Bridgewater Bancshares Inc
Bridgewater Bancshares Inc details
Bridgewater Bancshares, Inc. is a financial holding company headquartered in St. Louis Park, Minnesota. The Company has two wholly owned subsidiaries, Bridgewater Bank, a Minnesota-chartered commercial bank founded in November 2005, and Bridgewater Risk Management, Inc., a captive insurance company founded in December 2016. Bridgewater Bank has seven locations serving clients across the Minneapolis-St. Paul metropolitan statistical area in Minnesota and offers a full array of simple, quality loan and deposit products, primarily for commercial clients. As of June 30, 2020, theCompany had total assets of approximately $2.75 billion, total loans of approximately $2.19 billion, total deposits of approximately $2.24 billion and total shareholders' equity of approximately $257.2 million.
Ticker:BWB
Employees: 223
Filing
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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, 2022
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 26-0113412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4450 Excelsior Boulevard, Suite 100
St. Louis Park, Minnesota 55416
(Address of principal executive offices) (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 1/100 th interest in a share of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share BWBBP The Nasdaq Stock Market LLC
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 November 1, 2022 was 27,590,978 .
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Table of Contents
PART I FINANCIAL INFORMATION 3
Item 1. Consolidated Financial Statements (unaudited) 3
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Shareholders’ Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 62
Item 4. Controls and Procedures 64
PART II OTHER INFORMATION 65
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
Item 3. Defaults Upon Senior Securities 66
Item 4. Mine Safety Disclosures 66
Item 5. Other Information 67
Item 6. Exhibits 67
SIGNATURES 68
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PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
September 30, December 31,
2022 2021
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 75,496 $ 143,473
Bank-Owned Certificates of Deposit 1,182 1,876
Securities Available for Sale, at Fair Value 542,007 439,362
Loans, Net of Allowance for Loan Losses of $46,491 at September 30, 2022 (unaudited) and $40,020 at December 31, 2021 3,324,503 2,769,917
Federal Home Loan Bank (FHLB) Stock, at Cost 15,603 5,242
Premises and Equipment, Net 48,941 49,395
Accrued Interest 11,198 9,186
Goodwill 2,626 2,626
Other Intangible Assets, Net 336 479
Other Assets 107,095 56,103
Total Assets $ 4,128,987 $ 3,477,659
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing $ 961,084 $ 875,084
Interest Bearing 2,343,990 2,071,153
Total Deposits 3,305,074 2,946,237
Federal Funds Purchased 212,000 —
FHLB Advances 71,500 42,500
Subordinated Debentures, Net of Issuance Costs 92,559 92,239
Accrued Interest Payable 2,214 1,409
Other Liabilities 63,633 16,002
Total Liabilities 3,746,980 3,098,387
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value; Authorized 10,000,000
Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at September 30, 2022 (unaudited) and December 31, 2021 66,514 66,514
Common Stock- $0.01 par value; Authorized 75,000,000
Common Stock - Issued and Outstanding 27,587,978 at September 30, 2022 (unaudited) and 28,206,566 at December 31, 2021 276 282
Additional Paid-In Capital 95,973 104,123
Retained Earnings 235,964 199,347
Accumulated Other Comprehensive Income (Loss) (16,720) 9,006
Total Shareholders' Equity 382,007 379,272
Total Liabilities and Equity $ 4,128,987 $ 3,477,659
See accompanying notes to consolidated financial statements.
