it is more likely than not that the Company will not be required to sell these debt securities before the anticipated recovery of the amortized cost basis.

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NOTE 4 Loans and Allowance for Loan Losses

The components of loans in the consolidated balance sheets and the associated allowance by impairment methodology at June 30, 2019 and December 31, 2018 are displayed in the following table:

	Recorded Investment						Allowance Allocation

(dollars in thousands)	Individually Evaluated		Collectively Evaluated		Total		Individually Evaluated		Collectively Evaluated		Unallocated		Total
June 30, 2019
Commercial
Commercial and industrial	$	2,409	$	510,711	$	513,120	$	553	$	11,141	$	—	$	11,694
Real estate construction		—		26,584		26,584		—		323		—		323
Commercial real estate		1,557		441,240		442,797		377		5,388		—		5,765

Total commercial		3,966		978,535		982,501		930		16,852		—		17,782
Consumer
Residential real estate first mortgage		—		452,049		452,049		—		1,155		—		1,155
Residential real estate junior lien		727		184,482		185,209		—		710		—		710
Other revolving and installment		8		93,685		93,693		5		375		—		380

Total consumer		735		730,216		730,951		5		2,240		—		2,245

Total	$	4,701	$	1,708,751	$	1,713,452	$	935	$	19,092	$	1,219	$	21,246



December 31, 2018
Commercial
Commercial and industrial	$	3,945	$	506,761	$	510,706	$	2,059	$	10,068	$	—	$	12,127
Real estate construction		—		18,965		18,965		—		250		—		250
Commercial real estate		1,684		438,279		439,963		455		5,824		—		6,279

Total commercial		5,629		964,005		969,634		2,514		16,142				18,656
Consumer
Residential real estate first mortgage		352		447,791		448,143		—		1,156		—		1,156
Residential real estate junior lien		559		188,296		188,855		4		801		—		805
Other revolving and installment		20		95,198		95,218		20		360		—		380

Total consumer		931		731,285		732,216		24		2,317		—		2,341

Total	$	6,560	$	1,695,290	$	1,701,850	$	2,538	$	18,459	$	1,177	$	22,174

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

Changes in the allowance for the six months ended June 30, 2019 and 2018 are summarized in the following tables:

(dollars in thousands)	Beginning Balance		Provision for loan losses			Loan charge-offs			Loan recoveries		Ending Balance

Balance at June 30, 2019
Commercial
Commercial and industrial	$	12,127	$	4,225		$	(4,951	)	$	293	$	11,694
Real estate construction		250		72			(1	)		2		323
Commercial real estate		6,279		(664	)		—			150		5,765

Total commercial		18,656		3,633			(4,952	)		445		17,782
Consumer
Residential real estate first mortgage		1,156		(1	)		—			—		1,155
Residential real estate junior lien		805		(44	)		(134	)		83		710
Other revolving and installment		380		387			(482	)		95		380

Total consumer		2,341		342			(616	)		178		2,245

Unallocated		1,177		42			—			—		1,219

Total	$	22,174	$	4,017		$	(5,568	)	$	623	$	21,246



Balance at June 30, 2018
Commercial
Commercial and industrial	$	7,589	$	4,706		$	(2,654	)	$	383	$	10,024
Real estate construction		343		110			(60	)		2		395
Commercial real estate		4,909		1,530			—			39		6,478

Total commercial		12,841		6,346			(2,714	)		424		16,897
Consumer
Residential real estate first mortgage		1,411		104			(29	)		—		1,486
Residential real estate junior lien		902		(165	)		(86	)		179		830
Other revolving and installment		499		3			(137	)		118		483

Total consumer		2,812		(58	)		(252	)		297		2,799

Unallocated		911		(738	)		—			—		173

Total	$	16,564	$	5,550		$	(2,966	)	$	721	$	19,869

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

each individual loan. The Company's ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and Doubtful risk ratings. The risk ratings are defined as follows:

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

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

The tables below provide a breakdown of outstanding commercial loans by risk category at June 30, 2019 and December 31, 2018. All criticized loans are subject to high levels of

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

monitoring by management. The Criticized category includes Special Mention, Substandard, and Doubtful categories which are defined by banking regulatory agencies.

			Criticized

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2019
Commercial
Commercial and industrial	$	473,145	$	10,695	$	29,280	$	—	$	513,120
Real estate construction		25,288		286		1,010		—		26,584
Commercial real estate		413,237		4,491		25,069		—		442,797

Total commercial		911,670		15,472		55,359		—		982,501
Consumer
Residential real estate first mortgage		452,044		—		5		—		452,049
Residential real estate junior lien		183,735		—		1,474		—		185,209
Other revolving and installment		93,693		—		—		—		93,693

Total consumer		729,472		—		1,479		—		730,951

Total	$	1,641,142	$	15,472	$	56,838	$	—	$	1,713,452



December 31, 2018
Commercial
Commercial and industrial	$	459,565	$	12,055	$	37,523	$	1,563	$	510,706
Real estate construction		17,910		—		1,055		—		18,965
Commercial real estate		407,178		6,304		26,481		—		439,963

Total commercial		884,653		18,359		65,059		1,563		969,634
Consumer
Residential real estate first mortgage		448,124		—		19		—		448,143
Residential real estate junior lien		186,370		—		2,485		—		188,855
Other revolving and installment		95,218		—		—		—		95,218

Total consumer		729,712		—		2,504		—		732,216

Total	$	1,614,365	$	18,359	$	67,563	$	1,563	$	1,701,850

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

The following tables reflect the past due aging analysis of the loan portfolio at June 30, 2019 and December 31, 2018:

	Accruing

(dollars in thousands)	Current		30 - 89 Days Past Due		90 Days or More Past Due		Nonperforming		Total Loans
June 30, 2019
Commercial
Commercial and industrial	$	501,959	$	9,092	$	13	$	2,056	$	513,120
Real estate construction		26,584		—		—		—		26,584
Commercial real estate		441,358		—		—		1,439		442,797

Total commercial		969,901		9,092		13		3,495		982,501
Consumer
Residential real estate first mortgage		449,313		2,349		—		387		452,049
Residential real estate junior lien		184,199		268		9		733		185,209
Other revolving and installment		93,513		166		6		8		93,693

Total consumer		727,025		2,783		15		1,128		730,951

Total	$	1,696,926	$	11,875	$	28	$	4,623	$	1,713,452



December 31, 2018
Commercial
Commercial and industrial	$	504,313	$	2,815	$	—	$	3,578	$	510,706
Real estate construction		18,965		—		—		—		18,965
Commercial real estate		438,446		—		—		1,517		439,963

Total commercial		961,724		2,815		—		5,095		969,634
Consumer
Residential real estate first mortgage		444,470		2,411		—		1,262		448,143
Residential real estate junior lien		187,502		769		—		584		188,855
Other revolving and installment		94,615		581		—		22		95,218

Total consumer		726,587		3,761		—		1,868		732,216

Total	$	1,688,311	$	6,576	$	—	$	6,963	$	1,701,850

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

The table below summarizes key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses.

	Balance at June 30, 2019						Balance at December 31, 2018

(dollars in thousands)	Recorded investment		Unpaid principal		Related Allowance		Recorded investment		Unpaid principal		Related Allowance
Loans with no related allowance for loan losses
Commercial
Commercial and industrial	$	1,510	$	1,833	$	—	$	1,285	$	1,422	$	—
Real estate construction		—		—		—		—		—		—
Commercial real estate		181		211		—		185		218		—
Consumer
Residential real estate first mortgage		—		—		—		352		504		—
Residential real estate junior lien		727		809		—		555		697		—
Other revolving and installment		3		3		—		1		2		—

Total	$	2,421	$	2,856	$	—	$	2,378	$	2,843	$	—



Loans with related allowance for loan losses
Commercial
Commercial and industrial	$	899	$	1,024	$	553	$	2,660	$	2,752	$	2,059
Commercial real estate		1,376		1,439		377		1,499		1,517		455
Consumer
Residential real estate junior lien		—		—		—		4		4		4
Other revolving and installment		5		5		5		19		20		20

Total	$	2,280	$	2,468	$	935	$	4,182	$	4,293	$	2,538

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

The table below presents the average recorded investment in impaired loans and interest income for the six months ended June 30, 2019 and 2018, respectively.

	Six months ended June 30,

	2019				2018
(dollars in thousands)	Average recorded investment		Interest income		Average recorded investment		Interest income
Loans with no related allowance for loan losses
Commercial
Commercial and industrial	$	4,835	$	33	$	1,747	$	1
Commercial real estate		217		9		690		—
Consumer
Residential real estate first mortgage		—		—		560		—
Residential real estate junior lien		821		4		429		1
Other revolving and installment		13		—		5		—

Total	$	5,886	$	46	$	3,431	$	2



Loans with related allowance for loan losses
Commercial
Commercial and industrial	$	1,332	$	17	$	1,720	$	38
Commercial real estate		1,505		—		229		9
Consumer
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		—		—		65		3
Other revolving and installment		9		—		21		—

Total impaired loans	$	2,846	$	17	$	2,035	$	50

Loans with a carrying value of $1.1 billion and $1.1 billion were pledged at June 30, 2019 and December 31, 2018, respectively, to secure public deposits, and for other purposes required or permitted by law.

Troubled Debt Restructurings

Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 4 Loans and Allowance for Loan Losses (Continued)

During 2019 there was one loan that was modified as a troubled debt restructuring as a result of extending the amortization period. For the six months ending June 30, 2019, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for the loan losses allocated to the loan modified as troubled debt restructuring. During 2018, there was one loan modified as a troubled debt restructuring as a result of adjusting the interest rate below current market levels. The balance at the time of restructuring was $1.0 million. For year ending December 31, 2018, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for loan losses allocated to the loan modified as troubled debt restructuring.

The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 5 Goodwill and Other Intangible Assets

The following is a summary of the activity in the Company's intangible assets for the six months ended June 30, 2019.

(dollars in thousands)	Banking			Retirement and benefit services			Wealth management		Mortgage		Corporate administration		Consolidated

Balance at December 31, 2018
Goodwill	$	20,131		$	7,198		$	—	$	—	$	—	$	27,329
Identifiable customer intangibles		—			20,772			—		—		—		20,772
Core deposit intangible assets		1,701			—			—		—		—		1,701

Total		21,832			27,970			—		—		—		49,802
Additions:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			—			—		—		—		—
Core deposit intangible assets		—			—			—		—		—		—

Total		—			—			—		—		—		—
Amortization:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			(1,601	)		—		—		—		(1,601	)
Core deposit intangible assets		(500	)		—			—		—		—		(500	)

Total		(500	)		(1,601	)		—		—		—		(2,101	)
Impairment:
Goodwill		—			—			—		—		—		—
Identifiable customer intangibles		—			—			—		—		—		—
Core deposit intangible assets		—			—			—		—		—		—

Total		—			—			—		—		—		—
Ending balance:
Goodwill		20,131			7,198			—		—		—		27,329
Identifiable customer intangibles		—			19,171			—		—		—		19,171
Core deposit intangible assets		1,201			—			—		—		—		1,201

Balance at June 30, 2019	$	21,332		$	26,369		$	—	$	—	$	—	$	47,701

NOTE 6 Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $584.2 million and $591.6 million at June 30, 2019 and December 31, 2018, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on an accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 6 Loan Servicing (Continued)

The following table summarizes the Company's activity related to loan servicing for the six months ended June 30, 2019 and 2018:

	Six months ended June 30,

(dollars in thousands)	2019			2018
Balance, beginning of period	$	4,623		$	4,686
Additions		101			279
Amortization		(404	)		(347	)
(Impairment)/Recovery		(20	)		58

Balance, end of period	$	4,300		$	4,676

As of June 30, 2019 and December 31, 2018, key economic assumptions are as follows:

	Balance at

(dollars in thousands)	June 30, 2019			December 31, 2018
Fair value of servicing rights	$	4,300		$	4,623
Weighted average life		24.5			24.5
Prepayment speeds		9.2	%		7.8	%
Discount rate		10.0	%		10.5	%

NOTE 7 Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches, and office equipment rentals with terms extending through 2032. Portions of certain properties are subleased for terms extending through 2023. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company's consolidated financial statements. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated financial statements as a right-of-use ("ROU") asset and a corresponding lease liability. The Company has one existing finance lease (previously referred to as a capital lease) for a portion of the Company's headquarters' building with a lease term through 2022. As this lease was previously required to be recorded on the Company's consolidated financial statements, Topic 842 did not materially impact the accounting for this lease.

The following table represents the consolidated financial statements classification of the Company's ROU assets and lease liabilities. The Company elected not to include short-term

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 7 Leases (Continued)

leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated financial statements.

(dollars in thousands)		June 30, 2019

Lease right-of-use assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	9,364
Finance lease right-of-use assets	Land, premises and equipment, net		375

		$	9,739



Lease liabilities
Operating lease liabilities	Operating lease liabilities	$	9,891
Finance lease liabilities	Long-term debt		766

		$	10,657

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Company's only finance lease, the Company utilized its incremental borrowing rate at lease inception.



Weighted-average remaining lease term
Operating leases	5
Finance leases	3.3
Weighted-average discount rate
Operating leases	2.8	%
Finance leases	7.8	%

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 7 Leases (Continued)

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

(dollars in thousands)	Six months ended June 30, 2019

Lease costs
Operating lease cost	$	1,170
Variable lease cost		410
Short-term lease cost		465
Finance lease cost
Interest on lease liabilities		31
Amortization of right-of-use assets		58
Sublease income		(139	)

Net lease cost	$	1,995



Other information
Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases		1,174
Right-of-use assets obtained in exchange for new operating lease liabilities		—
Right-of-use assets obtained in exchange for new finance lease liabilities		—

Future minimum payments for finance and operating leases with initial or remaining terms of one year or more as of June 30, 2019 were as follows:

Twelve months ended June 30, (dollars in thousands)	Finance leases			Operating leases

2020	$	251		$	2,375
2021		251			1,707
2022		251			1,483
2023		105			1,437
2024		—			1,163
Thereafter		—			2,647

Total	$	858		$	10,812
Amounts representing interest		(91	)		(921	)

Present value of future minimum lease payments	$	766		$	9,891

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 8 Deposits

The components of deposits in the consolidated balance sheets at June 30, 2019 and December 31, 2018 were as follows:

	Balance at

(dollars in thousands)	June 30, 2019		December 31, 2018
Non interest-bearing transaction	$	506,021	$	550,640
Interest-bearing transaction
Savings accounts		56,163		53,971
Interest-bearing checking accounts		439,342		401,078
Money market savings		568,450		598,820
Time deposits		183,389		170,587

Total interest-bearing transaction		1,247,344		1,224,456

Total deposits	$	1,753,365	$	1,775,096

NOTE 9 Short-Term Borrowings

Short-term borrowings at June 30, 2019 and December 31, 2018 consisted of the following:

	Balance at

(dollars in thousands)	June 30, 2019		December 31, 2018
Short-term borrowings
Fed funds purchased	$	6,445	$	93,460
FHLB Short-term advances		135,000		—

Total	$	141,445	$	93,460

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 9 Short-Term Borrowings (Continued)

The following table shows additional information related to short term borrowings:

	Six months ended June 30,

(dollars in thousands)	2019			2018
Fed funds purchased
Balance at end of period	$	6,445		$	112,260
Average daily balance		93,238			79,371
Maximum month-end balance		139,605			112,260
Weighted-average rate
During period		2.59	%		1.91	%
End of period		2.50	%		2.10	%
FHLB Short-term advances
Balance at end of period	$	135,000		$	—
Average daily balance		6,464			166
Maximum month-end balance		135,000			—
Weighted-average rate
During period		2.17	%		2.88	%
End of period		2.40	%		0.00	%

NOTE 10 Long-Term Debt

Long-term debt at June 30, 2019 and December 31, 2018 consisted of the following:

(dollars in thousands)	Face Value		Carrying Value		Interest Rate			Maturity Date	Call Date

June 30, 2019
Subordinated notes payable	$	50,000	$	49,594	Fixed	5.75	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,000		3,379	Three-month LIBOR + 3.10%	5.43	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		5,069	Three-month LIBOR + 1.80%	4.21	%	9/15/2036	9/15/2011
Finance lease liability		2,700		766	Fixed	7.81	%	10/31/2022	N/A

Total	$	62,700	$	58,808

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 10 Long-Term Debt (Continued)

	Face Value		Carrying Value		Interest Rate			Maturity Date	Call Date

December 31, 2018
Subordinated notes payable	$	50,000	$	49,562	Fixed	5.75	%	12/30/2025	12/30/2020
Junior subordinated debenture (Trust I)		4,000		3,357	Three-month LIBOR + 3.10%	5.92	%	6/26/2033	6/26/2008
Junior subordinated debenture (Trust II)		6,000		5,035	Three-month LIBOR + 1.80%	4.59	%	9/15/2036	9/15/2011
Obligations under capital lease		2,700		870	Fixed	7.81	%	10/31/2022	N/A

Total	$	62,700	$	58,824

The Company had a $150 thousand letter of credit with the Federal Home Loan Bank at June 30, 2019 and December 31, 2018. Bank of North Dakota letters of credit are collateralized by loans pledged to the Bank of North Dakota in the amount of $244.1 million and $260.6 million at June 30, 2019 and December 31, 2018, respectively. There were no outstanding letters of credit with the Bank of North Dakota at June 30, 2019 and December 31, 2018, respectively.

NOTE 11 Financial Instruments with Off-Balance Sheet Risk

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

At June 30, 2019 and December 31, 2018, the following financial instruments whose contract amount represents credit risk were approximately as follows:

	Balance at

(dollars in thousands)	June 30, 2019		December 31, 2018
Commitments to extend credit	$	530,492	$	529,980
Standby letters of credit		8,379		8,852

Total	$	538,871	$	538,832

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 11 Financial Instruments with Off-Balance Sheet Risk (Continued)

the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

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

NOTE 12 Stock Based Compensation Plan

Effective May 2009, the Company adopted the Alerus Financial Corporation 2009 Stock Plan (the 2009 Plan) providing for the grant of up to 1.35 million shares (as adjusted for a three for one stock split) of its common stock to employees, officers, and directors pursuant to awards of non-qualified options, restricted stock, or other stock-based employee benefits. The 2009 Plan provides for the granting of restricted stock or restricted stock units at no cost to certain key employees. Granting of awards under the plan will expire following the 10th anniversary of the date the plan was adopted.

Upon the grant of a restricted stock award, shares of stock are issued to each employee and the employee becomes entitled to all rights of a shareholder, unless such shares are forfeited under the plan. The restricted stock award is subject to full or partial forfeiture, as defined, if the employee terminates employment with the Company within prescribed time periods (generally five to ten years) or violates any restrictions under their agreement. Restricted stock awards generally vest over a five to ten year period, but vesting may be accelerated or immediate due to death or disability of the employee or the occurrence of certain events relating primarily to significant changes in directors or ownership of the Company.

Restricted stock units vest, in the form of Company common stock, and generally vest over a three to ten year period. Vesting is generally based on the target performance metric associated with the award. The final award will be adjusted to reflect actual performance versus target performance, using a linear scale, with a threshold (minimum) of 50% award for 80% performance, and a maximum of 150% award for 120% performance. In determining compensation expense, the fair value of the restricted stock unit award will be determined based on the 20 day weighted average trade price of the Company's common stock on the grant date. The expense will be recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company estimates the most likely outcome is the achievement of the target level. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis.

Restricted stock and restricted stock units are considered to represent an element of employee compensation and are charged to expense over the period earned. Compensation

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 12 Stock Based Compensation Plan (Continued)

expense relating to restricted stock awards under this plan was $744 thousand and $500 thousand for the six months ending June 30, 2019 and June 30, 2018, respectively.

Amounts granted under the 2009 Plan have been retroactively adjusted for all stock splits effected in the form of dividends.

Activity in the stock plans for the six months ended June 30, 2019 and 2018 is as follows:

	Number of Shares

	Available for future grant			Restricted stock awards
Balance—December 31, 2017		672,458			677,542
Restricted units awarded		(42,038	)		42,038
Restricted shares awarded		(36,729	)		36,729
Shares withheld for taxes		9,703			(9,703	)
Awards forfeited		—			—

Balance—June 30, 2018		603,394			746,606
Balance—December 31, 2018		599,055			750,945
Restricted units awarded		(48,314	)		48,314
Restricted shares awarded		(22,303	)		22,303
Shares withheld for taxes		5,258			(5,258	)
Awards forfeited		753			(753	)
Plan expiration		(534,449	)		—

Balance—June 30, 2019		—			815,551

The number of unvested shares outstanding was 289,564 and 293,637 respectively, at June, 2019 and 2018. The number of unvested units outstanding was 84,477 and 42,038 at June 31, 2019 and 2018, respectively.

Effective May 2009, the Company also adopted the Alerus Financial Corporation Stock Grant Plan for Non-Employee Directors (the Retainer Plan) providing for the issuance of up to 180,000 shares (as adjusted for a three for one stock split) of its common stock to non-employee directors. The purpose of the Retainer Plan is to provide for payment for the annual retainer to directors in shares of Company common stock.

The number of shares to be issued is based on the retainer divided by the fair market value per share as of the grant date. Upon the issuance of shares under this plan, the then current value of the shares is charged to expense. Compensation expense relating to stock awards under this plan for the six months ending June 30, 2019 and 2018, was $251 thousand and $245 thousand respectively.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 12 Stock Based Compensation Plan (Continued)

Activity in the Retainer Plan for the six months ended June 30, 2019 and 2018 is as follows:

	Number of Shares

	Available for future grant			Restricted stock awards
Balance—December 31, 2017		35,842			144,158
Retainer shares awarded		(10,017	)		10,017

Balance—June 30, 2018		25,825			154,175



Balance—December 31, 2018		25,825			154,175
Retainer shares awarded		(13,144	)		13,144

Balance—June 30, 2019		12,681			167,319

On May 6, 2019, the Company's stockholders approved the 2019 Equity Incentive Plan. This plan allows the compensation committee the ability to grant a wide variety of equity awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards in such forms and amounts as it deems appropriate to accomplish the goals of the plan. Any shares subject to an award that is cancelled, forfeited, or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the plan. However, shares subject to an award shall not again be made available for issuance or delivery under the plan if such shares are (a) tendered in payment of the exercise price of a stock option, (b) delivered to, or withheld by, the Company to satisfy any tax withholding obligation, or (c) covered by a stock-settled stock appreciation right or other awards that were not issued upon the settlement of the award. Shares vest, become exercisable and contain such other terms and conditions as determined by the compensation committee and set forth in individual agreements with the participant receiving the award. The plan is authorized to issue up to 1,100,000. At June 30, 2019, no awards had been issued under the plan.

NOTE 13 Noninterest Income

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in noninterest income. The material groups of noninterest income are defined as follows:

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 13 Noninterest Income (Continued)

Wealth management: Wealth management income is earned from a variety of sources including trust administration and other related fiduciary services, custody, investment management and advisory services, and brokerage. Fees are based on the market value of the assets under management and are generally billed monthly in arrears and recognized monthly as the Company's performance obligations are met. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Other related services are based on a fixed fee schedule and the revenue is recognized when the services are rendered, which is when the Company has satisfied its performance obligation.

The following table presents the Company's noninterest income for the six months ended June 30, 2019 and 2018.

	For the six months ended June 30,

(dollars in thousands)	2019		2018
Noninterest Income
Retirement and Benefits	$	30,835	$	31,337
Wealth Management		7,489		7,263
Mortgage Banking (1)		11,604		8,233
Service charges on deposit accounts		874		891
Net gains (losses) on investment securities (1)		309		106
Other
Interchange fees		974		1,010
Bank-owned life insurance income (1)		396		400
Misc. transactional fees		569		512
Other noninterest income		2,008		598

Total	$	55,058	$	50,350

(1): Not within scope of ASC 606.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 14 Income Taxes

The components of income tax expense (benefit) for the six months ended June 30, 2019 and 2018 are as follows:

	Six months ended June 30,

	2019						2018
(dollars in thousands)	Amount			Percent of pretax income			Amount			Percent of pretax income
Taxes at statutory federal income tax rate	$	4,132			21.0	%	$	3,310			21.0	%
Tax effect of:
Tax exempt income		(222	)		(1.1	)		(269	)		(1.7	)
Other		983			5.0			260			1.6

Applicable income taxes	$	4,893			24.9	%	$	3,301			20.9	%

It is the opinion of management that the Company has no significant uncertain tax positions that would be subject to change upon examination.

NOTE 15 Segment Reporting

The financial information presented on each segment sets forth net interest income, provision for loan losses, direct noninterest income and direct noninterest expense before indirect allocations. Corporate Administration includes the indirect overhead and is set forth in the table below. The segment net income before taxes represents direct revenue and expense before indirect allocations and income taxes.

The following table presents key metrics related to our segments as of the dates presented:

Segment Reporting

Six months ended June 30, (dollars in thousands)	Banking		Retirement and benefit services		Wealth management		Mortgage			Corporate administration			Consolidated

2019
Net interest income	$	38,794	$	—	$	—	$	434		$	(1,817	)	$	37,411
Provision for loan losses		4,017		—		—		—			—			4,017
Noninterest income		3,578		30,835		7,489		11,604			1,552			55,058
Noninterest expense		20,080		17,591		4,101		9,928			17,075			68,775

Net income before taxes	$	18,275	$	13,244	$	3,388	$	2,110		$	(17,340	)	$	19,677



2018
Net interest income	$	38,392	$	—	$	30	$	405		$	(1,785	)	$	37,042
Provision for loan losses		5,550		—		—		—			—			5,550
Noninterest income		3,449		31,337		7,263		8,233			68			50,350
Noninterest expense		19,374		18,390		3,993		8,954			15,367			66,078

Net income before taxes	$	16,917	$	12,947	$	3,300	$	(316	)	$	(17,084	)	$	15,764

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 15 Segment Reporting (Continued)

Banking

Retirement and Benefit Services

Wealth Management

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

Mortgage

The mortgage division offers first and second mortgage loans through a centralized mortgage unit in Minneapolis, Minnesota as well as through the Banking office locations.

NOTE 16 Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock.

NOTE 17 Derivative Instruments

The Company did not have any derivatives designated as hedging instruments as of June 30, 2019 and December 31, 2018. The following table presents the amounts recorded in the

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 17 Derivative Instruments (Continued)

Company's consolidated balance sheets for derivatives not designated as hedging instruments at June 30, 2019 and December 31, 2018:

		June 30, 2019				December 31, 2018

(dollars in thousands)	Consolidated balance sheet location	Fair Value		Notional Amount		Fair Value		Notional Amount
Asset derivatives
Interest rate lock commitments	Other assets	$	2,293	$	88,248	$	12	$	33,858
Forward loan sales commitments	Other assets		646		18,719		—		—
TBA mortgage backed securities	Other assets		—		—		—		—

Total asset derivatives		$	2,939	$	106,967	$	12	$	33,858



Liability derivatives
Interest rate lock commitments	Accrued expenses and other liabilities	$	—	$	—	$	—	$	—
Forward loan sales commitments	Accrued expenses and other liabilities		—		—		7		2,956
TBA mortgage backed securities	Accrued expenses and other liabilities		784		141,500		—		—

Total liability derivatives		$	784	$	141,500	$	7	$	2,956

The gain (loss) recognized on derivatives instruments for the six months ended June 30, 2019 and 2018 was as follows:

		Gain/(loss)

		Six months ended
(dollars in thousands)	Consolidated statements of income location	June 30, 2019			June 30, 2018
Interest rate lock commitments	Mortgage banking	$	2,281		$	19
Forward loan sales commitments	Mortgage banking		653			(21	)
TBA mortgage backed securities	Mortgage banking		(784	)		—

Total gain/(loss) from derivative instruments		$	2,150		$	(2	)

NOTE 18 Regulatory Matters

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of common equity tier 1, tier 1, and total capital (as defined in the regulations) to risk weighted assets (as defined) and of tier 1 capital (as defined) to average assets (as defined). Management believes at June 30, 2019 and December 31, 2018, the Bank has met all of the capital adequacy requirements to which it is subject.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 18 Regulatory Matters (Continued)

As of June 30, 2019, the most recent notification from the Federal Deposit Insurance Corporation, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believe have changed in the Bank's category.

The Bank's actual capital amounts and ratios at June 30, 2019 and December 31, 2018 are presented in the following table:

	Actual					Requirements					Minimum to be Well Capitalized Under Prompt Corrective Action

At June 30, 2019 (dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk weighted assets (CET 1)
Consolidated	$	165,840		8.90	%		N/A		N/A			N/A		N/A
Bank		221,219		11.90	%		83,682		4.50	%		120,874		6.50	%
Tier 1 capital to risk weighted assets
Consolidated		173,978		9.34	%		N/A		N/A			N/A		N/A
Bank		221,219		11.90	%		111,576		6.00	%		148,767		8.00	%
Total capital to risk weighted assets
Consolidated		244,818		13.14	%		N/A		N/A			N/A		N/A
Bank		242,465		13.04	%		148,767		8.00	%		185,959		10.00	%
Tier 1 capital to average assets
Consolidated		173,978		8.08	%		N/A		N/A			N/A		N/A
Bank		221,219		10.29	%		86,034		4.00	%		107,542		5.00	%

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 18 Regulatory Matters (Continued)

											Minimum to be well Capitalized Under Prompt Corrective Action

	Actual					Requirements
At December 31, 2018 (dollars in thousands)	Actual					Requirements
At December 31, 2018 (dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk weighted assets (CET 1)
Consolidated	$	151,745		8.43	%		N/A		N/A			N/A		N/A
Bank		204,680		11.39	%		80,866		4.50	%		116,806		6.50	%
Tier 1 capital to risk weighted assets
Consolidated		159,774		8.87	%		N/A		N/A			N/A		N/A
Bank		204,680		11.39	%		107,821		6.00	%		143,761		8.00	%
Total capital to risk weighted assets
Consolidated		231,510		12.86	%		N/A		N/A			N/A		N/A
Bank		226,854		12.62	%		143,806		8.00	%		179,758		10.00	%
Tier 1 capital to average assets
Consolidated		159,774		7.51	%		N/A		N/A			N/A		N/A
Bank		204,680		9.63	%		85,018		4.00	%		106,272		5.00	%

The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Bank normally restricts dividends to a lesser amount. In addition, the Company must adhere to various U.S. Department of Housing and Urban Development (HUD) regulatory guidelines including required minimum capital and liquidity to maintain their Federal Housing Administration approval status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of June 30, 2019, and December 31, 2018 the Company was in compliance with HUD guidelines.

NOTE 19 Fair Value of Assets and Liabilities

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

Level 2— Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly,

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

for substantially the full term of the financial instrument. Estimated fair values for these instruments are estimated using pricing models, quoted prices of investment securities with similar characteristics, or discounted cash flows.

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

Recurring Basis

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

The following tables present the balances of the assets and liabilities measured at estimated fair value on a recurring basis at June 30, 2019 and December 31, 2018:

At June 30, 2019 (dollars in thousands)	Level 1		Level 2		Level 3		Total

Trading securities
U.S. treasury and government agencies	$	—	$	—	$	—	$	—



Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	21,833	$	—	$	21,833
Obligations of state and political agencies		—		49,064		—		49,064
Mortgage backed securities
Residential agency		—		149,109		—		149,109
Commercial		—		25,427		—		25,427
Asset backed securities		—		179		—		179
Corporate bonds		—		8,108		—		8,108
Equity securities		2,532		—		—		2,532

Total available-for-sale and equity securities	$	2,532	$	253,720	$	—	$	256,252



Other assets
Derivatives	$	—	$	2,939	$	—	$	2,939
Other liabilities
Derivatives	$	—	$	784	$	—	$	784

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

At December 31, 2018 (dollars in thousands)	Level 1		Level 2		Level 3		Total

Trading securities
U.S. treasury and government agencies	$	—	$	1,539	$	—	$	1,539



Available-for-sale and equity securities
U.S. treasury and government agencies	$	—	$	19,142	$	—	$	19,142
Obligations of state and political agencies		—		66,387		—		66,387
Mortgage backed securities
Residential agency		—		126,998		—		126,998
Commercial		—		28,767		—		28,767
Asset backed securities		—		399		—		399
Corporate bonds		—		8,481		—		8,481
Equity securities		3,165		—		—		3,165

Total available-for-sale and equity securities	$	3,165	$	250,174	$	—	$	253,339



Other assets
Derivatives	$	—	$	12	$	—	$	12
Other liabilities
Derivatives	$	—	$	7	$	—	$	7

Investment Securities

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

Derivatives

Nonrecurring Basis

Net impairment losses related to nonrecurring estimated fair value measurements of certain assets at June 30, 2019 and December 31, 2018 consisted of the following:

	Balance at June 30, 2019								Balance at December 31, 2018

(dollars in thousands)	Level 2		Level 3		Total		Losses		Level 2		Level 3		Total		Losses
Loans held for sale	$	44,616	$	—	$	44,616	$	—	$	14,486	$	—	$	14,486	$	—
Loans held for branch sale		—		—		—		—		—		32,031		32,031		—
Impaired loans		—		3,766		3,766		935		—		4,022		4,022		2,538
Foreclosed assets		—		381		381		—		—		204		204		245
Servicing rights		—		4,300		4,300		—		—		4,623		4,623		—

Loans Held for Sale

On January 15, 2019, the Bank entered into an agreement with a third party to sell the loans of two branch locations in Duluth Minnesota, and on April 26, 2019, the Company completed the sale. As of December 31, 2018, the loans were held for branch sale and totaled $32.0 million. The estimated fair value in the table above is based on the agreed upon purchase price in the sales contract. The measurements are classified as Level 3.

Impairment losses for loans held for sale that are carried at the lower of cost or estimated fair value represent additional net write-downs during the period to record these loans at the

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

lower of cost or estimated fair value subsequent to their initial classification as loans held for sale.

Impaired Loans

Foreclosed Assets

Servicing Rights

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

The valuation techniques and significant unobservable inputs used to measure Level 3 estimated fair values at June 30, 2019, and December 31, 2018, are as follows:

			Balance at June 30, 2019								Balance at December 31, 2018

(dollars in thousands) Asset type	Valuation technique	Unobservable input	Fair value		Range			Weighted average			Fair value		Range			Weighted average
Loans held for branch sale	Discounted cash flows	Sales contract		—			(1)			(1)		32,031			(1)			(1)
Impaired loans	Appraisal value	Property specific adjustment		3,766		N/A			N/A			4,022		N/A			N/A
Foreclosed assets	Appraisal value	Property specific adjustment		381		N/A			N/A			204		N/A			N/A
Servicing rights	Discounted cash flows	Prepayment speed assumptions		4,300		123 - 233			153			4,623		104 - 211			130
		Discount rate				10.0	%		10.0	%				10.5	%		10.5	%

(1): The significant unobservable input related to the loans held for branch sale was the third party sales the Bank entered into on January 15, 2019.

The following disclosures represent financial instruments in which the ending balances at June 30, 2019 and December 31, 2018 are not carried at estimated fair value in their entirety on the consolidated balance sheets.

Cash and Due from Banks and Accrued Interest

The carrying amounts reported in the Consolidated Balance Sheets approximate those assets and liabilities estimated fair values.

Loans

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

Bank-Owned Life Insurance

Deposits

Deposits held for sale

On January 15, 2019, the Bank entered into an agreement with a third party to sell the deposits of two branch locations in Duluth Minnesota, and on April 26, 2019, the Company completed the sale. As of December 31, 2018, the deposits were held for sale and totaled $24.2 million. The estimated fair value in the table below is based on the carrying value of the deposits less the premium the Company expects to receive in accordance with the purchase agreement.

Short-Term Borrowings and Long-Term Debt

Off-Balance Sheet Credit-Related Commitments

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

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 19 Fair Value of Assets and Liabilities (Continued)

The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments are as follows:

			Estimated fair value

At June 30, 2019 (dollars in thousands)	Carrying amount		Estimated fair value
At June 30, 2019 (dollars in thousands)	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	44,920	$	44,920	$	—	$	—	$	44,920
Loans		1,692,206		—		—		1,689,837		1,689,837
Accrued interest receivable		7,818		7,818		—		—		7,818
Bank-owned life insurance		31,159		—		31,159		—		31,159
Financial Liabilities
Noninterest-bearing transaction	$	506,021	$	—	$	506,021	$	—	$	506,021
Interest-bearing transaction		1,063,955		—		1,063,955		—		1,063,955
Time deposits		183,389		—		—		183,096		183,096
Short-term borrowings		141,445		141,445		—		—		141,445
Long-term debt		58,808		—		58,603		—		58,603
Accrued interest payable		2,378		2,378		—		—		2,378

			Estimated fair value

At December 31, 2018 (dollars in thousands)	Carrying amount		Estimated fair value
At December 31, 2018 (dollars in thousands)	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	40,651	$	40,651	$	—	$	—	$	40,651
Loans		1,679,676		—		—		1,663,401		1,663,401
Accrued interest receivable		7,645		7,645		—		—		7,645
Bank-owned life insurance		30,763		—		30,763		—		30,763
Financial Liabilities
Noninterest-bearing transaction	$	550,640	$	—	$	550,640	$	—	$	550,640
Interest-bearing transaction		1,053,869		—		1,053,869		—		1,053,869
Time deposits		170,587		—		—		172,616		172,616
Deposits held for sale		24,197		—		—		22,019		22,019
Short-term borrowings		93,460		93,460		—		—		93,460
Long-term debt		58,824		—		59,988		—		59,988
Accrued interest payable		720		720		—		—		720

NOTE 20 Branch Sale

On January 15, 2019, the Company announced an agreement to sell our branch offices located in Duluth, Minnesota, including loans and deposits attributable to those offices, to another financial institution. We decided to exit the Duluth market to reallocate resources to the Twin Cities MSA, which is a higher growth market in the State, and our other core markets in

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 20 Branch Sale (Continued)

the Phoenix MSA and in Fargo and Grand Forks, North Dakota. The loans and deposits were classified as held for sale in our consolidated financial statements as of December 31, 2018. The loans and deposits associated with this transaction totaled approximately $28.3 million and $19.4 million, respectively, as of the closing date. A pre-tax gain on the sale was recognized in the amount of $1.5 million. The transaction closed on April 26, 2019.

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Shares

Common Stock

PROSPECTUS


RAYMOND JAMES		D.A. Davidson & Co.
Piper Jaffray

Through and including , 2019 (the 25 ^th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

, 2019

Table of Contents

PART II—INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth all costs and expenses, other than underwriting discounts and commissions, in connection with the sale of shares of the Company's common stock being registered, all of which will be paid by us. All amounts shown are estimates, except for the SEC registration fee, the Financial Industry Regulatory Authority, Inc. filing fee and the Nasdaq listing fee.

	Amount

SEC registration fee	$	*
Financial Industry Regulatory Authority, Inc. filing fee		*
Nasdaq listing fee		*
Legal fees and expenses		*
Accounting fees and expenses		*
Printing fees and expenses		*
Transfer agent and registrar fees and expenses		*
Miscellaneous		*

Total	$	*

*: To be completed by amendment.

Item 14. Indemnification of Directors and Officers.

Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (regarding, among other things, the payment of unlawful dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. Our certificate of incorporation provides for such limitation of liability.

Section 145(a) of the DGCL empowers a corporation to indemnify any director, officer, employee or agent, or former director, officer, employee or agent, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of such person's service as a director, officer, employee or agent of the corporation, or such person's service, at the corporation's request, as a director, officer, employee or agent of another corporation, partnership joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding; provided that such director or officer acted in good faith and in a manner such director or officer reasonably believed to be in or not opposed to the best interests of the corporation; and, with respect to any criminal action or proceeding, provided that such director or officer had no reasonable cause to believe his conduct was unlawful.

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Section 145(b) of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the court shall deem proper.

Section 145(c) provides that to the extent a present or former director or officer of a corporation has been successful on the merits or in the defense of any action, suit or proceeding referred to above, or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith.

Article VII of the Company's certificate of incorporation and Section 6.2 of the Company's bylaws provide that, subject to the limits of applicable federal banking laws and regulations, the present and former directors and officers of the Company shall be indemnified by the Company to the fullest extent permitted by the DGCL.

Section 6.4 of the Company's bylaws provides that, subject to the limits of applicable federal banking laws and regulations, we are required to advance certain expenses (including attorneys' fees) to our current and former directors and officers arising from any pending or threatened action, suit or proceeding related to such officer's or director's service to the Company.

The Company maintains directors' and officers' liability insurance which covers certain liabilities and expenses of its directors and officers and covers it for reimbursement of payments to our directors and officers in respect of such liabilities and expenses, in each case subject to certain limits and exceptions.

Reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto for provisions providing that the underwriters are obligated under certain circumstances to indemnify the Company's directors, officers and controlling persons against certain liabilities under the Securities Act.

Item 15. Recent Sales of Unregistered Securities.

In the three years preceding the filing of this registration statement, the Company has not issued any securities that were not registered under the Securities Act, other than the transactions described below.

Since January 1, 2019 to the date of this registration statement, the Company issued a total of 83,761 shares of common stock to employees and directors in the form of restricted stock grants, restricted stock units and retainer shares pursuant to compensatory plans. In 2016, 2017

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and 2018, the Company issued a total of 241,919 shares of common stock to employees and directors in the form of restricted stock grants, restricted stock units and retainer shares pursuant to compensatory plans. These grants were made in reliance upon exemptions from registration requirements under Section 4(a)(2) of the Securities Act and pursuant to Rule 701 under the Securities Act. In 2017, the Company issued a total of 63,955 shares of common stock to the Alerus Financial Corporation Employee Stock Ownership Plan. This issuance was made in reliance upon exemptions from registration requirements under Section 4(a)(2) of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits . The following exhibits are filed as part of this Registration Statement:

		Description

1.1		Form of Underwriting Agreement
3.1		Third Amended and Restated Certificate of Incorporation of Alerus Financial Corporation
3.2		Second Amended and Restated Bylaws of Alerus Financial Corporation
4.1		Form of common stock certificate of Alerus Financial Corporation
		The other instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request.
5.1		Form of opinion of Barack Ferrazzano Kirschbaum & Nagelberg LLP
10.1	†	Executive Severance Agreement by and between Alerus Financial Corporation and Randy Newman, dated August 1, 2017
10.2	†	Executive Severance Agreement by and between Alerus Financial Corporation and Dan Cheever, dated October 8, 2017
10.3	†	Executive Severance Agreement by and between Alerus Financial Corporation and Kris Compton, dated October 8, 2017
10.4	†	Executive Severance Agreement by and between Alerus Financial Corporation and Katie Lorenson, dated October 31, 2018
10.5	†	Executive Severance Agreement by and between Alerus Financial Corporation and Ann McConn, dated October 8, 2017
10.6	†	Executive Severance Agreement by and between Alerus Financial Corporation and Karin Taylor, dated December 10, 2018
10.7	†	Alerus Financial Corporation 2009 Stock Plan

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		Description

10.8	†	Form of Restricted Stock Award Agreement under the Alerus Financial Corporation 2009 Stock Plan
10.9	†	Form of Performance-Based Restricted Stock Unit Agreement under the Alerus Financial Corporation 2009 Stock Plan
10.10	†	Alerus Financial Long Term Incentive Plan
10.11	†	Alerus Financial Short Term Incentive Plan
10.12	†	Alerus Financial Corporation Deferred Compensation Plan for Directors (As Restated Effective January 1, 2005)
10.13	†	Alerus Financial Corporation Deferred Compensation Plan for Executives (As Adopted Effective January 1, 2006) as subsequently amended
10.14	†	Alerus Financial Employee Stock Ownership Plan
10.15	†	Alerus Financial Corporation 2019 Equity Incentive Plan
10.16	†	Alerus Financial Corporation Stock Grant Plan for Non-Employee Directors
21.1		Subsidiaries of Alerus Financial Corporation
23.1		Consent of CliftonLarsonAllen LLP
23.2		Consent of Barack Ferrazzano Kirschbaum & Nagelberg LLP (included as part of Exhibit 5.1)
24.1		Powers of Attorney (included on the signature page)

†: Indicates a management contract or compensatory plan or arrangement.

(b) Financial Statement Schedules . All schedules are omitted because the required information is inapplicable or the information is presented in the consolidated financial statements and the related notes.

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is

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against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Grand Forks, State of North Dakota, on August 16, 2019.

POWERS OF ATTORNEY

Each of the undersigned officers and directors of Alerus Financial Corporation hereby constitutes and appoints Randy L. Newman and Katie A. Lorenson, and each of them individually (with full power to each of them to act alone), his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him or her and in his or her name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date


/s/ Randy L. Newman Randy L. Newman	Chairman, Chief Executive Officer and President (Principal Executive Officer)	August 16, 2019
/s/ Katie A. Lorenson Katie A. Lorenson	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	August 16, 2019
/s/ Karen M. Bohn Karen M. Bohn	Director	August 16, 2019

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Signature	Title	Date


/s/ Lloyd G. Case Lloyd G. Case	Director	August 16, 2019
/s/ Daniel E. Coughlin Daniel E. Coughlin	Director	August 16, 2019
/s/ Kevin D. Lemke Kevin D. Lemke	Director	August 16, 2019
/s/ Michael S. Mathews Michael S. Mathews	Director	August 16, 2019
/s/ Sally J. Smith Sally J. Smith	Director	August 16, 2019
/s/ Galen G. Vetter Galen G. Vetter	Director	August 16, 2019

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Exhibit 1.1

[ ] Shares(1)

ALERUS FINANCIAL CORPORATION

Common Stock

UNDERWRITING AGREEMENT

[ ], 2019

Raymond James & Associates, Inc.

As Representative of the Several Underwriters

listed on Schedule I hereto

880 Carillon Parkway

St. Petersburg, Florida 33716

Ladies and Gentlemen:

Alerus Financial Corporation, a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to the several Underwriters named in Schedule I hereto (the “Underwriters”), an aggregate of [ ] shares of the Company’s Common Stock, par value $1.00 per share (the “Common Stock”). The aggregate of [ ] shares to be purchased from the Company are called the “Firm Shares.” In addition, the Company has agreed to sell to the Underwriters, upon the terms and conditions stated herein, up to an additional [ ] shares of Common Stock (the “Additional Shares”) to cover over-allotments by the Underwriters, if any. The Firm Shares and the Additional Shares are collectively referred to in this agreement (this “Agreement”) as the “Shares.” Raymond James & Associates, Inc. is acting as the representative of the several Underwriters and in such capacity is referred to in this Agreement as “you” or the “Representative.”

The Company and the Underwriters agree that up to [ ]% of the Firm Shares (the “Directed Shares”) shall be reserved for sale by the Underwriters to [certain eligible officers, directors, employees, business associates and other persons having relationship with] the Company and its subsidiaries (collectively, the “Directed Share Participants”), as part of the distribution of the Shares by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and all other applicable laws, rules and regulations. To the extent that such Directed Shares are not orally confirmed for purchase, and subject to an agreement to purchase, by the Directed Share Participants by 11:59 p.m. St. Petersburg, Florida time on the first business day after the date of this Agreement, such Directed Shares may be offered to the public as part of the public offering contemplated hereby.

(1) Plus an additional [ ] shares subject to Underwriters’ over-allotment option.

The Company wishes to confirm as follows its agreement with you and the other several Underwriters, on whose behalf you are acting, in connection with the several purchases of the Shares from the Company.

1. Registration Statement and Prospectus . The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Act”), a registration statement on Form S-1 (File No. 333-[ ]), including a prospectus subject to completion, relating to the Shares. Such registration statement, as amended, including the financial statements and exhibits thereto, at the time when it was declared effective and as thereafter amended by any post-effective amendment, is referred to in this Agreement as the “Registration Statement.” The prospectus in the form included in the Registration Statement or, if the prospectus included in the Registration Statement omits certain information in reliance upon Rule 430A under the Act and such information is thereafter included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act or as part of a post-effective amendment to the Registration Statement after the Registration Statement is declared effective, the prospectus as so filed, is referred to in this Agreement as the “Prospectus.” If the Company files another registration statement with the Commission to register a portion of the Shares pursuant to Rule 462(b) under the Act (the “Rule 462 Registration Statement”), then any reference to “Registration Statement” herein shall be deemed to include the registration statement on Form S-1 (File No. 333-[ ]) and the Rule 462 Registration Statement, as each such registration statement may be amended pursuant to the Act. The prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of such Registration Statement with the Commission, as such prospectus is amended from time to time until the date of the Prospectus, is referred to in this Agreement as the “Preliminary Prospectus.” For purposes of this Agreement, “free writing prospectus” has the meaning ascribed to it in Rule 405 under the Act, and “Issuer Free Writing Prospectus” shall mean each free writing prospectus prepared by or on behalf of the Company or used or referred to by the Company in connection with the offering of the Common Stock. “Time of Sale Information” shall mean the Preliminary Prospectus together with the Issuer Free Writing Prospectuses, if any, identified in Schedule II hereto. All references in this Agreement to the Registration Statement, the Rule 462 Registration Statement, a Preliminary Prospectus, the Prospectus or the Time of Sale Information, or any amendments or supplements to any of the foregoing, shall be deemed to refer to and include any documents incorporated by reference therein, and shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”).

2. Agreements to Sell and Purchase . Upon the terms and conditions set forth herein, Company agrees to issue and sell an aggregate of [ ] Firm Shares to the Underwriters . Upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company at a purchase price of $[ ] per Share (the “Purchase Price per Share”), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto.

The Company hereby also agrees to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right for 30 days from the date of the Prospectus to purchase from the Company, up to [ ] Additional Shares at a purchase price equal to the Purchase Price per Share. The Additional Shares may be purchased solely for the purpose of covering over-allotments, if any, made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase the number of Additional Shares (subject to such adjustments as you may determine to avoid fractional shares) that bears the same proportion to the total number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of Firm Shares. The option to purchase Additional Shares may be exercised at any time within 30 days after the date of the Prospectus, but no more than once.

3. Terms of Public Offering . The Company has been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement has been declared effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus.

Not later than 12:00 p.m., St. Petersburg, Florida time, on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representative shall request.

4. Delivery of the Shares and Payment Therefor . The closing for the purchase of the Firm Shares shall take place at the offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida at 10:00 a.m., St. Petersburg, Florida time, on [ ], 2019, or such other place, time and date not later than 1:30 p.m., St. Petersburg, Florida time, on [ ], 2019 as the Representative and the Company may agree (the time and date of such closing are called the “Closing Date”).

The closing for the purchase of any Additional Shares to be purchased by the Underwriters shall take place at the offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time, on such date (the “Additional Closing Date”) (which may be the same as the Closing Date, but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to) as shall be specified in a written notice, from the Representative on behalf of the Underwriters to the Company, of the Underwriters’ determination to purchase a number, specified in such notice, of Additional Shares. Such notice may be given at any time within 30 days after the date of the Prospectus and must set forth (i) the aggregate number of Additional Shares as to which the Underwriters are exercising the option and (ii) the names and denominations in which the Additional Shares are to be registered. The place of closing for the Additional Shares and the Additional Closing Date may be varied by agreement between you and the Company.

Certificates or book-entries for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 1:00 p.m., St. Petersburg, Florida time, not later than the second full business day preceding the Closing Date or the Additional Closing Date, as the case may be. Such certificates, if any, shall be made available to you in St. Petersburg, Florida for inspection and packaging not later than 9:30 a.m., St. Petersburg, Florida time, on the business day immediately preceding the Closing Date or the Additional Closing Date, as the case may be. The certificates or book-entries evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Additional Closing Date, as the case may be, against payment of the purchase price therefor by wire transfer of immediately available funds to accounts specified in writing, not later than the close of business on the business day next preceding the Closing Date or the Additional Closing Date, as the case may be, by the Company. Payment for the Shares sold by the Company hereunder shall be delivered by the Representative to the Company. The Company shall deliver the Firm Shares and any Additional Shares through the facilities of The Depository Trust Company (“DTC”) unless the Representative shall otherwise instruct.

It is understood that the Representative has been authorized, for its own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the Purchase Price per Share for the Firm Shares and the Additional Shares, if any, that the Underwriters have agreed to purchase. Raymond James & Associates, Inc., individually and not as Representative of the Underwriters, may, but, subject to Section 12, shall not be obligated to, make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representative by the Closing Date or the Additional Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement.

5. Covenants and Agreements . The Company covenants and agrees with the several Underwriters as follows:

(a) The Company will use its best efforts to cause the Registration Statement and any amendments thereto to be declared effective, if it has not already been declared effective, and will advise you promptly and, if requested by you, will confirm such advice in writing (i) when the Registration Statement has been declared effective and the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any Preliminary Prospectus or the Prospectus and the time and date that any post-effective amendment to the Registration Statement becomes effective, (ii) if the prospectus included in the Registration Statement omits information in reliance upon Rule 430A under the Act, when the Prospectus has been timely filed pursuant to Rule 424(b) under the Act, (iii) of the receipt of any comments of the Commission, or any request by the Commission for amendments or supplements to the Registration Statement, any Preliminary Prospectus or the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purposes, and (v) within the period as in the reasonable opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or a dealer (the

“Prospectus Delivery Period”), of any change in the Company’s condition (financial or other), business, prospects, properties or results of operations, or of any event that comes to the attention of the Company that makes any statement made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue in any material respect or that requires the making of any additions thereto or changes therein in order to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading in any material respect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. The Company will provide the Underwriters with copies of the form of Prospectus, in such number as the Underwriters may reasonably request, and file with the Commission such Prospectus in accordance with Rule 424(b) under the Act within the time period required by Rule 424(b).

(b) Upon written request, the Company will furnish to you, without charge, two signed duplicate originals of the Registration Statement, or certified copies thereof, as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the Registration Statement as originally filed and of each amendment thereto as you may reasonably request.

