EDGAR 10-K Filing

Company CIK: 1341317
Filing Year: 2023
Filename: 1341317_10-K_2023_0001558370-23-002993.json

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ITEM 1. BUSINESS
Item 1. Business

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our corporate headquarters is located at 4450 Excelsior Boulevard, Suite 100, St. Louis Park, Minnesota 55416. Including our corporate headquarters, we operate seven full-service branch offices located in the Twin Cities MSA. We currently own three of our branch offices located in Orono, St. Louis Park and Minneapolis (Hennepin Avenue), and lease the remaining four locations. Additional information regarding our locations is set forth below:
Address
Owned/Leased
Headquarters and St. Louis Park Branch:
4450 Excelsior Boulevard, Suite 100, St. Louis Park, Minnesota 55416
Owned
Other Branch Locations:
21500 Highway 7, Greenwood, Minnesota 55331
Leased
Northstar Center West, 625 Marquette Avenue, Suite #W0100, Minneapolis, Minnesota 55402
Leased
2445 Shadywood Road, Orono, Minnesota 55331
Owned
3100 Hennepin Avenue, Minneapolis, Minnesota 55408(1)
Owned
370 Wabasha Street N., St. Paul, Minnesota 55102
Leased
7831 East Bush Lake Road, Suite 300, Bloomington, Minnesota 55439
Leased
(1) Does not include the leased drive-up property located adjacent to the branch.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the Nasdaq Stock Market (“Nasdaq”) under the symbol “BWB.” Our depository shares, each representing a 1/100th ownership interest in a share of our 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, $0.01 par value per share (“Series A Preferred Stock”) trade on Nasdaq under the symbol “BWBBP”.
Holders of Record
As of February 27, 2023, the Company had 97 holders of record of the Company’s common stock and an estimated 4,343 additional beneficial holders of the Company’s common stock whose stock was held in street name by brokerages or fiduciaries.
Issuer Purchases of Equity Securities
The following table presents stock purchases made during the fourth quarter of 2022:
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 - 31, 2022
-
$
-
-
$
25,000,000
November 1 - 30, 2022
-
-
-
25,000,000
December 1 - 31, 2022
37,639
18.48
-
25,000,000
Total
37,639
$
18.48
-
$
25,000,000
(1) The total number of shares repurchased during the periods indicated includes shares repurchased as part of the Company’s stock repurchase program and shares withheld for income tax purposes in connection with vesting of restricted stock and stock options. The shares were purchased or otherwise valued at the closing price of the Company’s common stock on the date of purchase and/or withholding.
(2) On August 17, 2022, the Company’s board of directors approved a stock repurchase program which authorizes the Company to repurchase up to $25.0 million of its common stock, subject to certain limitations and conditions. The stock repurchase program replaced and superseded the previous $40.0 million stock repurchase program which expired on October 27, 2022, under which approximately $1.6 million remained. The stock repurchase program will expire on August 16, 2024. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice.
Performance Graph
The following graph compares the percentage change in the cumulative shareholder return of the Company’s common stock during the period from the date of our initial public offering and listing on Nasdaq through December 31, 2022, with the cumulative return of the Nasdaq Composite Index and the total return of the Nasdaq Bank Index. This comparison assumes $100.00 was invested on March 14, 2018 and assumes the reinvestment of all cash dividends, if any, prior to any tax effect and retention of all stock dividends. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.
Dividend Policy
The Company has not historically declared or paid dividends on its common stock and does not intend to declare or pay dividends on its common stock in the foreseeable future. Instead, the Company anticipates that future earnings will be retained to support its operations and to finance the growth and development of its business. Any future determination relating to the Company’s common stock dividend policy will be made by the board of directors and will depend on a number of factors, including historic and projected financial condition, liquidity and results of operations, capital levels and needs, tax considerations, any acquisitions or potential acquisitions that may be pursued, statutory and regulatory prohibitions and other limitations, the terms of any credit agreements or other borrowing arrangements that restrict the ability to pay cash dividends, general economic conditions and other factors deemed relevant by the board of directors. The Company is not obligated to pay dividends on its common stock and is subject to restrictions on paying dividends on its common stock.
Although the Company intends to pay dividends on the Series A Preferred Stock, dividends on the Series A Preferred Stock are not cumulative or mandatory. If the board of directors does not declare a dividend on the Series A Preferred Stock or if the board of directors authorizes and declares less than a full dividend in respect of any dividend period, the holders of the Series A Preferred Stock will have no right to receive any dividend or a full dividend and the Company will have no obligation to pay a dividend or to pay full dividends for that dividend period at any time, whether or not dividends on the Series A Preferred Stock or common stock are declared for any future dividend period.
Dividend Restrictions
As a Minnesota corporation, the Company is subject to certain restrictions on dividends under the Minnesota Business Corporation Act, as amended. Generally, a Minnesota corporation is prohibited from paying a dividend if, after giving effect to the dividend the corporation would not be able to pay its debts as the debts become due in the usual course of business, or the corporation's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
In addition, the Company is 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 the Company is a financial holding company and does not engage directly in business activities of a material nature, the ability to pay dividends to shareholders depends, in large part, upon receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. See "Supervision and Regulation-Supervision and Regulation of the Bank-Dividend Payments."
Under the terms of a loan agreement with a third party correspondent lender which the Company entered into in March of 2021 and amended in July 2021 and September of 2022, the Company cannot declare or pay any cash dividend or make any other distribution in respect to capital stock, except in accordance with past practices and dividends paid on its preferred stock and so long as no default has occurred and is continuing. In addition, under the terms of the subordinated notes issued in June of 2020 and July of 2021, and the related subordinated note purchase agreements, the Company is not permitted to declare or pay any dividends on 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 shareholders' rights plan.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis of the Company’s results of operations and financial condition should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the forward-looking statements. The Company assumes no obligation to update any of these forward-looking statements. Readers of the Company’s Annual Report on Form 10-K should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements.
The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2022. This information should be read in connection with our audited consolidated financial statements and related notes appearing elsewhere in this report.
As of and for the year ended December 31,
(dollars in thousands, except per share data)
Per Common Share Data (1)
Basic Earnings Per Share
$
1.78
$
1.59
$
0.95
$
1.07
$
0.93
Diluted Earnings Per Share
1.72
1.54
0.93
1.05
0.91
Adjusted Diluted Earnings Per Share (2)
1.72
1.55
1.12
N/A
N/A
Book Value Per Share
11.80
11.09
9.43
8.45
7.34
Tangible Book Value Per Share (2)
11.69
10.98
9.31
8.33
7.22
Basic Weighted Average Shares Outstanding
27,758,336
28,027,454
28,582,064
29,358,644
29,001,393
Diluted Weighted Average Shares Outstanding
28,668,177
28,968,286
29,170,220
29,996,776
29,436,214
Shares Outstanding at Period End
27,751,950
28,206,566
28,143,493
28,973,572
30,097,274
Selected Performance Ratios
Return on Average Assets (ROA)
1.38
%
1.43
%
1.04
%
1.49
%
1.51
%
Pre-Provision Net Revenue Return on Average Assets (PPNR ROA) (3)
2.06
2.10
2.09
2.07
2.20
Return on Average Shareholders' Equity (ROE)
13.90
14.45
10.51
13.50
13.87
Return on Average Tangible Common Equity (2)
15.69
15.45
10.65
13.72
14.15
Average Shareholders' Equity to Average Assets
9.93
9.91
9.88
11.00
10.92
Yield on Interest Earning Assets
4.35
4.16
4.51
5.01
4.88
Yield on Total Loans, Gross
4.60
4.60
4.90
5.31
5.23
Cost of Interest Bearing Liabilities
1.34
0.93
1.53
2.03
1.65
Cost of Total Deposits
0.75
0.51
0.93
1.42
1.12
Net Interest Margin (4)
3.45
3.54
3.46
3.59
3.72
Core Net Interest Margin (2)(4)
3.27
3.28
3.25
3.37
3.40
Efficiency Ratio (2)
41.5
42.0
49.0
47.4
46.5
Adjusted Efficiency Ratio (3)
41.2
41.0
40.5
43.3
41.7
Noninterest Expense to Average Assets
1.46
1.51
1.73
1.75
1.78
Adjusted Noninterest Expense to Average Assets (3)
1.45
1.47
1.44
1.59
1.59
Loan to Deposit Ratio
104.5
95.7
93.0
104.9
106.7
Core Deposits to Total Deposits (6)
74.6
85.4
78.1
80.7
74.2
Tangible Common Equity to Tangible Assets (2)
7.48
8.91
8.96
10.65
11.03
Selected Asset Quality Data
Loans 30-89 Days Past Due
$
$
$
$
$
Loans 30-89 Days Past Due to Total Loans
0.01
%
-
%
-
%
0.02
%
0.02
%
Nonperforming Loans
$
$
$
$
$
Nonperforming Loans to Total Loans
0.02
%
0.03
%
0.03
%
0.02
%
0.03
%
Foreclosed Assets
$
-
$
-
$
-
$
-
$
-
Nonaccrual Loans to Total Loans
0.02
%
0.03
%
0.03
%
0.02
%
0.03
%
Nonaccrual Loans and Loans Past Due 90 Days and Still Accruing to Total Loans
0.02
0.03
0.03
0.02
0.03
Nonperforming Assets (5)
$
$
$
$
$
Nonperforming Assets to Total Assets (5)
0.01
%
0.02
%
0.03
%
0.02
%
0.03
%
Allowance for Loan Losses to Total Loans
1.34
1.42
1.50
1.18
1.20
Allowance for Loan Losses to Total Loans, Excluding PPP Loans
1.35
1.43
1.59
N/A
N/A
Allowance for Loans Losses to Nonaccrual Loans
7,511.11
5,542.94
4,495.61
4,886.33
3,447.68
Net Loan Charge-Offs to Average Loans
(0.01)
0.00
0.02
0.01
0.00
Capital Ratios (Bank Only)
Tier 1 Leverage Ratio
10.76
%
11.09
%
10.89
%
11.01
%
10.82
%
Common Equity Tier 1 Risk-based Capital Ratio
11.29
11.69
12.12
11.72
11.63
Tier 1 Risk-based Capital Ratio
11.29
11.69
12.12
11.72
11.63
Total Risk-based Capital Ratio
12.47
12.94
13.37
12.16
12.76
Capital Ratios (Consolidated)
Tier 1 Leverage Ratio
9.55
%
10.82
%
9.28
%
10.69
%
11.23
%
Common Equity Tier 1 Risk-based Capital Ratio
8.40
9.36
10.35
11.39
12.07
Tier 1 Risk-based Capital Ratio
10.03
11.43
10.35
11.39
12.07
Total Risk-based Capital Ratio
13.15
15.55
14.58
12.98
14.55
Growth Ratios
Percentage Change in Total Assets
25.0
%
18.8
%
29.0
%
15.0
%
22.1
%
Percentage Change in Total Loans, Gross
26.6
21.2
21.7
14.8
23.6
Percentage Change in Total Deposits
16.0
17.8
37.2
16.8
16.5
Percentage Change in Shareholders' Equity
3.9
42.9
8.4
10.8
61.1
Percentage Change in Net Income
16.9
68.0
(13.4)
16.7
59.4
Percentage Change in Diluted Earnings Per Share
12.0
64.8
(10.9)
14.5
35.5
Percentage Change in Tangible Book Value Per Share (2)
6.5
17.9
11.8
15.3
33.7
(1) Includes shares of common stock and non-voting common stock. On October 25, 2018, the Company exchanged shares of common stock for all of the outstanding shares of non-voting common stock. Following the exchange, no shares of non-voting common stock were outstanding.
(2) Represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" for further details.
(3) Ratio excludes the amortization of tax credit investments, debt prepayment fees and represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" for further details.
(4) Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%.
(5) Nonperforming assets are defined as nonaccrual loans plus loans 90 days past due plus foreclosed assets.
(6) Core deposits are defined as total deposits less brokered deposits and certificates of deposit greater than $250,000.
As of and for the year ended December 31,
(dollars in thousands)
Selected Balance Sheet Data
Total Assets
$
4,345,662
$
3,477,659
$
2,927,345
$
2,268,830
$
1,973,741
Total Loans, Gross
3,569,446
2,819,472
2,326,428
1,912,038
1,664,931
Allowance for Loan Losses
47,996
40,020
34,841
22,526
20,031
Securities Available for Sale
548,613
439,362
390,629
289,877
253,378
Goodwill and Other Intangibles
2,914
3,105
3,296
3,487
3,678
Deposits
3,416,543
2,946,237
2,501,636
1,823,310
1,560,934
Federal Funds Purchased
287,000
-
-
-
18,000
FHLB Advances and Notes Payable
110,750
42,500
68,500
149,500
139,000
Subordinated Debentures, Net of Issuance Costs
78,905
92,239
73,739
24,733
24,630
Tangible Common Equity (1)
324,636
309,653
262,109
241,307
217,320
Total Shareholders' Equity
394,064
379,272
265,405
244,794
220,998
Average Total Assets
3,866,480
3,189,800
2,617,579
2,114,211
1,777,592
Average Shareholders' Equity
384,033
316,237
258,736
232,539
194,083
(1) Represents a non-GAAP financial measure. See “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for further details.
For the year ended December 31,
(dollars in thousands)
Selected Income Statement Data
Interest Income
$
163,695
$
128,879
$
114,826
$
103,778
$
85,226
Interest Expense
33,997
19,370
26,862
29,646
20,488
Net Interest Income
129,698
109,509
87,964
74,132
64,738
Provision for Loan Losses
7,700
5,150
12,750
2,700
3,575
Net Interest Income after Provision for Loan Losses
121,998
104,359
75,214
71,432
61,163
Noninterest Income
6,332
5,309
5,839
3,826
2,543
Noninterest Expense
56,620
48,095
45,387
36,932
31,562
Income Before Income Taxes
71,710
61,573
35,666
38,326
32,144
Provision for Income Taxes
18,318
15,886
8,472
6,923
5,224
Net Income
53,392
45,687
27,194
31,403
26,920
Preferred Stock Dividends
(4,054)
(1,171)
-
-
-
Net Income Available to Common Shareholders
$
49,338
$
44,516
$
27,194
$
31,403
$
26,920
Overview
The Company is a financial holding company headquartered in St. Louis Park, Minnesota. The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple,
efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in “Note 1 - Description of the Business and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included as a part of this report. Certain policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that require the Company to make complex and subjective judgments.
Allowance for Loan Losses
The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to original contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.
Investment Securities Impairment
Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. In any such instance, the Company would consider many factors, including the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and the near-term prospects of the issuer, expected cash flows, and the intent and ability to hold the investment for a period of time
sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).
The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs an annual analysis on the pricing of investment securities to ensure that the prices represent reasonable estimates of fair value. The procedures include initial and ongoing reviews of pricing methodologies and trends. The Company seeks to ensure prices represent reasonable estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.
Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.
Deferred Tax Asset
The Company uses the asset and liability method of accounting for income taxes as prescribed by GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. If currently available information indicates it is “more likely than not” that the deferred tax asset will not be realized, a valuation allowance is established. 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. Accounting for deferred income taxes is a critical accounting estimate because the Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. These judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.
Results of Operations
Net Income
2022 Compared to 2021
Net income was $53.4 million for the year ended December 31, 2022, a 16.9% increase compared to net income of $45.7 million for the year ended December 31, 2021. Net income per diluted common share for the year ended December 31, 2022 was $1.72, a 12.0% increase, compared to $1.54 per diluted common share for the year ended December 31, 2021. ROA was 1.38% and 1.43% for the years ended December 31, 2022 and 2021, respectively. ROE was 13.90% and 14.45% for the years ended December 31, 2022 and 2021, respectively.
2021 Compared to 2020
Net income was $45.7 million for the year ended December 31, 2021, a 68.0% increase compared to net income of $27.2 million for the year ended December 31, 2020. Net income per diluted common share for the year ended December 31, 2021 was $1.54, a 64.8% increase, compared to $0.93 per diluted common share for the year ended December 31, 2020. Net income for the year ended December 31, 2020 was significantly impacted by increased provisions for loan losses, primarily attributable to economic uncertainties and evolving risks driven by the impacts of the COVID-19 pandemic, and non-recurring charges of $7.0 million related to prepayment fees associated with the early extinguishment of $94.0 million of higher priced FHLB term advances. ROA was 1.43% and 1.04% for the years ended December 31, 2021 and 2020, respectively. ROE was 14.45% and 10.51% for the years ended December 31, 2021 and 2020, respectively.
Net Interest Income
The Company’s primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate. Management’s ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings. The FOMC increased the targeted federal funds rate by a total of 425 basis points throughout 2022. This rapid increase may impact the comparability of net interest income between periods.
Average Balances and Yields
The following table presents, for the years ended December 31, 2022, 2021 and 2020, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.
December 31, 2022
December 31, 2021
December 31, 2020
Average
Interest
Yield/
Average
Interest
Yield/
Average
Interest
Yield/
Balance
& Fees
Rate
Balance
& Fees
Rate
Balance
& Fees
Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments
$
66,072
$
0.90
%
$
132,188
$
0.15
%
$
80,113
$
0.21
%
Investment Securities:
Taxable Investment Securities
448,500
13,960
3.11
317,954
7,015
2.21
234,873
5,712
2.43
Tax-Exempt Investment Securities (1)
72,379
3,101
4.29
75,313
3,242
4.30
87,587
3,807
4.35
Total Investment Securities
520,879
17,061
3.28
393,267
10,257
2.61
322,460
9,519
2.95
Paycheck Protection Program Loans (2)
7,441
13.03
103,151
6,441
6.24
122,240
4,143
3.39
Loans (1)(2)
3,183,271
145,857
4.58
2,481,706
112,587
4.54
2,032,180
101,469
4.99
Total Loans
3,190,712
146,827
4.60
2,584,857
119,028
4.60
2,154,420
105,612
4.90
Federal Home Loan Bank Stock
12,628
3.42
5,571
4.65
8,866
5.01
Total Interest Earning Assets
3,790,291
164,917
4.35
%
3,115,883
129,743
4.16
%
2,565,859
115,745
4.51
%
Noninterest Earning Assets
76,189
73,917
51,720
Total Assets
$
3,866,480
$
3,189,800
$
2,617,579
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits
$
524,968
$
4,336
0.83
%
$
441,528
$
2,052
0.46
%
$
295,036
$
1,626
0.55
%
Savings and Money Market Deposits
963,096
9,129
0.95
773,779
3,729
0.48
523,520
5,341
1.02
Time Deposits
284,868
3,264
1.15
323,638
4,099
1.27
374,195
7,806
2.09
Brokered Deposits
449,095
6,650
1.48
406,863
3,962
0.97
348,126
5,040
1.45
Total Interest Bearing Deposits
2,222,027
23,379
1.05
1,945,808
13,842
0.71
1,540,877
19,813
1.29
Federal Funds Purchased
149,608
4,507
3.01
2,479
0.24
7,239
1.53
Notes Payable
2,863
7.04
1,658
3.66
11,749
3.73
FHLB Advances
64,278
1,221
1.90
53,294
1.56
148,524
3,390
2.28
Subordinated Debentures
89,584
4,688
5.23
82,865
4,630
5.59
50,954
3,109
6.10
Total Interest Bearing Liabilities
2,528,360
33,997
1.34
%
2,086,104
19,370
0.93
%
1,759,343
26,862
1.53
%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits
910,490
764,087
579,595
Other Noninterest Bearing Liabilities
43,597
23,372
19,905
Total Noninterest Bearing Liabilities
954,087
787,459
599,500
Shareholders' Equity
384,033
316,237
258,736
Total Liabilities and Shareholders' Equity
$
3,866,480
$
3,189,800
$
2,617,579
Net Interest Income / Interest Rate Spread
130,920
3.01
%
110,373
3.23
%
88,883
2.98
%
Net Interest Margin (3)
3.45
%
3.54
%
3.46
%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans
(1,222)
(864)
(919)
Net Interest Income
$
129,698
$
109,509
$
87,964
(1) Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.
(2) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3) Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following table presents the changes in the volume and rate of interest bearing assets and liabilities for the year ended December 31, 2022, compared to the year ended December 31, 2021, and for the year ended December 31, 2021, compared to the year ended December 31, 2020:
Year Ended December 31, 2022
Year Ended December 31, 2021
Compared with
Compared with
Year Ended December 31, 2021
Year Ended December 31, 2020
Change Due To:
Interest
Change Due To:
Interest
(dollars in thousands)
Volume
Rate
Variance
Volume
Rate
Variance
Interest Earning Assets:
Cash Investments
$
(347)
$
$
$
$
(49)
$
Investment Securities:
Taxable Investment Securities
4,790
2,155
6,945
1,833
(530)
1,303
Tax-Exempt Investment Securities
(130)
(11)
(141)
(528)
(37)
(565)
Total Securities
4,660
2,144
6,804
1,305
(567)
Loans:
Paycheck Protection Program Loans
(10,709)
5,238
(5,471)
(1,192)
3,490
2,298
Loans
32,429
33,270
20,395
(9,277)
11,118
Total Loans
21,720
6,079
27,799
19,203
(5,787)
13,416
Federal Home Loan Bank Stock
(51)
(153)
(32)
(185)
Total Interest Earning Assets
$
26,258
$
8,917
$
35,174
$
20,433
$
(6,435)
$
13,998
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits
$
1,093
$
1,191
$
2,284
$
$
(254)
$
Savings and Money Market Deposits
2,703
2,697
5,400
1,206
(2,818)
(1,612)
Time Deposits
(543)
(292)
(835)
(640)
(3,067)
(3,707)
Brokered Deposits
1,146
1,542
2,688
(1,650)
(1,078)
Total Interest Bearing Deposits
4,399
5,138
9,537
1,818
(7,789)
(5,971)
Federal Funds Purchased
4,450
4,501
(11)
(94)
(105)
Notes Payable
(369)
(9)
(378)
FHLB Advances
(1,486)
(1,073)
(2,559)
Subordinated Debentures
(219)
1,783
(262)
1,521
Total Interest Bearing Liabilities
9,479
5,148
14,627
1,735
(9,227)
(7,492)
Net Interest Income
$
16,779
$
3,769
$
20,547
$
18,698
$
2,792
$
21,490
Interest Income, Interest Expense, and Net Interest Margin
2022 Compared to 2021
Net interest income was $129.7 million for the year ended December 31, 2022, an increase of $20.2 million, or 18.4%, compared to $109.5 million for the year ended December 31, 2021. The increase in net interest income was
primarily due to growth in average interest earning assets and higher yields on investment securities and core loans, offset partially by higher rates paid on deposits and borrowings and lower PPP fee recognition.
Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2022 was 3.45%, compared to 3.54% for the year ended December 31, 2021, a decrease of nine basis points. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the year ended December 31, 2022 was 3.27%, a one basis point decrease from 3.28% for the year ended December 31, 2021. The Company remains focused on managing the impact of continued interest rate hikes and the evolving shape of the yield curve during this unique interest rate environment.
As the PPP loan portfolio has almost fully paid off, the recognition of fees associated with the originations has decreased significantly, which impacts comparability between periods. The Company recognized $898,000 of PPP origination fees for the year ended December 31, 2022, compared to $5.4 million for the year ended December 31, 2021. There were no remaining PPP origination fees to be recognized as of December 31, 2022. At December 31, 2022, the Company had three PPP loans outstanding totaling $1.0 million, compared to 153 PPP loans outstanding totaling $26.2 million at December 31, 2021.
Average interest earning assets for the year ended December 31, 2022 increased $674.4 million, or 21.6%, to $3.79 billion from $3.12 billion for the year ended December 31, 2021. The increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances. Average interest bearing liabilities increased $442.3 million, or 21.2%, to $2.53 billion for the year ended December 31, 2022, from $2.09 billion for the year ended December 31, 2021. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits and federal funds purchased, offset partially by a decrease in time deposits.
Average interest earning assets produced a fully tax-equivalent yield of 4.35% for the year ended December 31, 2022, compared to 4.16% for the year ended December 31, 2021. The increase in the yield on interest earning assets was primarily due to growth and repricing of the loan and securities portfolios in the rising interest rate environment, offset partially by the lower recognition of PPP origination fees. The average rate paid on interest bearing liabilities was 1.34% for the year ended December 31, 2022, compared to 0.93% for the year ended December 31, 2021, primarily due to the rapid increase in market interest rates that occurred between the periods, which impacted all funding sources.
Interest Income. Total interest income on a tax-equivalent basis was $164.9 million for the year ended December 31, 2022, compared to $129.7 million for the year ended December 31, 2021. The $35.2 million, or 27.1%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees as the PPP loan portfolio has almost fully paid off.
Interest income on cash investments increased $398,000, or 199.9%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, despite a $66.1 million decrease in average balances, primarily due to the interest rate hikes during the year. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $6.8 million, or 66.3%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $127.6 million, or 32.4%, increase in average balances between the two periods and higher rates earned on securities.
Interest income on loans, on a fully-tax equivalent basis, for the year ended December 31, 2022 was $146.8 million, compared to $119.0 million for the year ended December 31, 2021. The $27.8 million, or 23.4%, increase was primarily due to a $605.9 million, or 23.4%, increase in the average balance of loans outstanding from continued organic loan growth and a four basis point increase in the average yield on loans, excluding PPP, partially offset by a $5.5 million decline of interest and fees earned on PPP loans.
Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans increased to 4.58% for the year ended December 31, 2022, which was four basis points higher than 4.54% for the year ended December 31, 2021. While loan fees have maintained
a relatively stable contribution to the aggregate loan yield, the Company has began to experience fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.
The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the years ended December 31, 2022, 2021 and 2020:
For the year ended December 31,
Interest
4.38
%
4.33
%
4.73
%
Fees
0.20
0.21
0.26
Yield on Loans, Excluding PPP Loans
4.58
%
4.54
%
4.99
%
Interest Expense. Interest expense on interest bearing liabilities increased $14.6 million, or 75.5%, to $34.0 million for the year ended December 31, 2022, compared to $19.4 million for the year ended December 31, 2021. The cost of interest bearing liabilities increased 41 basis points to 1.34% for the year ended December 31, 2022, compared to 0.93% for the year ended December 31, 2021. The increase was primarily due to the rapid increase in market interest rates that occurred between periods, which impacted all funding sources.
Interest expense on deposits increased to $23.4 million for the year ended December 31, 2022, compared to $13.8 million for the year ended December 31, 2021. The $9.5 million, or 68.9%, increase in interest expense on deposits was primarily due to the upward repricing of the deposit portfolio consistent with the higher rate environment and the average balance of interest bearing deposits increasing by $276.2 million, or 14.2%. The cost of total deposits increased 24 basis points from 0.51% for the year ended December 31, 2021, to 0.75% for the year ended December 31, 2022. The increase was primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings increased $5.1 million to $10.6 million for the year ended December 31, 2022, compared to $5.5 million for the year ended December 31, 2021. This increase was primarily due to the increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.
2021 Compared to 2020
Net interest income was $109.5 million for the year ended December 31, 2021, an increase of $21.5 million, or 24.5%, compared to $88.0 million for the year ended December 31, 2020. The increase in net interest income was largely attributable to growth in average interest earning assets and lower rates paid on deposits, offset partially by declining yields on loans.
Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2021 was 3.54%, compared to 3.46% for the year ended December 31, 2020, an increase of 8 basis points. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the year ended December 31, 2021 was 3.28%, a 3 basis point increase from 3.25% for the year ended December 31, 2020. The expansion of core net interest margin, a non-GAAP financial measure, was primarily due to the repricing of deposits and the early extinguishment of higher priced FHLB term advances, offset partially by a decline in the core loan yield and higher average cash balances.
The Company recognized $5.4 million of PPP origination fees for the year ended December 31, 2021, compared to $2.9 million for the year ended December 31, 2020. The elevated fee recognition is illustrated in the 6.24% PPP loan yield for the year ended December 31, 2021, compared to 3.39% for the year ended December 31, 2020.
Average interest earning assets for the year ended December 31, 2021 increased $550.0 million, or 21.4%, to $3.12 billion from $2.57 billion for the year ended December 31, 2020. The increase in average interest earning assets
was primarily due to increased cash balances, continued purchases of investment securities, and strong organic growth in the loan portfolio, offset partially by the forgiveness of PPP loans. Average interest bearing liabilities increased $326.8 million, or 18.6%, to $2.09 billion for the year ended December 31, 2021, from $1.76 billion for the year ended December 31, 2020. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of subordinated debentures in the second quarter of 2021, partially offset by a decrease in notes payable and FHLB advances.
Average interest earning assets produced a fully tax-equivalent yield of 4.16% for the year ended December 31, 2021, compared to 4.51% for the year ended December 31, 2020. The decline in the yield on interest earning assets was primarily due to excess cash balances and the historically low interest rate environment resulting in lower loan and security yields. The average rate paid on interest bearing liabilities was 0.93% for the year ended December 31, 2021, compared to 1.53% for the year ended December 31, 2020 primarily due to lower rates paid on deposits, the payoff of the Company’s notes payable and the early extinguishment of $94.0 million of higher priced FHLB term advances, offset partially by strong growth of interest bearing deposits and the issuance of additional subordinated debentures.
Interest Income. Total interest income on a tax-equivalent basis was $129.7 million for the year ended December 31, 2021, compared to $115.7 million for the year ended December 31, 2020. The $14.0 million, or 12.1%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio, as well as PPP loan income.
Interest income on cash investments increased $30,000, or 17.4%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $52.1 million, or 65.0%, increase in average cash balances, due to strong deposit inflows. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $738,000, or 7.7%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $70.8 million, or 22.0%, increase in average balances between the two periods, which was partially offset by a 34 basis point decline in the aggregate portfolio yield, driven by the historically low interest rate environment.
Interest income on loans, on a fully-tax equivalent basis, for the year ended December 31, 2021 was $119.0 million, compared to $105.6 million for the year ended December 31, 2020. The $13.4 million, or 12.7%, increase was due to a $430.4 million, or 20.0%, increase in the average balance of loans outstanding from continued organic loan growth, which was partially offset by a 30 basis point decline in the average yield on loans. The aggregate loan yield, excluding PPP loans decreased to 4.54% for the year ended December 31, 2021, which was 45 basis points lower than 4.99% for the year ended December 31, 2020, due to the historically low interest rate environment.
Interest Expense. Interest expense on interest bearing liabilities decreased $7.5 million, or 27.9%, to $19.4 million for the year ended December 31, 2021, compared to $26.9 million for the year ended December 31, 2020. The cost of interest bearing liabilities declined 60 basis points to 0.93% for the year ended December 31, 2021, compared to 1.53% for the year ended December 31, 2020. The decline was primarily due to lower rates paid on deposits, and the early extinguishment of $94.0 million of higher priced FHLB term advances, offset partially by growth of interest bearing deposits and the issuance of additional subordinated debentures.
Interest expense on deposits decreased to $13.8 million for the year ended December 31, 2021, compared to $19.8 million for the year ended December 31, 2020. The $6.0 million, or 30.1%, decrease in interest expense on deposits was primarily due to deposit rate cuts consistent with a lower rate environment and the repricing of time deposits, partially offset by the average balance of interest bearing deposits increasing by $404.4 million, or 26.3%. The cost of total deposits declined 42 basis points from 0.93% for the year ended December 31, 2020, to 0.51% for the year ended December 31, 2021.
Interest expense on borrowings decreased $1.5 million to $5.5 million for the year ended December 31, 2021, compared to $7.0 million for the year ended December 31, 2020. This decrease was primarily due to the lower average balance of federal funds purchased, the payoff of the Company’s note payable, the early extinguishment of $94.0 million of higher priced FHLB term advances, and the partial early redemption of $11.3 million of subordinated debentures
yielding 5.875%, offset partially by the issuance of $30.0 million of subordinated debentures in July 2021 yielding 3.25%.
Provision for Loan Losses
2022 Compared to 2021
The allowance for loan losses increased $8.0 million as of December 31, 2022, compared to December 31, 2021, reflecting a provision for loan losses of $7.7 million and net recoveries of $276,000 during 2022. The provision for loan losses was $7.7 million for the year ended December 31, 2022, an increase of $2.6 million, compared to the provision for loan losses of $5.2 million for the year ended December 31, 2021. The increase in the provision for loan losses was primarily attributable to the growth of the loan portfolio. The allowance for loan losses to total loans was 1.34% at December 31, 2022, compared to 1.42% at December 31, 2021.
As an emerging growth company, the adoption of Accounting Standards Update No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” or CECL, became effective January 1, 2023. With the adoption of CECL, provision expense may become more volatile in future periods due to changes in CECL model assumptions. The Company is currently in the process of finalizing its implementation of controls and processes which could affect the final impact of the adoption of this standard.
2021 Compared to 2020
The allowance for loan losses increased $5.2 million as of December 31, 2021, compared to December 31, 2020, reflecting a provision for loan losses of $5.2 million and net recoveries of $29,000 during 2021. The provision for loan losses was $5.2 million for the year ended December 31, 2021, a decrease of $7.6 million, compared to the provision for loan losses of $12.8 million for the year ended December 31, 2020. The decrease in the provision for loan losses related to improving economic conditions and increased clarity surrounding uncertainty and evolving risks driven by the impact of the COVID-19 pandemic, offset partially by growth of the loan portfolio.
The allowance for loan losses to total loans was 1.42% at December 31, 2021, compared to 1.50% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.43% at December 31, 2021, compared to 1.59% at December 31, 2020.
The following table presents a summary of the activity in the allowance for loan losses for the years ended December 31, 2022, 2021, and 2020:
Year Ended December 31,
(dollars in thousands)
Balance at Beginning of Period
$
40,020
$
34,841
$
22,526
Provision for Loan Losses
7,700
5,150
12,750
Charge-offs
(37)
(74)
(517)
Recoveries
Balance at End of Period
$
47,996
$
40,020
$
34,841
Noninterest Income
2022 Compared to 2021
Noninterest income was $6.3 million for the year ended December 31, 2022, compared to $5.3 million for the year ended December 31, 2021, an increase of $1.0 million, or 19.3%. The increase was primarily due to increases in
customer service fees, swap fees, bank-owned life insurance income and other income, offset partially by lower gains on sales of securities.
2021 Compared to 2020
Noninterest income was $5.3 million for the year ended December 31, 2021, compared to $5.8 million for the year ended December 31, 2020, a decrease of $530,000, or 9.1%. The decrease was primarily due to lower gains on sales of securities and swap fees, offset partially by bank owned-life insurance income.
The following table presents the major components of noninterest income for the year ended December 31, 2022, compared to the year ended December 31, 2021, and for the year ended December 31, 2021, compared to the year ended December 31, 2020:
Year Ended
Year Ended
December 31,
Increase/
December 31,
Increase/
(dollars in thousands)
(Decrease)
(Decrease)
Noninterest Income:
Customer Service Fees
$
1,236
$
1,007
$
$
1,007
$
$
Net Gain on Sales of Securities
(668)
1,503
(753)
Letter of Credit Fees
1,592
1,676
(84)
1,676
1,503
Debit Card Interchange Fees
Swap Fees
-
-
(907)
Bank-Owned Life Insurance
-
Other Income
1,517
Totals
$
6,332
$
5,309
$
1,023
$
5,309
$
5,839
$
(530)
Noninterest Expense
2022 Compared to 2021
Noninterest expense totaled $56.6 million for the year ended December 31, 2022, an $8.5 million, or 17.7%, increase from $48.1 million for the year ended December 31, 2021. The increase was primarily driven by a $6.1 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, a $684,000 increase in derivative collateral fees, and a $796,000 increase in other expense, offset partially by a decrease in debt prepayment fees.
The Company continues to invest in its people across the organization, with 246 full-time equivalent employees at December 31, 2022, and 220 employees at December 31, 2021.
Efficiency Ratio. The efficiency ratio, a non-GAAP financial measure, reports total noninterest expense, less amortization of intangible assets, as a percentage of net interest income plus total noninterest income less gains (losses) on sales of securities. Management believes this non-GAAP financial measure provides a meaningful comparison of operational performance and facilitates investors’ assessments of business performance and trends in comparison to peers in the banking industry.
The efficiency ratio was 41.5% for the year ended December 31, 2022, compared to 42.0% for the year ended December 31, 2021. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue making investments in technology as the industry adapts to evolving client behavior. At the same time, management seeks to contain costs whenever prudent, which is evident in the stable nature of the efficiency ratio.
2021 Compared to 2020
Noninterest expense totaled $48.1 million for the year ended December 31, 2021, a $2.7 million, or 6.0% increase from $45.4 million for the year ended December 31, 2020. The increase was primarily driven by a $5.3 million
increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, offset partially by a decrease in debt prepayment fees primarily attributable to a $7.0 million non-recurring prepayment fee associated with the early extinguishment of $94.0 million of higher priced FHLB term advances, incurred in 2020. Full-time equivalent employees increased from 183 as of December 31, 2020, to 220 as of December 31, 2021.
The efficiency ratio was 42.0% for the year ended December 31, 2021, compared to 49.0% for the year ended December 31, 2020. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes the impact of certain non-routine income and expenses from noninterest expense, mildly increased to 41.0% for the year ended December 31, 2021, compared to 40.5% for the year ended December 31, 2020.
The following table presents the major components of noninterest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, and for the year ended December 31, 2021, compared to the year ended December 31, 2020:
Year Ended
Year Ended
December 31,
Increase/
December 31,
Increase/
(dollars in thousands)
(Decrease)
(Decrease)
Noninterest Expense:
Salaries and Employee Benefits
$
36,941
$
30,889
$
6,052
$
30,889
$
25,568
$
5,321
Occupancy and Equipment
4,390
3,916
3,916
3,258
FDIC Insurance Assessment
1,365
1,305
1,305
Data Processing
1,396
1,222
1,222
1,027
Professional and Consulting Fees
2,664
2,520
2,520
1,966
Derivative Collateral Fees
-
Information Technology and Telecommunications
2,495
2,163
2,163
1,374
Marketing and Advertising
2,032
1,487
1,487
Intangible Asset Amortization
-
-
Amortization of Tax Credit Investments
(154)
(176)
Debt Prepayment Fees
-
(582)
7,043
(6,461)
Other Expense
4,051
3,255
3,255
2,646
Totals
$
56,620
$
48,095
$
8,525
$
48,095
$
45,387
$
2,708
Income Tax Expense
The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes and the recognition of tax credits. The Company’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income.
2022 Compared to 2021
Income tax expense was $18.3 million for the year ended December 31, 2022, compared to $15.9 million for the year ended December 31, 2021. The effective combined federal and state income tax rate for the year ended December 31, 2022 was 25.5%, compared to 25.8% for the year ended December 31, 2021.
2021 Compared to 2020
Income tax expense was $15.9 million for the year ended December 31, 2021, compared to $8.5 million for the year ended December 31, 2020. The effective combined federal and state income tax rate for the year ended December 31, 2021 was 25.8%, compared to 23.8% for the year ended December 31, 2020. The higher effective combined rate was primarily due to fewer tax credits being recognized during 2021.
Financial Condition
Overview
Total assets at December 31, 2022 were $4.35 billion, an increase of $868.0 million, or 25.0%, compared to December 31, 2021. The increase in total assets was primarily due to strong organic loan growth, purchases of investment securities and an increase of other assets, offset partially by a decrease in cash and cash equivalents. Total gross loans were $3.57 billion, an increase of $750.0 million, or 26.6%, compared to December 31, 2021.
Total liabilities at December 31, 2022 were $3.95 billion, an increase of $853.2 million, or 27.5%, compared to December 31, 2021. Total deposits were $3.42 billion, an increase of $470.3 million, or 16.0%, compared to December 31, 2021. Total borrowings were $476.7 million, an increase of $341.9 million, or 253.8%, compared to December 31, 2021.
Investment Securities Portfolio
The investment securities portfolio is used to make various term investments and is intended to provide the Company with adequate liquidity, a source of stable income, and at times, serve as collateral for certain types of deposits. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.
The investment securities portfolio consists primarily of U.S. government agency mortgage-backed securities, municipal securities, and corporate securities comprised primarily of subordinated debentures of banks and financial holding companies. In addition, the Company also holds U.S. treasury securities and other debt securities, all with varying contractual maturities. These maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities. All investment securities are held as available for sale.
Securities available for sale were $548.6 million at December 31, 2022, compared to $439.4 million at December 31, 2021, an increase of $109.3 million, or 24.9%. At December 31, 2022, government agency mortgage-backed securities represented 28.8% of the portfolio, municipal securities represented 23.9% of the portfolio, corporate securities represented 20.0% of the portfolio, U.S. treasury securities represented 0.5% of the portfolio, SBA securities represented 3.8% of the portfolio, other mortgage-backed securities represented 14.6% of the portfolio, and asset-backed securities represented 8.4% of the portfolio.
The following table presents the amortized cost and fair value of securities available for sale, by type, at December 31, 2022, 2021 and 2020:
December 31, 2022
December 31, 2021
December 31, 2020
Amortized
Fair
Amortized
Fair
Amortized
Fair
(dollars in thousands)
Cost
Value
Cost
Value
Cost
Value
U.S. Treasury Securities
$
2,621
$
2,580
$
$
$
-
$
-
SBA Securities
20,957
20,877
30,474
30,370
40,455
40,107
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA
55,200
54,441
Issued by FNMA and FHLMC
26,159
22,960
20,649
20,363
16,067
16,117
Other Residential Mortgage-Backed Securities
80,299
70,184
83,394
82,271
94,440
94,409
Commercial Mortgage-Backed Securities
10,993
10,345
10,646
11,138
11,254
12,032
All Other Commercial MBS
80,268
79,854
10,203
10,063
Total MBS
252,919
237,784
125,563
124,537
123,395
124,260
Municipal Securities
156,506
131,354
151,665
158,369
105,975
115,012
Corporate Securities
116,871
109,827
81,925
84,480
71,116
72,155
Asset-Backed Securities
46,623
46,191
39,867
40,852
38,135
39,095
Total
$
596,497
$
548,613
$
430,250
$
439,362
$
379,076
$
390,629
Loan Portfolio
The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.
The Company manages concentrations of credit exposure through a risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, internal and external loan review, and stress testing.
Total gross loans increased $750.0 million, or 26.6%, to $3.57 billion at December 31, 2022, compared to $2.82 billion at December 31, 2021. Excluding the forgiveness of $25.1 million of PPP loans, gross loans increased 27.7% at December 31, 2022 compared to December 31, 2021. The construction and land development, multifamily and commercial real estate, or CRE, nonowner occupied categories contributed most significantly to the $775.1 million of net loan growth, excluding PPP loans. As of December 31, 2022, construction and land development loans increased $84.3 million, or 30.0%, multifamily loans increased $396.5 million, or 43.6%, and nonowner occupied CRE loans increased $128.4 million, or 15.7%, when compared to December 31, 2021. While the Company’s strong loan growth continued to be driven by the strong brand of the Bank in the Twin Cities market and the M&A-related market disruption resulting in client and banker acquisition opportunities, overall loan demand began declining late in 2022 due to the rising interest rate environment.