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Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2022 2022 2021 2022 2021
INTEREST INCOME
Loans, Including Fees $ 37,666 $ 34,358 $ 31,049 $ 103,768 $ 87,705
Investment Securities 4,372 3,325 2,333 10,567 7,065
Other 321 99 135 500 334
Total Interest Income 42,359 37,782 33,517 114,835 95,104
INTEREST EXPENSE
Deposits 5,984 3,456 3,417 12,598 10,601
Notes Payable — — — — 61
FHLB Advances 329 167 213 646 669
Subordinated Debentures 1,242 1,219 1,214 3,658 3,411
Federal Funds Purchased 709 410 — 1,128 6
Total Interest Expense 8,264 5,252 4,844 18,030 14,748
NET INTEREST INCOME 34,095 32,530 28,673 96,805 80,356
Provision for Loan Losses 1,500 3,025 1,300 6,200 4,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 32,595 29,505 27,373 90,605 76,356
NONINTEREST INCOME
Customer Service Fees 313 298 268 892 733
Net Gain on Sales of Available for Sale Securities — 52 48 52 750
Other Income 1,074 1,300 1,094 3,650 2,538
Total Noninterest Income 1,387 1,650 1,410 4,594 4,021
NONINTEREST EXPENSE
Salaries and Employee Benefits 9,449 8,977 8,309 27,120 22,923
Occupancy and Equipment 1,086 1,042 942 3,213 2,977
Other Expense 3,622 3,733 3,985 11,084 9,736
Total Noninterest Expense 14,157 13,752 13,236 41,417 35,636
INCOME BEFORE INCOME TAXES 19,825 17,403 15,547 53,782 44,741
Provision for Income Taxes 5,312 4,521 4,038 14,125 11,568
NET INCOME 14,513 12,882 11,509 39,657 33,173
Preferred Stock Dividends (1,013) (1,014) — (3,040) —
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 13,500 $ 11,868 $ 11,509 $ 36,617 $ 33,173
EARNINGS PER SHARE
Basic $ 0.49 $ 0.43 $ 0.41 $ 1.32 $ 1.18
Diluted 0.47 0.41 0.40 1.27 1.14
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See accompanying notes to consolidated financial statements.
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net Income $ 14,513 $ 11,509 $ 39,657 $ 33,173
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities (18,073) (237) (56,487) 114
Unrealized Gains (Losses) on Cash Flow Hedges 7,725 242 21,117 3,295
Reclassification Adjustment for (Gains) Losses Realized in Income (119) 358 511 329
Income Tax Impact 4,808 (73) 9,133 (785)
Total Other Comprehensive Income (Loss), Net of Tax (5,659) 290 (25,726) 2,953
Comprehensive Income $ 8,854 $ 11,799 $ 13,931 $ 36,126
See accompanying notes to consolidated financial statements.
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Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Three and Nine Months Ended September 30, 2022 and 2021
(dollars in thousands, except share data)
(Unaudited)
Accumulated
Additional Other
Preferred Common Stock Paid-In Retained Comprehensive
Three Months Ended Stock Shares Amount Capital Earnings Income (Loss) Total
BALANCE June 30, 2021 $ — 28,162,777 $ 282 $ 104,811 $ 176,495 $ 9,242 $ 290,830
Stock-based Compensation — 4,552 — 608 — — 608
Comprehensive Income (Loss) — — — — 11,509 290 11,799
Preferred Stock Offering, Net of Issuance Costs 66,515 — — — — — 66,515
Stock Options Exercised — 26,000 — 89 — — 89
Stock Repurchases — (126,507) (1) (2,037) — — (2,038)
BALANCE September 30, 2021 $ 66,515 28,066,822 $ 281 $ 103,471 $ 188,004 $ 9,532 $ 367,803
BALANCE June 30, 2022 $ 66,514 27,677,372 $ 277 $ 96,689 $ 222,464 $ (11,061) $ 374,883
Stock-based Compensation — 4,744 — 876 — — 876
Comprehensive Income (Loss) — — — — 14,513 (5,659) 8,854
Stock Options Exercised — 3,250 — 41 — — 41
Stock Repurchases — (99,310) (1) (1,615) — — (1,616)
Vested Restricted Stock Units — 3,000 — — — — —
Restricted Shares Withheld for Taxes — (1,078) — (18) — — (18)
Preferred Stock Dividend — — — — (1,013) — (1,013)
BALANCE September 30, 2022 $ 66,514 27,587,978 $ 276 $ 95,973 $ 235,964 $ (16,720) $ 382,007
Accumulated
Additional Other
Preferred Common Stock Paid-In Retained Comprehensive
Nine Months Ended Stock Shares Amount Capital Earnings Income (Loss) Total
BALANCE December 31, 2020 $ — 28,143,493 $ 281 $ 103,714 $ 154,831 $ 6,579 $ 265,405
Stock-based Compensation — 14,408 — 1,765 — — 1,765
Comprehensive Income — — — — 33,173 2,953 36,126
Preferred Stock Offering, Net of Issuance Costs 66,515 — — — — — 66,515
Stock Options Exercised — 52,400 1 242 — — 243
Stock Repurchases — (143,125) (1) (2,245) — — (2,246)
Restricted Shares Withheld for Taxes — (354) — (5) — — (5)
BALANCE September 30, 2021 $ 66,515 28,066,822 $ 281 $ 103,471 $ 188,004 $ 9,532 $ 367,803
BALANCE December 31, 2021 $ 66,514 28,206,566 $ 282 $ 104,123 $ 199,347 $ 9,006 $ 379,272
Stock-based Compensation — 14,400 — 2,557 — — 2,557
Comprehensive Income (Loss) — — — — 39,657 (25,726) 13,931
Stock Options Exercised — 28,000 — 106 — — 106
Stock Repurchases — (662,765) (6) (10,772) — — (10,778)
Forfeiture of Restricted Stock Awards — (1,000) — (3) — — (3)
Vested Restricted Stock Units — 5,100 — — — — —
Restricted Shares Withheld for Taxes — (2,323) — (38) — — (38)
Preferred Stock Dividend — — — — (3,040) — (3,040)
BALANCE September 30, 2022 $ 66,514 27,587,978 $ 276 $ 95,973 $ 235,964 $ (16,720) $ 382,007
See accompanying notes to consolidated financial statements.