(c) The Company will promptly file with the Commission any amendment or supplement to the Registration Statement or the Prospectus that may, in the reasonable judgment of the Company or the Representative, be required by the Act or requested by the Commission.

(d) The Company will furnish a copy of any amendment or supplement to the Registration Statement or to the Prospectus or any Issuer Free Writing Prospectus to you and counsel to the Underwriters for review prior to its filing with the Commission and will not file any proposed amendment or supplement to the Registration Statement or to the Prospectus or any Issuer Free Writing Prospectus which the Representative reasonably object, unless the Company reasonably determines such amendment or supplement is required by law.

(e) The Company will not make any offer relating to the Common Stock that would constitute an Issuer Free Writing Prospectus without your express prior written consent.

(f) The Company will retain in accordance with the Act all Issuer Free Writing Prospectuses not required to be filed pursuant to the Act; and if at any time after the date hereof any events shall have occurred as a result of which any Issuer Free Writing Prospectus, as then amended or supplemented, would conflict with the information in the Registration Statement, the most recent Preliminary Prospectus or the Prospectus or would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or, if for any other reason it shall be necessary to amend or supplement any Issuer Free Writing Prospectus, to notify you and, upon your request, to file such document and to prepare and furnish without charge to each Underwriter as many copies as they may from time to time reasonably request of an

amended or supplemented Issuer Free Writing Prospectus that will correct such conflict, statement or omission or effect such compliance.

(g) Prior to the execution and delivery of this Agreement, the Company has delivered or will deliver to you, without charge, in such quantities as you have requested or may hereafter reasonably request, copies of each form of the Preliminary Prospectus. Consistent with the provisions of Section 5(h) hereof, the Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Preliminary Prospectus that was most recently furnished by the Company.

(h) As soon after the execution and delivery of this Agreement as is practicable and thereafter from time to time during the Prospectus Delivery Period, and for so long a period as you may request for the distribution of the Shares, the Company will deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus and the Time of Sale Information (and of any amendment or supplement thereto) as they may reasonably request. The Company consents to the use of the Prospectus and the Time of Sale Information (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If at any time prior to the later of (i) the completion of the distribution of the Shares pursuant to the offering contemplated by the Registration Statement; provided the Representative shall have advised the Company in writing if such distribution has not been completed on or prior to the date referenced in the following clause (ii), or (ii) the expiration of prospectus delivery requirements with respect to the Shares under Section 4(a)(3) of the Act and Rule 174 thereunder, any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to Section 5(a) hereof, file with the Commission and, if applicable, use its best efforts to cause to become effective as promptly as possible an appropriate supplement or amendment thereto, and will furnish to each Underwriter who has previously requested Prospectuses, without charge, a reasonable number of copies thereof.

(i) During the Prospectus Delivery Period, the Company will file all documents required to be filed with the Commission pursuant to Sections 13, 14 and 15 of the Exchange Act (as defined herein) in the manner and within the time periods required by the Exchange Act.

(j) The Company will cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may reasonably designate and will file such consents to service of process or other documents as may be reasonably necessary in order to effect and maintain such registration or qualification for

so long as required to complete the distribution of the Shares; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to general service of process in suits, other than those arising out of the offering or sale of the Shares, as contemplated by this Agreement and the Prospectus, in any jurisdiction where it is not now so subject. In the event that the Company is notified that the qualification of the Shares in any jurisdiction is suspended, the Company shall so advise you promptly in writing. If required, the Company will use its best efforts to qualify or register its Common Stock for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of each state where necessary to permit market making transactions and secondary trading and will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for so long as is required for the distribution of the Shares.

(k) The Company will timely file such periodic reports pursuant to the Exchange Act as are necessary in order to make generally available to its security holders a consolidated earnings statement (in form complying with the provisions of Rule 158), which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and the Rule 462 Registration Statement, if any, and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act.

(l) During the five-year period beginning on the date hereof, the Company will promptly furnish to you and, upon your request, to each of the other Underwriters, (i) a copy of each proxy statement, quarterly or annual report or other report of the Company mailed to stockholders or filed with the Commission, FINRA, [the Nasdaq Capital Market] (“Nasdaq”) or any national securities exchange and (ii) from time to time such other information concerning the Company as you may reasonably request; provided the Company’s obligation pursuant to this Section 5(l) shall be deemed to have been satisfied to the extent such documents or reports are filed or furnished on EDGAR or made available on the website of the Company or of Alerus Financial, National Association, a national banking association (the “Bank”).

(m) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder in accordance in all material respects with the statements under the caption “Use of Proceeds” in the Prospectus.

(n) For a period commencing on the date hereof and ending on the 180th day after the date of the Prospectus (the “Lock-Up Period”), the Company will not, directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by the Company during the Lock-Up Period) any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the Common Stock issued or issuable pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof, copies of which have been made available to the Underwriters, or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the grant of options, rights or warrants pursuant to employee benefit plans, qualified

stock option plans or other employee compensation plans existing on the date hereof, in each case, copies of which have been made available to the Underwriters), (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, (3) file or cause to be filed a registration statement (other than a registration statement on Form S-8 or Form S-4), including any amendments, with respect to the registration of any shares of Common Stock or securities convertible, exercisable or exchangeable into Common Stock or any other securities of the Company or (4) publicly disclose the intention to do any of the foregoing, in each case without the prior written consent of the Representative on behalf of the Underwriters; provided that this sentence shall not apply to (A) the Shares to be sold pursuant to this Agreement, or (B) any shares of Common Stock issued or issuable in connection with any merger, consolidation, joint venture, strategic alliance or other similar transaction with another company, provided that the recipient of such shares of Common Stock agrees to be bound in writing by an agreement of the same remaining duration and terms as set forth in this Section 5(n). The Company shall cause each individual set forth on Schedule IV hereto to furnish to the Representative, prior to the date hereof, a letter or letters, substantially in the form of Exhibit A hereto (the “Lock-Up Agreements”).

(o) Prior to the Closing Date or the Additional Closing Date, as the case may be, the Company will furnish to you, as promptly as possible, copies of any unaudited quarterly interim consolidated financial statements of the Company and its subsidiaries for any quarterly period subsequent to the periods covered by the financial statements appearing in the Prospectus.

(p) The Company will not at any time during the Lock-Up Period, directly or indirectly, take any action designed, or which might reasonably be expected to cause or result in, or which will constitute, stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares.

(q) The Company will use its best efforts to qualify the Shares for listing and, for a period of not less than three years, to maintain the listing of the Shares on the Nasdaq.

(r) If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representative and, should the Underwriters request, will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission. Written Testing-the-Waters Communications” means the Written Testing-the-Waters Communications, if any, listed on Schedule III hereto.

6. Certain Agreements of the Underwriters . Each Underwriter hereby represents and warrants to, and agrees with, the Company that:

(a) It has not and will not use, authorize use of, refer to or participate in the planning for use of, any “free writing prospectus”, as defined in Rule 405 under the Securities Act (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company) other than (i) a free writing prospectus that contains no “issuer information” (as defined in Rule 433(h)(2) under the Securities Act) that was not included (including through incorporation by reference) in any Preliminary Prospectus or a previously filed Issuer Free Writing Prospectus, (ii) any Issuer Free Writing Prospectus listed on Schedule II or prepared pursuant to Section 5(d), (e) or (f), above (including any electronic road show approved in advance by the Company), or (iii) any free writing prospectus prepared by such underwriter and approved by the Company in advance in writing (each such free writing prospectus referred to in clauses (i) or (iii), an “Underwriter Free Writing Prospectus”).

(b) It has not and will not, without the prior written consent of the Company, use any free writing prospectus that contains the final terms of the Shares unless such terms have previously been included in a free writing prospectus filed with the Commission[; provided that Underwriters may use a term sheet substantially in the form of Exhibit [•] hereto without the consent of the Company; provided further that any Underwriter using such term sheet shall notify the Company, and provide a copy of such term sheet to the Company, prior to, or substantially concurrently with, the first use of such term sheet].

(c) It is not subject to any pending proceeding under Section 8A of the Securities Act with respect to the offering (and will promptly notify the Company if any such proceeding against it is initiated during the Prospectus Delivery Period).

(d) It has not engaged in any Testing-the-Waters Communications.

7. Representations and Warranties . The Company hereby represents and warrants to each Underwriter on the date hereof, and shall be deemed to represent and warrant to each Underwriter on the Closing Date and the Additional Closing Date, as the case may be, that:

(a) The Company was not at the time of initial filing of the Registration Statement and at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Act) of the Common Stock, is not on the date hereof and will not be on the applicable Delivery Date an “ineligible issuer” (as defined in Rule 405 under the Act).

(b) The Registration Statement conformed, and any amendment to the Registration Statement filed after the date hereof will conform, in all material respects when filed, to the requirements of the Act. The most recent Preliminary Prospectus conformed, and the Prospectus will conform, in all material respects when filed with the Commission pursuant to Rule 424(b), to the requirements of the Act.

(c) The Registration Statement does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided , that no representation or warranty is made as to

information contained in or omitted from the Registration Statement in reliance upon and in conformity with [the information in the first sentence under the heading “Underwriting—Commissions and Expenses,” the information in the first and ninth sentences under the heading “Underwriting—Stabilization” and the information in the first sentence under the heading “Passive Market Making,”] in each case contained in the Prospectus (collectively, the “Underwriter Information”).

(d) The Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Prospectus in reliance upon and in conformity with the Underwriter Information.

(e) The Time of Sale Information does not, and will not at the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Time of Sale Information in reliance upon and in conformity with the Underwriter Information. For the purposes of this Agreement, the “Applicable Time” is [ ] [a.m./p.m.], St. Petersburg, Florida time, on [ ], 2019.

(f) Each Issuer Free Writing Prospectus (including, without limitation, any road show that is a free writing prospectus under Rule 433 under the Act), when considered together with the Time of Sale Information at the Applicable Time, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Prospectus in reliance upon and in conformity with the Underwriter Information.

(g) Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the Act on the date of first use, and the Company has complied or will comply with all prospectus delivery and any filing requirements applicable to such Issuer Free Writing Prospectus pursuant to the Act. The Company has not made any offer relating to the Common Stock that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representative. The Company has retained in accordance with the Act all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the Act. The Company has taken all actions necessary so that any “road show” (as defined in Rule 433 under the Act) in connection with the offering of the Shares will not be required to be filed pursuant to the Act or alternatively, shall timely file such road show pursuant to the Act.

(h) The capitalization of the Company is and will be as set forth in the Prospectus as of the date set forth therein. All the outstanding shares of Common Stock of the Company have been, and as of the Closing Date and the Additional Closing Date, as the case may be, will be, duly authorized and validly issued, fully paid and nonassessable and free of any preemptive or similar rights; except as set forth in the Time of Sale Information and the Prospectus, the

Company is not a party to or bound by any outstanding options, warrants or similar rights to subscribe for, or contractual obligations to issue, sell, transfer or acquire, any of its capital stock or any securities convertible into or exchangeable for any of such capital stock; the Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against full payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; the capital stock of the Company conforms to the description thereof in the Registration Statement, the Time of Sale Information and the Prospectus (or any amendment or supplement thereto); and the delivery of certificates or book-entries for the Shares being sold by the Company against payment therefor pursuant to the terms of this Agreement will pass valid title to the Shares being sold by the Company, free and clear of any claim, encumbrance or defect in title, to the several Underwriters purchasing such shares in good faith and without notice of any lien, claim or encumbrance. The certificates, if any, for the Shares being sold by the Company are in valid and sufficient form. There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act or otherwise register the offer or sale of any securities of the Company owned or to be owned by such person.

(i) The Company is in good standing in Delaware and is duly registered and qualified to conduct its business and is in good standing in each other jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except, in the case of such other jurisdictions or places, where the failure to so register or qualify has not had or will not have a material adverse effect on the condition (financial or other), business, properties, stockholders’ equity, results of operations or prospects of the Company and its subsidiaries, taken as a whole (a “Material Adverse Effect”). The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The activities of the Company’s subsidiaries are permitted of subsidiaries of a bank holding company under applicable law and the rules and regulations of the Federal Reserve set forth in Title 12 of the Code of Federal Regulations. Each of the Company and its subsidiaries is duly organized and validly existing as a corporation, limited liability company or other organization in good standing under the laws of the jurisdiction of its incorporation or organization with full corporate or organizational power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto). The Bank, which is the Company’s principal subsidiary bank, has been duly organized and is validly existing as a national banking association in good standing under the laws of the United States, and has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement, the Time of Sale Information and the Prospectus, and has been duly qualified for the transaction of business and is in good standing under the laws of each jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, except where the failure to be so qualified or to be in good standing has not had or will not have a Material Adverse Effect. The activities of the Bank are permitted under the laws and the rules and regulations applicable to banks chartered under the laws of the United States. Each other subsidiary of the Company is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration

or qualification except where the failure to so register or qualify has not had or will not have a Material Adverse Effect. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”).

(j) The issued shares of capital stock of each of the Company’s subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and, except as described in the Registration Statement, the Time of Sale Information and Prospectus, are owned by the Company free and clear of any security interests, liens, encumbrances, equities or claims. The Company does not have any subsidiaries and does not own a material interest in or control, directly or indirectly, any other corporation, partnership, joint venture, association, trust or other business organization, except as set forth in Exhibit 21 to the Registration Statement or that are not required to be set forth in such Exhibit. As used in this Agreement, subsidiaries shall mean direct and indirect subsidiaries of the Company.

(k) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or its subsidiaries or to which the Company or its subsidiaries or any of their properties are subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) but are not described as required. Except as described in the Registration Statement, the Time of Sale Information and Prospectus, there is no action, suit, inquiry, proceeding or investigation by or before any court or governmental or other regulatory or administrative agency or commission pending or, to the knowledge of the Company, threatened, against or involving the Company or its subsidiaries, which would individually or in the aggregate prevent or adversely affect the transactions contemplated by this Agreement or result in a Material Adverse Effect. There are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement, the Time of Sale Information or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described, filed or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus as required by the Act. All such contracts to which the Company or any of its subsidiaries is a party have been duly authorized, executed and delivered by the Company or the applicable subsidiary, constitute valid and binding agreements of the Company or the applicable subsidiary and are enforceable against the Company or the applicable subsidiary in accordance with the terms thereof, except as enforceability thereof may be limited by (x) the application of bankruptcy, reorganization, insolvency and other laws affecting creditors’ rights generally and (y) equitable principles being applied at the discretion of a court before which any proceeding may be brought. Neither the Company nor the applicable subsidiary has received notice or been made aware that any other party is in breach of or default to the Company under any of such contracts, in each case that could result in a Material Adverse Effect.

(l) Neither the Company nor any of its subsidiaries, including the Bank, is (A) in violation of (1) its certificate or articles of incorporation or association or bylaws, or other organizational documents, except, in the case of the Company’s subsidiaries other than the Bank, as would not result in a Material Adverse Effect, (2) any federal, state or foreign law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of its subsidiaries, the violation of which would have a Material Adverse Effect or (3) any decree of

any federal, state or foreign court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, except as would not result in a Material Adverse Effect; or (B) in default in the performance of any obligation, agreement or condition contained in (1) any bond, debenture, note or any other evidence of indebtedness or (2) any agreement, indenture, lease or other instrument to which the Company or any of its subsidiaries is a party or by which any of their properties may be bound (each of the documents and instruments described in clauses (B)(1) and (B)(2), an “Existing Instrument”), which default would have a Material Adverse Effect; and there does not exist any state of facts that constitutes an event of default on the part of the Company or any of its subsidiaries as defined in such documents or that, with notice or lapse of time or both, would constitute such an event of default, except, in each case, for events of default that would not result in a Material Adverse Effect.

(m) The Company’s execution and delivery of this Agreement and the performance by the Company of its obligations under this Agreement have been duly and validly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and, assuming the due authorization, execution and delivery of this Agreement by the Representative, constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent enforceability may be limited by (x) the application of bankruptcy, reorganization, insolvency and other laws affecting creditors’ rights generally and (y) equitable principles being applied at the discretion of a court before which any proceeding may be brought, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.

(n) None of the issuance and sale of the Shares by the Company, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (A) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (“Governmental Authority”) (except such as may be required for the registration of the offer and sale of the Shares under the Act, the listing of the Shares for trading on Nasdaq, the registration of the Common Stock under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Exchange Act”), and compliance with the securities or Blue Sky laws of various jurisdictions, all of which will be, or have been, to the extent required, effected in accordance with this Agreement, and except for FINRA’s clearance of the underwriting terms of the offering contemplated hereby as required under the applicable rules of FINRA), (B) conflicts with or will conflict with or constitutes or will constitute a breach of, or a default under, the Company’s certificate of incorporation or the Company’s bylaws or any Existing Instrument, (C) violates any statute, law, regulation, ruling, filing, judgment, injunction, order or decree applicable to the Company or any of its subsidiaries or any of their properties, or (D) results in a breach of, or default or Debt Repayment Triggering event (as defined below) under, or results in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or requires the consent of any other party to, any Existing Instrument, except in each case for such conflicts, breaches, defaults, liens, charges, encumbrances or failures to obtain required consents that would not, individually or in the aggregate, result in a Material Adverse Effect. As used herein, a “Debt Repayment Triggering Event” means any event or condition that gives, or

with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries.

(o) Except as described in the Time of Sale Information and the Prospectus, and except for options to purchase capital stock issued pursuant to the Company’s [Alerus Financial Long-Term Incentive Plan and Alerus Financial Corporation 2009 Stock Plan], neither the Company nor any of its subsidiaries has outstanding, and at the Closing Date and the Additional Closing Date, as the case may be, will not have outstanding, any options to purchase, or any warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of Common Stock or any such warrants or convertible securities or obligations. No holder of securities of the Company has rights to the registration of any securities of the Company as a result of or in connection with the filing of the Registration Statement or the consummation of the transactions contemplated hereby that have not been satisfied or heretofore waived in writing.

(p) CliftonLarsonAllen LLP, the certified public accountants who have certified the financial statements (including the related notes thereto) filed as part of the Registration Statement and the Prospectus (or any amendment or supplement thereto), are independent public accountants as required by the Act.

(q) The financial statements, together with related notes, included in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto), present fairly, in all material respects, the financial condition, results of operations, cash flows and changes in financial position of the Company on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein and subject, in the case of unaudited financial statements, to the absence of footnotes and normal year-end adjustments; and the other financial and statistical information and data set forth in the Registration Statement and Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. No other financial statements or schedules are required to be included in the Registration Statement.

(r) Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus (or any amendment or supplement thereto), since the date of the most recent audited financial statements of the Company included in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto), (A) neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, indirect, direct or contingent (including any off-balance sheet obligations), or entered into any material transaction that is not in the ordinary course of business, (B) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance, (C) neither the Company nor any of its subsidiaries has paid or declared

any dividends or other distributions with respect to its capital stock and neither the Company nor any of its subsidiaries is in default under the terms of any class of capital stock or any outstanding debt obligations, (D) there has not been any change in the authorized or outstanding capital stock of the Company or any material change in the indebtedness of the Company (other than in the ordinary course of business), and (E) there has been no change or development that could reasonably be expected to have a Material Adverse Effect.

(s) All offers and sales of the Company’s capital stock and other debt or other securities prior to the date hereof were made in compliance with or were the subject of an available exemption from the Act and all other applicable state and federal laws or regulations, or any actions under the Act or any state or federal laws or regulations in respect of any such offers or sales are effectively barred by effective waivers or statutes of limitation.

(t) The Shares have been approved for inclusion on the Nasdaq under the symbol “ALRS”, subject to any required official notice of issuance of the Shares being sold by the Company, and upon consummation of the offering contemplated hereby the Company will be in compliance with the designation and maintenance criteria applicable to Nasdaq issuers.

(u) Other than excepted activity pursuant to Regulation M under the Exchange Act, the Company has not taken and will not, during the Lock-Up Period, take, directly or indirectly, any action that constituted, or any action designed to, or that might reasonably be expected to cause or result in or constitute, under the Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or that would result in a violation of Regulation M under the Exchange Act.

(v) The Company and each of its subsidiaries have filed all tax returns required to be filed through the date hereof or have timely requested extensions thereof (other than tax returns, as to which the failure to file, individually or in the aggregate, would not have a Material Adverse Effect), and neither the Company nor any subsidiary is in default in the payment of any taxes that were payable pursuant to said returns except for cases in which the failure to file or pay would not result in a Material Adverse Effect, and except for such taxes, if any, as are being contested in good faith and as to which the Company has established adequate reserves. Except as disclosed in the Time of Sale Information and the Prospectus or that would not have a Material Adverse Effect, all deficiencies asserted as a result of any federal, state, local or foreign tax audits have been paid or finally settled. On the Closing Date and the Additional Closing Date, as the case may be, all stock transfer and other taxes that are required to be paid in connection with the sale of the Shares to the Underwriters will have been fully paid by the Company and all laws imposing such taxes will have been complied with.

(w) Except as set forth in the Time of Sale Information and the Prospectus, there are no transactions with “affiliates” (as defined in Rule 405 under the Act) or any officer, director or security holder of the Company (whether or not an affiliate) that are required by the Act to be disclosed in the Registration Statement that are not so disclosed. Additionally, no relationship, direct or indirect, exists between the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any

subsidiary, on the other hand, that is required by the Act to be disclosed in the Registration Statement, the Time of Sale Information and the Prospectus that is not so disclosed.

(x) The Company is not an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an investment company within the meaning of the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is not required, and upon the issuance and sale of the Shares as herein contemplated and the application of the net proceeds therefrom as described in the Registration Statement, the Time of Sale Information and the Prospectus will not be required, to register as an “investment company” under the 1940 Act or an entity “controlled” by an “investment company” within the meaning of the 1940 Act.

(y) Each of the Company and its subsidiaries has good and valid title to all property (real and personal) described in the Time of Sale Information and the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except (x) such as are described in the Time of Sale Information and the Prospectus or (y) such as would not result in a Material Adverse Effect. All property (real and personal) held under lease by the Company and its subsidiaries is held by it under valid, subsisting and enforceable leases with only such exceptions as in the aggregate would not result in a Material Adverse Effect.

(z) Each of the Company and its subsidiaries has all permits, licenses, franchises, approvals, consents and authorizations of governmental or regulatory authorities (hereinafter “permit” or “permits”) as are necessary to own its properties and to conduct its business in the manner described in the Time of Sale Information and the Prospectus, subject to such qualifications as may be set forth in the Time of Sale Information and the Prospectus, except where the failure to have any such permit has not had and will not have a Material Adverse Effect; each of the Company and its subsidiaries has operated and is operating its business in compliance with and not in violation of all of its obligations with respect to each such permit and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of any such permit or result in any other material impairment of the rights of any such permit, except, in each case, as would not to result in a Material Adverse Effect; and such permits contain no restrictions that are burdensome to the Company or any of its subsidiaries, such that they would result in a Material Adverse Effect.

(aa) All disclosures contained in the Time of Sale Information and the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission) comply in all material respects with Regulation G of the Exchange Act and Item 10(e) of Regulation S-K under the Act, to the extent applicable.

(bb) The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management’s general or specific authorizations, and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate

action is taken with respect to any differences; neither the Company’s independent auditors nor the Audit Committee of the Board of Directors of the Company is aware of: (i) any significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting that have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting (it being understood that this subsection shall not require the Company to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated in connection therewith (the “Sarbanes-Oxley Act”) as of an earlier date than it would otherwise be required to so comply under applicable law);.

(cc) The Company and its subsidiaries maintain an effective system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act) that has been designed to comply with the requirements of the Exchange Act applicable to the Company and that has been designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure; the Company and its subsidiaries are, and the Company has taken all necessary actions to ensure that the Company’s directors and officers in their capacities as such are, each in compliance in all material respects with all applicable effective provisions of the Sarbanes-Oxley Act, and the rules and regulations of the Commission and Nasdaq promulgated thereunder; and, to the knowledge of the Company, the Company’s directors or officers, in their capacities as such, are each in compliance in all material respects with Section 402 of the Sarbanes-Oxley Act and the rules and regulations of the Commission promulgated thereunder.

(dd) Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or any of its subsidiaries is aware of or has taken any action with respect to the Company or its subsidiaries, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “Foreign Corrupt Practices Act”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the Foreign Corrupt Practices Act) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the Foreign Corrupt Practices Act; and the Company, its subsidiaries and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance in all material respects with the Foreign Corrupt Practices Act and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance in all material respects therewith.

(ee) Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or any of its subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”); and the Company will not directly or indirectly use the proceeds of the sale of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(ff) The operations of the Company and its subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Bank Secrecy Act of 1970, as amended, the “United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001” (the “Patriot Act”) or the applicable money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar applicable rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(gg) No labor problem or dispute with the employees of the Company or any of its subsidiaries exists, or, to the Company’s knowledge, is threatened or imminent, which would reasonably be expected to result in a Material Adverse Effect. [Except as described in the Registration Statement, the Time of Sale Information and Prospectus, the] Company is not aware that any key employee or significant group of employees of the Company or any of its subsidiaries plans to terminate employment with the Company or any of its subsidiaries. Except for matters which would not, individually or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries has engaged in any unfair labor practice, (B) there is (1) no unfair labor practice complaint pending or, to the Company’s knowledge, threatened against the Company or any of its subsidiaries before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending or to the Company’s knowledge, threatened, (2) no strike, labor dispute, slowdown or stoppage pending or, to the Company’s knowledge, threatened against the Company or any of its subsidiaries, and (3) no union representation dispute currently existing concerning the employees of the Company or any of its subsidiaries, and (C) to the Company’s knowledge, (1) no union organizing activities are currently taking place concerning the employees of the Company or any of its subsidiaries and (2) there has been no violation of any federal, state, local or foreign law relating to discrimination in the hiring, promotion or pay of employees, any applicable wage or hour laws or any provision of the Employee Retirement Income Security Act of 1974 (“ERISA”) or the rules and regulations promulgated thereunder concerning the employees of the Company or any of its subsidiaries.

(hh) The Company and its subsidiaries (A) are in compliance with any and all applicable federal, state, local and foreign laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants

or contaminants (“Environmental Laws”), (B) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (C) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or other approvals would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any of its subsidiaries has been named as a “potentially responsible party” under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended. Neither the Company nor any of its subsidiaries owns, leases or occupies any property that appears on any list of hazardous sites compiled by any state or local governmental agency. There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, individually or in the aggregate, result in a Material Adverse Effect.

(ii) Each of the Company and its subsidiaries owns and has full right, title and interest in and to, or has valid licenses to use, each material trade name, trademark, service mark, patent, copyright, approval, trade secret and other similar rights (collectively “Intellectual Property”) under which the Company and its subsidiaries conduct all or any material part of its business, and the Company has not created any lien or encumbrance on, or granted any right or license with respect to, any such Intellectual Property except where the failure to own or have a license or right to use any such Intellectual Property has not and is not reasonably expected to have a Material Adverse Effect; there is no claim pending against the Company or its subsidiaries with respect to any Intellectual Property and the Company and its subsidiaries have not received notice or otherwise become aware that any Intellectual Property that it uses or has used in the conduct of its business infringes upon or conflicts with the rights of any third party, in each case except as would not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries has become aware that any material Intellectual Property that it uses or has used in the conduct of its business infringes upon or conflicts with the rights of any third party.

(jj) The Company has procured Lock-Up Agreements from each of the individuals set forth on Schedule IV hereto.

(kk) To the Company’s knowledge, there are no affiliations or associations between (A) any member of FINRA and (B) the Company or any of the Company’s officers, directors, 5% or greater security holders or any beneficial owner of the Company’s unregistered equity securities that were acquired at any time on or after the 180th day immediately preceding the date the Registration Statement was initially filed with the Commission, except as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus.

(ll) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which it is engaged; and neither the Company nor

any of its subsidiaries has reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a comparable cost.

(mm) The Company and its subsidiaries and any “employee benefit plan” (as defined under ERISA) established or maintained by the Company, its subsidiaries or their “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA and all other applicable state and federal laws. “ERISA Affiliate” means, with respect to the Company or a subsidiary, any member of any group or organization described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986 (the “Code”) of which the Company or such subsidiary is a member. No “reportable event” (as defined in ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No “employee benefit plan” established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined in ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (A) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (B) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, that would cause the loss of such qualification.

(nn) Each of the Company and its subsidiaries is in compliance in all material respects with all applicable laws, rules and regulations (including, without limitation, all applicable regulations and orders) of, or agreements with, any Governmental Authority, including any Governmental Authority having supervisory or regulatory authority with respect to the Company or any of its subsidiaries or their respective businesses, including, but not limited to, any federal or state agency charged with the supervision or regulation of depositary institutions or holding companies of depositary institutions, or engaged in the insurance of depositary institution deposits, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Bank Secrecy Act and Title III of the Patriot Act, to the extent such laws or regulations apply to the Company or its subsidiaries, as applicable, other than, in each case, where such failures to comply would not, individually or in the aggregate, to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to any investigation with respect to, any corrective, suspension or cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been a recipient of any supervisory letter from, or has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently relates to or restricts in any material respect the conduct of their business or that in any manner relates to their capital adequacy, credit policies or management (each, a “Regulatory Agreement”), nor has the Company or any of its subsidiaries been advised by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Agreement or any such Regulatory Agreement is pending or threatened; the

Company and its subsidiaries are each in substantial compliance with any Regulatory Agreements; there is no unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Company or any of its subsidiaries which, in the reasonable judgment of the Company, currently results in or is expected to result in a Material Adverse Effect. As used herein, the term “Regulatory Agency” means any Governmental Authority having supervisory or regulatory authority with respect to the Company or any of its subsidiaries, including, but not limited to, any federal or state agency charged with the supervision or regulation of depositary institutions or holding companies of depositary institutions, or engaged in the insurance of depositary institution deposits. Notwithstanding anything in this Agreement to the contrary, the Company makes no representations or warranties with respect to the nature or character of any fact or information that constitutes confidential supervisory information under applicable law, or the regulations, rules, guidance or interpretations of any Regulatory Agency.

(oo) The statistical and market related data contained in the latest dated of the Registration Statement, the Time of Sale Information and the Prospectus are based on or derived from sources which the Company believes are reliable and accurate.

(pp) Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries for a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Shares.

(qq) From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Act. “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Act.

(rr) The Company (i) has not alone engaged in any Testing-the-Waters Communications and (ii) has not authorized anyone to engage in Testing-the-Waters Communications. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Act.

(ss) The Company has filed publicly on EDGAR at least 15 calendar days prior to any road show, any confidentially submitted registration statement and registration statement amendments relating to the offer and sale of the Shares.

(tt) Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, the Bank is not prohibited, directly or indirectly, under any statute, law, rule, regulation, directive, order, agreement or other instrument to which it is a party or is subject, or otherwise, from paying any dividends to the Company, from making any other distribution on such subsidiary’s capital stock, from repaying to the Company any loans or

advances to such subsidiary from the Company or from transferring any of such subsidiary’s properties or assets to the Company.

(uu) The Company has not offered, or caused the Underwriters or the Representative to offer, Directed Shares to any Directed Shares Participant or any other person with the specific intent to unlawfully influence (A) a customer or supplier of the Company or the Bank to alter the customer’s or supplier’s level or type of business with the Company or the Bank, or (B) a trade journalist or publication to write or publish favorable information about the Company or the Bank or its products or services.

(vv) Except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, each of the Company and its subsidiaries has properly administered all accounts for which it acts as a fiduciary, including accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents, applicable federal and state law and regulation and common law. Neither the Company nor any of its subsidiaries or any of their respective directors, officers or employees has committed any breach of trust or fiduciary duty with respect to any such fiduciary account that would reasonably be expected to result in, individually or in the aggregate, a Material Adverse Effect and, except as would not reasonably be expected to result in, individually or in the aggregate, a Material Adverse Effect, the accountings for each such fiduciary account are true and correct and accurately reflect the assets of such fiduciary account.

(ww) The Bank (A) complies in all material respects with the Privacy Statements (as defined below) as applicable to any given set of personal information collected by the Bank from Individuals (as defined below), (B) complies in all material respects with all applicable federal, state, local and foreign laws and regulations regarding the collection, retention, use, transfer or disclosure of personal information, and (C) takes reasonable measures as are customary in the business in which the Bank and its subsidiaries are engaged to protect and maintain the confidential nature of the personal information provided to the Bank by Individuals in accordance with the terms of the applicable Privacy Statements. To the Company’s knowledge, no claim or controversy has arisen or been threatened regarding the Privacy Statements or the implementation thereof. As used herein, “Privacy Statements” means, collectively, any and all of the Bank’s privacy statements and policies published on the Bank’s websites or products or otherwise made available by the Bank regarding the collection, retention, use and distribution of the personal information of an individual, including, without limitation, from visitors or users of the Bank’s websites or products (“Individuals”).

(xx) No subsidiary of the Company is required to be registered, licensed or qualified as a broker-dealer or investment advisor with the Commission or under any similar state laws. The Company is not required to be registered as a futures commission merchant, commodities trading adviser, commodity pool operator or introducing broker under the Commodities Exchange Act or any similar state laws.

8. Expenses . Whether or not the transactions contemplated hereby are consummated or this Agreement becomes effective or is terminated, the Company agrees to pay or cause to be

paid the following expenses incidental to the performance of its obligations under this Agreement: (i) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the offer and sale of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, each Preliminary Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof and of any Preliminary Prospectus to the Underwriters and dealers; (ii) the printing and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the Prospectus, each Preliminary Prospectus, the Time of Sale Information and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) consistent with the provisions of Section 5(j), all expenses in connection with any necessary qualification of the Shares for offering and sale under state securities laws or Blue Sky laws and the preparation, printing and distribution of a Blue Sky Memorandum, including reasonable attorneys’ fees and out-of-pocket expenses of the counsel for the Underwriters in connection therewith; (iv) the filing fees incident to securing any required review by FINRA of the fairness of the terms of the sale of the Shares and the reasonable attorneys’ fees and out-of-pocket expenses of counsel for the Underwriters in connection therewith, provided , that the maximum aggregate amount that the Company shall be required to pay or reimburse pursuant to clauses (iii) and (iv) shall be $10,000; (v) the fees and expenses associated with listing the Shares on Nasdaq; (vi) the cost of preparing any stock certificates; (vii) the costs and charges of any transfer agent or registrar; (viii) the cost of the tax stamps, if any, in connection with the issuance and delivery of the Shares to the respective Underwriters; (ix) all other fees, costs and expenses of the Company referred to in Part II, Item 13 of the Registration Statement; (x) the transportation, lodging, graphics and other expenses incidental to the Company’s preparation for and participation in the “roadshow” for the offering contemplated hereby; (xi) all fees and expenses of the Underwriters in connection with matters relating to the Directed Shares, including any related reasonable fees and disbursements of counsel for the Underwriters, (xii) all costs and expenses incurred by the Underwriters in connection with the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of copies of information or materials relating to the Directed Shares; and (xiii) up to $150,000, if the offering of the Firm Shares contemplated hereby shall close, or $50,000 otherwise, in each case minus the amount of expenses incurred by the Underwriters and otherwise paid or reimbursed by the Company, of all other documented out-of-pocket costs and expenses incurred by the Underwriters in connection with the offering of the Shares contemplated hereby which are not otherwise specifically provided for in this Section (including but not limited to the fees and disbursements of their legal counsel, all related travel costs, document production, background checks, data room and other similar expenses, all reasonable fees and expenses of other professional advisors that are pre-approved by Company, which approval shall not be unreasonably withheld, conditioned or delayed). Except as provided in this Section 8 and in Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel.

9. Indemnification and Contribution .

Subject to the limitations in this paragraph below, the Company agrees to indemnify and hold harmless you and each other Underwriter, the directors, officers, partners, employees and agents of each Underwriter, the affiliates (as such term is defined in Rule 501(b) under the Act) (each an “Affiliate”) of each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorneys’ fees and expenses (collectively, “Damages”) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, in the Registration Statement, the Time of Sale Information, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication or the Prospectus or in any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, except to the extent that any such Damages arise out of or are based upon an untrue statement or omission or alleged untrue statement or omission that has been made therein or omitted therefrom in reliance upon and in conformity with the Underwriter Information; provided, however, that with respect to any untrue statement or omission made in any Preliminary Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter or to any officer, director, employee or agent of any Underwriter) from whom the person asserting any such Damages purchased the Shares concerned if both (A) a copy of the Time of Sale Information was not sent or given to such person at or prior to the written confirmation of the sale of such Shares to such person as required by the Act and (B) the untrue statement or omission in the Preliminary Prospectus was corrected in the Time of Sale Information.

In connection with the offer and sale of the Directed Shares, the Company agrees to indemnify and hold harmless you and each other Underwriter, the directors, officers, employees and agents of each Underwriter, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all Damages arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any prospectus wrapper or other material prepared by or with the consent of the Company for distribution to Directed Shares Participants in connection with the offering of the Directed Shares or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) are caused by the failure of any Directed Shares Participant to pay for and accept delivery of Directed Shares which have been properly confirmed for purchase by any Directed Shares Participant by 11:59 p.m., St. Petersburg, Florida time, on the first business day after the date of this Agreement, or (iii) are related to, or arise out of or in connection with, the offering of the Directed Shares, provided, however, that with respect to any untrue statement or omission made in any Preliminary Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter or to any officer, director, employee or agent of any Underwriter) from whom the person asserting any such Damages purchased the Shares concerned if both (A) a copy of the Time of Sale Information was not sent or given to such

person at or prior to the written confirmation of the sale of such Shares to such person as required by the Act and (B) the untrue statement or omission in the Preliminary Prospectus was corrected in the Time of Sale Information. The indemnification in this paragraph and the preceding paragraph shall be in addition to any liability that the Company may otherwise have.

If any action or claim shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company, such Underwriter or such controlling person shall promptly notify in writing the party(s) against whom indemnification is being sought (the “indemnifying party” or “indemnifying parties”), but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof, and such indemnifying party(s) shall assume the defense thereof, including the employment of counsel reasonably acceptable to such Underwriter or such controlling person and the payment of all reasonable fees of and expenses incurred by such counsel. Notwithstanding anything in this Agreement to the contrary, in no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Each such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person, unless (i) the indemnifying party(s) has (have) agreed in writing to pay such fees and expenses, (ii) the indemnifying party(s) has (have) failed to assume the defense and employ counsel reasonably acceptable to the Underwriter or such controlling person or (iii) the named parties to any such action (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying party(s), and such Underwriter or such controlling person shall have been advised by its counsel that one or more legal defenses may be available to the Underwriter that may not be available to the Company, or that representation of such indemnified party and any indemnifying party(s) by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party(s) shall not have the right to assume the defense of such action on behalf of such Underwriter or such controlling person (but the Company shall not be liable for the fees and expenses of more than one counsel for the Underwriters and such controlling persons)). The indemnifying party(s) shall not be liable for any settlement of any such action effected without its (their several) written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, the indemnifying party(s) agree(s) to indemnify and hold harmless any Underwriter and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment, but in the case of a judgment only to the extent stated in the first and second paragraph of this Section 9.

Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing several indemnity from the Company to each

Underwriter, but only with respect to the Underwriter Information. If any action or claim shall be brought or asserted against the Company, any of its directors, any of its officers or any such controlling person based on the Registration Statement, the Prospectus, the Time of Sale Information or any Preliminary Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph, such Underwriter shall have the rights and duties given to the Company by the immediately preceding paragraph (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel, and the fees and expenses of counsel to the Company, shall be at such Underwriter’s expense), and the Company, its directors, any such officers and any such controlling persons, shall have the rights and duties given to the Underwriters by the immediately preceding paragraph.

In any event, the Company will not, without the prior written consent of the Representative, settle or compromise or consent to the entry of any judgment in any proceeding or threatened claim, action, suit or proceeding in respect of which the indemnification may be sought hereunder (whether or not the Representative or any person who controls the Representative within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of all Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding.

If the indemnification provided for in this Section 9 is unavailable or insufficient for any reason whatsoever to an indemnified party in respect of any Damages referred to herein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Damages (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand, and the Underwriters on the other hand, from the offering and sale of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative and several fault of the Company on the one hand, and the Underwriters on the other hand, in connection with the statements or omissions that resulted in such Damages as well as any other relevant equitable considerations. The relative and several benefits received by the Company on the one hand, and the Underwriters on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering and sale of the Shares (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the number of Additional Shares purchased and the per share amounts set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand, and the Underwriters on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the

omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 was determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount of the underwriting commissions received by such underwriter in connection with the Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 12 hereof) and not joint.

Notwithstanding the third paragraph of this Section 9, any Damages for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as Damages are incurred after receipt of reasonably itemized invoices therefor. The indemnity, contribution and reimbursement agreements contained in this Section 9 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9.

10. Conditions of Underwriters’ Obligations . The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions:

(a) The Registration Statement shall have become effective not later than 12:00 noon, St. Petersburg, Florida time, on the date hereof, or at such later date and time as shall be consented to in writing by the Representative, and all filings required by Rules 424(b), 430A and 462 under the Act shall have been timely made.

(b) You shall be reasonably satisfied that since the respective dates as of which information is given in the Registration Statement, the Time of Sale Information and Prospectus,

(i) there shall not have been any change in the capital stock of the Company or any material change in the indebtedness (other than in the ordinary course of business) of the Company, (ii) except as set forth in the Registration Statement, the Time of Sale Information or the Prospectus, no material oral or written agreement or other transaction shall have been entered into by the Company that is not in the ordinary course of business or that could reasonably be expected to result in a material reduction in the future earnings of the Company, (iii) no loss or damage (whether or not insured) to the property of the Company shall have been sustained that had or could reasonably be expected to have a Material Adverse Effect, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of its properties that is material to the Company or that affects or could reasonably be expected to affect the transactions contemplated by this Agreement shall have been instituted or threatened and (v) there shall not have been any material change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company or its subsidiaries that makes it impractical or inadvisable in your judgment to proceed with the public offering or purchase of the Shares as contemplated hereby.

(c) You shall have received on the Closing Date (and the Additional Closing Date, if any) an opinion of Barack Ferrazzano Kirschbaum & Nagelberg LLP (“BFKN”), counsel to the Company, substantially to the effect as is set forth on Exhibit B attached hereto.

(d) [Reserved].

(e) You shall have received on the Closing Date or Additional Closing Date, as the case may be, an opinion of Squire Patton Boggs (US) LLP, as counsel for the Underwriters, dated the Closing Date or Additional Closing Date, as the case may be, with respect to the issuance and sale of the Shares, the Registration Statement and other related matters as you may reasonably request, and the Company and its counsel shall have furnished to your counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters.

(f) You shall have received letters addressed to you and dated the date hereof and the Closing Date or the Additional Closing Date, as the case may be, from (i) the firm of CliftonLarsonAllen LLP, independent certified public accountants, and (ii) the Chief Financial Officer of the Company, substantially in the forms heretofore approved by you.

(g) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and no proceedings for that purpose shall be pending or, to the knowledge of the Company, shall be threatened or contemplated by the Commission at or prior to the Closing Date or Additional Closing Date, as the case may be; (ii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities; (iii) after the date hereof, no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to you and you did not object thereto in good faith; and (i v) all of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects (except for such representations and warranties qualified by materiality, which representations and warranties

shall be true and correct in all respects) on and as of the date hereof and on and as of the Closing Date or Additional Closing Date, as the case may be, as if made on and as of the Closing Date or Additional Closing Date, as the case may be, and you shall have received a certificate, dated the Closing Date and signed by the President and Chief Executive Officer and the Chief Financial Officer of the Company (or such other officers as are acceptable to you) to the effect set forth in this Section 10(g) and in Sections 10(b) and 10(h) hereof.

(h) The Company shall not have failed in any material respect at or prior to the Closing Date or the Additional Closing Date, as the case may be, to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date or Additional Closing Date, as the case may be.

(i) The Company shall have furnished or caused to have been furnished to you such further certificates and documents as you shall have reasonably requested.

(j) At or prior to the Closing Date, you shall have received an executed Lock-Up Agreement from each of the individuals set forth on Schedule IV hereto.

(k) At or prior to the effective date of the Registration Statement, you shall have received a letter from the Corporate Financing Department of FINRA confirming that such Department has determined to raise no objections with respect to the fairness or reasonableness of the underwriting terms and arrangements of the offering contemplated hereby, if such letter is required by applicable laws or regulations.

(l) The Shares to be delivered on the Closing Date or the Additional Closing Date, as the case may be, shall have been approved for listing on the Nasdaq, subject to official notice of issuance.

All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and your counsel.

The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of the Additional Closing Date of the conditions set forth in this Section 10, except that, if the Additional Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in this Section 10 shall be dated as of the Additional Closing Date and the opinions called for by paragraphs (c) and (e) shall be revised to reflect the sale of Additional Shares.

If any of the conditions hereinabove provided for in this Section 10 shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by you by notifying the Company of such termination in writing at or prior to such Closing Date, but you shall be entitled to waive any of such conditions.

11. Effective Date of Agreement . This Agreement shall become effective upon the later of (a) the execution and delivery hereof by the parties hereto and (b) notification of the

effectiveness of the Registration Statement by the Commission; provided, however, that the provisions of Sections 7 and 8 shall at all times be effective.

12. Defaulting Underwriters . If any one or more of the Underwriters shall fail or refuse to purchase Firm Shares that it or they have agreed to purchase hereunder, and the aggregate number of Firm Shares that such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Firm Shares, or if any one or more of the Underwriters shall fail or refuse to purchase Additional Shares with respect to which the Underwriters have exercised their option to purchase, each non-defaulting Underwriter shall be obligated, severally, in the proportion in which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may agree with such non-defaulting Underwriters, to purchase the Firm Shares or Additional Shares, as the case may be, that such defaulting Underwriter or Underwriters failed or refused to purchase. If any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares and arrangements satisfactory to you and the Company for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case that does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven (7) days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this Section 12 shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement.

13. Termination of Agreement . This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company by notice to the Company, if prior to the Closing Date or the Additional Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, in your sole judgment, (i) trading in the Company’s Common Stock shall have been suspended by the Commission or Nasdaq, (ii) trading in securities generally on the NYSE or Nasdaq shall have been suspended or materially limited, or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any such exchange or by order of the Commission or any court or other governmental authority, (iii) a general moratorium on commercial banking activities shall have been declared by either federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions or other material event the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares. Notice of such cancellation shall be promptly given to the Company and its counsel by telephone or electronic mail and shall be subsequently confirmed by letter.

14. Miscellaneous . Notice given pursuant to any of the provisions of this Agreement shall be in writing and shall be delivered

(i) to the Company or the Bank:

c/o Alerus Financial Corporation

401 Demers Avenue

Grand Forks, North Dakota 58201

Attention: [ ]

with a copy (which shall not constitute notice pursuant to this Section 14) to:

Barack Ferrazzano Kirschbaum & Nagelberg LLP

200 West Madison Street

Chicago, Illinois 60606

Attention: Joseph T. Ceithaml

(ii) to the Underwriters:

c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Attention: General Counsel, Equity Capital Markets

with a copy (which shall not constitute notice pursuant to this Section 14) to:

Squire Patton Boggs (US) LLP

201 East Fourth Street, Suite 1900
Cincinnati, Ohio 45202
Attention: James J. Barresi

15. Governing Law; Counterparts . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to choice of law principles thereunder.

This Agreement may be signed in various counterparts, which together shall constitute one and the same instrument.

This Agreement shall be effective when, but only when, at least one counterpart hereof shall have been executed on behalf of each party hereto.

The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

16. No Fiduciary Duty . Notwithstanding any pre-existing relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by any of the Underwriters, the Company acknowledges and agrees that (i) in connection with the offering of the Shares and the process leading thereto, each Underwriter is and has been acting solely as a principal and is not acting as the agent, fiduciary advisor, expert or otherwise of the Company, any of its subsidiaries, or its managers, employees or creditors or any other party; (ii) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company with respect to the offering of the Shares or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company or any of its subsidiaries on other matters) and no Underwriter has any obligation to the Company with respect to the offering of the Shares except the obligations expressly set forth in this Agreement, including, without limitation, with respect to the public offering price of the Shares; (iii) the relationship between the Company, on the one hand, and the Underwriters, on the other hand, is entirely and solely commercial, and the price of the Shares was established by the Company and the Underwriters based on discussions and arms’ length negotiations and the Company understands and accepts the terms, risks and conditions of the transactions contemplated by this Agreement; (iv) any duties and obligations that the Underwriters may have to the Company shall be limited to those duties and obligations specifically stated herein; (v) notwithstanding anything in this Agreement to the contrary, the Company acknowledges that the Underwriters and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company and may have financial interests in the success of the Offering that are not limited to the difference between the price to the public and the purchase price paid to the Company for the Shares and such interests may differ from the interests of the Company, and the Underwriters have no obligation to disclose, or account to the Company for any benefit they may derive from such additional financial interests; and (vi) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering of the Shares and the Company has consulted its own respective legal, accounting, regulatory and tax advisors to the extent it deemed appropriate. The Company hereby waives and releases, to the fullest extent permitted by the applicable law, any claims it may have against the Underwriters with respect to any breach or alleged breach of fiduciary duty and agrees that the Underwriters shall have no liability (whether direct or indirect) to the Company in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the Company, any of its subsidiaries, or its stockholders, managers, employees or creditors or any other party.

17. Research Analyst Independence . The Company acknowledges that (a) the Underwriters’ research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies and (b) the Underwriters’ research analysts may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company, the value of the Common Stock and/or the offering contemplated by this Agreement that differ from the views of their respective investment banking divisions. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by the Underwriters’ independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company by any

Underwriter’s investment banking division. The Company acknowledges that each of the Underwriters is a full service securities firm and as such, from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies that are the subject of the transactions contemplated by this Agreement.

18. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters and the Company, and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, entity firm or corporation, other than the Underwriters and the Company, and their respective successors and the controlling persons, agents, and officers and directors referred to in Section 9 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company, and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, entity, firm or corporation. No purchaser of Shares from any Underwriter shall be deemed to be a successor by reason merely of such purchase.

19. Amendments or Waivers . No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.

20. Partial Unenforceability . The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.

21. Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.

[22. Recognition of the U.S. Special Resolution Regimes .

(a) In the event that any Underwriter that is a Covered Entity becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer from such Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.

(b) In the event that any Underwriter that is a Covered Entity or a BHC Act Affiliate of such Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under this Agreement that may be exercised against such Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under

the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.

“BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 1841(k).

“Covered Entity” means any of the following:

(i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);

(ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or

(iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).

“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.

“U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.]

[Remainder of Page Intentionally Left Blank]

Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters.

		Very truly yours,

		ALERUS FINANCIAL CORPORATION


		Name:
		Title:


CONFIRMED as of the date first above mentioned, on behalf of the Representative and the other several Underwriters named in Schedule I hereto.

RAYMOND JAMES & ASSOCIATES, INC.

By:
	Authorized Representative

[Signature Page to Underwriting Agreement]

SCHEDULE I

Name		Number Firm Shares
Raymond James & Associates, Inc.		[ ]
D.A Davidson & Co.		[ ]
Piper Jaffray & Co.		[ ]

Total:		[ ]

SCHEDULE II

Issuer Free Writing Prospectus

SCHEDULE III

Permitted Written Testing-the-Waters Communications

SCHEDULE IV

Directors and Executive Officers Subject to Lock-up

EXHIBIT A

Form of Lock-up Agreement

[ · ] , 2019

RAYMOND JAMES & ASSOCIATES, INC.

As Representative of the Several Underwriters

c/o Raymond James & Associates, Inc.

880 Carillon Parkway

St. Petersburg, FL 33716

Re: Alerus Financial Corporation (the “Company”) - Restriction on Stock Sales

Dear Sirs and Mesdames:

This letter is delivered to you pursuant to the Underwriting Agreement (the “Underwriting Agreement”) to be entered into by the Company, as issuer, and Raymond James & Associates, Inc., the representative (the “Representative”) of certain underwriters (the “Underwriters”) to be named therein. Upon the terms and subject to the conditions of the Underwriting Agreement, the Underwriters intend to effect a public offering of Common Stock, $1.00 par value per share, of the Company (the “Shares”), as described in and contemplated by the registration statement of the Company on Form S-1, File No. 333- [ · ] (the “Registration Statement”), as filed with the Securities and Exchange Commission on [ · ] (the “Offering”).

The undersigned recognizes that it is in the best financial interests of the undersigned, as an officer or director, or an owner of stock, options, warrants or other securities of the Company (the “Company Securities”), that the Company complete the proposed Offering.

The undersigned further recognizes that the Company Securities held by the undersigned are, or may be, subject to certain restrictions on transferability, including those imposed by United States federal securities laws. Notwithstanding these restrictions, the undersigned has agreed to enter into this letter agreement to further assure the Underwriters that the Company Securities of the undersigned, now held or hereafter acquired, will not enter the public market at a time that might impair the underwriting effort.

Therefore, as an inducement to the Underwriters to execute the Underwriting Agreement, the undersigned hereby acknowledges and agrees that the undersigned will not (i) offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose of (collectively, a “Disposition”) any Company Securities, or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or otherwise acquire, any Company Securities held by the undersigned or acquired by the undersigned after the date hereof, or that may be deemed to be beneficially owned by the undersigned, pursuant to the Rules and Regulations promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of

1934, as amended (the “Exchange Act”) (collectively, the “Lock-Up Shares”), for a period commencing on the date hereof and ending 180 days after the date of the Company’s Prospectus first filed pursuant to Rule 424(b) under the Securities Act, inclusive (the “Lock-Up Period”), without the prior written consent of Raymond James & Associates, Inc. or (ii) exercise or seek to exercise or effectuate in any manner any rights of any nature that the undersigned has or may have hereafter to require the Company to register under the Securities Act the undersigned’s sale, transfer or other disposition of any of the Lock-Up Shares or other securities of the Company held by the undersigned, or to otherwise participate as a selling securityholder in any manner in any registration effected by the Company under the Securities Act, including under the Registration Statement, in each case during the Lock-Up Period. The foregoing restrictions are expressly agreed to preclude the undersigned from engaging in any hedging, collar (whether or not for any consideration) or other similar transaction that is designed to or reasonably expected to lead or result in a Disposition of Lock-Up Shares during the Lock-Up Period, even if such Lock-Up Shares would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include any short sale or any purchase, sale or grant of any right (including any put or call option or reversal or cancellation thereof) with respect to any Lock-Up Shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Lock-Up Shares.

