Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________
Commission File Number 001-38412
BRIDGEWATER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Minnesota(State or other jurisdiction ofincorporation or organization)
26-0113412(I.R.S. EmployerIdentification No.)
4450 Excelsior Boulevard, Suite 100St. Louis Park, Minnesota(Address of principal executive offices)
55416(Zip Code)
(952) 893-6868
(Registrant’s telephone number, including area code)
. Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Common Stock, $0.01 Par Value
BWB
The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/100th interest in a share of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share
BWBBP
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Common Stock outstanding as of October 31, 2023 was 28,000,570.
PART I FINANCIAL INFORMATION
3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Shareholders’ Equity
6
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
67
Item 4. Controls and Procedures
69
PART II OTHER INFORMATION
70
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
71
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
72
2
PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Bridgewater Bancshares, Inc. and Subsidiaries
(dollars in thousands, except share data)
September 30,
December 31,
2023
2022
(Unaudited)
ASSETS
Cash and Cash Equivalents
$
124,358
87,043
Bank-Owned Certificates of Deposit
1,225
1,181
Securities Available for Sale, at Fair Value
553,076
548,613
Loans, Net of Allowance for Credit Losses of $50,585 at September 30, 2023 (unaudited) and $47,996 at December 31, 2022
3,664,464
3,512,157
Federal Home Loan Bank (FHLB) Stock, at Cost
17,056
19,606
Premises and Equipment, Net
49,331
48,445
Accrued Interest
15,182
13,479
Goodwill
2,626
Other Intangible Assets, Net
197
288
Bank-Owned Life Insurance
34,209
33,485
Other Assets
95,346
78,739
Total Assets
4,557,070
4,345,662
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing
754,297
884,272
Interest Bearing
2,921,212
2,532,271
Total Deposits
3,675,509
3,416,543
Federal Funds Purchased
—
287,000
Notes Payable
13,750
FHLB Advances
294,500
97,000
Subordinated Debentures, Net of Issuance Costs
79,192
78,905
Accrued Interest Payable
3,816
2,831
Other Liabilities
74,343
55,569
Total Liabilities
4,141,110
3,951,598
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 September 30, 2023 (unaudited) and December 31, 2022
66,514
Common Stock- $0.01 par value; Authorized 75,000,000
Common Stock - Issued and Outstanding 28,015,505 at September 30, 2023 (unaudited) and 27,751,950 at December 31, 2022
280
278
Additional Paid-In Capital
100,120
96,529
Retained Earnings
272,812
248,685
Accumulated Other Comprehensive Loss
(23,766)
(17,942)
Total Shareholders' Equity
415,960
394,064
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
(dollars in thousands, except per share data)
Three Months Ended
Nine Months Ended
INTEREST INCOME
Loans, Including Fees
48,999
37,666
141,675
103,768
Investment Securities
6,507
4,372
18,962
10,567
Other
1,303
321
3,165
500
Total Interest Income
56,809
42,359
163,802
114,835
INTEREST EXPENSE
Deposits
27,225
5,984
66,597
12,598
296
844
2,316
329
5,269
646
Subordinated Debentures
1,003
1,242
2,979
3,658
548
709
8,253
1,128
Total Interest Expense
31,388
8,264
83,942
18,030
NET INTEREST INCOME
25,421
34,095
79,860
96,805
Provision for (Recovery of) Credit Losses
(600)
1,500
75
6,200
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES
26,021
32,595
79,785
90,605
NONINTEREST INCOME
Customer Service Fees
379
313
1,096
892
Net Gain (Loss) on Sales of Available for Sale Securities
(6)
52
Other Income
1,347
1,074
3,994
3,650
Total Noninterest Income
1,726
1,387
5,084
4,594
NONINTEREST EXPENSE
Salaries and Employee Benefits
9,519
9,449
26,923
27,120
Occupancy and Equipment
1,101
1,086
3,385
3,213
Other Expense
4,730
3,622
13,613
11,084
Total Noninterest Expense
15,350
14,157
43,921
41,417
INCOME BEFORE INCOME TAXES
12,397
19,825
40,948
53,782
Provision for Income Taxes
2,768
5,312
9,861
14,125
NET INCOME
9,629
14,513
31,087
39,657
Preferred Stock Dividends
(1,013)
(3,040)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
8,616
13,500
28,047
36,617
EARNINGS PER SHARE
Basic
0.31
0.49
1.01
1.32
Diluted
0.30
0.47
0.99
1.27
(dollars in thousands)
Net Income
Other Comprehensive Loss:
Unrealized Losses on Available for Sale Securities
(10,151)
(18,073)
(14,338)
(56,487)
Unrealized Gains on Cash Flow Hedges
7,763
7,725
10,167
21,117
Reclassification Adjustment for (Gains) Losses Realized in Income
(1,623)
(119)
(4,004)
511
Income Tax Impact
1,153
4,808
2,351
9,133
Total Other Comprehensive Loss, Net of Tax
(2,858)
(5,659)
(5,824)
(25,726)
Comprehensive Income
6,771
8,854
25,263
13,931
Three and Nine Months Ended September 30, 2023 and 2022
Accumulated
Additional
Preferred
Common Stock
Paid-In
Retained
Comprehensive
Stock
Shares
Amount
Capital
Earnings
Loss
Total
BALANCE June 30, 2022
27,677,372
277
96,689
222,464
(11,061)
374,883
Stock-based Compensation
4,744
876
Comprehensive Income (Loss)
Stock Options Exercised
3,250
41
Stock Repurchases
(99,310)
(1)
(1,615)
(1,616)
Vested Restricted Stock Units
3,000
Restricted Shares Withheld for Taxes
(1,078)
(18)
Preferred Stock Dividend
BALANCE September 30, 2022
27,587,978
276
95,973
235,964
(16,720)
382,007
BALANCE June 30, 2023
27,973,995
99,044
264,196
(20,908)
409,126
12,588
997
27,000
90
(11)
BALANCE September 30, 2023
28,015,505
Income (Loss)
BALANCE December 31, 2021
28,206,566
282
104,123
199,347
9,006
379,272
14,400
2,557
28,000
106
(662,765)
(10,772)
(10,778)
Forfeiture of Restricted Stock Awards
(1,000)
(3)
5,100
(2,323)
(38)
BALANCE December 31, 2022
27,751,950
Cumulative Effect of Change in Accounting Principle, Net of Tax
(3,920)
Balance as of January 1, 2023, as Adjusted for Change in Accounting Principle
244,765
390,144
35,460
2,910
226,000
715
717
(250)
5,225
(2,880)
(34)
7
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale
196
1,712
Net (Gain) Loss on Sales of Securities Available for Sale
(52)
Provision for Credit Losses on Loans
2,050
Credit for Off-Balance Sheet Exposures
(1,975)
Depreciation of Premises and Equipment
1,901
1,911
Amortization of Other Intangible Assets
91
143
Amortization of Right-of Use Asset
396
Amortization of Subordinated Debt Issuance Costs
287
320
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets
(8,923)
(7,859)
Accrued Interest Payable and Other Liabilities
10,457
35,780
Net Cash Provided by Operating Activities
38,483
80,369
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-Owned Certificates of Deposit
(44)
694
Proceeds from Sales of Securities Available for Sale
26,976
25,066
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale
23,812
30,253
Purchases of Securities Available for Sale
(63,777)
(210,432)
Net Increase in Loans
(155,123)
(560,786)
Net Decrease (Increase) in FHLB Stock
2,550
(10,361)
Purchases of Premises and Equipment
(2,787)
(1,457)
Proceeds from Sales of Foreclosed Assets
116
Purchase of Bank-Owned Life Insurance
(7,407)
Net Cash Used in Investing Activities
(168,277)
(734,430)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
258,966
358,837
Net (Decrease) Increase in Federal Funds Purchased
(287,000)
212,000
Proceeds from FHLB Advances
486,500
29,000
Principal Payments on FHLB Advances
(289,000)
Preferred Stock Dividends Paid
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards
Net Cash Provided by Financing Activities
167,109
586,084
NET CHANGE IN CASH AND CASH EQUIVALENTS
37,315
(67,977)
Cash and Cash Equivalents Beginning
143,473
Cash and Cash Equivalents Ending
75,496
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest
82,670
16,905
Cash Paid for Income Taxes
8,931
14,155
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net Investment Securities Purchased but Not Settled
6,007
5,731
Note 1: Description of the Business and Summary of Significant Accounting Policies
Organization
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company 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. 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three and nine-month periods ended September 30, 2023 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2023.
Principles of Consolidation
These 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 judgements includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including elevated levels of inflation and possible recession, 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 credit 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 (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.
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.
Allowance for Credit Losses
Securities Available for Sale
For any securities classified as available for sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or if it is more likely than not it will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For securities that do not meet the aforementioned criteria, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. In making this assessment, management considers the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security, among other factors. If the assessment indicates that a credit loss exists, an allowance for credit losses, or ACL, is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.
Changes in the ACL on securities are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on securities available for sale is excluded from the estimate of credit losses.
Loans
The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over their contractual life. The contractual term does not consider
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extensions, renewals or modifications. Loans are charged off against the ACL on loans when management believes the uncollectibility of a loan balance has been confirmed. Recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off. Subsequent recoveries, if any, are credited to the ACL on loans.
The ACL on loans is measured on a collective or pooled basis when similar risk characteristics exist. The Company’s pooling method is primarily based on loan purpose and collateral type and generally follows the Company’s loan segmentation for regulatory reporting. The Company has identified the following pools of loans with similar risk characteristics for measuring the ACL on loans:
Commercial: Commercial loans generally are loans to sole proprietorships, partnerships, corporations, and other business enterprises to finance working capital, capital investment, or for other business related purposes. Collateral generally consists of pledges of business assets or interests, including but not limited to accounts receivable, inventory, plant and equipment, and real estate interests, if applicable. The primary repayment sources for commercial loans are the cash flow of the operating businesses which can be adversely affected by company, industry and economic business cycles. Commercial loans may be secured or unsecured.