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Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 39,657 $ 33,173
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale 1,712 2,567
Net Gain on Sales of Securities Available for Sale (52) (750)
Provision for Loan Losses 6,200 4,000
Depreciation of Premises and Equipment 1,911 1,755
Amortization of Other Intangible Assets 143 143
Amortization of Subordinated Debt Issuance Costs 320 299
Stock-based Compensation 2,557 1,765
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets (7,859) (6,957)
Accrued Interest Payable and Other Liabilities 35,780 7,876
Net Cash Provided by Operating Activities 80,369 43,871
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Bank-Owned Certificates of Deposit 694 983
Proceeds from Sales of Securities Available for Sale 25,066 11,877
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale 30,253 33,250
Purchases of Securities Available for Sale (210,432) (64,669)
Net Increase in Loans (560,786) (384,476)
Net Increase in FHLB Stock (10,361) (415)
Purchases of Premises and Equipment (1,457) (571)
Purchase of Bank-Owned Life Insurance (7,407) (25,166)
Net Cash Used in Investing Activities (734,430) (429,187)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 358,837 352,521
Net Increase in Federal Funds Purchased 212,000 —
Principal Payments on Notes Payable — (11,000)
Proceeds from FHLB Advances 29,000 —
Principal Payments on FHLB Advances — (10,000)
Issuance of Preferred Stock, net of Issuance Costs — 66,515
Preferred Stock Dividends Paid (3,040) —
Issuance of Subordinated Debt, net of Issuance Costs — 29,365
Redemption of Subordinated Debt — (11,250)
Stock Options Exercised 106 243
Stock Repurchases (10,778) (2,246)
Forfeiture of Restricted Stock Awards (3) —
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards (38) (5)
Net Cash Provided by Financing Activities 586,084 414,143
NET CHANGE IN CASH AND CASH EQUIVALENTS (67,977) 28,827
Cash and Cash Equivalents Beginning 143,473 160,675
Cash and Cash Equivalents Ending $ 75,496 $ 189,502
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest $ 16,905 $ 14,408
Cash Paid for Income Taxes 14,155 15,176
Net Investment Securities Purchased but Not Settled 5,731 5,432
See accompanying notes to consolidated financial statements.
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Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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, 2022 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 8, 2022.
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 rising inflation and ongoing COVID-19 pandemic related changes, and changes in the financial condition of borrowers.
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Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on March 13, 2018; (2) the last day of the fiscal year in which the Company has $1.24 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.
Impact of Recently Issued Accounting Guidance
In March 2022, the FASB issued ASU 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 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. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 for companies that have adopted CECL, including interim periods within those fiscal years, with early adoption permitted.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (modified by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses, ASU 2019-05, Financial Instruments Credit Losses – Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses). The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to
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varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (815), and Leases (Topic 842) – Effective Dates. This ASU amended the effective date of ASU 2016-13 for smaller reporting companies and non-SEC reporting entities. The amendment delays the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, t he Company is required to implement by January 1, 2023 and is currently evaluating the impact on its consolidated financial statements. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company has contracted with a third party to develop a model to comply with CECL requirements. The Company has established a steering committee with representation from various departments across the enterprise. While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings upon adoption. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors.