Notwithstanding the agreement not to make any Disposition during the Lock-Up Period, you have agreed that the foregoing restrictions shall not apply to: (1) the Company Securities being offered in the prospectus included in the Registration Statement, including, for the avoidance of doubt, any such Company Securities beneficially owned by the undersigned; or (2) any grant or exercise of options or vesting of restricted stock or restricted stock units pursuant to the Company’s 2009 Stock Plan or the Company’s 2019 Equity Incentive Plan, including any withholding of Company Securities to satisfy the exercise price of outstanding options held by the undersigned or to satisfy tax obligations upon exercise or vesting of any such awards. Further, the undersigned may make a Disposition or transfer of Lock-Up Shares: (i) as a bona fide gift or gifts, charitable contributions or by will or intestate succession provided that the donee or donees agree to be bound in writing by the restrictions set forth herein for the balance of the Lock-Up Period; (ii) to any trust or family limited partnership for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided that the trustee of the trust or general partner of the family limited partnership, as the case may be, agrees to be bound by the restrictions set forth herein for the balance of the Lock-Up Period; (iii) pledged in a bona fide transaction outstanding as of the date hereof to a lender to the undersigned, as disclosed in an appendix to this letter; (iv) pursuant to a qualified domestic order or divorce settlement, provided that the transferee agrees to be bound in writing by the restrictions set forth herein for the balance of the Lock-Up Period; or (v) with the prior written consent of the Representative; provided that, in the case of any Disposition, transfer, distribution or sale pursuant to clauses (i) through (iv), no filing under Section 16(a) of the Exchange Act during the Lock-Up Period shall be required or shall be voluntarily made in connection therewith (other than (x) a filing that reports solely one or more acquisitions of Company Securities or (y) a filing on a Form 5, Schedule 13D or Schedule 13G, or any amendment thereto, that is made after the expiration of the Lock-Up Period). For purposes of this agreement, “immediate family” shall mean any relationship by blood, marriage, domestic partnership or adoption, not more remote than first cousin.

In addition to the preceding paragraph and notwithstanding anything to the contrary herein, the undersigned may enter into an agreement or trading plan to allow brokerage sales of all or a portion of the Shares or Lock-Up Shares pursuant to Rule 10b5-1 of the Exchange Act, provided that (i) any such brokerage sales or transfers may not occur prior to the expiration of the Lock-Up Period, (ii) prior to the expiration of the Lock-Up Period, no public disclosure or filing under the Exchange Act or Rule 144 under the Securities Act by any party shall be required, or made, voluntarily reporting such agreement or trading plan, and (iii) the undersigned provides notice to the Representative upon entering into any such agreement or adopting any such trading plan.

It is understood that, if the Underwriting Agreement (other than the provisions thereof that survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, or if the Company fails to enter into the Underwriting Agreement on or prior to April 1, 2020, this letter agreement shall terminate automatically.

In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Lock-Up Shares if such transfer would constitute a violation or breach of this letter. This letter shall be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Underwriting Agreement.

	Very truly yours,



	[name of securityholder]

EXHIBIT B

Opinion of Counsel for the Company to Be Delivered Pursuant to Section 10(c)

(i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto), and is duly registered or otherwise qualified to conduct its business as a foreign corporation and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a Material Adverse Effect. The Bank has been duly organized and is validly existing as a national banking association authorized to transact the business of banking under the laws of the United States, and has corporate power and authority to own, lease and operate its material properties and conduct its business substantially as described in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto).

(ii) Each of the Company’s subsidiaries is a corporation, limited liability company or other organization duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Time of Sale Information and the Prospectus (and any amendment or supplement thereto), and is duly registered or otherwise qualified to conduct its business as a foreign corporation and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a Material Adverse Effect; and all of the outstanding shares of capital stock of each of the Company’s subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other subsidiaries, free and clear of any perfected security interest, or any other security interest, lien, adverse claim, equity or other encumbrance.

(iii) The capitalization of the Company conforms in all material respects to the description thereof contained in the Time of Sale Information and the Prospectus under the caption “Capitalization” and the Shares conform in all material respects to the description of the Common Stock in the Time of Sale Information and the Prospectus. Except as set forth in the Time of Sale Information and the Prospectus, the Company is not a party to or bound by any outstanding options, warrants or similar rights to subscribe for, or contractual obligations to issue, sell, transfer or acquire, any of its capital stock or any securities convertible into or exchangeable for any of such capital stock.

(iv) All shares of capital stock of the Company outstanding prior to the issuance of the Shares to be issued and sold by the Company hereunder have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company, and no such rights will exist as of the Closing Date.

Exhibit B- 1

(v) To such counsel’s knowledge, all offers and sales of the Company’s securities have been made in compliance in all material respects with the registration requirements of the Act and other applicable state securities laws or regulations or applicable exemptions therefrom.

(vi) To the knowledge of such counsel after reasonable inquiry, neither the Company nor any of its subsidiaries is in violation of its certificate of incorporation or bylaws and is not in default in the performance of any obligation, agreement or condition contained in any bond, indenture, note or other evidence of indebtedness or any other agreement or obligation of the Company, where the default would have, individually or in the aggregate, a Material Adverse Effect.

(vii) Neither the offer, sale or delivery of the Shares by the Company, the execution, delivery or performance by the Company of this Agreement, compliance by the Company with all provisions hereof nor consummation by the Company of the transactions contemplated hereby (A) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate of incorporation or bylaws of the Company or any material agreement, indenture, lease or other instrument to which the Company is a party or by which any of its properties is bound or (B) creates or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or (C) violates or will result in any violation of any existing law, statute, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree that is known to such counsel and is applicable to the Company or any of its properties.

(viii) Except as described in the Registration Statement, the Time of Sale Information or Prospectus, there is no action, suit, inquiry, proceeding, or investigation by or before any court or governmental or other regulatory or administrative agency or commission pending or, to the knowledge of such counsel, threatened, against or involving the Company or its subsidiaries, or the properties of either the Company or any of its subsidiaries: (A) which might individually or in the aggregate prevent or adversely affect the transactions contemplated by this Agreement or result in a Material Adverse Effect, nor, to the knowledge of such counsel, is there any basis for any such action, suit, inquiry, proceeding or investigation; or (B) that are required to be described in the Registration Statement, the Time of Sale Information or Prospectus (or any amendment or supplement thereto) that are not described as required therein.

(ix) Such counsel has reviewed all agreements, contracts, indentures, leases or other documents or instruments described or referred to in the Registration Statement, the Time of Sale Information and the Prospectus, and such agreements, contracts (and forms of contracts), indentures, leases or other documents or instruments are fairly summarized or disclosed in all material respects therein, and filed as exhibits thereto as required, and such counsel does not know of any agreements, contracts, indentures, leases or other documents or instruments required to be so summarized or disclosed or filed that have not been so summarized or disclosed or filed.

(x) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official is required on the part of the Company (except such as have been obtained under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and

Exhibit B- 2

distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters under this Agreement.

(xi) The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the certificate of incorporation and bylaws of the Company and the General Corporation Law of the State of Delaware.

(xii) The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Registration Statement, the Time of Same Information and the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights.

(xiii) The Company has all requisite power and authority to enter into this Agreement and to issue, sell and deliver the Shares to be sold by it to the Underwriters as provided herein. The Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as to the extent enforceability may be limited by (i) the application of bankruptcy, reorganization, insolvency or other laws affecting creditors’ rights generally and (ii) equitable principles being applied at the discretion of a court before which any proceeding may be brought, and except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.

(xiv) The Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, (A) such Shares will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company and (B) good and valid title to such Shares, free and clear of any claim, encumbrance or defect in title of any nature (other than any arising by or through the Underwriters), will pass to each Underwriter that has purchased any portion of such Shares in good faith and without knowledge of any such claim, encumbrance or defect.

(xv) The Registration Statement has been declared effective by the Commission under the Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued under the Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Act has been made in the manner and within the time period required by such Rule 424(b).

(xvi) The Registration Statement, including any Rule 462 Registration Statement, the Time of Sale Information, the Prospectus, including any document incorporated by reference therein, and each amendment or supplement to the Registration Statement, the Time of Sale Information and the Prospectus, including any document incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included or incorporated by reference therein or in exhibits to or excluded from the Registration Statement, the Time of Sale Information or the Prospectus, as to which no opinion

Exhibit B- 3

need be given) comply as to form in all material respects with the requirements of the Act.

(xvii) The descriptions in the Registration Statement, the Time of Sale Information and the Prospectus of statutes, regulations or legal or governmental proceedings, insofar as they purport to summarize certain of the provisions thereof, are accurate in all material respects and fairly present the information required to be presented by the Act and the rules and regulations thereunder.

(xviii) The Company is not an “investment company” or an “affiliated person” of, or “promoter” or “principal investor” for, an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended.

(xix) The Shares have been approved for listing on the [Nasdaq Capital Market].

(xx) The statements (i) in the Time of Sale Information and the Prospectus under the captions “Risk Factors—[ ],” “Description of Capital Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity,” “Business—Legal Proceedings,” “Supervision and Regulation” “Certain Relationships and Related Party Transactions,” “Shares Eligible for Future Sale,” “Material United States Income Tax Considerations for Non-U.S. Holders” and “Underwriting” and (ii) in Item 14 and Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company’s certificate of incorporation or bylaw provisions, documents or legal proceedings, or legal conclusions, have been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein.

In rendering such opinion, counsel may rely, to the extent they deem such reliance proper, as to matters of fact upon certificates of officers of the Company and of government officials, provided that counsel shall state their belief that they and the Underwriters are justified in relying thereon. Copies of all such certificates shall be furnished to the Underwriters and their counsel on the Closing Date and the Additional Closing Date, as the case may be.

In addition to the opinion set forth above, such counsel shall state that during the course of his participation in the preparation of the Registration Statement, the Time of Sale Information and the Prospectus and the amendments thereto, nothing has come to the attention of such counsel that has caused him to believe or given him reason to believe that the Registration Statement or any amendment thereto (except for the financial statements and other financial and accounting information contained therein or omitted therefrom as to which no opinion need be expressed), as of its effective date and each deemed effective date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Time of Sale Information, as of the Applicable Time, or the Prospectus, as of its date and the date of the opinion (except as aforesaid), contained or contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

Exhibit B- 4

Exhibit 3.1

THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

ALERUS FINANCIAL CORPORATION

(Original Certificate of Incorporation filed October 2, 1992;

First Amended and Restated Certificate of Incorporation filed May 31, 2006;

Second Amended and Restated Certificate of Incorporation filed May 15, 2014)

Alerus Financial Corporation, a corporation originally incorporated on October 2, 1992 under the name First National Corporation North Dakota and organized and existing under, and by virtue of, the General Corporation Law of the State of Delaware (the “ Corporation ”), does hereby certify that this Third Amended and Restated Certificate of Incorporation of the Corporation (the “ Certificate of Incorporation ”) set forth below has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware.

Name

The name of the Corporation is Alerus Financial Corporation.

Registered Office and Agent

The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle and the name of its Delaware registered agent at such address shall be The Corporation Trust Company.

III

Purpose

The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware.

Authorized Capital

This Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Corporation is

authorized to issue is thirty-two million (32,000,000) shares, thirty million (30,000,000) shares of which shall be Common Stock (the “ Common Stock ”) and two million (2,000,000) shares of which shall be Preferred Stock (the “ Preferred Stock ”). The Preferred Stock shall have a par value of one dollar ($1.00) per share and the Common Stock shall have a par value of one dollar ($1.00) per share. The designations and the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Preferred Stock and the Common Stock that are fixed by this Certificate of Incorporation and the express grant of authority to the Board of Directors to fix by resolution or resolutions the designations and the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Preferred Stock that are not fixed by this Certificate of Incorporation are as follows and as elsewhere set forth herein:

1. The Preferred Stock may be issued at any time or from time to time in any amount as Preferred Stock of one or more series, as hereinafter provided. Each share of any one series of Preferred Stock shall be identical in all respects except as to the date from which dividends thereon may be cumulative, each series of Preferred Stock shall be distinctly designated by letter or descriptive words, and all series of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Section 2 of this Article IV. Shares of Preferred Stock shall be issued only as fully paid and nonassessable shares.

2. Authority is hereby expressly granted to and vested in the Board of Directors at any time or from time to time, without action by or approval of the stockholders, to issue the Preferred Stock as Preferred Stock of one or more series, to fix by resolution or resolutions providing for the issuance of shares of any series the designations and the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such series so far as not inconsistent with the provisions of this Article IV applicable to all series of Preferred Stock, and to the full extent now or hereafter permitted by the laws of the State of Delaware, including the following:

(a) the distinctive designation of such series and the number of shares that shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors;

(b) the rate or rates of dividends payable on shares of such series, whether dividends shall be cumulative and, if so, the date or dates from which dividends shall be cumulative on the shares of such series, the preferences, restrictions, limitations and conditions upon the payment of dividends, and the dates on which dividends, if declared, shall be payable;

(c) whether shares of such series shall be redeemable and, if so, the terms and provisions of such redemption, including the date or dates upon or after which they shall be redeemable, the amount per share payable in case of

redemption, which amount may vary under different conditions and at different redemption dates, and the manner of selecting shares for redemption;

(d) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, and the relative rights of priority, if any, of payment of shares of such series;

(e) whether shares of such series shall have a purchase, retirement or sinking fund for the purchase, retirement or redemption of shares of such series and, if so, the terms and provisions thereof;

(f) whether shares of such series shall have conversion privileges and, if so, the terms and provisions thereof, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine;

(g) whether shares of such series shall have voting rights, in addition to voting rights provided by law, and, if so, the terms and provisions thereof; and

(h) any other preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof.

3. The holders of the Preferred Stock of each series shall be entitled to receive such dividends, when and as declared by the Board of Directors, out of funds legally available therefor, as they may be entitled to in accordance with the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series, payable on such dates as may be fixed in such resolution or resolutions. Subject to the foregoing and to any further limitations prescribed in accordance with the provisions of Section 2 of this Article IV, the Board of Directors may declare, out of funds legally available therefor, dividends upon the then-outstanding shares of Common Stock, and shares of Preferred Stock of any series shall not be entitled to participate therein.

4. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Preferred Stock of each series shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any distribution of assets shall be made to the holders of the Common Stock, the amount per share provided by the Board of Directors pursuant to Section 2 of this Article IV, which may include an amount equal to any cumulative dividends thereon to the date of final distribution to the holders of the Preferred Stock. If upon any liquidation, dissolution or winding up of the Corporation the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Preferred Stock the full amounts to which they respectively shall be entitled, unless otherwise provided by the Board of Directors pursuant to Section 2 of this Article IV, the holders of shares of Preferred Stock of all series shall participate ratably in any distribution of assets according to the respective amount that would be payable in respect to the shares of Preferred Stock held by them upon such distribution if all amounts payable in respect of the Preferred Stock of all series were paid in full. Except as otherwise provided by the Board of Directors pursuant to Section 2 of this Article IV, neither a statutory merger nor consolidation of the Corporation into or

with any other corporation, nor a statutory merger or consolidation of any other corporation, into or with the Corporation, nor a sale, transfer or exchange or lease of all or any part of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4.

5. The Corporation, at the option of the Board of Directors, may redeem the whole or any part of the Preferred Stock of any series at the price or prices and on the terms and conditions provided in the resolution or resolutions of the Board of Directors providing for the issuance of such series.

6. Anything herein or in any resolution or resolutions of the Board of Directors providing for the issuance of any series of Preferred Stock to the contrary notwithstanding, the rights of holders of all classes and series of capital stock of the Corporation in respect of dividends and purchase, retirement or sinking funds, if any, shall at all times be subject to the power of the Board of Directors from time to time to set aside such reserves and to make such other provisions, if any, as the Board of Directors shall deem to be necessary or advisable for working capital, for expansion of the Corporation’s business (including the acquisition of real and personal property for that purpose) and for any other purpose of the Corporation.

7. Except as otherwise provided by law or by this Certificate of Incorporation or by the resolution or resolutions of the Board of Directors providing for the issuance of any series of Preferred Stock, the vote of the holders of all or any portion of any class or series of capital stock, as a class or series, shall not be required for any action to be taken or authorized by the stockholders of the Corporation, including any amendment of this Certificate of Incorporation. Without limiting the foregoing, the number of authorized shares of Common Stock or any series thereof may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, without regard for the provisions of Section 242(b) of the General Corporation Law of the State of Delaware. Except as otherwise provided by law or by this Certificate of Incorporation, each holder of shares of Common Stock shall be entitled to one vote for each share of Common Stock held by such holder.

8. Except as otherwise provided by law or by this Certificate of Incorporation or by the resolution or resolutions of the Board of Directors providing for the issuance of any series of Preferred Stock or by the instrument governing the security, obligation, warrant, option or right, no holder of shares of any class or series of capital stock of the Corporation or of any security or obligation convertible into, or of any warrant, option or right to subscribe for, purchase or otherwise acquire, shares of any class or series of capital stock of the Corporation, whether now or hereafter authorized, shall, as such holder, have any preemptive right to subscribe for, purchase or otherwise acquire shares of any class or series of capital stock of the Corporation or any security or obligation convertible into, or any warrant, option or right to subscribe for, purchase or otherwise acquire, shares of any class or series of capital stock of the Corporation, whether now or hereafter authorized.

9. Authority is hereby expressly granted to and vested in the Board of Directors at any time and from time to time, without action by or approval of the stockholders, to declare, create and issue, with respect to shares of any class or series of capital stock of the Corporation, dividends or distributions in, or options or rights to acquire, shares of any class or series of capital stock of the Corporation, or other securities, and to fix by resolution or resolutions providing for the declaration, creation and issuance of any such dividend, distribution, option or right the terms, provisions, rights, qualifications, limitations or restrictions thereof so far as not inconsistent with the provisions of this Article IV, and to the full extent now or hereafter permitted by the laws of the State of Delaware, including (a) provisions for the adjustment thereof upon an acquisition of shares, reorganization, merger, consolidation, sale of assets, business combination or other event, and (b) provisions that prevent the holder of a specified percentage of outstanding shares of any class or series of capital stock of the Corporation, including transferees of such holder, from exercising rights thereunder.

Management of the Corporation

The following provisions shall govern the management of the business and the conduct of the affairs of the Corporation and shall define, limit and regulate the rights and powers of the Corporation and of the Board of Directors and stockholders:

1. Number of Directors . The board of directors of the Corporation shall consist of a maximum of twelve (12) persons and a minimum of five (5) persons.

2. Election of Directors by Written Ballot . Elections of directors need not be by written ballot unless the Bylaws of the Corporation so provide.

3. Removal of Directors . A director of the Corporation may be removed during his or her term of office, with or without cause, by the affirmative vote of a majority of the outstanding shares of stock of the Corporation then entitled to vote at an election of directors.

4. Director Liability . A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty by the director as a director; provided, however, that this Section 4 shall not eliminate or limit the liability of a director to the extent provided by applicable law (a) for any breach of the duty of loyalty of the director to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) for any unlawful action under Section 174 of the General Corporation Law of the State of Delaware, or (d) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Section 4 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of the director occurring prior to such amendment or repeal. If the laws of the State of Delaware are hereafter changed to permit further elimination or limitation of the liability of directors, then the liability of each director of

the Corporation shall thereupon be eliminated or limited to the fullest extent then permitted by law.

5. Amendment of Bylaws . The Board of Directors shall have the power to adopt, alter, amend or repeal the Bylaws of the Corporation. The Board of Directors may so adopt or change the Bylaws upon the affirmative vote of the number of directors which shall constitute, under the provisions of the Bylaws, the action of the Board of Directors.

6. Votes Required to Approve Hostile Acquisition . In the event that more than twenty-five percent (25%) of the Board of Directors of the Corporation recommends against a Corporation stockholder vote in favor of (1) a merger or consolidation of the Corporation with, or (2) a sale, exchange or lease of all or substantially all of the assets of the Corporation to, any person or entity, then the affirmative vote of the holders of not less than seventy-five (75%) of the outstanding voting stock of the Corporation will be required to approve such transaction. For purposes of this provision, substantially all of the assets shall mean assets having a fair market value or book value, whichever is greater, twenty- five percent (25%) or more of the total assets as reflected on a balance sheet of the Corporation as of a date not earlier than 45 days prior to any acquisition of such assets.

Forum for Adjudication of Disputes

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for: (a) any derivative action or proceeding brought on behalf of the Corporation; (b) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders; (c) any action asserting a claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, the Certificate of Incorporation or the Bylaws of the Corporation; or (d) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VI.

VII

Indemnification

Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation in accordance with, and to the fullest extent permitted by, the General Corporation Law of the State of Delaware, subject to the limits of applicable federal banking laws and regulations.

Each person who is or was an employee or agent of the Corporation or who serves or served at the request of the Corporation as a director, officer, employee or agent of another corporation, bank, partnership, joint venture, trust or other enterprise may be indemnified by the Corporation

in accordance with, and to the fullest extent permitted by, the General Corporation Law of the State of Delaware, subject to the limits of applicable federal banking laws and regulations.

No amendment to or repeal of this Article VII shall apply to or have any effect on the rights of any individual referred to in this Article VII for or with respect to acts or omissions of such individual occurring prior to such amendment or repeal.

VIII

Amendment of Certificate of Incorporation

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute or any other provision of this Certificate of Incorporation, and any rights conferred upon a stockholder herein are granted subject to this reservation.

* * * *

IN WITNESS WHEREOF , Alerus Financial Corporation has caused this Third Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer this 15 th day of May, 2019.

	Alerus Financial Corporation


	By:	/s/ Randy L. Newman
		Randy L. Newman

Exhibit 3.2

SECOND AMENDED AND RESTATED BYLAWS
OF
ALERUS FINANCIAL CORPORATION

ARTICLE I

Stockholders

Section 1.1. Annual Meetings . An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting.

Section 1.2. Special Meetings . Special meetings of stockholders for any purpose or purposes may be called at any time by the Chairman, the Chief Executive Officer, the President or the Secretary and shall be called by any such officer at the request in writing of a majority of the Board of Directors or by holders of shares entitled to cast not less than 25 percent (25%) of the votes at the meeting. Such request shall state the purpose or purposes of the meeting.

Section 1.3. Notice of Meetings . Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the stockholders, but subject to the provisions of the Delaware General Corporation Law, as amended (the “ DGCL ”), any proper matter may be presented at the meeting for such action.

Notice of a stockholders’ meeting shall be given either personally or by mail, and shall be addressed to the stockholder at the address of such stockholder appearing on the books of the Corporation or given by the stockholder to the Corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the Corporation is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication.

Notwithstanding anything in these bylaws to the contrary, without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. “Electronic transmission” means any form of

communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

Whenever notice is required to be given, under any provision of the DGCL, the certificate of incorporation or these bylaws, to any stockholder to whom (1) written notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (2) all, and at least two, payments (if sent by first-class mail) of dividends or interest on securities during a 12-month period, have been mailed addressed to such person at such person’s address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required (does not include notice given by electronic transmission). Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the Corporation a written notice setting forth such person’s then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any of the other sections of this title, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this section.

Section 1.4. Adjournments . Any meeting of stockholders, annual or special, may be adjourned from time to time and reconvened at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 1.5. Quorum . Except as otherwise provided by the DGCL, the certificate of incorporation or these bylaws, at each meeting of stockholders the presence in person or by proxy of the holders of shares of stock having a majority of the votes that could be cast by the holders of all outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.4 of these bylaws until a quorum shall attend. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including, without limitation, its own stock, held by it in a fiduciary capacity.

Section 1.6. Organization . Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in such person’s absence by the Vice Chairman of the Board or Lead Independent Director, if any, or in such person’s absence by the Chief Executive Officer, or in such person’s absence by the President (if not the Chief Executive Officer), or in such person’s absence by a Vice President, or in the absence of the foregoing persons by a chairman designated

by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such person’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of the meeting shall announce at the meeting of stockholders the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote.

Section 1.7. Voting; Proxies; Inspectors . Except as otherwise provided by the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such person that has voting power upon the matter in question. Unless otherwise provided by the DGCL, the certificate of incorporation or these bylaws, on all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at any stockholder meeting and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at any stockholder meeting and entitled to vote on the election of directors.

Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him or her by proxy in any manner, including, without limitation, via telephone, Internet, other means of electronic communication or such other manner as permitted by Section 212 of the DGCL, provided that such authorization sets forth or contains information from which the Corporation can determine that the authorization was granted by the stockholder. Any copy, facsimile telecommunication, or other reliable reproduction of the original of either the writing or transmission may be used in lieu of the original, provided that it is a complete and legible reproduction of the entire original. If the authorization is granted in a manner other than in a written form, the proxy holder shall provide such reasonable verification as required by the Corporation. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

Section 1.8. Fixing Date for Determination of Stockholders of Record . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, express consent to corporate action in writing without a meeting, receive payment of any dividend or other distribution or allotment of any rights or exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of

Directors and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than 60 nor less than 10 days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than 10 days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than 60 days prior to such other action. If no record date is fixed: (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (b) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (c) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 1.9. List of Stockholders Entitled to Vote . A complete list of the stockholders entitled to vote at each meeting of the stockholders, arranged in alphabetical order and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary or other officer of the Corporation having charge of the stock ledger, at least 10 days before the meeting. The Corporation does not need to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least 10 days prior to the meeting, either on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or, during ordinary business hours, at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. The list shall be produced and kept at the time and place of the meeting during the whole time thereof for inspection by any stockholder who may be present.

Section 1.10. Action By Consent of Stockholders . Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of minutes of stockholders are recorded. Prompt notice of the taking of the

corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

Section 1.11. Conduct of Meetings . The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

Section 1.12. Advance Notice of Stockholder Nominees for Director and Other Stockholder Proposals .

(a) The matters to be considered and brought before any annual or special meeting of stockholders of the Corporation shall be limited to only such matters, including the nomination and election of directors, as shall be brought properly before such meeting in compliance with the procedures set forth in this Section 1.12.

(b) For any matter to be brought properly before the annual meeting of stockholders, the matter must be (i) specified in the notice of the annual meeting given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors or (iii) brought before the annual meeting by a stockholder who is a stockholder of record of the Corporation on the date the notice provided for in this Section 1.12 is delivered to the Secretary of the Corporation, who is entitled to vote at the annual meeting and who complies with the procedures set forth in this Section 1.12.

(c) In addition to any other requirements under applicable law and the certificate of incorporation and bylaws of the Corporation, written notice (the “ Stockholder Notice ”) of any nomination or other proposal must be timely and any proposal, other than a nomination, must constitute a proper matter for stockholder action. To be timely, the Stockholder Notice must be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not less than 90 nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year; provided, however, that if (and only if) the annual meeting is not scheduled to be held within a period that commences 30 days before such anniversary date and ends within 60 days after such anniversary date (an annual meeting date outside such period being referred to herein as an “ Other Meeting Date ”), the Stockholder Notice shall be given in the manner provided herein by the later of the close of business on (i) the date 90 days prior to such Other Meeting Date

or (ii) the 10th day following the date such Other Meeting Date is first publicly announced or disclosed. A Stockholder Notice must contain the following information: (i) whether the stockholder is providing the notice at the request of a beneficial holder of shares, whether the stockholder, any such beneficial holder or any nominee has any agreement, arrangement or understanding with, or has received any financial assistance, funding or other consideration from, any other person with respect to the investment by the stockholder or such beneficial holder in the Corporation or the matter the Stockholder Notice relates to, and the details thereof, including the name of such other person (the stockholder, any beneficial holder on whose behalf the notice is being delivered, any nominees listed in the notice and any persons with whom such agreement, arrangement or understanding exists or from whom such assistance has been obtained are hereinafter collectively referred to as “ Interested Persons ”); (ii) the name and address of all Interested Persons; (iii) a complete listing of the record and beneficial ownership positions (including number or amount) of all equity securities and debt instruments, whether held in the form of loans or capital market instruments, of the Corporation or any of its subsidiaries held by all Interested Persons; (iv) whether and the extent to which any hedging, derivative or other transaction is in place or has been entered into within the prior six months preceding the date of delivery of the Stockholder Notice by or for the benefit of any Interested Person with respect to the Corporation or its subsidiaries or any of their respective securities, debt instruments or credit ratings, the effect or intent of which transaction is to give rise to gain or loss as a result of changes in the trading price of such securities or debt instruments or changes in the credit ratings for the Corporation, its subsidiaries or any of their respective securities or debt instruments (or, more generally, changes in the perceived creditworthiness of the Corporation or its subsidiaries), or to increase or decrease the voting power of such Interested Person, and if so, a summary of the material terms thereof; and (v) a representation that the stockholder is a holder of record of stock of the Corporation that would be entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to propose the matter set forth in the Stockholder Notice. As used herein, “ beneficially owned ” has the meaning provided in Rules 13d-3 and 13d-5 under the Exchange Act. The Stockholder Notice shall be updated not later than 10 days after the record date for the determination of stockholders entitled to vote at the meeting to provide any material changes in the foregoing information as of the record date. Any Stockholder Notice relating to the nomination of directors must also contain (i) the information regarding each nominee required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any successor regulation), (ii) each nominee’s signed consent to serve as a director of the Corporation if elected and (iii) whether each nominee is eligible for consideration as an independent director under the relevant standards contemplated by Item 407(a) of Regulation S-K (or the corresponding provisions of any successor regulation). The Corporation may also require any proposed nominee to furnish such other information, including completion of the Corporation’s directors’ questionnaire, as it may reasonably require to determine whether the nominee would be considered “independent” as a director or as a member of the audit committee of the Board of Directors under the various rules and standards applicable to the Corporation. Any Stockholder Notice with respect to a matter other than the nomination of directors must contain (i) the text of the proposal to be presented, including the text of any resolutions to be proposed for consideration by stockholders and (ii) a brief written statement of the reasons why such stockholder favors the proposal.

Notwithstanding anything in this Section 1.12(c) to the contrary, if the number of directors to be elected to the Board of Directors of the Corporation is increased and either all of the nominees

for director or the size of the increased Board of Directors is not publicly announced or disclosed by the Corporation at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a Stockholder Notice shall also be considered timely hereunder, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the 10th day following the first date all of such nominees or the size of the increased Board of Directors shall have been publicly announced or disclosed.

(d) For any matter to be brought properly before a special meeting of stockholders, the matter must be set forth in the Corporation’s notice of the meeting given by or at the direction of the Board of Directors. In the event that the Corporation calls a special meeting of stockholders for the purpose of electing one or more persons to the Board of Directors, any stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of the meeting, if the Stockholder Notice required by Section 1.12(c) hereof shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the 10th day following the day on which the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is publicly announced or disclosed.

(e) For purposes of this Section 1.12, a matter shall be deemed to have been “publicly announced or disclosed” if such matter is disclosed in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission.

(f) Only persons who are nominated in accordance with the procedures set forth in this Section 1.12 shall be eligible for election as directors of the Corporation. In no event shall the postponement or adjournment of an annual meeting already publicly noticed, or any announcement of such postponement or adjournment, commence a new period (or extend any time period) for the giving of notice as provided in this Section 1.12. This Section 1.12 shall not apply to (i) stockholder proposals made pursuant to Rule 14a-8 under the Exchange Act or (ii) the election of directors selected by or pursuant to the provisions of the certificate of incorporation relating to the rights of the holders of any class or series of stock of the Corporation having a preference over the common stock as to dividends or upon liquidation to elect directors under specified circumstances.

(g) The person presiding at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall have the power and duty to determine whether notice of nominees and other matters proposed to be brought before a meeting has been duly given in the manner provided in this Section 1.12 and, if not so given, shall direct and declare at the meeting that such nominees and other matters are not properly before the meeting and shall not be considered. Notwithstanding the foregoing provisions of this Section 1.12, if the stockholder or a qualified representative of the stockholder does not appear at the annual or special meeting of stockholders of the Corporation to present any such nomination, or make any such proposal, such nomination or proposal shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation.

Section 1.13. Remote Communications . Subject to such guidelines as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of

stockholders may, by means of remote communications, (a) participate in a meeting of stockholders and (b) be deemed present in person and vote at a meeting of stockholders, whether such meeting is to be held at a designated place or solely by means of remote communication; provided, that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.

ARTICLE II

Board of Directors

Section 2.1. Powers . Subject to any provisions of the certificate of incorporation, these bylaws and the DGCL limiting the powers of the Board of Directors or reserving powers to the stockholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the Corporation and exercise all corporate powers permitted by law.

Section 2.2. Number; Qualification . The number of Directors constituting the Board of Directors shall be fixed from time to time by the Board of Directors, except as required by the certificate of incorporation or the DGCL. Directors need not be stockholders, except as required by the certificate of incorporation or the DGCL.

Section 2.3. Resignation; Vacancies . Any director may resign at any time upon written notice to the Corporation. Any such resignation shall take effect on the date of receipt of such notice by the Corporation or on such later effective date or upon the happening of an event or events as is therein specified. Unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any newly created directorship or, except as otherwise provided in the certificate of incorporation, any vacancy occurring in the Board of Directors for any cause may be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each director so elected shall hold office until the expiration of the term of office of the director whom such person has replaced or until such person’s successor is elected and qualified.

Section 2.4. Regular Meetings . Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given.

Section 2.5. Special Meetings . Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman, the Chief Executive Officer, the President, any Vice President, the Secretary, or by any two members of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by

the person or persons calling the meeting at least 48 hours before the special meeting by oral, electronic transmission or written notice duly sent or mailed to each director.

Section 2.6. Telephonic Meetings Permitted . Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this bylaw shall constitute presence in person at such meeting.

Section 2.7. Quorum: Vote Required for Action . At all meetings of the Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the certificate of incorporation or these bylaws otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

Section 2.8. Organization . Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in such person’s absence by the Vice Chairman of the Board or Lead Independent Director, if any, or in such person’s absence by the Chief Executive Officer, or in such person’s absence by the President (if not the Chief Executive Officer), or in such person’s absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such person’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

Section 2.9. Informal Action by Directors . Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 2.10. Adjournment . A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place.

Section 2.11. Notice of Adjournment . Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting before adjourned, except that if the meeting is adjourned for more than 24 hours such notice shall be given prior to the adjourned meeting of the directors who were not present at the time of the adjournment.

Section 2.12. Presumption of Assent . A director of the Corporation who is present at a meeting of the directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the

Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 2.13. Fees and Expenses . Directors shall receive such reasonable fees for their services on the Board of Directors and any committee thereof and such reimbursement of their actual and reasonable expenses as may be fixed or determined by the Board of Directors.

Section 2.14. Removal of Directors . At any duly called and held meeting of the stockholders, any director or directors may, by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote in an election of directors, be removed from office, either with or without cause. The successor or successors to any director or directors so removed may be elected by the stockholders at the meeting at which removal was effectuated. The remaining directors may, to the extent vacancies are not filled by election by the stockholders, fill any vacancy or vacancies created by the removal.

Section 2.15. Chairman of the Board . The Board of Directors shall annually elect one of its members to be its Chairman of the Board and shall fill any vacancy in the position of Chairman of the Board at such time and in such manner as the Board of Directors shall determine. Except as otherwise provided in these bylaws, the Chairman of the Board shall preside at all meetings of the Board of Directors and of stockholders. The Chairman of the Board shall perform such other duties and services as shall be assigned to or required of the Chairman of the Board by the Board of Directors.

Section 2.16. Vice Chairman / Lead Independent Director . Whenever the Chairman of the Board and Chief Executive Officer are one and the same person or whenever the Chairman of the Board is not ‘independent’ according to strict stock exchange definitions, the independent members of the Board of Directors shall appoint one of its members to be the Vice Chairman or Lead Independent Director of the Corporation. In the absence of the Chairman of the Board, the Vice Chairman or Lead Independent Director shall preside at any meeting of the Board. The Lead Independent Director, or the Vice Chairman acting as such, shall have ultimate approval over the information flow that goes to the Board, board meeting agendas, and board meeting schedules. The Vice Chairman or Lead Independent Director shall also chair any meeting of the non-management directors.

Section 2.17. Directors Emeritus/Advisory Directors . The Board of Directors may by resolution appoint directors emeritus or advisory directors who shall have such authority and receive such compensation and reimbursement as the Board of Directors shall provide. Directors emeritus or advisory directors shall not have the authority to participate by vote in the transaction of business.

ARTICLE III

Committees

Section 3.1. Committees . The Board of Directors may, by resolution, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any

committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she, or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified members. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation.

Section 3.2. Committee Rules . Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these bylaws.

ARTICLE IV

Officers

Section 4.1. Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies . The Board of Directors shall elect a Chief Executive Officer and Secretary, and it may also choose one or more Presidents, one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until his or her successor is elected and qualified or until such person’s earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any such resignation shall take effect on the date of receipt of such notice by the Corporation or on such later effective date or upon the happening of an event or events as is therein specified. Unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Subject to Section 4.2, any number of offices may be held by the same person. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting.

Section 4.2. Powers and Duties of Executive Officers . The officers of the Corporation shall have such powers and duties in the management of the Corporation as may be prescribed in a resolution by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors.

ARTICLE V

Stock

Section 5.1. Certificates . Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the Chief Executive Officer, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation

certifying the number of shares owned by such person in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she was such officer, transfer agent, or registrar at the date of issue.

Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates . The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such person’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

Section 5.3. Uncertificated Shares . Notwithstanding anything in these bylaws to the contrary, the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation.

ARTICLE VI

Limitation of Liability and Indemnification

Section 6.1. Limitation of Director Liability . Pursuant to the provisions of the certificate of incorporation, and to the fullest extent permitted by the DGCL, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty of a director.

Section 6.2. Indemnification . (a) Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation in accordance with, and to the fullest extent permitted by, the DGCL, subject to the limits of applicable federal banking laws and regulations.

(b) Each person who is or was an employee or agent of the Corporation or who serves or served at the request of the Corporation as a director, officer, employee or agent of another corporation, bank, partnership, joint venture, trust or other enterprise may be indemnified by the Corporation in accordance with, and to the fullest extent permitted by, the DGCL, subject to the limits of applicable federal banking laws and regulations.

(c) No amendment to or repeal of this Article shall apply to or have any effect on the rights of any individual referred to in this Article for or with respect to acts or omissions of such individual occurring prior to such amendment or repeal.

Section 6.3. Claims . If a claim for indemnification or payment of expenses under this Article VI is not paid in full within 60 days after a written claim therefor has been received by the Corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim.

In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.

Section 6.4. Advancement of Expenses . (a) Expenses (including attorneys’ fees) incurred by each person who is or was an officer or director of the Corporation arising from any pending or threatened action, suit or proceeding related to such officer’s or director’s service to the Corporation shall be paid by the Corporation, subject to the limits of applicable federal banking laws and regulations, in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by the officer or director incurring such expenses to repay such amount if it should ultimately be determined that such officer or director was guilty of fraud, theft or a crime involving dishonesty or did not act in good faith or in a manner he or she did not reasonably believe to be in the best interests of the Corporation.

(b) Expenses (including attorneys’ fees) incurred by each person who is or was an employee or agent of the Corporation or who serves or served at the request of the Corporation as a director, officer, employee or agent of another corporation, bank, partnership, joint venture, trust or other enterprise arising from any pending or threatened action, suit or proceeding related to such person’s service to the Corporation may be paid by the Corporation, subject to the limits of applicable federal banking laws and regulations, in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by such person incurring such expenses to repay such amount if it should ultimately be determined that such person was guilty of fraud, theft or a crime involving dishonesty or did not act in good faith or in a manner he or she did not reasonably believe to be in the best interests of the Corporation.

Section 6.5. Liability Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, bank, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify such person against such liability.

ARTICLE VII

Interests of Directors or Officers in Certain Transactions

Section 7.1. Action or Criteria Required . No contract or transaction between the Corporation and one or more of its directors or officers, and no contract or transaction between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because the vote of an interested director is counted for such purposes, if:

(a) the material facts regarding the director’s or officer’s relationship or interest and the contract or transaction are disclosed or are known to the Board of Directors or the

committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum;

(b) the material facts regarding the director’s or officer’s relationship or interest and the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof, or the stockholders.

Section 7.2. Effect of Quorum . Interested directors may be counted in determining the presence of a quorum at any meeting of the Board of Directors or of a committee thereof.

ARTICLE VIII

Miscellaneous

Section 8.1. Fiscal Year . The fiscal year of the Corporation shall be determined by resolution of the Board of Directors.

Section 8.2. Seal . The Corporation shall have no seal.

Section 8.3. Books and Records . Any records administered by or on behalf of the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be maintained on any information storage device, method, or one or more electronic networks or databases (including one or more distributed electronic networks or databases); provided that the records so kept can be converted into clearly legible paper form within a reasonable time, and, with respect to the stock ledger, the records so kept comply with Section 224 of the DGCL. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to applicable law.

Section 8.4. Amendment of Bylaws . These bylaws may be altered or repealed, and new bylaws made, in the manner prescribed in the certificate of incorporation.

Section 8.5. Waiver of Notice . Whenever notice is required to be given, by the DGCL, the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the date of the meeting, shall be deemed equivalent to notice. Attendance of a person at a meeting of the stockholders, the Board of Directors or any committee designated by the Board of Directors shall constitute a waiver of notice of the meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or any committee designated thereby need be specified in

any written waiver of notice unless so required by the DGCL, the certificate of incorporation or these bylaws.

Duly adopted by the Board of Directors of Alerus Financial Corporation on August 13, 2019.

Exhibit 4.1

FINANCIAL CORPORATI ON 13282 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 01446U 10 3 AUTHORIZED: 30,000,000 COMMON SHARES, $1.00 PAR VALUE PER SHARE SEE REVERSE FOR CERTAIN DEFINITIONS This Certifies That is the owner of Fully Paid and Non-Assessable Common Stock, $1.00 Par Value of ALERUS FINANCIAL CORPORATION transferable on the books of this Corporation in person or by attomey u pon surrend er of this Certificate duly endorsed or assig ned. This Certificat e and the shares represent ed hereby are subject to the laws of the Stat e of Delaware, and t o the Articles of Incorporation and the Bylaws of the Corporation , as now or h ereafter amended. This Certificat e is not valid until countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Corporation ha s caused this Certificate t o be signed by the facsimile sig natures of its dul y authorized officers and to be sealed with the facsimile seal of the Corporation. Dated: :::f< "cb M.) . '-"oPRESIDENT

ALERUS FINANCIAL CORPORATION AMERICAN STOCK TRANSFER & TRUST CO. TRANSFER FEE: AS REQUIRED The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable Jaws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - -....,.,---Co!.!us to!.!ld ia:!!!n!.._ (Cust) (Minor) under Uniform Gifts to Minors Act (State) Additional abbreviations may also be used though not in the above list. PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE FOR VALUE RECEIVED.----------------------------hereby sell. assign and transfer unto PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ----------------------------------------------------------------------------------Sh es of the Common Stock represented by the within Certificate and do hereby irrevocably constitute and appoint ------- ---------- --- - -------------------- -Attorney to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated:. 20. _ Signature:X Signature(s) Guaranteed: Signature: X THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR. WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks. Stockbrokers. Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM.PURSUANT TO S.E.C. RULE 17Ad-15.

Exhibit 5.1

[Letterhead of Barack Ferrazzano Kirschbaum & Nagelberg LLP]

Form of Opinion of Barack Ferrazzano Kirschbaum & Nagelberg LLP

[ ], 2019

Alerus Financial Corporation

401 Demers Avenue

Grand Forks, North Dakota 58201

Ladies and Gentlemen:

We have acted as special counsel to Alerus Financial Corporation, a Delaware corporation (the “ Company ”), in connection with the Registration Statement on Form S-1 (File No. [ ]) (as amended through the date hereof, the “ Registration Statement ”) filed by the Company with the Securities and Exchange Commission (the “ Commission ”) under the Securities Act of 1933, as amended (the “ Act ”). The Registration Statement relates to the issuance and sale by the Company of up to an aggregate of [ ] shares of the Company’s common stock, par value $1.00 per share (including up to [ ] shares of common stock issuable upon exercise of an over-allotment option granted by the Company and together with any additional shares of such common stock that may be issued and sold by the Company pursuant to Rule 462(b) under the Act in connection with the offering contemplated by the Registration Statement, the “ Shares ”). The Shares are to be sold pursuant to an underwriting agreement to be entered into by and among the Company and the underwriters named therein, the form of which has been filed as Exhibit 1.1 to the Registration Statement (the “ Underwriting Agreement ”). This opinion letter is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or related prospectus, other than as expressly stated herein.

For the purposes of providing the opinions contained herein, we have examined such documents, including the Registration Statement and the form of the Underwriting Agreement, corporate records, certificates of public officials and other instruments as we have deemed necessary. As to questions of fact material to this opinion letter, we have relied, with your approval, upon oral and written representations of officers and representatives of the Company and certificates or comparable documents of public officials and of officers and representatives of the Company. In our examination, we have assumed, without verification, the genuineness of all signatures, the proper execution of all documents submitted to us as originals, the conformity with the originals of all documents submitted to us as copies, the authenticity of the originals of such documents and the legal competence of all signatories to such documents.

This opinion letter is limited to the laws of the State of Delaware, and we do not express any opinion as to the effect of the laws of any other jurisdiction.

Based upon the foregoing, and subject to the qualifications, assumptions and limitations set forth herein, it is our opinion that when the Registration Statement has been declared effective pursuant to the Act, the Board of Directors of the Company or the Pricing Committee of the Board of Directors has taken action necessary to set the sale price of the Shares and the Shares

have been issued, delivered and paid for in the manner contemplated by and upon the terms and conditions set forth in the Registration Statement and the Underwriting Agreement, the Shares to be issued and sold by the Company will be validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption “Legal Matters” in the prospectus included in the Registration Statement. We further consent to the incorporation by reference of this opinion letter and consent into any registration statement filed pursuant to Rule 462(b) under the Act with respect to the Shares. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, and the rules and regulations of the Commission promulgated thereunder.

Very truly yours,

Exhibit 10.1

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Randy Newman (the “Employee”).

WHEREAS Employee is a key member of the management of the Company and has provided guidance, leadership, and direction in the growth, management, and development of the Company and has learned trade secrets, confidential procedures and information, and sensitive business plans of the Company;

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

NOW THEREFORE, in consideration of these premises, the mutual promises and undertakings set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Employee and the Company hereby agree as follows.

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to: (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(l), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

c. Change in Control shall mean a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as such change is defined under the default definition in Treasury Regulation §1.409A-3(i)(5) or any subsequently applicable Treasury Regulation.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

e. Disability or Disabled shall mean the Employee: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, is receiving income replacement benefits for a period of not less than three (3) months under a disability plan covering employees of the Company.

f. Good Reason shall mean: (i) without the Employee’s express written consent, a material diminution in authority, duties or responsibilities (except after the Employee attains Retirement Age or in connection with the termination of the Employee’s employment for Disability, death, Cause, or by the Employee other than for Good Reason); (ii) any material reduction by the Company in the Employee’s Base Salary; (iii) any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Section 13 hereof; (iv) the Company’s material breach of this Agreement; or (v) the Company requiring the Employee to be permanently assigned to a location more than 35 miles from Employee’s current work location, except for required travel on Company business, or, in the event the Employee consents to any relocation, and such relocation is more than 35 miles from the Employee’s previous location, the failure by the Company to pay (or reimburse the Employee) for all reasonable moving expenses incurred by the Employee relating to a change of the Employee’s principal residence in connection with such relocation and to indemnify the Employee against any loss realized on the sale of the Employee’s principal residence in connection with any such change of residence. Employee must notify Company in writing of any Event that constitutes Good Reason hereunder within thirty days following Employee’s initial knowledge of the existence of such Event or such Event shall not constitute Good Reason under this Agreement. Employee must provide prior written notification in accordance with Section 4 of his intention to terminate his employment for Good Reason and the Termination Date and Company shall have thirty days from the date of receipt of such notice to effect a cure of the condition constituting Good Reason, and, upon cure thereof by the Company, such event shall no longer constitute Good Reason.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(l)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

2. TERM. The term of this Agreement shall commence upon the date this Agreement is executed by all parties (the “Effective Date”) and will continue for an initial term of twenty four months. Thereafter, the term of this Agreement will automatically renew each day after the Effective Date for one additional day so that the term of the Agreement shall always be twenty four months. Notwithstanding the forgoing, prior to a Change in Control, this Agreement may be terminated upon 120 days’ written notice of intent not to renew by either party; after a Change in Control, this Agreement shall automatically terminate upon the second anniversary of the closing on the event constituting the Change in Control.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

a. Except as permitted in writing by the Company, the Employee shall not at any time divulge, furnish or make accessible to anyone, or use in any way other than in the ordinary course of the business of the Company or its Affiliates, any confidential, proprietary, or secret knowledge or information of the Company or its Affiliates that the Employee has acquired or will acquire about the Company or its Affiliates, whether developed by himself or herself or by others, concerning (i) any trade secrets; (ii) any confidential, proprietary, or secret designs, programs, processes, formulae, plans, devices, or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company or of its Affiliates; (iii) any customer or supplier lists; (iv) any confidential, proprietary, or secret development or research work; (v) any strategic or other business, marketing, or sales plans; (vi) any financial data or plans; or (viii) any other confidential, proprietary, or secret information about any aspect of the business of the Company or of its Affiliates (collectively “Confidential Information”).

b. The Employee acknowledges that the knowledge and information described above constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company or its Affiliates would be wrongful and would cause irreparable harm to the Company. The Employee shall not intentionally commit any act that would materially reduce the value of such knowledge or information to the Company or its Affiliates. The Employee’s obligations under this Agreement to maintain the confidentiality of the Company’s confidential, proprietary, and secret information are in addition to any obligations of the Employee under applicable statutory or common law. The obligations of the Employee under this Section 3 shall survive the termination of this Agreement and the termination of the Employee’s employment with the Company.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

other than as a direct or indirect result of the breach of this Agreement; (ii) is independently made available to the Employee in good faith by a third party who has not violated a confidential relationship with the Company or its Affiliates or any other entity; or (iii) is required to be disclosed by law or legal process.

d. If the Employee breaches any of the covenants in this Section 3, the Employee’s right to any of the payments specified in Section 5 after the date of the breach shall be forever forfeited and the right of the Employee’s designated beneficiary or estate to any payments under this Agreement shall likewise be forever forfeited. This forfeiture is in addition to and not instead of any injunctive or other relief that may be available to the Company.

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

a. the date specified in written notice from the Company to Employee notifying him of the termination of his employment for any reason, provided that if Employee’s employment is terminated by the Company without Cause (defined below), then the Company shall provide Employee at least thirty days’ notice of termination or pay in lieu of notice;

b. Employee providing to the Company not less than sixty nor more than ninety days’ prior written notice of his resignation of employment, including for Good Reason, effective at the end of such period, provided that the Company may in its sole discretion elect to relieve Employee from his duties and place him on paid leave during all or any portion of the notice period; or

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

a. Except as provided in Section 5(b), upon the termination of Employee’s employment by the Company other than for Cause prior to a Change in Control, the Employee shall be entitled to an amount equal to the aggregate of one times: (i) the annual rate of base salary then being paid to the Employee, plus (ii) the average of the past three years short term bonus pay, plus (iii) the Company’s portion of 12 months’ premiums under any health, disability and life insurance plan or program in which the Employee was entitled to participate immediately prior to the Termination Date (the aggregated amount, the “Severance Pay”), which shall be paid to Employee by the Company over a period of 12 months from the Termination Date in accordance with the Company’s regular payroll cycle, commencing on the first regular payroll date of the Company that occurs more than 60 days after the Termination Date (and including any installment that would have otherwise been paid on regular payroll dates during the period of 60 days following the Termination Date), provided the conditions specified in Section 5(c) have been satisfied.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive 2.99 times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

c. Notwithstanding the foregoing provisions of Section 5(a) and (b), the Company will not be obligated to make any payments to or on behalf of Employee under Section 5(a) and (b), as applicable, unless (i) Employee signs a release of claims in favor of the Company in a form as prepared by the Company (the “ Release ”) and delivered to Employee no later than five business days after the Termination Date, (ii) all applicable consideration periods and rescission periods provided by law with respect to the Release have expired without Employee rescinding the Release, and (iii) Employee is in strict compliance with the terms of this Agreement as of the dates of the payments. The cessation of these payments will be in addition to, and not as an alternative to, any other remedies at law or in equity available to the Company, including without limitation the right to seek specific performance or an injunction.

d. If, when the Employee’s termination of employment occurs, the Employee is a specified employee within the meaning of section 409A of the Code, and if the Severance Pay would be considered deferred compensation under section 409A of the Code, and finally if an exemption from the six-month delay requirement of section 409A(a)(2)(B)(i) of the Code is not available, the Employee’s Severance Pay payments for the first six months following separation from service shall be paid to the Employee in a single lump sum on the first day of the seventh month after the month in which the Employee’s separation from service occurs.

e. In the event that the vesting, acceleration and payment of any equity awards or other compensation or benefits, together with all other payments and the value of any benefit received or to be received by the Employee under this Agreement would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the amounts due under Section 5(b) that the Company shall pay to the Employee shall be either (i) the full payment or (ii) such lesser amount determined by the Company in accordance with this Section 5(e) that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. In the event the amounts due under Section are reduced, the amounts shall be reduced in the following order of priority: first, with respect to any amount that

does not constitute the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control and second, with respect to any amount that constitutes the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control first with respect to Company funded amounts and then the Employee’s deferrals, in each case only to the extent necessary to satisfy (ii) above. All determinations required to be made under this Section 5(e) shall be made by a nationally recognized accounting firm that is the Company’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax (the “Accounting Firm”). The Company shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Company and Employee. Notice must be given to the Accounting Firm within 15 business days after an event entitling Employee to an amount due under this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by the Company. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). For the purposes of all calculations under Section 280G of the Code and the application of this Section 5.1, all determination as to present value shall use 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded based on the nature of the payment, as in effect on the Date of Termination, but if not otherwise specified, compounded on a semiannual basis. The determination by the Accounting Firm shall be final and binding on the Company and the Employee.

f. If Employee’s employment with the Company is terminated by the Company for Cause or for any reason not covered by Section 5(a) or 5(b), then the Company shall pay to Employee only his base salary and any accrued but unused vacation or PTO earned through the Termination Date.

g. In addition to the benefits otherwise provided in Section 5, the Employee shall be entitled to the following benefits and payments upon the Employee’s termination of employment: (i) the payment of the Employee’s base salary and any other form or type of compensation earned, vested and payable through the Date of Termination; (ii) the right to receive all benefits to which the Employee is vested on the Date of Termination in accordance with the terms under the Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits; and (iii) the right to exercise and to receive all rights in which the Employee is vested on the Date of Termination, in accordance with the terms of all awards under any Company stock purchase and stock incentive plans or programs, or any successor to any such plans or programs.