The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:
December 31, 2022
December 31, 2021
December 31, 2020
December 31, 2019
December 31, 2018
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Commercial
$
435,344
12.2
%
$
360,169
12.8
%
$
304,220
13.1
%
$
276,035
14.5
%
$
260,833
15.7
%
Paycheck Protection Program
1,049
-
26,162
0.9
138,454
6.0
-
-
-
-
Construction and Land Development
365,796
10.3
281,474
10.0
170,217
7.3
196,776
10.3
210,041
12.6
Real Estate Mortgage:
1 - 4 Family Mortgage
355,474
10.0
305,317
10.8
294,479
12.7
260,611
13.6
226,773
13.6
Multifamily
1,306,738
36.6
910,243
32.3
626,465
26.9
515,014
26.9
407,934
24.5
CRE Owner Occupied
149,905
4.2
111,096
4.0
75,604
3.2
66,584
3.5
64,458
3.9
CRE Nonowner Occupied
947,008
26.5
818,569
29.0
709,300
30.5
592,545
31.0
490,632
29.5
Total Real Estate Mortgage Loans
2,759,125
77.3
2,145,225
76.1
1,705,848
73.3
1,434,754
75.0
1,189,797
71.5
Consumer and Other
8,132
0.2
6,442
0.2
7,689
0.3
4,473
0.2
4,260
0.2
Total Loans, Gross
3,569,446
100.0
%
2,819,472
100.0
%
2,326,428
100.0
%
1,912,038
100.0
%
1,664,931
100.0
%
Allowance for Loan Losses
(47,996)
(40,020)
(34,841)
(22,526)
(20,031)
Net Deferred Loan Fees
(9,293)
(9,535)
(9,151)
(5,512)
(4,515)
Total Loans, Net
$
3,512,157
$
2,769,917
$
2,282,436
$
1,884,000
$
1,640,385
The Company primarily focuses on real estate mortgage lending, which constituted 77.3% of the portfolio as of December 31, 2022. The composition of the portfolio has remained relatively consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.
As of December 31, 2022, investor CRE loans totaled $2.62 billion, consisting of $1.31 billion of loans secured by multifamily residential properties, $947.0 million of loans secured by nonowner occupied CRE and $365.8 million of construction and land development loans. Investor CRE loans represented 73.4% of the total gross loan portfolio, excluding PPP loans, and 514.9% of the Bank’s total risk-based capital at December 31, 2022, compared to 483.4% at December 31, 2021.
The following table presents time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at December 31, 2022 and 2021:
As of December 31, 2022
Due in One Year
More Than One
More Than Five
After
(dollars in thousands)
or Less
Year to Five Years
Year to Fifteen Years
Fifteen Years
Commercial
$
137,657
$
197,363
$
97,259
$
3,065
Paycheck Protection Program
-
1,049
-
-
Construction and Land Development
151,171
136,506
71,419
6,700
Real Estate Mortgage:
1 - 4 Family Mortgage
54,499
214,434
85,880
Multifamily
157,585
454,880
642,029
52,244
CRE Owner Occupied
5,709
47,894
96,302
-
CRE Nonowner Occupied
120,645
471,656
354,707
-
Total Real Estate Mortgage Loans
338,438
1,188,864
1,178,918
52,905
Consumer and Other
4,921
2,988
-
Total Loans, Gross
$
632,187
$
1,526,770
$
1,347,596
$
62,893
Interest Rate Sensitivity:
Fixed Interest Rates
$
333,898
$
1,187,519
$
804,838
$
11,115
Floating or Adjustable Rates
298,289
339,251
542,758
51,778
Total Loans, Gross
$
632,187
$
1,526,770
$
1,347,596
$
62,893
As of December 31, 2021
Due in One Year
More Than One
More Than Five
After
(dollars in thousands)
or Less
Year to Five Years
Year to Fifteen Years
Fifteen Years
Commercial
$
143,878
$
149,541
$
63,588
$
3,162
Paycheck Protection Program
25,264
-
-
Construction and Land Development
88,814
121,357
71,303
-
Real Estate Mortgage:
1 - 4 Family Mortgage
55,794
185,729
63,117
Multifamily
78,875
331,447
470,353
29,568
CRE Owner Occupied
4,679
22,385
84,032
-
CRE Nonowner Occupied
146,508
359,735
312,326
-
Total Real Estate Mortgage Loans
285,856
899,296
929,828
30,245
Consumer and Other
3,088
2,645
Total Loans, Gross
$
522,534
$
1,198,103
$
1,065,214
$
33,621
Interest Rate Sensitivity:
Fixed Interest Rates
$
226,008
$
919,024
$
591,560
$
7,477
Floating or Adjustable Rates
296,526
279,079
473,654
26,144
Total Loans, Gross
$
522,534
$
1,198,103
$
1,065,214
$
33,621
Asset Quality
The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs. Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present
make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “watch.”
The following table presents information on loan classifications at December 31, 2022. The Company had no assets classified as doubtful or loss.
Risk Category
(dollars in thousands)
Watch
Substandard
Total
Commercial
$
9,477
$
19,675
$
29,152
Construction and Land Development
Real Estate Mortgage:
1 - 4 Family Mortgage
1,073
Multifamily
3,270
-
3,270
CRE Owner Occupied
-
1,637
1,637
CRE Nonowner Occupied
18,112
6,239
24,351
Total Real Estate Mortgage Loans
22,063
8,268
30,331
Totals
$
32,252
$
28,049
$
60,301
Loans that have potential weaknesses that warranted a watchlist risk rating at December 31, 2022, totaled $32.3 million, compared to $49.3 million at December 31, 2021. Loans that warranted a substandard risk rating at December 31, 2022 totaled $28.0 million, compared to $22.6 million at December 31, 2021. Management continues to actively work with these borrowers and closely monitor substandard credits.
The Company developed programs for clients who experienced business and personal disruptions due to the COVID-19 pandemic by providing interest-only modifications, loan payment deferrals, and extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic are not considered TDRs. Modifications under this guidance, which could only be applied to modifications made by January 1, 2022, were granted on a case-by-case basis based on specific needs and circumstances affecting each borrower. As of December 31, 2022, the Company had no pandemic modified loans outstanding compared to 12 modified loans outstanding totaling $35.0 million, representing 1.3% of the loan portfolio, excluding PPP loans, as of December 31, 2021.
Nonperforming Assets
Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled $639,000 at December 31, 2022 and $722,000 at December 31, 2021, a decrease of $83,000. There were no loans 90 days past due and still accruing as of December 31, 2022 and 2021. There were no foreclosed assets as of December 31, 2022 and 2021.
The following table presents a summary of nonperforming assets, by category, at the dates indicated:
December 31,
(dollars in thousands)
Total Nonaccrual Loans
$
$
$
$
$
Total Nonperforming Loans
$
$
$
$
$
Total Nonperforming Assets (1)
$
$
$
$
$
Total Restructured Accruing Loans
1,304
Total Nonperforming Assets and Restructured Accruing Loans
$
$
2,026
$
1,040
$
$
Nonaccrual Loans to Total Loans
0.02
%
0.03
%
0.03
%
0.02
%
0.03
%
Nonperforming Loans to Total Loans
0.02
0.03
0.03
0.02
0.03
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)
0.02
0.03
0.03
0.02
0.03
(1) Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets. There were no loans greater than 90 days past due still accruing for any period shown.
The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. There are not any loans, outside of those included in the tables above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms. Due to the low levels of nonaccrual loans, gross income that would have been recorded on nonaccrual loans during the years ended December 31, 2022 and 2021 was approximately $60,000.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.
At December 31, 2022 the allowance for loan losses was $48.0 million, an increase of $8.0 million from $40.0 million at December 31, 2021. Net charge-offs (recoveries) totaled ($276,000) during the year ended December 31, 2022 and ($29,000) during the year ended December 31, 2021. The allowance for loan losses as a percentage of total loans was 1.34% at December 31, 2022, compared to 1.42% at December 31, 2021.
The following table presents a summary of the activity in the allowance for loan loss reserve for the periods indicated:
As of and for the year ended December 31,
(dollars in thousands)
Net Charge-offs (Recoveries)
Commercial
$
$
(8)
$
$
$
(15)
Construction and Land Development
-
-
-
(1)
Real Estate Mortgage:
1 - 4 Family Mortgage
(288)
(21)
(38)
CRE Owner Occupied
-
(32)
(10)
-
-
Total Real Estate Mortgage Loans
(288)
(53)
(38)
Consumer and Other
Total Net Charge-offs (Recoveries)
$
(276)
$
(29)
$
$
$
Net Charge-offs to Average Loans
Commercial
0.00
%
0.00
%
0.12
%
0.05
%
(0.01)
%
Construction and Land Development
0.00
0.00
0.00
0.00
0.04
Real Estate Mortgage:
1 - 4 Family Mortgage
(0.09)
(0.01)
0.03
0.01
(0.02)
CRE Owner Occupied
0.00
(0.04)
(0.01)
0.00
0.00
Total Real Estate Mortgage Loans
(0.01)
0.00
0.01
0.00
0.00
Consumer and Other
0.12
0.45
0.28
0.65
0.63
Total Net Charge-offs (Recoveries) to Average Loans
(0.01)
%
0.00
%
0.02
%
0.01
%
0.00
%
Gross Loans, End of Period
$
3,569,446
$
2,819,472
2,326,428
1,912,038
1,664,931
Average Loans
3,190,712
2,584,857
2,154,420
1,785,937
1,491,166
Allowance to Total Gross Loans
1.34
%
1.42
%
1.50
%
1.18
%
1.20
%
Allowance to Total Gross Loans, Excluding PPP Loans
1.35
1.43
%
1.59
%
N/A
N/A
The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:
December 31,
December 31,
December 31,
December 31,
December 31,
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Commercial
$
6,500
13.5
%
$
6,256
15.6
%
$
5,703
16.4
%
$
3,058
13.6
%
$
2,898
14.5
%
Paycheck Protection Program
-
-
0.2
-
-
-
-
Construction and Land Development
4,756
9.9
3,757
9.4
2,491
7.1
2,202
9.8
2,451
12.2
Real Estate Mortgage:
1 - 4 Family Mortgage
4,325
9.0
3,757
9.4
3,972
11.4
2,839
12.6
2,597
13.0
Multifamily
17,459
36.4
12,610
31.5
9,517
27.3
5,824
25.9
4,644
23.2
CRE Owner Occupied
1,965
4.1
1,495
3.7
1,162
3.3
3.5
4.0
CRE Nonowner Occupied
12,576
26.2
11,335
28.3
10,991
31.6
6,972
30.9
5,872
29.3
Total Real Estate Mortgage Loans
36,325
75.7
29,197
72.9
25,642
73.6
16,427
72.9
13,921
69.5
Consumer and Other
0.3
0.5
0.6
0.4
0.3
Unallocated
0.6
1.6
2.1
3.3
3.5
Total Allowance for Loan Losses
$
47,996
100.0
%
$
40,020
100.0
%
$
34,841
100.0
%
$
22,526
100.0
%
$
20,031
100.0
%
Goodwill and Other Intangible Assets
Goodwill was $2.6 million at December 31, 2022 and 2021. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired, which originated from the acquisition of First National Bank of the Lakes in May of 2016. Goodwill is not amortized but is subject to, at a minimum, an annual test for impairment. Other
intangible assets consist of core deposit relationships and favorable lease term intangibles. Total other intangible assets at December 31, 2022 and 2021 were $288,000 and $479,000, respectively. Other intangible assets are amortized over their estimated useful life.
Deposits
The principal sources of funds for the Company are deposits, consisting of demand deposits, money market accounts, savings accounts, and certificates of deposit. The following table presents the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:
December 31, 2022
December 31, 2021
December 31, 2020
December 31, 2019
December 31, 2018
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Noninterest Bearing Transaction Deposits
$
884,272
25.9
%
$
875,084
29.7
%
$
671,903
26.9
%
$
447,509
24.5
%
$
369,203
23.6
%
Interest Bearing Transaction Deposits
451,992
13.2
544,789
18.5
366,290
14.6
264,627
14.5
179,567
11.5
Savings and Money Market Deposits
1,031,873
30.2
863,567
29.3
657,617
26.3
516,785
28.3
402,639
25.8
Time Deposits
272,253
8.0
293,474
10.0
353,543
14.1
360,027
19.8
318,356
20.4
Brokered Deposits
776,153
22.7
369,323
12.5
452,283
18.1
234,362
12.9
291,169
18.7
Total Deposits
$
3,416,543
100.0
%
$
2,946,237
100.0
%
$
2,501,636
100.0
%
$
1,823,310
100.0
%
$
1,560,934
100.0
%
Total deposits at December 31, 2022 were $3.42 billion, an increase of $470.3 million, or 16.0%, compared to total deposits of $2.95 billion at December 31, 2021. The growth in deposits was primarily due to an increase in brokered deposits, which were used to supplement core deposit growth during the year. The Company’s ability to support loan growth with core deposit growth was impacted by the higher interest rate environment in 2022, especially with the emergence of unprecedented competition from the Treasury markets. When appropriate, the Company utilizes alternative funding sources such as brokered deposits, which provide flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels. At December 31, 2022, total brokered deposits were $776.2 million or 22.7% of total deposits, compared to total brokered deposits of $369.3 million, or 12.5% of total deposits at December 31, 2021.
The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense.
The following table presents the average balance and average rate paid on each of the following deposit categories for the years ended December 31, 2022, 2021, and 2020:
As of and for the
As of and for the
As of and for the
Year Ended
Year Ended
Year Ended
December 31, 2022
December 31, 2021
December 31, 2020
Average
Average
Average
Average
Average
Average
(dollars in thousands)
Balance
Rate
Balance
Rate
Balance
Rate
Noninterest Bearing Transaction Deposits
$
910,490
-
%
$
764,087
-
%
$
579,595
-
%
Interest Bearing Transaction Deposits
524,968
0.83
441,528
0.46
295,036
0.55
Savings and Money Market Deposits
963,096
0.95
773,779
0.48
523,520
1.02
Time Deposits < $250,000
215,419
1.00
255,808
1.24
244,779
2.13
Time Deposits > $250,000
69,449
1.61
67,830
1.37
129,416
2.01
Brokered Deposits
449,095
1.48
406,863
0.97
348,126
1.45
Total Deposits
$
3,132,517
0.75
%
$
2,709,895
0.51
%
$
2,120,472
0.93
%
The following table presents time deposits, including brokered time deposits, that are in excess of the FDIC insurance limit, currently $250,000, by time remaining until maturity:
December 31,
(dollars in thousands)
Three Months or Less
$
38,325
Over Three Months through Six Months
5,317
Over Six Months through 12 Months
20,896
Over 12 Months
27,735
Totals
$
92,273
The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.32 billion and $1.21 billion at December 31, 2022 and 2021, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
Federal Funds Purchased
In addition to deposits, the Company utilizes overnight borrowings to meet the daily liquidity needs of clients and fund loan growth. The Company had $287.0 million federal funds purchased as of December 31, 2022. The Company had no federal funds purchased as of December 31, 2021.
Other Borrowings
At December 31, 2022, the Company had outstanding FHLB advances of $97.0 million. The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $390.9 million and $550.8 million at December 31, 2022 and 2021, respectively.
The Company has an outstanding Loan and Security Agreement and revolving note with a third party correspondent lender, which is secured by 100% of the issued and outstanding stock of the Bank. On September 1, 2022, the Company entered into a second amendment to the agreement which increased the maximum principal amount of the Company’s revolving line of credit from $25.0 million to $40.0 million and extended the maturity date from February 28, 2023 to September 1, 2024. Concurrently with the subordinated debenture redemption on October 17, 2022, the Company drew on its revolving line of credit in the amount of $13.8 million. As of December 31, 2022, there was $13.8 million outstanding balances under the revolving line of credit. As of December 31, 2021, there were no outstanding balances under the revolving line of credit.
Additionally, the Company has borrowing capacity from other sources. As of December 31, 2022, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately $157.8 million and $126.0 million at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had no outstanding advances from the discount window.
Subordinated Debentures
On October 15, 2022, the Company elected to redeem the outstanding 2027 Notes in the aggregate principal amount of $13.8 million and made all payments of principal and interest due on the 2027 Notes on October 17, 2022.
For additional information, see “Note 12 - Subordinated Debentures” of the Company’s Consolidated Financial Statements included as part of this report.
Contractual Obligations
The following table presents supplemental information regarding total contractual obligations at December 31, 2022:
Within
One to
Three to
After
(dollars in thousands)
One Year
Three Years
Five Years
Five Years
Total
Deposits Without a Stated Maturity
$
2,552,415
$
-
$
-
$
-
$
2,552,415
Time Deposits
387,433
339,385
128,166
9,144
864,128
Federal Funds Purchased
287,000
-
-
-
287,000
Notes Payable
-
13,750
-
-
13,750
FHLB Advances
83,000
10,000
4,000
-
97,000
Subordinated Debentures
-
-
-
80,000
80,000
Commitment to Fund Tax Credit Investments
-
-
-
Operating Lease Obligations
1,078
2,597
Totals
$
3,310,695
$
364,213
$
132,837
$
89,468
$
3,897,213
Operating lease obligations are in place for facilities and land on which banking branches are located. See “Note 8 - Leases” of the Company’s Consolidated Financial Statements included as part of this report for additional information.
The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Capital
Total shareholders’ equity at December 31, 2022 was $394.1 million, an increase of $14.8 million, or 3.9%, over shareholders’ equity of $379.3 million at December 31, 2021, primarily due to net income retained and unrealized gains in the derivatives portfolio, offset partially by stock repurchases made under the Company’s stock repurchase program, preferred stock dividends, and an increase in unrealized losses in the securities portfolio.
Stock Repurchase Program. During the year ended December 31, 2022, the Company repurchased 662,765 shares of its common stock, representing 2.4% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $16.26 for a total of $10.8 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares.
On August 17, 2022, the Company’s board of directors approved a new stock repurchase program which authorizes the Company to repurchase up to $25.0 million of its common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded the $40.0 million stock repurchase program, under which approximately $1.6 million remained. The new stock repurchase program will expire on August 16, 2024. At December 31, 2022, no shares had been repurchased under the new plan. The company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program based on various factors including valuation, capital levels and other uses of capital.
Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.
Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of December 31, 2022. 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 are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.
Minimum Required
For Capital Adequacy
To be Well Capitalized
For Capital Adequacy
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2022
Company (Consolidated):
Total Risk-based Capital
$
536,352
13.15
%
$
326,190
8.00
%
$
428,125
10.50
%
N/A
N/A
Tier 1 Risk-based Capital
409,092
10.03
244,643
6.00
346,577
8.50
N/A
N/A
Common Equity Tier 1 Capital
342,578
8.40
183,482
4.50
285,417
7.00
N/A
N/A
Tier 1 Leverage Ratio
409,092
9.55
171,368
4.00
171,368
4.00
N/A
N/A
Bank:
Total Risk-based Capital
$
508,760
12.47
%
$
326,288
8.00
%
$
428,253
10.50
%
$
407,860
10.00
%
Tier 1 Risk-based Capital
460,404
11.29
244,716
6.00
346,681
8.50
326,288
8.00
Common Equity Tier 1 Capital
460,404
11.29
183,537
4.50
285,502
7.00
265,109
6.50
Tier 1 Leverage Ratio
460,404
10.76
171,113
4.00
171,113
4.00
213,891
5.00
Minimum Required
For Capital Adequacy
To be Well Capitalized
For Capital Adequacy
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Company (Consolidated):
Total Risk-based Capital
$
499,554
15.55
%
$
256,966
8.00
%
$
337,268
10.50
%
N/A
N/A
Tier 1 Risk-based Capital
367,161
11.43
192,725
6.00
273,027
8.50
N/A
N/A
Common Equity Tier 1 Capital
300,647
9.36
144,543
4.50
224,845
7.00
N/A
N/A
Tier 1 Leverage Ratio
367,161
10.82
135,723
4.00
135,723
4.00
N/A
N/A
Bank:
Total Risk-based Capital
$
415,848
12.94
%
$
257,005
8.00
%
$
337,319
10.50
%
$
321,256
10.00
%
Tier 1 Risk-based Capital
375,688
11.69
192,754
6.00
273,068
8.50
257,005
8.00
Common Equity Tier 1 Capital
375,688
11.69
144,565
4.50
224,879
7.00
208,816
6.50
Tier 1 Leverage Ratio
375,688
11.09
135,508
4.00
135,508
4.00
169,386
5.00
The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require a capital conservation buffer of 2.5% that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At December 31, 2022, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by
the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.
The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Fixed
Variable
Fixed
Variable
(dollars in thousands)
Unfunded Commitments Under Lines of Credit
$
444,669
$
404,065
$
335,842
$
463,306
Letters of Credit
20,658
95,111
10,521
109,126
Totals
$
465,327
$
499,176
$
346,363
$
572,432
Commitments to extend credit beyond current funding are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Commercial letters of credit are issued specifically to facilitate trade or commerce and are paid directly when the underlying transaction is consummated. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company had outstanding letters of credit with the FHLB in the amount of $78.4 million and $36.5 million at December 31, 2022 and 2021, respectively, on behalf of customers and to secure public deposits.