Subsequent Events
Subsequent events have been evaluated through November 3, 2022, 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, 2022, stock options, restricted stock awards and restricted stock units of approximately 300,500 shares were excluded from the calculation because they were deemed to be anti-dilutive. For the three and nine months ended September 30, 2021, stock options, restricted stock awards and restricted stock units of approximately 55,000 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, 2022 and 2021:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands, except per share data) 2022 2021 2022 2021
Net Income Available to Common Shareholders $ 13,500 $ 11,509 $ 36,617 $ 33,173
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic) 27,520,117 28,047,280 27,825,517 28,035,246
Dilutive Effect of Stock Compensation 1,072,737 1,063,267 1,057,184 1,042,604
Weighted Average Common Stock Outstanding (Dilutive) 28,592,854 29,110,547 28,882,701 29,077,850
Basic Earnings per Common Share $ 0.49 $ 0.41 $ 1.32 $ 1.18
Diluted Earnings per Common Share 0.47 0.40 1.27 1.14
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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, 2022 and December 31, 2021:
September 30, 2022
Gross Gross
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value
Securities Available for Sale:
U.S. Treasury Securities $ 2,374 $ — $ (36) $ 2,338
Municipal Bonds 196,102 54 (25,920) 170,236
Mortgage-Backed Securities 207,973 8 (16,396) 191,585
Corporate Securities 113,041 39 (5,020) 108,060
SBA Securities 22,585 96 (141) 22,540
Asset-Backed Securities 47,359 348 (459) 47,248
Total Securities Available for Sale $ 589,434 $ 545 $ (47,972) $ 542,007
December 31, 2021
Gross Gross
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value
Securities Available for Sale:
U.S. Treasury Securities $ 756 $ — $ (2) $ 754
Municipal Bonds 151,665 7,492 (788) 158,369
Mortgage-Backed Securities 125,563 1,085 (2,111) 124,537
Corporate Securities 81,925 2,740 (185) 84,480
SBA Securities 30,474 102 (206) 30,370
Asset-Backed Securities 39,867 1,044 (59) 40,852
Total Securities Available for Sale $ 430,250 $ 12,463 $ (3,351) $ 439,362
The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021:
Less Than 12 Months 12 Months or Greater Total
Unrealized Unrealized Unrealized
(dollars in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
September 30, 2022
U.S. Treasury Securities $ 2,338 $ (36) $ — $ — $ 2,338 $ (36)
Municipal Bonds 135,714 (16,465) 31,839 (9,455) 167,553 (25,920)
Mortgage-Backed Securities 125,805 (6,300) 54,041 (10,096) 179,846 (16,396)
Corporate Securities 93,186 (4,098) 9,549 (922) 102,735 (5,020)
SBA Securities 1,071 (2) 10,645 (139) 11,716 (141)
Asset-Backed Securities 24,382 (330) 2,900 (129) 27,282 (459)
Total Securities Available for Sale $ 382,496 $ (27,231) $ 108,974 $ (20,741) $ 491,470 $ (47,972)
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Less Than 12 Months 12 Months or Greater Total
Unrealized Unrealized Unrealized
(dollars in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
December 31, 2021
U.S. Treasury Securities $ 754 $ (2) $ — $ — $ 754 $ (2)
Municipal Bonds 44,332 (708) 3,757 (80) 48,089 (788)
Mortgage-Backed Securities 36,921 (630) 35,949 (1,481) 72,870 (2,111)
Corporate Securities 9,398 (133) 1,948 (52) 11,346 (185)
SBA Securities 3,896 (7) 16,297 (199) 20,193 (206)
Asset-Backed Securities 6,742 (59) — — 6,742 (59)
Total Securities Available for Sale $ 102,043 $ (1,539) $ 57,951 $ (1,812) $ 159,994 $ (3,351)
At September 30, 2022, 564 debt securities had unrealized losses with aggregate depreciation of approximately 8.9% from the Company’s amortized cost basis. At December 31, 2021, 199 debt securities had unrealized losses with aggregate depreciation of approximately 2.1% from the Company’s amortized cost basis. These unrealized losses related principally to changes in interest rates and were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of September 30, 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, 2022. 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.