6. POST TERMINATION OBLIGATIONS.

a. Upon the Employee’s termination of employment for any reason, or at any time upon the Company’s request, the Employee shall promptly deliver to the Company all Company and Affiliate records and all Company and Affiliate property in the Employee’s possession or the Employee’s control, including without limitation manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables or calculations, and all copies thereof; documents that in whole or in part contain any Confidential Information of the Company or its Affiliates and all copies thereof; and keys, access cards, access codes, passwords, credit cards, personal or laptop computers, telephones, PDAs, smart phones, and other electronic equipment belonging to the Company or an Affiliate.

b. Unless otherwise requested by the Company in writing, upon Employee’s termination of employment with the Company for any reason Employee shall automatically resign as of the Termination Date from all titles, positions and appointments Employee then holds with the Company and any and all Affiliates, whether as an officer, director, trustee, fiduciary or employee (without any claim for compensation related thereto), and Employee hereby agrees to take all actions necessary to effectuate such resignations.

c. During the Term and thereafter during the 24 month period following termination of employment for any reason, to the fullest extent permitted by law, the Employee shall not make any statement that is disparaging or reflects negatively upon the Company or its Affiliates, or any of their officers, directors or employees, to, or that is likely to come to the attention of, (a) any customer, vendor, supplier, distributor or other trade related business relation of the Company or any of its Affiliates, (b) any employee of the Company or its Affiliates, or (c) any member of the media. Nothing herein shall prevent the Employee from responding truthfully to any inquiry from a governmental entity, engaging in any protected activities and/or from communicating with the Board and/or those employees with a need to know about personnel issues involving Company officers, directors and/or employees.

d. Following termination of Employee’s employment with the Company for any reason, Employee will, upon reasonable request of the Company or its designee and provided the Company is not in material breach of any provision of this Agreement, respond to inquiries and cooperate with the Company in connection with the transition of his duties and responsibilities for the Company for up to six months following the Termination Date; and be reasonably available at mutually convenient times, with or without subpoena, to be interviewed, review documents or things, give depositions, testify, or engage in other reasonable activities in connection with any litigation or investigation, with respect to matters that Employee then has or may have knowledge of by virtue of his employment by or service to the Company or any of its Affiliates. In connection with such cooperation requested by the Company, the Company shall reimburse Employee

for reasonable out-of-pocket costs incurred as a result of his compliance with his obligations, and, with respect to such cooperation provided by Employee during any period for which he is not receiving payments under Section 5(a), the Company shall compensate Employee at a daily rate comparable to his regular base salary rate in effect as of the Termination Date. The Company will endeavor to schedule such activities taking into account other obligations Employee may have and so as not to materially interfere with Employee’s then-current employment or other business activities.

7. REMEDIES. Employee agrees that if Employee fails to fulfill Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3, the damages to the Company or any of its Affiliates would be very difficult or impossible to determine. Therefore, in addition to any other rights or remedies available to the Company at law, in equity or by statute, Employee hereby consents to the specific enforcement by the Company of this Agreement through an injunction or restraining order issued by an appropriate court, without the necessity of proving actual damages, and Employee hereby waives as a defense to any equitable action the allegation that the Company has an adequate remedy at law. The provisions of this Section shall not diminish the right of the Company to claim and recover damages or to obtain any equitable remedy in addition to injunctive relief to which the Company may otherwise be entitled. The Employee understands and agrees that the Employee will also be responsible for all costs and attorney’s fees incurred by the Company in enforcing any of the provisions of this Agreement including, but not limited to, expert witness fees and deposition costs.

8. SEVERABILITY. If, for any reason, any Section or portion of this Agreement shall be held by a court to be invalid or unenforceable, it is agreed that such holding shall not affect any other section or portion of this Agreement. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Agreement is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between Company and the Employee concerning the subject matter and supersedes all prior agreements between the parties, including, without limitation, the Management Agreement, executed February 14, 2006 and amended December 31, 2008. No rights are granted to the Employee under this Agreement other than those specifically set forth herein.

10. NO EMPLOYMENT AGREEMENT. This Agreement is not an employment policy or contract. It does not give the Employee the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Employee. It also does not

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

11. AMENDMENTS. The parties agree that no modification of the Agreement may be made except by means of a written agreement signed by the parties. However, if the Company determines to its reasonable satisfaction that an alteration or amendment of this Agreement is necessary or advisable so that the Agreement complies with the Code or any other applicable tax law, then, upon written notice to Employee, the Company may unilaterally amend this Agreement in such manner and to such extent as the Company reasonably considers necessary or advisable to ensure compliance with the Code or other applicable tax law. Nothing in this Section shall be deemed to limit the Company’s right to terminate this Agreement at any time and without stated cause.

12. ASSIGNMENT OF RIGHTS; SPENDTHRIFT CLAUSE. None of the Employee, the Employee’s estate, or the Employee’s beneficiary shall have any right to sell, assign, transfer, pledge, attach, encumber, or otherwise convey the right to receive any payment hereunder. To the extent permitted by law, benefits payable under this Agreement shall not be subject to the claim of any creditor of the Employee, the Employee’s estate, or the Employee’s designated beneficiary or subject to any legal process by any creditor of the Employee, the Employee’s estate, or the Employee’s designated beneficiary.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

14. SUCCESSORS; BINDING AGREEMENT. By an assumption agreement in form and substance satisfactory to the Employee, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement had no succession occurred.

15. TAX WITHHOLDING. If taxes are required by the Code or other applicable tax law to be withheld by the Company from payments under this Agreement, the Company shall withhold any taxes that are required to be withheld.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

Either party may, by notice hereunder, designate a changed address. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed to have been given on the registered date or that date stamped on the certified mail receipt.

18. SEVERABILITY. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, it is hereby agreed that such invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions or portions hereof shall remain in full force and effect, and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable.

19. COMPLIANCE WITH CODE SECTION 409A. The Company and the Employee intend that their exercise of authority or discretion under this Agreement shall comply with section 409A of the Code. Notwithstanding anything herein to the contrary in this Agreement, to the extent that any benefit under this Agreement that is nonqualified deferred compensation (within the meaning of section 409A of the Code) payable upon Employee’s termination of employment, such payment(s) shall be made only upon Employee’s “Separation from Service” pursuant to the default definition in Treasury Regulation section 1.409A-1(h).

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	August 1, 2017	/s/ Randy J. Newman
		Randy Newman

		Accepted for Alerus Financial Corporation:

Date:	August 1, 2017	By:	/s/ Kris Compton
			Kris Compton

		Its: CSO

Exhibit 10.2

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Dan Cheever (the “Employee”).

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

6. POST TERMINATION OBLIGATIONS.

b. Unless otherwise requested by the Company in writing, upon Employee’s termination of employment with the Company for any reason Employee shall automatically resign as of the Tennination Date from all titles, positions and appointments Employee then holds with the Company and any and all Affiliates, whether as an officer, director, trustee, fiduciary or employee (without any claim for compensation related thereto), and Employee hereby agrees to take all actions necessary to effectuate such resignations.

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

19. COMPLIANCE WITH CODE SECTION 409A . The Company and the Employee intend that then exercise of authority or discretion under this Agreement shall comply with section 409A of the Code. Notwithstanding anything herein to the contrary in this Agreement, to the extent that any benefit under this Agreement that is nonqualified deferred compensation (within the meaning of section 409A of the Code) payable upon Employee’s termination of employment, such payment(s) shall be made only upon Employee’s “Separation from Service” pursuant to the default definition in Treasury Regulation section 1.409A-1(h).

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	August 23, 2017	/s/ Dan Cheever
		Dan Cheever

		Accepted for Alerus Financial Corporation:

Date:	October 8, 2017	By:	/s/ Randy J. Newman
			Randy Newman

		Its: CEO

Exhibit 10.3

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Kris Compton (the “Employee”).

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to: (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(1), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

6. POST TERMINATION OBLIGATIONS.

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	August 8, 2017	/s/ Kris Compton
		Kris Compton

		Accepted for Alerus Financial Corporation:

Date:	October 8, 2017	By:	/s/ Randy J. Newman
			Randy Newman

		Its: CEO

Exhibit 10.4

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Katie Lorenson (the “Employee”).

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to: (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(1), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

4. TERMINATION OF EMPLOYMENT . During the Term, the Employee’s employment with the Company shall terminate upon:

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

6. POST TERMINATION OBLIGATIONS.

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

15. TAX WITHHOLDING . If taxes are required by the Code or other applicable tax law to be withheld by the Company from payments under this Agreement, the Company shall withhold any taxes that are required to be withheld.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	October 26, 2018	/s/ Katie Lorenson
		Employee

		Accepted for Alerus Financial Corporation:
Date:	October 31, 2018	By:	/s/ Randy J. Newman

		Its	CEO, Chairman & President

Exhibit 10.5

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Ann McConn (the “Employee”).

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to: (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(1), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

c. Change in Control shall mean a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as such change is defined under the default definition in Treasury Regulation §l.409A-3(i)(5) or any subsequently applicable Treasury Regulation.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

6. POST TERMINATION OBLIGATIONS.

7. REMEDIES. Employee agrees that if Employee fails to fulfill Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3, the damages to the Company or any of its Affiliates would be very difficult or impossible to determine. Therefore, in addition to any other rights or remedies available to the Company at law, in equity or by statute, Employee hereby consents to the specific enforcement by the Company of this Agreement through an injunction or restraining order issued by an appropriate court, without the necessity of proving actual damages, and Employee hereby waives as a defense to any equitable action the allegation that the Company has an adequate remedy at law. The provisions of this Section shall not diminish the right of the Company to claim and recover damages or to obtain any equitable remedy in addition to injunctive relief to which the Company may otherwise be entitled, The Employee understands and agrees that the Employee will also be responsible for all costs and attorney’s fees incurred by the Company in enforcing any of the provisions of this Agreement including, but not limited to, expert witness fees and deposition costs.

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	August 8, 2017	/s/ Ann McConn
		Ann McConn

		Accepted for Alerus Financial Corporation:

Date:	October 8, 2017	By:	/s/ Randy J. Newman
			Randy Newman

		Its: CEO

Exhibit 10.6

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) is made and entered into between Alerus Financial Corporation, a Delaware corporation (the “Company”), and Karin Taylor (the “Employee”).

WHEREAS the Company desires to continue to employ the Employee, and Employee desires to continue employment with the Company; and

WHEREAS the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders;

1. DEFINITIONS. As used in this Agreement, certain terms shall have the following meanings:

a. Affiliate shall mean the Company and any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company

b. Cause shall mean and be limited to: (i) willful and gross neglect of duties by the Employee, (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation, (iii) any action or inaction detrimental to the Company or its reputation that results in regulatory enforcement action, whether or not such enforcement action is subject to direct enforcement under 12 U.S.C § 1818(i)(1), by any regulatory authorities having authority over the Company, or (iv) any violation of Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3.

d. Code shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect.

g. Retirement Age shall mean the attainment of age 65.

h. Specified Employee shall mean an employee who at the time of termination of employment is a key employee of the Company, if any stock of the Company is publicly traded on an established securities market or otherwise. For purposes of this Agreement, an employee is a key employee if the employee meets the requirements of Code section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period ending on December 31 (the “identification period”). If the employee is a key employee during an identification period, the employee is treated as a key employee for purposes of this Agreement during the twelve (12)

month period that begins on the first day of January following the close of the identification period.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.

c. The foregoing obligations of confidentiality shall not apply to any knowledge or information that: (i) is now or subsequently becomes generally publicly known,

4. TERMINATION OF EMPLOYMENT. During the Term, the Employee’s employment with the Company shall terminate upon:

c. Employee’s death or Disability.

5. SEVERANCE PAYMENTS.

b. Notwithstanding Section 5(a) and subject to the limitation in Section 5(e), if (i) the Employee’s employment is terminated by the Company without Cause or by the Employee for Good Reason, and (ii) the Termination Date occurs within 24 months immediately following a Change in Control, the Employee shall receive two times the Severance Pay calculated in accordance with Section 5(a), which shall be paid to Employee by the Company in a lump sum on the later of 60th day following the Termination Date or the closing on the event constituting the Change in Control, provided the conditions specified in Section 5(c) have been satisfied.

6. POST TERMINATION OBLIGATIONS.

7. REMEDIES. Employee agrees that if Employee fails to fulfill Employee’s obligations under this Agreement, including, without limitation, the obligations set forth in Section 3, the damages to the Company or any of its Affiliates would be very difficult or impossible to determin e. Therefore, in addition to any other rights or remedies available to the Company at law, in equity or by statute, Employee hereby consents to the specific enforcement by the Company of this Agreement through an injunction or restraining order issued by an appropriate court, without the necessity of proving actual damages, and Employee hereby waives as a defense to any equitable action the allegation that the Company has an adequate remedy at law. The provisions of this Section shall not diminish the right of the Company to claim and recover damages or to obtain any equitable remedy in addition to injunctive relief to which the Company may otherwise be entitled. The Employee understands and agrees that the Employee will also be responsible for all costs and attorney’s fees incurred by the Company in enforcing any of the provisions of this Agreement including, but not limited to, expert witness fees and deposition costs.

require the Employee to remain an employee or interfere with the Employee’s right to separate from service at any time.

13. BINDING EFFECT. This Agreement shall bind the Employee, the Company, and their beneficiaries, survivors, executors, successors and assigns, administrators, and transferees.

16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota.

17. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which:

a. In the case of the Company shall be:

Alerus Financial Corporation

322 DeMers Avenue

PO Box 1200

Grand Forks, North Dakota 56206-1200

Attention: Randy Newman

b. In the case of the Employee shall be:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

Date:	November 27, 2018	/s/ Karin Taylor
		Employee

		Accepted for Alerus Financial Corporation:

Date:	December 10, 2018	By:	/s/ Randy Newman

		Its	CEO

Exhibit 10.7

ALERUS FINANCIAL CORPORATION

2009 STOCK PLAN

Table of Contents

Section 1.	Purpose	1

Section 2.	Definitions	1

Section 3.	Administration	4
(a)	Power and Authority of the Committee	4
(b)	Power and Authority of the Board	4

Section 4.	Shares Available for Awards	4
(a)	Shares Available	4
(b)	Accounting for Awards	5
(c)	Adjustments	5

Section 5.	Eligibility	6

Section 6.	Awards	7
(a)	Options	7
(b)	Stock Appreciation Rights	7
(c)	Restricted Stock and Restricted Stock Units	8
(d)	Performance Awards	8
(e)	Dividend Equivalents	8
(f)	Other Stock Grants	9
(g)	Other Stock-Based Awards	9
(h)	General	9

Section 7.	Amendment and Termination; Adjustments	11
(a)	Amendments to the Plan	11
(b)	Amendments to Awards	11
(c)	Correction of Defects, Omissions and Inconsistencies	11

Section 8.	Income Tax Withholding	11

Section 9.	General Provisions	11
(a)	No Rights to Awards	11
(b)	Award Agreements	12
(c)	Plan Provisions Control	12
(d)	No Rights of Stockholders	12
(e)	No Limit on Other Compensation Arrangements	12
(f)	No Right to Employment	12
(g)	Governing Law	13
(h)	Severability	13
(i)	No Trust or Fund Created	13
(j)	Other Benefits	13
(k)	No Fractional Shares	13

(l)	Headings	13
(m)	Conditions Precedent to Issuance of Shares	14

Section 10.	Effective Date of the Plan	14

Section 11.	Term of the Plan	14

iii

ALERUS FINANCIAL CORPORATION

2009 STOCK PLAN

Section 1. Purpose

The purpose of the Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting and retaining employees, officers, and directors capable of assuring the future success of the Company, to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to afford such persons an opportunity to acquire a proprietary interest in the Company.

Section 2. Definitions

As used in the Plan, the following terms shall have the meanings set forth below:

(a) “ Affiliate ” shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

(b) “ Award ” shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan.

(c) “ Award Agreement ” shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. Each Award Agreement shall be subject to the applicable terms and conditions of the Plan and any other terms and conditions (not inconsistent with the Plan) determined by the Committee.

(d) “ Board ” shall mean the Board of Directors of the Company.

(e) “ Committee ” shall mean a committee of Directors designated by the Board to administer the Plan, which shall initially be the Company’s compensation committee. In the absence of the designation of a committee, the Board shall serve as the Committee

(f) “ Company ” shall mean Alerus Financial Corporation, a Delaware corporation, and any successor corporation.

(g) “ Director ” shall mean a member of the Board, including any Non-Employee Director.

(h) “ Dividend Equivalent ” shall mean any right granted under Section 6(e) of the Plan.

(i) “ Eligible Person ” shall mean any employee, officer, consultant, independent contractor or director providing services to the Company or any Affiliate who the Committee determines to be an Eligible Person. “Event” shall mean the occurrence of any of the following events:

(i) a majority of the directors of the Company shall be persons other than persons:

(A) for whose election proxies shall have been solicited by the Board

(B) who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships;

(ii) 50% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule thereto) by any person (other than the Company or a subsidiary of the Company) or group of persons acting in concert (other than the acquisition and beneficial ownership by a parent corporation or its wholly-owned subsidiaries, as long as they shall remain wholly-owned subsidiaries, of 100% of the outstanding voting stock of the Company as a result of a merger which complies with paragraph subsection (iii)(A)(2) below in all respects); an Event shall not be deemed to occur with respect to a recipient of an Award if the acquisition of the 50% or greater interest referred to in this subsection (ii) is by the recipient or a group, acting in concert, that includes the recipient or if a majority of the voting stock (or the voting equity interest) of the surviving corporation or its parent corporation or of any corporation (or other entity) acquiring all or substantially all of the assets of the Company (in the case of a merger, consolidation or disposition of assets) or the Company or its parent corporation (in the case of a statutory share exchange) is, immediately following the merger, consolidation, statutory share exchange or disposition of assets, beneficially owned by such recipient or by a group, acting in concert, that includes the recipient; or

(iii) the stockholders of the Company approve a definitive agreement or plan to:

(A) merge or consolidate the Company with or into another corporation (other than (1) a merger or consolidation with a subsidiary of the Company or (2) a merger in which the Company is the surviving corporation and either (A) no outstanding voting stock of the Company (other than fractional shares) held by stockholders immediately prior to the merger is converted into cash, securities, or other property or (B) all holders of outstanding voting stock of the Company (other than fractional shares) immediately prior to the merger have substantially the same proportionate ownership of the voting stock of the Company or its parent corporation immediately after the merger),

(B) exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by stockholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for cash, securities or other property,

(C) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or

(D) liquidate or dissolve the Company.

(j) “ Fair Market Value ” shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.

(k) “ Family Member ” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employees household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than fifty percent of the voting interests.

(l) “ Non-Qualified Stock Option ” shall mean an option granted under Section 6(a) of the Plan.

(m) “ Option ” shall mean a Non-Qualified Stock Option.

(n) “ Other Stock Grant ” shall mean any right granted under Section 6(f) of the Plan.

(o) “ Other Stock-Based Award ” shall mean any right granted under Section 6(g) of the Plan.

(p) “ Participant ” shall mean an Eligible Person designated to be granted an Award under the Plan.

(q) “ Performance Award ” shall mean any right granted under Section 6(d) of the Plan.

(r) “ Person ” shall mean any individual or entity, including a corporation, partnership, limited liability company, association, joint venture or trust.

(s) “ Plan ” shall mean the Alerus Financial Corporation 2009 Stock Plan, as amended from time to time, the provisions of which are set forth herein.

(t) “ Restricted Stock ” shall mean any Share granted under Section 6(c) of the Plan.

(u) “ Restricted Stock Unit ” shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date.

(v) “ Share ” or “ Shares ” shall mean a share or shares of common stock, no par value per share, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

(w) “ Stock Appreciation Right ” shall mean any right granted under Section 6(b) of the Plan.

Section 3. Administration

(a) Power and Authority of the Committee . The Plan shall be administered by the Committee. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or the method by which payments or other rights are to be determined in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of any Option or waive any restrictions relating to any Award; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement, including an Award Agreement, relating to the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Eligible Person and any holder or beneficiary of any Award.

(b) Power and Authority of the Board . Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan.

Section 4. Shares Available for Awards

(a) Shares Available . Subject to adjustment as provided in Section 4(c) of the Plan, the aggregate number of Shares that may be issued under the Plan shall be 450,000. Shares to be issued under the Plan may be either authorized but unissued Shares or Shares re-acquired and held in treasury.

(b) Accounting for Awards . For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan. Any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award or in connection with the satisfaction of tax obligations relating to an Award, shall again be available for granting Awards under the Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise

terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan.

(i) In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase price or exercise price with respect to any Award; provided , however , that the number of Shares covered by any Award or to which such Award relates shall always be a whole number; and provided further , and for the avoidance of doubt, that no adjustment shall be required with respect to any Award under the Plan, unless otherwise provided by separate agreement, in connection with any Event or any transaction resulting from an Event, to the extent the consideration per share of Common Stock to be distributed in connection with such Event or transaction is less than the exercise price of such Award.

(ii) In the event of any transaction or event described in Section 4(c)(i) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations or accounting principles, and whenever the Committee determines that action is appropriate in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles, the Committee, in its sole discretion and on such terms and conditions as it deems appropriate, either by amendment of the terms of any outstanding Awards or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions:

(A) To provide for either (x) termination of any such Award in exchange for an amount of cash and/or other property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 4(c)(ii) the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then

such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Committee in its sole discretion;

(B) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

(C) To make adjustments in the number and type of shares of Stock (or other securities or property) subject to outstanding Awards, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Awards and Awards which may be granted in the future;

(D) To provide that such Award shall be exercisable or payable or fully vested with respect to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and

(E) To provide that the Award cannot vest, be exercised or become payable after such event.

Section 5. Eligibility

Any Eligible Person shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant.

Section 6. Awards

(a) Options . The Committee is hereby authorized to grant Options to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

(i) Exercise Price . The purchase price per Share purchasable under an Option shall be determined by the Committee.

(ii) Option Term . The term of each Option shall be fixed by the Committee at the time of grant.

(iii) Time and Method of Exercise . The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which,

payment of the exercise price with respect thereto may be made or deemed to have been made.

Notwithstanding any other provision of this Plan, no Option granted under the Plan is intended to be, or shall be characterized as being, an Incentive Stock Option as described in Section 422 of the internal revenue code of 1986, as amended.

(b) Stock Appreciation Rights . The Committee is hereby authorized to grant Stock Appreciation Rights to Eligible Persons subject to the terms of the Plan. Each Stock Appreciation Right granted under the Plan shall confer on the holder upon exercise the right to receive, as determined by the Committee, cash or a number of Shares equal to the excess of (a) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (b) the grant price of the Stock Appreciation Right as determined by the Committee, which grant price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions (including conditions or restrictions on the exercise thereof) of any Stock Appreciation Right shall be as determined by the Committee.

(c) Restricted Stock and Restricted Stock Units . The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

(i) Restrictions . Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, a restriction on or prohibition against the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.

(ii) Stock Certificates . Any Restricted Stock granted under the Plan shall be evidenced by the issuance of a stock certificate or certificates, which shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the applicable Award Agreement and possible forfeiture of such shares of Restricted Stock.

(iii) Forfeiture . Except as otherwise determined by the Committee, upon a Participant’s termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all applicable Shares of Restricted Stock and Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided , however , the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units.

(iv) Restricted Stock Units Cash Election. With respect to a Restricted Stock Unit Award, a Participant may elect, at the time of each Award, to receive up to 50% of the Award in cash or in Shares upon the lapse of the restrictions applicable to such Restricted Stock Units.

(d) Performance Awards . The Committee is hereby authorized to grant Performance Awards to Eligible Persons subject to the terms of the Plan. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee.

(e) Dividend Equivalents . The Committee is hereby authorized to grant Dividend Equivalents to Eligible Persons under which the Participant shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion

of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan, such Dividend Equivalents may have such terms and conditions as the Committee shall determine.

(f) Other Stock Grants . The Committee is hereby authorized, subject to the terms of the Plan, to grant to Eligible Persons Shares without restrictions thereon as are deemed by the Committee to be consistent with the purpose of the Plan.

(g) Other Stock-Based Awards . The Committee is hereby authorized to grant to Eligible Persons, subject to the terms of the Plan, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, promissory notes, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted.

(h) General .

(i) Consideration for Awards . Awards may be granted for no cash consideration or for any cash or other consideration as determined by the Committee and required by applicable law.

(ii) Awards May Be Granted Separately or Together . Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

(iii) Forms of Payment under Awards . Subject to the terms of the Plan, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, promissory notes, other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

(iv) Limits on Transfer of Awards . No Award (other than Other Stock Grants) and no right under any such Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution and the Company shall not be required to recognize any attempted assignment of such rights by any Participant; provided , however , that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant; provided , further , that, if so determined by the Committee, a Participant may transfer an Option to any Family Member at any time that such Participant holds such Option, provided that the Participant may not receive any consideration for such transfer, the Family Member may not make any subsequent transfers other than by will or by the laws of descent and distribution and the Company receives written notice of such transfer, provided , further , that, if so determined by the Committee, Awards may be transferable as determined by the Committee. Except as otherwise determined by the Committee, each Award or right under any such Award shall be exercisable during the Participant’s lifetime only by the Participant or, if permissible under applicable law, by the Participant’s guardian or legal representative. Except as otherwise determined by the Committee, no Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or other encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

(v) Term of Awards . The term of each Award shall be for such period as may be determined by the Committee.

(vi) Restrictions; Securities Exchange Listing . All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may direct appropriate stop transfer orders and cause other legends to be placed on the certificates for such Shares or other securities to reflect such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been admitted for trading on such securities exchange.

Section 7. Amendment and Termination; Adjustments

(a) Amendments to the Plan . The Board may amend, alter, suspend, discontinue or terminate the Plan at any time.

(b) Amendments to Awards . The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. Except as otherwise provided herein or in an Award Agreement, the Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, if such action would adversely affect the rights of the holder of such Award, without the consent of the Participant or holder or beneficiary thereof.

(c) Correction of Defects, Omissions and Inconsistencies . The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.

Section 8. Income Tax Withholding

In order to comply with all applicable federal, state or local income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state or local payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal, state and local taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

Section 9. General Provisions

(a) No Rights to Awards . No Eligible Person or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

(b) Award Agreements . No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

(c) Plan Provisions Control . In the event that any provision of an Award Agreement conflicts with or is inconsistent in any respect with the terms of the Plan as set forth herein or subsequently amended, the terms of the Plan shall control.

(d) No Rights of Stockholders . Except with respect to Shares of Restricted Stock as to which the Participant has been granted the right to vote, neither a Participant nor the Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company with respect to any Shares issuable to such Participant upon the exercise or payment of any Award, in whole or in part, unless and until such Shares have been issued in the name of such Participant or such Participant’s legal representative without restrictions thereto.

(e) No Limit on Other Compensation Arrangements . Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or

additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.

(f) No Right to Employment . The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or us giving a director of the Company or an Affiliate the right to continue as a director or an Affiliate of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or any Award, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing in this Plan shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Awards granted hereunder shall not form any part of the wages or salary of any Eligible Person for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, each Participant shall be deemed to have accepted all the conditions of the Plan and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(g) Governing Law . The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(h) Severability . If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

(i) No Trust or Fund Created . Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and an Eligible Person or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

(j) Other Benefits . No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant’s compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan.

(k) No Fractional Shares . No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

(l) Headings . Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

(m) Conditions Precedent to Issuance of Shares . Shares shall not be issued pursuant to the exercise or payment of the purchase price relating to an Award unless such exercise or payment and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, the Delaware General Corporation Law. As a condition to the exercise or payment of the purchase price relating to such Award, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

Section 10. Effective Date of the Plan

The Plan shall be effective upon its adoption by the Board.

Section 11. Term of the Plan

No Award shall be granted under the Plan after ten years from the date of adoption of the Plan by Board or any earlier date of discontinuation or termination established pursuant to Section 7(a) of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board to amend the Plan, shall extend beyond the termination of the Plan.

Section 12. Acceleration of Awards

Upon the occurrence of an Event, (1) any Option or Stock Appreciation Right held by a Participant under this Plan that has not expired shall, to the extent not previously exercisable, become and be fully exercisable as of the date of such Event, and (2) all restrictions contained in any outstanding Restricted Stock or Restricted Stock Unit shall be deemed to have lapsed, and in the case of Restricted Stock Units, the Shares or the cash value issuable pursuant to such Restricted Stock Unit shall issue, as of the date of such Event.

Exhibit 10.8

ALERUS FINANCIAL CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
FOR LONG TERM INCENTIVE AWARD

Full Name of Employee:
No. of Shares Covered	Date of Grant:

This is a RESTRICTED STOCK AWARD AGREEMENT (the “ Award Agreement ”) between Alerus Financial Corporation, a Delaware corporation (the “ Company ”) and the employee of the Company or a subsidiary of the Company (the “ Employee ”) listed above.

1. Award . The Company hereby grants to Employee a restricted stock award of the number of shares (the “ Restricted Shares ”) of the Company’s Common Stock, no par value (the “ Common Stock ”) set forth in the table above. The Restricted Shares are “Restricted Stock” granted under Section 6(c) of the Alerus Financial Corporation 2009 Stock Plan (the “ Plan ”) and are subject to the restrictions on transfer, pledge or disposition, and to forfeiture to the Company, contained in this Award Agreement and in Section 6(c) of the Plan. A copy of the Plan will be furnished upon request of Employee. Employee shall be entitled to exercise the rights of a stockholder with respect to the Restricted Shares, including the right to vote the Shares and the right to receive dividends on the Shares.

2. Performance Adjusted Shares and Vesting . The vesting period for the Award is five (5) years (the “ Vesting Period ”). At the end of the Vesting Period, the number of shares vesting under this Award Agreement may be adjusted, by either an increase in the number of shares of the Award or a decrease in the number of shares of the Award, on the basis of actual performance to a target performance.

The actual number of shares vesting at the end of the five (5) year Vesting Period under the Restricted Shares pursuant to this Award Agreement may be adjusted upward or downward, based on the Company’s actual Total Shareholder Return and Target Total Shareholder Return. For this purpose, Total Shareholder Return shall be equal to the year over year change in the price of shares, as indicated in the Company’s Employee Stock Ownership Plan (the “ ESOP ”), plus dividends. The Target Shareholder Return is set by the Committee annually and is indicated in Schedule A attached to this Award Agreement.

The adjustment in the number of shares vesting under this Award Agreement will be determined by comparing the average of the Company’s actual Total Shareholder Return over the five (5) year Vesting Period to the average of the Target Total Shareholder Return over the same period, to determine whether the Company has exceeded, met or fallen below the target performance level.

If the Company’s average Total Shareholder Return exceeds the average of the Target Total Shareholder Return established by the Committee, the number of shares vesting under the Restricted Stock will be increased by the ratio of the average actual Total Shareholder Return to the average Target Total Shareholder Return. If the Company’ s average actual Total

Shareholder Return falls below the average of the Target Total Shareholder Return, the number of shares vesting under the Restricted Stock will be decreased by the ratio of the average actual Total Shareholder Return to the average Target Total Shareholder Return. If the Company’s average actual Total Shareholder Return equals the average of the Target Total Shareholder Return, the number of shares vesting under the Restricted Stock will not be adjusted.

3. Restrictions on Transfer . Until the Shares vest pursuant to Paragraph 2 hereof, none of the Restricted Shares may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company, and no attempt to transfer the Restricted Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Restricted Shares.

4. Forfeiture; Early Vesting . If Employee (i) ceases to be an employee of the Company or any Affiliate (as defined in the Plan) prior to vesting of the Restricted Shares pursuant to Paragraph 2 hereof, (ii) Employee violates any restrictions with respect to the Restricted Shares contained in the Plan or this Award Agreement, or (iii) Employee violates the provisions of Paragraph 7 of this Award Agreement, all of Employee’s rights to all unvested Restricted Shares shall be immediately and irrevocably forfeited. Upon forfeiture, Employee will no longer have any rights relating to the unvested Restricted Shares, including the right to vote the Restricted Shares and the right to receive dividends declared on the Restricted Shares.

5. Issuance of Shares . The Company shall cause the Restricted Shares to be issued in the name of Employee, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Restricted Shares. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. Employee hereby acknowledges that the certificate or certificates representing the Restricted Shares, if any, shall bear, in addition to any other legend required by law or agreement, the following legend:

The Company may, in sole discretion, retain custody of any certificate for the Restricted Shares throughout the period during which any restrictions are in effect. After any Restricted Shares vest pursuant to Paragraph 2 hereof, and following payment of the applicable withholding taxes pursuant to Paragraph 8(a) of this Award Agreement, the Employee may surrender the certificate or Certificates reflecting the Vested Shares and the Company shall promptly cause to be issued a certificate or certificates, registered in the name of Employee, evidencing such Vested Shares without the foregoing legend.

6. Adjustments in Certain Events . In the event of any change made in the number of outstanding shares of Common Stock caused by merger, consolidation, recapitalization, reclassification, combination, stock dividend, stock split, or other event, all Common Stock (and all other securities, if any) received by Employee with respect to Restricted Shares hereunder as a consequence of such change shall be deemed Restricted Shares and shall be subject to the terms and conditions of the Plan and of this Award Agreement.

7. Other Requirements .

(a) Confidential Information . Except as permitted by the Company, Employee shall not at any time divulge, furnish or make accessible to anyone or use in any way other than in the

ordinary course of the business of the Company or its affiliates, any confidential, proprietary, or secret knowledge or information of the Company or its affiliates that Employee has acquired or will acquire about the Company or its affiliates, whether developed by himself or herself or by others, concerning (i) any trade secrets; (ii) any confidential, proprietary, or secret designs, programs, processes, formulate, plans devices, or material (whether or not patented or patentable) directly or indirectly useful in any aspect or the business of the Company or of its affiliates; (iii) any customer or supplier lists; (iv) any confidential, proprietary, or secret development or research work; (v) any strategic or other business, marketing, or sales plans; (vi) any financial data or plans; or (vii) any other confidential, proprietary, or secret information about any aspect or the business of the Company or of its affiliates. Employee acknowledges that the knowledge and information described above constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company or its affiliates would be wrongful and would cause irreparable harm to the Company. Employee shall not intentionally commit any act that would materially reduce the value of such knowledge or information to the Company or its affiliates. The foregoing obligations or confidentially shall not apply to any knowledge or information that (i) is now or subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Award Agreement, (ii) is independently made available to Employee in good faith by a third party who has not violated a confidential relationship with the Company or its affiliates, or (iii) is required to be disclosed by law or legal process. Employee’s obligations under this Award Agreement to maintain the confidentiality of the Company’s confidential, proprietary, and secret information are in addition to any obligations of Employee under applicable statutory or common law.

(b) Return of Records and Property . Upon termination or Employee’s employment, or at any time upon the Company’s request, Employee shall promptly deliver to the Company all Company and affiliate records and all Company and affiliate property in his or her possession or under his or her control, including without limitation manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, sources codes, data, tables, or calculations, and all copies thereof; documents that in whole or in part contain any trade secrets or confidential, proprietary, or other secret information of the Company or its affiliates and all copies thereof; and keys, access cards, access codes, passwords, credit cards, personal computers, telephones and other electronic equipment belonging to the Company or an affiliate.

8. Miscellaneous

(a) Income Tax Matters .

(i) In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Employee, are withheld or collected from Employee.

(ii) In accordance with the terms of the Plan, and such rules as may be adopted by the Committee under the Plan, Employee may elect to satisfy Employee’s

federal and state income tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Restricted Shares, by (i) delivering cash, check (bank check, certified check or personal check) or money order payable to the Company, (ii) having the Company withhold a portion of the Vested Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock already owned by Employee having a Fair Market Value equal to the amount of such taxes. Any shares already owned by Employee for no less than six months prior to the date delivered to the Company if such shares were acquired upon the exercise of an option or upon the vesting of restricted stock units or other restricted stock. The Company will not deliver any fractional Shares but will pay, in lieu thereof, the Fair Market Value of such fractional Shares. Employee’s election must be made on or before the date that the amount of tax to be withheld is determined.

(b) Plan Provisions Control . In the event that any provision of the Award Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control.

(c) No Right to Employment . The issuance of the Restricted Shares shall not be construed as giving Employee the right to be retained in the employ, or as giving a director of the Company or an Affiliate the right to continue as a director, of the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Employee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or the Award Agreement. Nothing in the Award Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Award granted hereunder shall not form any part of the wages or salary of Employee for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Award Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Employee shall be deemed to have accepted all the conditions of the Plan and the Award Agreement and the terms and conditions of any rules and regulations adopted by the Committee (as defined in the Plan) and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and the Award Agreement, and any rules and regulations relating to the Plan and the Award Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(e) Securities Matters . The Company shall not be required to deliver Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied.

(f) Severability . If any provision of the Award Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Award Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award Agreement, such provision shall be stricken as to such jurisdiction or the Award Agreement, and the remainder of the Award Agreement shall remain in full force and effect.

(g) No Trust or Fund Created . Neither the Plan nor the Award Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Employee or any other person.

(h) Headings . Headings are given to the Sections and subsections of the Award Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Award Agreement or any provision thereof.

IN WITNESS WHEREOF , the Company and Employee have executed this Restricted Stock Award Agreement on the date set forth in the first paragraph.

	Alerus Financial Corporation

	By:
	Name:
	Title:


	Name:

Exhibit 10.9

ALERUS FINANCIAL CORPORATION
2009 STOCK PLAN

PERFORMANCE-BASED
RESTRICTED STOCK UNIT AWARD AGREEMENT

Name of Employee:
Number of Units:	Date of Grant:
Performance Period:
Scheduled Vesting Date:

This is a RESTRICTED STOCK UNIT AWARD AGREEMENT (the “ Award Agreement ”) between Alerus Financial Corporation, a Delaware corporation (the “ Company ”), and the employee of the Company or an Affiliate of the Company (the “ Employee ”) specified in the table above. Except as otherwise set forth herein, this Award Agreement is subject to the terms and conditions of the Alerus Financial Corporation 2009 Stock Plan (the “ Plan ”). Any capitalized term used in this Award Agreement that is not defined herein shall have the meaning set forth in the Plan.

1. Award The Company hereby grants to Employee on the Date of Grant that number of performance-based restricted stock units (“ Units ”) equal to the “Number of Units” specified in the table above on the terms and conditions set forth in this Award Agreement and as otherwise provided in the Plan (the “ Award ”). Each Unit that vests will entitle Employee to receive one Share.

2. Nature of Units The Units granted pursuant to this Award are bookkeeping entries only and do not provide Employee with any dividend, voting or other rights of a stockholder of the Company; provided, however, Employee shall be entitled to Dividend Equivalents as described in Paragraph 3 of this Award Agreement. The Units shall remain forfeitable at all times unless and to the extent the vesting conditions set forth in [Paragraph 4] of this Award Agreement are satisfied. Neither this Award nor the Units may be sold, transferred, assigned, encumbered or otherwise disposed of, except by will or the laws of descent and distribution in the event of Employee’s death. Any attempt to otherwise transfer this Award or the Units shall be void and without effect.

3. Dividend Equivalents As part of this RSU award, the participant will receive dividend equivalents during the Performance Period, equal to the amount of dividends declared by the company for one common share of stock during the Performance Period, multiplied by the number of RSUs granted during the same Performance Period. Dividend equivalents will be accrued and paid in cash at the end of the Performance Period.

4. Vesting of Restricted Stock Units For purposes of this Award Agreement, “Vesting Date” means any date, including the Scheduled Vesting Date, on which Units subject to this Award vest as provided in this Paragraph 4.

(a) General . Except as otherwise provided in Paragraphs 4(b) and 4(c), the Units subject to this Award shall vest on the Scheduled Vesting Date only if and to the extent the Company satisfies the performance-based objective(s) for the Performance Period as set forth in Schedule A to this Award Agreement. If the Committee certifies that the Company achieved at least its threshold performance-based

objective for the Performance Period, then some or all of the Units subject to this Award will vest as of the Scheduled Vesting Date. The portion of the Units subject to this Award that will vest as of the Scheduled Vesting Date will be determined according to the formula specified in Schedule A . Any Units that have not vested on the Scheduled Vesting Date will be forfeited.

(b) Termination of Employment . Except as provided in the following sentences and in Paragraph 4(c), if Employee’s employment with the Company and all of its Affiliates ceases at any time during the Performance Period, this Award shall terminate and all Units subject to this Award shall be forfeited by Employee. If, however, Employee’s employment with the Company and all of its Affiliates ends due to death, Disability, or Retirement, then, upon any such termination, Employee shall become immediately vested in [a pro rata portion of] this Award determined as if a Target Goal level performance-based objective for the Performance Period were achieved. [The pro rata portion of this Award in which Employee will become immediately vested will be based on the full fiscal months of the Performance Period during which Employee was actively employed as a percentage of total fiscal months in the Performance Period.] It is understood that if Employee’s employment ends for any reason during the period between the Vesting Date and the date Shares are to be issued in settlement of Units vested as of the Vesting Date, Employee shall not forfeit any such Units.

(c) Occurrence of Event . If an Event occurs and Employee holds Units subject to this Award Agreement at the time, then one of the following shall occur:

(i) If, pending the Event, the Committee determines that this Award will not continue after the Event or that the successor entity (or its parent) will not agree to provide for the assumption or replacement of this Award with a comparable equity-based award covering shares of the successor entity (or its parent) that would equitably preserve the compensation element of the Award at the time of the Event, then a portion of the Units subject to this Award shall vest and be settled within 30 days of the date of the Committee action to accelerate vesting. That portion shall be equal to the number of Units subject to this Award that would vest as of the Scheduled Vesting Date if the Company were to achieve the Target Goal level performance-based objective for the Performance Period, multiplied by a fraction, the numerator of which is the number of days between the Date of Grant and the date of the Committee action to accelerate vesting, and the denominator of which is the number of days in the Performance Period.

(ii) If, in connection with the Event, subparagraph 4(c)(i) is not applicable and this Award Agreement is continued, assumed or replaced in the manner described in subparagraph 4(c)(i), and if within one year after that Event Employee’s employment with the Company and all of its Affiliates (or with any successor entity) is terminated by the employer for reasons other than Cause, or is terminated by Employee for Good Reason, then a portion of the Units subject to this Award shall immediately vest and be settled within 30 days after the date of Employee’s termination of employment. That portion shall be equal to the number of Units subject to this Award that would vest as of the Scheduled Vesting Date if the Company were to achieve the Target Goal level performance-based objective for the Performance Period, multiplied by a fraction, the numerator of which is the number of days between the Date of Grant and the date of Employee’s termination of employment, and the denominator of which is the number of days in the Performance Period.

(d) Definitions .

(i) “ Cause ” means what the term is expressly defined to mean in a then-effective employment agreement between Employee and the Company, or, in the absence of any such then-effective agreement or definition, means: (A) Employee’s commission of any act constituting a

felony or Employee’s conviction or guilty or no contest plea to any criminal misdemeanor involving fraud, misrepresentation or theft; (B) gross misconduct or any act of fraud, disloyalty or dishonesty by Employee related to or connected with Employee’s employment by the Company or otherwise likely to cause material harm to the Company or its reputation; (C) a material violation by Employee of the Company’s policies or codes of conduct; or (D) the willful or material breach by Employee of any agreement between Employee and the Company.

(ii) “ Disability ” means what the term is expressly defined to mean in a then-effective employment agreement between Employee and the Company, or, in the absence of any such then-effective agreement or definition, means any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes Employee to be unable to perform the duties of Employee’s position of employment or any substantially similar position of employment.

(iii) “ Good Reason ” means what the term is expressly defined to mean in a then-effective employment agreement between Employee and the Company, or, in the absence of any such then-effective agreement or definition, means any of the following conditions arising without the consent of Employee, provided that Employee has first given written notice to the Company of the existence of the condition within 90 days of its first occurrence, and the Company has failed to remedy the condition within 30 days thereafter: (A) a material diminution in Employee’s base salary; (B) a material diminution in Employee’s authority, duties, or responsibilities; (C) relocation of Employee’s principal office more than 50 miles from its current location; or (D) any other action or inaction that constitutes a material breach by the Company of any terms or conditions of any agreement between the Company and Employee, which breach has not been caused by Employee.

(iv) “ Retirement ” means a voluntary termination of employment by Employee following Employee’s attainment of age 60 provided that Employee has then worked for the Company for at least 10 years.

5. Settlement of Units; Issuance of Shares

(a) Settlement of Units . Except as otherwise provided in Paragraph 4(c), as soon as practicable after the Scheduled Vesting Date, but no later than March 15 of the year following the Scheduled Vesting Date, the Company shall cause to be issued to Employee (or his or her beneficiary or personal representative) one Share in payment and settlement of each vested Unit. The Company may withhold from the number of such Shares to be delivered in settlement of the Units any Shares required for the payment of withholding taxes as provided in Paragraph 8(a) below.

(b) Issuance of Shares . Upon settlement of the Units, the Company shall cause Shares to be issued in the name of Employee, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Shares.

6. Adjustments in Certain Events Pursuant and subject to Section 4(c) of the Plan, certain changes in the number or character of the Shares (through merger, consolidation, recapitalization, reclassification, combination, stock dividend, stock split, or other event) shall result in an equitable adjustment to avoid dilution or enlargement of Employee’s rights with respect to any Units subject to this Award which have not yet been settled.

7. Other Requirements

(a) Confidential Information . Except as permitted by the Company, Employee shall not at any time divulge, furnish or make accessible to anyone or use in any way other than in the ordinary course of the business of the Company or its affiliates, any confidential, proprietary, or secret

knowledge or information of the Company or its affiliates that Employee has acquired or will acquire about the Company or its affiliates, whether developed by himself or herself or by others, concerning (i) any trade secrets; (ii) any confidential, proprietary, or secret designs, programs, processes, formulate, plans devices, or material (whether or not patented or patentable) directly or indirectly useful in any aspect or the business of the Company or of its affiliates; (iii) any customer or supplier lists; (iv) any confidential, proprietary, or secret development or research work; (v) any strategic or other business, marketing, or sales plans; (vi) any financial data or plans; or (vii) any other confidential, proprietary, or secret information about any aspect or the business of the Company or of its affiliates. Employee acknowledges that the knowledge and information described above constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company or its affiliates would be wrongful and would cause irreparable harm to the Company. Employee shall not intentionally commit any act that would materially reduce the value of such knowledge or information to the Company or its affiliates. The foregoing obligations or confidentially shall not apply to any knowledge or information that (i) is now or subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Award Agreement, (ii) is independently made available to Employee in good faith by a third party who has not violated a confidential relationship with the Company or its affiliates, or (iii) is required to be disclosed by law or legal process. Employee’s obligations under this Award Agreement to maintain the confidentiality of the Company’s confidential, proprietary, and secret information are in addition to any obligations of Employee under applicable statutory or common law.

8. Miscellaneous

(a) Income Tax Matters .

(ii) In accordance with the terms of the Plan, and such rules as may be adopted by the Committee under the Plan, Employee may elect to satisfy Employee’s federal and state income tax withholding obligations arising from the receipt of Shares, by (i) delivering cash, check (bank check, certified check or personal check) or money order payable to the Company, (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company Shares already owned by Employee having a Fair Market Value equal to the amount of such taxes. The Company will not deliver any fractional Shares but will pay, in lieu thereof, the Fair Market Value of such fractional Shares. Employee’s election must be made on or before the date that the amount of tax to be withheld is determined.

(b) Plan Provisions Control . In the event that any provision of this Award Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. Notwithstanding the foregoing, as a condition to receiving this Award, Employee acknowledges and agrees that Employee shall have no right pursuant to Section 6(c)(iv) (“Restricted Stock Units Cash Election”) of the Plan to make an election to receive any portion of this Award in cash.

(c) No Right to Employment . The issuance of this Award, the Units or any Shares hereunder shall not be construed as giving Employee the right to be retained in the employ, or as giving a director of the Company or an Affiliate the right to continue as a director, of the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Employee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or this Award Agreement. Nothing in this Award Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. This Award shall not form any part of the wages or salary of Employee for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under this Award Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Employee shall be deemed to have accepted all the conditions of the Plan and this Award Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and this Award Agreement, and any rules and regulations relating to the Plan and this Award Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(f) Severability . If any provision of this Award Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify this Award Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or this Award Agreement, such provision shall be stricken as to such jurisdiction or this Award Agreement, and the remainder of this Award Agreement shall remain in full force and effect.

(g) No Trust or Fund Created . Neither the Plan nor this Award Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Employee or any other person.

(h) Headings . Headings are given to the Paragraphs and subparagraphs of this Award Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Award Agreement or any provision thereof.

IN WITNESS WHEREOF , the Company and Employee have executed this Performance-Based Restricted Stock Unit Award Agreement on the date set forth in the first paragraph.

	Alerus Financial Corporation

	By:
	Name:
	Title:

	Employee


	Name:

Exhibit 10.10

ALERUS FINANCIAL

LONG TERM INCENTIVE PLAN

Summary Document

Purpose of the Plan

The Alerus Financial (“Alerus” or “Company”) Executive Compensation Philosophy drives all aspects of compensation payable to the key executives of Alerus, particularly incentive compensation. The Compensation Philosophy states that executive compensation practices are designed to attract, motivate, and retain key talent. Our pay-for-performance system ties compensation to shareholder value and core Alerus values, utilizing a mix of base salary, short and long term incentives (including cash and equity), benefits, and perquisites. The purpose of the Long Term Incentive Plan (“LTIP” or “Plan”) is to:

· Enhance performance consistent with Alerus’ corporate strategic goals;

· Focus on long-term performance results consistent with the Company’s long-term strategic plan;

· Strengthen the link between performance and pay by delivering awards based on measurable goals for Alerus and the Participant; and

· Strengthen the link between executives and investors through the use of equity grants to enhance shareholder value.

Plan Overview

The LTIP is a performance-based equity incentive plan whereby restricted stock units (RSUs) are granted annually to Participants. Depending on Company performance, these RSUs vest and are earned after 3 years, at which time they are converted to stock. One RSU is equal to one share of stock. The initial equity award in the form of RSUs are made are determined as a percentage of base salary. All rights, privileges and limitations of equity awards will be governed by the Alerus Financial Corporation 2009 Stock Plan or other such equity plan in place at the time of the incentive award as adopted by the Board of Directors.

Eligibility for Participation

The Compensation Committee (“Committee”), with management input, will determine the executives who are eligible to participate in the LTIP. Participation in one plan does not guarantee or entitle any employee to participate in any other incentive plan enacted in the future.

Target Incentive Award

Participant incentive awards are targeted at a specified percentage of Base Salary. The Committee has the authority to modify Target Percentages on an annual basis.

For each calendar year, a 3 year cumulative target Net Income (or EPS) goal will be established for making awards at the Target Percentage level. A threshold Net Income (or EPS) will be set such that Net Income (or EPS) below this level will result in no equity awards made for that given year. A maximum will also be established which will set a maximum level of award. Actual awards will range between 50% and 150% of the Target Percentage on a linear basis based on actual Net Income (or EPS) of the Company relative to the target goal.

Vesting of Incentive Awards

Each annual award will have two qualifying components required in order to vest and earn the initial award of RSUs.

1. Time-Based Vesting : At the end of the 3 rd year from the date of the initial RSU award, the vesting requirement will be met.

2. Performance-Based Vesting : At the end of the 3 year vesting period, the target performance metric associated with each particular annual award will be measured as a percent of actual performance compared to the target performance. The final award will be adjusted to reflect actual performance versus target performance, using a linear scale, with a threshold (minimum) of 50% award for 80% performance, and a maximum of 150% award for 120% performance .

Dividend Equivalents (to be discussed)

As part of this RSU award, the participant will receive dividend equivalents during the Performance Period, equal to the amount of dividends declared by the company for one common share of stock during the Performance Period, multiplied by the number of RSUs granted during the same Performance Period.

Changes in Employment Status

A participant must be actively employed by Alerus at the time awards are made. If an employee is a new Participant in the LTIP for less than a full year, the measure of his/her award will be prorated for the period of actual service. Generally, employees hired during the fourth quarter are not eligible to participate in that year’s LTIP. The Committee has the authority to make all determinations in this regard.