Liquidity
Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or financial condition. The Bank’s ALM Committee, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.
The Company manages liquidity by maintaining adequate levels of cash and other assets from on- and off-balance sheet arrangements. Specifically, on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB, the Federal Reserve Bank of Minneapolis, and a correspondent lender, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity.
In addition, the Bank is a member of the American Financial Exchange, or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of December 31, 2022 and 2021, the Company had no borrowings outstanding through the AFX.
The following tables present a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity-On-Balance Sheet
December 31, 2022
December 31, 2021
(dollars in thousands)
Cash and Cash Equivalents
$
48,090
$
130,884
Securities Available for Sale
548,613
439,362
Total Primary Liquidity
$
596,703
$
570,246
Ratio of Primary Liquidity to Total Deposits
17.5
%
19.4
%
Secondary Liquidity-Off-Balance Sheet
Borrowing Capacity
December 31, 2022
December 31, 2021
(dollars in thousands)
Net Secured Borrowing Capacity with the FHLB
$
390,898
$
550,807
Net Secured Borrowing Capacity with the Federal Reserve Bank
157,827
126,043
Unsecured Borrowing Capacity with Correspondent Lenders
208,000
208,000
Secured Borrowing Capacity with Correspondent Lender
26,250
25,000
Total Secondary Liquidity
$
782,975
$
909,850
Ratio of Primary and Secondary Liquidity to Total Deposits
40.4
%
50.2
%
During the year ended December 31, 2022, primary liquidity increased $26.5 million due to a $109.3 million increase in securities available for sale, offset partially by a $82.8 million decrease in cash and cash equivalents, when compared to December 31, 2021. Secondary liquidity decreased $126.9 million as of December 31, 2022 when compared to December 31, 2021, due to a $159.9 million decrease in the borrowing capacity with the FHLB, offset partially by a $31.8 million increase on the secured credit line with the Federal Reserve Bank and a $1.3 increase in the secured borrowing capacity with a correspondent lender.
In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At December 31, 2022, core deposits totaled approximately $2.55 billion and represented 74.6% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.
The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity and interest rate risk management purposes. At December 31, 2022, brokered deposits totaled $776.2 million, consisting of $591.9 million of brokered time deposits and $184.3 million of non-maturity brokered money market and transaction accounts. At December 31, 2021, brokered deposits totaled $369.3 million, consisting of $238.1 million of brokered time deposits and $131.2 million of non-maturity brokered money market and transaction accounts.
The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of December 31, 2022, the Company was in compliance with all established liquidity guidelines in the policy.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial data included in this report are not measures of financial performance recognized by GAAP. Management uses these non-GAAP financial measures in the analysis of performance:
● "Pre-Provision Net Revenue" is defined as net interest income plus total noninterest income (excluding all gains and losses on sales of assets) minus total non-interest expense, excluding the amortization of tax credit investments and debt prepayment fees.
● “Core Net Interest Margin” is defined as the ratio of net interest income (on a fully tax-equivalent basis), reduced by loan fees and PPP interest and fees, divided by interest earning assets, excluding average PPP loans.
● “Efficiency ratio” is defined as noninterest expense less the amortization of intangibles divided by our operating revenue, which is equal to net interest income plus noninterest income excluding gains and losses on sales of assets. In management’s judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to the Company’s core business.
● “Adjusted Efficiency ratio” is defined as the efficiency ratio adjusted to exclude the amortization of tax credit investments and debt prepayments fees from noninterest expense.
● “Adjusted Noninterest expense to average assets” is defined as the ratio of noninterest expense adjusted to exclude the amortization of tax credit investments and debt prepayment fees, divided by average assets.
● “Tangible common equity” is defined as shareholders’ equity reduced by preferred stock, goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common shareholders’ equity exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing both equity and assets while not increasing tangible equity or tangible assets.
● “Tangible common equity to tangible assets” is defined as the ratio of tangible common equity, as defined above, divided by total assets reduced by goodwill and other intangible assets. The Company believes that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common shareholders’ equity to total assets, each exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing both equity and assets while not increasing our tangible equity or tangible assets.
● “Tangible book value per share” is defined as tangible common shareholders’ equity divided by total common voting and non-voting shares outstanding. The Company believes that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing book value while not increasing tangible book value.
● “Return on average tangible common equity” is defined as the ratio of net income available to common shareholders, divided by average tangible common equity. Management believes that this measure is important to many investors in the marketplace because it measures the return on common equity, exclusive of the effects of preferred stock and intangible assets on earnings and capital.
● “Adjusted Diluted Earnings per Common Share” is defined as net income available to common shareholders excluding the impact of debt prepayment fees divided by diluted weighted average common shares outstanding. In our judgment, the adjustments to earnings remove the volatility that is associated with certain one-time items unrelated to our core business.
The Company believes these non-GAAP financial measures provide useful information to management and investors that is supplementary to the financial condition, results of operations and cash flows computed in accordance with GAAP; however, the Company acknowledges that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
As of and for the year ended December 31,
(dollars in thousands)
Pre-Provision Net Revenue
Noninterest Income
$
6,332
$
5,309
$
5,839
$
3,826
$
2,543
Less: (Gain) Loss on Sales of Securities
(82)
(750)
(1,503)
(516)
Total Operating Noninterest Income
6,250
4,559
4,336
3,310
2,668
Plus: Net Interest Income
129,698
109,509
87,964
74,132
64,738
Net Operating Revenue
$
135,948
$
114,068
$
92,300
$
77,442
$
67,406
Noninterest Expense
$
56,620
$
48,095
$
45,387
$
36,932
$
31,562
Less: Amortization of Tax Credit Investments
(408)
(562)
(738)
(3,225)
(3,293)
Less: Debt Prepayment Fees
-
(582)
(7,043)
-
-
Total Operating Noninterest Expense
$
56,212
$
46,951
$
37,606
$
33,707
$
28,269
Pre-Provision Net Revenue
$
79,736
$
67,117
$
54,694
$
43,735
$
39,137
Plus:
Non-Operating Revenue Adjustments
1,503
(125)
Less:
Provision for Loan Losses
7,700
5,150
12,750
2,700
3,575
Non-Operating Expense Adjustments
1,144
7,781
3,225
3,293
Provision for Income Taxes
18,318
15,886
8,472
6,923
5,224
Net Income
$
53,392
$
45,687
$
27,194
$
31,403
$
26,920
Average Assets
$
3,866,480
$
3,189,800
$
2,617,579
$
2,114,211
$
1,777,592
Pre-Provision Net Revenue Return on Average Assets
2.06
%
2.10
%
2.09
%
2.07
%
2.20
%
As of and for the year ended December 31,
(dollars in thousands)
Core Net Interest Margin
Net Interest Income (Tax-Equivalent Basis)
$
130,920
$
110,373
$
88,883
$
75,040
$
65,752
Less: Loan Fees
(6,273)
(5,173)
(5,283)
(4,562)
(5,654)
Less: PPP Interest and Fees
(970)
(6,441)
(4,143)
-
-
Core Net Interest Income
$
123,677
$
98,759
$
79,457
$
70,478
$
60,098
Average Interest Earning Assets
3,790,291
3,115,883
2,565,859
2,091,198
1,766,492
Less: Average PPP Loans
(7,441)
(103,151)
(122,240)
-
-
Core Average Interest Earning Assets
$
3,782,850
$
3,012,732
$
2,443,619
$
2,091,198
$
1,766,492
Core Net Interest Margin
3.27
%
3.28
%
3.25
%
3.37
%
3.40
%
As of and for the year ended December 31,
(dollars in thousands)
Efficiency Ratio
Noninterest Expense
$
56,620
$
48,095
$
45,387
$
36,932
$
31,562
Less: Amortization of Intangible Assets
(191)
(191)
(191)
(191)
(191)
Adjusted Noninterest Expense
$
56,429
$
47,904
$
45,196
$
36,741
$
31,371
Net Interest Income
129,698
109,509
$
87,964
$
74,132
$
64,738
Noninterest Income
6,332
5,309
5,839
3,826
2,543
Less: (Gain) Loss on Sales of Securities
(82)
(750)
(1,503)
(516)
Adjusted Operating Revenue
$
135,948
$
114,068
$
92,300
$
77,442
$
67,406
Efficiency Ratio
41.5
%
42.0
%
49.0
%
47.4
%
46.5
%
Adjusted Efficiency Ratio
Noninterest Expense
$
56,620
$
48,095
$
45,387
$
36,932
$
31,562
Less: Amortization of Tax Credit Investments
(408)
(562)
(738)
(3,225)
(3,293)
Less: Debt Prepayment Fees
-
(582)
(7,043)
-
-
Less: Amortization of Intangible Assets
(191)
(191)
(191)
(191)
(191)
Adjusted Noninterest Expense
$
56,021
$
46,760
$
37,415
$
33,516
$
28,078
Net Interest Income
129,698
109,509
87,964
74,132
64,738
Noninterest Income
6,332
5,309
5,839
3,826
2,543
Less: (Gain) Loss on Sales of Securities
(82)
(750)
(1,503)
(516)
Adjusted Operating Revenue
$
135,948
$
114,068
$
92,300
$
77,442
$
67,406
Adjusted Efficiency Ratio
41.2
%
41.0
%
40.5
%
43.3
%
41.7
%
As of and for the year ended December 31,
(dollars in thousands)
Adjusted Noninterest Expense to Average Assets
Noninterest Expense
$
56,620
$
48,095
$
45,387
$
36,932
$
31,562
Less: Amortization of Tax Credit Investments
(408)
(562)
(738)
(3,225)
(3,293)
Less: Debt Prepayment Fees
-
(582)
(7,043)
-
-
Adjusted Noninterest Expense
$
56,212
$
46,951
$
37,606
$
33,707
$
28,269
Average Assets
$
3,866,480
$
3,189,800
$
2,617,579
$
2,114,211
$
1,777,592
Adjusted Noninterest Expense to Average Assets
1.45
%
1.47
%
1.44
%
1.59
%
1.59
%
As of and for the year ended December 31,
(dollars in thousands)
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Total Shareholders' Equity
$
394,064
$
379,272
$
265,405
$
244,794
$
220,998
Less: Preferred Stock
(66,514)
(66,514)
-
-
-
Total Common Shareholders' Equity
327,550
312,758
265,405
244,794
220,998
Less: Intangible Assets
(2,914)
(3,105)
(3,296)
(3,487)
(3,678)
Tangible Common Equity
$
324,636
$
309,653
$
262,109
$
241,307
$
217,320
Total Assets
$
4,345,662
$
3,477,659
$
2,927,345
$
2,268,830
$
1,973,741
Less: Intangible Assets
(2,914)
(3,105)
(3,296)
(3,487)
(3,678)
Tangible Assets
$
4,342,748
$
3,474,554
$
2,924,049
$
2,265,343
$
1,970,063
Tangible Common Equity/Tangible Assets
7.48
%
8.91
%
8.96
%
10.65
%
11.03
%
Tangible Book Value Per Share
Book Value Per Common Share
$
11.80
$
11.09
$
9.43
$
8.45
$
7.34
Less: Effects of Intangible Assets
(0.11)
(0.11)
(0.12)
(0.12)
(0.12)
Tangible Book Value Per Common Share
$
11.69
$
10.98
$
9.31
$
8.33
$
7.22
Return on Average Tangible Common Equity
Net Income Available to Common Shareholders
$
49,338
$
44,516
$
27,194
$
31,403
$
26,920
Average Shareholders' Equity
$
384,033
$
316,237
$
258,736
$
232,539
$
194,083
Less: Average Preferred Stock
(66,514)
(24,915)
-
-
-
Average Common Equity
317,519
291,322
258,736
232,539
194,083
Less: Effects of Average Intangible Assets
(3,012)
(3,204)
(3,395)
(3,582)
(3,772)
Average Tangible Common Equity
$
314,507
$
288,118
$
255,341
$
228,957
$
190,311
Return on Average Tangible Common Equity
15.69
%
15.45
%
10.65
%
13.72
%
14.15
%
As of and for the year ended December 31,
(dollars in thousands)
Adjusted Diluted Earnings Per Common Share
Net Income Available to Common Shareholders
$
49,338
$
44,516
$
27,194
$
31,403
$
26,920
Add: Debt Prepayment Fees
-
7,043
-
-
Less: Tax Impact
-
(151)
(1,676)
-
-
Net Income, Excluding Impact of Debt Prepayment Fees
$
49,338
$
44,947
$
32,561
$
31,403
$
26,920
Diluted Weighted Average Shares Outstanding
28,668,177
28,968,286
29,170,220
29,996,776
29,436,214
Adjusted Diluted Earnings Per Common Share
$
1.72
$
1.55
$
1.12
$
1.05
$
0.91

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As a financial institution, the Company’s primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. The Company continually seeks to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.
The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis. The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.
The Company manages the interest rate risk associated with interest earning assets by managing the interest rates and terms associated with the investment securities portfolio by purchasing and selling investment securities from time to time. The Company manages the interest rate risk associated with interest bearing liabilities by managing the interest rates and terms associated with wholesale borrowings and deposits from customers which the Company relies on for funding. For example, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities.
The Company has entered into certain hedging transactions including interest rate swaps and caps, which are designed to lessen elements of the Company’s interest rate exposure. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. At December 31, 2022 and December 31, 2021, these cash flow hedges had a total notional amount of $288.0 million and $235.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.
Net Interest Income Simulation
The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purposes of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest
rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.
Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of December 31, 2022 are presented in the table below. The projections assume an immediate, parallel shift downward of the yield curve of 100, 200, and 300 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 400 basis points does not provide meaningful results and thus is not presented.
(dollars in thousands)
December 31, 2022
December 31, 2021
Change (basis points)
Forecasted
Percentage
Forecasted
Percentage
in Interest Rates
Net Interest
Change
Net Interest
Change
(12-Month Projection)
Income
from Base
Income
from Base
+400
$
129,621
(4.84)
%
$
116,256
5.75
%
+300
131,357
(3.57)
114,328
4.00
+200
133,089
(2.30)
112,288
2.15
+100
134,591
(1.20)
110,539
0.55
136,220
-
109,930
-
−100
137,641
1.04
106,955
(2.71)
−200
137,968
1.28
NM
NM
−300
138,587
1.74
NM
NM
The table above indicates that as of December 31, 2022, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a 4.84% decrease in net interest income. In the event of an immediate 300 basis point decrease in interest rates, the Company would experience a 1.74% increase in net interest income.
The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or re-price faster than the Company’s assets. Actual results could differ from those projected if the Company grows assets and liabilities faster or slower than estimated, if the Company experienced a net outflow of deposit liabilities, or if the mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if the Company experienced substantially different prepayment speeds in the loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that the Company may undertake in response to potential or actual changes in interest rates, such as changes to the Company’s loan, investment, deposit, or funding strategies.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bridgewater Bancshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bridgewater Bancshares, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CliftonLarsonAllen LLP
CliftonLarsonAllen LLP
Minneapolis, Minnesota
March 6, 2023
We have served as the Company’s auditor since 2005.
CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
December 31,
December 31,
ASSETS
Cash and Cash Equivalents
$
87,043
$
143,473
Bank-Owned Certificates of Deposit
1,181
1,876
Securities Available for Sale, at Fair Value
548,613
439,362
Loans, Net of Allowance for Loan Losses of $47,996 at December 31, 2022, and $40,020 at December 31, 2021
3,512,157
2,769,917
Federal Home Loan Bank (FHLB) Stock, at Cost
19,606
5,242
Premises and Equipment, Net
48,445
49,395
Accrued Interest
13,479
9,186
Goodwill
2,626
2,626
Other Intangible Assets, Net
Bank-Owned Life Insurance
33,485
25,316
Other Assets
78,739
30,787
Total Assets
$
4,345,662
$
3,477,659
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing
$
884,272
$
875,084
Interest Bearing
2,532,271
2,071,153
Total Deposits
3,416,543
2,946,237
Federal Funds Purchased
287,000
-
Notes Payable
13,750
-
FHLB Advances
97,000
42,500
Subordinated Debentures, Net of Issuance Costs
78,905
92,239
Accrued Interest Payable
2,831
1,409
Other Liabilities
55,569
16,002
Total Liabilities
3,951,598
3,098,387
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value; Authorized 10,000,000
Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at December 31, 2022 and December 31, 2021
66,514
66,514
Common Stock- $0.01 par value; Authorized 75,000,000
Common Stock - Issued and Outstanding 27,751,950 at December 31, 2022 and 28,206,566 at December 31, 2021
Additional Paid-In Capital
96,529
104,123
Retained Earnings
248,685
199,347
Accumulated Other Comprehensive Income (Loss)
(17,942)
9,006
Total Shareholders' Equity
394,064
379,272
Total Liabilities and Equity
$
4,345,662
$
3,477,659
See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except per share data)
Year Ended
December 31,
December 31,
December 31,
INTEREST INCOME
Loans, Including Fees
$
146,256
$
118,845
$
105,492
Investment Securities
16,410
9,576
8,720
Other
1,029
Total Interest Income
163,695
128,879
114,826
INTEREST EXPENSE
Deposits
23,379
13,842
19,813
Notes Payable
FHLB Advances
1,221
3,390
Subordinated Debentures
4,688
4,630
3,109
Federal Funds Purchased
4,507
Total Interest Expense
33,997
19,370
26,862
NET INTEREST INCOME
129,698
109,509
87,964
Provision for Loan Losses
7,700
5,150
12,750
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
121,998
104,359
75,214
NONINTEREST INCOME
Customer Service Fees
1,236
1,007
Net Gain on Sales of Available for Sale Securities
1,503
Other Income
5,014
3,552
3,510
Total Noninterest Income
6,332
5,309
5,839
NONINTEREST EXPENSE
Salaries and Employee Benefits
36,941
30,889
25,568
Occupancy and Equipment
4,390
3,916
3,258
Other Expense
15,289
13,290
16,561
Total Noninterest Expense
56,620
48,095
45,387
INCOME BEFORE INCOME TAXES
71,710
61,573
35,666
Provision for Income Taxes
18,318
15,886
8,472
NET INCOME
53,392
45,687
27,194
Preferred Stock Dividends
(4,054)
(1,171)
-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
49,338
$
44,516
$
27,194
EARNINGS PER SHARE
Basic
$
1.78
$
1.59
$
0.95
Diluted
1.72
1.54
0.93
Dividends Paid Per Common Share
-
-
-
See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
December 31,
December 31,
December 31,
Net Income
$
53,392
$
45,687
$
27,194
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities
(56,914)
(1,689)
6,394
Unrealized Gains (Losses) on Cash Flow Hedges
20,430
3,991
(3,185)
Reclassification Adjustment for (Gains) Losses Realized in Income
(90)
(924)
Income Tax Impact
9,626
(645)
(480)
Total Other Comprehensive Income (Loss), Net of Tax
(26,948)
2,427
1,805
Comprehensive Income
$
26,444
$
48,114
$
28,999
See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(amounts in thousands, except share data)
Accumulated
Additional
Other
Preferred
Common Stock
Paid-In
Retained
Comprehensive
Year Ended
Stock
Shares
Amount
Capital
Earnings
Income (Loss)
Total
BALANCE December 31, 2019
$
-
28,973,572
$
$
112,093
$
127,637
$
4,774
$
244,794
Stock-based Compensation
-
29,050
-
1,668
-
-
1,668
Comprehensive Income
-
-
-
-
27,194
1,805
28,999
Stock Options Exercised
-
74,400
-
-
Stock Repurchases
-
(940,781)
(10)
(10,324)
-
-
(10,334)
Issuance of Restricted Stock Awards
-
18,641
-
-
-
-
-
Forfeiture of Restricted Stock Awards
-
(8,200)
-
-
-
-
-
Restricted Shares Withheld for Taxes
-
(3,189)
-
(39)
-
-
(39)
BALANCE December 31, 2020
-
28,143,493
103,714
154,831
6,579
265,405
Stock-based Compensation
-
18,920
-
2,426
-
-
2,426
Comprehensive Income
-
-
-
-
45,687
2,427
48,114
Preferred Stock Offering, Net of Issuance Costs
66,514
-
-
-
-
-
66,514
Stock Options Exercised
-
164,405
-
-
Stock Repurchases
-
(146,445)
(2)
(2,299)
-
-
(2,301)
Vested Restricted Stock Units
-
51,146
(1)
-
-
-
Restricted Shares Withheld for Taxes
-
(24,953)
-
(439)
-
-
(439)
Preferred Stock Dividend
-
-
-
-
(1,171)
-
(1,171)
BALANCE December 31, 2021
66,514
28,206,566
104,123
199,347
9,006
379,272
Stock-based Compensation
-
19,024
-
3,340
-
-
3,340
Comprehensive Income (Loss)
-
-
-
-
53,392
(26,948)
26,444
Stock Options Exercised
-
133,301
-
-
Stock Repurchases
-
(662,765)
(6)
(10,772)
-
-
(10,778)
Forfeiture of Restricted Stock Awards
-
(1,000)
-
(2)
-
-
(2)
Vested Restricted Stock Units
-
96,786
(1)
-
-
-
Restricted Shares Withheld for Taxes
-
(39,962)
-
(735)
-
-
(735)
Preferred Stock Dividend
-
-
-
-
(4,054)
-
(4,054)
BALANCE December 31, 2022
$
66,514
27,751,950
$
$
96,529
$
248,685
$
(17,942)
$
394,064
See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
December 31,
December 31,
December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$
53,392
$
45,687
$
27,194
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale
1,867
3,362
2,691
Net Gain on Sales of Securities Available for Sale
(82)
(750)
(1,503)
Provision for Loan Losses
7,700
5,150
12,750
Depreciation of Premises and Equipment
2,565
2,369
1,206
Loss on Sale of Premises and Equipment
-
Amortization of Other Intangible Assets
Amortization of Right-of use Asset
-
-
Amortization of Subordinated Debt Issuance Costs
Stock-based Compensation
3,340
2,426
1,668
Deferred Income Taxes
(1,401)
(4,522)
(2,590)
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets
(14,080)
(4,064)
(5,121)
Accrued Interest Payable and Other Liabilities
30,576
3,946
(13,692)
Net Cash Provided by Operating Activities
84,999
54,236
23,019
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-Owned Certificates of Deposit
(206)
Proceeds from Sales of Securities Available for Sale
64,439
11,877
40,862
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale
38,226
44,235
32,577
Purchases of Securities Available for Sale
(268,259)
(109,898)
(170,488)
Net Increase in Loans
(749,940)
(492,631)
(411,320)
Net (Increase) Decrease in FHLB Stock
(14,364)
(215)
2,797
Purchases of Premises and Equipment
(1,633)
(777)
(24,688)
Proceeds from Sales of Foreclosed Assets
-
-
Purchase of Bank-Owned Life Insurance
(7,407)
(25,000)
-
Net Cash Used in Investing Activities
(938,243)
(571,425)
(530,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
470,306
444,601
678,326
Net Increase in Federal Funds Purchased
287,000
-
-
Principal Proceeds (Payments) on Notes Payable
13,750
(11,000)
(2,000)
Proceeds from FHLB Advances
158,000
-
100,000
Principal Payments on FHLB Advances
(103,500)
(15,000)
(179,000)
Issuance of Preferred Stock, net of Issuance Costs
-
66,514
-
Preferred Stock Dividends Paid
(4,054)
(1,171)
-
Issuance of Subordinated Debt, net of Issuance Costs
-
29,309
48,783
Redemption of Subordinated Debt
(13,750)
(11,250)
-
Stock Options Exercised
Stock Repurchases
(10,778)
(2,301)
(10,334)
Forfeiture of Restricted Stock Awards
(2)
-
-
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards
(620)
(439)
(39)
Shares Repurchased for Tax Withholdings Upon Exercise of Stock Options
(115)
-
-
Net Cash Provided by Financing Activities
796,814
499,987
636,053
NET CHANGE IN CASH AND CASH EQUIVALENTS
(56,430)
(17,202)
128,740
Cash and Cash Equivalents Beginning
143,473
160,675
31,935
Cash and Cash Equivalents Ending
$
87,043
$
143,473
$
160,675
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest
$
32,159
$
19,135
$
27,004
Cash Paid for Income Taxes
20,565
19,376
10,723
Loans Transferred to Foreclosed Assets
-
-
Premises and Equipment Transferred to Other Assets
-
-
Net Investment Securities Purchased but Not Settled
2,438
-
-
See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Description of the Business and Summary of Significant Accounting Policies
Organization
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company headquartered in St. Louis Park, Minnesota, whose operations consist of the ownership of its wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc. The Bank commenced operations in 2005 and provides retail and commercial loan and deposit services, principally to customers within the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In 2008, the Bank formed BWB Holdings, LLC, a wholly owned subsidiary of the Bank, for the purpose of holding repossessed property. In 2018, the Bank formed Bridgewater Investment Management, Inc., a wholly owned subsidiary of the Bank, for the purpose of holding certain municipal securities and to engage in municipal lending activities.