Paycheck Protection Program (PPP): PPP loans are loans to businesses, sole proprietorships, independent contractors and self-employed individuals who met certain criteria and eligibility requirements through a loan program established by the CARES Act and administered through the Small Business Administration, or SBA. In 2021, the PPP loan program ended and the Company is no longer originating loans under this program. Credit risk in these loans is limited due to a full guarantee by the U.S. Government.
Construction and Land Development: Construction and land development loans are generally loans to finance land development or the construction of industrial, commercial, or multifamily buildings. Construction loans can include construction of new structures, additions or alterations to existing structures, or the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules and the reliance on the sale of the completed project as the primary repayment source for the loan. Factors that may influence the completion of construction may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions. 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 Construction: 1-4 family construction loans are generally loans to finance the construction of new structures, additions or alterations to existing structures, or the demolition of existing structures to make way for new structures. 1-4 family construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of 1-4 family construction may be customer specific or related to changes in general economic conditions.
1-4 Family Mortgage: 1-4 family mortgage loans are generally loans to finance loans on owner occupied and nonowner occupied properties. 1-4 family mortgage loans are secured by first or second liens on the property. The degree of risk in residential mortgage lending involving owner occupied properties depends primarily on the borrower’s ability to repay 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. 1-4 family mortgage loans include 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.
11
Multifamily: Multifamily loans are loans to finance multifamily properties. The primary source of repayment for multifamily loans is the cash flows of the underlying property. The primary risk characteristics include increases in vacancy rates, overbuilt supply, interest rates or changes in general economic conditions. Economic factors such as unemployment, wage growth and home affordability can impact vacancy rates and property cash flow.
Commercial Real Estate (CRE) Owner Occupied: Owner occupied commercial real estate loans are properties that are owned and operated by the borrower and the primary source for repayment is the cash flow from the ongoing operations and activities conducted by the borrower’s business. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Also, 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. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions.
Commercial Real Estate (CRE) Nonowner Occupied: Nonowner occupied commercial real estate loans are investment properties and the primary source for repayment of the loan is derived from rental income associated with the property or proceeds of the sale of the property. Nonowner occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities and other specific use properties. The primary risk characteristics include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses, and general economic conditions. Banks that are concentrated in commercial real estate lending are subject to additional regulatory scrutiny and must employ enhanced risk management practices.
Consumer and Other: Consumer and other loans generally include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, debt consolidation loans, personal expense loans or overdraft protection. The primary risk characteristics associated with consumer and other loans typically include major changes to the borrower’s financial or personal circumstances, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.
Management assesses the adequacy of the ACL on loans on a quarterly basis. Management estimates the ACL on loans using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company uses the weighted-average remaining maturity, or WARM, method as the basis for estimating expected credit losses. The WARM method uses a historical average annual charge off rate. This average annual charge off rate contains loss content over a historical lookback period and is used as a foundation for estimating the ACL on loans for the remaining outstanding balances of loans by segment at the balance sheet date. The average annual charge off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge off rate. The calculation of the unadjusted historical charge off rate is then adjusted for current conditions and for reasonable and supportable forecast periods through qualitative factors prior to being applied to the current balance of the loan segments. Accrued interest receivable on loans available for sale is excluded from the estimate of credit losses.
Forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, a forecast of the difference between the 10-year and 3-month treasury rates, and the most recent available BBB rated corporate bond spreads to U.S. Treasury securities, or BBB Spread. The forecast overlay adjustment for the reasonable and supportable forecast assumes an immediate reversion after a one-year forecast period to historical loss rates for the remaining life of the respective loan segment.
Qualitative factors are used to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the historic loss factors. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The qualitative factors applied to each loan segment include changes in lending policies and procedures, general economic and business conditions, the nature, volume and
12
terms of loans, the experience, depth and ability of lending staff, the quality of the loan review function, the value of underlying collateral, competition, legal and regulatory factors, the volume and severity of watchlist and past due loans, and the level of concentrations.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled evaluations and typically represent collateral dependent loans but may also include other nonperforming loans or modifications. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale of the collateral.
Management may also adjust its assumptions to account for differences between expected and actual losses from period to period. The variability of management’s assumptions could alter the ACL on loans materially and impact future results of operations and financial condition. The loss estimation models and methods used to determine the allowance for credit losses are continually refined and enhanced.
Off-Balance Sheet Credit Exposures
The Company maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments, financial guarantees, and letters of credit, which is included in other liabilities on the consolidated balance sheet, unless the obligation is unconditionally cancellable. The ACL on off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated life of such commitments. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of the loan segment and applied to the amount of commitments expected to fund.
Impact of Recently Adopted Accounting Guidance
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” as amended, which replaces the incurred loss methodology with an expected loss methodology that is commonly referred to as the current expected credit loss, or CECL, methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $3.9 million as of January 1, 2023 for the cumulative effect of adopting CECL. The transition adjustment included a $650,000 impact due to the increase in ACL related to loans, a $4.8 million impact due the establishment of the allowance for off-balance sheet credit exposures, and a $1.6 million impact on deferred taxes.
13
The following table presents the impact of adopting CECL:
January 1, 2023
Impact of
As Reported
Pre-CECL Adoption
CECL Adoption
Under CECL
Assets:
Commercial
6,500
(1,157)
5,343
Paycheck Protection Program
1
Construction and Land Development
3,911
(1,070)
2,841
1-4 Family Construction
845
(235)
610
Real Estate Mortgage:
1-4 Family Mortgage
4,325
(1,778)
2,547
Multifamily
17,459
3,318
20,777
CRE Owner Occupied
1,965
(943)
1,022
CRE Nonowner Occupied
12,576
2,869
15,445
Consumer and Other
151
(90)
61
Unallocated
263
(263)
Allowance for Credit Losses on Loans
47,996
650
48,646
Liabilities:
Allowance for Credit Losses on Off-balance Sheet Credit Exposures
360
4,850
5,210
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU updates guidance in Topic 326 to eliminate the accounting guidance for troubled debt restructurings, or TDRs, by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current period gross write offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivables by year of origination. The Company adopted this standard during the first quarter of 2023 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Impact of Recently Issued Accounting Guidance
In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU was issued to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC's regulations. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated statements.
In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. The FASB issued guidance clarifies the accounting for leasehold improvements associated with common control leases, by requiring that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease. Additionally, leasehold improvements associated with common control leases should be accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2023 and are not expected to have a material impact on the Company’s consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional
14
amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company is assessing ASU 2023-02 and its impact on its accounting and disclosures.
Subsequent Events
Subsequent events have been evaluated through November 2, 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 computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of stock compensation. For the three and nine months ended September 30, 2023, stock options, restricted stock awards and restricted stock units of approximately 1,152,100 and 1,042,500 shares, respectively, were excluded from the calculation because they were deemed to be anti-dilutive. For the three and nine months ended September 30, 2022, stock options, restricted stock awards and restricted stock units of approximately 300,500 shares were excluded from the calculation because their effect would have been anti-dilutive.
The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three and nine months ended September 30, 2023 and 2022:
Net Income Available to Common Shareholders
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)
27,943,409
27,520,117
27,853,036
27,825,517
Dilutive Effect of Stock Compensation
368,369
1,072,737
486,816
1,057,184
Weighted Average Common Stock Outstanding (Dilutive)
28,311,778
28,592,854
28,339,852
28,882,701
Basic Earnings per Common Share
Diluted Earnings per Common Share
Note 3: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at September 30, 2023 and December 31, 2022:
September 30, 2023
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
Securities Available for Sale:
U.S. Treasury Securities
2,883
(19)
2,864
Municipal Bonds
148,725
(26,228)
122,497
Mortgage-Backed Securities
233,920
137
(23,682)
210,375
Corporate Securities
134,369
268
(12,920)
121,717
SBA Securities
19,779
312
(125)
19,966
Asset-Backed Securities
75,616
388
(347)
75,657
Total Securities Available for Sale
615,292
1,105
(63,321)
15
December 31, 2022
2,621
(41)
2,580
156,506
62
(25,214)
131,354
252,919
2,465
(17,600)
237,784
116,871
45
(7,089)
109,827
20,957
79
(159)
20,877
46,623
188
(620)
46,191
596,497
2,839
(50,723)
Securities with a carrying value of $164.3 million at September 30, 2023 were pledged to secure borrowing capacity. The securities portfolio was unencumbered at December 31, 2022.
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 September 30, 2023 and December 31, 2022:
Less Than 12 Months
12 Months or Greater
Number of
(dollars in thousands, except number of holdings)
Holdings
886
(5)
880
(14)
1,766
218
8,358
(232)
114,139
(25,996)
140
68,938
(2,205)
135,408
(21,477)
204,346
109
18,899
(1,024)
94,731
(11,896)
113,630
47
2,319
6,811
9,130
16
17,215
(130)
14,173
(217)
535
116,615
(3,602)
366,142
(59,719)
482,757
2,330
225
59,912
(5,321)
69,424
(19,893)
129,336
130
123,224
(5,427)
62,882
(12,173)
186,106
100
88,486
(5,121)
17,054
(1,968)
105,540
49
2,498
9,750
(153)
12,248
20
21,919
(396)
6,186
(224)
28,105
530
298,369
(16,312)
165,296
(34,411)
463,665
Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any securities in a loss position require an allowance for credit losses on securities in accordance with ASC 326 - Measurement of Credit Losses on Financial Instruments.
At September 30, 2023, 535 debt securities had unrealized losses with aggregate depreciation of approximately 11.6% from the Company’s amortized cost basis. These unrealized losses have not been recognized into income because management does not intend to sell these securities, and it is not more likely than not it will be required to sell the securities before recovery of its amortized cost basis. Furthermore, the unrealized losses are due to changes in interest rates and other market conditions and were not reflective of credit events. To make this determination, consideration is given to such factors as the credit rating of the issuer, level of credit enhancement, changes in credit ratings, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. As of September 30, 2023, there was no allowance for credit losses carried on the Company’s securities portfolio.