In the event of a termination prior to the end of the 3 year Performance Period, the award will be forfeited. In the event of a termination due to death, disability, or retirement, (retirement defined as age 60 and 10 years of service), the award will be pro-rated at the “target” level based on full fiscal months of the Performance Period during which the participant was actively employed, as a percentage of the fiscal months in the Performance Period.

Plan Administration

The Compensation Committee is assigned authority by the Board for the LTIP administration. All Incentive Awards will be paid within 60 days after the close of the performance period.

Typically, the Committee has the responsibility and authority to:

1) Design the basics of the Plan and the implementation process, and submit to the Board for final approval.

2) Review and recommend for the Board’s approval appropriate modifications to the Plan.

3) Review and revise Company performance metrics, target award percentages, vesting arrangements and other performance-based triggers.

4) Approve an accrual adequate to fund Board approved payments and adjusting as appropriate per the LTIP during the plan period;

5) Approve a determination and assessment of actual performance for the plan period;

6) Approve any performance-based adjustments or adjustments due to unforeseen extraordinary events to incentive awards where appropriate;

7) Correct any defect, supply any omission, reconcile any inconsistency and otherwise interpret and administer the LTIP and any instrument or award agreement relating to the LTIP or any award hereunder;

8) Establish, amend, suspend, or waive such rules, regulations and procedures that the Committee may establish in the administration of the LTIP, and appoint such agents as it shall deem appropriate for the proper administration of the LTIP; and

9) Make any other determination and take any other action that the Committee deems necessary or desirable for the proper administration of the LTIP.

The Committee may delegate to any member of the Board or committee of Board members such of its powers as it deems appropriate, including the power to sub-delegate; except that, pursuant to such delegation or sub-delegation, only a member of the Board (or a committee thereof) may grant awards.

Acting within the authority conferred on the Committee by the Board through the Committee’s Charter and unless otherwise expressly provided in the LTIP, all designations, determinations, adjustments, interpretations, and other decisions under or with respect to the LTIP, any award or award agreement shall be within the discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon the Company and any Participant. No member of the Committee shall be liable for any action, determination or interpretation made in good faith, and all members of the Committee shall, in addition to their rights as Directors, be fully protected by Alerus with respect to any such action, determination or interpretation.

Modification and Termination

The Compensation Committee has sole authority for decisions regarding interpretation of the terms of the LTIP. The LTIP is provided at the discretion of Alerus. Nothing within the Plan is construed as creating an employment contract between any Participant and Alerus. Alerus has the exclusive right to modify the LTIP, in whole or in part, or to terminate the LTIP entirely. The LTIP is not an ERISA Plan. The LTIP is intended as a long-term incentive award bonus program.

Exhibit 10.11

ALERUS FINANCIAL

SHORT TERM INCENTIVE PLAN

Summary Document

Purpose of the Plan

The Alerus Financial (“Alerus” or “Company”) Executive Compensation Philosophy drives all aspects of compensation payable to the key executives of Alerus, particularly incentive compensation. The Compensation Philosophy states that executive compensation practices are designed to attract, motivate, and retain key talent. Our pay-for-performance system ties compensation to shareholder value and core Alerus values, utilizing a mix of base salary, short and long term incentives (including cash and equity), benefits, and perquisites. The purpose of the Short Term Incentive Plan (“STIP” or “Plan”) is to:

· Enhance performance consistent with Alerus’ corporate strategic goals;

· Focus on near-term performance results as well as progress toward the achievement of long-term objectives; and

· Strengthen the link between performance and pay by delivering awards based on measurable goals for Alerus and the Participant.

Plan Overview

The STIP is a performance-based annual cash incentive plan. Performance metrics are established no later than February each respective performance period and includes both company performance measures and individual performance measures. Cash awards made are determined as a percentage of base salary.

Eligibility for Participation

The Compensation Committee (“Committee”), with management input, will determine the executives who are eligible to participate in the STIP. Participation in one plan does not guarantee or entitle any employee to participate in any other incentive plan enacted in the future.

Target Incentive Award

Participant incentive awards are targeted at a specified percentage of Base Salary. The Committee has the authority, with management’s input and recommendations, to modify Target Percentages on an annual basis. A maximum incentive award has been established for the Company Performance portion at 150% of the Target Payout for each Participant.

Minimum Threshold and Incentive Pool

To ensure the plan protects shareholder value, a minimum threshold performance has been established, referred to as the Minimum Acceptable Return (“MAR”). The MAR is expressed as earnings per share (“EPS”). This minimum EPS must be achieved before any incentive awards are earned. Once the minimum is achieved in a performance period, a percentage of each dollar over MAR is set aside to establish the incentive pool from which incentive awards are made. The current Incremental Percentage is 15%. Both the MAR and the Incremental Percentage are set annually by the committee no later than February of each respective performance period. When setting MAR, peer group performance comparisons are prepared to establish a reasonable standard.

Performance Criteria

Performance criteria for the performance period are comprised of two components: 80% based on company performance and 20% based on individual performance. The individual performance component is not dependent on achieving MAR and awards are made regardless of Company performance. However, the Committee reserves the right to withhold awards based on unacceptable overall Company performance.

Current Company performance metrics include Company Net Income, Revenue and Efficiency Ratio. Individual performance metrics differ by individual and are based on areas of accountability and special projects for the year.

Changes in Employment Status

A participant must be actively employed by Alerus at the time awards are made. If an employee is a Participant in the STIP for less than a full year, the measure of his/her award will be prorated for the period of actual service. Generally, employees hired during the fourth quarter are not eligible to participate in that year’s STIP. The Committee has the authority to make all determinations in this regard.

Plan Administration

The Compensation Committee is assigned authority by the Board for the STIP administration. All Incentive Awards will be paid within 60 days after the close of the performance period.

Typically, the Committee has the responsibility and authority to:

1) Design the basics of the Plan and the implementation process, and submit to the Board for final approval.

2) Review and recommend for the Board’s approval appropriate modifications to the Plan.

3) Annually, or as appropriate, review and recommend Board approval of;

a) Minimum Acceptable Return;

b) The Incremental Percentage;

c) The Company performance metrics and weightings as recommended by Management; and

d) The individual performance metrics criteria and weightings as recommended by Management.

4) Approve an accrual adequate to fund Board approved payments and adjusting as appropriate per the STIP during the plan period;

5) Approve a determination and assessment of actual performance for the plan period;

6) Approve any performance-based adjustments or adjustments due to unforeseen extraordinary events to incentive awards where appropriate;

7) Correct any defect, supply any omission, reconcile any inconsistency and otherwise interpret and administer the STIP and any instrument or award agreement relating to the STIP or any award hereunder;

8) Establish, amend, suspend, or waive such rules, regulations and procedures that the Committee may establish in the administration of the STIP, and appoint such agents as it shall deem appropriate for the proper administration of the STIP; and

9) Make any other determination and take any other action that the Committee deems necessary or desirable for the proper administration of the STIP.

Acting within the authority conferred on the Committee by the Board through the Committee’s Charter and unless otherwise expressly provided in the STIP, all designations, determinations, adjustments, interpretations, and other decisions under or with respect to the STIP, any award or award agreement shall be within the discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon the Company and any Participant. No member of the Committee shall be liable for any action, determination or interpretation made in good faith, and all members of the Committee shall, in addition to their rights as Directors, be fully protected by Alerus with respect to any such action, determination or interpretation.

Modification and Termination

The Compensation Committee has sole authority for decisions regarding interpretation of the terms of the STIP. The STIP is provided at the discretion of Alerus. Nothing within the Plan is construed as creating an employment contract between any Participant and Alerus. Alerus has the exclusive right to modify the STIP, in whole or in part, or to terminate the STIP entirely. The STIP is not an ERISA Plan. The STIP is intended as an annual incentive award bonus program.

Exhibit 10.12

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR DIRECTORS

(As Restated Effective January 1, 2005)

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR DIRECTORS

TABLE OF CONTENTS

		Page

ARTICLE I INTRODUCTION		1
1.1	Purpose of the Plan; History	1
1.2	Non-Qualified “Top-Hat” Plan	1
1.3	Plan Document	1
1.4	Effective Date of Document	1

ARTICLE II DEFINITIONS AND CONSTRUCTION		1
2.1	Definitions	1
2.2	Choice of Law	2

ARTICLE III PARTICIPATION AND CONTRIBUTION CREDITS		2
3.1	Participation	2
3.2	Elective Deferral Credits	3

ARTICLE IV ACCOUNTS AND INVESTMENT ADJUSTMENTS		3
4.1	Accounts	3
4.2	Valuation of Accounts	4
4.3	Earnings Credits	4
4.4	Statements	4

ARTICLE V DISTRIBUTIONS AFTER SEPARATION FROM SERVICE		5
5.1	Benefit on Separation from Service	5
5.2	Time and Form of Distribution	5
5.3	Cash-Out of Small Accounts	6
5.4	Valuation of Accounts Following Separation from Service	6

ARTICLE VI DISTRIBUTIONS AFTER DEATH		6
6.1	Survivor Benefits	6
6.2	Beneficiary Designation	6
6.3	Successor Beneficiary	7
6.4	Valuation of Accounts Following Separation from Service	7

ARTICLE VII CONTRACTUAL OBLIGATIONS AND FUNDING		7
7.1	Contractual Obligations	7
7.2	Funding	8

ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN		8
8.1	Right to Amend or Terminate	8
8.2	Effect of Termination	10

ARTICLE EX ADMINISTRATION/CLAIMS PROCEDURES		10
9.1	Administration	10
9.2	Correction of Errors And Duty to Review Information	10
9.3	Claims Procedure	11
9.4	Indemnification	12

9.5	Exercise of Authority	12
9.6	Telephonic or Electronic Notices and Transactions	12

ARTICLE X MISCELLANEOUS		12
10.1	Nonassignability	12
10.2	Withholding	13
10.3	Successors of the Company	13
10.4	Directorship Not Guaranteed	13
10.6	Captions	13
10.7	Validity	13
10.8	Waiver of Breach	13
10.9	Notice	13

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR DIRECTORS

ARTICLE I

INTRODUCTION

1.1 PURPOSE OF THE PLAN; HISTORY . The Alerus Financial Corporation Deferred Compensation Plan for Directors (the “Plan”) is sponsored by Alerus Financial Corporation and its Participating Affiliates to attract high quality directors and to provide directors with an opportunity to defer directors fees on a pre-tax basis and accumulate tax-deferred earnings to achieve their financial goals.

1.2 NON-QUALIFIED “TOP-HAT” PLAN .

1.2.1 Type of Plan . The Plan is a “top-hat” plan — that is, an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of ERISA §§ 201(2), 301(a)(3) and 401(a)(1), and therefore is exempt from Parts 2, 3 and 4 of Title I of ERISA. The Plan also is a nonqualified deferred compensation plan subject to Code § 409A.

1.2.2 Savings Clause Relating to Compliance with Code § 409A . To the extent any provision of this Plan does not satisfy the requirements of Code § 409A or of any regulations or other guidance issued by the Treasury Department or the Internal Revenue Service under Code § 409A subsequent to the adoption of this Plan, such provision will be applied in a manner consistent with such requirements, regulations or guidance, notwithstanding any provision of the Plan or any contrary or inconsistent election made by a Participant.

1.3 PLAN DOCUMENT . The Plan document consists of this document, any appendix to this document and any document that is expressly incorporated by reference into this document.

1.4 EFFECTIVE DATE OF DOCUMENT . The Plan (as restated in this document) is effective January 1, 2005.

ARTICLE II

DEFINITIONS AND CONSTRUCTION

2.1 DEFINITIONS .

2.1.1 “ Account ” means an account established for a Participant pursuant to Article IV.

2.1.2 “ Affiliate ” means any business entity that is required to be aggregated and treated as one employer with the Company under Code § 414(b) or (c).

2.1.3 “ Beneficiary ” means a person or persons designated as such pursuant to Section 6.2.

2.1.4 “ Code ” means the Internal Revenue Code of 1986, as amended.

2.1.5 “ Company ” means Alerus Financial Corporation, a Delaware Corporation.

2.1.6 “ Director ” means a member of the Board of Directors of the Company or a Participating Affiliate.

2.1.7 “ Earnings Credit ” means the gains credited on the balance of an Account in accordance with Section 4.3.

2.1.8 “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

2.1.9 “ Fee ” means the cash fee payable to the Director for service as a Director.

2.1.10 “ Participant ” means a Director who is enrolled in the Plan, or a current or former Director who is not enrolled but who has a balance remaining in an Account under the Plan. “ Active Participant ” means a Director who is enrolled in the Plan.

2.1.11 “ Participating Affiliate ” means Alerus Financial, National Association, provided, however, that , a Participating Affiliate will automatically cease to be such as of the date it ceases to be an Affiliate.

2.1.12 “ Plan Year ” means the calendar year.

2.1.13 “ Separation from Service ” means that an individual has had a separation from service recognized as such under Code § 409A.

2.1.14 “ Specified Employee ” means a key employee, as that term is defined in Code § 416(i) (without regard to 416(i)(5)). An Employee is a Specified Employee for the twelve (12)-month period beginning April 1 and ending the following March 31 if he/she was a key employee any time during the twelve (12)-month period ending on the December 31 preceding such April 1. Notwithstanding the foregoing, an Employee is only a Specified Employee if the Company’s stock is publicly traded on an established securities market.

2.1.15 “ Trustee ” means the trustee of a trust established pursuant to Section 8.2.

2.2 CHOICE OF LAW . The Plan will be governed by the laws of the State of North Dakota to the extent that such laws are not preempted by the laws of the United States. All controversies, disputes, and claims arising hereunder must be submitted to the United States District Court for the District of North Dakota.

ARTICLE III

PARTICIPATION AND CONTRIBUTION CREDITS

3.1 PARTICIPATION .

3.1.1 Eligible Directors . All Directors will be eligible to participate in the Plan. Participation in the Plan is voluntary.

3.1.2 Enrollment for Fee Deferrals .

(a) Initial Eligibility . A Director who becomes a Director during a Plan Year may make an election to defer 100% of his/her Fees on the date he/she becomes a Director.

(b) Thereafter . A Director may make an election to defer 100% of his/her Fees for a Plan Year during the enrollment period established by the Company for such Plan Year, which enrollment period will end not later than the last day of the prior Plan Year.

3.1.3 Elections Are Evergreen . Elections will remain in effect until a Director files a new election under Section 3.1.2.

3.1.4 Enrollment Procedure . Enrollment is required as a condition of participation in the Plan and must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Company (including by means of a voice response or other electronic system under circumstances authorized by the Company).

3.1.5 End of Eligibility . A Director may continue to participate in the Plan for so long as the Plan remains in effect and he/she remains a Director.

3.2 ELECTIVE DEFERRAL CREDITS .

3.2.1 Elective Deferral Credits . Elective Deferral Credits will be credited to a Participant’s Account as of the date the Director’s Fee would otherwise have been payable in cash.

3.2.2 Elections Are Irrevocable for the Plan Year . An election will be irrevocable throughout the Plan Year or (or the remaining portion thereof); except that , Elective Deferral Credits will automatically stop during the Plan Year:

(a) If the Participant receives a hardship withdrawal prior to age fifty-nine and one-half (59½) from his/her elective deferral account under the Alerus Financial Retirement Savings Plan; or

(b) Upon Separation from Service.

If Elective Deferral Credits are stopped pursuant to paragraph (a), a Participant will be required to file a new election under Section 3.1.2 in order to resume Elective Deferral Credits for the next Plan Year.

ARTICLE IV

ACCOUNTS AND INVESTMENT ADJUSTMENTS

4.1 ACCOUNTS .

4.1.1 Separate Accounts . The Company will maintain a separate Account under the Plan for each Participant.

4.1.2 Balance of Accounts . An Account will have a cash balance expressed in United States dollars.

4.1.3 Accounts for Bookkeeping Only . Accounts are for bookkeeping purposes only and the maintenance of Accounts will not require any segregation of assets of the Company or any Participating Affiliate. Except as provided in Section 7.2, neither the Company nor any Participating Affiliate will have any obligation whatsoever to set aside funds for the Plan or for the benefit of any Participant or Beneficiary, and no Participant or Beneficiary will have any rights to any amounts that may be set aside other than the rights of an unsecured general creditor of the Company or Participating Affiliate.

4.2 VALUATION OF ACCOUNTS .

4.2.1 Adjustments . Accounts will be adjusted from time to time as follows:

(a) Elective Deferral Credits . Elective Deferral Credits will be added to the balance of the Account as of the dates specified in Section 3.2.

(b) Earnings Credits . Earnings Credits will be added to the balance of the Account as provided in Section 4.3.

(c) Withdrawals and Distributions . The withdrawals and distributions made from an Account will be subtracted from the balance of the Account as of the date the withdrawal or distribution is made from the Plan.

4.2.2 Processing Transactions Involving Accounts . Accounts will be adjusted to reflect Elective Deferral Credits, Earnings Credits, distributions and other transactions as provided in Section 4.2.1. However, all information necessary to properly reflect a given transaction in an Account may not be immediately available, in which case the transaction will be reflected in the Account when such information is received and processed. Further, the Company reserves the right to delay any Elective Deferral Credit, Earnings Credit, distribution or other transaction for any legitimate administrative reason (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to timely receive net asset values or prices, or to correct for its errors or omissions or the errors or omissions of any service provider).

4.3 EARNINGS CREDITS .

4.3.1 Adjustment to Reflect Earnings Credits . Accounts will be increased to reflect Earnings Credits as determined under Section 4.3.2.

4.3.2 Earnings Credits . Each Participant’s Account will be credited with Earnings Credits at a rate equal to the market yield on Ten Year Treasury Constant Maturities, quoted on the last business day of the preceding Plan Year, plus two percent (2%). Earnings Credits will begin to accrue for Elective Deferral Credits beginning on the date the Elective Deferral Credit is added to the Participant’s Account.

4.4 STATEMENTS .

4.4.1 Statements . The Company may cause benefit statements to be issued from time to time advising Participants and Beneficiaries of the balance of their Accounts, but it is not required to issue benefit statements.

4.4.2 Errors on Statements and Responsibility to Review . The Company may correct errors that appear on benefit statements at any time, and the issuance of a benefit statement (and any errors that may appear on a statement) will not in any way alter or affect the rights of a Participant or Beneficiary with respect to the Plan.

Each Participant or Beneficiary has a duty to promptly review each benefit statement and to notify the Company of any error that appears on such statement as provided in Section 9.2.2.

ARTICLE V

DISTRIBUTIONS AFTER SEPARATION FROM SERVICE

5.1 BENEFIT ON SEPARATION FROM SERVICE . A Participant will be eligible to receive a distribution of his/her Account following his/her Separation from Service in accordance with the terms of this Article.

5.2 TIME AND FORM OF DISTRIBUTION .

5.2.1 Time of Distribution . A distribution will be made (or installment distributions will commence if installments were elected) at the following time:

(a) Specified Employees . In the case of a Participant who is a Specified Employee, a distribution will be made (or installment distributions will commence) as soon as administratively practicable after the later of:

(i) The first day of the calendar month beginning seven (7) months after the Participant’s Separation from Service, or

(ii) January 1 of the year following the Participant’s Separation from Service.

(b) Participants Other Than Specified Employees . In the case of any other Participant, a distribution will be made (or installment distributions will commence) as soon as administratively practicable after January 1 of the year following the Participant’s Separation from Service.

5.2.2 Form of Distribution . A distribution will be made in either of the following forms as elected by the Participant:

(a) A single-sum distribution of the full vested balance of the Participant’s Account;

(b) Annual installments over a five (5) year period; or

In the case of installments, the first annual installment will be made as of the date specified in Section 5.2.1, and subsequent annual installments will be made on the anniversary of the first annual installment (or as soon as administratively practicable thereafter).

5.2.3 Distribution Election Procedures . A distribution election must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Company (including by means of a voice response or other electronic system under circumstances authorized by the Company).

A distribution election will be effective only if it is received in properly completed form by the Company as part of the Participant’s initial entry into the Plan, and thereafter may not be modified.

5.2.4 Elections Required . A Participant will be required to file or have filed a form of distribution election as a condition of participation in the Plan.

5.3 CASH-OUT OF SMALL ACCOUNTS . Notwithstanding any contrary provision, if the vested balance of a Participant’s Account does not exceed ten thousand dollars ($10,000), the balance of such Account will be paid as of the date specified in Section 5.2.1 in a single-sum distribution in full settlement of all obligations under the Plan with respect to such Account.

5.4 VALUATION OF ACCOUNTS FOLLOWING SEPARATION FROM SERVICE . An Account will continue to be credited with Earnings Credits in accordance with Article IV until it is paid in full to the Participant or Beneficiary.

ARTICLE VI

DISTRIBUTIONS AFTER DEATH

6.1 SURVIVOR BENEFITS .

6.1.1 Survivor Benefits - Form . If a Participant dies prior to the full distribution of his/her Account, his/her Beneficiary will be entitled to a survivor benefit under the Plan. The survivor benefit will consist of the total balance (or total remaining balance) in the Account and will be distributed to the Beneficiary in the same form as benefits would have been paid to the Participant.

6.1.2 Survivor Benefits — Time of Payment . A distribution of the survivor benefit will be made (or installment distributions will commence or continue if installments were elected by the Participant) as soon as administratively practicable after the later of:

(a) The date the Company determines that a survivor benefit is payable under the Plan — that is, the date the Company is provided with the documentation necessary to establish the fact of death of the Participant and the identity and entitlement of the Beneficiary; or

(b) January 1 of the year following the Participant’s death.

6.2 BENEFICIARY DESIGNATION .

6.2.1 General Rule . A Participant may designate any person (natural or otherwise, including a trust) as his/her Beneficiary to receive any vested balance remaining in his/her Account when he/she dies, and may change or revoke a designation previously made without the consent of any Beneficiary.

6.2.2 Form and Method of Designation . A Beneficiary designation must be made on such form and in accordance with such rules as may be prescribed for this purpose by the Company. A Beneficiary designation will be effective (and will revoke all prior designations) if it is received by the Company (or if sent by mail, the post-mark of the mailing is) prior to the date of death of the Participant. The Company may rely on the latest Beneficiary designation on file (or if an effective designation is not on file may direct that payment be made pursuant to the default provision of the Plan) and will not be liable to any person making claim for such payment under a subsequently filed designation or for any other reason.

6.2.4 Default Designation . If a Beneficiary designation is not on file, or if a Beneficiary designation is revoked by divorce or otherwise and a new designation is not on file at death, or if no designated Beneficiary survives the Participant, the Beneficiary will be the Participant’s estate.

6.3 SUCCESSOR BENEFICIARY . If the primary Beneficiary dies prior to complete distribution of the benefits under Section 6.1.2, the remaining survivor benefit will be paid to the contingent Beneficiary elected by the Participant in the form of a lump sum payable as soon as administratively practicable after the primary Beneficiary’s death is established. If there is no surviving contingent Beneficiary, the lump sum will be paid to the estate of the primary Beneficiary.

6.4 VALUATION OF ACCOUNTS FOLLOWING SEPARATION FROM SERVICE . An Account will continue to be credited with Earnings Credits in accordance with Article IV until it is paid in full to the Beneficiary.

ARTICLE VII

CONTRACTUAL OBLIGATIONS AND FUNDING

7.1 CONTRACTUAL OBLIGATIONS .

7.1.1 Obligations of Employer . The Plan creates a contractual obligation on the part of the Company and each Participating Affiliate to provide benefits as set forth in the Plan with respect to:

(a) Participants who serve as Directors for the Company or that Participating Affiliate;

(b) Participants who served as Directors for the Company or that Participating Affiliate prior to Separation from Service; and

A Participating Affiliate is not responsible for (and has no contractual obligation with respect to) benefits payable to a Participant who serves or served as a Director for the Company or another Participating Affiliate. If a Participant serves on the Board of Directors of two or more entities (the Company and a Participating Affiliate or two or more Participating Affiliates, etc.), either concurrently or at different times, each will be responsible for the benefit attributable to Elective Deferral Credits made with respect to the period the Participant served that entity’s Board of Directors, adjusted for Earnings Credits.

7.1.2 Guarantee by Company . The Company will guarantee and assume secondary liability for the contractual commitment of each Participating Affiliate under Section 7.1.1.

7.2 FUNDING .

7.2.1 Establishment and Funding of Rabbi Trust . The Company may, in its sole and absolute discretion, establish a “rabbi” trust to serve as a funding vehicle for benefits payable under the Plan. Neither the Company nor any Participating Affiliate will have any obligation to establish such a trust, or to fund such trust if established. Any rabbi trust hereby established may be revocable if so established under the terms of the trust.

Any rabbi trust used to fund benefits payable under this Plan may be used to fund benefits payable under any other non-qualified deferred compensation plan maintained by the Company or any Participating Affiliate.

The assets of any rabbi trust hereby established will not be held or transferred outside of the United States, and the trust will not have any other feature that would result in a transfer of property being deemed to have occurred under Code § 409A (for example, there will be no funding obligation or restrictions on assets in connection with a change in financial health of the Company or any Affiliate).

7.2.2 Effect on Contractual Benefit Obligations . The establishment and funding of a rabbi trust will not affect the contractual obligations of the Company and each Participating Affiliate under Section 7.1, except that such obligations with respect to any Participant or Beneficiary will be offset to the extent that payments actually are made from the trust to such Participant or Beneficiary.

ARTICLE VIII

AMENDMENT AND TERMINATION OF PLAN

8.1 RIGHT TO AMEND OR TERMINATE .

8.1.1 Termination . The Company may terminate the Plan at any time and for any reason by action of the Company’s Board of Directors.

8.1.2 Termination of Participation by a Participating Affiliate . Each Participating Affiliate may terminate its participation in the Plan at any time and for any reason by action of its Board of Directors and by providing notice to the Company.

8.1.3 Amendment . Action to amend the Plan may be taken by any of the following:

(a) The Board of Directors of the Company.

(b) Any person, committee or body to which amendment authority has been delegated by the Board of Directors of the Company.

An amendment of the Plan may not have the effect of reducing the balance of any Participant’s or Beneficiary’s Account.

8.1.4. Amendment Following a Change in Control . Notwithstanding anything in Section 8.1.3 to the contrary, in the event of a Change in Control of the Company, the Earnings Credit rate (as set out in Section 4.3) may not be decreased by amendment. For purposes of this Section 8.1.4, a “Change in Control” means any one of the following events:

(a) A person, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or any successor rule thereto) acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of, or becomes the beneficial owner of, 35% or more of the Company’s outstanding shares of common stock or of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (“Outstanding Company Voting Securities”), (other than in connection with a Business Combination in which clauses (1), (2) and (3) of subsection (c) apply) provided, however, that the following acquisitions and beneficial ownership shall not constitute a Change in Control pursuant to this paragraph:

(i) Any acquisition or beneficial ownership by the Company or an Affiliate,

(ii) Any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its Affiliates,

(iii) Any increase in ownership by a person, entity or group subsequent to initially becoming beneficial owner of 35% or more of the Company’s outstanding shares of common stock or Outstanding Company Voting Securities.

(b) Individuals who, as of the date this Plan is approved and adopted (as set out on the last page hereof), constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual becoming a director subsequent to the date hereof whose election (except to fill a vacancy caused by removal), or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board.

their ownership of the Company’s common stock immediately prior to such Business Combination, (2) no person, entity or group beneficially owns, directly or indirectly, 35% or more of the common stock of the corporation resulting from such Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors of the Company providing for such Business Combination.

(d) The shareholders of the Company approve a definitive agreement or plan to liquidate or dissolve the Company.

8.2 EFFECT OF TERMINATION .

8.2.1 No Negative Effect on Balances . The termination of the Plan may not have the effect of reducing the balance of any Participant’s or Beneficiary’s Account.

8.2.2 Other Effects of Termination . After termination of the Plan, no additional credits will be added to the Account of any Participant attributable to periods after the date of termination. However, distribution following termination of the Plan will be made at the same time and in the same form as if the termination had not occurred, and termination will not result in any acceleration of any distribution under the Plan.

ARTICLE IX

ADMINISTRATION/CLAIMS PROCEDURES

9.1 ADMINISTRATION .

9.1.1 Company . The Company is the administrator of the Plan with authority to control and manage the operation and administration of the Plan and make all decisions and determinations incident thereto. Action on behalf of the Company will be taken by the Compensation Committee of the Board of Directors of the Company. However, the Board of Directors of the Company may, at any time, and from time to time, exercise the powers and duties of the Compensation Committee under the Plan. To the extent that any permitted action taken by the Board of Directors of the Company conflicts with action taken by the Committee, the Board of Directors action will control.

9.1.2 Third-Party Service Providers. The Company may from time to time contract with or appoint a recordkeeper or other third-party service provider for the Plan. Any such recordkeeper or other third-party service provider will serve in a non-discretionary capacity and will act in accordance with directions given and/or procedures established by the Company.

9.1.3 Rules of Procedure . The Company may establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan.

9.2 CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION .

9.2.1 Correction of Errors . Errors may occur in the operation and administration of the Plan. The Company reserves the right to cause such equitable adjustments to be made to correct for such

errors as it considers appropriate (including adjustments to Participant or Beneficiary Accounts), which will be final and binding on the Participant or Beneficiary.

9.2.2 Participant Duty to Review Information . Each Participant and Beneficiary has the duty to promptly review any information that is provided or made available to the Participant or Beneficiary and that relates in any way to the operation and administration of the Plan or his/her elections under the Plan (for example, to review benefit statements, to review summary plan descriptions and prospectuses, etc.) and to notify the Company of any error made in the operation or administration of the Plan that affects the Participant or Beneficiary within thirty (30) days of the date such information is provided or made available to the Participant or Beneficiary (for example, the date the information is sent by mail or the date the information is provided or made available electronically). If the Participant or Beneficiary fails to review any information or fails to notify the Company of any error within such period of time, he/she will not be able to bring any claim seeking relief or damages based on the error.

If the Company is notified of an alleged error within the thirty (30) day time period, the Company will investigate and either correct the error or notify the Participant or Beneficiary that it believes that no error occurred. If the Participant or Beneficiary is not satisfied with the correction (or the decision that no correction is necessary), he/she will have sixty (60) days from the date of notification of the correction (or notification of the decision that no correction is necessary), to file a formal claim under the claims procedures under Section 9.3.

9.3 CLAIMS PROCEDURE .

9.3.1 Claims Procedure . If a Participant or Beneficiary does not feel that he/she has received full payment of the benefit due to such person under the Plan, or if a Participant or Beneficiary feels that an error has been made with respect to his/her Account and has satisfied the requirements in Section 9.2.2, the Participant or Beneficiary may file a written claim with the Company setting forth the nature of the benefit claimed, the amount thereof, and the basis for claiming entitlement to such benefit. The Company will determine the validity of the claim and communicate a decision to the claimant promptly and, in any event, not later than ninety (90) days after the date of the claim. The claim may be deemed by the claimant to have been denied for purposes of further review described below in the event a decision is not furnished to the claimant within such ninety (90) day period. If additional information is necessary to make a determination on a claim, the claimant will be advised of the need for such additional information within forty-five (45) days after the date of the claim. The claimant will have up to one hundred and eighty (180) days to supplement the claim information, and the claimant will be advised of the decision on the claim within forty-five (45) days after the earlier of the date the supplemental information is supplied or the end of the one hundred and eighty (180) day period.

A claim for benefits which is denied will be denied by written notice setting forth in a manner calculated to be understood by the claimant:

(a) Reason for Denial . The specific reason or reasons for the denial, including a specific reference to any provisions of the Plan (including any internal rules, guidelines, protocols, criteria, etc.) on which the denial is based;

(b) Information Necessary to Process . A description of any additional material or information that is necessary to process the claim; and

9.3.2 Review Procedures . Within sixty (60) days after the receipt of a denial on a claim, a claimant or his/her authorized representative may file a written request for review of such denial. Such review will be undertaken by the Company and will be a full and fair review. The claimant will have the right to review all pertinent documents. The Company will issue a decision not later than sixty (60) days after receipt of a request for review from a claimant unless special circumstances, such as the need to hold a hearing, require a longer period of time, in which case a decision will be rendered as soon as possible but not later than one hundred and twenty (120) days after receipt of the claimant’s request for review. The decision on review will be in writing and will include specific reasons for the decision written in a manner calculated to be understood by the claimant with specific reference to any provisions of the Plan on which the decision is based. Following the claims procedures through to completion is a condition of filing any suit against the Company.

9.4 INDEMNIFICATION . The Company and the Participating Affiliates jointly and severally agree to indemnify and hold harmless, to the extent permitted by law, each director, officer, and employee against any and all liabilities, losses, costs, or expenses (including legal fees) of whatsoever kind and nature that may be imposed on, incurred by, or asserted against such person at any time by reason of such person’s services in the administration of the Plan, but only if such person did not act dishonestly, or in bad faith, or in willful violation of the law or regulations under which such liability, loss, cost, or expense arises.

9.5 EXERCISE OF AUTHORITY . The Company, the Board of Directors of the Company, and any person who has authority with respect to the management, administration or investment of the Plan may exercise that authority in its/his/her full discretion. This discretionary authority includes, but is not limited to, the authority to make any and all factual determinations and interpret all terms and provisions of this document (or any other document established for use in the administration of the Plan) relevant to the issue under consideration. The exercise of authority will be binding upon all persons; and it is intended that the exercise of authority be given deference in all courts of law to the greatest extent allowed under law, and that it not be overturned or set aside by any court of law unless found to be arbitrary and capricious.

9.6 TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS . Any notice that is required to be given under the Plan to a Participant or Beneficiary, and any action that can be taken under the Plan by a Participant or Beneficiary (including enrollments, changes in deferral percentages, consents, etc.), may be made or given by means of voice response or other electronic system to the extent so authorized by the Company.

ARTICLE X

MISCELLANEOUS

10.1 NONASSIGNABILITY . Neither the rights of, nor benefits payable to, a Participant or Beneficiary under the Plan may be alienated, assigned, transferred, pledged or hypothecated by any person, at any time, or to any person whatsoever. Such interest and benefits will be exempt from the claims of creditors or other claimants of the Participant or Beneficiary and from all orders, decrees, levies, garnishments or executions to the fullest extent allowed by law.

10.2 WITHHOLDING . A Participant must make appropriate arrangements with the Company or Participating Affiliate for satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the payment of benefits under the Plan. If no other arrangements are made, the Company or Participating Affiliate may provide, at its discretion, for such withholding and tax payments as may be required, including, without limitation, by the reduction of other amounts payable to the Participant.

10.3 SUCCESSORS OF THE COMPANY . The rights and obligations of the Company or a Participating Affiliate under the Plan will inure to the benefit of, and will be binding upon, the successors and assigns of the Company or such Participating Affiliate.

10.4 DIRECTORSHIP NOT GUARANTEED . Nothing contained in the Plan nor any action taken hereunder will be construed as giving any Participant any right to continued service as Director of the Company or a Participating Affiliate

10.6 CAPTIONS . The captions of the articles, paragraphs and sections of this document are for convenience only and will not control or affect the meaning or construction of any of its provisions.

10.7 VALIDITY . In the event any provision of the Plan is held invalid, void or unenforceable, the same will not affect, in any respect whatsoever, the validity of any other provisions of the Plan.

10.8 WAIVER OF BREACH . The waiver by the Company of any breach of any provision of the Plan will not operate or be construed as a waiver of any subsequent breach by that Participant or any other Participant.

10.9 NOTICE . Any notice or filing required or permitted to be given to the Company or the Participant under this Plan will be sufficient if in writing and hand-delivered, or sent by registered or certified mail, in the case of the Company, to the principal office of the Company, directed to the attention of the Company, and in the case of the Participant, to the last known address of the Participant indicated on the records of the Company. Such notice will be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Notices to the Company may be permitted by electronic communication according to specifications established by the Company.

Approved and adopted this 12 th day of February 2006.

	ALERUS FINANCIAL CORPORATION

	By:	/s/ Randy J. Newman
	Its:	Chairman & CEO

	ALERUS FINANCIAL, N.A.

	By:	/s/ Randy J. Newman
	Its:	Chairman & CEO & President

Exhibit 10.13

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR EXECUTIVES

(As Adopted Effective January 1, 2006)

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR EXECUTIVES

TABLE OF CONTENTS

		Page

ARTICLE I INTRODUCTION		1
1.1	Purpose of the Plan; History	1
1.2	Non-Qualified “Top-Hat” Plan	1
1.3	Plan Document	1
1.4	Effective Date of Document	1

ARTICLE II DEFINITIONS AND CONSTRUCTION		1
2.1	Definitions	1
2.2	Choice of Law	3

ARTICLE III PARTICIPATION AND CONTRIBUTION CREDITS		3
3.1	Participation	3
3.2	Elective Deferral Credits	4

ARTICLE IV ACCOUNTS AND INVESTMENT ADJUSTMENTS		5
4.1	Accounts	5
4.2	Valuation of Accounts	5
4.3	Earnings Credits	5
4.4	Statements	6

ARTICLE V DISTRIBUTIONS AFTER SEPARATION FROM SERVICE		6
5.1	Benefit on Separation from Service	6
5.2	Time and Form of Distribution	6
5.3	Cash-Out of Small Accounts	7
5.4	Valuation of Accounts Following Separation from Service	7

ARTICLE VI DISTRIBUTIONS AFTER DEATH		7
6.1	Survivor Benefits	7
6.2	Beneficiary Designation	8
6.3	Successor Beneficiary	8
6.4	Valuation of Accounts Following Separation from Service	8

ARTICLE VII CONTRACTUAL OBLIGATIONS AND FUNDING		8
7.1	Contractual Obligations	8
7.2	Funding	9

ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN		9
8.1	Right to Amend or Terminate	9
8.2	Effect of Termination	11

ARTICLE IX ADMINISTRATION/CLAIMS PROCEDURES		11
9.1	Administration	11
9.2	Correction of Errors And Duty to Review Information	12
9.3	Claims Procedure	12
9.4	Indemnification	13

9.5	Exercise of Authority	13
9.6	Telephonic or Electronic Notices and Transactions	14

ARTICLE X MISCELLANEOUS		14
10.1	Nonassignability	14
10.2	Withholding	14
10.3	Successors of the Company	14
10.4	Employment Not Guaranteed	14
10.5	Gender, Singular and Plural	14
10.6	Captions	14
10.7	Validity	14
10.8	Waiver of Breach	14
10.9	Notice	15

ALERUS FINANCIAL CORPORATION

DEFERRED COMPENSATION PLAN FOR EXECUTIVES

ARTICLE I

INTRODUCTION

1.1 PURPOSE OF THE PLAN: HISTORY . The Alerus Financial Corporation Deferred Compensation Plan for Executives (the “Plan”) is sponsored by Alerus Financial Corporation and its Participating Affiliates to attract high quality executives and to provide eligible executives with an opportunity to save on a pre-tax basis and accumulate tax-deferred earnings to achieve their financial goals.

1.2 NON-QUALIFIED “TOP-HAT” PLAN .

1.3 PLAN DOCUMENT . The Plan document consists of this document, any appendix to this document and any document that is expressly incorporated by reference into this document.

1.4 EFFECTIVE DATE OF DOCUMENT . The Plan is adopted effective January 1, 2006.

ARTICLE II

DEFINITIONS AND CONSTRUCTION

2.1 DEFINITIONS .

2.1.1 “ Account ” means an account established for a Participant pursuant to Article IV.

2.1.2 “ Affiliate ” means any business entity that is required to be aggregated and treated as one employer with the Company under Code § 414(b) or (c).

2.1.3 “ Beneficiary ” means a person or persons designated as such pursuant to Section 6.2.

2.1.4 “ Code ” means the Internal Revenue Code of 1986, as amended.

2.1.5 “ Company ” means Alerus Financial Corporation, a Delaware corporation.

2.1.6 “ Deferral Eligible Amounts ” means a Participant’s base salary from the Company or a Participating Affiliate, plus any annual bonus that the Company (acting in its corporate capacity) determines in its sole discretion to be eligible for a deferral election under this Plan.

2.1.7 “ Earnings Credit ” means the gains credited on the balance of an Account pursuant to Section 4.3.

2.1.8 “ Eligible Employee ” means the following Employees of the Company or a Participating Affiliate:

a) Chief Executive Officer

b) Chief Financial Officer

c) Chief Operating Officer

d) Director, Banking Division

e) Director, Wealth Management Division

The Compensation Committee of the Board of Directors of the Company may determine, in its sole discretion, that other Employees are Eligible Employees.

Eligible Employee status will apply throughout the Plan Year (or the remaining portion thereof), or until earlier Separation from Service.

2.1.9 “ Employee ” means any common-law employee of the Company or an Affiliate (while it is an Affiliate).

2.1.10 “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

2.1.11 “ Participant ” means an Eligible Employee who is enrolled in the Plan, or a current or former Employee who is not enrolled but who has a balance remaining in an Account under the Plan. “ Active Participant ” means an Eligible Employee who is enrolled in the Plan.

2.1.12 “ Participating Affiliate ” means Alerus Financial, National Association, provided, however, that a Participating Affiliate will automatically cease to be such as of the date it ceases to be an Affiliate.

2.1.13 “ Plan Year ” means the calendar year.

2.1.14 “ Separation from Service ” means that an individual has had a separation from service recognized as such under Code § 409A.

2.1.15 “ Specified Employee ” means a key employee, as that term is defined in Code § 416(i) (without regard to 416(i)(5)). An Employee is a Specified Employee for the twelve (12)-month period beginning April 1 and ending the following March 31 if he/she was a key employee any time during the twelve (12)-month period ending on the December 31 preceding such April 1. Notwithstanding the foregoing, an Employee is only a Specified Employee if the Company’s stock is publicly traded on an established securities market.

2.1.16 “ Trustee ” means the trustee of a trust established pursuant to Section 8.2.

ARTICLE III

PARTICIPATION AND CONTRIBUTION CREDITS

3.1 PARTICIPATION .

3.1.1 Eligible Employees . All Employees who are Eligible Employees will be eligible to participate in the Plan. Participation in the Plan is voluntary.

3.1.2 Enrollment for Base Pay Deferrals . An Employee who is an Eligible Employee may make an election to defer base pay as follows:

(a) Initial Eligibility . An Employee who is an Eligible Employee may make an election to defer base pay during the thirty (30) day period following the date he/she is notified of eligibility for the Plan, with enrollment to be effective as of the payroll period that next starts following the close of such thirty (30) day period.

(b) Thereafter . An Employee who is an Eligible Employee may elect to enroll for a Plan Year during the enrollment period established by the Company for such Plan Year, which enrollment period will end not later than the last day of the prior Plan Year.

3.1.3 Enrollment for Bonus Deferrals . An Employee who is an Eligible Employee may make an election to defer annual bonuses as follows:

(a) Initial Eligibility . An Employee who is an Eligible Employee may make an election to defer the annual bonus (if any) payable for the Plan Year of initial eligibility during the thirty (30) day period following the date he/she is notified of initial eligibility for the Plan, provided that , such election will apply only to a fraction of such annual bonus, the numerator of which is the number of days remaining in the Plan Year after the last day of the enrollment period, and the denominator of which is three hundred and sixty-five (365).

(b) Thereafter . An Employee who is an Eligible Employee may make an election to defer annual bonus pay during the enrollment period established by the Company for the Plan Year, which enrollment period will end not later than the last day of the prior Plan Year.

3.1.4 Enrollment Procedure . Enrollment is a condition of participation in the Plan and must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Company (including by means of a voice response or other electronic system under circumstances authorized by the Company).

3.1.5 End of Eligibility . An Eligible Employee may continue to participate in the Plan for so long as the Plan remains in effect and he/she remains an Eligible Employee.

3.2 ELECTIVE DEFERRAL CREDITS .

3.2.1 Elective Deferral Credits . Elective Deferral Credits will be made for each pay date on behalf of each Active Participant who has enrolled in the Plan and who thereby elects to have his/her Deferral Eligible Amounts reduced in order to receive Elective Deferral Credits. The Elective Deferral Credits for a pay date will be credited to the Participant’s Account on or as soon as administratively practicable after the pay date in an amount equal to the amount of the reduction in Deferral Eligible Amounts.

An Eligible Employee may elect to reduce his/her Deferral Eligible Amounts as follows for any pay date:

(a) In the case of base pay, any whole percent, but not more than fifty percent (50%); and

(b) In the case of annual bonus pay, any whole percent up to one-hundred percent (100%).

An election must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Company (including by means of a voice response or other electronic system under circumstances authorized by the Company). An election must be made as part of enrollment described in Sections 3.1.2 and 3.1.3.

3.2.2 Elections Are Evergreen . Elections will remain in effect for subsequent Plan Years unless a Participant files a new election pursuant to Section 3.1.2 or 3.1.3.

3.2.3 Elections Are Irrevocable for the Plan Year . An election will be irrevocable throughout the Plan Year (or the remaining portion thereof); except that , Elective Deferral Credits will automatically stop during the Plan Year:

(a) If the Participant receives a hardship withdrawal prior to age fifty-nine and one-half (59½) from his/her elective deferral account under the Alerus Financial Retirement Savings Plan; or

(b) Upon Separation from Service.

If Elective Deferral Credits are stopped pursuant to paragraph (a), a Participant will be required to file a new election under Section 3.1.2 or 3.1.3 in order to resume Elective Deferral Credits for the next Plan Year.

3.2.4 Limits . The Company may, in its sole discretion, limit the minimum or maximum amount of Elective Deferral Credits that are allowed under the Plan by any Active Participant or any group of Active Participants, provided that such limit is established prior to the beginning of the Plan Year or prior to enrollment of the affected Participant.

ARTICLE IV

ACCOUNTS AND INVESTMENT ADJUSTMENTS

4.1 ACCOUNTS .

4.1.1 Separate Accounts . The Company will maintain a separate Account under the Plan for each Participant.

4.1.2 Balance of Accounts . An Account will have a cash balance expressed in United States dollars.

4.2 VALUATION OF ACCOUNTS .

4.2.1 Adjustments . Accounts will be adjusted from time to time as follows:

(a) Elective Deferral Credits . Elective Deferral Credits will be added to the balance of the Account as of the dates specified in Section 3.2.

(b) Earnings Credits . Earnings Credits will be added to the balance of the Account as provided in Section 4.3.

4.3 EARNINGS CREDITS .

4.3.1 Adjustment to Reflect Earnings Credits . Accounts will be increased to reflect Earnings Credits as determined under Section 4.3.2.

4.4 STATEMENTS .

Each Participant or Beneficiary has a duty to promptly review each benefit statement and to notify the Company of any error that appears on such statement as provided in Section 9.2.2.

ARTICLE V

DISTRIBUTIONS AFTER SEPARATION FROM SERVICE

5.1 BENEFIT ON SEPARATION FROM SERVICE . A Participant will be eligible to receive a distribution of the balance of his/her Account following his/her Separation from Service in accordance with the terms of this Article.

5.2 TIME AND FORM OF DISTRIBUTION .

5.2.1 Time of Distribution . A distribution will be made (or installment distributions will commence if installments were elected) at the following time:

(i) The first day of the calendar month beginning seven (7) months after the Participant’s Separation from Service, or

(ii) January 1 of the year following the Participant’s Separation from Service.

5.2.2 Form of Distribution . A distribution will be made in one of the following forms as elected by the Participant:

(a) A single-sum distribution of the full vested balance of the Participant’s Account;

(b) Annual installments over a five (5) year period; or

5.2.4 Elections Required . A Participant will be required to file or have filed a form of distribution election as a condition of participation in the Plan.

ARTICLE VI

DISTRIBUTIONS AFTER DEATH

6.1 SURVIVOR BENEFITS .

a) The date the Company determines that a survivor benefit is payable under the Plan — that is, the date the Company is provided with the documentation necessary to establish the fact of the death of the Participant and the identity and entitlement of the Beneficiary; or

b) January 1 of the year following the Participant’s death.

6.2 BENEFICIARY DESIGNATION .

6.2.1 General Rule . A Participant may designate any person (natural or otherwise, including a trust) as his/her Beneficiary to receive any balance remaining in his/her Account when he/she dies, and may change or revoke a designation previously made without the consent of any Beneficiary.

6.2.3 Default Designation . If a Beneficiary designation is not on file, or if a Beneficiary designation is revoked by divorce or otherwise and a new designation is not on file at death, or if no designated Beneficiary survives the Participant, the Beneficiary will be the Participant’s estate.

6.4 VALUATION OF ACCOUNTS FOLLOWING SEPARATION FROM SERVICE . All Account will continue to be credited with Earnings Credits in accordance with Article IV until it is paid in full to the Beneficiary.

ARTICLE VII

CONTRACTUAL OBLIGATIONS AND FUNDING

7.1 CONTRACTUAL OBLIGATIONS .

7.1.1 Obligations of Employer . The Plan creates a contractual obligation on the part of the Company and each Participating Affiliate to provide benefits as set forth in the Plan with respect to:

(a) Participants who are employed with the Company or that Participating Affiliate;

(b) Participants who were employed with the Company or that Participating Affiliate prior to Separation from Service; and

A Participating Affiliate is not responsible for (and has no contractual obligation with respect to) benefits payable to a Participant who is or was employed with the Company or another Participating Affiliate. If a Participant is employed with two or more employers (the Company and a Participating Affiliate, or two or more Participating Affiliates, etc.), either concurrently or at different times, each will be responsible for the benefit attributable to Elective Deferral Credits made with respect to the period while the Participant was employed with that employer, adjusted for Earnings Credits.

7.1.2 Guarantee by Company . The Company will guarantee and assume secondary liability for the contractual commitment of each Participating Affiliate under Section 7.1.1.

7.2 FUNDING .

ARTICLE VIII

AMENDMENT AND TERMINATION OF PLAN

8.1 RIGHT TO AMEND OR TERMINATE .

8.1.1 Termination . The Company may terminate the Plan at any time and for any reason by action of the Board of Directors of the Company.

8.1.3 Amendment . Action to amend the Plan may be taken by any of the following:

(a) The Board of Directors of the Company.

(b) Any person, committee or body to which amendment authority has been delegated by the Board of Directors of the Company.

An amendment of the Plan may not have the effect of reducing the balance of any Participant’s or Beneficiary’s Account.

(i) Any acquisition or beneficial ownership by the Company or an Affiliate,

(ii) Any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its Affiliates,

(c) The consummation of a reorganization, merger, statutory share exchange, consolidation or similar transaction involving the Company, a sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the Company’s assets or the issuance by the Company of its stock in connection with the acquisition of assets or stock of another entity (each, a “Business Combination”), in each case unless, following such Business Combination, (1) all or substantially all of the individuals and entities that were the beneficial owners of the Company’s common stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then outstanding shares of common stock of the corporation and of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors resulting from such Business Combination (including such beneficial ownership of a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one of more subsidiaries) in substantially the same proportions as their ownership of the Company’s common stock immediately prior to such Business Combination, (2) no person, entity or group beneficially owns, directly or indirectly, 35% or more of the common stock of the corporation resulting from such Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors of the Company providing for such Business Combination.

(d) The shareholders of the Company approve a definitive agreement or plan to liquidate or dissolve the Company.

8.2 EFFECT OF TERMINATION .

8.2.1 No Negative Effect on Balances . The termination of the Plan may not have the effect of reducing the balance of any Participant’s or Beneficiary’s Account.

ARTICLE IX

ADMINISTRATION/CLAIMS PROCEDURES

9.1 ADMINISTRATION .

9.1.1 Company . The Company is the administrator of the Plan with authority to control and manage the operation and administration of the Plan and make all decisions and determinations incident thereto. Action on behalf of the Company will be taken by the Compensation Committee of the Board of Directors of the Company. However, the Board of Directors of the Company may at any time, and from time to time, exercise the powers and duties of the Compensation Committee under the Plan. To the extent that any permitted action taken by the Board of Directors of the

Company conflicts with action taken by the Compensation Committee, the Board of Directors action will control.

9.1.3 Rules of Procedure . The Company may establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan.

9.2 CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION .

9.2.1 Correction of Errors . Errors may occur in the operation and administration of the Plan. The Company reserves the right to cause such equitable adjustments to be made to correct for such errors as it considers appropriate (including adjustments to Participant or Beneficiary Accounts), which will be final and binding on the Participant or Beneficiary.

9.2.2 Participant Duty to Review Information . Each Participant and Beneficiary has the duty to promptly review any information that is provided or made available to the Participant or Beneficiary and that relates in any way to the operation and administration of the Plan or his/her elections under the Plan (for example, to review payroll stubs to make sure a contribution election is being implemented appropriately, to review benefit statements, to review summary plan descriptions and prospectuses, etc.) and to notify the Company of any error made in the operation or administration of the Plan that affects the Participant or Beneficiary within thirty (30) days of the date such information is provided or made available to the Participant or Beneficiary (for example, the date the information is sent by mail or the date the information is provided or made available electronically). If the Participant or Beneficiary fails to review any information or fails to notify the Company of any error within such period of time, he/she will not be able to bring any claim seeking relief or damages based on the error.

9.3 CLAIMS PROCEDURE .

claim, the claimant will be advised of the need for such additional information within forty-five (45) days after the date of the claim. The claimant will have up to one hundred and eighty (180) days to supplement the claim information, and the claimant will be advised of the decision on the claim within forty-five (45) days after the earlier of the date the supplemental information is supplied or the end of the one hundred and eighty (180) day period.

A claim for benefits which is denied will be denied by written notice setting forth in a manner calculated to be understood by the claimant:

(b) Information Necessary to Process . A description of any additional material or information that is necessary to process the claim; and

9.5 EXERCISE OF AUTHORITY . The Company, the Board of Directors of the Company and any person who has authority with respect to the management, administration or investment of the Plan may exercise that authority in its/his/her full discretion. This discretionary authority includes, but is not limited to, the authority to make any and all factual determinations and interpret all terms and provisions of this document (or any other document established for use in the administration of the Plan) relevant to the issue under consideration. The exercise of authority will be binding upon all persons; and it is intended that the exercise of authority be given deference in all courts of law to the greatest extent allowed under law, and that it not be overturned or set aside by any court of law unless found to be arbitrary and capricious.