Bridgewater Risk Management, Inc. was incorporated in December 2016 as a wholly-owned insurance company subsidiary of the Company. It insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. Bridgewater Risk Management pools resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
Principles of Consolidation
The consolidated financial statements include the amounts of the Company, the Bank, with locations in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, Minnesota, BWB Holdings, LLC, Bridgewater Investment Management, Inc., and Bridgewater Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Information available which could affect judgments includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 pandemic related changes, and changes in the financial condition of borrowers.
Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the
fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on March 13, 2018; (2) the last day of the fiscal year in which the Company has $1.235 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act; or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
Cash and Cash Equivalents
For purpose of the consolidated statements of cash flows, cash and cash equivalents include cash, both interest bearing and noninterest bearing balances due from banks and federal funds sold, all of which mature within 90 days. Cash flows from loans and deposits are reported net.
Bank-Owned Certificates of Deposit
Bank-owned certificates of deposit mature within five years and are carried at cost.
Securities Available for Sale
Debt securities are classified as available for sale and are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss). Realized gains and losses on securities available for sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income (loss). Gains and losses on sales of 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 over the estimated life (earliest call date, maturity, or estimated life) using a prospective method that approximates level yield.
Declines in the fair value of individual available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to the fair value. The Company monitors the investment securities portfolio for impairment on an individual security basis and has a process in place to identify 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 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.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid balances adjusted for charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans, and premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and recognized as an adjustment of the related loan yield using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
The accrual of interest on all loans is discounted if the loan is 90 days past due unless the credit is well-secured and in process of collection. 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 is considered doubtful.
All interest accrued, but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income and amortization of related deferred loan fees or costs is suspended. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. The cash-basis is used when a determination has been made that the principal and interest of the loan is collectible. If collectability of the principal and interest is in doubt, payments are applied to loan principal. The determination of ultimate collectability is supported by a current, well documented credit evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has demonstrated a period of sustained performance, and future payments are reasonably assured. A sustained period of repayment performance generally would be a minimum of six months.
Allowance for Loan Losses
The allowance for loan losses (the “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 all or a portion of the loan balance to be uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to the allowance.
The allowance consists of three primary components, general reserves, specific reserves related to impaired loans, and unallocated reserves. The general component covers nonimpaired loans and is based on historical losses adjusted for current 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; trends in volume and terms of loans; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions, including uncertainty related to effects of the COVID-19 pandemic; industry conditions; COVID-19 pandemic related modifications; and effects of change 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. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is 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 reserves are included in the unallocated portion. While allocations are made for loans and leases 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 global, national and state economic conditions such as changes in unemployment rates and productivity, geopolitical tensions, monetary and fiscal policy uncertainty, political gridlock, and real estate market trends. The unallocated reserve addresses inherent probable losses not included elsewhere in the allowance for loan losses.
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. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above in the calendar year of the restructuring. In subsequent years, a restructured loan may cease being classified as impaired if the loan was modified at a market rate and is performing according to the modified terms. 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. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included with other nonaccrual loans.
The Coronavirus Aid, Relief and Economic Security Act, or, CARES Act, signed into law on March 27, 2020, included provisions that provide temporary relief from TDR accounting for certain types of modifications. Under these provisions, modifications deemed to be COVID-19-related would not be considered a TDR if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The termination of these provisions was extended, to the earlier of 60 days after the COVID-19 national emergency date or January 1, 2022, by the Consolidated Appropriations Act, 2021. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification was considered to be short-term. Modifications are first evaluated for eligibility under the CARES Act, then the interagency guidance if they do not qualify for the CARES Act relief. Modifications that are not eligible for either program continue to follow the Company’s established TDR policy. Additionally, loans with deferrals granted due to COVID-19 are not generally reported as past due or nonaccrual.
The Company assigns risk ratings to all loans and periodically performs detailed internal reviews of all such 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 fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories defined as follows:
Pass: A pass loan is a credit with no known or existing potential weaknesses deserving of management’s close attention.
Watch: Loans classified as watch 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. Watch 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 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 Company maintains a separate general valuation allowance for each portfolio segment. These portfolio segments include commercial, Paycheck Protection Program, construction and land development, 1-4 family mortgage, multifamily, CRE owner occupied, CRE nonowner occupied, and consumer and other with risk characteristics described as follows:
Commercial: Commercial loans generally are loans to sole proprietorships, partnerships, corporations, and other business enterprises to finance accounts receivable or inventory, capital assets, or for other business related purposes. Commercial lending is not without risk as this asset class has generally exhibited higher loss rates compared to other loan types. The primary repayment sources for commercial and industrial loans are the existing cash flows of operating businesses which can be adversely affected by company, industry and economic business cycles. Economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. The liquidation of collateral, typically accounts receivable, inventory, equipment, or other business assets, is the primary source of principal repayment if the borrower defaults. The value of these assets can be uncertain in a liquidation scenario.
Paycheck Protection Program: The Paycheck Protection Program, or PPP, loan segment was added by the Company starting in the second quarter of 2020. PPP loans are loans to businesses, sole proprietorships, independent contractors and self-employed individuals who meet certain criteria and eligibility requirements through a loan program established by the CARES Act and administered through the Small Business Administration, or SBA. PPP loans generally have two or five year terms and earn interest at 1%. The Company believes that the primary source of repayment will be forgiveness granted by the SBA in accordance with the terms of the program. Credit risk in these loans is limited due to a full guarantee by the U.S. Government. The Company does not assign risk ratings to loans in this segment and will continue to monitor segment performance as circumstances evolve.
Construction and Land Development: Construction and land development loans generally possess a higher inherent risk of loss and have experienced the highest loss rates of any loan category based on statistics published by the FDIC. Risks associated with these loans often include the borrower’s ability to complete the project within specified costs and timelines and the reliance on the sale of the completed project as the primary repayment source for the loan. Trends in the commercial and residential construction industries can significantly impact the credit quality of these loans due to supply and demand imbalances. In addition, fluctuations in real estate values can significantly impact the credit quality of these loans, as property values may determine the economic viability of construction projects and adversely impact the value of the collateral securing the loan.
1-4 Family Mortgage: The degree of risk in residential mortgage lending involving owner occupied properties depends primarily on the borrower’s ability to repay in an orderly fashion and the loan amount in relation to collateral value. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrower’s capacity to repay their obligations may be deteriorating. Residential mortgage lending also includes the credits to finance nonowner occupied properties used as rentals. These loans can involve additional risks as the borrower’s ability to repay is based on the net operating income from the property which can be impacted by occupancy levels, rental rates, and operating expenses. Declines in net operating income can negatively impact the value of the property which increases the credit risk in the event of default. While 1-4 family mortgage loans have historically possessed a lower inherent risk of loss than other real estate portfolio segments, this loan class was significantly impacted during the last recession due in part to weak credit underwriting and speculative lending practices which led to higher default rates and deterioration in residential real estate values.
Multifamily: Multifamily lending has historically had the lowest default rate of any loan class. Nonetheless, economic factors such as unemployment, wage growth and home affordability can impact vacancy rates and property cash flow. In addition, an overbuilt supply of multifamily units can increase competition amongst properties and could have an adverse effect on leasing rates and overall occupancy, which could result in higher default rates and possible loan losses.
CRE Owner Occupied: Owner occupied commercial real estate loans are generally reliant on a single tenant as the repayment source for the loan. The underlying business can be affected by changes in industry and economic
business cycles, unemployment and other key economic indicators, which could impact the cash flows of the business and their ability to make rental payments. Certain types of businesses also may require specialized facilities that can increase costs and may not be economically feasible to an alternative user, which could adversely impact the market value of the collateral.
CRE Nonowner Occupied: Nonowner occupied commercial real estate loans can possess a higher inherent risk of loss as the primary repayment source for these loans is based on the net operating income from the underlying property. Changes in economic and market conditions can affect different segments of commercial real estate by impacting overall leasing rates, absorption timelines, vacancy rates, and operating expenses. Banks which are concentrated in commercial real estate lending are subject to additional regulatory scrutiny and must employ enhanced risk management practices.
Consumer and Other: The consumer and other loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most loans are made directly for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate the borrowers’ capacity to repay their obligations may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors 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. In addition, the Company’s regulators assess the adequacy of the allowance from time to time. The regulatory agencies may require adjustments to the allowance based on their judgment about information available at the time of their review and examinations.
Off-Balance Sheet Instruments
In the ordinary course of business, the Company has entered into off-balance sheet instruments including commitments to extend credit and unfunded commitments under lines of credit, standby letters of credit, and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The Company maintains a separate allowance for off-balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is included in other liabilities.
Federal Home Loan Bank Stock
The Bank is a member of FHLB Des Moines. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. Restricted stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery at par value. Both cash and stock dividends are reported as income.
Premises and Equipment
Land is stated at cost. Premises and equipment are stated at cost less accumulated depreciation on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful life or lease term for leasehold improvements. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance. Subsequent to foreclosure, valuations are periodically performed by management and the assets held for sale are carried at the lower of the new cost basis or fair value less cost
to sell. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
Impairment losses on assets to be held and used are measured at the amount by which the carrying amount of a property exceeds its fair value. Costs relating to holding and improving assets are expensed. Revenues and expenses from operations are included in other noninterest income and expense on the income statement.
Goodwill and Intangible Assets
Intangible assets attributed to the value of core deposits and favorable lease terms are stated at cost less accumulated amortization and reported in other intangible assets in the consolidated balance sheets. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets.
The excess of purchase price over fair value of net assets acquired is recorded as goodwill and is not amortized.
The Company evaluates whether goodwill and other intangible assets may be impaired at least annually and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount.
Leases
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the extension or termination option.
Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company's ROU asset is included in other assets and its lease liability is included in other liabilities in the accompanying consolidated balance sheets. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Transfers of Financial Assets and Participating Interests
Transfers of an entire financial asset or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) 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 maturity.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be
divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, and (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.
Advertising
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.
These calculations are based on many 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.
Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions.
In preparation of the income tax returns, tax positions are taken based on interpretation of federal and state income tax laws. Management periodically reviews and evaluates the status of uncertain tax positions and makes estimates of amounts ultimately due or owed. 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 audit based on the technical merit of the position. The Company recognizes both interest and penalties as a component of other noninterest expense.
The amount of the uncertain tax positions was not deemed 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 for the years ended December 31, 2022, 2021 and 2020.
The Company is no longer subject to federal or state tax examination by tax authorities for years ending before December 31, 2019.
Tax Credit Investments
The Company invests in qualified affordable housing projects and federal historic projects for the purpose of community reinvestment and obtaining tax credits. These investments are included in other assets on the balance sheet, with any unfunded commitments included within other liabilities. The qualified affordable housing projects are accounted for under the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is recognized over the period that the Company expects to receive the tax credits, with the expense included within income tax expense on the consolidated statements of income. The historic tax credits are accounted for under the equity method, with the expense included within noninterest expense on the consolidated statements of income. Management analyzes these investments for potential impairment when events or changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized. An impairment loss is measured as the amount by which the carrying amount of an investment exceeds its fair value.
Comprehensive Income
Recognized revenue, expenses, gains, and losses are included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale and changes in the fair value of derivative instruments designated as a cash flow hedge, 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.
Derivative Financial Instruments
The Company uses derivative financial instruments, which consist of interest rate swaps and interest rate caps, to assist in its interest rate risk management. All derivatives are measured and reported at fair value on the Company’s consolidated balance sheet as other assets or other liabilities. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. If the derivative instrument is not designated as a hedge, changes in the fair value of the derivative instrument are recognized in earnings, specifically in noninterest income.
The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. and international financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.
Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. The Company prepares written hedge documentation for all derivatives which are designed as hedges. The written hedge documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management's assertion that the hedge will be highly effective. Assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed at least quarterly. For a cash flow hedge that is effective, the gain or loss on the derivative is reported as a component in other comprehensive income (loss) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in expected cash flows of the hedged item are recognized immediately in current earnings. To determine fair value, the Company uses third party pricing models that incorporate assumptions about market conditions and risks that are current at the reporting date. The Company does not use derivative instruments for trading or speculative purposes.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income.
Hedge accounting discontinues on transactions that are no longer deemed effective, or for which the derivative has been terminated or de-designated. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions will affect earnings.
Stock-based Compensation
The Company’s stock-based compensation plans provide for awards of stock options, restricted stock awards and restricted stock units to the Company’s directors, officers and employees. The cost of employee services received in exchange for awards of equity instruments is based on the grant-date fair value of those awards. Compensation cost is recognized over the requisite service period as a component of compensation expense. Compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are recognized as they occur.
The Company uses the Black-Scholes model to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards and restricted stock units.
Compensating Balances
The Bank is required to maintain average balances with the Federal Reserve Bank. The Bank has implemented a deposit reclassification program which allows the Bank to reclassify a portion of transaction accounts to nontransaction accounts for reserve purposes. The deposit reclassification program was provided by a third-party vendor, and has been approved by the Federal Reserve Bank. Generally, the Company is required to maintain average reserve balances with the Federal Reserve Bank based upon outstanding balances of deposit transaction accounts. However, as announced on March 15, 2020, The Federal Reserve Board reduced reserve requirement ratios to zero percent, effective March 26, 2020, due to the COVID-19 pandemic. Therefore, at December 31, 2022 and 2021, there were no reserve requirements with the Federal Reserve Bank.
Earnings per Share
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings common per share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock compensation using the treasury stock method.
Segment Reporting
All of the Company’s operations are considered by management to be one operating segment.
Reclassifications
Certain reclassifications have been made to the 2021 consolidated financial statements to conform to the 2022 classifications.
Impact of Recently Adopted Accounting Guidance
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, ASU 2016-02 requires lessees to recognize most leases on the balance sheet, thus increasing reported assets and liabilities. Lessor accounting remains substantially similar to historical GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-10, 2018-11, and 2021-05. The Company has elected to use the additional transition method approach as provided in ASU 2018-11, which permits the Company to use January 1, 2022 as both the application date and the adoption date. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a ROU asset and lease liability that arise from short-term leases (i.e., leases with terms of 12 months or less), the option of hindsight when determining lease term and the practical expedient to not separate lease and non-lease components. The Company has several lease agreements for its bank branches and corporate office space, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated balance sheets. As of January 1, 2022, the Company recorded a ROU asset and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-02 did not have a material impact on the Company's consolidated financial statements. See “Note 8 -Leases” for more information.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. The standard was elective and provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update were effective for all entities between March 12, 2020 and December 31,
2022. The Company has discontinued the use of new LIBOR-based loans and interest rate derivatives, according to regulatory guidelines. LIBOR is used as an index rate for the Company’s interest-rate swaps, various investment securities, and approximately 1.1% of the Company’s loans as of December 31, 2022. The Company adopted ASU 2020-04 on January 1, 2022. The adoption did not have a material impact on the Company’s consolidated financial statements. In December 2022, The FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU extends the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04. This ASU, which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2022-06 did not have a material impact on the Company’s consolidated financial statements.
Impact of Recently Issued Accounting Standards
The following ASUs have been issued by FASB and may impact the Company’s consolidated financial statements in future reporting periods.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (modified by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses, ASU 2019-05, Financial Instruments Credit Losses - Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses). The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (815), and Leases (Topic 842) - Effective Dates. This ASU amended the effective date of ASU 2016-13 for smaller reporting companies and non-SEC reporting entities. The amendment delays the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company has taken advantage of this delay.
The Company adopted CECL effective January 1, 2023. The implementation process included establishing a cross function committee to oversee the adoption of the ASU and contracting with a third party to develop a model to comply with the CECL requirements. During the first quarter of 2023, the Company will finalize all internal processes related to the adoption of CECL. Upon finalization of internal processes, the Company will recognize a one-time cumulative effect adjustment to equity, using the modified retrospective transition method. The Company expects the initial increase to the allowance for credit losses, including the allowance for unfunded commitments, will not have a material impact on the consolidated financial statements. The initial increase to the allowance for credit losses is expected to be substantially attributable to the allowance for unfunded commitments. The ultimate impact to the Company’s financial condition and results of operations of the ASU, at both adoption and each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, the composition of the loan portfolio, along with other management judgments.
In March 2022 the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires entities to disclose current-period gross write-offs by year of
origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, this ASU will be effective for the Company on January 1, 2023. The adoption of ASU 2022-02 is not expected to have a significant impact on the financial statements.
Subsequent Events
Subsequent events have been evaluated through March 7, 2023, which is the date the consolidated financial statements were available to be issued.
Note 2: Earnings Per Share
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares adjusted for the dilutive effect of stock compensation. For the years ended December 31, 2022, 2021 and 2020, 410,760, 222,107, and 732,433, respectively, of stock options, restricted stock awards and restricted stock units were excluded from the calculation because they were deemed to be antidilutive.