Accrued interest receivable on securities, which is recorded within accrued interest on the balance sheet, totaled $4.3 million at September 30, 2023 and is excluded from the estimate of credit losses.
At December 31, 2022, 530 debt securities had unrealized losses with aggregate depreciation of approximately 9.9% from the Company’s amortized cost basis. For periods prior to the adoption of ASC 326, management conducted a quarterly review and evaluation of its securities for other than temporary impairment. In analyzing whether unrealized losses on debt securities were other than temporary, management considered the length of time and the extent to which the fair value was less than amortized cost, 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, the quality of any underlying assets or credit enhancements, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. 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 September 30, 2023. Call date is used when a call of the debt security is expected, as 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.
Amortized Cost
Due in One Year or Less
9,779
9,833
Due After One Year Through Five Years
44,811
42,665
Due After Five Years Through 10 Years
179,590
155,444
Due After 10 Years
51,797
39,136
Subtotal
285,977
247,078
Totals
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 three and nine months ended September 30, 2023 and September 30, 2022:
Proceeds From Sales of Securities
Gross Gains on Sales
247
234
Gross Losses on Sales
(253)
(182)
17
Note 4: Loans and Allowance for Credit Losses
The following table presents the components of the loan portfolio at September 30, 2023 and December 31, 2022:
459,063
435,344
791
1,049
294,818
295,554
64,463
70,242
404,716
355,474
1,378,669
1,306,738
159,485
149,905
951,263
947,008
Total Real Estate Mortgage Loans
2,894,133
2,759,125
9,003
8,132
Total Loans, Gross
3,722,271
3,569,446
(50,585)
(47,996)
Net Deferred Loan Fees
(7,222)
(9,293)
Total Loans, Net
The following tables present the aging in past due loans and nonaccrual status, with and without an ACL, by loan segment as of September 30, 2023 and December 31, 2022:
Accruing Interest
30-89 Days
90 Days or
Nonaccrual
Current
Past Due
More Past Due
with ACL
without ACL
458,883
74
95
294,732
86
158,991
494
3,721,511
675
18
435,274
295,448
HELOC and 1-4 Family Junior Mortgage
36,875
1st REM - 1-4 Family
50,945
LOCs and 2nd REM - Rentals
27,985
1st REM - Rentals
239,553
239,669
149,372
533
3,568,621
186
639
The Company aggregates loans into credit quality indicators based on relevant information about the ability of borrowers to service their debt by using internal reviews in which 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. The Company analyzes all loans individually to assign a risk rating, 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.
19
The following table presents loan balances classified by credit quality indicators by year of origination as of September 30, 2023:
2021
2020
2019
Prior
Revolving
Pass
47,507
141,694
39,407
25,556
19,018
4,735
160,955
438,872
Watch
332
38
1,796
2,184
4,360
Substandard
76
11,462
4,220
15,831
Total Commercial
47,590
153,488
39,456
19,021
6,593
167,359
Current Period Gross Write-offs
96
Total Paycheck Protection Program
37,814
194,143
48,288
5,021
9,375
Total Construction and Land Development
194,229
33,966
13,594
935
358
15,610
Total 1-4 Family Construction
61,412
109,495
87,381
55,250
19,059
4,880
66,575
404,052
663
Total 1-4 Family Mortgage
5,544
136,071
437,174
473,938
230,980
42,344
46,635
8,598
1,375,740
2,929
Total Multifamily
139,000
31,090
48,727
41,274
20,827
5,076
9,728
1,194
157,916
200
875
1,569
Total CRE Owner Occupied
31,290
41,768
10,603
123,283
297,158
256,990
84,384
78,708
68,128
5,553
914,204
6,176
10,173
3,238
19,587
9,780
4,408
3,284
17,472
Total CRE Nonowner Occupied
139,239
311,739
260,228
81,992
370,941
907,135
863,315
391,441
148,471
130,910
81,920
2,744
290
1,501
4,447
Total Consumer and Other
31
33
Total Period Gross Write-offs
98
129
Total Loans
493,055
1,268,736
952,795
423,877
167,503
137,594
278,711
The following table presents the risk category of loans by loan segment as of December 31, 2022:
406,192
9,477
19,675
294,736
712
50,271
674
27,978
239,277
392
1,303,468
3,270
148,268
1,637
922,657
18,112
6,239
3,509,145
32,252
28,049
The following table presents the activity in the allowance for credit losses, by segment, for the three and nine months ended September 30, 2023. On January 1, 2023, the Company adopted CECL, which added $650,000 to the total ACL. Under CECL, the Company recorded a $0 and $2.1 million provision for credit losses on loans during the three and nine months ended September 30, 2023, respectively, compared to a $1.5 million and $6.2 million provision for loan losses in the three and nine months ended September 30, 2022, respectively, under the incurred loss method.
Paycheck
Construction
CRE
Protection
and Land
1-4 Family
1--4 Family
Owner
Non-owner
Consumer
Program
Development
Mortgage
Occupied
and Other
Three Months Ended September 30, 2023
Allowance for Credit Losses for Loans:
Beginning Balance
5,439
3,476
654
2,836
21,164
15,976
50,701
Provision for Credit Losses for Loans
(704)
(80)
22
1,052
(464)
Loans Charged-off
(96)
(26)
(122)
Recoveries of Loans
Total Ending Allowance Balance
5,496
2,772
574
2,860
22,216
1,089
15,512
66
50,585
Nine Months Ended September 30, 2023
Beginning Balance, Prior to Adoption of CECL
Impact of Adopting CECL
242
(69)
(36)
309
1,439
(33)
(129)
21
The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2022, prepared using the previous GAAP incurred loss method prior to the adoption of CECL:
Three Months Ended September 30, 2022
Allowance for Loan Losses:
6,275
4,134
638
4,206
14,977
1,920
12,235
154
170
44,711
Provision for Loan Losses
(363)
60
(257)
1,845
107
(21)
281
285
6,348
3,771
698
4,230
16,822
2,027
12,282
163
149
46,491
Nine Months Ended September 30, 2022
6,256
3,139
618
3,757
12,610
1,495
11,335
147
40,020
(12)
632
80
187
4,212
532
947
25
(501)
(13)
286
305
The following tables present the balance in the allowance for credit losses and the recorded investment in loans, by segment, based on impairment method as of September 30, 2023 and December 31, 2022:
ACL at September 30, 2023
Individually Evaluated for Impairment
84
Collectively Evaluated for Impairment
5,412
50,501
ALL at December 31, 2022
6,429
47,925
Loans at September 30, 2023
35,621
443,232
404,053
933,791
3,686,650
Loans at December 31, 2022
415,669
355,082
940,769
3,541,397
The following table presents the amortized cost basis of collateral dependent loans by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of September 30, 2023:
Primary Type of Collateral
Business
ACL
Real Estate
Assets
Allocation
5,459
10,372
19,790
Accrued interest receivable on loans, which is recorded within accrued interest on the balance sheet, totaled $10.8 million at September 30, 2023, and was excluded from the estimate of credit losses.
Effective January 1, 2023, the Company adopted the provision of ASU 2022-02, which eliminated the accounting for TDRs, while expanding loan modification and vintage disclosure requirements. For the three months ended September 30, 2023, there were no loan modifications. For the nine months ended September 30, 2023, the Company modified one CRE nonowner occupied loan, with an outstanding balance of $9.6 million, for a borrower experiencing financial difficulty by granting a 12-month extension at a below market rate. There was no forgiveness of principal and this loan was current with its modified terms as of September 30, 2023.
Prior to the adoption of ASU 2022-02, at December 31, 2022, there were two loans classified as TDRs with total aggregate outstanding balances of $188,000.
Pre-ASC 326 Adoption Impaired Loan Disclosures
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:
Recorded
Principal
Related
Investment
Balance
Allowance
Loans With No Related Allowance for Loan Losses:
19,508
713
27,882
28,578
Loans With An Allowance for Loan Losses:
167
Grand Totals
28,745
23
The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three and nine months ended September 30, 2022:
September 30, 2022
Average
Interest
Recognized
9,929
11,343
519
114
120
1,751
1,762
6,333
85
6,431
249
18,409
293
19,942
828
12,135
127
370
12,219
12,221
371
30,628
420
32,163
1,199
Note 5: Deposits
The following table presents the composition of deposits at September 30, 2023 and December 31, 2022:
Transaction Deposits
1,535,160
1,336,264
Savings and Money Market Deposits
872,534
1,031,873
Time Deposits
265,737
272,253
Brokered Deposits
1,002,078
776,153
Brokered deposits are comprised of brokered transaction and money market accounts of $177.7 million and $184.3 million as of September 30, 2023 and December 31, 2022, respectively.
The following table presents the scheduled maturities of brokered and customer time deposits at September 30, 2023:
Less than 1 Year
397,981
1 to 2 Years
143,267
2 to 3 Years
350,978
3 to 4 Years
63,790
4 to 5 Years
101,357
Greater than 5 Years
32,709
1,090,082
The aggregate amount of time deposits greater than $250,000 was approximately $88.5 million and $92.3 million at September 30, 2023 and December 31, 2022, respectively.