9.6 TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS . Any notice that is required to be given under the Plan to a Participant or Beneficiary, and any action that can be taken under the Plan by a Participant or Beneficiary (including enrollments, changes in deferral percentages, investment changes, consents, etc.), may be made or given by means of voice response or other electronic system to the extent so authorized by the Company.

ARTICLE X

MISCELLANEOUS

10.2 WITHHOLDING . A Participant must make appropriate arrangements with the Company or Participating Affiliate for satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the payment of benefits under the Plan. If no other arrangements are made, the Company or Participating Affiliate may provide, at its discretion, for such withholding and tax payments as may be required, including, without limitation, by the reduction of other amounts payable to the Participant.

10.4 EMPLOYMENT NOT GUARANTEED . Nothing contained in the Plan nor any action taken hereunder will be construed as a contract of employment or as giving any Participant any right to continued employment with the Company.

10.5 GENDER, SINGULAR AND PLURAL . All pronouns and any variations thereof will be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular.

10.8 WAIVER OF BREACH . The waiver by the Company of any breach of any provision of the Plan will not operate or be construed as a waiver of any subsequent breach by that Participant or any other Participant.

10.9 NOTICE . Any notice or filing required or permitted to be given to the Company or the Participant under this Plan will be sufficient if in writing and hand-delivered, or sent by registered or certified mail, in the case of the Company, to the principal office of the Company, directed to the attention of the Company, and in the case of the Participant, to the last known address of the Participant indicated on the employment records of the Company. Such notice will be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Notices to the Company may be permitted by electronic communication according to specifications established by the Company.

Approved and adopted this 12th day of February, 2006.

	ALERUS FINANCIAL CORPORATION

	By:	/s/ Randy J. Newman
	Its:	Chairman & CEO

	ALERUS FINANCIAL, N.A.

	By:	/s/ Randy J. Newman
	Its:	Chairman & CEO & President

FIRST AMENDMENT

ALERUS FINANCAL CORPORATION.

DEFERRED COMPENSATION PLAN FOR EXECUTIVES

Alerus Financial Corporation, (the “Company”) has established and maintains a deferred compensation plan (the “Plan”) for the purpose of providing an opportunity for eligible executives to save on a pre-tax basis and accumulate tax-deferred earnings to achieve their financial goals, is hereby amended in the following respects:

1. COMPANY CONTRIBUTION CREDITS. Effective January 1, 2008, Article III of the Plan is amended as follows by adding Section 3.3 to permit the Company to make discretionary contributions to the account of a participant:

3.3 Company Contribution Credits. The Company may, from time to time as directed by the Board of Directors, make additional Company Contribution Credits to a Participant’s account. Such amounts shall be 100% vested upon contribution unless otherwise specified by the Board of Directors. Such Credits shall be made at such time as the Board of Directors determines.

2. CASH-OUT OF SMALL AMOUNTS. Effective January 1, 2008, Section 5.3 of the Plan is amended to read in its entirety as follows:

5.3 Cash-Out of Small Amounts. Notwithstanding any contrary provision, if the vested balance of a Participant’s Account does not exceed the then current limit in effect under Internal Revenue Code Section 402(g)(1)(B), the balance of such Account will be paid as of the date specified in Section 5.2.1 in a single-sum distribution in full settlement of all obligations under the Plan with respect to such Account.

3. COMPLIANCE WITH SECTION 409A OF THE CODE. Effective January 1, 2008, Article X of the Plan is amended by adding the following Section 10.10 to the to read in full as follows:

10.10. Compliance with Section 409A of the Code. Notwithstanding anything in this Plan to the contrary, for Plan years beginning on or after January 1, 2005, this Plan shall be construed and administered in accordance with the provisions of Internal Revenue Service Notice 2005-1, Code Section 409A and the final Treasury Regulations thereunder.

4. SAVINGS CLAUSE. Save and except as hereinabove expressly amended, the Plan Statement shall continue in full force and effect.

Exhibit 10.14

ALERUS FINANCIAL CORPORATION

EMPLOYEE STOCK OWNERSHIP PLAN

(As Amended and Restated Effective January 1, 2013)

TABLE OF CONTENTS

ARTICLE I GENERAL		1

Sec. 1.1	Name of Plan	1
Sec. 1.2	Purpose	1
Sec. 1.3	Effective Date	1
Sec. 1.4	History	1
Sec. 1.5	Company	1
Sec. 1.6	Participating Employers	1
Sec. 1.7	Construction and Applicable Law	1
Sec. 1.8	Benefits Determined Under Provisions in Effect at Termination of Employment	2
Sec. 1.9	Effective Date of Document	2

ARTICLE II MISCELLANEOUS DEFINITIONS		3

Sec. 2.1	Account	3
Sec. 2.2	Active Participant	3
Sec. 2.3	Affiliate	3
Sec. 2.4	Beneficiary	3
Sec. 2.5	Board	3
Sec. 2.6	Certified Earnings	3
Sec. 2.7	Code	3
Sec. 2.8	Common Control	4
Sec. 2.9	Company Stock	4
Sec. 2.10	ERISA	4
Sec. 2.11	Exempt Loan	4
Sec. 2.12	Forfeitures	6
Sec. 2.13	Fund	6
Sec. 2.14	Funding Agency	6
Sec. 2.15	Highly Compensated Employee	6
Sec. 2.16	Leased Employee	7
Sec. 2.17	Named Fiduciary	7
Sec. 2.18	Non-Highly Compensated Employee	7
Sec. 2.19	Normal Retirement Age	7
Sec. 2.20	Participant	7
Sec. 2.21	Plan Year	8
Sec. 2.22	Predecessor Employer	8
Sec. 2.23	Qualified Employee	8
Sec. 2.24	Successor Employer	9
Sec. 2.25	Spouse	9
Sec. 2.26	Top-Heavy Plan	9
Sec. 2.27	Unallocated Reserve	9
Sec. 2.28	Valuation Date	9

ARTICLE III SERVICE PROVISIONS		10

Sec. 3.1	Employment Commencement Date	10
Sec. 3.2	Termination of Employment	10
Sec. 3.3	Hours of Service	10
Sec. 3.4	Eligibility Computation Period	11
Sec. 3.5	Year of Eligibility Service	11
Sec. 3.6	Year of Vesting Service	11

Sec. 3.7	1-Year Break In Service	12
Sec. 3.8	Periods of Military Service	12

ARTICLE IV PLAN PARTICIPATION		13

Sec. 4.1	Entry Date	13
Sec. 4.2	Eligibility for Participation	13
Sec. 4.3	Duration of Participation	13
Sec. 4.4	No Guarantee of Employment	13

ARTICLE V CONTRIBUTIONS		14

Sec. 5.1	Source	14
Sec. 5.2	Employer Contributions	14
Sec. 5.3	Pension Plan Contributions	14
Sec. 5.4	Discretionary Stock Bonus Plan Contributions	14
Sec. 5.5	Form of Contributions	14
Sec. 5.6	Disposition of Shares of Company Stock	14
Sec. 5.7	Application of Dividends	14
Sec. 5.8	Eligibility to Share in Annual Contributions and Forfeitures	15
Sec. 5.9	Allocations	15
Sec. 5.10	Time of Contributions	16
Sec. 5.11	Limitations on Contributions	16
Sec. 5.12	S Corporation Limitation	16
Sec. 5.13.	Safe Harbor Match Contribution	16

ARTICLE VI LIMITATION ON ALLOCATIONS		17

Sec. 6.1	Limitation on Allocations	17
Sec. 6.2	Limitation on Allocation of Company Stock Purchased in a Code Sections 1042 or 2057 Transaction	20

ARTICLE VII INDIVIDUAL ACCOUNTS		22

Sec. 7.1	Accounts for Participants	22
Sec. 7.2	Valuation Procedure	22
Sec. 7.3	Valuation of Diversified Accounts	23
Sec. 7.4	Participant Statements	23

ARTICLE VIII DESIGNATION OF BENEFICIARY		24

Sec. 8.1	Persons Eligible to Designate	24
Sec. 8.2	Special Requirements for Married Participants	24
Sec. 8.3	Form and Method of Designation	24
Sec. 8.4	No Effective Designation	24
Sec. 8.5	Successor Beneficiary	25

ARTICLE IX BENEFIT REQUIREMENTS		26

Sec. 9.1	Benefit on Retirement or Disability	26
Sec. 9.2	Other Termination of Employment	26
Sec. 9.3	Death	28
Sec. 9.4	Withdrawals Before Termination of Employment	28

ARTICLE X DISTRIBUTION OF BENEFITS		29

Sec. 10.1	Time and Method of Payment	29
Sec. 10.2	Distributions from More Than One Account	32
Sec. 10.3	Distribution in Cash or Kind	32
Sec. 10.4	Accounting Following Termination of Employment	32
Sec. 10.5	Right of First Refusal	32
Sec. 10.6	Put Option	33
Sec. 10.7	Other Restrictions on Qualifying Employer Securities	34

Sec. 10.8	Reemployment	35
Sec. 10.9	Source of Benefits	35
Sec. 10.10	Incompetent Payee	35
Sec. 10.11	Benefits May Not Be Assigned or Alienated	35
Sec. 10.12	Payment of Taxes	35
Sec. 10.13	Conditions Precedent	35
Sec. 10.14	Company Directions to Funding Agency	35
Sec. 10.15	Effect on Unemployment Compensation	35
Sec. 10.16	Transfer to Diversified Account	36
Sec. 10.17	Missing Participants or Beneficiaries	36

ARTICLE XI FUND		38

Sec. 11.1	Composition	38
Sec. 11.2	Funding Agency	38
Sec. 11.3	Compensation and Expenses of Funding Agency	38
Sec. 11.4	Funding Policy	38
Sec. 11.5	Investment in Company Stock or Property	38
Sec. 11.6	Authority to Borrow	39
Sec. 11.7	No Diversion	39
Sec. 11.8	Voting Company Stock	40
Sec. 11.9	Election To Receive Cash Dividends	40

ARTICLE XII ADMINISTRATION OF PLAN		42

Sec. 12.1	Administration by Company	42
Sec. 12.2	ESOP Committee	42
Sec. 12.3	Exercise of Authority	43
Sec. 12.4	Certain Fiduciary Provisions	43
Sec. 12.5	Payment of Fees and Expenses	43
Sec. 12.6	Discrimination Prohibited	44
Sec. 12.7	Evidence	44
Sec. 12.8	Correction of Errors and Duty to Review Information	44
Sec. 12.9	Records	44
Sec. 12.10	Prohibited Transactions	45
Sec. 12.11	Claims Procedure and Limitations on Actions	45
Sec. 12.12	Bonding	45
Sec. 12.13	Notices; Waiver of Notice	45
Sec. 12.14	Agent for Legal Process	45
Sec. 12.15	Indemnification	45

ARTICLE XIII AMENDMENT, TERMINATION, MERGER		46

Sec. 13.1	Amendment	46
Sec. 13.2	Permanent Discontinuance of Contributions	46
Sec. 13.3	Termination	46
Sec. 13.4	Partial Termination	47
Sec. 13.5	Merger, Consolidation, or Transfer of Plan Assets	47
Sec. 13.6	Deferral of Distributions	47
Sec. 13.7	Reorganizations of Participating Employers	47
Sec. 13.8	Discontinuance of Joint Participation of a Participating Employer	48
Sec. 13.9	Participating Employers Not Under Common Control	48

ARTICLE XIV TOP-HEAVY PLAN PROVISIONS		49

Sec. 14.1	Key Employee Defined	49
Sec. 14.2	Determination of Top-Heavy Status	49

iii

Sec. 14.3	Minimum Contribution Requirement	51
Sec. 14.4	Definition of Employer	52
Sec. 14.5	Exception For Collective Bargaining Unit	52

ARTICLE XV MISCELLANEOUS PROVISIONS		53

Sec. 15.1	Insurance Company Not Responsible for Validity of Plan	53
Sec. 15.2	Headings	53
Sec. 15.3	Capitalized Definitions	53
Sec. 15.4	Gender	53
Sec. 15.5	Use of Compounds of Word “Here”	53
Sec. 15.6	Construed as a Whole	53

ALERUS FINANCIAL CORPORATION

EMPLOYEE STOCK OWNERSHIP PLAN

(As Amended and Restated Effective January 1, 2013)

ARTICLE I

GENERAL

Sec. 1.1 Name of Plan . The name of the plan set forth herein is Alerus Financial Corporation Employee Stock Ownership Plan. It is sometimes herein referred to as the “Plan.” The Plan is a single plan consisting of a money purchase pension plan component and a stock bonus plan component. The money purchase pension plan component is sometimes referred to as the “Pension Plan” and the stock bonus plan component is sometimes referred to as the “Stock Bonus Plan.” Collectively, the Pension Plan and the Stock Bonus Plan are also referred to as the “Plan.”

Sec. 1.2 Purpose . The Plan has been established so that eligible employees may share in the growth and prosperity of the Participating Employers and may have an additional source of retirement income.

Sec. 1.3 Effective Date . The “Effective Date” of the Plan, the date as of which the Plan was established, is January 1, 1986.

Sec. 1.4 History . The Plan was most recently amended and restated effective January 1, 2008, which restatement was subsequently amended with five amendments with effective dates prior to January 1, 2013.

Sec. 1.5 Company . The “Company” is Alerus Financial Corporation, a Delaware corporation, and any Successor Employer thereof.

Sec. 1.6 Participating Employers . The Company is a Participating Employer in the Plan. With the consent of the Company, any other trade or business entity in the controlled group of the Company under Code § 414 may also become a Participating Employer in the Plan effective as of the date specified by it in its adoption of the Plan. Any Successor Employer to a Participating Employer shall also be a Participating Employer in the Plan. The other Participating Employers on January 1, 2013 are:

Alerus Financial, National Association

Alerus Securities Corporation

Alerus Financial Insurance Services, Inc.

Alerus Investment Advisors Corporation

Sec. 1.7 Construction and Applicable Law . The Plan is intended to meet the qualification requirements for a money purchase pension plan and stock bonus plan under Code § 401(a), and the requirements for an employee stock ownership plan under Code § 4975(e)(7) which is designed to invest primarily in qualifying employer securities meeting the requirements of Code §§ 4975(c)(8) and 409(l). The Plan is also intended to be in full compliance with applicable requirements of ERISA. The Plan shall be administered and construed consistent with said intent. It shall also be construed and administered according to the laws of the State of North Dakota to the extent that such laws are not preempted by the laws of the United States of America. All controversies, disputes, and claims arising hereunder shall be submitted

to the United States District Court for the District of North Dakota, except as otherwise provided in any trust agreement entered into with a Funding Agency.

Sec. 1.8 Benefits Determined Under Provisions in Effect at Termination of Employment . Except as may be specifically provided herein to the contrary, benefits under the Plan attributable to service prior to a Participant’s Termination of Employment shall be determined and paid in accordance with the provisions of the Plan as in effect as of the date the Termination of Employment occurred unless he or she becomes an Active Participant after that date and such active participation causes a contrary result under the provisions hereof. However, the provisions of this document shall apply to any such Participant to the extent necessary to maintain the qualified status of the Plan under Code § 401(a) or to comply with the requirements of ERISA.

Sec. 1.9 Effective Date of Document . Unless a different date is specified for some purpose in this document, the provisions of this Plan document are generally effective as of January 1, 2013. However, any provision necessary to comply with a requirement of any federal legislation or a Treasury regulation which requirement has an earlier effective date shall be effective retroactively to the date required by the applicable law or regulation insofar as that provision is necessary to permit the Plan to comply with such law or regulation.

ARTICLE II

MISCELLANEOUS DEFINITIONS

Sec. 2.1 Account . “Account” means a Participant’s or Beneficiary’s interest in the Fund of any of the types described in Sec. 7.1.

Sec. 2.2 Active Participant . An employee is an “Active Participant” only while he or she is both a Participant and a Qualified Employee.

Sec. 2.3 Affiliate . “Affiliate” means any trade or business entity under Common Control with a Participating Employer, or under Common Control with a Predecessor Employer while it is such.

Sec. 2.4 Beneficiary . “Beneficiary” means the person or persons designated as such pursuant to the provisions of Article VIII.

Sec. 2.5 Board . The “Board” is the board of directors of the Company, and includes any executive committee thereof authorized to act for said board of directors.

Sec. 2.6 Certified Earnings . “Certified Earnings” of a Participant from a Participating Employer for a Plan Year means the amount determined by the Participating Employer and reported to the Company to be the total earnings paid to the Participant by the Participating Employer during such Plan Year for service as a Qualified Employee, subject to the following:

(a) Certified Earnings for the Plan Year only include the employee’s compensation for the portion of the Plan Year that the employee was a Participant.

(b) Certified Earnings include any contributions made by salary reduction to any plan which meets the requirements of Code §§ 125, 132(f)(4), 401(k), 402(h)(1)(B), or 403(b), whether or not such contributions are actually excludable from the Participant’s gross income for federal income tax purposes. Certified Earnings do not include contributions to this Plan.

(c) Allowances or reimbursements for expenses, severance pay, payments or contributions to or for the benefit of the employee under any other deferred compensation, pension, profit sharing, insurance, or other employee benefit plan, stock options, stock appreciation rights or cash payments in lieu thereof, merchandise or service discounts, non-cash employee awards, benefits in the form of property or the use of property, or other similar fringe benefits shall not be included in computing Certified Earnings, except as provided in subsection (b) or to the extent such amounts are required to be included in determining the employee’s regular rate of pay under the Federal Fair Labor Standards Act for purposes of computing overtime pay thereunder.

(d) Certified Earnings of a Participant for any Plan Year shall not exceed the maximum amount permitted to be taken into account for such year under Code § 401(a)(17).

(e) Effective January 1, 2009, Certified Earnings includes military differential wage payments (as defined in Code § 3401(h)) to the extent required under Code § 414(u).

Sec. 2.7 Code . “Code” means the Internal Revenue Code of 1986 as from time to time amended.

Sec. 2.8 Common Control . A trade or business entity (whether a corporation, partnership, sole proprietorship or otherwise) is under “Common Control” with another trade or business entity (i) if both entities are corporations which are members of a controlled group of corporations as defined in Code § 414(b), or (ii) if both entities are trades or businesses (whether or not incorporated) which are under common control as defined in Code § 414(c), or (iii) if both entities are members of an affiliated service group as defined in Code § 414(m), or (iv) if both entities are required to be aggregated pursuant to regulations under Code § 414(o). Service for all entities under Common Control shall be treated as service for a single employer to the extent required by the Code; provided, however, that an individual shall not be a Qualified Employee by reason of this section. In applying the first sentence of this section for purposes of Article VI, the provisions of subsections (b) and (c) of Code § 414 are deemed to be modified as provided in Code § 415(h).

Sec. 2.9 Company Stock . “Company Stock” means (i) common stock of the Company or of any corporation that is a member of a controlled group that includes the Company, or (ii) convertible preferred stock of the Company or of any corporation that is a member of a controlled group that includes the Company if such preferred stock satisfies the requirements of Code § 409(l)(3). For purposes of this section, a “controlled group” shall include all corporations described in Code § 409(l)(4).

Sec. 2.10 ERISA . “ERISA” means the Employee Retirement Income Security Act of 1974 as from time to time amended.

Sec. 2.11 Exempt Loan . “Exempt Loan” means a direct or indirect extension of credit to the Plan that is either an Exempt Guaranteed Loan or an Exempt Non-Guaranteed Loan:

(a) Exempt Guaranteed Loan . “Exempt Guaranteed Loan” means a direct or indirect extension of credit to the Plan that is made or guaranteed by either a party in interest (as defined in ERISA § 3(14)) or a disqualified person (as defined in Code § 4975), and which satisfies the following requirements:

(1) The proceeds of the Exempt Guaranteed Loan must be used solely, and within a reasonable time after their receipt, to acquire Company Stock for the Unallocated Reserve, or to repay such Exempt Guaranteed Loan, or to repay a prior Exempt Guaranteed Loan, or for any combination of the foregoing purposes.

(2) The Exempt Guaranteed Loan must be without recourse against the Fund except that:

(A) The Company Stock acquired with the proceeds of the Exempt Guaranteed Loan may be pledged or otherwise used to secure repayment of the Exempt Guaranteed Loan, and

(B) Any Company Stock which was acquired with the proceeds of a prior Exempt Guaranteed Loan which was repaid with the proceeds of the Exempt Guaranteed Loan may be pledged or otherwise used to secure repayment of the Exempt Guaranteed Loan, and

(C) Any cash contributions to the Plan that are made for the purpose of satisfying the Plan’s obligations under the Exempt Guaranteed Loan (and

earnings thereon) may be pledged or otherwise used to secure repayment of the Exempt Guaranteed Loan, and

(D) The earnings attributable to shares of Company Stock acquired with the proceeds of an Exempt Guaranteed Loan may be used to repay that Exempt Guaranteed Loan or any renewal or extension thereof, and

(E) The earnings attributable to unallocated shares of Company Stock that were acquired with the proceeds of an Exempt Guaranteed Loan may be pledged as security for another Exempt Guaranteed Loan.

(3) The Exempt Guaranteed Loan must provide for principal and interest to be paid over a specific term.

(4) Except as provided below in paragraph (5), the number of shares which are released from the Unallocated Reserve each Plan Year shall equal the number of shares of Company Stock held in the Unallocated Reserve immediately before the release of any shares for the Plan Year, multiplied by a fraction with a numerator equal to all principal and interest payments made on the Exempt Guaranteed Loan for the Plan Year and a denominator equal to the total principal and interest paid on the Exempt Guaranteed Loan for the current Plan Year and to be paid for all subsequent years. The number of future years for which principal and interest are payable under the Exempt Guaranteed Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the loan is variable, the amount of future interest payable shall be calculated by using the interest rate in effect on the last day of the current Plan Year.

(5) In lieu of the method described in paragraph (4), the number of shares of Company Stock which are released from the Unallocated Reserve each Plan Year may be determined with reference to principal payments only, provided all of the following conditions are met.

(A) The Exempt Guaranteed Loan provides for principal and interest payments at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten years.

(B) If the Exempt Guaranteed Loan constitutes a renewal, extension or refinancing of a prior Exempt Guaranteed Loan, the sum of the expired duration of the prior Exempt Guaranteed Loan, the renewal period, the extension period, and the duration of the new Exempt Guaranteed Loan does not exceed ten years.

(C) The number of shares which shall be released from the Unallocated Reserve each Plan Year must equal the number of shares of Company Stock held in the Unallocated Reserve immediately before the release of any shares for the Plan Year, multiplied by a fraction with a numerator equal to the amount of all principal payments made with respect to the Exempt Guaranteed Loan for the current Plan Year and a denominator equal to the total principal payments to be paid over the remaining term of

the Exempt Guaranteed Loan (including the principal payments for the current Plan Year).

(D) For purposes of this paragraph (5), the amount of interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables.

(6) The rate of interest (which may be fixed or variable) on the Exempt Guaranteed Loan must not be in excess of a reasonable rate of interest considering all relevant factors including (but not limited to) the amount and duration of the loan, the security given, the guarantees involved, the credit standing of the Plan, the Company and the guarantors, and the generally prevailing rates of interest.

(7) In the event of default upon an Exempt Guaranteed Loan, the fair market value of Company Stock and other assets which can be transferred in satisfaction of the loan must not exceed the amount of the loan. If the lender is a party in interest (as defined in ERISA) or disqualified person (as defined in the Code), the loan must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to satisfy the payment schedule of the Exempt Guaranteed Loan.

(b) Exempt Non-Guaranteed Loan . “Exempt Non-Guaranteed Loan” means a direct or indirect extension of credit to the Plan that neither is made nor is guaranteed by either a party in interest (as defined in ERISA § 3(14)) or a disqualified person (as defined in Code § 4975) and the proceeds of which must be used solely to acquire Company Stock for the Unallocated Reserve, or to repay such Exempt Non-Guaranteed Loan or to repay a prior Exempt Loan, or for any combination of the foregoing purposes.

Sec. 2.12 Forfeitures . “Forfeitures” means that part of the Fund so recognized under Sec. 9.2(b)(2).

Sec. 2.13 Fund . “Fund” means the aggregate of assets described in Sec. 11.1.

Sec. 2.14 Funding Agency . “Funding Agency” is a trustee or trustees or an insurance company appointed and acting from time to time in accordance with the provisions of Sec. 11.2 for the purpose of holding, investing, and disbursing all or a part of the Fund.

Sec. 2.15 Highly Compensated Employee . “Highly Compensated Employee” for any Plan Year means an individual described as such in Code § 414(q).

(a) Unless otherwise provided in Code § 414(q), each employee who meets one of the following requirements is a “Highly Compensated Employee”:

(1) The employee at any time during the current or prior Plan Year was a more than 5% owner as defined in Code § 414(q)(2), or was the Spouse, child, parent or grandparent of such an owner to whom the owner’s stock is attributed pursuant to Code § 318 (regardless of the Compensation of the owner or family member).

(2) The employee received Compensation from the employer in excess of the amount in effect under Code Sec. 414(q)(1)(A) for the prior Plan Year. The employee must also have been in the top 20% of employees of the employer who

performed services for the employer in such prior Plan Year, when ranked on the basis of Compensation paid during the Plan Year. For purposes of determining the top 20% of employees under Code § 414(q)(3), the Plan will disregard any non-resident aliens who receive no earned income from the employer which constitutes income from sources within the United States.

(3) The individual is a former employee who had a separation year prior to the current Plan Year and such individual performed services for the employer and was a Highly Compensated Employee for either (i) such separation year, or (ii) any Plan Year ending on or after the individual’s 55th birthday. A “separation year” is the Plan Year in which the individual separates from service with the employer.

(b) For purposes of this section, “employer” includes the Company and all Affiliates, and “employee” includes Leased Employees.

Sec. 2.16 Leased Employee . “Leased Employee” means any person defined as such by Code § 414(n). In general, a Leased Employee is any person who is not otherwise an employee of a Participating Employer or an Affiliate (referred to collectively as the “recipient”) and who pursuant to an agreement between the recipient and any other person (“leasing organization”) has performed services for the recipient (or for the recipient and related persons determined in accordance with Code § 414(n)(6)) on a substantially full-time basis for a period of at least one year and such services are performed under primary direction or control by the recipient. For purposes of the requirements listed in Code § 414(n)(3), any Leased Employee shall be treated as an employee of the recipient, and contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. However, if Leased Employees constitute less than 20% of the Participating Employers’ non-highly compensated work force within the meaning of Code § 414(n)(5)(C)(ii), those Leased Employees covered by a plan described in Code § 414(n)(5) shall be disregarded. Notwithstanding the foregoing, no Leased Employee shall be a Qualified Employee or a Participant in this Plan.

Sec. 2.17 Named Fiduciary . The Company is a “Named Fiduciary” for purposes of ERISA with authority to appoint additional named fiduciaries and to allocate responsibility among them, and the power to control or manage the assets of the Plan. If so permitted by the Company in the appointment of a named fiduciary, such named fiduciary may designate another person to carry out any or all of the fiduciary responsibilities of the named fiduciary; except that , a named fiduciary may not designate another person to carry out any responsibilities relating to the management or control of Plan assets other than in exercise of a power granted under the trust agreement to appoint an investment manager. The ESOP Committee members are not Named Fiduciaries of the Plan; rather the ESOP Committee, and its members, act on behalf of the Company in its role as administrator and/or Named Fiduciary of the Plan.

Sec. 2.18 Non-Highly Compensated Employee . “Non-Highly Compensated Employee” means an employee of the Participating Employers who is not a Highly Compensated Employee.

Sec. 2.19 Normal Retirement Age . “Normal Retirement Age” is age 59½.

Sec. 2.20 Participant . A “Participant” is an individual described as such in Article IV.

Sec. 2.21 Plan Year . A “Plan Year” is the 12-consecutive-month period commencing on each January 1st.

Sec. 2.22 Predecessor Employer . Any corporation, partnership, firm, or individual, a substantial part of the assets and employees of which are acquired by a successor is a “Predecessor Employer” if named in this section, subject to any conditions and limitations with respect thereto imposed by this section; provided, however, that any such corporation, partnership, firm, or individual may be named as a Predecessor Employer only if all of its employees who at the time of the acquisition become employees of the successor and Participants hereunder are treated uniformly, the use of service with it does not produce discrimination in favor of Highly Compensated Employees, and there is no duplication of benefits for such service. To be considered a Predecessor Employer, the acquisition of assets and employees of a corporation, partnership, firm, or individual must be by a Participating Employer, by an Affiliate, or by another Predecessor Employer. Notwithstanding the foregoing, an employer shall be a Predecessor Employer if so required by regulations prescribed by the Secretary of the Treasury. As of January 1, 2013, there are no Predecessor Employers.

Sec. 2.23 Qualified Employee . “Qualified Employee” means any employee of a Participating Employer, subject to the following:

(a) An employee is not a Qualified Employee prior to the date as of which his or her employer becomes a Participating Employer.

(b) A nonresident alien within the meaning of Code § 7701(b)(1)(B) while not receiving earned income (within the meaning of Code § 911(d)(2)) from a Participating Employer which constitutes income from sources within the United States (within the meaning of Code § 861(a)(3)) is not a Qualified Employee.

(c) Eligibility of employees in a collective bargaining unit to participate in the Plan is subject to negotiations with the representative of that unit. During any period that an employee is covered by the provisions of a collective bargaining agreement between a Participating Employer and such representative, the employee shall not be considered a Qualified Employee for purposes of this Plan unless such agreement expressly so provides. For purposes of this section only, such an agreement shall be deemed to continue after its formal expiration during collective bargaining negotiations pending the execution of a new agreement.

(d) An employee shall be deemed to be a Qualified Employee during a period of absence from active service which does not result from a Termination of Employment, provided he or she is a Qualified Employee at the commencement of such period of absence.

(e) Notwithstanding anything herein to the contrary, an individual is not a Qualified Employee during any period during which the individual is classified by a Participating Employer as an independent contractor or as any other status in which the person is not treated as a common law employee of the Participating Employer for purposes of withholding of taxes, or is treated as an employee of another entity who is leased to the Participating Employer, regardless of the correct legal status of the individual. The previous sentence applies to all periods of such service of an individual who is subsequently reclassified as an employee, whether the reclassification is retroactive or prospective.

Sec. 2.24 Successor Employer . A “Successor Employer” is any entity that succeeds to the business of a Participating Employer through merger, consolidation, acquisition of all or substantially all of its assets, or any other means and which elects before or within a reasonable time after such succession, by appropriate action evidenced in writing, to continue the Plan; provided, however, that in the case of such succession with respect to any Participating Employer other than the Company, the acquiring entity shall be a Successor Employer only if consent thereto is granted by the Company, by action of the Board or a duly authorized officer.

Sec. 2.25 Spouse. “Spouse” means a person of the opposite sex to whom the Participant is legally married (including a common-law spouse in any state that recognizes common-law marriage, provided that acceptable proof and certification of common-law marriage has been received by the Company); except that, a former spouse will be treated as a Spouse to the extent provided in a domestic relations order that has been determined to be a qualified domestic relations order (as defined in Code § 414(q)) with respect to the Plan.

Sec. 2.26 Top-Heavy Plan . “Top-Heavy Plan” is defined in Sec. 14.2(a).

Sec. 2.27 Unallocated Reserve . “Unallocated Reserve” means that portion of the Fund which consists of shares of Company Stock (and dividends and other earnings attributable thereto) that were acquired with the proceeds of an Exempt Loan and that are held in suspense pending allocation to Participants’ Accounts.

Sec. 2.28 Valuation Date . “Valuation Date” means the date on which the Fund and Accounts are valued as provided in Article VII. Each of the following is a Valuation Date:

(a) The last day of each Plan Year.

(b) Such other day, as designated by the Company in written notice to the Funding Agency, as the Company may consider necessary or advisable to provide for the orderly and equitable administration of the Plan.

ARTICLE III

SERVICE PROVISIONS

Sec. 3.1 Employment Commencement Date . “Employment Commencement Date” means the date on which an employee first performs an Hour of Service for a Participating Employer (whether before or after the Participating Employer becomes such), an Affiliate, or a Predecessor Employer. The date on which an employee first performs an Hour of Service after a 1-Year Break in Service is also an “Employment Commencement Date”.

Sec. 3.2 Termination of Employment . The “Termination of Employment” of an employee for purposes of the Plan shall be deemed to occur upon resignation, discharge, retirement, death, failure to return to active work at the end of an authorized leave of absence or the authorized extension or extensions thereof, failure to return to work when duly called following a temporary layoff, or upon the happening of any other event or circumstance which, under the policy of a Participating Employer, Affiliate, or Predecessor Employer as in effect from time to time, results in the termination of the employer-employee relationship; provided, however, that a Termination of Employment shall not be deemed to occur upon a transfer between any combination of Participating Employers, Affiliates, and Predecessor Employers.

Sec. 3.3 Hours of Service . “Hours of Service” are determined according to the following subsections with respect to each applicable computation period. The Company may round up the number of Hours of Service at the end of each computation period or more frequently as long as a uniform practice is followed with respect to all employees determined by the Company to be similarly situated for compensation, payroll, and recordkeeping purposes.

(a) Hours of Service are computed only with respect to service with Participating Employers (for service both before and after the Participating Employer becomes such), Affiliates, and Predecessor Employers and are aggregated for service with all such employers.

(b) For any portion of a computation period during which a record of hours is maintained for an employee, Hours of Service shall be credited as follows:

(1) Each hour for which the employee is paid, or entitled to payment, for the performance of duties for his or her employer during the applicable computation period is an Hour of Service.

(2) Each hour for which the employee is paid, or entitled to payment, by his or her employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence, is an Hour of Service. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours of Service shall not be credited under this paragraph with respect to payments under a plan maintained solely for the purpose of complying with applicable workers’ compensation, unemployment compensation, or disability insurance laws or with respect to a payment which solely reimburses the individual for medical or medically related expenses incurred by the employee.

(3) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the employer is an Hour of Service. Such Hours of Service shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement, or payment is made. Crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in paragraph (2) shall be subject to the limitations set forth therein.

(4) Hours under this subsection shall be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by this reference.

(5) The Company may use any records to determine Hours of Service which it considers an accurate reflection of the actual facts.

(c) For any portion of a computation period during which an employee is within a classification for which a record of hours for the performance of duties is not maintained, the employee shall be credited with 190 Hours of Service for each month for which he or she would otherwise be credited with at least one Hour of Service under subsection (b).

(d) Nothing in this section shall be construed as denying an employee credit for an Hour of Service if credit is required by any federal law other than ERISA. The nature and extent of such credit shall be determined under such other law.

(e) In no event shall duplicate credit as an Hour of Service be given for the same hour.

(f) This subsection shall apply to an individual who has service as (i) either a common law employee or a Leased Employee of (ii) either a Participating Employer or an Affiliate. For purposes of determining Hours of Service, such an individual shall be considered an employee of the Participating Employer or such Affiliate during any period he or she would have been a Leased Employee of such Participating Employer or an Affiliate but for the requirement that he or she must have performed services for such Participating Employer or an Affiliate on a substantially full-time basis for a period of at least one year.

Sec. 3.4 Eligibility Computation Period . An employee’s first Eligibility Computation Period is the 12-consecutive-month period beginning on his or her Employment Commencement Date. The second Eligibility Computation Period is the Plan Year commencing in said 12-consecutive-month period. Each subsequent Plan Year prior to the end of the Plan Year in which the employee has a 1-Year Break In Service is an Eligibility Computation Period. If subsequent to a 1-Year Break In Service the employee has another Employment Commencement Date, Eligibility Computation Periods for the period beginning on such date shall be computed as though such date were the employee’s first Employment Commencement Date.

Sec. 3.5 Year of Eligibility Service . A “Year of Eligibility Service” is an Eligibility Computation Period in which an employee has at least 1,000 Hours of Service.

Sec. 3.6 Year of Vesting Service . A “Year of Vesting Service” is a Plan Year in which an employee has at least 1,000 Hours of Service, subject to the following:

(a) If the Participant has had a period of five consecutive 1-Year Breaks In Service, for purposes of determining the vested percentage of the Participant’s Accounts attributable to employer contributions which accrued before such break, any Years of Vesting Service after such break in service shall not be taken into account.

(b) If the Participant has a period of one or more consecutive 1-Year Breaks In Service, for purposes of determining the vested percentage of the Participant’s Accounts (if any) attributable to employer contributions made on his or her behalf after such period, all Years of Vesting Service before and after such period shall be taken into account.

Sec. 3.7 1-Year Break In Service . “1-Year Break In Service” means a Plan Year during which the employee (or former employee) completes 500 or fewer Hours of Service. The 1-Year Break In Service shall be recognized as such on the last day of such Plan Year.

(a) Notwithstanding the provisions of Sec. 3.3, for purposes of determining whether a 1-Year Break In Service has occurred with respect to a Plan Year an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence; provided, however, that the total number of Hours of Service recognized under this subsection shall not exceed 501 hours. The Hours of Service credited under this subsection shall be credited in the Plan Year in which the absence begins if the crediting is necessary to prevent a 1-Year Break In Service in that Plan Year or, in all other cases, in the following Plan Year.

(b) For purposes of subsection (a), an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of the birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

Sec. 3.8 Periods of Military Service . The Plan will comply with the requirements of Code § 414(u) with respect to each Participant who is absent from service because of “qualified military service” (as defined in Code § 414(u)(5)) as prescribed under Code § 414(u) (or other federal law cited therein).

ARTICLE IV

PLAN PARTICIPATION

Sec. 4.1 Entry Date . “Entry Date” means January 1, April 1, July 1, and October 1 of each Plan Year.

Sec. 4.2 Eligibility for Participation . Eligibility to participate in the Plan shall be determined as follows:

(a) An employee of a Participating Employer shall become a Participant in the Plan on the earliest Entry Date (on or after the date the Plan becomes effective with respect to his or her Participating Employer) on which all of the following requirements are met:

(1) The employee is a Qualified Employee.

(2) The employee has completed one Year of Eligibility Service during an Eligibility Computation Period that ended prior to the Entry Date.

(3) The employee has attained age 21 prior to the Entry Date.

(b) If a former Participant is reemployed and meets the requirements of subsection (a) on the date of rehire, the employee will become a Participant again on that date.

(c) If a former employee who was not previously a Participant is reemployed as a Qualified Employee, if the employee meets the requirements of subsection (a) on the date of rehire, and if the employee would have met the requirements of subsection (a) on the immediately preceding Entry Date if he or she had been a Qualified Employee on that Entry Date, the employee shall become a Participant on the date of rehire.

(d) If an employee of a Participating Employer or an Affiliate who is neither a Participant nor a Qualified Employee is transferred to a position in which he or she is a Qualified Employee, and if the employee would have met the eligibility requirements of subsection (a) on the Entry Date preceding the transfer had he or she been a Qualified Employee on that Entry Date, the employee shall become a Participant on the date of transfer.

Sec. 4.3 Duration of Participation . A Participant shall continue to be such until the later of:

(a) The Participant’s Termination of Employment.

(b) The date all benefits, if any, to which the Participant is entitled hereunder have been distributed from the Fund.

Sec. 4.4 No Guarantee of Employment . Participation in the Plan does not constitute a guarantee or contract of employment with the Participating Employers. Such participation shall in no way interfere with any rights the Participating Employers would have in the absence of such participation to determine the duration of an employee’s employment.

ARTICLE V

CONTRIBUTIONS

Sec. 5.1 Source . This Plan is a money purchase pension plan and stock bonus plan for purposes of Code § 401(a). Contributions by the Company and Participating Employers shall not be limited to current or accumulated earnings or profits.

Sec. 5.2 Employer Contributions . Pursuant to Sec. 5.4, the Participating Employers may make sufficient cash contributions to enable the Funding Agency to pay any currently maturing obligations under an Exempt Loan, if any, made pursuant to Sec. 11.6, to the extent those obligations have not been paid with dividends pursuant to Sec. 5.7. The Participating Employers may also make additional cash contributions for the purpose of repaying the Exempt Loan more rapidly than is required under the terms of that loan. The Funding Agency shall apply such contributions (and any earnings thereon) to make such loan payments as directed by the Company. The shares of Company Stock which are released from encumbrance as a result of loan payments made with such contributions shall be allocated as of the annual Valuation Date of the Plan Year for which the contributions were made in accordance with Sec. 5.8 and 5.9.

Sec. 5.3 Pension Plan Contributions . Pension Plan contributions shall not be made to the Fund for Plan Years beginning after December 31, 2002.

Sec. 5.4 Discretionary Stock Bonus Plan Contributions . For each Plan Year, the Company shall determine, in its discretion, the amount of the Stock Bonus Plan contribution, if any, to the Fund for such Plan Year. The Stock Bonus Plan contribution of each Participating Employer, other than the Company, for a Plan Year shall be in an amount which is in the same ratio to the total Certified Earnings for such year of its employees eligible to share in the contribution for such year as the Stock Bonus Plan contribution of the Company for such Plan Year bears to the total Certified Earnings for such year of its employees eligible to share in the contribution for such year, unless for such Plan Year, a Participating Employer determines not to make a contribution or determines that its contribution for such Plan Year shall be a different amount and also determines the amount of the contribution (or the formula by which the amount of the contribution shall be calculated).

Sec. 5.5 Form of Contributions . Contributions shall be made in the form of cash or Company Stock.

Sec. 5.6 Disposition of Shares of Company Stock . In connection with termination of the Plan, the Company may direct the Funding Agency to sell sufficient shares of Stock not previously released or required to be released prior to said date (to the Company or another purchaser) to enable it to pay off the remaining obligations under an Exempt Loan or a Non-Exempt Loan. Any remaining shares or proceeds from the sale of shares held in the Unallocated Reserve of the Plan shall, subject to the terms of the pledge agreement, be allocated as of the date of termination (excluding Participants who have had a Termination of Employment prior to the date of the termination and excluding Beneficiaries of Participants who died prior to the termination ) who have an Account under the Plan, in proportion to the number of shares of Stock allocated to their Stock Bonus Accounts as of said date without regard to this section. Such amounts shall not be considered as Annual Additions.

Sec. 5.7 Application of Dividends . Dividends received on shares of Company Stock held in the Unallocated Reserve and on shares of Company Stock allocated to Accounts shall be applied as follows:

(a) Dividends received on shares of Company Stock held in the Unallocated Reserve shall first be used to repay principal and interest then due on the Exempt Loan used to acquire such shares. If the amount of such dividends exceeds the amount needed to repay such principal and interest, the excess shall be held in the Unallocated Reserve until it is needed to repay principal and interest due on such Exempt Loan or, with the prior concurrence of the Company, the excess shall be used to prepay principal on such Exempt Loan. If an excess still remains, it shall be treated as a general investment gain of the Fund and allocated to the Accounts of Participants as of the next Valuation Date as provided in Sec. 7.2. Any dividends so allocated shall not be considered an Annual Addition with respect to a Participant for purposes of Sec. 6.1.

(b) Dividends received on shares of Company Stock allocated to Accounts shall not be used to pay principal or interest on an Exempt Loan. Such dividends shall be paid or invested as described in Sec. 11.9.

Sec. 5.8 Eligibility to Share in Annual Contributions and Forfeitures . A Participant shall be eligible to share in the Employer contribution and Forfeitures for a Plan Year if all of the following requirements are satisfied:

(a) He or she is an Active Participant at any time during the Plan Year.

(b) Either:

(1) He or she has at least 1,000 Hours of Service during the Plan Year and is in the employ of a Participating Employer on the last business day of the Plan Year, or

(2) His or her Termination of Employment occurs during the Plan Year on or after his or her Normal Retirement Date, or prior to his or her Normal Retirement Date by reason of his or her death or disability (as defined in Sec. 9.1(b)).

Notwithstanding anything in the Plan to the contrary, this Sec. 5.8 does not apply to any Safe Harbor Match Contribution made under Sec. 5.13.

Sec. 5.9 Allocations . The amounts available for allocation shall be allocated among the Accounts of Participants as follows:

(a) The following amounts are available for allocation pursuant to this section:

(1) Stock Bonus Plan contributions.

(2) Shares of Company Stock released from the Unallocated Reserve.

(3) Forfeitures.

(b) The amounts available for allocation shall be allocated among the Accounts of Participants who meet the requirements of Sec. 5.8 in the proportion that the Certified Earnings of each such Participant for the Plan Year bears to the total Certified Earnings of all such Participants for the Plan Year.

Notwithstanding anything in the Plan to the contrary, this Sec. 5.9 does not apply to any Safe Harbor Match Contribution made under Sec. 5.13.

Sec. 5.10 Time of Contributions . Contributions by a Participating Employer for a Plan Year shall be paid to the Funding Agency no later than the time (including extensions thereof) prescribed by law for filing the employer’s federal income tax return for the tax year in which the Plan Year ends.

Sec. 5.11 Limitations on Contributions . In no event shall the amount of a Participating Employer’s contribution under this Article for any Plan Year exceed the lesser of:

(a) The maximum amount allowable as a deduction in computing the Participating Employer’s taxable income for that Plan Year for federal income tax purposes.

(b) The aggregate amount of the contributions by such Participating Employer that may be allocated to Accounts of Participants under the provisions of Article VI.

Sec. 5.12 S Corporation Limitation . Notwithstanding the foregoing, no portion of Plan assets attributable to Company Stock in an S corporation may, during a nonallocation year (as defined in Code § 409(p)(3)), accrue to the benefit of a disqualified person (as defined in Code § 409(p)(4)).

Sec. 5.13. Safe Harbor Match Contribution . For the Plan Year beginning January 1, 2011, the Company shall make a contribution (“Safe Harbor Match Contribution”) to each Participant’s Safe Harbor Match Account based upon the Participant’s rate of deferral in the Alerus Financial Corporation Safe Harbor 401k Plan (“401k Plan”) calculated on a payroll basis according to the following schedule:

Deferral Percentage in 401k Plan	Matching Rate
3% or less	100	%
Over 3%, but not in excess of 6%	50	%

Notwithstanding anything in the Plan or the 401k Plan to the contrary, the Safe Harbor Match Contribution:

(a) Shall be made only to those Participants who have met the requirements for Plan participation under Article IV of this Plan;

(b) Shall be contributed no later than the end of the calendar year quarter following the quarter in the Participant’s elective deferral contribution was made to the 401k Plan;

(d) Shall not be distributed except in the event of the Participant’s death, disability, Severance from Employment, attainment of age 59½ or Plan termination.

(e) No additional Safe Harbor Matching Contributions will be made to this Plan for Plan Years beginning on or after January 1, 2012.

ARTICLE VI

LIMITATION ON ALLOCATIONS

Sec. 6.1 Limitation on Allocations . Notwithstanding any provisions of the Plan to the contrary, allocations to Participants under the Plan shall not exceed the maximum amount permitted under Code § 415. For purposes of the preceding sentence, the following rules shall apply unless otherwise provided in Code § 415:

(a) The Annual Additions with respect to a Participant for any Plan Year shall not exceed the lesser of:

(1) $51,000 for Plan Years commencing in 2013 or later, adjusted for each subsequent Plan Year to reflect cost of living increases for that Plan Year published by the Secretary of the Treasury.

(2) 100% of the Compensation of such Participant for Plan Years. This paragraph (2) shall not apply to any contribution for medical benefits after separation from service within the meaning of Code §§ 401(h) or 419(f)(2) which is otherwise treated as an Annual Addition.

(b) For purposes of this section, “Annual Additions” means the sum of the following amounts allocated to a Participant for a Plan Year under this Plan and all other defined contribution plans maintained by a Participating Employer or an Affiliate in which he or she participates:

(1) Employer contributions, including contributions made under Code § 401(k).

(2) Forfeitures, if any.

(3) Voluntary non-deductible contributions, if any.

(4) Amounts attributable to medical benefits as described in Code §§ 415(1)(2) and 419A(d)(2).

An Annual Addition with respect to a Participant’s Accounts shall be deemed credited thereto with respect to a Plan Year if it is allocated to the Participant’s Accounts under the terms of the Plan as of any date within such Plan Year.

(1) Rollover contributions as described in Code §§ 401(a)(3), 402(c), 403(a)(4), 403(b)(8) or 457(e)(16) or in any other provision of the Code which may allow rollover contributions to be made to another Plan maintained by the Company or its Affiliates;

(2) Catch-up contributions made under Code § 414(v);

(3) Direct transfers from a qualified plan to a defined contribution plan;

(4) Reinvested dividends on Company Stock pursuant to Sec. 11.9;

(5) Restorative payments allocated to a Participant’s Account which include payments made to restore losses to a Plan resulting from actions (or a failure to act) by a fiduciary for which there is a reasonable risk of liability under Title I of ERISA or under other applicable federal or state law, where similarly situated Participants are similarly treated; and

(6) If no more than one-third of the Employer contributions for the Plan Year that are applied to pay principal and interest on an Exempt Loan are allocated to Participants who are Highly Compensated Employees, then Annual Additions do not include:

(A) Forfeitures allocated to a Participant for such Plan Year to the extent such Forfeitures consist of Company Stock that was acquired with an Exempt Loan;

(B) Interest on the Exempt Loan.

(d) For purposes of this section, “Compensation” means an employee’s wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Participating Employers and Affiliates to the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible in gross income but for an election under Code §§ 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). The following rules apply to determine “Compensation”:

(1) “Compensation” includes, but is not limited to:

(A) commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan described in Treasury Regulation § 1.62-2(c);

(B) amounts described in Code §§ 104(a)(3), 105(a), or 105(h), but only to the extent that these amounts are includible in gross income;

(C) amounts paid or reimbursed by a Participating Employer or an Affiliate for moving expenses incurred by an employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are not deductible by the employee under Code § 217;

(D) the value of a nonqualified stock option granted to an employee, but only to the extent that the value of the option is includible in gross income of the employee for the taxable year of the stock option grant;

(E) the amount includible in the gross income of the employee upon making the election described in Code § 83(b);

(F) amounts that are includible in the gross income of the employee under the rules of Code §§ 409A or 457(f)(1)(A) or because the amounts are constructively received by the employee;

(G) amounts received by an employee pursuant to a nonqualified unfunded deferred compensation plan in the year the amounts are actually received, to the extent that such amounts are includible in the employee’s gross income; and

(H) amounts paid after the employee’s termination of employment, but only including regular pay for services during the employee’s regular working hours, or pay for service outside the employee’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and only if such pay would have been paid to the employee prior to termination of employment if the employee had continued in employment with the Participating Employer or an Affiliate. Such pay is Compensation only if paid by the later of (i) 2½ months after the employee’s termination of employment with the Participating Employer or an Affiliate, or (ii) the end of the Limitation Year that includes the date of the employee’s termination of employment.

Notwithstanding anything in this section to the contrary, “Compensation” will not exceed the amount permitted to be taken into account for any Limitation Year under Code § 401(a)(17).

(2) “Compensation” does not include:

(A) Contributions (other than elective contributions described in Code §§ 402(e)(3), 408(k)(6), 408(p)(2)(A)(i), or 457(b)) made by the Participating Employer and Affiliates to a plan of deferred compensation (including a simplified employee pension described in Code § 408(k) or a simple retirement account described in Code § 408(p)), to the extent that the contributions are not includible in the gross income of the employee for the taxable year in which contributed.

(B) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) either becomes transferable or is no longer subject to a substantial risk of forfeiture.

(D) Other amounts that receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the employee and are not salary reduction amounts that are described in Code § 125).

(E) Other items of remuneration that are similar to the items listed in this Sec. 6.1(d)(2)(A)-(D).

Sec. 6.2 Limitation on Allocation of Company Stock Purchased in a Code Sections 1042 or 2057 Transaction . Notwithstanding any provisions of the Plan to the contrary, no shares of Company Stock acquired in a “qualified sale” shall be allocated to the Accounts of (or otherwise accrue to the benefit of) (i) a “25% owner” or (ii) during the “non-allocation period,” to a “disqualified individual,” subject to the following:

(a) The phrase “qualified sale” means the acquisition of Company Stock by the Plan (i) from a seller if the seller elects and is eligible to receive nonrecognition treatment under Code § 1042, or (ii) from a decedent’s estate in a transaction qualifying for a deduction under Code § 2057(a).

(b) The phrase “disqualified individual” means the following:

(1) The seller who made the election under Code § 1042.

(2) The decedent whose estate made the qualified sale under Code § 2057(a).

(3) The seller’s or decedent’s brother or sister (whether by whole or half blood), spouse, ancestor, or lineal descendent, or any other individual who is related to the seller in one of the ways described in Code § 267(b).

However, such an individual shall not be a disqualified individual by reason of this paragraph with respect to a qualified sale involving any other seller.

(c) The phrase “25% owner” means any individual who owns, at any time during the one year period ending on the date of the qualified sale or on the date as of which the Company Stock is allocated to Accounts, more than:

(1) 25%, by number, of any class of outstanding stock of the Company (or of any corporation under Common Control with the Company), or

(2) 25% of the total value of the outstanding stock of the Company (or any corporation under Common Control with the Company).

For purposes of this subsection, ownership shall be determined by applying the attribution rules of Code § 318(a) (without regard to the employee trust exception in Code § 318(a)(2)(B)(i)).

(d) The phrase “nonallocation period” means the period beginning on the date of the qualified sale and ending on the later of:

(1) The date that is 10 years after the date of the qualified sale.

(2) The date of the allocation under the Plan attributable to the final payment of any acquisition indebtedness incurred in connection with the qualified sale.