The following table presents the numerators and denominators for basic and diluted earnings per share computations for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
(dollars in thousands, except per share data)
Net Income Available to Common Shareholders
$
49,338
$
44,516
$
27,194
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)
27,758,336
28,027,454
28,582,064
Dilutive Effect of Stock Compensation
909,841
940,832
588,156
Weighted Average Common Stock Outstanding (Dilutive)
28,668,177
28,968,286
29,170,220
Basic Earnings per Common Share
$
1.78
$
1.59
$
0.95
Diluted Earnings per Common Share
1.72
1.54
0.93
Note 3: Bank-Owned Certificates of Deposit
Certificates of deposit in other financial institutions by maturity are as follows:
Year Ended December 31,
(dollars in thousands)
Certificates of Deposit at Cost Maturing in:
One Year or Less
$
$
After One Year Through Five Years
$
1,181
$
1,876
Note 4: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at December 31, 2022 and 2021:
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
(dollars in thousands)
Cost
Gains
Losses
Fair Value
Securities Available for Sale:
U.S. Treasury Securities
$
2,621
$
-
$
(41)
$
2,580
Municipal Bonds
156,506
(25,214)
131,354
Mortgage-Backed Securities
252,919
2,465
(17,600)
237,784
Corporate Securities
116,871
(7,089)
109,827
SBA Securities
20,957
(159)
20,877
Asset-Backed Securities
46,623
(620)
46,191
Total Securities Available for Sale
$
596,497
$
2,839
$
(50,723)
$
548,613
December 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
(dollars in thousands)
Cost
Gains
Losses
Fair Value
Securities Available for Sale:
U.S. Treasury Securities
$
$
-
$
(2)
$
Municipal Bonds
151,665
7,492
(788)
158,369
Mortgage-Backed Securities
125,563
1,085
(2,111)
124,537
Corporate Securities
81,925
2,740
(185)
84,480
SBA Securities
30,474
(206)
30,370
Asset-Backed Securities
39,867
1,044
(59)
40,852
Total Securities Available for Sale
$
430,250
$
12,463
$
(3,351)
$
439,362
The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2022 and 2021:
Less Than 12 Months
12 Months or Greater
Total
Unrealized
Unrealized
Unrealized
(dollars in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
December 31, 2022
U.S. Treasury Securities
$
2,330
$
(41)
$
-
$
-
$
2,330
$
(41)
Municipal Bonds
59,912
(5,321)
69,424
(19,893)
129,336
(25,214)
Mortgage-Backed Securities
123,224
(5,427)
62,882
(12,173)
186,106
(17,600)
Corporate Securities
88,486
(5,121)
17,054
(1,968)
105,540
(7,089)
SBA Securities
2,498
(6)
9,750
(153)
12,248
(159)
Asset-Backed Securities
21,919
(396)
6,186
(224)
28,105
(620)
Total Securities Available for Sale
$
298,369
$
(16,312)
$
165,296
$
(34,411)
$
463,665
$
(50,723)
Less Than 12 Months
12 Months or Greater
Total
Unrealized
Unrealized
Unrealized
(dollars in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
December 31, 2021
U.S. Treasury Securities
$
$
(2)
$
-
$
-
$
$
(2)
Municipal Bonds
44,332
(708)
3,757
(80)
48,089
(788)
Mortgage-Backed Securities
36,921
(630)
35,949
(1,481)
72,870
(2,111)
Corporate Securities
9,398
(133)
1,948
(52)
11,346
(185)
SBA Securities
3,896
(7)
16,297
(199)
20,193
(206)
Asset-Backed Securities
6,742
(59)
-
-
6,742
(59)
Total Securities Available for Sale
$
102,043
$
(1,539)
$
57,951
$
(1,812)
$
159,994
$
(3,351)
At December 31, 2022, 530 debt securities had unrealized losses with aggregate depreciation of approximately 9.9% from the Company’s amortized cost basis. At December 31, 2021, 199 debt securities had unrealized losses with aggregate depreciation of approximately 2.1% from the Company’s amortized cost basis. These unrealized losses related principally to changes in interest rates and were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of December 31, 2022.
The following table presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of December 31, 2022. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.
(dollars in thousands)
Amortized Cost
Fair Value
December 31, 2022
Due in One Year or Less
$
6,362
$
6,375
Due After One Year Through Five Years
32,673
31,428
Due After Five Years Through 10 Years
153,887
139,648
Due After 10 Years
83,076
66,310
Subtotal
275,998
243,761
Mortgage-Backed Securities
252,919
237,784
SBA Securities
20,957
20,877
Asset-Backed Securities
46,623
46,191
Totals
$
596,497
$
548,613
As of December 31, 2022 and 2021, the securities portfolio was unencumbered.
The following table presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the years ended December 31, 2022, 2021, and 2020:
Year Ended December 31,
(dollars in thousands)
Proceeds From Sales of Securities
$
64,439
$
11,877
$
40,862
Gross Gains on Sales
1,200
1,592
Gross Losses on Sales
(530)
(450)
(89)
Note 5: Loans
The following table presents the components of the loan portfolio at December 31, 2022 and December 31, 2021:
December 31,
December 31,
(dollars in thousands)
Commercial
$
435,344
$
360,169
Paycheck Protection Program
1,049
26,162
Construction and Land Development
365,796
281,474
Real Estate Mortgage:
1-4 Family Mortgage
355,474
305,317
Multifamily
1,306,738
910,243
CRE Owner Occupied
149,905
111,096
CRE Nonowner Occupied
947,008
818,569
Total Real Estate Mortgage Loans
2,759,125
2,145,225
Consumer and Other
8,132
6,442
Total Loans, Gross
3,569,446
2,819,472
Allowance for Loan Losses
(47,996)
(40,020)
Net Deferred Loan Fees
(9,293)
(9,535)
Total Loans, Net
$
3,512,157
$
2,769,917
The following table presents the activity in the allowance for loan losses, by segment, for the years ended December 31, 2022, 2021 and 2020:
Paycheck
Construction
CRE
CRE
Protection
and Land
1--4 Family
Owner
Non-owner
Consumer
(dollars in thousands)
Commercial
Program
Development
Mortgage
Multifamily
Occupied
Occupied
and Other
Unallocated
Total
Balance at January 1, 2020
$
3,058
$
-
$
2,202
$
2,839
$
5,824
$
$
6,972
$
$
$
22,526
Provision for Loan Losses
2,984
1,223
3,693
4,019
(22)
12,750
Loans Charged-off
(346)
-
-
(144)
-
-
-
(27)
-
(517)
Recoveries of Loans
-
-
-
-
-
Balance at December 31, 2020
$
5,703
$
$
2,491
$
3,972
$
9,517
$
1,162
$
10,991
$
$
$
34,841
Provision for Loan Losses
(57)
1,266
(236)
3,093
(24)
(82)
5,150
Loans Charged-off
(28)
-
-
(5)
-
-
-
(41)
-
(74)
Recoveries of Loans
-
-
-
-
-
Balance at December 31, 2021
$
6,256
$
$
3,757
$
3,757
$
12,610
$
1,495
$
11,335
$
$
$
40,020
Provision for Loan Losses
(12)
4,849
1,241
(387)
7,700
Loans Charged-off
(13)
-
-
-
-
-
-
(24)
-
(37)
Recoveries of Loans
-
-
-
-
-
-
Balance at December 31, 2022
$
6,500
$
$
4,756
$
4,325
$
17,459
$
1,965
$
12,576
$
$
$
47,996
The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of December 31, 2022 and 2021:
Paycheck
Construction
CRE
CRE
Protection
and Land
1--4 Family
Owner
Non-owner
Consumer
(dollars in thousands)
Commercial
Program
Development
Mortgage
Multifamily
Occupied
Occupied
and Other
Unallocated
Total
Allowance for Loan Losses at December 31, 2022
Individually Evaluated for Impairment
$
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
Collectively Evaluated for Impairment
6,429
4,756
4,325
17,459
1,965
12,576
47,925
Totals
$
6,500
$
$
4,756
$
4,325
$
17,459
$
1,965
$
12,576
$
$
$
47,996
Allowance for Loan Losses at December 31, 2021
Individually Evaluated for Impairment
$
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
Collectively Evaluated for Impairment
5,649
3,757
3,757
12,610
1,495
11,335
39,413
Totals
$
6,256
$
$
3,757
$
3,757
$
12,610
$
1,495
$
11,335
$
$
$
40,020
Paycheck
Construction
CRE
CRE
Protection
and Land
1--4 Family
Owner
Non-owner
Consumer
(dollars in thousands)
Commercial
Program
Development
Mortgage
Multifamily
Occupied
Occupied
and Other
Total
Loans at December 31, 2022
Individually Evaluated for Impairment
$
19,675
$
-
$
$
$
-
$
1,637
$
6,239
$
-
$
28,049
Collectively Evaluated for Impairment
415,669
1,049
365,690
355,082
1,306,738
148,268
940,769
8,132
3,541,397
Totals
$
435,344
$
1,049
$
365,796
$
355,474
$
1,306,738
$
149,905
$
947,008
$
8,132
$
3,569,446
Loans at December 31, 2021
Individually Evaluated for Impairment
$
14,512
$
-
$
$
1,390
$
-
$
2,421
$
4,188
$
-
$
22,641
Collectively Evaluated for Impairment
345,657
26,162
281,344
303,927
910,243
108,675
814,381
6,442
2,796,831
Totals
$
360,169
$
26,162
$
281,474
$
305,317
$
910,243
$
111,096
$
818,569
$
6,442
$
2,819,472
The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Recorded
Principal
Related
Recorded
Principal
Related
(dollars in thousands)
Investment
Balance
Allowance
Investment
Balance
Allowance
Loans With No Related Allowance for Loan Losses:
Commercial
$
19,508
$
19,508
$
-
$
4,545
$
4,545
$
-
Construction and Land Development
-
-
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
-
-
-
-
1st REM - Rentals
-
-
CRE Owner Occupied
1,637
1,726
-
2,421
2,466
-
CRE Nonowner Occupied
6,239
6,239
-
4,188
4,188
-
Totals
27,882
28,578
-
12,674
13,326
-
Loans With An Allowance for Loan Losses:
Commercial
9,967
9,967
Totals
9,967
9,967
Grand Totals
$
28,049
$
28,745
$
$
22,641
$
23,293
$
The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
Average
Interest
Average
Interest
Average
Interest
(dollars in thousands)
Investment
Recognized
Investment
Recognized
Investment
Recognized
Loans With No Related Allowance for Loan Losses:
Commercial
$
21,276
$
$
5,008
$
$
$
Construction and Land Development
-
-
-
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
-
-
1st REM - Rentals
CRE Owner Occupied
1,755
2,471
CRE Nonowner Occupied
6,390
4,247
12,334
Totals
29,940
1,210
13,268
14,983
Loans With An Allowance for Loan Losses:
Commercial
13,761
Consumer and Other
-
-
-
-
Totals
13,761
Grand Totals
$
30,120
$
1,215
$
27,029
$
1,415
$
15,118
$
The Company categorizes loans 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. The process of analyzing loans for changes in risk ratings is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.
The following tables present the risk category of loans by loan segment as of December 31, 2022 and 2021, based on the most recent analysis performed by management:
December 31, 2022
(dollars in thousands)
Pass
Watch
Substandard
Total
Commercial
$
406,192
$
9,477
$
19,675
$
435,344
Paycheck Protection Program
1,049
-
-
1,049
Construction and Land Development
364,978
365,796
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
36,875
-
-
36,875
1st REM - 1-4 Family
50,271
-
50,945
LOCs and 2nd REM - Rentals
27,978
-
27,985
1st REM - Rentals
239,277
-
239,669
Multifamily
1,303,468
3,270
-
1,306,738
CRE Owner Occupied
148,268
-
1,637
149,905
CRE Nonowner Occupied
922,657
18,112
6,239
947,008
Consumer and Other
8,132
-
-
8,132
Totals
$
3,509,145
$
32,252
$
28,049
$
3,569,446
December 31, 2021
(dollars in thousands)
Pass
Watch
Substandard
Total
Commercial
$
336,939
$
8,718
$
14,512
$
360,169
Paycheck Protection Program
26,162
-
-
26,162
Construction and Land Development
281,344
-
281,474
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
30,327
-
31,260
1st REM - 1-4 Family
48,024
-
48,713
LOCs and 2nd REM - Rentals
21,625
-
21,641
1st REM - Rentals
203,246
-
203,703
Multifamily
910,243
-
-
910,243
CRE Owner Occupied
108,675
-
2,421
111,096
CRE Nonowner Occupied
774,474
39,907
4,188
818,569
Consumer and Other
6,442
-
-
6,442
Totals
$
2,747,501
$
49,330
$
22,641
$
2,819,472
The following tables present the aging of the recorded investment in past due loans by loan segment as of December 31, 2022 and 2021:
Accruing Interest
30-89 Days
90 Days or
(dollars in thousands)
Current
Past Due
More Past Due
Nonaccrual
Total
December 31, 2022
Commercial
$
435,274
$
$
-
$
-
$
435,344
Paycheck Protection Program
1,049
-
-
-
1,049
Construction and Land Development
365,690
-
-
365,796
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
36,875
-
-
-
36,875
1st REM - 1-4 Family
50,945
-
-
-
50,945
LOCs and 2nd REM - Rentals
27,985
-
-
-
27,985
1st REM - Rentals
239,553
-
-
239,669
Multifamily
1,306,738
-
-
-
1,306,738
CRE Owner Occupied
149,372
-
-
149,905
CRE Nonowner Occupied
947,008
-
-
-
947,008
Consumer and Other
8,132
-
-
-
8,132
Totals
$
3,568,621
$
$
-
$
$
3,569,446
Accruing Interest
30-89 Days
90 Days or
(dollars in thousands)
Current
Past Due
More Past Due
Nonaccrual
Total
December 31, 2021
Commercial
$
360,169
$
-
$
-
$
-
$
360,169
Paycheck Protection Program
26,162
-
-
-
26,162
Construction and Land Development
281,344
-
-
281,474
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage
31,211
-
-
31,260
1st REM - 1-4 Family
48,713
-
-
-
48,713
LOCs and 2nd REM - Rentals
21,641
-
-
-
21,641
1st REM - Rentals
203,703
-
-
-
203,703
Multifamily
910,243
-
-
-
910,243
CRE Owner Occupied
110,504
-
-
111,096
CRE Nonowner Occupied
818,569
-
-
-
818,569
Consumer and Other
6,442
-
-
-
6,442
Totals
$
2,818,701
$
$
-
$
$
2,819,472
At December 31, 2022, there were two loans classified as troubled debt restructurings with total aggregate outstanding balances of $188,000. In comparison, at December 31, 2021, there were four loans classified as troubled debt restructurings with total aggregate outstanding balances of $1.4 million. There were no new loans classified as troubled debt restructuring during the year ended December 31, 2022 and no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the year ended December 31, 2022.
In response to the COVID-19 pandemic, the Company developed programs for clients who experienced business and personal disruptions due to the COVID-19 pandemic pursuant to which the Company provided interest-only modifications, loan payment deferrals or extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic, made before January 1, 2022, are not considered troubled debt restructurings. The Company had no active modifications made in response to the COVID-19 pandemic at December 31, 2022. The Company had 12 loans totaling $35.0 million of loan modifications outstanding in response to the COVID-19 pandemic at December 31, 2021.
Note 6: Premises and Equipment
Premises and equipment are summarized as follows for the years ended December 31, 2022 and 2021:
Range of
December 31,
December 31,
(dollars in thousands)
Useful Lives
Land
N/A
$
5,174
$
5,174
Building
15 - 39 Years
41,265
40,758
Leasehold Improvements
3 - 10 Years
2,380
2,684
Furniture and Equipment
2 - 5 Years
6,978
7,058
Subtotal
55,797
55,674
Accumulated Depreciation
(7,352)
(6,279)
Totals
$
48,445
$
49,395
Depreciation and amortization expense charged to noninterest expense for the years ended December 31, 2022, 2021 and 2020, totaled $2.6 million, $2.4 million and $1.2 million, respectively.
Note 7: Intangible Assets
The following table presents a summary of intangible assets at December 31, 2022 and 2021:
December 31,
(dollars in thousands)
Core Deposit Intangible
$
1,093
$
1,093
Favorable Lease
Subtotal
1,538
1,538
Accumulated Amortization
(1,250)
(1,059)
Totals
$
$
Amortization expense of intangible assets was $191,000 for the years ended December 31, 2022, 2021 and 2020.
The following table presents the estimated future amortization of the core deposit intangible and favorable lease asset for the next five years and thereafter. The projections of amortization expense are based on existing asset balances as of December 31, 2022.
Core Deposit
Favorable
(dollars in thousands)
Intangible
Lease
$
$
-
-
-
-
Thereafter
-
Totals
$
$
Note 8: Leases
The Company’s operating leases are real estate leases which are comprised of bank branches and office space with terms extending through 2029. These leases were not previously recognized on the Company's consolidated financial statements. With the adoption of ASU 2016-02, operating lease agreements were required to be recognized on the consolidated balance sheets as a ROU asset and a corresponding lease liability. 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.
Operating lease ROU assets represent the Company’s right to use the underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using the rate implicit in the lease. As the rate implicit in the lease is rarely determinable, the Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments. The Company's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. For operating leases existing prior to January 1, 2022, the rate for the remaining lease term as of January 1, 2022 was used.
As the Company elected 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, property taxes and other costs associated with the lease. These variable payments are not included in the lease liability and are expensed as incurred.
The following table presents the components of lease expense and cash flow information related to operating leases as of the period indicated:
December 31,
(dollars in thousands)
Operating Lease Cost
$
Variable Lease Cost
Total Lease Cost
$
Prior to the adoption of ASU 2016-02, rent expense, net of rental income, including common area maintenance pertaining to banking premises totaled $52,000 and $1.2 million for the years ended December 31, 2021 and 2020.
The following table presents other information on the Company’s operating leases for the year ended December 31, 2022:
December 31,
(dollars in thousands)
Operating Lease Right-of-Use Assets
$
2,472
Operating Lease Liabilities
2,496
Weighted Average Remaining Lease Term (in Years)
6.12
Years
Weighted Average Discount Rate
1.46
%
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
The following table presents the future expected operating lease payments under the Company's operating lease agreements as of December 31, 2022:
December 31,
(dollars in thousands)
$
Thereafter
Total Undiscounted Lease Payments
2,597
Discount for Present Value of Expected Cash Flows
(101)
Total Lease Liability
$
2,496
The Greenwood location is leased pursuant to the terms of a non-cancelable lease agreement with Bridgewater Properties Greenwood, LLC, a related party through common ownership, in effect at December 31, 2022. The lease contains one option to extend the lease for a period of five years. Future minimum rent commitments under the operating lease are listed below at December 31, 2022.
(dollars in thousands)
$
Total
$
The Company receives rents from the lease of office and retail space in its corporate headquarters building. Rental income is included in noninterest expense as an offset to rental expense. Future minimum rental income under these leases are listed below at December 31, 2022.
(dollars in thousands)
$
Thereafter
Total
$
2,819
Rental income, which is included in occupancy and equipment expense, including common area maintenance pertaining to banking premises for the years ended December 31, 2022, 2021 and 2020, totaled $907,000, $634,000 and $12,000, respectively.
Note 9: Deposits
The following table presents the composition of deposits at December 31, 2022 and 2021:
December 31,
(dollars in thousands)
Transaction Deposits
$
1,336,264
$
1,419,873
Savings and Money Market Deposits
1,031,873
863,567
Time Deposits
272,253
293,474
Brokered Deposits
776,153
369,323
Totals
$
3,416,543
$
2,946,237
Brokered deposits contained brokered transaction and money market accounts of $184.3 million and $131.2 million as of December 31, 2022 and 2021, respectively.
The following table presents the scheduled maturities of brokered and customer time deposits at December 31, 2022:
December 31,
(dollars in thousands)
Less than 1 Year
$
387,433
1 to 2 Years
109,652
2 to 3 Years
229,732
3 to 4 Years
102,280
4 to 5 Years
25,887
Greater than 5 Years
9,144
Totals
$
864,128
The aggregate amount of time deposits greater than $250,000 was approximately $92.3 million and $59.6 million at December 31, 2022 and 2021, respectively.
Note 10: Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments, which consist of interest rate swaps and interest rate caps, to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.
Non-hedge Derivatives
The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.
The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Notional
Estimated
Notional
Estimated
(dollars in thousands)
Amount
Fair Value
Amount
Fair Value
Interest rate swap agreements:
Assets
$
65,315
$
8,240
$
49,101
$
Liabilities
65,315
(8,240)
49,101
(641)
Total
$
130,630
$
-
$
98,202
$
-
Cash Flow Hedging Derivatives
For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income (loss), net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate risk. During the next 12 months, the Company estimates that $5.2 million will be reclassified to interest expense, as a reduction of the expense.
The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of December 31, 2022 and 2021:
(dollars in thousands)
December 31, 2022
December 31, 2021
Notional Amount
$
163,000
$
125,000
Weighted Average Pay Rate
1.90
%
1.27
%
Weighted Average Receive Rate
3.47
%
0.14
%
Weighted Average Maturity (Years)
5.15
3.76
Net Unrealized Gain
$
9,175
$
The Company purchases interest rate caps, which are designated as cash flow hedges, of certain deposit and borrowing liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the years ended December 31, 2022 and 2021, the Company recognized amortization expense on the interest rate caps of $772,000 and $362,000, respectively, and was recorded as a component of interest expense on brokered deposits and FHLB advances.
The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of December 31, 2022 and 2021:
(dollars in thousands)
December 31, 2022
December 31, 2021
Notional Amount
$
125,000
$
110,000
Unamortized Premium Paid
5,872
5,859
Weighted Average Strike Rate
0.96
%
0.90
%
Weighted Average Maturity (Years)
7.35
8.72
The following table presents a summary of the Company’s interest rate contracts as of December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Notional
Estimated
Notional
Estimated
(dollars in thousands)
Amount
Fair Value
Amount
Fair Value
Interest rate swap agreements:
Assets
$
125,000
$
10,477
$
90,000
$
1,717
Liabilities
38,000
(1,302)
35,000
(926)
Interest rate cap agreements:
Assets
125,000
19,406
110,000
7,356
The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of December 31, 2022 and 2021, the Company pledged cash collateral for the Company’s derivative contracts of $0 and $370,000, respectively. In addition, as of December 31, 2022 and 2021, the Company's derivative counterparties have pledged cash collateral to the Company of $36.4 million and $8.6 million, respectively.
The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
(dollars in thousands)
Derivatives in
Location of Gain (Loss)
Gain (Loss)
Cash Flow Hedging
Reclassified
Reclassified from
Relationships
from AOCI into Income
AOCI into Earnings
Interest rate swaps
Interest expense
$
$
(1,117)
$
(579)
Interest rate caps
Interest expense
(671)
(403)
-
No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the years ended December 31, 2022, 2021 and 2020, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.