24
Note 6: 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 counterparty 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 September 30, 2023 and December 31, 2022:
Notional
Estimated
Interest rate swap agreements:
64,241
9,962
65,315
8,240
Liabilities
(9,962)
(8,240)
128,482
130,630
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, 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 exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that $8.6 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 September 30, 2023 and December 31, 2022:
Notional Amount
183,000
163,000
Weighted Average Pay Rate
2.00
%
1.90
Weighted Average Receive Rate
5.40
3.47
Weighted Average Maturity (Years)
4.30
5.15
Net Unrealized Gain
11,139
9,175
The Company purchases interest rate caps, designated as cash flow hedges, of certain deposit 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 three and nine months ended September 30, 2023, the company recognized amortization expense on the interest rate caps of $198,000 and $593,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances. For the three and nine months ended September 30, 2022, the company recognized amortization expense on the interest rate caps of $204,000 and $574,000, respectively, which 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 September 30, 2023 and December 31, 2022:
125,000
Unamortized Premium Paid
5,279
5,872
Weighted Average Strike Rate
0.96
6.60
7.35
The following table presents a summary of the Company’s interest rate contracts as of September 30, 2023 and December 31, 2022:
10,477
38,000
(1,302)
Interest rate cap agreements:
23,006
19,406
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 September 30, 2023 and December 31, 2022, the Company pledged no cash collateral for the Company’s derivative contracts. In addition, as of September 30, 2023 and December 31, 2022, the Company's counterparties pledged cash collateral to the Company of $46.0 million and $36.4 million, respectively.
The following table summarizes gross and net information about derivative instruments that are eligible for offset in the balance sheet at September 30, 2023 and December 31, 2022:
Gross Amounts Not Offset in the Balance Sheet
Net Amounts of
Gross Amounts
Assets (Liabilities)
of Recognized
Offset in the
Presented in the
Financial
Cash Collateral
Net Assets
Balance Sheet
Instruments
Received (Paid)
(Liabilities)
44,107
46,023
(1,916)
38,123
36,353
1,770
(9,542)
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The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,
Nine Months Ended September 30,
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
1,575
4,169
(24)
Interest rate caps
48
(169)
(539)
No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and nine months ended September 30, 2023 and 2022, 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 7: 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 with aggregate principal balances of $1.37 billion and $1.20 billion at September 30, 2023 and December 31, 2022, 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 $516.5 million and $390.9 million at September 30, 2023 and December 31, 2022, respectively.
The following table presents FHLB advances, by maturity, at September 30, 2023 and December 31, 2022:
Weighted
Rate
Outstanding
5.26
208,000
83,000
4.31
25,000
1.05
5,000
4.06
17,500
1.22
3.35
21,500
0.78
4,000
4.01
22,500
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. The Company believes it was in compliance with all covenants as of September 30, 2023 and December 31, 2022.
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. As of September 30, 2023 and December 31, 2022, there was an outstanding balance of $13.8 million under the revolving line of credit.
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Note 8: Subordinated Debentures
The following table presents a summary of the Company’s subordinated debentures as of September 30, 2023 and December 31, 2022:
Total Debt
Date
First
Maturity
Name
Established
Redemption Date
Coupon Structure
2030 Notes
June 19, 2020
July 1, 2025
July 1, 2030
50,000
5.25
Fixed-to-Floating (1)
2031 Notes
July 8, 2021
July 15, 2026
July 15, 2031
30,000
3.25
Fixed-to-Floating (2)
80,000
Debt Issuance Costs
(808)
(1,095)
Note 9: 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 table presents commitments outstanding at September 30, 2023 and December 31, 2022:
Unfunded Commitments Under Lines of Credit
570,363
848,734
Letters of Credit
107,292
115,769
677,655
964,503
The Company had outstanding letters of credit with the FHLB in total amounts of $66.8 million and $78.4 million at September 30, 2023 and December 31, 2022, respectively, on behalf of customers and to secure public deposits.
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The ACL for off-balance sheet credit exposures was $3.2 million at September 30, 2023 and is separately classified on the balance sheet within other liabilities. Prior to the adoption of CECL, the Company’s ACL for off-balance sheet credit exposures was not material. The following table presents the balance and activity in the allowance for credit losses for off-balance sheet credit exposures for the three and nine months ended September 30, 2023:
Allowance for Credit Losses:
3,835
Provision for (Recovery of) Off-Balance Sheet Credit Exposures
Total Ending Balance
3,235
Legal Contingencies
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 material proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Note 10: Stock Options and Restricted Stock
In 2012, the Company adopted the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company was able to 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 were 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, 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 September 30, 2023 and December 31, 2022, there were -0- and 44,700 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”). Under the 2019 EIP, the Company may grant 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 a vesting period of four years. As of September 30, 2023 and December 31, 2022, there were -0- and 231,363 shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.
At the 2023 Annual Meeting of Shareholders (the "Annual Meeting") of the Company, which was held on April 25, 2023, the Company's shareholders approved the Bridgewater Bancshares, Inc. 2023 Equity Incentive Plan (the "2023 EIP"), which the Company's board of directors adopted on February 28, 2023, subject to shareholder approval at the Annual Meeting. Under the 2023 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may
29
grant these awards to its directors, officers, employees and certain other service providers for up to 1,500,000 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 a vesting period of four years. As of September 30, 2023, there were 1,438,137 shares of the Company’s common stock reserved for future grants under the 2023 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 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 of valuing stock option grants for the nine months ended September 30, 2023, are as follows:
Dividend Yield
Expected Life
Years
Expected Volatility
42.25
Risk-Free Interest Rate
4.15
The following table presents a summary of the status of the Company’s outstanding stock options for the nine months ended September 30, 2023:
Exercise Price
Outstanding at Beginning of Year
1,913,444
9.35
Granted
239,000
10.65
Exercised
(226,000)
3.17
Forfeitures
(9,000)
13.04
Outstanding at Period End
1,917,444
10.22
Options Exercisable at Period End
1,378,194
8.88
For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $230,000 and $326,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $601,000 and $926,000, respectively.
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The following table presents information pertaining to options outstanding at September 30, 2023:
Options Outstanding
Options Exercisable
Weighted Average
Remaining Contractual
Range of Exercise Prices
Options
Life in Years
3.00 - 3.99
88,500
3.07
0.4
7.00 - 7.99
893,416
7.47
4.0
8.00 - 8.99
8.76
6.5
11,250
10.00 - 10.99
249,000
10.63
9.7
7,500
10.08
11.00 - 11.99
85,000
11.27
5.6
68,000
12.00 - 12.99
263,528
12.90
5.9
206,778
13.00 - 13.99
13.22
4.6
17.00 - 17.99
295,500
17.50
8.3
77,750
As of September 30, 2023, there was $2.2 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan, 2019 EIP, and 2023 EIP that is expected to be recognized over a weighted-average period of 2.7 years.
The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the nine months ended September 30, 2023:
Average Grant
Date Fair Value
Nonvested Options at December 31, 2022
421,375
4.87
5.39
Vested
(116,125)
4.78
Forfeited
(5,000)
5.74
Nonvested Options at September 30, 2023
539,250
5.11
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 forfeitable voting and dividend rights.
The following table presents an analysis of nonvested restricted stock awards outstanding for the nine months ended September 30, 2023:
Nonvested Awards at December 31, 2022
38,762
12.50
(2,785)
10.32
12.92
Nonvested Awards at September 30, 2023
35,727
12.67
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 three months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock
awards of $112,000 and $113,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock awards of $333,000 and $335,000, respectively.
As of September 30, 2023, there was $97,000 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 0.2 years.
In addition, during the nine months ended September 30, 2023, the Company issued 35,460 shares of unrestricted common stock to non-employee 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 non-employee directors of $355,000 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 nine months ended September 30, 2023:
Units
Nonvested Units at December 31, 2022
351,310
16.30
82,969
15.59
(5,225)
16.20
(10,253)
17.79
Nonvested Units at September 30, 2023
418,801
16.13
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 three months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock units of $535,000 and $358,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for the restricted stock of $1.6 million and $1.1 million, respectively.
As of September 30, 2023, there was $5.0 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 2.4 years.
Note 11: 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
32
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 September 30, 2023 and December 31, 2022:
Minimum Required
For Capital Adequacy
To be Well Capitalized
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
Ratio
Company (Consolidated):
Total Risk-based Capital
567,202
13.88
326,865
8.00
429,010
10.50
N/A
Tier 1 Risk-based Capital
436,903
10.69
245,149
6.00
347,294
8.50
Common Equity Tier 1 Capital
370,389
9.07
183,861
4.50
286,007
7.00
Tier 1 Leverage Ratio
9.62
181,605
4.00
Bank:
543,914
13.33
326,519
428,556
408,149
10.00
492,861
12.08
244,889
346,926
183,667
285,704
265,297
6.50
10.88
181,256
226,570
5.00
536,352
13.15
326,190
428,125
409,092
10.03
244,643
346,577
342,578
8.40
183,482
285,417
9.55
171,368
508,760
12.47
326,288
428,253
407,860
460,404
11.29
244,716
346,681
183,537
285,502
265,109
10.76
171,113
213,891
The Company and the Bank must maintain a capital conservation buffer, as defined by regulatory guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers.
Note 12: 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 tables present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
Level 1
Level 2
Level 3
Fair Value of Financial Assets:
Interest Rate Caps
Interest Rate Swaps
21,101
Total Fair Value of Financial Assets
594,319
597,183
Fair Value of Financial Liabilities:
Total Fair Value of Financial Liabilities
34
18,717
584,156
586,736
9,542
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.
The fair value of the caps is 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 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.
35
The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at September 30, 2023 and December 31, 2022:
Individually Evaluated Loans
175
179
Impaired Loans
Individually Evaluated Loans (Impaired Loans prior to January 1, 2023)
In accordance with the provisions of the individually evaluated loan guidance, credit loss 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 Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale of the collateral. Those individually evaluated 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. Individually evaluated 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.
Credit loss amounts on individually evaluated loans represent specific valuation allowance and write-downs during the period presented 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.
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 above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the
36
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 September 30, 2023 and December 31, 2022:
Fair Value Hierarchy
Carrying
Financial Assets:
Cash and Due From Banks
1,210
550,212
FHLB Stock, at Cost
Loans, Net
3,522,379
Accrued Interest Receivable
Financial Liabilities:
3,653,876
13,771
292,436
71,794
1,173
546,033
3,314,190
3,390,416
13,473
96,061
70,931
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.
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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.
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.
Subordinated debentures – The fair values of the Company’s subordinated debt are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.