(e) Any individuals who are ineligible to receive an allocation of Company Stock (or other assets in lieu thereof) solely because they are lineal descendants described in subsection (b)(3), may receive an allocation of Company Stock acquired in the qualified sale provided that the total amount of such Company Stock (or assets in lieu thereof) allocated to all such

lineal descendants during the nonallocation period is not more than 5% of all Company Stock (or the equivalent value thereof) acquired in the qualified sale.

ARTICLE VII

INDIVIDUAL ACCOUNTS

Sec. 7.1 Accounts for Participants . The following Accounts may be established under the Plan for a Participant:

(a) A Pension Account was established for each Participant who received Pension Plan contributions made pursuant to Sec. 5.3.

(b) A Stock Bonus Account shall be established for each Participant who receives Stock Bonus Plan contributions made pursuant to Sec. 5.4.

(c) A Dividend Account shall be established for each Participant for whom the Fund receives a cash dividend under Sec. 11.9.

(d) A Diversified Account shall be established for each Participant who makes the requisite election under Sec. 10.16, and for each Participant whose Account is diversified under Sec. 11.5(d).

(e) A Forfeiture Account shall be established for each Participant whose Termination of Employment occurs under circumstances such that at that time the Participant has not become 100% vested in his or her Stock Bonus Account.

(f) A Safe Harbor Match Account shall be established for each Participant who receives Safe Harbor Match Contributions made pursuant to Sec. 5.13.

(g) A Safe Harbor Match Dividend Account shall be established for each Participant for whom the Fund receives a cash dividend under Sec. 11.9 for Company Stock held in the Participant’s Safe Harbor Match Account.

More than one of any of the above types of Accounts may be established if required by the Plan or if considered advisable by the Company in the administration of the Plan. Except as expressly provided herein to the contrary, the Fund shall be held and invested on a commingled basis, Accounts shall be for bookkeeping purposes only, and, except as may be necessary with respect to a Diversified Account, the establishment of Accounts shall not require any segregation of Fund assets.

Sec. 7.2 Valuation Procedure . As of each Valuation Date, the value of each Account (other than Diversified Accounts) shall be adjusted to reflect the effect of distributions, transfers, income (other than income with respect to Company Stock acquired with the proceeds of an Exempt Loan to the extent such income is used to repay the Exempt Loan as provided in Sec. 5.6 or 5.7), realized and unrealized profit and losses, contributions, and all other transactions with respect to the Fund since the next preceding Valuation Date, as follows:

(a) In accordance with a method consistently followed and uniformly applied, each Funding Agency shall determine the fair market value of the portion of the Fund held by it as of the current Valuation Date and report such fair market value to the Company. If fair market value of an asset is not available, it shall be deemed to be fair market value as determined in good faith by the Company or other Named Fiduciary assigned such function or, if such asset is held in trust and the trust agreement so provides, as determined in good faith by the

trustee. The fair market value of a share of Company Stock shall be determined by an independent appraiser meeting the requirements of Code § 401(a)(28) if such Company Stock is not readily tradable on an established securities market at the time its value is determined.

(b) From the value of each Account determined as of the next preceding Valuation Date, there shall be deducted the amount of all distributions made from the Account since the preceding Valuation Date and any amount transferred from the Account to a Diversified Account since the preceding Valuation Date.

(c) The value of each Account as determined in subsection (b) above shall be adjusted pro rata so that the total value of all Accounts equals the fair market value of the Fund as determined in subsection (a) above, less (i) the sum of any unallocated contributions, and (ii) the fair market value of any shares of Company Stock held in the Unallocated Reserve, and (iii) the value of all Diversified Accounts, and plus the amount of any contribution by a Participating Employer for a Plan Year prior to the Plan Year in which the Valuation Date falls which is to be made to the Fund but has not yet been made on the Valuation Date.

(d) If the Valuation Date is the last day of the Plan Year, to the value of each Account as determined under (c) shall be added the amounts allocable to such Account under Article V.

If a Participant’s Termination of Employment (or any other event) occurred after the preceding Valuation Date and on or before the current Valuation Date, and if the Participant was not 100% vested in his or her Stock Bonus Account, the value of such Account as determined above shall be adjusted by deducting the percentage of such Account not so vested and crediting it to the Participant’s Forfeiture Account.

Sec. 7.3 Valuation of Diversified Accounts . Diversified Accounts shall be valued by the Funding Agency at fair market value as of the Valuation Date at the end of each Plan Year and at such other times as may be necessary for the proper administration of the Plan.

Sec. 7.4 Participant Statements . The Company may cause benefit statements to be issued from time to time advising Participants and Beneficiaries of the balance and/or investment of their Accounts, but it is not required to issue benefit statements except as expressly required by ERISA § 105(a).

ARTICLE VIII

DESIGNATION OF BENEFICIARY

Sec. 8.1 Persons Eligible to Designate . Any Participant may designate a Beneficiary to receive any amount payable from the Fund as a result of the Participant’s death, provided that the Beneficiary survives the Participant. The Beneficiary may be one or more persons, natural or otherwise. By way of illustration, but not by way of limitation, the Beneficiary may be an individual, trustee, executor, or administrator. The Beneficiary with respect to one Account may be different from the Beneficiary with respect to another Account. A Participant may also change or revoke a designation previously made, without the consent of any Beneficiary named therein.

Sec. 8.2 Special Requirements for Married Participants . Notwithstanding the provisions of Sec. 8.1, if a Participant is married at the time of his or her death, the Beneficiary shall be the Participant’s Spouse unless the Spouse has consented in writing to the designation of a different Beneficiary, the Spouse’s consent acknowledges the effect of such designation, and the Spouse’s consent is witnessed by a representative of the Plan or a notary public. Such consent shall be deemed to have been obtained if it is established to the satisfaction of the Company that such consent cannot be obtained because there is no Spouse, because the Spouse cannot be located, or because of such other circumstances as may be prescribed by federal regulations. Any consent by a Spouse shall be irrevocable. Any such consent shall be valid only with respect to the Spouse who signed the consent, or in the case of a deemed consent, the designated Spouse.

Sec. 8.3 Form and Method of Designation . Any designation or a revocation of a prior designation of Beneficiary shall be in writing on a form acceptable to the Company and shall be filed with the Company. The Company and all other parties involved in making payment to a Beneficiary may rely on the latest Beneficiary designation on file with the Company at the time of payment or may make payment pursuant to Sec. 8.4 if an effective designation is not on file, shall be fully protected in doing so, and shall have no liability whatsoever to any person making claim for such payment under a subsequently filed designation of Beneficiary or for any other reason.

Sec. 8.4 No Effective Designation . If there is not on file with the Company an effective designation of Beneficiary by a deceased Participant, the Beneficiary shall be the person or persons surviving the Participant in the first of the following classes in which there is a survivor, share and share alike:

(a) The Participant’s Spouse.

(b) The Participant’s children, except that if any of the Participant’s children predecease the Participant but leave issue surviving the Participant, such issue shall take by right of representation the share their parent would have taken if living.

(d) The Participant’s brothers and sisters.

(e) The Participant’s estate.

Determination of the identity of the Beneficiary in each case shall be made by the Company.

Sec. 8.5 Successor Beneficiary . If a Beneficiary who survives the Participant subsequently dies before receiving all payments to which the Beneficiary was entitled, the successor Beneficiary, determined in accordance with the provisions of this section, shall be entitled to the balance of any remaining payments due. A Beneficiary who is not the surviving Spouse of the Participant may not designate a successor Beneficiary. A Beneficiary who is the surviving Spouse may designate a successor Beneficiary only if the Participant specifically authorized such designations on the Participant’s Beneficiary designation form. If a Beneficiary is permitted to designate a successor Beneficiary, each such designation shall be made according to the same rules (other than Sec. 8.2) applicable to designations by Participants. If a Beneficiary is not permitted to designate a successor Beneficiary, or is permitted to do so but fails to make such a designation, the balance of any payments remaining due will be payable to a contingent Beneficiary if the Participant’s Beneficiary designation so specifies, and otherwise to the estate of the deceased Beneficiary.

ARTICLE IX

BENEFIT REQUIREMENTS

Sec. 9.1 Benefit on Retirement or Disability . If a Participant’s Termination of Employment occurs (for any reason other than death) after either of the following events, the Participant shall be 100% vested and shall be entitled to a benefit equal to the value of all of his or her Accounts determined as of the Valuation Date coincident with or next following the Termination of Employment:

(a) The Participant has reached age 59½.

(b) The Participant’s Termination of Employment has occurred due to a bodily injury or disease which the Company determines, based on competent medical evidence, makes the Participant permanently disabled from performing the normal duties of his or her position with a Participating Employer.

The benefit shall be paid at the times and in the manner determined under Article X.

Sec. 9.2 Other Termination of Employment . If a Participant’s Termination of Employment occurs (for any reason other than death) under circumstances such that the Participant is not entitled to a benefit under Sec. 9.1, the Participant shall be entitled to a benefit equal to the value of all of his or her Accounts other than the Stock Bonus Account and also a benefit equal to vested percentage of the value of his or her Stock Bonus Account, determined as of the Valuation Date coincident with or next following the Termination of Employment, subject, however, to the following:

(a) The vested percentage shall depend upon the number of the Participant’s Years of Vesting Service at the time of the Termination of Employment, as follows:

Vesting Schedule
Years of Vesting Service	Vested Percentage
Less than 1	10	%
1 but less than 2	20	%
2 but less than 3	40	%
3 but less than 4	60	%
4 but less than 5	80	%
5 or more	100	%

(b) The portion of the Stock Bonus Account that is not vested shall be transferred to the Participant’s Forfeiture Account as of the Valuation Date coincident with or next following his or her Termination of Employment, as provided in Sec. 7.2. Thereafter, the disposition of said Forfeiture Account shall be as provided below:

(1) If the Participant is subsequently reemployed before the last day of the Plan Year in which the Termination of Employment occurred, the Forfeiture Account shall be reinstated as a separate Stock Bonus Account, to which the Participant shall be entitled in accordance with the provisions of this Article IX upon a subsequent Termination of Employment, subject to the provisions of paragraph (4).

(2) If the Participant is not reemployed before the last day of the Plan Year in which the Termination of Employment occurred, the value of such Participant’s Forfeiture Account shall be recognized as a Forfeiture as of the earlier of the following dates:

(A) The date the Participant incurred his or her fifth consecutive 1-Year Break In Service.

(B) The date that the vested portion of all of the Participant’s Accounts have been distributed to the Participant. If a Participant was 0% vested in a particular Account, that Account will be deemed for purposes of this subparagraph (B) to have been distributed when the Participant’s Termination of Employment occurred.

The Participant shall lose all claim to the Forfeiture Account when the Forfeiture occurs. The Forfeiture Account shall be revalued on the Valuation Date preceding the date on which the Forfeiture is recognized and shall be allocated as provided in Article V.

(3) If a former Participant whose Account was forfeited under paragraph (2) is subsequently reemployed and completes a Year of Vesting Service before incurring five consecutive 1-Year Breaks In Service, a separate Stock Bonus Account shall be reinstated for the Participant as of the Valuation Date coincident with the last day of the Plan Year in which such Year of Vesting Service is completed. The Participant shall be entitled to such Account in accordance with the provisions of this Article IX upon any subsequent Termination of Employment, subject to the provisions of paragraph (4). The value of such Account as of such Valuation Date shall be equal to the value of the Forfeiture Account as of the Valuation Date referred to in paragraph (2). The reinstated Account shall be funded as provided in paragraph (5).

(4) If a Participant referred to in paragraph (1) or paragraph (3) is not 100% vested in the reinstated Account upon a subsequent Termination of Employment, the benefit to which the Participant is entitled therefrom shall be determined as of the Valuation Date coincident with or next following the subsequent Termination of Employment as follows:

(A) To the value of such reinstated Account determined as of such Valuation Date there shall be added the amount of the benefit from the Account which the Participant received as a result of the prior Termination of Employment.

(B) The applicable vested percentage from the vesting schedule shall be applied to such sum.

(C) From the result obtained in (B), there shall be subtracted the amount added to the value of the reinstated Account under (A).

(5) The amount required to reinstate Accounts pursuant to paragraph (3) as of the last day of a Plan Year shall be provided from the following sources in the priority indicated:

(A) Amounts forfeited under this subsection (b) for the Plan Year.

(B) Employer contributions for the Plan Year.

Sec. 9.3 Death . If a Participant’s Termination of Employment is the result of death, his or her Beneficiary shall be entitled to a benefit equal to the value of all of the Participant’s Accounts determined as of the Valuation Date coincident with or next following the date of death. Such benefit shall be paid at the times and in the manner determined under Article X.

If a Participant’s death occurs after his or her Termination of Employment, distribution of the balance of the Participant’s Accounts shall be made to the Beneficiary in accordance with the provisions of Article X.

Sec. 9.4 Withdrawals Before Termination of Employment . A Participant may request a withdrawal from his or her Accounts as of the last day of any Plan Year after reaching age 59½ and prior to the date benefits first become payable to the Participant under Sec. 9.1 or Sec. 9.2 pursuant to the following:

(a) A withdrawal may be made for any reason of any part or all of the value of all of his or her Accounts.

(b) Requests for withdrawals under this section shall be made pursuant to applicable rules and regulations adopted by the Company which are uniform and non-discriminatory as to all Participants and shall be submitted in writing to the Company on such form as the Company prescribes for this purpose.

(c) The Company shall direct the Funding Agency respecting the payment of withdrawals under this section. Payment shall be made to the Participant as soon as administratively feasible after the end of the Plan Year in which the Company receives the Participant’s completed request form.

ARTICLE X

DISTRIBUTION OF BENEFITS

Sec. 10.1 Time and Method of Payment . The benefit to which a Participant or Beneficiary may become entitled under Article IX shall be distributed to that individual in a single sum equal to the value of all of his or her Accounts determined on the Valuation Date coincident with or next following the date on which the Participant submits a written distribution request to the Company, subject to the following:

(a) Benefit distribution to a Participant may be made as of the Valuation Date that coincides with or follows the Participant’s Termination of Employment. (However, the distribution to a Participant shall be delayed until he or she has a 1-Year Break In Service if necessary to avoid an excess tax under Code § 4978.) Benefit distribution to a Beneficiary may be made as of the Valuation Date that coincides with or follows the date the Beneficiary becomes entitled to a benefit. To affect a distribution, the Participant or Beneficiary must submit a written request for distribution to the Company on such form as the Company prescribes for this purpose. The distribution shall be made as soon as administratively feasible after the Valuation Date coincident with or following the date the form was submitted.

(b) Unless the Participant elects otherwise, the distribution must be made no later than the 60th day after the close of the Plan Year in which the Participant reaches Normal Retirement Age or in which the Participant’s Termination of Employment occurs, whichever is later; provided, however, that if the amount of the distribution to be made cannot be determined by the later of the aforesaid dates, a distribution retroactive to such date may be made no later than 60 days after the earliest date on which the amount of such distribution can be ascertained. For purposes of this subsection, the failure of a Participant to elect to receive a distribution shall be deemed to be an election to defer the distribution. If a Participant cannot be located, his or her Accounts will be forfeited prior to the “required beginning date” (as defined in Sec. 10.1(c) below) pursuant to the missing person provisions of Sec. 10.17.

(c) For purposes of this Sec. 10.1, a Participant’s “required beginning date” is April 1 of the calendar year following the later of (i) the calendar year in which the Participant attained age 70½, or (ii) the calendar year in which the Participant’s Termination of Employment occurs. However, clause (ii) of the previous sentence does not apply to any Participant who is a more than 5% owner of the Company (as defined in Code § 416) with respect to the Plan Year ending in the calendar year in which the Participant attains age 70½. Notwithstanding the foregoing or any other provision of this Sec. 10.1 to the contrary, in accordance with Code § 401(a)(9)(H), no required minimum distribution was required to be made with respect to the 2009 distribution calendar year.

(d) Notwithstanding any provisions of the Plan to the contrary, a Participant’s entire benefit must be distributed by the Participant’s required beginning date unless the Participant’s death occurs before that date.

(e) Notwithstanding the foregoing, any Participant whose required beginning date falls on or before April 1, 2005, shall be eligible to receive his or her benefit in installments. If installment payments are made, the minimum amount to be distributed during the Participant’s lifetime for each distribution calendar year, beginning with the first

distribution calendar year (i.e. the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date), must be at least equal to the quotient obtained by dividing the Participant’s Account balance on the most recent Valuation Date preceding the distribution calendar year (adjusted as may be required by Treasury regulations) by whichever of the following numbers is applicable:

(1) In the case of distributions to a Participant whose designated Beneficiary for the distribution calendar year is not solely the Participant’s Spouse, the number equal to the distribution period in the Uniform Lifetime Table set forth in Treasury Regulations § 1.401(a)(9)-9, using the Participant’s age as of the Participant’s birthday in the distribution calendar year.

(2) In the case of distributions to a Participant whose sole designated Beneficiary for the distribution calendar year is the Participant’s Spouse, the number equal to the greater of (i) the distribution period in the Uniform Lifetime Table set forth in Treasury Regulations § 1.401(a)(9)-9, using the Participant’s age as of the Participant’s birthday in the distribution calendar year, or (ii) the number in the Joint and Last Survivor Table set forth in Treasury Regulations § 1.401(a)(9)-9, using the Participant’s and Spouse’s attained ages as of the Participant’s and Spouse’s birthdays in the distribution calendar year.

(f) If a Participant has a vested balance remaining in his/her Accounts at death, then his/her Beneficiary will be entitled to receive a distribution of that portion of the vested balance (or remaining vested balance) of the Participant’s Accounts allocated to such Beneficiary. A Beneficiary may elect to receive a distribution at any time after his/her entitlement has been established by the Company after the death of a Participant; provided, however, that a Beneficiary must receive a full distribution no later than December 31 of the calendar year that contains the fifth anniversary of the Participant’s death. A distribution to a Beneficiary will be made in a single lump sum. If more than one Beneficiary is entitled to benefits following the Participant’s death, the interest of each Beneficiary shall be segregated into a separate Account for purposes of applying this section. Notwithstanding the foregoing, in accordance with Code § 401(a)(9)(H)(ii)(II), the calendar year 2009 shall be disregarded for purposes of determining the five-year period described above, so that with respect to a Participant who died on or after January 1, 2004 and before January 1, 2010, the Participant’s Accounts shall be distributed to the Beneficiary not later than December 31 of the year containing the sixth anniversary of the Participant’s death.

(g) Notwithstanding any provision of the Plan to the contrary, distributions under this section shall be made in accordance with the requirements of Code § 401(a)(9), including the incidental death benefit requirements of Code § 401(a)(9)(G) and the regulations thereunder.

(h) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election, a distributee may elect, at the time and in the manner prescribed by the Company, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this subsection:

(1) An “eligible rollover distribution” is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution

does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life expectancy of the distributee or the joint life expectancies of the distributee and the distributee’s designated beneficiary, or for a specified period of ten years or more; and any distribution to the extent such distribution is required under Code § 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).

(2) An “eligible retirement plan” is a qualified trust described in Code § 401(a), an annuity plan described in Code § 403(a), an annuity contract described in Code § 403(b), an individual retirement account described in Code § 408(a), an individual retirement annuity described in Code § 408(b), or an eligible plan under Code § 457(b) that is maintained by a state or a political subdivision of a state and that agrees to separately account for amounts transferred into such plan. An “eligible retirement plan” also includes a Roth IRA described in Code § 408A. However, the distributee of the eligible rollover distribution is solely responsible for determining whether he or she is eligible to make such a direct rollover and the Company will not inquire as to or confirm such eligibility.

(3) A “distributee” includes a Participant or former Participant. In addition, the Participant’s or former Participant’s surviving Spouse and the Participant’s or former Participant’s Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code § 414(p), are distributees with regard to the interest of the Spouse or former Spouse.

(4) A “direct rollover” is a payment by the Plan to the eligible retirement plan specified by the distributee.

(i) Notwithstanding any other Plan provision, if the total nonforfeitable value of a Participant’s Account as of the most recent Valuation Date preceding the date of distribution of benefits does not exceed $1,000, the Account shall be distributed in a lump sum, and shall not require the consent of the Participant or any Beneficiary.

(j) A Beneficiary who is not a Spouse of a deceased Participant, but who is a “designated beneficiary” under Code § 401(a)(9)(E) may elect, at the time and in the manner prescribed by the Company, to have all or any portion of the “transfer-eligible” amount payable from the Plan transferred directly to an individual retirement account described in Code § 408. For this purpose, the “transfer-eligible” amount is:

(1) During the calendar year containing the date of the Participant’s death, the full balance of the Beneficiary’s Accounts.

(2) During the next calendar year, the full balance of the Beneficiary’s Accounts, provided, however, that if the Beneficiary wants to apply the “life expectancy” rule of Code § 401(a)(9)(B)(iii) to the individual retirement account, the “transfer-eligible” amount is the balance of the Beneficiary’s Accounts, less the required minimum distribution due to the Beneficiary, as determined under Code § 401(a)(9).

(3) During the subsequent three calendar years, the full balance of the Beneficiary’s Accounts.

(4) During the calendar year containing the fifth anniversary of the Participant’s death, the “transfer-eligible” amount is zero, because the Beneficiary’s Accounts must be fully distributed from the Plan.

A Beneficiary electing a direct transfer under this Sec. 10.1(j) must provide the Company with the information necessary to accomplish the direct transfer in such manner and in accordance with such rules as may be prescribed for this purpose by the Company.

Sec. 10.2 Distributions from More Than One Account . If a Participant or Beneficiary has more than one Account, the distribution shall be made from all such Accounts.

Sec. 10.3 Distribution in Cash or Kind . The distribution shall be made in the form of Company Stock, except that any fractional share shall be distributed in cash. However, the distribution from a Diversified Account pursuant to Sec. 10.16 shall be made in cash.

Sec. 10.4 Accounting Following Termination of Employment . If distribution of all or any part of a benefit is deferred or delayed for any reason, the undistributed portion of any Account shall continue to be revalued as of each Valuation Date as provided in Article VII.

Sec. 10.5 Right of First Refusal . Before a distributee of Company Stock distributed from the Fund, the estate of such a distributee, or the trustee of any rollover account established by such a distributee may dispose of any shares of Company Stock received from the Fund, such shares must first be offered in writing to the Funding Agency and the Company.

(a) The Funding Agency and the Company shall have a period of 14 days from the date of such offer to agree to purchase all (but not less than all) shares so offered. The Funding Agency and the Company shall determine between themselves the amount to be purchased by each. Any purchase made pursuant to this section shall be for the greater of (i) the highest price offered by a prospective buyer in an outstanding bona fide written offer, or (ii) the fair market value of the shares determined as of the Valuation Date coincident with or immediately preceding the date of such offer.

(b) The terms of payment for any shares of Company Stock purchased in accordance with this section shall be in one of the following manners, as the purchaser may in its discretion determine, provided, however, that the terms must not be less favorable than those offered by the prospective buyer whose outstanding bona fide written offer offers the highest price:

(1) Cash or its equivalent.

(2) Cash in an amount equal to one-fifth of the purchase price and a note of the purchaser for the unpaid balance of said purchase price payable in four equal annual installments due on the first, second, third, and fourth anniversaries of the cash payment made hereunder.

(3) Cash in an amount equal to one-fourth or more of the purchase price and a note of the purchaser for the unpaid balance of said purchase price payable in three or

fewer equal annual installments due on the first anniversary of the cash payment and on subsequent anniversaries until the amount due is paid in full.

The purchaser shall make the cash payment under (1) above or the initial cash payment under (2) or (3) above not later than 30 days after the date it gives notice of its intention to purchase such shares. At the time of payment of any annual installment of a note referred to in (2) or (3) above, the purchaser shall also pay interest on the unpaid principal balance of said note at an annual rate equal to the posted prime rate of Alerus Financial, National Association from time to time for 90-day unsecured loans to commercial borrowers of the highest credit rating, to change when and as said prime rate shall change; provided that regardless of any change in said prime rate occurring after the maturity of said note, the note shall bear the same rate of interest after maturity as it bore at maturity. The interest payments are to be made simultaneously with the principal payments. The purchaser shall have the privilege of prepaying at any time and from time to time all or any part of said note.

(c) If the Company Stock subject to the “right of first refusal” heretofore described shall have been transferred before the expiration of the applicable period described in subsections (a) and (b) above or at any time after the Funding Agency or the Company has given timely notice of its intention to purchase but before the expiration of the period in which they must tender full payment, or without the required notice having been given to the Funding Agency and the Company and the proper refusal period having expired, then such shares in the hands of the transferee or any subsequent transferee shall be subject to purchase at the lesser of fair market value at the date of the distributee’s death or transfer by the distributee, or the fair market value at the date the transferee is notified of the Funding Agency’s or the Company’s intention to purchase; provided, however, that this right to purchase from the transferee shall be inapplicable to any transferee of Company Stock which did not bear the legend described in subsection (d) below.

(d) At the election of the Company, all certificates or other instruments representing Company Stock distributed hereunder may be required to bear a legend setting forth the essential terms of this right of first refusal.

(e) The procedure to be followed in offering shares of Company Stock to the Funding Agency and the Company shall be governed by rules and regulations adopted by the Company from time to time.

Sec. 10.6 Put Option . If they are not readily tradable on an established market when distributed or are subject to a trading limitation when distributed, shares of Company Stock distributed hereunder shall be subject to a “put option” as follows:

(a) The put option shall be exercisable only by the distributee (whether the Participant or a Beneficiary), any person to whom the shares of Company Stock have passed by gift from the distributee and any person (including an estate or the distributee from an estate) to whom the shares of Company Stock passed upon the death of the distributee (hereinafter referred to as the “holder”).

(b) The first put option period shall be for 60 days following the date the Company Stock is distributed to any individual who may exercise the put option. If the individual does not exercise the put option within such 60-day period, then such option shall lapse and a second

and final put option period shall commence in the Plan Year following the Plan Year within which the first 60-day option period commenced. This final put option period shall be for 60 days after individuals holding the put option are notified of the fair market value as of the most recent Valuation Date.

If, within either or both of said put option periods, the Company Stock was readily tradable on an established market without restrictions, but ceases to be so traded, the Administrator will notify each such security holder in writing on or before the tenth day after the date the Company Stock ceases to be so traded that for the remainder of the put option period the Company Stock is subject to the put option. If such notice is not given within ten days, a day shall be added to the duration of the put option during which the Company Stock issued to be readily traded on an established market without restriction for each day after said ten-day period such notice has not been given. Such notice must inform distributes of the terms of the put option they are to hold.

(d) Upon receipt of such notice, the Company shall tender to the holder the fair market value either in a lump sum or substantially equal installments (bearing a reasonable rate of interest and providing adequate security to the holder) over a period beginning within 30 days following the date the put option is exercised and ending not more than five years after the date the put option is exercised.

(e) The Plan is not bound to purchase Company Stock pursuant to the put option, but the Funding Agency may cause the Plan to assume the Company’s rights and obligations to acquire Company Stock under the put option.

(f) For the purposes of subsection (d), fair market value shall be determined in good faith and on the basis of all relevant factors for determining the fair market value of securities and in accordance with the requirements of 26 C.F.R. § 54.4975-11(d)(5). In addition, Company Stock shall be valued by an independent appraiser in accordance with the requirements of Code § 401(a)(28). In the case of a transaction between the Plan and a disqualified person, fair market value must be determined as of the date of the transaction. In all other cases, fair market value shall be determined as of the most recent Valuation Date.

(g) For the purposes of this section, a “trading limitation” on a security is a restriction under any federal or state securities law, any regulation thereunder, or an agreement affecting the security which would make the security not as freely tradable as one not subject to such restrictions.

Sec. 10.7 Other Restrictions on Qualifying Employer Securities . Except as provided in Sec. 10.5 and 10.6, no options, buy-sell arrangements, puts, calls, rights of first refusal or other restrictions on alienability shall attach to any Company Stock acquired with the proceeds of an Exempt Guaranteed Loan and distributed hereunder or held by the Funding Agency, whether or not this Plan continues to be an employee stock ownership plan. The put option extended under Sec. 10.6 shall continue in force notwithstanding that an Exempt Guaranteed Loan is repaid or that this Plan ceases to be an employee stock ownership plan.

Sec. 10.8 Reemployment . Except where distribution is required under Sec. 10.1, the distribution from the Fund shall cease upon reemployment of a Participant in a regular position by a Participating Employer, and shall recommence in accordance with the provisions of this Article upon the Participant’s subsequent Termination of Employment.

Sec. 10.9 Source of Benefits . All benefits to which persons become entitled hereunder shall be provided only out of the Fund and only to the extent that the Fund is adequate therefor. No benefits are provided under the Plan except those expressly described herein.

Sec. 10.10 Incompetent Payee . If in the opinion of the Company a person entitled to distribution hereunder is disabled from caring for his or her affairs because of mental or physical condition, or age, the distribution due such person may be made to such person’s guardian, conservator, or other legal personal representative upon furnishing the Company with evidence satisfactory to the Company of such status. Prior to the furnishing of such evidence, the Company may cause the distribution due the person under disability to be made, for such person’s use and benefit, to any person or institution then in the opinion of the Company caring for or maintaining the person under disability. The Company shall have no liability with respect to distributions so made. The Company shall have no duty to make inquiry as to the competence of any person entitled to receive distribution hereunder.

Sec. 10.11 Benefits May Not Be Assigned or Alienated . Except as otherwise expressly permitted by the Plan or required by law, the interests of persons entitled to benefits under the Plan may not in any manner whatsoever be assigned or alienated, whether voluntarily or involuntarily, or directly or indirectly. However, the Plan shall comply with the provisions of any court order which the Company determines is a qualified domestic relations order as defined in Code § 414(p). Notwithstanding any provisions in the Plan to the contrary, an individual who is entitled to distribution from the Plan as an “alternate payee” pursuant to a qualified domestic relations order may receive a lump sum distribution from the Plan as soon as administratively feasible after the Valuation Date coincident with or next following the date of the Company’s determination that the order is a qualified domestic relations order, unless the order specifically provides for distribution to be made at a later time permitted under Sec. 10.1.

Sec. 10.12 Payment of Taxes . The Funding Agency may pay any estate, inheritance, income, or other tax, charge, or assessment attributable to any benefit payable hereunder which in the Funding Agency’s opinion it shall be or may be required to pay out of such benefit. The Funding Agency may require, before making any payment, such release or other document from any taxing authority and such indemnity from the intended payee as the Funding Agency shall deem necessary for its protection.

Sec. 10.13 Conditions Precedent . No person shall be entitled to a benefit hereunder until his or her right thereto has been finally determined by the Company nor until the person has submitted to the Company relevant data reasonably requested by the Company, including, but not limited to, proof of birth or death.

Sec. 10.14 Company Directions to Funding Agency . The Company shall issue such written directions to the Funding Agency as are necessary to accomplish distributions to the Participants and Beneficiaries in accordance with the provisions of the Plan.

Sec. 10.15 Effect on Unemployment Compensation . For purposes of any unemployment compensation law, a distribution hereunder in one sum to the extent attributable to employer contributions, shall be considered to be a severance payment and shall be allocated over a period of weeks equal to the one sum payment divided by the employee’s regular weekly pay while employed by the Participating Employers, which period shall commence immediately following the employee’s Termination of

Employment. Notwithstanding the foregoing, a distribution that is rolled over pursuant to Sec. 10.1(h) will not be considered a severance payment.

Sec. 10.16 Transfer to Diversified Account . Each qualified Participant may elect to have a percentage of his or her Pension, Stock Bonus and Dividend Accounts transferred to a Diversified Account where it will be invested in investments other than Company Stock, subject to the following:

(a) An individual is a “qualified Participant” eligible to make such an election only if the individual has completed 10 or more years of participation in the Plan and has reached age 55.

(b) An election under this section may be made only during the 90 days after the close of each Plan Year within the “qualified election period”, which is the six Plan Year period beginning with the Plan Year in which the Participant first becomes a qualified Participant.

(c) Within 90 days after the close of any Plan Year in the qualified election period, a qualified Participant may elect to have up to 25% of his or her Pension, Stock Bonus and Dividend Accounts transferred to a Diversified Account. In the case of the election year for which the qualified Participant can make the last election, “50%” shall be substituted for “25%” in the preceding sentence. The maximum amount that may be transferred for any one Plan Year shall be reduced to reflect amounts transferred for prior Plan Years.

(d) The Company shall offer three or more investment options for investment of Diversified Accounts. Said options shall not be inconsistent with regulations prescribed by the Secretary of the Treasury.

(e) Elections made pursuant to this section shall be subject to such uniform and nondiscriminatory rules as the Company may from time to time prescribe.

(f) Any amounts held in Diversified Accounts or amounts that may be transferred to Diversified Accounts may be withdrawn from the Plan by the Participant at any time during a Plan year that other regular distributions are being made or other times made available by the Company in accordance with uniform non-discriminatory rules, and may specifically transfer said amounts (but not Company Stock) to the Alerus Financial Corporation Safe Harbor 401k Plan as a direct rollover, or exercise any other available rollover option required under other provisions of this Plan. Amounts withdrawn or transferred by the Participant under these or other Plan provisions during the qualified election period shall reduce the amount available for transfer or withdrawal under this Sec. 10.16.

Notwithstanding anything herein to the contrary, if the fair market value of Company Stock allocated to a Participant’s Account on or before the last day of the Plan Year immediately before an election period during which the Participant is eligible to make a transfer or withdrawal under this Sec. 10.16 is $500 or less (and never exceeded this amount), then the above transfer and withdrawal rules shall not apply.

Sec. 10.17 Missing Participants or Beneficiaries . A Participant or Beneficiary must maintain his/her most recent post office address on file with the Company, and any communication addressed to the Participant or Beneficiary at the post office address on file with the company will be binding on the Participant or Beneficiary for all purposes of the Plan.

If a Participant or Beneficiary fails to claim any amount payable under the Plan (or fails to cash any check

drawn on the disbursement account established for the Plan), such amount will be forfeited by the Participant or Beneficiary at such time as is deemed appropriate by the Company (but prior to any required payment date under Code § 401(a)(9)) or may be disposed of in such other equitable manner deemed appropriate by the Company. Forfeited amounts may be allocated as required under Article V, or may be applied in such other manner as deemed appropriate by the Company and consistent with ERISA and the Code. If a Participant or Beneficiary claims a forfeited amount prior to termination of the Plan, the value forfeited (measured as of the date of the forfeiture, without adjustment for income or appreciation) will be restored to the Participant or Beneficiary. Such restored amounts may be drawn from then current forfeitures, or the Company will make an additional contribution as necessary to provide for the restoration under the Plan.

ARTICLE XI

FUND

Sec. 11.1 Composition . All sums of money and all securities and other property received by the Funding Agency for purposes of the Plan, together with all investments made therewith, the proceeds thereof, and all earnings and accumulations thereon, and the part from time to time remaining shall constitute the “Fund”. The Company may cause the Fund to be divided into any number of parts for investment purposes or any other purposes necessary or advisable for the proper administration of the Plan.

Sec. 11.2 Funding Agency . The Fund may be held and invested as one fund or may be divided into any number of parts for investment purposes. Each part of the Fund, or the entire Fund if it is not divided into parts for investment purposes, shall be held and invested by one or more trustees or by an insurance company. The trustee or trustees or the insurance company so acting with respect to any part of the Fund is referred to herein as the Funding Agency with respect to such part of the Fund. The selection and appointment of each Funding Agency shall be made by the Company. The Company shall have the right at any time to remove a Funding Agency and appoint a successor thereto, subject only to the terms of any applicable trust agreement or group annuity contract. The Company shall have the right to determine the form and substance of each trust agreement and group annuity contract under which any part of the Fund is held, subject only to the requirement that they are not inconsistent with the provisions of the Plan. Any such trust agreement may contain provisions pursuant to which the trustee will make investments on direction of a third party.

Sec. 11.3 Compensation and Expenses of Funding Agency . The Funding Agency shall be entitled to receive such reasonable compensation for its services as may be agreed upon with the Company. The Funding Agency shall also be entitled to reimbursement for all reasonable and necessary costs, expenses, and disbursements incurred by it in the performance of its services. Such compensation and reimbursements shall be paid from the Fund if not paid directly by the Participating Employers in such proportions as the Company shall determine.

Sec. 11.4 Funding Policy . The Company shall adopt a procedure, and revise it from time to time as it shall consider advisable, for establishing and carrying out a funding policy and method consistent with the objectives of the Plan and the requirements of ERISA. It shall advise each Funding Agency of the funding policy in effect from time to time.

Sec. 11.5 Investment in Company Stock or Property .

(a) Primary Investment . The Plan is designed to invest primarily in Company Stock.

(b) Agreement with Funding Agency . An agreement with a Funding Agency may provide that all or any part of the Fund may be invested in qualifying employer securities or qualifying employer real property, as those terms are used in ERISA; provided, however, that (i) paragraph (a) above shall be satisfied and (ii) the Company shall take any steps necessary to assure that investments in securities of the Company or any trade or business entity directly or indirectly controlling, controlled by, or under Common Control with the Company do not exceed those that can be acquired by that part of the Fund attributable to contributions by the Participating Employers, as distinguished from that part of the Fund, if any, attributable to contributions by Participants, unless there has been compliance with any applicable securities laws.

(c) Valuation . If qualifying employer securities or qualifying employer real property are purchased or sold as an investment of the Fund from or to a disqualified person (as defined in Code § 4975(e)(2)) or party in interest (as defined in ERISA § 3(14)), the purchase shall be for not more than fair market value and the sale shall be for not less than fair market value, as determined in good faith by the Company or other Named Fiduciary assigned such function, or if such assets are held in trust and the trust agreement so provides, as determined in good faith by the trustee. With respect to all activities carried on by the Plan, however, all valuations of Company Stock or other qualifying employer securities which are not readily tradable on an established securities market shall be determined by an independent appraiser meeting the requirements of Code § 401(a)(28).

(d) Diversified Sub Accounts for Certain Non-Employee Participants . If either (1) a Participant terminates his employment with the Employer for reasons other than retirement or disability and he has not received a distribution of his entire benefit, or (2) an Account is established for an alternate payee, then the Employer, in its discretion, may diversify Stock Accounts of some or all of the persons described in (1) or (2) above by directing that some or all of the Stock in such Accounts shall be sold or exchanged at the Fair Market Value of the Stock determined as of the most recent valuation of the Stock on or prior to the date of the diversification. The proceeds shall be invested in the same type of assets as permitted for statutory Diversified Accounts, as specified by the Employer and shall be considered a segregated Diversified Sub-Account. Exchanges may be made for other non-Stock assets held by the Plan, except that non-Stock assets held for segregated Diversified Accounts (including Sub-Accounts) which have been diversified shall not be used. Assets obtained by the Plan with the proceeds of an exempt loan made for purposes of this diversification may be so used. If assets are available for diversification of some but not all Stock, then the Stock shall be diversified on a pro-rata basis. For purposes of this paragraph, action on diversification by the Employer may be taken by Board resolutions or by action of an officer designated by the Board.

If the Employer diversifies a Participant’s Stock Account pursuant to terms of this paragraph, then the Participant may elect to withdraw the balance of his vested Account on or after the first date distributions pursuant to Article IX could commence.

Sec. 11.6 Authority to Borrow . The Funding Agency, with the prior concurrence of the Company, is authorized to enter into one or more Exempt Loans. The proceeds of any Exempt Loan shall be used as provided in Sec. 2.11. All shares of Company Stock acquired with the proceeds of an Exempt Loan and held to secure payment of an Exempt Loan shall be credited to the Unallocated Reserve until such time as they are released from encumbrance.

Sec. 11.7 No Diversion . The Fund shall be for the exclusive purpose of providing benefits to Participants under the Plan and their beneficiaries and defraying reasonable expenses of administering the Plan. Such expenses may include premiums for the bonding of Plan officials required by ERISA. No part of the corpus or income of the Fund may be used for, or diverted to, purposes other than for the exclusive benefit of employees of the Participating Employers or their beneficiaries. Notwithstanding the foregoing:

(a) If any contribution or portion thereof is made by a Participating Employer by a mistake of fact, the Funding Agency shall, upon written request of the Company, return such contribution or portion thereof to the Participating Employer within one year after the payment of the contribution to the Funding Agency; however, earnings attributable to such

contribution or portion thereof shall not be returned but shall remain in the Fund, and the amount returned to the Participating Employer shall be reduced by any losses attributable to such contribution or portion thereof.

(b) Contributions by a Participating Employer are conditioned upon initial qualification of the Plan as to such Participating Employer under Code § 401(a). If the Plan receives an adverse determination letter from the Internal Revenue Service with respect to such initial qualification, the Funding Agency shall, upon written request of the Company, return the amount of such contribution to the Participating Employer within one year after the date of denial of qualification of the Plan. For this purpose, the amount to be so returned shall be the contributions actually made, adjusted for the investment experience of, and any expenses chargeable against, the portion of the Fund attributable to the contributions actually made.

(c) Contributions by the Participating Employers are conditioned upon the deductibility of each contribution under Code § 404. To the extent the deduction is disallowed, the Funding Agency shall return such contribution to the Participating Employer within one year after the disallowance of the deduction; however, earnings attributable to such contribution (or disallowed portion thereof) shall not be returned but shall remain in the Fund, and the amount returned to the Participating Employer shall be reduced by any losses attributable to such contribution (or disallowed portion thereof).

In the case of any such return of contribution the Company shall cause such adjustments to be made to the Accounts of Participants as it considers fair and equitable under the circumstances resulting in the return of such contribution.

Sec. 11.8 Voting Company Stock . Shares of Company Stock held in the Fund shall be voted by the Funding Agency in accordance with the following provisions:

(a) Each Participant or Beneficiary may direct voting of a proportionate number of shares reflecting his proportionate interest in the portion of the Trust Fund in accordance with Code § 409(e), as applicable. If no instructions are received from a person, the shares with respect to which he could have directed voting shall be voted by the Funding Agency in accordance with directions from the Company.

(b) Shares held in the Unallocated Reserve and in Forfeiture Accounts shall be voted by the Funding Agency in accordance with directions from the Company.

Sec. 11.9 Election To Receive Cash Dividends . A Participant may elect to have cash dividends on the shares of Company Stock allocated to his or her Accounts either paid to him or her in cash, or added to his or her Dividend Account and reinvested in Company Stock.

(a) Election Procedures . An election hereunder must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Company. The election shall apply to all dividends paid during a Plan Year. In the absence of an affirmative election received by the deadline established for this purpose, a Participant will be deemed to have elected to have cash dividends added to his or her Dividend Account and reinvested in Company Stock. To the extent so prescribed by the Company, an election hereunder will be “evergreen” — that is, it will continue to apply until changed by the Participant.

(b) Processing Distributions . The distribution of cash dividends to Participants may be made in either of the following ways, as determined by the Company in its discretion: (i) direct payment in cash to the Participants, or (ii) payment to the Fund and distribution in cash to Participants not later than 90 days after the close of the Plan Year in which paid.

ARTICLE XII

ADMINISTRATION OF PLAN

Sec. 12.1 Administration by Company.

(a) Generally . The Company is the “administrator” of the Plan for purposes of ERISA, with all authority and full discretion to control and manage the operation and administration of the Plan and make all decisions and determinations incident thereto. The Company is also the Named Fiduciary for purposes of ERISA, as provided in Sec. 2.17. Action on behalf of the Company as administrator and named fiduciary may be taken by any of the following:

(1) Its Chief Executive Officer;

(2) Its ESOP Committee;

(3) Any individual, committee, or entity to whom responsibility for the operation and administration of the Plan is allocated by action of one of the above; but action of such person, committee or entity shall be within the scope of said allocation.

(b) Employee Benefits Department; Third-Party Service Providers . The Human Resource and/or Employee Benefits Departments of the Company have the authority to act on behalf of the Company with respect to non-discretionary day-to-day administrative matters and such discretionary matters as may be assigned by the ESOP Committee (including initial claims review if so provided in the claims procedures). The Company also may from time to time contract with or appoint a recordkeeper or other third-party service provider for the Plan to have such authority and responsibility as may be assigned by the ESOP Committee.

Sec. 12.2 ESOP Committee.

(a) Membership . The ESOP Committee will consist of one or more members appointed by the Chief Executive Officer of the Company. A committee member may be removed by the Chief Executive Officer of the Company at any time and for any reason, and may resign at any time and for any reason by giving written notice of resignation to the Chief Executive Officer. A committee member who is an Employee will automatically cease to be a committee member upon his/her Termination of Employment. If a committee does not have current members for any reason (including termination or removal without replacements being appointed), the Company may act as administrator in any manner consistent with its corporate authority.

(b) Charter . The ESOP Committee, acting on behalf of the Company, will have such duties and responsibilities, and will act in such manner, as may be specified from time to time in any charter for the ESOP Committee adopted by the Chief Executive Officer of the Company, which (if adopted) is incorporated herein by reference. In the absence of a charter, the ESOP Committee will act by majority action with respect to matters consistent with the general responsibilities assigned to the committee in Sec. 12.1.

time to time, in writing, all or any part of its responsibilities under the Plan to one or more of its members as it may deem advisable, and in the same manner to revoke such allocations of responsibilities, to the extent not inconsistent with its charter. Any action of the member to whom responsibilities are allocated in the exercise of such allocated responsibilities will have the same force and effect for all purposes hereunder as if the allocating authority had taken such action.

(d) Delegations of Responsibility . The ESOP Committee has the authority to delegate from time to time, in writing, all or any part of their responsibilities under the Plan to such person or persons as they may deem advisable (and may authorize such person, upon receiving the written consent of the delegating authority, to delegate such responsibilities to such other person or persons as the delegating authority may authorize), and in the same manner to revoke any such delegation of responsibility. Any action of the delegate in the exercise of the delegated responsibilities will have the same force and effect for all purposes as if the delegating authority had taken such action.

Sec. 12.3 Exercise of Authority . The Company, the ESOP Committee, the Chief Executive Officer, and any other person who has authority with respect to the management, administration or investment of the Plan may exercise that authority in his/her/its full discretion, subject only to the duties imposed under ERISA. This discretionary authority includes, but is not limited to, the authority to make any and all factual determinations and interpret all terms and provisions of the documents governing the Plan and relevant to the issue under consideration. This discretion also includes the authority to make any rules, regulations or computations that the Company deems necessary to administer the Plan. The exercise of authority will be binding upon all persons; and it is intended that the exercise of authority be given deference in all courts of law to the greatest extent allowed under law, and that it not be overturned or set aside by any court of law unless found to be arbitrary and capricious.

Sec. 12.4 Certain Fiduciary Provisions . For purposes of the Plan:

(a) Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.

(b) A fiduciary may employ one or more persons to render advice with regard to any responsibility such fiduciary has under the Plan.

(c) A person who is a fiduciary with respect to the Plan shall be recognized and treated as a fiduciary only with respect to the particular fiduciary functions as to which such person has responsibility.

(d) Each fiduciary shall discharge its duties with respect to the Plan solely in the interests of Participants and their Beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Sec. 12.5 Payment of Fees and Expenses . Except to the extent a fee is properly chargeable to the Account of the affected Participant or Beneficiary, all reasonable fees and expenses incurred in the operation or administration of the Plan that can be paid out of the Fund consistent with ERISA will be paid out of the Fund if not directly paid by the Company or a Participating Employer (and the Company reserves the right to decide in its corporate capacity whether a fee or expense will be paid

and in such proportions). Such fees and expenses include, but are not limited to, compensation and expense reimbursements payable to the Trustee or any other fiduciary, or to any recordkeeper or other service provider, stock administration fees, brokerage fees, accounting fees, fees and expenses for investment education or advice services, premiums on bonds required under ERISA, and direct costs incurred in connection with the Plan by the Company or an Affiliate. Notwithstanding the foregoing, no person who already receives full-time pay from any employer or association of employers whose employees are Participants, or from an employee organization whose members are Participants, shall receive compensation from the Plan, except for reimbursement of expenses properly and actually incurred. Furthermore, no Participant, Beneficiary, or “alternate payee” under a qualified domestic relations order who is eligible to direct the investment of his or her Accounts shall receive any compensation or reimbursement of expenses with respect to such investing. Any fee or expenses paid from the Fund and not charged to the Account of the affected Participant or Beneficiary will be allocated among the Accounts (other than a Forfeiture Account) in such manner as is deemed appropriate by the ESOP Committee.

Sec. 12.6 Discrimination Prohibited . No person or persons in exercising discretion in the operation and administration of the Plan shall discriminate in favor of Highly Compensated Employees.

Sec. 12.7 Evidence . Evidence required of anyone under this Plan may be by certificate, affidavit, document, or other instrument which the person acting in reliance thereon considers to be pertinent and reliable and to be signed, made, or presented to the proper party.

Sec. 12.8 Correction of Errors and Duty to Review Information . It is recognized that in the operation and administration of the Plan certain mathematical and accounting errors may be made or mistakes may arise by reason of factual errors in information supplied to the Company or Funding Agency. The Company shall have power to cause such equitable adjustments to be made to correct for such errors as the Company in its discretion considers appropriate (including adjustments to Participant or Beneficiary Accounts). Such adjustments shall be final and binding on all persons. Any return of a contribution due to a mistake in fact will be subject to Sec. 11.7. Each Participant and Beneficiary has the duty to promptly review any information that is provided or made available to the Participant or Beneficiary and that relates in any way to the operation and administration of the Plan or his or her elections under the Plan (for example, to review benefit statements, to review summary plan descriptions, and to review other documents) and to notify the Company of any error made in the operation or administration of the Plan that affects the Participant or Beneficiary within thirty (30) days of the date such information is provided or made available to the Participant or Beneficiary (for example, the date the information is sent by mail or the date the information is provided or made available electronically). If the Participant or Beneficiary fails to review any information or fails to notify the Company of any error within such period of time, he/she will not be able to bring any claim seeking relief or damages based on the error. If the Company is notified of an alleged error within the thirty (30) day time period, the Company will investigate and either correct the error or notify the Participant or Beneficiary that it believes that no error occurred. If the Participant or Beneficiary is not satisfied with the correction (or the decision that no correction is necessary), he or she will have sixty (60) days from the date of notification of the correction (or notification of the decision that no correction is necessary), to file a formal claim under the claims procedures established for the Plan. The Company reserves the right to make corrections and equitable adjustments at its discretion at any time.

Sec. 12.9 Records . Each Participating Employer, each fiduciary with respect to the Plan, and each other person performing any functions in the operation or administration of the Plan or the management or control of the assets of the Plan shall keep such records as may be necessary or appropriate in the discharge of their respective functions hereunder, including records required by ERISA or any other applicable law. Records shall be retained as long as necessary for the proper administration of the Plan and

at least for any period required by ERISA or other applicable law.

Sec. 12.10 Prohibited Transactions . A fiduciary with respect to the Plan shall not cause the Plan to engage in any prohibited transaction within the meaning of ERISA.

Sec. 12.11 Claims Procedure and Limitations on Actions . The Company shall establish as a separate written document (which may be a section in the Summary Plan Description) a claims procedure for the Plan consistent with the requirements of ERISA. Such claims procedure shall provide adequate notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the claimant and shall afford a reasonable opportunity to a claimant whose claim for benefits has been denied for a full and fair review of the decision denying the claim. A claimant must follow the claims procedure (and comply with all applicable deadlines established as part thereof) as a condition to the receipt of any benefit under the Plan, and as a condition to the availability of any other relief under or with respect to the Plan. The failure of a claimant to follow the claims procedure (including the failure to comply with the deadlines established as part thereof) will extinguish his or her right to file a subsequent claim or to file a lawsuit with respect to the claim. If a claimant follows the claims procedure, but his or her final appeal is denied, he or she will have one year to file a lawsuit with respect to that claim, and failure to meet the one-year deadline will extinguish his or her right to file a lawsuit with respect to that claim.

Sec. 12.12 Bonding . Plan personnel shall be bonded to the extent required by ERISA. Premiums for such bonding may, in the sole discretion of the Company, be paid in whole or in part from the Fund. Such premiums may also be paid in whole or in part by the Participating Employers in such proportions as the Company shall determine. The Company may provide by agreement with any person that the premium for required bonding shall be paid by such person.

Sec. 12.13 Notices; Waiver of Notice . Any notice that is required to be given under the Plan to a Participant or beneficiary, and any action that can be taken under the Plan by a Participant or Beneficiary (including enrollments, beneficiary designations, withdrawals, diversifications, distributions, investment changes, consents, etc.), may be by means of voice response or other electronic system to the extent so authorized by the Company and permitted under the Code or ERISA. Any notice or other communication sent by a Participant or Beneficiary to the Company, or to a recordkeeper or other service-provider acting on behalf of the Company with respect to the Plan, via e-mail will be considered adequate only if it is sent to a specific e-mail address provided for purposes of such notice or other communication, it is confirmed to have been received and it complies with such other procedural requirements as may be established for this purpose by the Company. Any notice required hereunder may be waived by the person entitled thereto.

Sec. 12.14 Agent for Legal Process . The Company shall be the agent for service of legal process with respect to any matter concerning the Plan, unless and until the Company designates some other person as such agent.

Sec. 12.15 Indemnification . In addition to any other applicable provisions for indemnification, the Participating Employers jointly and severally agree to indemnify and hold harmless, to the extent permitted by law, each director, officer, ESOP Committee member and employee of the Participating Employers against any and all liabilities, losses, costs, or expenses (including legal fees) of whatsoever kind and nature which may be imposed on, incurred by, or asserted against such person at any time by reason of such person’s services in the administration of the Plan, but only if such person did not act dishonestly, or in bad faith, or in willful violation of the law or regulations under which such liability, loss, cost, or expense arises.