Note 11: Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank Advances. The Company has entered into an Advances, Pledge, and Security Agreement with the FHLB whereby specific mortgage loans of the Bank’s with principal balances of $1.20 billion and $930.9 million at December 31, 2022 and 2021, respectively, were pledged to the FHLB as collateral. FHLB advances are also secured with FHLB stock owned by the Company. Total remaining available capacity under the agreement was $390.9 million and $550.8 million at December 31, 2022 and 2021, respectively.
The following table presents FHLB advances, by maturity, at December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Weighted
Weighted
Average
Total
Average
Total
(dollars in thousands)
Rate
Outstanding
Rate
Outstanding
Less than 1 Year
4.30
%
$
83,000
-
%
$
-
1 to 2 Years
1.05
5,000
-
-
2 to 3 Years
1.22
5,000
1.66
22,500
3 to 4 Years
0.78
4,000
1.22
16,000
4 to 5 Years
-
-
0.78
4,000
Totals
$
97,000
$
42,500
Convertible advances are callable at the option of the FHLB. If an advance is called, the Company has the option to pay off the advance without penalty or re-borrow funds on different terms. The Company had no convertible advances with the FHLB at December 31, 2022 and $28.5 million of convertible advances with the FHLB at December 31, 2021.
Federal Reserve Discount Window. At December 31, 2022 and 2021, the Company had the ability to draw additional borrowings of $157.8 million and $126.0 million, respectively, from the Federal Reserve Bank of Minneapolis. The ability to draw borrowings is based on loan collateral pledged with principal balances of $225.3 million and $240.4 million as of December 31, 2022 and 2021, subject to the approval from the Board of Governors of the Federal Reserve System. There were no federal reserve borrowings outstanding as of December 31, 2022 and 2021.
Federal Funds Purchased. Federal funds purchased mature one business day from the transaction date. There were $287.0 million federal funds purchased outstanding as of December 31, 2022 and no federal funds purchased outstanding as of December 31, 2021.
Line of Credit. In 2021, the Company entered into a Loan and Security Agreement and related revolving note with an unaffiliated financial institution that was secured by 100% of the issued and outstanding stock of the Bank. The note contains customary representations, warranties, and covenants, including certain financial covenants and capital ratio requirements. As of December 31, 2022, the Company believes it was in compliance with all such covenants and capital ratio requirements.
The following table presents the revolving line of credit at December 31, 2022 and 2021:
Total Debt
Total Debt
Outstanding
Outstanding
Interest
Name
Maturity Date
December 31, 2022
December 31, 2021
Rate
Coupon Structure
Revolving Credit Facility (1)
September 1, 2024
$
13,750
-
7.50
%
Variable with Floor (2)
(1) On September 1, 2022, the Company entered into a second amendment to the agreement which increased the maximum principal amount of the Company’s revolving line of credit from $25.0 million to $40.0 million and extended the maturity date from February 28, 2023 to September 1, 2024.
(2) The variable interest rate is equal to the greater of the Wall Street Journal Prime Rate in effect or a floor rate of 3.85%.
Note 12: Subordinated Debentures
The following presents a summary of the Company’s subordinated debentures as of December 31, 2022 and 2021:
Total Debt
Total Debt
Date
First
Maturity
Outstanding
Outstanding
Interest
Name
Established
Redemption Date
Date
December 31, 2022
December 31, 2021
Rate
Coupon Structure
(dollars in thousands)
2027 Notes
July 12, 2017
July 15, 2022
N/A
$
-
$
13,750
N/A
%
Fixed-to-Floating (1)
2030 Notes
June 19, 2020
July 1, 2025
July 1, 2030
50,000
50,000
5.25
%
Fixed-to-Floating (2)
2031 Notes
July 8, 2021
July 15, 2026
July 15, 2031
30,000
30,000
3.25
%
Fixed-to-Floating (3)
Subordinated Debentures
80,000
93,750
Debt Issuance Costs
(1,095)
(1,511)
Subordinated Debentures, Net of Issuance Costs
$
78,905
$
92,239
(1) Migrates to three month LIBOR + 3.88% beginning July 15, 2022 until either the early redemption date or the maturity date.
(2) Migrates to three month term SOFR + 5.13% beginning July 1, 2025 until either the early redemption date or the maturity date.
(3) Migrates to three month term SOFR + 2.52% beginning July 15, 2026 until either the early redemption date or the maturity date.
On October 15, 2022, the Company elected to redeem the outstanding 2027 Notes in the aggregate principal amount of $13.8 million and made all payments of principal and interest due on the 2027 Notes on October 17, 2022.
Note 13: Related-Party Transactions
In the ordinary course of business, the Company has granted loans to executive officers, directors, principal shareholders, and their affiliates (related parties). The following table presents the activity associated with loans made between related parties for the years ended December 31, 2022 and 2021:
(dollars in thousands)
Beginning Balance
$
49,964
$
34,130
New Loans and Advances
16,006
45,407
Repayments
(38,294)
(29,573)
Totals
$
27,676
$
49,964
Deposits from related parties held by the Company at December 31, 2022 and 2021 were $22.2 million and $37.7 million, respectively.
The Company has a related party lease which is disclosed in “Note 8 - Leases”.
Note 14: Income Taxes
The following table presents the allocation of federal and state income taxes between current and deferred portions as of December 31, 2022, 2021 and 2020:
(dollars in thousands)
Current Tax Provision
$
19,719
$
20,408
$
11,062
Deferred Tax Benefit
(1,401)
(4,522)
(2,590)
Total Income Tax Provision
$
18,318
$
15,886
$
8,472
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows as of December 31, 2022, 2021 and 2020:
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount of Statutory Rate
$
15,059
21.0
%
$
12,930
21.0
%
$
7,489
21.0
%
State Income Taxes (Net of Federal Income Tax Benefit)
5,349
7.5
4,647
7.6
3,014
8.5
Interest on Investment Securities and Loans Exempt From Federal Income Tax
(899)
(1.3)
(657)
(1.1)
(702)
(2.0)
Tax Credits
(835)
(1.2)
(540)
(0.9)
(770)
(2.1)
Other Differences
(356)
(0.5)
(494)
(0.8)
(559)
(1.6)
Totals
$
18,318
25.5
%
$
15,886
25.8
%
$
8,472
23.8
%
The Company’s effective tax rate may fluctuate as it is impacted by the level and timing of the Company’s utilization of historic tax credits, low-income housing tax credits, the level of tax-exempt investments and loans, and the overall level of pre-tax income.
The following table presents the components of the net deferred tax asset included in other assets, as of December 31, 2022 and 2021:
(dollars in thousands)
Depreciation
$
(325)
$
(274)
Allowance for Loan Losses
13,639
11,332
Unrealized Loss (Gain) on Securities Available for Sale
13,759
(1,914)
Unrealized (Gain) Loss on Cash Flow Hedges
(6,527)
(480)
Prepaid Expenses
(886)
(392)
Deferred Compensation
Deferred Loan Fees
2,745
2,653
Other
Totals
$
22,917
$
11,890
Note 15: Tax Credit Investments
The Company invests in qualified affordable housing projects and federal historic projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.
The following table presents a summary of the Company’s investments in qualified affordable housing projects and other tax credit investments at December 31, 2022 and 2021:
(dollars in thousands)
December 31, 2022
December 31, 2021
Investment
Accounting Method
Investment
Unfunded Commitment (1)
Investment
Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)
Proportional Amortization
$
4,701
$
-
$
2,871
$
-
Federal Historic Tax Credit (FHTC)
Equity
1,785
1,732
Total
$
6,486
$
$
4,603
$
(1) All commitments are expected to be paid by the Company by December 31, 2023.
The following table presents a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments during 2022, 2021 and 2020:
Year Ended
December 31,
(dollars in thousands)
Amortization Expense (1)
LIHTC
$
$
$
FHTC
Total
$
$
$
1,019
Tax Benefit Recognized (2)
LIHTC
$
(330)
$
(330)
$
(330)
FHTC
(607)
(625)
(1,056)
Total
$
(937)
$
(955)
$
(1,386)
(1) The amortization expense for the LIHTC investments are included in income tax expense. The amortization for the FHTC tax credits are included in noninterest expense.
(2) All of the tax benefits recognized are included in income tax expense. The tax benefit recognized for the FHTC investments primarily reflects the tax credits generated from the investments, and excludes the net tax expense/benefit of the investments’ income/loss.
Note 16: Commitments, Contingencies and Credit Risk
Financial Instruments with Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual, or notional, amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.
The following commitments were outstanding at December 31, 2022 and December 31, 2021:
December 31,
December 31,
(dollars in thousands)
Unfunded Commitments Under Lines of Credit
$
848,734
$
799,148
Letters of Credit
115,769
119,647
Totals
$
964,503
$
918,795
Commitments to extend credit are agreements to lend to a customer at fixed or variable rates 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. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; real estate; and stocks and bonds. Unfunded commitments under commercial lines of credit, home equity lines of credit, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit may or may not require collateral and may or may not contain a specific maturity date.
Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all standby letters of credit issued have expiration dates within
two years. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments.
The Company had outstanding letters of credit with the FHLB in total amounts of $78.4 million and $36.5 million at December 31, 2022 and 2021, respectively, on behalf of customers and to secure public deposits.
Legal Contingencies
Various legal claims arise from time to time in the normal course of business. In the opinion of management, any liability resulting from such proceedings would not have a material impact on the consolidated financial statements.
Note 17: Stock Options and Restricted Stock
The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company may grant options to its directors, officers, and employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options could be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. The 2012 Plan expired in March 2022, and awards are no longer able to be granted under the 2012 Plan.
In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, and employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of December 31, 2022 and 2021, there were 44,700 and 294,700 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.
In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted under the 2019 EIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with vesting periods of four years. As of December 31, 2022, and 2021, there were 231,363 and 352,575 shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.
Stock Options
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future.
The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 51 banks in the index ranging in market capitalization from $500 million up to $4.0 billion.
The weighted average assumptions used in the model for valuing stock option grants in 2022 is as follows:
December 31,
Dividend Yield
-
%
Expected Life
Years
Expected Volatility
24.71
%
Risk-Free Interest Rate
1.70
%
The following table presents a summary of the status of the Company’s outstanding stock options for the years ended December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Weighted
Weighted
Average
Average
Shares
Exercise Price
Shares
Exercise Price
Outstanding at Beginning of Year
1,768,745
$
7.67
1,914,250
$
7.29
Granted
290,000
17.50
20,500
16.88
Exercised
(133,301)
4.33
(164,405)
4.40
Forfeitures
(12,000)
14.77
(1,600)
7.47
Outstanding at Period End
1,913,444
$
9.35
1,768,745
$
7.67
Options Exercisable at Period End
1,492,069
$
7.51
1,332,845
$
6.83
For the years ended December 31, 2022, 2021 and 2020, the Company recognized compensation expense for stock options of $1.1 million, $922,000 and $881,000, respectively.
The following table presents information pertaining to options outstanding at December 31, 2022:
Options Outstanding
Options Exercisable
Weighted Average
Number of
Weighted Average
Remaining Contractual
Number of
Weighted Average
Range of Exercise Prices
Options
Exercise Price
Life in Years
Options
Exercise Price
$
2.13 - 3.99
307,000
$
3.04
1.1
307,000
$
3.04
7.00 - 7.99
904,916
7.47
4.8
904,916
7.47
8.00 - 8.99
17,500
8.76
7.3
5,000
8.76
10.00 - 10.99
10,000
10.08
7.4
5,000
10.08
11.00 - 11.99
85,000
11.27
6.4
56,000
11.30
12.00 - 12.99
263,528
12.90
6.6
191,528
12.91
13.00 - 13.99
25,000
13.22
5.4
20,000
13.22
17.00 - 17.99
300,500
17.50
9.1
2,625
17.49
Totals
1,913,444
$
9.35
5.2
1,492,069
$
7.51
As of December 31, 2022, there was $1.6 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 2.6 years.
The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the year ended December 31, 2022:
Weighted
Number of
Average Grant
Shares
Date Fair Value
Nonvested Options at December 31, 2021
435,900
$
3.43
Granted
290,000
5.28
Vested
(292,525)
3.12
Forfeited
(12,000)
5.12
Nonvested Options at December 31, 2022
421,375
$
4.87
Restricted Stock Awards
In 2019 and 2020, the Company granted restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with voting and forfeitable dividend rights.
The following table presents an analysis of nonvested restricted stock awards outstanding for the years ended December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Weighted
Weighted
Number of
Average Grant
Number of
Average Grant
Shares
Date Fair Value
Shares
Date Fair Value
Nonvested at December 31, 2021
75,113
$
12.59
110,962
$
12.63
Granted
-
-
-
-
Vested
(35,351)
12.69
(35,849)
12.69
Forfeited
(1,000)
12.92
-
-
Nonvested at December 31, 2022
38,762
$
12.50
75,113
$
12.59
Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the years ended December 31, 2022, 2021 and 2020, the Company recognized compensation expense for restricted stock awards of $448,000, $455,000 and $441,000, respectively.
As of December 31, 2022, there was $433,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 1.0 year.
In addition, during the year ended December 31, 2022, the Company issued 19,024 shares of common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $319,000 was included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.
Restricted Stock Units
In 2020, the Company began granting restricted stock units out of the 2019 EIP. Restricted stock units granted out of the 2019 EIP represent the right to receive one share of Company stock upon vesting and vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock units have no voting or dividend rights and are not considered outstanding until vesting.
The following table presents an analysis of nonvested restricted stock units outstanding for the years ended December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Weighted
Weighted
Number of
Average Grant
Number of
Average Grant
Shares
Date Fair Value
Shares
Date Fair Value
Nonvested at December 31, 2021
344,908
$
15.02
205,666
$
12.27
Granted
112,760
18.72
191,468
17.22
Vested
(96,786)
14.65
(51,146)
12.27
Forfeited
(9,572)
15.12
(1,080)
12.27
Nonvested at December 31, 2022
351,310
$
16.30
344,908
$
15.02
Compensation expense associated with the restricted stock units is recognized on a straight-line basis over the period that the restrictions associated with the units lapse based on the total cost of the unit at the grant date. For the years ended December 31, 2022, 2021 and 2020, the Company recognized compensation expense for restricted stock units of $1.5 million, $731,000 and $43,000, respectively.
As of December 31, 2022, there was $5.5 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 3.1 years.
Note 18: Profit Sharing Plan
The Company has a combined profit sharing 401(k) plan which provides that an annual contribution up to 100% of each participating employee’s total pay, may be contributed to the plan. Employees are eligible to participate after meeting certain eligibility requirements as defined in the plan and are allowed to make pre-tax contributions up to the maximum amount allowed by the Internal Revenue Service. The terms of the 401(k) plan require employer match contributions equal to 100% of the employee contributions up to 4% of pay. In addition, the terms of the plan allow for discretionary profit sharing contributions as determined by the Company and approved by the Board of Directors.
The employer match contributions for the 401(k) plan were $1.0 million, $804,000, and $743,000 for the years ended December 31, 2022, 2021 and 2020, respectively. The total employer discretionary profit sharing contributions to the plan were $793,000, $636,000, and $533,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 19: Deferred Compensation Plan
In 2013, the Company implemented a deferred compensation plan for certain employees which allows the Company to make a discretionary contribution to the account of any employee designated as a participant in the plan based upon the participant’s performance for the calendar year. Company contributions to the plan vest on the fourth anniversary of the last day of the calendar year for which the contribution was made to the plan and accrue interest at a rate equal to the Bank’s return on average equity for the immediately preceding calendar year, or an alternative rate set by the Company’s board of directors. Distribution of amounts contributed under the plan, including accrued interest, is made in a lump sum cash payment within 75 days following the date such amounts become vested. As of December 31, 2022 and 2021, the Company had a liability of $1.8 million and $3.1 million, respectively, recorded on the consolidated balance sheets. There were no new contributions made to the plan during the years ended December 31, 2022 and 2021.
Note 20: Preferred Stock
On August 17, 2021, the Company announced the closing of its underwritten public offering of 2,400,000 depositary shares, each representing a 1/100th interest in a share of the Company’s 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, $0.01 par value per share (“Series A Preferred Stock”). On August 20, 2021, the underwriters of the offering exercised in full their option to purchase 360,000 additional depositary shares to cover over-allotments. As a result, the gross proceeds from the offering totaled $69.0 million. Dividends on the Series A Preferred Stock will be non-
cumulative and, if declared, accrue and are payable quarterly, in arrears, at a rate of 5.875% per annum. The Series A Preferred Stock qualifies as additional Tier 1 capital for the purposes of the regulatory capital calculations. The net proceeds from the issuance and sale of the depositary shares, each representing a 1/100th ownership interest in our Series A Preferred Stock, after deducting $2.5 million of issuance costs, including the underwriting discount and professional service fees, were $66.5 million.
Note 21: Regulatory Capital
The Company and the Bank are subject to various regulatory requirements administered by 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 financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank must also meet certain specific capital guidelines under the regulatory framework for prompt corrective action. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.
The following tables present the capital amounts and ratios for the Company, on a consolidated basis, and the Bank as of December 31, 2022 and 2021:
Minimum Required
For Capital Adequacy
To be Well Capitalized
For Capital Adequacy
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2022
Company (Consolidated):
Total Risk-based Capital
$
536,352
13.15
%
$
326,190
8.00
%
$
428,125
10.50
%
N/A
N/A
Tier 1 Risk-based Capital
409,092
10.03
244,643
6.00
346,577
8.50
N/A
N/A
Common Equity Tier 1 Capital
342,578
8.40
183,482
4.50
285,417
7.00
N/A
N/A
Tier 1 Leverage Ratio
409,092
9.55
171,368
4.00
171,368
4.00
N/A
N/A
Bank:
Total Risk-based Capital
$
508,760
12.47
%
$
326,288
8.00
%
$
428,253
10.50
%
$
407,860
10.00
%
Tier 1 Risk-based Capital
460,404
11.29
244,716
6.00
346,681
8.50
326,288
8.00
Common Equity Tier 1 Capital
460,404
11.29
183,537
4.50
285,502
7.00
265,109
6.50
Tier 1 Leverage Ratio
460,404
10.76
171,113
4.00
171,113
4.00
213,891
5.00
Minimum Required
For Capital Adequacy
To be Well Capitalized
For Capital Adequacy
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Company (Consolidated):
Total Risk-based Capital
$
499,554
15.55
%
$
256,966
8.00
%
$
337,268
10.50
%
N/A
N/A
Tier 1 Risk-based Capital
367,161
11.43
192,725
6.00
273,027
8.50
N/A
N/A
Common Equity Tier 1 Capital
300,647
9.36
144,543
4.50
224,845
7.00
N/A
N/A
Tier 1 Leverage Ratio
367,161
10.82
135,723
4.00
135,723
4.00
N/A
N/A
Bank:
Total Risk-based Capital
$
415,848
12.94
%
$
257,005
8.00
%
$
337,319
10.50
%
$
321,256
10.00
%
Tier 1 Risk-based Capital
375,688
11.69
192,754
6.00
273,068
8.50
257,005
8.00
Common Equity Tier 1 Capital
375,688
11.69
144,565
4.50
224,879
7.00
208,816
6.50
Tier 1 Leverage Ratio
375,688
11.09
135,508
4.00
135,508
4.00
169,386
5.00
The Company and the Bank must maintain a capital conservation buffer as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers.
As of December 31, 2022 and 2021, the capital ratios of the Company and the Bank were in excess of the quantitative capital ratio standards applicable on those dates. However, there can be no assurance that the Company and the Bank will continue to maintain such status in the future.
Note 22: Fair Value Measurement
The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The 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 fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 - Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company 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 instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Level 3 - Inputs that are unobservable 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 fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at 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 fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.
Recurring Basis
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021:
December 31, 2022
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities
$
2,580
$
-
$
-
$
2,580
Municipal Bonds
-
131,354
-
131,354
Mortgage-Backed Securities
-
237,784
-
237,784
Corporate Securities
-
109,827
-
109,827
SBA Securities
-
20,877
-
20,877
Asset-Backed Securities
-
46,191
-
46,191
Interest Rate Caps
-
19,406
-
19,406
Interest Rate Swaps
-
18,717
-
18,717
Total Fair Value of Financial Assets
$
2,580
$
584,156
$
-
$
586,736
Fair Value of Financial Liabilities:
Interest Rate Swaps
$
-
$
9,542
$
-
$
9,542
Total Fair Value of Financial Liabilities
$
-
$
9,542
$
-
$
9,542
December 31, 2021
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities
$
$
-
$
-
$
Municipal Bonds
-
158,369
-
158,369
Mortgage-Backed Securities
-
124,537
-
124,537
Corporate Securities
-
84,480
-
84,480
SBA Securities
-
30,370
-
30,370
Asset-Backed Securities
-
40,852
-
40,852
Interest Rate Caps
-
7,356
-
7,356
Interest Rate Swaps
-
2,358
-
2,358
Total Fair Value of Financial Assets
$
$
448,322
$
-
$
449,076
Fair Value of Financial Liabilities:
Interest Rate Swaps
$
-
$
1,567
$
-
$
1,567
Total Fair Value of Financial Liabilities
$
-
$
1,567
$
-
$
1,567
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.
For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is 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 and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market 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, or cannot be obtained or corroborated, a security is generally classified as Level 3.