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 September 30, 2023 and December 31, 2022.
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 13: Subsequent Events
On October 25, 2023, the Company’s Board of Directors announced a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), payable on December 1, 2023, to shareholders of record on the Series A Preferred Stock at the close of business on November 15, 2023.
General
The following discussion explains the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2023. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission, or the SEC, on March 7, 2023.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of future results. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
The Company is a 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
40
of Significant Accounting Policies” of the notes to the consolidated financial statements included as a part of the Company’s most recent Annual Report on Form 10-K, filed with the SEC on March 7, 2023. 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, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that require the Company to make complex and subjective judgements.
In accordance with ASC 326, Financial Instruments - Credit Losses, the allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses when management determines all or a portion of the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is increased (decreased) by provisions (or reversals of) reported in the income statement as a component of provisions for credit loss. Under the new guidance, the allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from an off-balance sheet exposure.
The amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses for loans is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. Management qualitatively adjusts model results for reasonable and supportable forecasts and risk factors that are not considered within the modeling processes but are relevant in assessing the expected credit losses within the loan segment. These qualitative factor adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Due to the subjective nature of these estimates the various components of the calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit metrics and variations between expected and actual outcomes are likely.
Investment Securities Impairment
In accordance with ASC 326, Financial Instruments - Credit Losses, available for sale securities in unrealized loss positions are evaluated for impairment related to credit losses. For any securities classified as available for sale that are in an unrealized loss position, the Company assesses whether or not it intends to sell the security, or if it is more likely than not it will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met,
the security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For securities that do not meet the aforementioned criteria, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. In making this assessment, management considers the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security, among other factors. If the assessment indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.
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.
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Operating Results Overview
The following table summarizes certain key financial results as of and for the periods indicated:
As of and for the Three Months Ended
June 30,
March 31,
Per Common Share Data
Basic Earnings Per Share
0.32
0.38
0.46
Diluted Earnings Per Share
0.37
0.45
Book Value Per Share
12.25
12.05
11.80
11.44
Tangible Book Value Per Share (1)
12.37
12.15
11.95
11.69
11.33
Basic Weighted Average Shares Outstanding
27,886,425
27,726,894
27,558,983
Diluted Weighted Average Shares Outstanding
28,198,739
28,490,046
28,527,306
Shares Outstanding at Period End
27,845,244
Selected Performance Ratios
Return on Average Assets (2)
0.85
0.88
1.07
1.28
1.46
Pre-Provision Net Revenue Return on Average Assets (1)(2)
1.16
1.49
1.82
2.15
Return on Average Shareholders' Equity (2)
9.23
9.69
11.70
14.06
14.99
Return on Average Tangible Common Equity (1)(2)
9.92
10.48
15.86
17.03
Yield on Interest Earning Assets(3)
5.14
5.06
4.91
4.67
4.37
Yield on Total Loans, Gross(3)
5.19
4.59
Cost of Interest Bearing Liabilities
3.81
3.59
3.03
2.22
1.30
Cost of Funds
3.10
2.91
2.41
1.67
0.93
Cost of Total Deposits
2.99
2.66
2.01
1.31
0.73
Net Interest Margin (3)
2.32
2.40
2.72
3.16
3.53
Core Net Interest Margin (1)(3)
2.24
2.31
2.62
3.05
3.38
Efficiency Ratio (1)
56.5
52.7
46.2
43.8
39.8
Noninterest Expense to Average Assets (2)
1.35
1.29
1.42
Loan to Deposit Ratio
101.3
104.4
108.0
104.5
102.3
Core Deposits to Total Deposits (4)
70.3
72.4
74.6
83.0
Tangible Common Equity to Tangible Assets (1)
7.61
7.39
7.23
7.48
7.57
43
Selected Financial Data
The following tables summarize certain selected financial data as of and for the periods indicated:
Selected Balance Sheet Data
4,603,185
4,602,899
4,128,987
3,736,211
3,684,360
3,380,082
50,148
Goodwill and Other Intangibles
2,823
2,832
2,866
2,914
2,962
3,577,932
3,411,123
3,305,074
Tangible Common Equity (1)
346,623
339,780
332,626
324,636
312,531
402,006
Average Total Assets - Quarter-to-Date
4,504,937
4,483,662
4,405,234
4,251,345
3,948,201
Average Shareholders' Equity - Quarter-to-Date
414,047
406,347
403,533
387,589
384,020
For the Three Months Ended
Selected Income Statement Data
Interest Income
55,001
51,992
48,860
Interest Expense
29,129
23,425
15,967
Net Interest Income
25,872
28,567
32,893
50
625
Net Interest Income after Provision for Credit Losses
25,822
27,942
31,393
Noninterest Income
1,415
1,943
1,738
Noninterest Expense
14,388
14,183
15,203
Income Before Income Taxes
12,849
15,702
17,928
3,033
4,060
4,193
9,816
11,642
13,735
(1,014)
8,802
10,629
12,721
44
Discussion and Analysis of Results of Operations
Net income was $9.6 million for the third quarter of 2023, compared to net income of $14.5 million for the third quarter of 2022. Earnings per diluted common share for the third quarter of 2023 were $0.30, compared to $0.47 per diluted common share for the third quarter of 2022. Net income was $31.1 million for the nine months ended September 30, 2023, compared to net income of $39.7 million for the nine months ended September 30, 2022. Earnings per diluted common share for the nine months ended September 30, 2023 were $0.99, compared to $1.27 per diluted common share for the nine months ended September 30, 2022.
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 Company’s primary source of earnings.
Average Balances and Yields
The following tables present, for the three and nine months ended September 30, 2023 and 2022, 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.
Yield/
& Fees
Interest Earning Assets:
Cash Investments
81,038
903
4.42
57,613
165
1.13
Investment Securities:
Taxable Investment Securities
565,008
6,234
4.38
461,255
3,741
3.22
Tax-Exempt Investment Securities (1)
29,955
346
4.58
75,801
799
4.18
Total Investment Securities
594,963
6,580
4.39
537,056
4,540
Paycheck Protection Program Loans (2)
1.00
2,424
15.75
Loans (1)(2)
3,721,766
49,324
3,263,390
37,724
3,722,594
49,326
3,265,814
37,820
Federal Home Loan Bank Stock
17,829
400
8.89
11,413
156
5.42
Total Interest Earning Assets
4,416,424
57,209
3,871,896
42,681
Noninterest Earning Assets
88,513
76,305
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits
730,244
7,136
3.88
517,658
1,032
0.79
874,612
8,089
3.67
999,932
2,494
266,635
1,962
2.92
288,621
847
985,276
10,038
4.04
447,034
1,612
1.43
Total Interest Bearing Deposits
2,856,767
3.78
2,253,245
5,985
39,641
5.48
106,826
2.63
8.58
275,261
3.34
72,343
328
1.80
79,137
5.03
92,503
5.33
Total Interest Bearing Liabilities
3,264,556
2,524,917
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits
754,567
991,545
Other Noninterest Bearing Liabilities
71,767
47,719
Total Noninterest Bearing Liabilities
826,334
1,039,264
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Net Interest Income / Interest Rate Spread
25,821
1.33
34,417
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans
(400)
(322)
46
For the Nine Months Ended
68,150
1,937
3.80
66,301
231
569,097
18,192
4.27
417,462
8,692
2.78
28,947
975
73,900
2,373
4.29
598,044
19,167
491,362
11,065
3.01
913
9,575
922
12.88
3,689,283
142,652
5.17
3,082,924
103,204
4.48
3,690,196
142,659
3,092,499
104,126
22,343
1,228
7.34
9,593
269
3.75
4,378,733
164,991
5.04
3,659,755
115,691
4.23
86,243
77,028
4,464,976
3,736,783
625,531
15,833
545,301
2,322
0.57
926,494
21,636
3.12
934,408
4,597
0.66
261,474
4,734
2.42
286,059
2,257
876,130
24,394
3.72
419,352
3,422
1.09
2,689,629
3.31
2,185,120
0.77
220,434
5.01
85,287
1.77
8.21
215,938
3.26
54,227
1.59
79,042
92,396
5.29
3,218,793
3.49
2,417,030
774,523
899,456
63,646
37,463
838,169
936,919
408,014
382,834
81,049
1.55
97,661
3.23
2.47
3.57
(1,189)
(856)
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 tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, and for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022:
Compared with
Change Due To:
Volume
Variance
261
477
738
1,145
1,348
2,493
Tax-Exempt Investment Securities
(529)
(453)
Total Securities
616
1,424
2,040
Loans:
Paycheck Protection Program Loans
(4)
(94)
6,074
5,526
11,600
6,070
5,436
11,506
144
244
7,091
7,437
14,528
2,077
4,027
6,104
(1,159)
6,754
5,595
(162)
1,277
1,115
5,484
2,942
8,426
6,240
15,000
21,240
(928)
767
(161)
1,708
1,988
(170)
(239)
7,146
15,978
23,124
(55)
(8,541)
(8,596)
1,654
1,706
4,848
4,652
9,500
(1,514)
(1,398)
3,334
4,768
8,102
(64)
(851)
(915)
23,446
16,002
39,448
23,382
15,151
38,533
701
258
959
27,469
21,831
49,300
2,031
11,480
13,511
(185)
17,224
17,039
(445)
2,922
2,477
12,718
8,254
20,972
14,119
39,880
53,999
5,059
2,066
7,125
3,946
677
4,623
(504)
(175)
(679)
23,464
42,448
65,912
4,005
(20,617)
(16,612)
Comparison of Interest Income, Interest Expense, and Net Interest Margin
Third Quarter of 2023 Compared to Third Quarter of 2022
Net interest income was $25.4 million for the third quarter of 2023, a decrease of $8.7 million, compared to $34.1 million for the third quarter of 2022. The decrease in net interest income was primarily due to higher rates paid on deposits and increased borrowings in the rising interest rate environment.
Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2023 was 2.32%, a 121 basis point decline from 3.53% in the third quarter of 2022. 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 third quarter of 2023 was 2.24%, a 114 basis point decline from 3.38% in the third quarter of 2022. The decline in the margin was primarily due to higher funding costs and increased borrowings in the rising interest rate environment, offset partially by higher earning asset yields.
Average interest earning assets for the third quarter of 2023 increased $544.5 million, or 14.1%, to $4.42 billion, from $3.87 billion for the third quarter of 2022. This increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and purchases of investment securities. Average interest bearing liabilities increased $739.6 million, or 29.3%, to $3.26 billion for the third quarter of 2023, from $2.52 billion for the third quarter of 2022. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing transaction deposits, brokered deposits and FHLB advances.
Average interest earning assets produced a tax-equivalent yield of 5.14% for the third quarter of 2023, compared to 4.37% for the third quarter of 2022. 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. The average rate paid on
interest bearing liabilities was 3.81% for the third quarter of 2023, compared to 1.30% for the third quarter of 2022 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 $57.2 million for the third quarter of 2023, compared to $42.7 million for the third quarter of 2022. The $14.5 million increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio, continued purchases of investment securities, and higher earning asset yields in the rising interest rate environment.
Interest income on loans, on a tax-equivalent basis, was $49.3 million for the third quarter of 2023, compared to $37.8 million for the third quarter of 2022. The $11.5 million increase was primarily due to a 14.0% increase in the average balance of loans outstanding from organic loan growth and a 67 basis point increase in yield from the rising interest rate environment.
Loan interest income and loan fees remain the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield increased to 5.26% in the third quarter of 2023, which was 67 basis points higher than 4.59% in the third quarter of 2022. While loan fees have historically maintained a relatively stable contribution to the aggregate loan yield, the recent periods saw fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the overall 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 interest rate environment.
The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the periods indicated:
June 30, 2023
March 31, 2023
5.16
5.09
4.95
4.74
Fees
0.10
0.11
0.12
0.17
Yield on Loans, Excluding PPP Loans
4.86
Interest Expense. Interest expense on interest bearing liabilities increased $23.1 million, to $31.4 million for the third quarter of 2023, compared to $8.3 million for the third quarter of 2022. The cost of interest bearing liabilities increased 251 basis points from 1.30% in the third quarter of 2022 to 3.81% in the third quarter of 2023, primarily due to the rapid increase in market interest rates that occurred between the periods, which impacted all funding sources.
Interest expense on deposits was $27.2 million for the third quarter of 2023, an increase of $21.2 million, from $6.0 million for the third quarter of 2022. The cost of total deposits increased 226 basis points from 0.73% in the third quarter of 2022, to 2.99% in the third quarter of 2023, primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings was $4.2 million for the third quarter of 2023, an increase of $1.9 million from $2.3 million for the third quarter of 2022. This increase was primarily due to higher average balances of FHLB advances in the higher interest rate environment, offset partially by a decreased utilization of federal funds purchased.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Net interest income was $79.9 million for the nine months ended September 30, 2023, a decrease of $16.9 million, or 17.5%, compared to $96.8 million for the nine months ended September 30, 2022. The decrease in net interest income was primarily due to higher rates paid on deposits and increased borrowings in the rising interest rate environment, offset partially by higher earning asset yields.
Net interest margin (on a fully tax-equivalent basis) for the nine months ended September 30, 2023 was 2.47%, compared to 3.57% for the nine months ended September 30, 2022, a decrease of 110 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 nine months ended September 30, 2023 was 2.39%, a 96 basis point decrease from 3.35% for the nine months ended September 30, 2022.
Average interest earning assets for the nine months ended September 30, 2023 increased $719.0 million, or 19.6%, to $4.38 billion, from $3.66 billion for the nine months ended September 30, 2022. This increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by the forgiveness of PPP loans. Average interest bearing liabilities increased $801.8 million, or 33.2%, to $3.22 billion for the nine months ended September 30, 2023, from $2.42 billion for the nine months ended September 30, 2022. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing transaction deposits, brokered deposits, federal funds purchased, and FHLB advances.
Average interest earning assets produced a tax-equivalent yield of 5.04% for the nine months ended September 30, 2023, compared to 4.23% for the nine months ended September 30, 2022. The average rate paid on interest bearing liabilities was 3.49% for the nine months ended September 30, 2023, compared to 1.00% for the nine months ended
September 30, 2022.
Interest Income. Total interest income on a tax-equivalent basis was $165.0 million for the nine months ended September 30, 2023, compared to $115.7 million for the nine months ended September 30, 2022. The $49.3 million increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio, continued purchases of investment securities, and higher earning asset yields in the rising interest rate environment.
Interest income on the investment securities portfolio, on a fully-tax equivalent basis, increased $8.1 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a $106.7 million, or 21.7%, increase in average balances and a 128 basis point increase in yield between the periods.
Interest income on loans, on a fully-tax equivalent basis, for the nine months ended September 30, 2023 was $142.7 million, compared to $104.1 million for the nine months ended September 30, 2022. The $38.5 million increase was primarily due to a 19.3% increase in the average balances of loans outstanding and a 67 basis point increase in yield.
Interest Expense. Interest expense on interest bearing liabilities increased $65.9 million to $83.9 million for the nine months ended September 30, 2023, compared to $18.0 million for the nine months ended September 30, 2022, primarily due to higher rates paid on deposits and increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.
Interest expense on deposits increased to $66.6 million for the nine months ended September 30, 2023, compared to $12.6 million for the nine months ended September 30, 2022. The $54.0 million increase in interest expense on deposits was primarily due to upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings increased $11.9 million to $17.3 million for the nine months ended September 30, 2023, compared to $5.4 million for the nine months ended September 30, 2022. This increase was primarily due to higher average balances of federal funds purchased and FHLB advances in the higher interest rate environment.
Provision for Credit Losses
The provision for credit losses on loans was $-0- for the third quarter of 2023, compared to $1.5 million for the third quarter of 2022. The provision for credit losses on loans was $2.1 million for the nine months ended September 30, 2023, compared to $6.2 million for the nine months ended September 30, 2022. No provision for credit losses on loans was recorded in the third quarter of 2023 due to a more managed pace of loan growth and continued strong asset quality.
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The allowance for credit losses on loans to total loans was 1.36% at September 30, 2023, compared to 1.38% at September 30, 2022.
The following table presents a summary of the activity in the allowance for credit losses on loans for the periods indicated:
Balance at Beginning of Period
Charge-offs
Recoveries
Balance at End of Period
The provision for credit losses for off-balance sheet credit exposures was a negative provision of $600,000 for the third quarter of 2023, compared to $-0- for the third quarter of 2022. The provision for credit losses for off-balance sheet credit exposures was a negative provision of $2.0 million for the nine months ended September 30, 2023, compared to $-0- for the nine months ended September 30, 2022. The negative provision for both periods was due to a reduction in outstanding unfunded commitments primarily attributable to the migration to funded loans, as well as a moderation of volume of newly originated projects with unfunded commitments. The allowance for credit losses on off-balance sheet credit exposures was $3.2 million at September 30, 2023, compared to $360,000 at December 31, 2022.
The following table presents a summary of the activity in the provision for credit losses for the periods indicated:
Increase/
(Decrease)
(1,500)
(4,150)
Provision for (Recovery of) Credit Losses for Off-Balance Sheet Credit Exposures
(2,100)
(6,125)
Noninterest income was $1.7 million for the third quarter of 2023, an increase of $339,000 from $1.4 million for the third quarter of 2022. The increase was primarily due to FHLB prepayment income, offset partially by lower other income. Noninterest income was $5.1 million for the nine months ended September 30, 2023, an increase of $490,000, compared to $4.6 million for the nine months ended September 30, 2022. The increase was primarily due to increased customer service fees, swap fees, and bank-owned life insurance income, offset partially by lower other income.
The following table presents the major components of noninterest income for the periods indicated:
Noninterest Income:
204
Net Gain (Loss) on Sales of Securities
(58)
Letter of Credit Fees
315
428
(113)
1,328
1,234
94
Debit Card Interchange Fees
150
153
443
438
Swap Fees
557
(557)
252
227
724
524
FHLB Prepayment Income
493
792
266
707
897
(190)
339
490
Noninterest expense was $15.4 million for the third quarter of 2023, an increase of $1.2 million from $14.2 million for the third quarter of 2022. The increase was primarily attributable to increases in the FDIC insurance assessment and derivative collateral fees, offset partially by decreases in marketing and advertising expenses.
Nine months ended September 30, 2023 Compared to Nine months ended September 30, 2022
Noninterest expense was $43.9 million for the nine months ended September 30, 2023, an increase of $2.5 million, or 6.0%, from $41.4 million for the nine months ended September 30, 2022. The increase was primarily attributable to increases in the FDIC insurance assessment and derivative collateral fees, offset partially by decreases in marketing and advertising expenses.
The Company had 255 full-time equivalent employees at the end of the third quarter of 2023 compared to 246 employees at the end of the third quarter of 2022.
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 56.5% for the third quarter of 2023, compared to 39.8% for the third quarter of 2022. The efficiency ratio for the nine months ended September 30, 2023 and 2022 was 51.6% and 40.7%, respectively. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue navigating a challenging environment for a more spread-based revenue model.
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The following table presents the major components of noninterest expense for the periods indicated:
Noninterest Expense:
(197)
172
FDIC Insurance Assessment
1,075
760
2,640
1,005
1,635
Data Processing
372
1,150
1,025
125
Professional and Consulting Fees
594
121
2,299
2,030
Derivative Collateral Fees
543
122
421
1,327
1,176
Information Technology and Telecommunications
683
1,822
255
Marketing and Advertising
222
479
805
1,629
(824)
Intangible Asset Amortization
(39)
Amortization of Tax Credit Investments
113
341
294
978
928
2,985
(102)
1,193
2,504
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.