(dollars in thousands) Amortized Cost Fair Value
September 30, 2022
Due in One Year or Less $ 2,692 $ 2,665
Due After One Year Through Five Years 35,380 34,227
Due After Five Years Through 10 Years 158,065 146,852
Due After 10 Years 115,380 96,890
Subtotal 311,517 280,634
Mortgage-Backed Securities 207,973 191,585
SBA Securities 22,585 22,540
Asset-Backed Securities 47,359 47,248
Totals $ 589,434 $ 542,007
As of September 30, 2022 and December 31, 2021, the securities portfolio was unencumbered.
The following table presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three and nine months ended September 30, 2022 and September 30, 2021:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Proceeds From Sales of Securities $ — $ 4,119 $ 25,066 $ 11,877
Gross Gains on Sales — 498 234 1,200
Gross Losses on Sales — (450) (182) (450)
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Note 4: Loans
The following table presents the components of the loan portfolio at September 30, 2022 and December 31, 2021:
September 30, December 31,
(dollars in thousands) 2022 2021
Commercial $ 412,448 $ 360,169
Paycheck Protection Program 1,192 26,162
Construction and Land Development 335,557 281,474
Real Estate Mortgage:
1-4 Family Mortgage 341,102 305,317
Multifamily 1,230,509 910,243
CRE Owner Occupied 151,088 111,096
CRE Nonowner Occupied 900,691 818,569
Total Real Estate Mortgage Loans 2,623,390 2,145,225
Consumer and Other 7,495 6,442
Total Loans, Gross 3,380,082 2,819,472
Allowance for Loan Losses (46,491) (40,020)
Net Deferred Loan Fees (9,088) (9,535)
Total Loans, Net $ 3,324,503 $ 2,769,917
The following table presents the activity in the allowance for loan losses, by segment, for the three months ended September 30, 2022 and 2021:
Paycheck Construction CRE CRE
Protection and Land 1--4 Family Owner Non-owner Consumer
(dollars in thousands) Commercial Program Development Mortgage Multifamily Occupied Occupied and Other Unallocated Total
Three Months Ended September 30, 2022
Allowance for Loan Losses:
Beginning Balance $ 6,275 $ 2 $ 4,772 $ 4,206 $ 14,977 $ 1,920 $ 12,235 $ 154 $ 170 $ 44,711
Provision for Loan Losses 70 (1) (303) (257) 1,845 107 47 13 (21) 1,500
Loans Charged-off — — — — — — — (5) — (5)
Recoveries of Loans 3 — — 281 — — — 1 — 285
Total Ending Allowance Balance $ 6,348 $ 1 $ 4,469 $ 4,230 $ 16,822 $ 2,027 $ 12,282 $ 163 $ 149 $ 46,491
Three Months Ended September 30, 2021
Allowance for Loan Losses:
Beginning Balance $ 6,525 $ 50 $ 3,427 $ 3,502 $ 11,150 $ 1,244 $ 11,018 $ 220 $ 455 $ 37,591
Provision for Loan Losses 171 (23) 47 33 816 179 3 (37) 111 1,300
Loans Charged-off (6) — — — — — — (14) — (20)
Recoveries of Loans 12 — — 18 — — — — — 30
Total Ending Allowance Balance $ 6,702 $ 27 $ 3,474 $ 3,553 $ 11,966 $ 1,423 $ 11,021 $ 169 $ 566 $ 38,901
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The following table presents the activity in the allowance for loan losses, by segment, for the nine months ended September 30, 2022 and 2021:
Paycheck Construction CRE CRE
Protection and Land 1--4 Family Owner Non-owner Consumer
(dollars in thousands) Commercial Program Development Mortgage Multifamily Occupied Occupied and Other Unallocated Total
Nine Months Ended September 30, 2022
Allowance for Loan Losses:
Beginning Balance $ 6,256 $ 13 $ 3,757 $ 3,757 $ 12,610 $ 1,495 $ 11,335 $ 147 $ 650 $ 40,020
Provision for Loan Losses 98 (12) 712 187 4,212 532 947 25 (501) 6,200
Loans Charged-off (13) — — — — — — (21) — (34)
Recoveries of Loans 7 — — 286 — — — 12 — 305
Total Ending Allowance Balance $ 6,348 $ 1 $ 4,469 $ 4,230 $ 16,822 $ 2,027 $ 12,282 $ 163 $ 149 $ 46,491
Nine Months Ended September 30, 2021
Allowance for Loan Losses:
Beginning Balance $ 5,703 $ 70 $ 2,491 $ 3,972 $ 9,517 $ 1,162 $ 10,991 $ 203 $ 732 $ 34,841
Provision for Loan Losses 971 (43) 983 (437) 2,449 229 30 (16) (166) 4,000
Loans Charged-off (6) — — (5) — — — (26) — (37)
Recoveries of Loans 34 — — 23 — 32 — 8 — 97