Interest Rate Caps
The fair value of the caps are calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities, and accordingly are valued using Level 2 inputs.
Interest Rate Swaps
Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets for the periods ended December 31, 2022, 2021 and 2020:
December 31, 2022
(dollars in thousands)
Level 1
Level 2
Level 3
Loss
Impaired Loans
$
-
$
$
-
$
Totals
$
-
$
$
-
$
December 31, 2021
(dollars in thousands)
Level 1
Level 2
Level 3
Loss
Impaired Loans
$
-
$
9,360
$
-
$
Totals
$
-
$
9,360
$
-
$
December 31, 2020
(dollars in thousands)
Level 1
Level 2
Level 3
Loss
Impaired Loans
$
-
$
$
-
$
Totals
$
-
$
$
-
$
Impaired Loans
In accordance with the provisions of the loan impairment guidance, impairment is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.
Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.
Fair Value
Disclosure of 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 where quoted market prices are not available, fair values are based on estimates using present value of cash flow 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 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 a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the below amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the carrying amounts and estimated fair values of financial instruments at December 31, 2022 and 2021:
December 31, 2022
Fair Value Hierarchy
Carrying
Estimated
(dollars in thousands)
Amount
Level 1
Level 2
Level 3
Fair Value
Financial Assets:
Cash and Due From Banks
$
87,043
$
87,043
$
-
$
-
$
87,043
Bank-Owned Certificates of Deposit
1,181
-
1,173
-
1,173
Securities Available for Sale
548,613
2,580
546,033
-
548,613
FHLB Stock, at Cost
19,606
-
19,606
-
19,606
Loans, Net
3,512,157
-
3,314,190
-
3,314,190
Accrued Interest Receivable
13,479
-
13,479
-
13,479
Interest Rate Caps
19,406
-
19,406
-
19,406
Interest Rate Swaps
18,717
-
18,717
-
18,717
Financial Liabilities:
Deposits
$
3,416,543
$
-
$
3,390,416
$
-
$
3,390,416
Federal Funds Purchased
287,000
-
287,000
-
287,000
Notes Payable
13,750
13,473
-
13,473
FHLB Advances
97,000
-
96,061
-
96,061
Subordinated Debentures
78,905
-
70,931
-
70,931
Accrued Interest Payable
2,831
-
2,831
-
2,831
Interest Rate Swaps
9,542
-
9,542
-
9,542
December 31, 2021
Fair Value Hierarchy
Carrying
Estimated
(dollars in thousands)
Amount
Level 1
Level 2
Level 3
Fair Value
Financial Assets:
Cash and Due From Banks
$
143,473
$
143,473
$
-
$
-
$
143,473
Bank-Owned Certificates of Deposit
1,876
-
1,884
-
1,884
Securities Available for Sale
439,362
438,608
-
439,362
FHLB Stock, at Cost
5,242
-
5,242
-
5,242
Loans, Net
2,769,917
-
2,726,417
-
2,726,417
Accrued Interest Receivable
9,186
-
9,186
-
9,186
Interest Rate Caps
7,356
-
7,356
-
7,356
Interest Rate Swaps
2,358
-
2,358
-
2,358
Financial Liabilities:
Deposits
$
2,946,237
$
-
$
2,931,215
$
-
$
2,931,215
FHLB Advances
42,500
-
42,515
-
42,515
Subordinated Debentures
92,239
-
97,700
-
97,700
Accrued Interest Payable
1,409
-
1,409
-
1,409
Interest Rate Swaps
1,567
-
1,567
-
1,567
The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.
Cash and due from banks - The carrying amount of cash and cash equivalents approximates their fair value.
Bank-owned certificates of deposit - Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.
FHLB stock - The carrying amount of FHLB stock approximates its fair value.
Loans, Net - Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable - The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.
Deposits - The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Funds Purchased - The carrying amount of federal funds purchased approximates the fair value.
Notes payable and subordinated debentures - The fair values of the Company’s notes payable and subordinated debentures are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.
FHLB advances - The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.
Accrued interest payable - The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.
Off-balance sheet instruments - Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees and was not material at December 31, 2022 and 2021.
Limitations - The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, 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 estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Note 23: Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
Substantially all of the Company’s revenue is generated from financial instruments, including interest income related to loans and investment securities, letters of credit, and derivatives, which are not within the scope of Topic 606 as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. The following is a summary of revenue-generating activities that are within the scope of Topic 606, which are presented in the Company’s income statements as components of noninterest income:
Service charges on deposit accounts. These represent general service fees for monthly account maintenance and activity and transaction-based fees such as wire transfer fees, check cashing fees, check printing fees, stop payment fees and ATM and card replacement fees. Revenue is recognized when the Company’s performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payments for these performance obligations are generally received at the time the performance obligations are satisfied. The adoption of Topic 606 had no impact on the Company’s revenue recognition practice for these services.
Debit card interchange fees. When a debit card issued by the Company is used to purchase goods or services from a merchant, the Company earns an interchange fee. The performance obligation is completed and the fees are recognized as the service is provided (i.e., when the customer uses the debit card). The adoption of Topic 606 has no impact on the Company’s revenue recognition related to debit card interchange fees.
Gain on sales of other real estate. ASU 2014-09 also created Topic 610-20, under which a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 list several criteria which must exist to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled.
Note 24: Accumulated Other Comprehensive Income (Loss)
The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020:
(dollars in thousands)
Before Tax
Tax Effect
Net of Tax
Year Ended December 31, 2022
Net Unrealized Loss on Available for Sale Securities
$
(56,914)
$
15,649
$
(41,265)
Less: Reclassification Adjustment for Net Gains Included in Net Income
(82)
(59)
Total Unrealized Loss
(56,996)
15,672
(41,324)
Net Unrealized Gain on Cash Flow Hedge
20,430
(6,048)
14,382
Less: Reclassification Adjustment for Gains Included in Net Income
(8)
(6)
Total Unrealized Gain
20,422
(6,046)
14,376
Other Comprehensive Loss
$
(36,574)
$
9,626
$
(26,948)
Year Ended December 31, 2021
Net Unrealized Loss on Available for Sale Securities
$
(1,689)
$
$
(1,334)
Less: Reclassification Adjustment for Net Gains Included in Net Income
(750)
(593)
Total Unrealized Loss
(2,439)
(1,927)
Net Unrealized Gain on Cash Flow Hedge
3,991
(838)
3,153
Less: Reclassification Adjustment for Losses Included in Net Income
1,520
(319)
1,201
Total Unrealized Gain
5,511
(1,157)
4,354
Other Comprehensive Gain
$
3,072
$
(645)
$
2,427
Year Ended December 31, 2020
Net Unrealized Gain on Available for Sale Securities
$
6,394
$
(1,343)
$
5,051
Less: Reclassification Adjustment for Net Gains Included in Net Income
(1,503)
(1,187)
Total Unrealized Gain
4,891
(1,027)
3,864
Net Unrealized Loss on Cash Flow Hedge
(3,185)
(2,516)
Less: Reclassification Adjustment for Losses Included in Net Income
(122)
Total Unrealized Loss
(2,606)
(2,059)
Other Comprehensive Gain
$
2,285
$
(480)
$
1,805
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2022, 2021 and 2020:
Accumulated
Available For
Other Comprehensive
(dollars in thousands)
Sale Securities
Cash Flow Hedge
Income (Loss)
Year Ended December 31, 2022
Balance at Beginning of Year
$
7,200
$
1,806
$
9,006
Other Comprehensive Income (Loss) Before Reclassifications
(41,265)
14,382
(26,883)
Amounts Reclassified from Accumulated Other Comprehensive Income
(59)
(6)
(65)
Net Other Comprehensive Income (Loss) During Period
(41,324)
14,376
(26,948)
Balance at End of Year
$
(34,124)
$
16,182
$
(17,942)
Year Ended December 31, 2021
Balance at Beginning of Year
$
9,127
$
(2,548)
$
6,579
Other Comprehensive Income (Loss) Before Reclassifications
(1,334)
3,153
1,819
Amounts Reclassified from Accumulated Other Comprehensive Income
(593)
1,201
Net Other Comprehensive Income (Loss) During Period
(1,927)
4,354
2,427
Balance at End of Year
$
7,200
$
1,806
$
9,006
Year Ended December 31, 2020
Balance at Beginning of Year
$
5,263
$
(489)
$
4,774
Other Comprehensive Income (Loss) Before Reclassifications
5,051
(2,516)
2,535
Amounts Reclassified from Accumulated Other Comprehensive Income
(1,187)
(730)
Net Other Comprehensive Income (Loss) During Period
3,864
(2,059)
1,805
Balance at End of Year
$
9,127
$
(2,548)
$
6,579
Note 25: Parent Company Financial Information
The following information presents the condensed balance sheets of the Company as of December 31, 2022 and 2021, and the condensed statements of income and cash flows of the Company for the years ended December 31, 2022, 2021 and 2020:
Condensed Balance Sheets
December 31,
December 31,
(dollars in thousands)
ASSETS
Cash and Cash Equivalents
$
37,414
$
80,551
Investment in Subsidiaries
447,931
390,196
Premises and Equipment, Net
Other Assets
3,180
1,556
Total Assets
$
489,369
$
473,056
LIABILITIES AND EQUITY
LIABILITIES
Notes Payable
$
13,750
$
-
Subordinated Debentures, Net of Issuance Costs
78,905
92,239
Accrued Interest Payable
Other Liabilities
2,198
Total Liabilities
95,305
93,784
SHAREHOLDERS’ EQUITY
Preferred Stock-$0.01 par value
Preferred Stock-Authorized 10,000,000
66,514
66,514
Common Stock-$0.01 par value
Voting Common Stock-Authorized 75,000,000
Additional Paid-In Capital
96,529
104,123
Retained Earnings
248,685
199,347
Accumulated Other Comprehensive Income (Loss)
(17,942)
9,006
Total Shareholders’ Equity
394,064
379,272
Total Liabilities and Shareholders' Equity
$
489,369
$
473,056
Condensed Statements of Income
December 31,
December 31,
December 31,
(dollars in thousands)
INCOME
Dividend Income
$
1,585
$
1,350
$
1,300
Interest Income
-
-
Other Income
Total Income
1,714
1,467
1,498
EXPENSE
Interest Expense
4,890
4,691
3,547
Other Expenses
1,570
1,972
1,412
Total Interest Expense
6,460
6,663
4,959
LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED EARNINGS
(4,746)
(5,196)
(3,461)
Income Tax Benefit
1,792
1,847
1,323
LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
(2,954)
(3,349)
(2,138)
Equity in Undistributed Earnings
56,346
49,036
29,332
NET INCOME
$
53,392
$
45,687
$
27,194
Condensed Statements of Cash Flows
December 31,
December 31,
December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$
53,392
$
45,687
$
27,194
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:
Equity in Undistributed Earnings of Subsidiaries
(56,346)
(49,036)
(29,332)
Changes in Other Assets and Liabilities
(193)
Net Cash Used by Operating Activities
(3,147)
(2,715)
(1,904)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (Increase) Decrease in Loans
-
-
Investment in Subsidiaries
(25,000)
(25,000)
(25,000)
Net Cash Used in Investing Activities
(25,000)
(25,000)
(24,258)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Notes Payable
-
(11,000)
(2,000)
Proceeds from Notes Payable
13,750
-
-
Proceeds from Issuance of Subordinated Debt
-
29,309
48,783
Redemption of Subordinated Debt
(13,750)
(11,250)
-
Stock Options Exercised
Stock Repurchases
(11,513)
(2,740)
(10,373)
Issuance of Preferred Stock
-
66,514
-
Preferred Stock Dividends Paid
(4,054)
(1,171)
-
Net Cash Provided (Used) by Financing Activities
(14,990)
70,386
36,727
NET CHANGE IN CASH AND CASH EQUIVALENTS
(43,137)
42,671
10,565
Cash and Cash Equivalents Beginning
80,551
37,880
27,315
Cash and Cash Equivalents Ending
$
37,414
$
80,551
$
37,880
Note 26: Subsequent Events
On January 24, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on the Series A Preferred Stock, payable on March 1, 2023, to shareholders of record on the Series A Preferred Stock at the close of business on February 15, 2023.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of December 31, 2022, the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
This annual report does not include an attestation report of the Company’s independent registered public accounting firm. As an emerging growth company, management’s report on internal control over financial reporting was not subject to attestation by the Company’s independent registered public accounting firm in accordance with the JOBS Act.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Internal control over financial reporting of the Company includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.
Management assessed the Company’s internal control over financial reporting as of December 31, 2022. This assessment was based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in 2013. Based on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective internal control over financial reporting as of December 31, 2022 based on the specified criteria.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information called for by this item is set forth under the headings “Proposal 1 - Election of Directors,” “Security Ownership of Certain Beneficial Owners,” and “Corporate Governance and the Board of Directors” appearing in the Company’s definitive Proxy Statement for our Annual Meeting of Shareholders to be held on April 25, 2023, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end, which is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is set forth under the headings “Executive Compensation,” “Corporate Governance and the Board of Directors - Director Compensation,” and “Corporate Governance and the Board of Directors - Compensation Committee Interlocks and Insider Participation” appearing in the Company's definitive Proxy Statement for our Annual Meeting of Shareholders to be held on April 25, 2023, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end, which is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plans
The following table presents the number of outstanding options, warrants and rights granted to participants by the Company under its equity compensation plans, as well as the number of securities remaining available for future issuance under these plans as of December 31, 2022. The table provides this information separately for equity compensation plans that have and have not been approved by security holders. Additional information regarding stock incentive plans is presented in “Note 17 - Stock Options and Restricted Stock” to the Consolidated Financial Statements for the year ending December 31, 2022.
(c)
Number of
securities
(a)
remaining
Number of
(b)
available for
securities to be
Weighted-
future issuance
issued upon
average
under equity
exercise of
exercise price
compensation
outstanding
of outstanding
plans (excluding
options,
options,
securities
warrants and
warrants and
reflected in
Plan Category
rights
rights
column (a))
Equity compensation plans approved by shareholders (1)
2,264,754
$
9.35
276,063
Equity compensation plans not approved by shareholders
-
-
-
Total
2,264,754
$
9.35
276,063
(1) Column (a) includes outstanding stock options granted under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan, the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan, the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan and the Bridgewater Bancshares, Inc. 2005 Combined Incentive and Non-Statutory Stock Option Plan. This column also includes unvested restricted stock units granted under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan. Restricted stock units are not reflected in Column (b) as they do not include an exercise price. Column (c) includes 44,700 and 231,363 shares remaining available for future issuance under the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan and the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan, respectively, as of December 31, 2022.
The information required pursuant to Item 403 of Regulation S-K can be found under the caption “Security Ownership of Certain Beneficial Owners” in the Company’s definitive Proxy Statement on Form DEF 14A for our Annual Meeting of Shareholders to be held on April 25, 2023, which will be filed with the SEC within 120 days of the Company’s fiscal year end, and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information called for by this item is set forth under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance and the Board of Directors” appearing in the Company’s definitive Proxy Statement for our Annual Meeting of Shareholders to be held on April 25, 2023, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end, which is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information called for by this item is set forth under the heading “Proposal 5 - Ratification of the Appointment of RSM US LLP as our Independent Registered Public Accounting Firm” appearing in the Company’s definitive Proxy Statement for our Annual Meeting of Shareholders to be held on April 25, 2023, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end, which is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements: The consolidated financial statements that appear in Item 8 of this Form 10-K are incorporated herein by reference.
2. Financial Statement Schedules: All schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number
Description
3.1
Second Amended and Restated Articles of Incorporation of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on April 25, 2019)
3.2
Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 on Form S-1/A filed on March 5, 2018)
3.3
Statement of Designation of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on August 17, 2021)
4.1
Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
4.3
Indenture, dated June 19, 2020, by and between Bridgewater Bancshares, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on June 19, 2020)
4.4
Forms of 5.25% Fixed-to-Floating Rate Subordinated Note due July 1, 2030 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.3 hereto and incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on June 19, 2020)
4.5
Indenture, dated July 8, 2021, by and between Bridgewater Bancshares, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on July 8, 2021)
4.6
Forms of 3.25% Fixed-to-Floating Rate Subordinated Note due July 15, 2031 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.5 hereto and incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on July 8, 2021)
4.7
Deposit Agreement, dated as of August 17, 2021, among Bridgewater Bancshares, Inc., Computershare Inc. and Computershare Trust Company, N.A., jointly as depositary, and the holders from time to time of the depositary receipts issued thereunder (incorporated herein by reference to Exhibit 4.1 on Form 8-K filed on August 17, 2021)
4.8
Form of depositary receipt representing the Depositary Shares (included as Exhibit A to Exhibit 4.7 hereto)
10.1
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Jerry Baack, dated October 1, 2017 (incorporated herein by reference to Exhibit 10.1 on Form S-1 filed on February 16, 2018)†
10.2
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Mary Jayne Crocker, dated October 1, 2017 (incorporated herein by reference to Exhibit 10.2 on Form S-1 filed on February 16, 2018)†
10.3
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Jeffrey D. Shellberg, dated October 1, 2017 (incorporated herein by reference to Exhibit 10.3 on Form S-1 filed on February 16, 2018)†
10.4
Bridgewater Bank Deferred Cash Incentive Plan effective December 31, 2013 (incorporated herein by reference to Exhibit 10.4 filed on Form S-1 on February 16, 2018)†
10.5
Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.5 on Form S-1 filed on February 16, 2018)†
10.6
Form of Stock Option Agreement under the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2019)†
10.7
Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.7 on Form S-1 filed on February 16, 2018)†
10.8
Form of Stock Option Agreement under the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.8 on Form S-1 filed on February 16, 2018)†
10.9
Bridgewater Bancshares, Inc. 2005 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.9 filed on Form S-1 on February 16, 2018)†
10.10
Form of Incentive Stock Option Agreement under the Bridgewater Bancshares, Inc. 2005 Combined Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.10 on Form S-1 filed on February 16, 2018)†
10.11
Construction Contract, dated as of August 27, 2018, by and between Bridgewater Bank and Reuter Walton Commercial, LLC (incorporated herein by reference to Exhibit 10.1 filed with the Form 8-K on August 30, 2018)
10.12
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and Castle Creek Capital Partners V, LP (incorporated herein by reference to Exhibit 10.1 filed with the Form 8-K on October 26, 2018)
10.13
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and EJF Sidecar Fund, Series LLC - Series E (incorporated herein by reference to Exhibit 10.2 filed with the Form 8-K on October 26, 2018)
10.14
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and Endeavour Regional Bank Opportunities Fund II LP (incorporated herein by reference to Exhibit 10.3 filed with the Form 8-K on October 26, 2018)
10.15
Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 filed on April 26, 2019)†
10.16
Form of Restricted Stock Award Agreement under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed on April 26, 2019)†
10.17
Form of Restricted Stock Unit Award Agreement under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 filed on April 26, 2019)†
10.18
Form of Nonqualified Stock Option Award Agreement under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8 filed on April 26, 2019)†
10.19
Form of Incentive Stock Option Award Agreement under the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-8 filed on April 26, 2019)†
10.20
Form of Subordinated Note Purchase Agreement, dated June 19, 2020, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on June 19, 2020)
10.21
Form of Registration Rights Agreement, dated June 19, 2020, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on June 19, 2020)
10.22
Loan and Security Agreement, dated as of March 1, 2021, by and between Bridgewater Bancshares, Inc., as Borrower, and ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on March 5, 2021)
10.23
Revolving Note, dated as of March 1, 2021, made by Bridgewater Bancshares, Inc., as Borrower, to and in favor of ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on March 5, 2021)
10.24
Pledge Agreement, dated as of March 1, 2021, by and between Bridgewater Bancshares, Inc., as Borrower, and ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.3 on Form 8-K filed on March 5, 2021)
10.25
Form of Subordinated Note Purchase Agreement, dated July 8, 2021, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on July 8, 2021)
10.26
Form of Registration Rights Agreement, dated July 8, 2021, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on July 8, 2021)
10.27
Executive Employment Agreement, dated January 1, 2022 between Bridgewater Bancshares, Inc. and Jerry Baack†
10.28
Executive Employment Agreement, dated January 1, 2022 between Bridgewater Bancshares, Inc. and Mary Jayne Crocker†
10.29
Executive Employment Agreement, dated January 1, 2022 between Bridgewater Bancshares, Inc. and Joseph Chybowski†
10.30
Executive Employment Agreement, dated January 1, 2022 between Bridgewater Bancshares, Inc. and Jeffrey Shellberg†
10.31
Executive Employment Agreement, dated January 1, 2022 between Bridgewater Bancshares, Inc. and Nicholas Place†
10.32
Second Amendment to Loan and Security Agreement, dated September 1, 2022, by and between Bridgewater Bancshares, Inc. and ServisFirst Bank (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on September 1, 2022)
10.33
Amended and Restated Revolving Note, dated September 1, 2022, made by Bridgewater Bancshares, Inc. to and in favor of ServisFirst Bank (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on September 1, 2022)
16.1
Letter of CliftonLarsonAllen LLP, dated December 22, 2022 (incorporated herein by reference to Exhibit 16.1 on Form 8-K filed on December 22, 2022)
21.1
Subsidiaries of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 21.1 filed with the Form S-1 on February 16, 2018)
23.1
Consent of CliftonLarsonAllen LLP
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1
Financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
Cover Page Interactive Data File (formatted as inline XBRL, with applicable taxonomy extension information contained in Exhibit 101)
________________
† Indicates a management contract or compensatory plan.