ARTICLE XIII

AMENDMENT, TERMINATION, MERGER

Sec. 13.1 Amendment . Subject to the non-diversion provisions of Sec. 11.7, the Company, by action of the Board, or by written action of a person so authorized by resolution of the Board, may amend the Plan at any time and from time to time. No action by a person other than the Board shall be an amendment of the Plan unless it specifically references the Plan and states that it alters the terms or conditions of the Plan. No amendment of the Plan shall have the effect of changing the rights, duties, and liabilities of any Funding Agency without its written consent. Also, no amendment shall divest a Participant or Beneficiary of Accounts accrued prior to the amendment, eliminate any optional form of benefit, decrease a Participant’s accrued benefit, or otherwise place greater restrictions or conditions on a Participant’s rights to Code § 411(d)(6) benefits except to the extent permitted by Code § 411(d)(6).

(a) Promptly upon adoption of any amendment to the Plan, the Company will furnish a copy of the amendment, together with a certificate evidencing its due adoption, as follows:

(1) To each Funding Agency then acting.

(2) To any other Participating Employer who is not under Common Control with the Company. The amendment shall be effective as to such a Participating Employer and its employees unless, within 30 days of receipt of the certificate, it notifies the Company and each Funding Agency in writing that it is discontinuing its joint participation in the Plan pursuant to Sec. 13.8.

(b) If an amendment to the Plan changes the vesting schedule of the Plan, each Participant having not less than three years of service by the end of the election period with respect to such amendment shall be permitted within such election period to elect to have his or her vested percentage computed under the Plan without regard to such amendment. Each election shall be made in writing by filing with the Company within the election period a form available from the Company for the purpose. The election period shall be a reasonable period determined by the Company commencing not later than the date the amendment is adopted and shall be in conformance with any applicable regulation prescribed by the Secretary of Labor or the Secretary of the Treasury. Notwithstanding the foregoing, no election need be provided for any Participant whose vested percentage under the Plan, as amended, cannot at any time be less than the vested percentage determined without regard to such amendment.

Sec. 13.2 Permanent Discontinuance of Contributions . The Company, by action of the Board, may completely discontinue contributions in support of the Stock Bonus Plan component(s) of the Plan by all Participating Employers. In such event, notwithstanding any provisions of the Plan to the contrary, (i) no employee shall become a Participant in such component(s) after such discontinuance, (ii) any then existing Forfeiture Account of a Participant shall revert to its prior status as an Account in such component(s) and be nonforfeitable, and (iii) the Accounts in such component(s) of each Participant in the employ of the Participating Employers at the time of such discontinuance shall be nonforfeitable. Subject to the foregoing, all of the provisions of the Plan shall continue in effect, and upon entitlement thereto distributions shall be made in accordance with the provisions of Article X.

Sec. 13.3 Termination . The Company, by action of the Board, may terminate the Pension Plan or the Stock Bonus Plan component(s) of the Plan or the entire Plan as applicable to all Participating

Employers and their employees. After such termination no employee shall become a Participant, no further contributions shall be made, and any then existing Forfeiture Account of a Participant shall revert to its prior status as an Account and be nonforfeitable. The Accounts of each Participant in the employ of the Participating Employers at the time of such termination shall be nonforfeitable, the Participant shall be entitled to a benefit equal to the value of those Accounts attributable to the portion of the Plan terminating (i.e., Pension Plan and/or Stock Bonus Plan) determined as of the Valuation Date coincident with or next following the termination of the Pension Plan and/or the Stock Bonus Plan component(s) of the Plan, distributions shall be made to Participants, Beneficiaries and alternate payees promptly after the termination of the component(s) of the Plan so terminated, but not before the earliest date permitted under the Code and applicable regulations, and the Plan and any related trust agreement or group annuity contract shall continue in force for the purpose of making such distributions.

Sec. 13.4 Partial Termination . If there is a partial termination of the Pension Plan and/or Stock Bonus Plan component(s) of the Plan, either by operation of law, by amendment of the Plan, or for any other reason, which partial termination shall be confirmed by the Company, any then existing Forfeiture Account of a Participant (who was in the classification of employees with respect to which the partial termination occurs) shall revert to its prior status as an Account and be nonforfeitable, and the Accounts of each Participant with respect to whom the partial termination applies shall be nonforfeitable. Subject to the foregoing, all of the provisions of the Plan shall continue in effect as to each such Participant, and upon entitlement thereto distributions shall be made in accordance with the provisions of Article X.

Sec. 13.5 Merger, Consolidation, or Transfer of Plan Assets . In the case of any merger or consolidation of the Pension Plan and/or Stock Bonus Plan component(s) of the Plan with any other plan, or in the case of the transfer of assets or liabilities of such component(s) of the Plan to any other plan, provision shall be made so that each Participant, Beneficiary and alternate payee would (if such other plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he or she would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). No such merger, consolidation, or transfer shall be effected until such statements with respect thereto, if any, required by ERISA to be filed in advance thereof have been filed.

Sec. 13.6 Deferral of Distributions . Notwithstanding any provisions of the Plan to the contrary, in the case of a complete discontinuance of contributions to the Pension Plan and/or Stock Bonus Plan component(s) of the Plan or of a complete or partial termination of such component(s) of the Plan, the Company or the Funding Agency may defer any distribution of benefit payments to Participants and Beneficiaries with respect to which such discontinuance or termination applies (except for distributions which are required to be made under Sec. 10.1) until after the following have occurred:

(a) Receipt of a final determination from the Treasury Department or any court of competent jurisdiction regarding the effect of such discontinuance or termination on the qualified status of the Plan under Code § 401(a).

(b) Appropriate adjustment of Accounts to reflect taxes, costs, and expenses, if any, incident to such discontinuance or termination.

Sec. 13.7 Reorganizations of Participating Employers . In the event two or more Participating Employers are consolidated or merged or in the event one or more Participating Employers acquires the assets of another Participating Employer, the Plan shall be deemed to have continued, without termination and without a complete discontinuance of contributions, as to all the Participating Employers involved in such reorganization and their employees. In such event, in administering the Plan the

corporation resulting from the consolidation, the surviving corporation in the merger, or the employer acquiring the assets shall be considered as a continuation of all of the Participating Employers involved in the reorganization.

Sec. 13.8 Discontinuance of Joint Participation of a Participating Employer . The Company, by action of the Board, may discontinue the joint participation in the Pension Plan and/or Stock Bonus Plan component(s) of the Plan by another Participating Employer. A Participating Employer which is not under Common Control with the Company may discontinue its joint participation in such component(s) of the Plan with the other Participating Employers by action of its board of directors and on appropriate written notice to the Company and each Funding Agency then acting.

(a) If the Company determines in its sole discretion to spin off the Pension Plan and/or Stock Bonus Plan component(s) of the Plan attributable to the withdrawing employer, the Company shall cause a determination to be made of the equitable part of the Fund assets held on account of Participants of the withdrawing employer and their Beneficiaries. The Company shall direct the Funding Agency or Funding Agencies to transfer assets representing such equitable part to a separate fund for the plan of the withdrawing employer. Such withdrawing employer may thereafter exercise, with respect to such separate fund, all the rights and powers reserved to the Company with respect to the Fund. The plan of the withdrawing employer shall, until amended by the withdrawing employer, continue with the same terms as the Plan herein, except that with respect to the separate plan of the withdrawing employer the words “Participating Employer”, “Participating Employers”, and “Company” shall thereafter be considered to refer only to the withdrawing employer. Any such spin-off shall be effected in such manner that each Participant or Beneficiary would (if the Plan and the plan of the withdrawing employer then immediately terminated) receive a benefit which is equal to or greater than the benefit the individual would have been entitled to receive immediately before such spin-off if the Plan had then terminated. No transfer of assets pursuant to this section shall be effected until such statements with respect thereto, if any, required by ERISA to be filed in advance thereof have been filed.

(b) If subsection (a) does not apply, the Accounts of Participants of the withdrawing employer and their Beneficiaries shall continue to be held in the Plan for distribution in accordance with the provisions hereof.

Sec. 13.9 Participating Employers Not Under Common Control . If a Participating Employer is not under Common Control with the Company, the provisions of the Plan (other than this Article XIII) shall be applied as though a separate plan is being maintained for that Participating Employer to the extent required by Code § 413(c).

ARTICLE XIV

TOP-HEAVY PLAN PROVISIONS

Sec. 14.1 Key Employee Defined . “Key Employee” means any employee or former employee of the employer who at any time during the determination period was an officer of the employer or is deemed to have had an ownership interest in the employer and who is within the definition of key employee in Code § 416(i) and the regulations thereunder in effect for the particular Plan Year. “Non-Key Employee” means any employee who is not a Key Employee.

Sec. 14.2 Determination of Top-Heavy Status . The top-heavy status of the Plan shall be determined according to Code § 416 and the regulations thereunder, using the following standards and definitions:

(a) The Plan is a Top-Heavy Plan for a Plan Year if either of the following applies:

(1) If this Plan is not part of a required aggregation group and the top-heavy ratio for this Plan exceeds 60%.

(2) If this Plan is part of a required aggregation group of plans and the top-heavy ratio for the group of plans exceeds 60%. Notwithstanding paragraphs (1) and (2) above, the Plan is not a Top-Heavy Plan with respect to a Plan Year if it is part of a permissive aggregation group of plans for which the top-heavy ratio does not exceed 60%.

(b) The “top-heavy ratio” shall be determined as follows:

(1) If the employer maintains one or more defined contribution plans (including any simplified employee pension plan) and has not maintained any defined benefit plan which during the 5-year period ending on the determination date has or has had accrued benefits, the top-heavy ratio for this Plan or for the required or permissive aggregation group (as appropriate) is a fraction, the numerator of which is the sum of the account balances of all Key Employees under the Plan or plans as of the determination date (including any part of any account balance distributed in the five-year period ending on the determination date), and the denominator of which is the sum of the account balances (including any part of any account balance distributed in the five-year period ending on the determination date) of all employees under the Plan or plans as of the determination date. Both the numerator and denominator of the top-heavy ratio shall be increased to reflect any contribution not actually made as of the determination date but which is required to be taken into account on that date under Code § 416 and the regulations thereunder.

(2) If the employer maintains one or more defined contribution plans (including any simplified employee pension plan) and maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the determination date has or has had any accrued benefits, the top-heavy ratio for any required or permissive aggregation group (as appropriate), is a fraction, the numerator of which is the sum of the account balances of all Key Employees under the aggregated defined contribution plan or plans, determined according to paragraph (1) above, and the present value of accrued benefits of all Key Employees under the defined

benefit plan or plans as of the determination date, and the denominator of which is the sum of such account balances of all employees under the aggregated defined contribution plan or plans and the present value of accrued benefits of all employees under the defined benefit plan or plans as of the determination date. The account balances and accrued benefits in both the numerator and denominator of the top-heavy ratio shall be adjusted to reflect any distributions made in the five-year period ending on the determination date and any contributions due but unpaid as of the determination date.

(3) For purposes of paragraphs (1) and (2), the value of account balances and the present value of accrued benefits will be determined as of the most recent valuation date that falls within the 12-month period ending on the determination date, except as provided in Code § 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of an employee (i) who is not a Key Employee but who was a Key Employee in a prior year, or (ii) who has not been credited with at least one hour of service with any employer maintaining the Plan at any time during the 5-year period ending on the determination date, will be disregarded. The calculation of the top-heavy ratio and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code § 416 and the regulations thereunder. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year.

(4) Any distribution due to severance from employment, death or disability which was made prior to the one-year period ending on the determination date shall be disregarded for purposes of applying this subsection (b). Paragraphs (1) and (2) of this subsection shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with this Plan under Code § 416(a)(2)(A)(i).

(c) “Required aggregation group” means (i) each qualified plan of the employer in which at least one Key Employee participates in the Plan Year containing the determination date, or any of the four preceding Plan Years, and (ii) any other qualified plan of the employer that enables a plan described in (i) to meet the requirements of Code §§ 401(a)(4) or 410.

(d) “Permissive aggregation group” means the required aggregation group of plans plus any other plan or plans of the employer which, when consolidated as a group with the required aggregation group, would continue to satisfy the requirements of Code §§ 401(a)(4) and 410.

(e) “Determination date” means, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that year is the determination date.

(f) The “determination period” for a Plan Year is the Plan Year in which the applicable determination date occurs and the four preceding Plan Years.

(g) The “valuation date” is the last day of each Plan Year and is the date as of which account balances or accrued benefits are valued for purposes of calculating the top-heavy ratio.

(h) For purposes of establishing the “present value” of benefits under a defined benefit plan to compute the top-heavy ratio, any benefit shall be discounted only for mortality and interest based on the interest rate and mortality table specified in the defined benefit plan for this purpose.

(i) If an individual has not performed any services for the employer at any time during the one-year period ending on the determination date with respect to a Plan Year commencing in 2002 or later, any account balance or accrued benefit for such individual shall not be taken into account for such Plan Year.

(j) For purposes of determining if a defined benefit plan included in a required aggregation group of which this Plan is a part is a Top-Heavy Plan, the accrued benefit to any employee (other than a Key Employee) shall be determined as follows:

(1) Under the method which is used for accrual purposes under all defined benefit plans maintained by the employer.

(2) If there is no method described in paragraph (1), as if such benefit accrued not more rapidly than the lowest accrual rate permitted under Code § 411(b)(1)(C).

Sec. 14.3 Minimum Contribution Requirement . For any Plan Year with respect to which the Plan is a Top-Heavy Plan, the employer contributions and Forfeitures allocated to each Active Participant who is not a Key Employee and whose Termination of Employment has not occurred prior to the end of such Plan Year shall not be less than the minimum amount determined in accordance with the following:

(a) The minimum amount shall be the amount equal to that percentage of the Participant’s Compensation for the Plan Year which is the smaller of:

(1) 3%.

(2) The percentage which is the largest percentage of Compensation allocated to any Key Employee from employer contributions and Forfeitures for such Plan Year.

For purposes of this section, “Compensation” means the amounts specified in Sec. 6.1(d), subject to the limitation in that section.

(b) For purposes of this section, any employer contribution attributable to a salary reduction or similar arrangement shall be taken into account. Any employer contribution attributable to a salary reduction or similar arrangement may not be used to satisfy the minimum amount of employer contributions which must be allocated under subsection (a). However, employer matching contributions under any other plan whose contributions are to be used to satisfy the requirements of subsection (a) may be used to satisfy the minimum amount of employer contributions which must be allocated under subsection (a).

(c) This section shall not apply to any Participant who is covered under any other plan of the employer under which the minimum contribution or minimum benefit requirement applicable to Top-Heavy Plans will be satisfied.

Sec. 14.4 Definition of Employer . For purposes of this Article XIV, the term “employer” means all Participating Employers and any trade or business entity under Common Control with a Participating Employer.

Sec. 14.5 Exception For Collective Bargaining Unit . Section 14.3 shall not apply with respect to any employee included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representative and such employer or employers.

ARTICLE XV

MISCELLANEOUS PROVISIONS

Sec. 15.1 Insurance Company Not Responsible for Validity of Plan . No insurance company that issues a contract under the Plan shall have any responsibility for the validity of the Plan. An insurance company to which an application may be submitted hereunder may accept such application and shall have no duty to make any investigation or inquiry regarding the authority of the applicant to make such application or any amendment thereto or to inquire as to whether a person on whose life any contract is to be issued is entitled to such contract under the Plan.

Sec. 15.2 Headings . Headings at the beginning of articles and sections hereof are for convenience of reference, shall not be considered a part of the text of the Plan, and shall not influence its construction.

Sec. 15.3 Capitalized Definitions . Capitalized terms used in the Plan shall have their meaning as defined in the Plan unless the context clearly indicates to the contrary.

Sec. 15.4 Gender . Any references to the masculine gender include the feminine and vice versa.

Sec. 15.5 Use of Compounds of Word “Here” . Use of the words “hereof”, “herein”, “hereunder”, or similar compounds of the word “here” shall mean and refer to the entire Plan unless the context clearly indicates to the contrary.

Sec. 15.6 Construed as a Whole . The provisions of the Plan shall be construed as a whole in such manner as to carry out the provisions thereof and shall not be construed separately without relation to the context.

IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be executed as of the 24 th day of January, 2013.

	Alerus Financial Corporation

	By:	/s/ Bonnie Upham
		(signature)

		Bonnie Upham
		(Print name)

	Its:	Corporate Secretary
		(Print Corporate Officer Title)

Exhibit 10.15

ALERUS FINANCIAL CORPORATION
2019 EQUITY INCENTIVE PLAN

Article 1
INTRODUCTION

Section 1.1 Purpose, Effective Date and Term . The purpose of this Alerus Financial Corporation 2019 Equity Incentive Plan is to promote the long-term financial success of Alerus Financial Corporation and its Subsidiaries by providing a means to attract, retain and reward individuals who can and do contribute to such success, and to further align their interests with those of the Shareholders. The “ Effective Date ” of the Plan is May 6, 2019, the date of the approval of the Plan by the Shareholders. The Plan shall remain in effect as long as any Awards are outstanding; provided, however, that no Awards may be granted after the 10-year anniversary of the Effective Date.

Section 1.2 Participation . Each employee and director of, and service provider (with respect to which issuances of securities may be registered under Form S-8) to, the Company and each Subsidiary who is granted, and currently holds, an Award in accordance with the provisions of the Plan shall be a “ Participant ” in the Plan. Award recipients shall be limited to employees and directors of, and service providers (with respect to which issuances of securities may be registered under Form S-8) to, the Company and its Subsidiaries; provided, however, that an Award (other than an ISO) may be granted to an individual prior to the date on which he or she first performs services as an employee, director or service provider, provided that such Award does not become vested prior to the date such individual commences such services.

Section 1.3 Definitions . Capitalized terms in the Plan shall be defined as set forth in the Plan (including the definition provisions of Article 8 ).

Article 2
AWARDS

Section 2.1 General . Any Award may be granted singularly, in combination with another Award (or Awards), or in tandem whereby the exercise or vesting of one Award held by a Participant cancels another Award held by the Participant. Each Award shall be subject to the provisions of the Plan and such additional provisions as the Committee may provide with respect to such Award and as may be evidenced in the Award Agreement. Subject to the provisions of Section 3.4(b) , an Award may be granted as an alternative to or replacement of an existing award under the Plan, any other plan of the Company or a Subsidiary, or as the form of payment for grants or rights earned or due under any other compensation plan or arrangement of the Company or a Subsidiary, including the plan of any entity acquired by the Company or a Subsidiary. The types of Awards that may be granted include the following:

(a) Stock Options . A stock option represents the right to purchase Shares at an exercise price established by the Committee. Any stock option may be either an ISO or a nonqualified stock option that is not intended to be an ISO. No ISOs may be (i) granted after the 10-year anniversary of the Effective Date or (ii) granted to a non-employee. To the extent the aggregate Fair Market Value (determined at the time of grant) of Shares with respect to which ISOs are exercisable for the first time by any Participant during any calendar year under all plans of the Company and its Subsidiaries exceeds $100,000, the stock options or portions thereof that exceed such limit shall be treated as nonqualified stock options. Unless otherwise specifically provided by the Award Agreement, any stock option granted under the Plan shall be a nonqualified stock option. All or a portion of any ISO granted under the Plan that does not qualify as an ISO for any reason shall be deemed to be a nonqualified stock option. In addition, any ISO granted

under the Plan may be unilaterally modified by the Committee to disqualify such stock option from ISO treatment such that it shall become a nonqualified stock option.

(b) Stock Appreciation Rights. A stock appreciation right (a “ SAR ”) is a right to receive, in cash, Shares or a combination of both (as shall be reflected in the respective Award Agreement), an amount equal to or based upon the excess of (i) the Fair Market Value at the time of exercise of the SAR over (ii) an exercise price established by the Committee.

(c) Stock Awards. A stock award is a grant of Shares or a right to receive Shares (or their cash equivalent or a combination of both, as shall be reflected in the respective Award Agreement) in the future, excluding Awards designated as stock options, SARs or cash incentive awards by the Committee. Such Awards may include bonus shares, stock units, performance shares, performance units, restricted stock, restricted stock units or any other equity-based Award as determined by the Committee.

(d) Cash Incentive Awards . A cash incentive award is the grant of a right to receive a payment of cash (or Shares having a value equivalent to the cash otherwise payable, excluding Awards designated as stock options, SARs or stock awards by the Committee, all as shall be reflected in the respective Award Agreement) determined on an individual basis or as an allocation of an incentive pool that is contingent on the achievement of performance objectives established by the Committee.

Section 2.2 Exercise of Stock Options and SARs . A stock option or SAR shall be exercisable in accordance with such provisions as may be established by the Committee; provided , however , that a stock option or SAR shall expire no later than 10 years after its grant date (five years in the case of an ISO granted to a 10% Shareholder). The exercise price of each stock option and SAR shall be not less than 100% of the Fair Market Value on the grant date (or, if greater, the par value of a Share); provided, however, that the exercise price of an ISO shall not be less than 110% of Fair Market Value on the grant date in the case of a 10% Shareholder; and provided, further , that, to the extent permitted under Code Section 409A, and subject to Section 3.4(b) , the exercise price may be higher or lower in the case of stock options and SARs granted in replacement of existing awards held by an employee, director or service provider granted by an acquired entity. The payment of the exercise price of a stock option shall be by cash or, subject to limitations imposed by applicable law, by any of the following means unless otherwise determined by the Committee from time to time: (a) by tendering, either actually or by attestation, Shares acceptable to the Committee and valued at Fair Market Value as of the day of exercise; (b) by irrevocably authorizing a third party, acceptable to the Committee, to sell Shares acquired upon exercise of the stock option and to remit to the Company no later than the third business day following exercise of a sufficient portion of the sale proceeds to pay the entire exercise price and any tax withholding resulting from such exercise; (c) by payment through a net exercise such that, without the payment of any funds, the Participant may exercise the option and receive the net number of Shares equal in value to (i) the number of Shares as to which the option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value (on the date of exercise) less the exercise price, and the denominator of which is such Fair Market Value (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); (d) by personal, certified or cashiers’ check; (e) by other property deemed acceptable by the Committee or (f) by any combination thereof.

Section 2.3 Minimum Vesting Period . If the right to become vested in an Award granted to an employee Participant is conditioned on the completion of a specified period of service with the Company or its Subsidiaries, without achievement of performance measures or other performance objectives (whether or not related to the performance measures) being required as a condition of vesting, and without it being granted in lieu of, or in exchange for, other compensation, or other Awards, then the required period of service for full vesting shall not be less than one year (subject to acceleration of vesting, to the extent

permitted by the Committee, as provided herein); provided, however , that the required period of service for full vesting with respect to stock awards shall not apply to Awards granted to Director Participants provided that the aggregate of such director grants do not exceed 5% of the total Share reserve set forth in Section 3.2(a) .

Section 2.4 Dividends and Dividend Equivalents . Any Award may provide the Participant with the right to receive dividend payments or dividend equivalent payments with respect to Shares subject to the Award; provided, however, any dividend payments or dividend equivalent payments with respect to the Award shall be withheld by the Company for the Participant’s account, and interest may be credited on the amount of the dividend payments or dividend equivalent payments withheld at a rate and subject to such terms as determined by the Committee. The dividend payments or dividend equivalent payments so withheld by the Committee and attributable to any particular Award (and earnings thereon, if applicable) shall be distributed to the Participant in cash or, at the discretion of the Committee, in Shares having a Fair Market Value equal to the amount of such dividends, if applicable, upon the release of restrictions on such Award and, if such Award is forfeited, the Participant shall have no right to such dividend payments or dividend equivalent payments.

Section 2.5 Forfeiture of Awards . Unless specifically provided to the contrary in an Award Agreement, upon notification of Termination of Service for Cause, any outstanding Award, whether vested or unvested, held by a Participant shall terminate immediately, such Award shall be forfeited and the Participant shall have no further rights thereunder.

Section 2.6 Deferred Compensation . The Plan is, and all Awards are, intended to be exempt from (or, in the alternative, to comply with) Code Section 409A, and each shall be construed, interpreted and administered accordingly. The Company does not guarantee that any benefits that may be provided under the Plan will satisfy all applicable provisions of Code Section 409A. If any Award would be considered “deferred compensation” under Code Section 409A (“ Deferred Compensation ”), the Committee reserves the absolute right (including the right to delegate such right) to unilaterally amend the Plan or the applicable Award Agreement, without the consent of the Participant, to avoid the application of, or to maintain compliance with, Code Section 409A. Any amendment by the Committee to the Plan or an Award Agreement pursuant to this Section 2.6 shall maintain, to the extent practicable, the original intent of the applicable provision without violating Code Section 409A. A Participant’s acceptance of any Award shall be deemed to constitute the Participant’s acknowledgment of, and consent to, the rights of the Committee under this Section 2.6 , without further consideration or action. Any discretionary authority retained by the Committee pursuant to the terms of the Plan or pursuant to an Award Agreement shall not be applicable to an Award that is determined to constitute Deferred Compensation, if such discretionary authority would contravene Code Section 409A.

Article 3
SHARES SUBJECT TO PLAN

Section 3.1 Available Shares . The Shares with respect to which Awards may be granted shall be Shares currently authorized but unissued, currently held or, to the extent permitted by applicable law, subsequently acquired by the Company, including Shares purchased in the open market or in private transactions.

Section 3.2 Share Limitations .

(a) Share Reserve . Subject to the following provisions of this Section 3.2 , the maximum number of Shares that may be delivered under the Plan shall be 1,100,000 Shares (all of which

may be granted as ISOs). As of the Effective Date, no further awards shall be granted pursuant to the Predecessor Plan. The maximum number of Shares available for delivery under the Plan and the number of Shares subject to outstanding Awards shall be subject to adjustment as provided in Section 3.4 .

(b) Reuse of Shares. Any Shares subject to an Award that is canceled, forfeited or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the Plan. Notwithstanding anything to the contrary contained herein: shares subject to an Award under the Plan shall not again be made available for issuance or delivery under the Plan if such shares are (a) shares tendered in payment of a stock option, (b) shares delivered or withheld by the Company to satisfy any tax withholding obligation, or (c) shares covered by a stock-settled SAR or other Awards that were not issued upon the settlement of the Award.

Section 3.3 Limitations on Grants to Director Participants . The following limitations shall apply with respect to any Award to a Director Participant:

(a) Share-Based Awards . The maximum number of Shares subject to Awards granted during a single calendar year to any Director Participant, shall not exceed a total value of $150,000. For purposes of this Section 3.3 , the value of any Share based Awards shall be determined based on the grant date fair value of such Awards computed in accordance with FASB ASC Topic 718 (or any successor provision in accordance with GAAP).

(b) Cash Incentive Awards and Share-Based Awards Settled in Cash . The maximum dollar amount that may be payable to any one Director Participant pursuant to cash incentive awards and cash-settled Share-based Awards that are granted to any one Director Participant during any calendar year shall be $150,000.

(c) Director Election . The foregoing limitations shall not apply to cash-based Director fees that the Director elects to receive in the form of Shares or Share-based units equal in value to the cash-based Director fees.

Section 3.4 Corporate Transactions; No Repricing .

(a) Adjustments . To the extent permitted under Code Section 409A, to the extent applicable, in the event of a corporate transaction involving the Company or the Shares (including any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), all outstanding Awards, the number of Shares available for delivery under the Plan under Section 3.2 shall be adjusted automatically to proportionately and uniformly reflect such transaction; provided, however, that, subject to Section 3.4(b) , the Committee may otherwise adjust Awards (or prevent such automatic adjustment) as it deems necessary, in its sole discretion, to preserve the benefits or potential benefits of the Awards and the Plan. Action by the Committee under this Section 3.4(a) may include: (i) adjustment of the number and kind of shares that may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the exercise price of outstanding stock options and SARs; and (iv) any other adjustments that the Committee determines to be equitable (which may include (A) replacement of an Award with another award that the Committee determines has comparable value and that is based on stock of a company resulting from a corporate transaction, and (B) cancellation of an Award in return for cash payment of the current value of the Award, determined as though the Award were fully vested at the time of payment, provided that in the case of a stock option or SAR, the amount of such payment shall be the excess of the value of the stock subject to the option or SAR at the time of the transaction over the exercise price, and provided , further , that no such payment shall be required in

consideration for the cancellation of the Award if the exercise price is greater than the value of the stock at the time of such corporate transaction).

(b) No Repricing . Notwithstanding any provision of the Plan to the contrary, no adjustment or reduction of the exercise price of any outstanding stock option or SAR in the event of a decline in Stock price shall be permitted without approval by the Shareholders or as otherwise expressly provided under Section 3.4(a) . The foregoing prohibition includes (i) reducing the exercise price of outstanding stock options or SARs, (ii) cancelling outstanding stock options or SARs in connection with the granting of stock options or SARs with a lower exercise price to the same individual, (iii) cancelling stock options or SARs with an exercise price in excess of the current Fair Market Value in exchange for a cash or other payment, and (iv) taking any other action that would be treated as a repricing of a stock option or SAR under the rules of the primary securities exchange or similar entity on which the Shares are listed.

Section 3.5 Delivery of Shares . Delivery of Shares or other amounts under the Plan shall be subject to the following:

(a) Compliance with Applicable Laws. Notwithstanding any provision of the Plan to the contrary, the Company shall have no obligation to deliver any Shares or make any other distribution of benefits under the Plan unless such delivery or distribution complies with all applicable laws and the applicable requirements of any securities exchange or similar entity.

(b) No Certificates Required. To the extent that the Plan provides for the delivery of Shares, the delivery may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any securities exchange or similar entity.

Article 4
CHANGE IN CONTROL

Section 4.1 Consequence of a Change in Control . Subject to the provisions of Section 3.4 (relating to the adjustment of shares), and except as otherwise provided in the Plan or in any Award Agreement, at the time of a Change in Control:

(a) Subject to any forfeiture and expiration provisions otherwise applicable to the respective Awards, all stock options and SARs under the Plan then held by the Participant shall become fully exercisable immediately if, and all stock awards and cash incentive awards under the Plan then held by the Participant shall become fully earned and vested immediately if, (i) the Plan and the respective Award Agreements are not the obligations of the entity, whether the Company, a successor thereto or an assignee thereof, that conducts following a Change in Control substantially all of the business conducted by the Company and its Subsidiaries immediately prior to such Change in Control or (ii) the Plan and the respective Award Agreements are the obligations of the entity, whether the Company, a successor thereto or an assignee thereof, that conducts following a Change in Control substantially all of the business conducted by the Company and its Subsidiaries immediately prior to such Change in Control and the Participant incurs a Termination of Service without Cause or by the Participant for Good Reason following such Change in Control.

(b) Notwithstanding the foregoing provisions of this Section 4.1 , if the vesting of an outstanding Award is conditioned upon the achievement of performance measures, then such vesting shall be subject to the following:

(i) If, at the time of the Change in Control, the established performance measures are less than 50% attained (as determined in the sole discretion of the Committee, but in any event, based pro rata in accordance with time lapsed through the date of the Change in Control in the event of any period-based performance measures with respect to determining attainment of the performance metrics), then such Award shall become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50% upon the Change in Control.

(ii) If, at the time of the Change in Control, the established performance measures are at least 50% attained (as determined in the sole discretion of the Committee, but in any event based pro rata in accordance with time lapsed through the date of the Change in Control in the event of any period-based performance measures with respect to determining attainment of the performance metrics), then such Award shall become fully earned and vested immediately upon the Change in Control.

Section 4.2 Definition of Change in Control .

(a) For purposes of the Plan, “ Change in Control ” means the first to occur of the following:

(i) The consummation of the acquisition by any “person” (as such term is defined in Section 13(d) or 14(d) of the Exchange Act) of “beneficial ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company;

(ii) During any 12-month period, the individuals who, as of the Effective Date, are members of the Board cease for any reason to constitute a majority of the Board, unless either the election of, or the nomination for election by, the Shareholders of any new director was approved by a vote of a majority of the Board, in which case such new director shall for purposes of the Plan be considered as a member of the Board; or

(iii) The consummation by the Company of (i) a merger, consolidation or other similar transaction if the Shareholders immediately before such merger, consolidation or other similar transaction do not, as a result of such merger, consolidation or other similar transaction, own, directly or indirectly, more than 50% of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution of, or an agreement for the sale or other disposition of, all or substantially all of the assets of the Company.

(b) Notwithstanding any provision in the foregoing definition of Change in Control to the contrary, a Change in Control shall not be deemed to occur solely because 50% or more of the combined voting power of the then outstanding securities of the Company are acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation that, immediately prior to such acquisition, is owned directly or indirectly by the Shareholders in the same proportion as their ownership of Stock immediately prior to such acquisition.

(c) Further notwithstanding any provision in the foregoing definition of Change in Control to the contrary, in the event that any Award constitutes Deferred Compensation, and the settlement of, or distribution of benefits under such Award is to be triggered by a Change in Control, then

such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Code Section 409A.

Article 5
COMMITTEE

Section 5.1 Administration . The authority to control and manage the operation and administration of the Plan shall be vested in the Committee in accordance with this Article 5 . The Committee shall be selected by the Board, provided that the Committee shall consist of two or more members of the Board, each of whom is a “non-employee director” (within the meaning of Rule 16b-3 promulgated under the Exchange Act) and an “independent director” (within the meaning of the rules of the securities exchange which then constitutes the principal listing for the Stock), in each case to the extent required by the Exchange Act or the applicable rules of the securities exchange which then constitutes the principal listing for the Stock, respectively. Subject to the applicable rules of any securities exchange or similar entity, if the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.

Section 5.2 Powers of Committee . The Committee’s administration of the Plan shall be subject to the other provisions of the Plan and the following:

(a) The Committee shall have the authority and discretion to select from among the Company’s and each Subsidiary’s’ employees, directors and service providers those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of Shares covered by the Awards, to establish the terms of Awards, to cancel or suspend Awards and to reduce or eliminate any restrictions or vesting requirements applicable to an Award at any time after the grant of the Award.

(b) The Committee shall have the authority and discretion to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan.

(c) The Committee shall have the authority to define terms not otherwise defined in the Plan.

(d) Any interpretation of the Plan by the Committee and any decision made by it under the Plan shall be final and binding on all persons.

(e) In controlling and managing the operation and administration of the Plan, the Committee shall take action in a manner that conforms to the articles and bylaws of the Company and to all applicable law.

Section 5.3 Delegation by Committee . Except to the extent prohibited by applicable law, the applicable rules of any securities exchange or similar entity, the Plan, the charter of the Committee, or as necessary to comply with the exemptive provisions of Rule 16b-3 of the Exchange Act, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers under the Plan to any person or persons selected by it. The acts of such delegates shall be treated under the Plan as acts of the Committee and such delegates shall report regularly to the Committee regarding the delegated duties and responsibilities and any Awards granted. Any such allocation or delegation may be revoked by the Committee at any time.

Section 5.4 Information to be Furnished to Committee . As may be permitted by applicable law, the Company and each Subsidiary shall furnish the Committee with such data and information as it determines may be required for it to discharge its duties under the Plan. The records of the Company and each Subsidiary as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment and compensation shall be conclusive with respect to all persons unless determined by the Committee to be manifestly incorrect. Subject to applicable law, Participants and other persons entitled to benefits under the Plan shall furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan.

Section 5.5 Expenses and Liabilities . All expenses and liabilities incurred by the Committee in the administration and interpretation of the Plan or any Award Agreement shall be borne by the Company. The Committee may employ attorneys, consultants, accountants or other persons in connection with the administration and interpretation of the Plan, and the Company, and its officers and directors, shall be entitled to rely upon the advice, opinions and valuations of any such persons.

Article 6
AMENDMENT AND TERMINATION

Section 6.1 General . The Board may, as permitted by law, at any time, amend or terminate the Plan, and may amend any Award Agreement; provided , however , that no amendment or termination may (except as provided in Section 2.6 , Section 3.4 and Section 6.2 ), in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), impair the rights of any Participant or beneficiary under any Award granted prior to the date such amendment or termination is adopted by the Board; and provided, further , that, no amendment may (a) materially increase the benefits accruing to Participants under the Plan; (b) materially increase the aggregate number of securities that may be delivered under the Plan, other than pursuant to Section 3.4 , or (c) materially modify the requirements for participation in the Plan, unless the amendment under (a), (b) or (c) immediately above is approved by the Shareholders.

Section 6.2 Amendment to Conform to Law . Notwithstanding any provision of the Plan or an Award Agreement to the contrary, the Committee may amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of conforming the Plan or the Award Agreement to any applicable law. By accepting an Award, the Participant shall be deemed to have acknowledged and consented to any amendment to an Award made pursuant to this Section 6.2 , Section 2.6 or Section 3.4 without further consideration or action.

Article 7
GENERAL TERMS

Section 7.1 No Implied Rights .

(a) No Rights to Specific Assets. No person shall by reason of participation in the Plan acquire any right in or title to any assets, funds or property of the Company or any Subsidiary, including any specific funds, assets, or other property that the Company or a Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the Shares or amounts, if any, distributable in accordance with the provisions of the Plan, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the Plan or an Award Agreement shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to provide any benefits to any person.

(b) No Contractual Right to Employment or Future Awards. The Plan does not constitute a contract of employment, and selection as a Participant shall not give any person the right to be retained in the service of the Company or a Subsidiary or any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the Plan. No individual shall have the right to be selected to receive an Award, or, having been so selected, to receive a future Award.

(c) No Rights as a Shareholder . Except as otherwise provided in the Plan, no Award shall confer upon the holder thereof any rights as a Shareholder prior to the date on which the individual fulfills all conditions for receipt of such rights.

Section 7.2 Transferability . Except as otherwise provided by the Committee, Awards are not transferable except as designated by the Participant by will or by the laws of descent and distribution or pursuant to a domestic relations order. The Committee shall have the discretion to permit the transfer of Awards; provided, however, that such transfers shall be limited to immediate family members of Participants, trusts, partnerships, limited liability companies and other entities that are permitted to exercise rights under Awards in accordance with Form S-8 established for the primary benefit of such family members or to charitable organizations; and provided, further, that such transfers shall not be made for value to the Participant.

Section 7.3 Designation of Beneficiaries . A Participant hereunder may file with the Company a designation of a beneficiary or beneficiaries under the Plan and may from time to time revoke or amend any such designation. Any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee is in doubt as to the entitlement of any such beneficiary to any Award, the Committee may determine to recognize only the legal representative of the Participant in which case the Company, the Committee and the members thereof shall not have any further liability to anyone.

Section 7.4 Non-Exclusivity . Neither the adoption of the Plan by the Board nor the submission of the Plan to the Shareholders for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as either may deem desirable.

Section 7.5 Award Agreement . Each Award shall be evidenced by an Award Agreement. A copy of the Award Agreement, in any medium chosen by the Committee, shall be made available to the Participant, and the Committee may require that the Participant sign a copy of the Award Agreement.

Section 7.6 Form and Time of Elections . Unless otherwise specified in the Plan, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be filed with the Company at such times, in such form, and subject to such terms or conditions, not inconsistent with the provisions of the Plan, as the Committee may require.

Section 7.7 Evidence . Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information that the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.

Section 7.8 Tax Withholding . All distributions under the Plan shall be subject to withholding of all applicable taxes and the Committee may condition the delivery of any Shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. Except as otherwise provided by the Committee, such withholding obligations may be satisfied (a) through cash payment by the Participant; (b) through the surrender of Shares that the Participant already owns or (c) through the surrender of Shares

to which the Participant is otherwise entitled under the Plan; provided, however, that except as otherwise specifically provided by the Committee, such Shares under clause (c) may not be used to satisfy more than the maximum individual statutory tax rate for each applicable tax jurisdiction, or such lesser amount as established by the Company.

Section 7.9 Successors . All obligations of the Company under the Plan shall be binding upon and inure to the benefit of any successor to the Company.

Section 7.10 Indemnification . To the fullest extent permitted by law, each person who is or shall have been a member of the Committee or the Board, or an officer of the Company to whom authority was delegated in accordance with Section 5.3 , or an employee of the Company shall be indemnified and held harmless by the Company against and from any loss (including amounts paid in settlement), cost, liability or expense (including reasonable attorneys’ fees) that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her ( provided that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf), unless such loss, cost, liability or expense is a result of his or her own willful misconduct or except as expressly provided by statute. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s charter or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

Section 7.11 No Fractional Shares . Unless otherwise permitted by the Committee, no fractional Shares shall be delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, Shares or other property shall be delivered or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.

Section 7.12 Governing Law . The Plan, all Awards, and all actions taken in connection herewith and therewith shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws, except as superseded by applicable federal law.

Section 7.13 Benefits Under Other Plans . Except as otherwise provided by the Committee, Awards granted to a Participant (including the grant and the receipt of benefits) shall be disregarded for purposes of determining the Participant’s benefits under, or contributions to, any qualified retirement plan, nonqualified plan and any other benefit plan maintained by the Participant’s employer.

Section 7.14 Validity . If any provision of the Plan is determined to be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provision had never been included in the Plan.

Section 7.15 Notice . Unless provided otherwise in an Award Agreement or policy adopted from time to time by the Committee, all communications to the Company provided for in the Plan, or any Award Agreement, shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid ( provided that international mail shall be sent via overnight or two-day delivery), or sent by facsimile or prepaid overnight courier to the Company at the address set forth below:

Alerus Financial Corporation

Attn: General Counsel

401 Demers Avenue
Grand Forks, ND 58201

Such communications shall be deemed given:

(a) In the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or

(b) In the case of certified or registered U.S. mail, five days after deposit in the U.S. mail;

provided, however, that in no event shall any communication be deemed to be given later than the date it is actually received, provided it is actually received. In the event a communication is not received, it shall be deemed received only upon the showing of an original of the applicable receipt, registration or confirmation from the applicable delivery service provider. Communications that are to be delivered by U.S. mail or by overnight service to the Company shall be directed to the attention of the Company’s General Counsel.

Section 7.16 Clawback Policy . Any Award, amount or benefit received under the Plan shall be subject to potential cancellation, recoupment, rescission, payback or other similar action in accordance with any applicable Company clawback policy (the “ Policy ”) or any applicable law. A Participant’s receipt of an Award shall be deemed to constitute the Participant’s acknowledgment of and consent to the Company’s application, implementation and enforcement of (i) the Policy and any similar policy established by the Company that may apply to the Participant, whether adopted prior to or following the making of any Award and (ii) any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation, as well as the Participant’s express agreement that the Company may take such actions as are necessary to effectuate the Policy, any similar policy and applicable law, without further consideration or action.

Section 7.17 Breach of Restrictive Covenants . Except as otherwise provided by the Committee, notwithstanding any provision of the Plan to the contrary, if the Participant breaches a non-competition, non-solicitation, non-disclosure, non-disparagement or other restrictive covenant set forth in an Award Agreement or any other agreement between the Participant and the Company or a Subsidiary, whether during or after the Participant’s Termination of Service, in addition to and not in limitation of any other rights, remedies, damages, penalties or restrictions available to the Company under the Plan, an Award Agreement, any other agreement between the Participant and the Company or a Subsidiary, or otherwise at law or in equity, the Participant shall forfeit or pay to the Company:

(a) Any and all outstanding Awards granted to the Participant, including Awards that have become vested or exercisable;

(b) Any Shares held by the Participant in connection with the Plan that were acquired by the Participant after the Participant’s Termination of Service and within the 12-month period immediately preceding the Participant’s Termination of Service;

(c) The profit realized by the Participant from the exercise of any stock options and SARs that the Participant exercised after the Participant’s Termination of Service and within the 12-month period immediately preceding the Participant’s Termination of Service, which profit is the difference

between the exercise price of the stock option or SAR and the Fair Market Value of any Shares or cash acquired by the Participant upon exercise of such stock option or SAR; and

(d) The profit realized by the Participant from the sale, or other disposition for consideration, of any Shares received by the Participant in connection with the Plan after the Participant’s Termination of Service and within the 12-month period immediately preceding the Participant’s Termination of Service and where such sale or disposition occurs in such similar time period.

Article 8
DEFINED TERMS; CONSTRUCTION

Section 8.1 Definitions . In addition to the other definitions contained in the Plan, unless otherwise specifically provided in an Award Agreement, the following definitions shall apply:

(a) “ 10% Shareholder ” means an individual who, at the time of grant, owns Voting Securities possessing more than 10% of the total combined voting power of the Voting Securities.

(b) “ Award ” means an award under the Plan.

(c) “ Award Agreement ” means the document that evidences the terms and conditions of an Award. Such document shall be referred to as an agreement regardless of whether a Participant’s signature is required. Each Award Agreement shall be subject to the terms and conditions of the Plan, and, if there is any conflict between the Award Agreement and the Plan, the Plan shall control.

(d) “ Board ” means the Board of Directors of the Company.

(e) If the Participant is subject to an employment agreement (or other similar agreement) with the Company or a Subsidiary that provides a definition of termination for “cause” (or the like), then, for purposes of the Plan, the term “ Cause ” has the meaning set forth in such agreement; and in the absence of such a definition, “ Cause ” means (i) any act of (A) fraud or intentional misrepresentation or (B) embezzlement, misappropriation or conversion of assets or opportunities of the Company or a Subsidiary, (ii) willful violation of any law, rule or regulation in connection with the performance of the Participant’s duties to the Company or a Subsidiary (other than traffic violations or similar offenses), (iii) with respect to any employee of the Company or a Subsidiary, commission of any act of moral turpitude or conviction of a felony or (iv) the willful or negligent failure of the Participant to perform the Participant’s duties to the Company or a Subsidiary in any material respect.

Further, the Participant shall be deemed to have terminated for Cause if, after the Participant’s Termination of Service, facts and circumstances arising during the course of the Participant’s employment with the Company are discovered that would have constituted a termination for Cause.

Further, all rights a Participant has or may have under the Plan shall be suspended automatically during the pendency of any investigation by the Board or its designee or during any negotiations between the Board or its designee and the Participant regarding any actual or alleged act or omission by the Participant of the type described in the applicable definition of “Cause.”

(f) “ Change in Control ” has the meaning ascribed to it in Section 4.2 .

(g) “ Code ” means the Internal Revenue Code of 1986.

(h) “ Code Section 409A ” means the provisions of Section 409A of the Code and any rules, regulations and guidance promulgated thereunder.

(i) “ Committee ” means the Committee acting under Article 5 , and in the event a Committee is not currently appointed, the Board.

(j) “ Company ” means Alerus Financial Corporation, a Delaware corporation.

(k) “ Director Participant ” means a Participant who is a member of the Board or the board of directors of a Subsidiary that is not otherwise an employee of the Company or a Subsidiary.

(l) “ Disability ” means the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident or health plan covering the Company’s or a Subsidiary’s employees.

(m) “ Effective Date ” has the meaning ascribed to it in Section 1.1 .

(n) “ Exchange Act ” means the Securities Exchange Act of 1934.

(o) “ Fair Market Value ” means, as of any date, the officially-quoted closing selling price of the Shares on such date on the principal national securities exchange on which Shares are listed or admitted to trading or, if there have been no sales with respect to Shares on such date, or if the Shares are not so listed or admitted to trading, the Fair Market Value shall be the value established by the Committee in good faith and, to the extent required, in accordance with Code Section 409A and Section 422 of the Code.

(p) “ Form S-8 ” means a Registration Statement on Form S-8 promulgated by the U.S. Securities and Exchange Commission or any successor thereto.

(q) If the Participant is subject to an employment agreement (or other similar agreement) with the Company or a Subsidiary that provides a definition of termination for “good reason” (or the like), then, for purposes of the Plan, the term “ Good Reason ” has the meaning set forth in such agreement; and in the absence of such a definition, “ Good Reason ” means the occurrence of any one of the following events, unless the Participant agrees in writing that such event shall not constitute Good Reason:

(i) A material, adverse change in the nature, scope or status of the Participant’s position, authorities or duties from those in effect immediately prior to the applicable Change in Control;

(ii) A material reduction in the Participant’s aggregate compensation or benefits in effect immediately prior to the applicable Change in Control; or

(iii) Relocation of the Participant’s primary place of employment of more than 50 miles from the Participant’s primary place of employment immediately prior to the applicable Change in Control, or a requirement that the Participant engage in travel that is materially greater than prior to the applicable Change in Control.

Notwithstanding any provision of this definition to the contrary, prior to the Participant’s Termination of Service for Good Reason, the Participant must give the Company written notice of the existence of any condition set forth in clause (i) — (iii) immediately above within 90 days of its initial existence and the Company shall have 30 days from the date of such notice in which to cure the condition giving rise to Good Reason, if curable. If, during such 30-day period, the Company cures the condition giving rise to Good Reason, the condition shall not constitute Good Reason. Further notwithstanding any provision of this definition to the contrary, in order to constitute a termination for Good Reason, such termination must occur within 12 months of the initial existence of the applicable condition.

(r) “ ISO ” means a stock option that is intended to satisfy the requirements applicable to an “incentive stock option” described in Section 422(b) of the Code.

(s) “ Participant ” has the meaning ascribed to it in Section 1.2 .

(t) “ Plan ” means the Alerus Financial Corporation 2019 Equity Incentive Plan.

(u) “ Policy ” has the meaning ascribed to it in Section 7.16 .

(v) “ Predecessor Plan ” means the Alerus Financial Corporation 2009 Stock Plan.

(w) “ SAR ” has the meaning ascribed to it in Section 2.1(b) .

(x) “ Securities Act ” means the Securities Act of 1933.

(y) “ Share ” means a share of Stock.

(z) “ Shareholders ” means the shareholders of the Company.

(aa) “ Stock ” means the common stock of the Company, $1.00 par value per share.

(bb) “ Subsidiary ” means any corporation or other entity that would be a “subsidiary corporation,” as defined in Section 424(f) of the Code, with respect to the Company.

(cc) “ Termination of Service ” means the first day occurring on or after a grant date on which the Participant ceases to be an employee and director of, and service provider to the Company and each Subsidiary, regardless of the reason for such cessation, subject to the following:

(i) The Participant’s cessation as an employee or service provider shall not be deemed to occur by reason of the transfer of the Participant between the Company and a Subsidiary or between two Subsidiaries.

(ii) The Participant’s cessation as an employee or service provider shall not be deemed to occur by reason of the Participant’s being on a leave of absence from the Company or a Subsidiary approved by the Company or Subsidiary otherwise receiving the Participant’s services.

(iii) If, as a result of a sale or other transaction, the Subsidiary for whom the Participant is employed (or to whom the Participant is providing services) ceases to be a Subsidiary, and the Participant is not, following the transaction, an employee or director of, or service provider to, the Company or an entity that is then a Subsidiary, then the occurrence of such transaction shall be treated as the Participant’s Termination of Service caused by the Participant being discharged by the entity for whom the Participant is employed or to whom the Participant is providing services.

(iv) A service provider, other than an employee or director, whose services to the Company or a Subsidiary are governed by a written agreement with such service provider shall cease to be a service provider at the time the provision of services under such written agreement ends (without renewal); and such a service provider whose services to the Company or a Subsidiary are not governed by a written agreement with the service provider shall cease to be a service provider on the date that is 90 days after the date the service provider last provides services requested by the Company or a Subsidiary.

(v) Notwithstanding the foregoing, in the event that any Award constitutes deferred compensation, the term Termination of Service shall be interpreted by the Committee in a manner consistent with the definition of “separation from service” as defined under Code Section 409A.

(dd) “ Voting Securities ” means any securities that ordinarily possess the power to vote in the election of directors without the happening of any precondition or contingency.

Exhibit 10.16

ALERUS FINANCIAL CORPORATION

STOCK GRANT PLAN FOR NON-EMPLOYEE DIRECTORS

1. Purpose of Plan

This plan shall be known as the “Alerus Financial Corporation Stock Grant Plan For Non-Employee Directors” (the “Plan”). The purpose of the Plan is to promote the interests of Alerus Financial Corporation, a Delaware corporation (the “Company”), by enhancing its ability to attract and retain the services of non-employee directors without cash outlay and by encouraging the accumulation of shares of the common stock, (the “Common Stock”) of the Company by such non-employee directors.

2. Stock Subject to Plan

The stock to be subject to the Plan shall be authorized but unissued shares of Common Stock. Subject to adjustment as provided in Section 4 hereof, the maximum number of shares under this Plan shall be 60,000 shares.

3. Stock Grants .

Effective at the annual meeting of stockholders of the Company held in 2009, each director who is not otherwise an employee of the Company or any subsidiary of the Company (an “Eligible Director”) shall automatically receive, on the date of the annual meeting of stockholders of the Company at which such Eligible Director is elected to serve on the Board of Directors and each annual meeting of stockholders of the Company thereafter a grant of 600 shares of Common Stock provided, however, that no Eligible Director shall be entitled to such shares until, or unless, the issuance thereof complies with applicable securities laws. Such shares shall be fully vested in the director as of the date of the annual meeting and a certificate representing such shares shall be issued and delivered to such director as soon as practicable thereafter.

4. Dilution or Other Adjustments

If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate proportionate adjustments in the shares of Common Stock to be issued under the Plan shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, and the number of shares issued annually under the Plan.

5. Amendment or Discontinuance of Plan

The Plan may be terminated by the Board of Directors at any time.

Exhibit 21.1

LIST OF SUBSIDIARIES OF ALERUS FINANCIAL CORPORATION

Subsidiary		Organized Under Laws of

Excelsior Financial Statutory Trust I		Minnesota

Excelsior Financial Statutory Trust II		Minnesota

Alerus Financial, National Association		United States of America

Subsidiaries of Alerus Financial, National Association: Alerus Securities Corporation		North Dakota

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement of Alerus Financial Corporation and Subsidiaries on Form S-1 of our report dated June 6, 2019 on the consolidated financial statements of Alerus Financial Corporation and Subsidiaries and to the reference to our firm under the heading “Experts” in the prospectus.

/s/ CliftonLarsonAllen LLP

CliftonLarsonAllen LLP

Minneapolis, Minnesota

August 16, 2019