Total Ending Allowance Balance $ 6,702 $ 27 $ 3,474 $ 3,553 $ 11,966 $ 1,423 $ 11,021 $ 169 $ 566 $ 38,901
The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of September 30, 2022 and December 31, 2021:
Paycheck Construction CRE CRE
Protection and Land 1--4 Family Owner Non-owner Consumer
(dollars in thousands) Commercial Program Development Mortgage Multifamily Occupied Occupied and Other Unallocated Total
Allowance for Loan Losses at September 30, 2022
Individually Evaluated for Impairment $ 12 $ — $ — $ — $ — $ — $ 222 $ — $ — $ 234
Collectively Evaluated for Impairment 6,336 1 4,469 4,230 16,822 2,027 12,060 163 149 46,257
Totals $ 6,348 $ 1 $ 4,469 $ 4,230 $ 16,822 $ 2,027 $ 12,282 $ 163 $ 149 $ 46,491
Allowance for Loan Losses at December 31, 2021
Individually Evaluated for Impairment $ 607 $ — $ — $ — $ — $ — $ — $ — $ — $ 607
Collectively Evaluated for Impairment 5,649 13 3,757 3,757 12,610 1,495 11,335 147 650 39,413
Totals $ 6,256 $ 13 $ 3,757 $ 3,757 $ 12,610 $ 1,495 $ 11,335 $ 147 $ 650 $ 40,020
Paycheck Construction CRE CRE
Protection and Land 1--4 Family Owner Non-owner Consumer
(dollars in thousands) Commercial Program Development Mortgage Multifamily Occupied Occupied and Other Total
Loans at September 30, 2022
Individually Evaluated for Impairment $ 10,273 $ — $ 110 $ 280 $ — $ 1,667 $ 18,437 $ — $ 30,767
Collectively Evaluated for Impairment 402,175 1,192 335,447 340,822 1,230,509 149,421 882,254 7,495 3,349,315
Totals $ 412,448 $ 1,192 $ 335,557 $ 341,102 $ 1,230,509 $ 151,088 $ 900,691 $ 7,495 $ 3,380,082
Loans at December 31, 2021
Individually Evaluated for Impairment $ 14,512 $ — $ 130 $ 1,390 $ — $ 2,421 $ 4,188 $ — $ 22,641
Collectively Evaluated for Impairment 345,657 26,162 281,344 303,927 910,243 108,675 814,381 6,442 2,796,831
Totals $ 360,169 $ 26,162 $ 281,474 $ 305,317 $ 910,243 $ 111,096 $ 818,569 $ 6,442 $ 2,819,472
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The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Recorded Principal Related Recorded Principal Related
(dollars in thousands) Investment Balance Allowance Investment Balance Allowance
Loans With No Related Allowance for Loan Losses:
Commercial $ 10,190 $ 10,190 $ — $ 4,545 $ 4,545 $ —
Construction and Land Development 110 717 — 130 737 —
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage — — — 933 933 —
1st REM - Rentals 280 280 — 457 457 —
CRE Owner Occupied 1,667 1,744 — 2,421 2,466 —
CRE Nonowner Occupied 6,302 6,302 — 4,188 4,188 —
Totals 18,549 19,233 — 12,674 13,326 —
Loans With An Allowance for Loan Losses:
Commercial 83 83 12 9,967 9,967 607
Real Estate Mortgage:
CRE Nonowner Occupied 12,135 12,135 222 — — —
Totals 12,218 12,218 234 9,967 9,967 607
Grand Totals $ 30,767 $ 31,451 $ 234 $ 22,641 $ 23,293 $ 607
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 and 2021:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Average Interest Average Interest Average Interest Average Interest
(dollars in thousands) Investment Recognized Investment Recognized Investment Recognized Investment Recognized
Loans With No Related Allowance for Loan Losses:
Commercial $ 9,929 $ 187 $ 50 $ 1 $ 11,343 $ 519 $ 50 $ 3
Construction and Land Development 114 — 137 — 120 — 144 —
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage — — 884 12 — — 884 34
1st REM - Rentals 282 4 465 6 286 11 470 18
CRE Owner Occupied 1,751 17 867 3 1,762 49 868 9
CRE Nonowner Occupied 6,333 85 4,232 54 6,431 249 4,262 161
Totals 18,409 293 6,635 76 19,942 828 6,678 225
Loans With An Allowance for Loan Losses:
Commercial 84 — 1,154 14 86 1 1,155 40
Real Estate Mortgage:
CRE Nonowner Occupied 12,135 127 — — 12,135 370 — —
Totals 12,219 127 1,154 14 12,221 371 1,155 40
Grand Totals $ 30,628 $ 420 $ 7,789 $ 90 $ 32,163 $ 1,199 $ 7,833 $ 265
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The process of analyzing loans for
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changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.