Income tax expense was $2.8 million for the third quarter of 2023, compared to $5.3 million for the third quarter of 2022. The effective combined federal and state income tax rate for the third quarter of 2023 was 22.3%, compared to 26.8% for the third quarter of 2022. Income tax expense was $9.9 million for the nine months ended September 30, 2023, compared to $14.1 million for the nine months ended September 30, 2022. The effective combined federal and state income tax rate for the nine months ended September 30, 2023 and 2022 was 24.1% and 26.3%, respectively.
Financial Condition
Total assets at September 30, 2023 were $4.56 billion, an increase of $211.4 million, or 4.9%, over total assets of $4.35 billion at December 31, 2022, and an increase of $428.1 million, or 10.4%, over total assets of $4.13 billion at September 30, 2022. The growth in both periods was primarily due to strong organic loan growth and an increase in cash and cash equivalents.
Total gross loans at September 30, 2023 were $3.72 billion, an increase of $152.8 million, or 4.3%, over total gross loans of $3.57 billion at December 31, 2022, and an increase of $342.2 million, or 10.1%, over total gross loans of $3.38 billion at September 30, 2022. Although loan growth for the year has been strong, the pace of loan growth has been moderated due to active balance sheet management to align loan growth with the funding outlook, sales of participations on larger originations to manage growth, and ultimately the impact of the higher interest rate environment on the number of prospective deals that meet underwriting standards.
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, to serve as collateral for certain types of deposits or borrowings. Investment balances in the investment securities portfolio are subject to change over time based
54
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 $553.1 million at September 30, 2023, compared to $548.6 million at December 31, 2022, an increase of $4.5 million or 0.8%. At September 30, 2023, U.S. government agency mortgage-backed securities represented 25.1% of the portfolio, municipal securities represented 22.2% of the portfolio, corporate securities represented 22.0% of the portfolio, U.S. treasury securities represented 0.5% of the portfolio, SBA securities represented 3.6% of the portfolio, other mortgage-backed securities represented 12.9% of the portfolio, and asset-backed securities represented 13.7% of the portfolio.
The following table presents the amortized cost and fair value of securities available for sale, by type, at September 30, 2023 and December 31, 2022:
Fair
Value
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA
45,372
44,044
55,200
54,441
Issued by FNMA and FHLMC
24,722
20,793
26,159
22,960
Other Residential Mortgage-Backed Securities
76,163
64,094
80,299
70,184
Commercial Mortgage-Backed Securities
10,847
10,029
10,993
10,345
All Other Commercial MBS
76,816
71,415
80,268
79,854
Total MBS
Municipal Securities
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.
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Total gross loans increased $152.8 million to $3.72 billion at September 30, 2023, compared to $3.57 billion at December 31, 2022, and increased $342.2 million from $3.38 billion at September 30, 2022. As of September 30, 2023, commercial loans increased $23.7 million, 1-4 family mortgage loans increased $49.2 million and multifamily loans increased $71.9 million, compared to December 31, 2022. Collectively, the Company’s annualized loan growth for the nine months ended September 30, 2023 was 5.7%.
The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:
Percent
12.3
459,184
454,193
12.2
412,448
877
963
1,192
7.9
351,069
9.4
312,277
8.5
280,380
1.7
69,648
1.8
85,797
2.3
2.0
55,177
1.6
1 - 4 Family Mortgage
10.9
400,708
10.7
380,210
10.3
10.0
341,102
10.1
37.0
1,314,524
35.2
1,320,081
35.8
36.6
1,230,509
36.4
4.3
159,088
158,650
4.2
151,088
4.5
25.6
971,532
26.0
962,671
26.2
26.5
900,691
26.7
77.8
2,845,852
76.2
2,821,612
76.6
77.3
2,623,390
77.7
0.3
9,581
9,518
0.2
7,495
100.0
(50,701)
(50,148)
(46,491)
(7,718)
(8,735)
(9,088)
3,677,792
3,625,477
3,324,503
The Company’s primary focus throughout its history has been on real estate mortgage lending, which constituted 77.8% of the portfolio as of September 30, 2023. 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 September 30, 2023, investor CRE loans totaled $2.69 billion, consisting of $951.3 million of loans secured by nonowner occupied CRE, $1.38 billion of loans secured by multifamily residential properties, $64.5 million of 1-4 family construction loans and $294.8 million of construction and land development loans. Investor CRE loans represented 72.2% of the total gross loan portfolio and 494.4% of the Bank’s total risk-based capital at September 30, 2023, compared to 73.4% and 514.9%, respectively, at December 31, 2022.
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The following tables present time to contractual maturity and sensitivity to interest rate changes for the loan portfolio as of September 30, 2023 and December 31, 2022:
As of September 30, 2023
Due in One Year
More Than One
More Than Five
After
or Less
Year to Five Years
Year to Fifteen Years
Fifteen Years
165,607
195,627
94,844
95,708
135,525
63,585
49,895
9,040
5,528
66,485
257,028
80,553
254,101
456,778
580,048
87,742
7,087
65,501
86,897
170,999
506,886
273,378
498,672
1,286,193
1,020,876
88,392
2,611
6,180
212
812,493
1,633,356
1,184,833
91,589
Interest Rate Sensitivity:
Fixed Interest Rates
459,365
1,380,238
682,841
25,345
Floating or Adjustable Rates
353,128
253,118
501,992
66,244
As of December 31, 2022
137,657
197,363
97,259
3,065
96,702
125,996
66,156
6,700
54,469
10,510
5,263
54,499
214,434
85,880
661
157,585
454,880
642,029
52,244
5,709
47,894
96,302
120,645
471,656
354,707
338,438
1,188,864
1,178,918
52,905
4,921
2,988
223
632,187
1,526,770
1,347,596
62,893
333,898
1,187,519
804,838
11,115
298,289
339,251
542,758
51,778
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
57
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 September 30, 2023. The Company had no assets classified as doubtful or loss at September 30, 2023.
Risk Category
20,191
664
37,059
22,517
19,704
42,221
26,877
62,498
Loans that have potential weaknesses that warranted a watchlist risk rating at September 30, 2023, totaled $26.9 million, compared to $32.3 million at December 31, 2022. Loans that warranted a substandard risk rating at September 30, 2023 totaled $35.6 million, compared to $28.0 million at December 31, 2022. Management continues to actively work with these borrowers and closely monitor substandard credits.
Nonperforming Assets
Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonaccrual loans totaled $749,000 at September 30, 2023 and $639,000 at December 31, 2022, an increase of $110,000. There were no loans 90 days past due and still accruing as of September 30, 2023 or December 31, 2022. There were no foreclosed assets as of September 30, 2023 and December 31, 2022.
The following table presents a summary of nonperforming assets, by category, at the dates indicated:
Total Nonaccrual Loans
749
Total Nonperforming Loans
Total Nonperforming Assets (1)
Total Modified Accruing Loans (2)
9,702
82
Total Nonperforming Assets and Modified Accruing Loans (2)
10,451
721
Nonaccrual Loans to Total Loans
0.02
Nonperforming Loans to Total Loans
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)
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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 credit losses on loans is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. Gross income that would have been recorded on nonaccrual loans during the three and nine months ended September 30, 2023 was $20,000 and $51,000, respectively.
The allowance for credit losses on loans is a reserve established through charges to earnings in the form of a provision for credit losses. The Company maintains an allowance for credit losses at a level management considers adequate to provide for expected lifetime losses in the portfolio. 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, among other factors, all could cause changes to the allowance for credit losses on loans.
At September 30, 2023, the allowance for credit losses on loans was $50.6 million, an increase of $2.6 million from $48.0 million at December 31, 2022. Net charge-offs (recoveries) totaled $116,000 during the third quarter of 2023 and ($280,000) during the third quarter of 2022. Net charge-offs (recoveries) totaled $111,000 for the nine months ended September 30, 2023 and ($271,000) during the nine months ended September 30, 2022. The allowance for credit losses on loans as a percentage of total loans was 1.36% at September 30, 2023 compared to 1.34% at December 31, 2022.
The following table presents a summary of net charge-offs for the periods indicated:
Net Charge-offs (Recoveries)
89
(2)
(281)
(286)
Total Net Charge-offs (Recoveries)
(280)
111
(271)
Net Charge-offs to Average Loans
0.08
0.00
0.03
(0.33)
(0.12)
(0.04)
(0.02)
1.02
0.22
0.36
0.16
Total Net Charge-offs (Recoveries) (Annualized) to Average Loans
0.01
(0.03)
(0.01)
Gross Loans, End of Period
Average Loans
Allowance to Total Gross Loans
1.36
1.38
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The following table presents a summary of the allocation of the allowance for credit losses on loans by loan portfolio segment as of the dates indicated:
13.5
5.5
8.1
1.1
9.0
43.9
2.2
4.1
30.7
41,677
82.4
36,325
75.7
0.1
0.6
Total Allowance for Credit Losses
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:
20.5
751,217
21.0
742,198
21.8
25.9
961,084
29.1
780,863
21.3
719,488
20.1
630,037
18.4
451,992
13.2
510,396
15.4
23.7
860,613
24.1
913,013
26.8
30.2
1,077,333
32.6
7.2
271,783
7.6
266,213
7.8
8.0
293,052
8.9
27.3
974,831
27.2
859,662
25.2
22.7
463,209
14.0
Total deposits at September 30, 2023 were $3.68 billion, an increase of $259.0 million, or 7.6%, compared to total deposits of $3.42 billion at December 31, 2022, and an increase of $370.4 million, or 11.2%, over total deposits of $3.31 billion at September 30, 2022. Deposits increased in the third quarter of 2023 primarily due to inflows of core deposits, defined as deposits excluding brokered deposits and time deposits greater than $250,000. Brokered deposits continue to be used as a supplemental funding source, as needed, to support loan portfolio growth.
The Company relies on increasing the deposit base to fund loans and other asset growth. 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. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. The brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels. At September 30, 2023, total brokered deposits were $1.0 billion, an increase of $225.9 million, compared to total brokered deposits of $776.2 million at December 31, 2022.
The following table presents the average balance and average rate paid on each of the following deposit categories as of and for the three months ended September 30, 2023 and 2022:
As of and for the
Time Deposits < $250,000
181,689
2.56
209,200
0.95
Time Deposits > $250,000
84,946
3.70
79,421
1.74
3,611,334
3,244,790
The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $814.7 million, or 22% of total deposits, at September 30, 2023 and $1.32 billion, or 38% of total deposits, at December 31, 2022. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
In addition to deposits, the Company utilizes overnight borrowings to meet the daily liquidity needs as a supplemental funding source for loan growth. The Company had $-0- and $287.0 million federal funds purchased as of September 30, 2023 and December 31, 2022, respectively.
Other Borrowings
At September 30, 2023, other borrowings outstanding consisted of FHLB advances of $294.5 million, compared to $97.0 million at December 31, 2022. 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 $516.5 million and $390.9 million at September 30, 2023 and December 31, 2022, 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. As of September 30, 2023 and December 31, 2022, the Company had $13.8 million of outstanding balances under the revolving line of credit.
Additionally, the Company has borrowing capacity from other sources. As of September 30, 2023, 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 $1.02 billion and $157.8 million at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, the Company had no outstanding advances from the discount window or the Bank Term Funding Program (BTFP).
For additional information, see “Note 8 – 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 September 30, 2023:
Within
One to
Three to
One Year
Three Years
Five Years
Deposits Without a Stated Maturity
2,585,427
494,245
165,147
42,500
44,000
Commitment to Fund Tax Credit Investments
1,100
Operating Lease Obligations
584
980
503
117
3,206,842
537,725
209,650
112,826
4,067,043
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.
Total shareholders’ equity at September 30, 2023 was $416.0 million, an increase of $21.9 million compared to total shareholders’ equity of $394.1 million at December 31, 2022. The increase was due to net income retained, offset partially by the day 1 impact of adopting CECL, preferred stock dividends, and net unrealized losses.
Tangible book value per share, a non-GAAP financial measure, was $12.37 as of September 30, 2023, an increase of 5.8% from $11.69 as of December 31, 2022. The increase occurred despite the market value depreciation of the securities portfolio driven by the rising interest rate environment. Tangible common equity as a percentage of tangible assets, a non-GAAP financial measure, was 7.61% at September 30, 2023, compared to 7.48% at December 31, 2022.
Stock Repurchase Program. The Company has 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 will expire on August 16, 2024. As of September 30, 2023, no shares had been repurchased under the 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 September 30, 2023. 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 were as of the dates indicated:
Regulations include 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 September 30, 2023, 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.
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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 represented credit risk as of September 30, 2023 and December 31, 2022:
Fixed
Variable
191,186
379,177
444,669
404,065
7,573
99,719
20,658
95,111
198,759
478,896
465,327
499,176
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 Asset Liability Management, or ALM, Committee, which is comprised of members of senior management, 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 September 30, 2023, the Company had no borrowings outstanding through the AFX.
Total on- and off-balance sheet liquidity was $2.18 billion as of September 30, 2023, compared to $1.38 billion at December 31, 2022. The Company did not utilize the Bank Term Funding Program (BTFP) or Federal Reserve Discount Window during the nine months ended September 30, 2023.
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The following tables present a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity—On-Balance Sheet
77,617
48,090
Less: Pledged Securities
(164,277)
Total Primary Liquidity
466,416
596,703
Ratio of Primary Liquidity to Total Deposits
12.7
17.5
Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity
Net Secured Borrowing Capacity with the FHLB
516,501
390,898
Net Secured Borrowing Capacity with the Federal Reserve Bank
1,022,128
157,827
Unsecured Borrowing Capacity with Correspondent Lenders
150,000
Secured Borrowing Capacity with Correspondent Lender
26,250
Total Secondary Liquidity
1,714,879
782,975
Total Primary and Secondary Liquidity
2,181,295
1,379,678
Ratio of Primary and Secondary Liquidity to Total Deposits
59.3
40.4
During the nine months ended September 30, 2023, primary liquidity decreased by $130.3 million due to pledging $164.3 million of securities, partially offset by a $29.5 million increase in cash and cash equivalents and a $4.5 million increase in securities available for sale, when compared to December 31, 2022. Secondary liquidity increased by $931.9 million as of September 30, 2023, when compared to December 31, 2022, due to an $864.3 million increase in the borrowing capacity with the Federal Reserve Bank and a $125.6 million increase in the borrowing capacity with the FHLB, offset partially by a $58.0 million decrease in the unsecured borrowing capacity with correspondent lenders.
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 September 30, 2023, core deposits totaled approximately $2.58 billion and represented 70.3% 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 September 30, 2023, brokered deposits totaled $1.0 billion, consisting of $824.3 million of brokered time deposits and $177.7 million of non-maturity brokered money market and transaction accounts. 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.
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.
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Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. The Company believes these non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the Company’s operating performance and trends, and to facilitate comparisons with the performance of peers. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of non-GAAP disclosures used in this report to the comparable GAAP measures are provided in the following tables:
Pre-Provision Net Revenue
Less: (Gain) Loss on Sales of Securities
(50)
(30)
Less: FHLB Advance Prepayment Income
(493)
(299)
(792)
Total Operating Noninterest Income
1,233
1,365
1,700
4,298
4,542
Plus: Net Interest Income
Net Operating Revenue
26,654
27,237
30,267
34,601
35,482
84,158
101,347
Less: Amortization of Tax Credit Investments
(114)
(341)
(294)
Total Operating Noninterest Expense
15,237
14,274
14,069
15,089
14,043
43,580
41,123
11,417
12,963
16,198
19,512
21,439
40,578
60,224
Plus:
Non-Operating Revenue Adjustments
243
786
Less:
Non-Operating Expense Adjustments
Average Assets
Pre-Provision Net Revenue Return on Average Assets
Core Net Interest Margin
Net Interest Income (Tax-equivalent Basis)
26,280
33,260
Less: Loan Fees
(914)
(941)
(998)
(1,100)
(1,400)
(2,853)
(5,173)
Less: PPP Interest and Fees
(48)
(7)
(922)
Core Net Interest Income
24,906
25,336
27,947
32,112
32,921
78,189
91,566
Average Interest Earning Assets
4,395,050
4,323,706
4,177,644
Less: Average PPP Loans
(828)
(913)
(999)
(1,109)
(2,424)
(9,575)
Core Average Interest Earning Assets
4,415,596
4,394,137
4,322,707
4,176,535
3,869,472
4,377,820
3,650,180
2.39
Efficiency Ratio
Less: Amortization of Intangible Assets
(9)
(91)
(143)
Adjusted Noninterest Expense
15,341
14,354
14,135
15,155
14,109
43,830
Less: Gain on Sales of Securities
Adjusted Operating Revenue
27,147
30,566
84,950
51.6
40.7
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Less: Preferred Stock
(66,514)
Total Common Shareholders' Equity
349,446
342,612
335,492
327,550
315,493
Less: Intangible Assets
(2,823)
(2,832)
(2,866)
(2,914)
(2,962)
Tangible Common Equity
Tangible Assets
4,554,247
4,600,353
4,600,033
4,342,748
4,126,025
Tangible Common Equity/Tangible Assets
Tangible Book Value Per Share
Book Value Per Common Share
Less: Effects of Intangible Assets
(0.10)
(0.11)
Tangible Book Value Per Common Share
Return on Average Tangible Common Equity
Average Shareholders' Equity
Less: Average Preferred Stock
Average Common Equity
347,533
339,833
337,019
321,075
317,506
341,500
316,320
Less: Effects of Average Intangible Assets
(2,828)
(2,846)
(2,894)
(2,941)
(2,989)
(2,856)
(3,036)
Average Tangible Common Equity
344,705
336,987
334,125
318,134
314,517
338,644
313,284
11.07
15.63
Item 3. 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 September 30, 2023 and December 31, 2022, these cash flow hedges had a total notional amount of $308.0 million and $288.0 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 September 30, 2023 and 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
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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 us with meaningful results and thus is not presented.
Change (basis points)
Forecasted
Percentage
in Interest Rates
Net Interest
Change
(12-Month Projection)
Income
from Base
+400
130,379
(1.69)
129,621
(4.84)
+300
130,562
(1.55)
131,357
(3.57)
+200
131,101
(1.14)
133,089
(2.30)
+100
131,791
(0.62)
134,591
(1.20)
0
132,617
136,220
−100
135,862
2.45
137,641
1.04
−200
139,058
137,968
−300
142,200
138,587
The table above indicates that as of September 30, 2023, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience an 1.69% decrease in net interest income. In the event of an immediate 300 basis point decrease in interest rates, the Company would experience an 7.23% 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 repayment 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.
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 September 30, 2023, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, 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.
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 Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
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.
Item 1.A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 7, 2023.
Issuer Repurchases of Equity Securities
The following table presents stock purchases made during the third quarter of 2023:
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
July 1 - 31, 2023
1,078
9.85
25,000,000
August 1 - 31, 2023
September 1 - 30, 2023
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
Not applicable.
Rule 10b5-1 Trading Plans
During the quarter ended September 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Exhibit Number
Description
3.1
Third 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 27, 2023)
3.2
Second Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 on Form 8-K filed on April 27, 2023)
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)
Second Amendment to Loan and Security Agreement, dated as of 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)
10.2
Amended and Restated Revolving Note, dated as of 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)
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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, 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
104
The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended September 30, 2023 formatted in inline XBRL and contained in Exhibit 101
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bridgewater Bancshares, Inc.
Date: November 2, 2023
By:
/s/ Jerry J. Baack
Name:
Jerry J. Baack
Title:
Chairman, Chief Executive Officer and President(Principal Executive Officer)
/s/ Joe M. Chybowski
Joe M. Chybowski
Chief Financial Officer(Principal Financial and Accounting Officer)