The following tables present the risk category of loans by loan segment as of September 30, 2022 and December 31, 2021, based on the most recent analysis performed by management:
September 30, 2022
(dollars in thousands) Pass Watch Substandard Total
Commercial $ 396,736 $ 5,439 $ 10,273 $ 412,448
Paycheck Protection Program 1,192 — — 1,192
Construction and Land Development 335,447 — 110 335,557
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage 29,981 — — 29,981
1st REM - 1-4 Family 51,246 678 — 51,924
LOCs and 2nd REM - Rentals 25,164 10 — 25,174
1st REM - Rentals 233,743 — 280 234,023
Multifamily 1,230,509 — — 1,230,509
CRE Owner Occupied 149,421 — 1,667 151,088
CRE Nonowner Occupied 865,622 16,632 18,437 900,691
Consumer and Other 7,495 — — 7,495
Totals $ 3,326,556 $ 22,759 $ 30,767 $ 3,380,082
December 31, 2021
(dollars in thousands) Pass Watch Substandard Total
Commercial $ 336,939 $ 8,718 $ 14,512 $ 360,169
Paycheck Protection Program 26,162 — — 26,162
Construction and Land Development 281,344 — 130 281,474
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage 30,327 — 933 31,260
1st REM - 1-4 Family 48,024 689 — 48,713
LOCs and 2nd REM - Rentals 21,625 16 — 21,641
1st REM - Rentals 203,246 — 457 203,703
Multifamily 910,243 — — 910,243
CRE Owner Occupied 108,675 — 2,421 111,096
CRE Nonowner Occupied 774,474 39,907 4,188 818,569
Consumer and Other 6,442 — — 6,442
Totals $ 2,747,501 $ 49,330 $ 22,641 $ 2,819,472
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The following tables present the aging of the recorded investment in past due loans by loan segment as of September 30, 2022 and December 31, 2021:
Accruing Interest
30-89 Days 90 Days or
(dollars in thousands) Current Past Due More Past Due Nonaccrual Total
September 30, 2022
Commercial $ 412,448 $ — $ — $ — $ 412,448
Paycheck Protection Program 1,155 37 — — 1,192
Construction and Land Development 335,447 — — 110 335,557
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage 29,981 — — — 29,981
1st REM - 1-4 Family 51,924 — — — 51,924
LOCs and 2nd REM - Rentals 25,174 — — — 25,174
1st REM - Rentals 234,023 — — — 234,023
Multifamily 1,230,509 — — — 1,230,509
CRE Owner Occupied 150,535 — — 553 151,088
CRE Nonowner Occupied 900,691 — — — 900,691
Consumer and Other 7,494 1 — — 7,495
Totals $ 3,379,381 $ 38 $ — $ 663 $ 3,380,082
Accruing Interest
30-89 Days 90 Days or
(dollars in thousands) Current Past Due More Past Due Nonaccrual Total
December 31, 2021
Commercial $ 360,169 $ — $ — $ — $ 360,169
Paycheck Protection Program 26,162 — — — 26,162
Construction and Land Development 281,344 — — 130 281,474
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage 31,211 49 — — 31,260
1st REM - 1-4 Family 48,713 — — — 48,713
LOCs and 2nd REM - Rentals 21,641 — — — 21,641
1st REM - Rentals 203,703 — — — 203,703
Multifamily 910,243 — — — 910,243
CRE Owner Occupied 110,504 — — 592 111,096
CRE Nonowner Occupied 818,569 — — — 818,569
Consumer and Other 6,442 — — — 6,442
Totals $ 2,818,701 $ 49 $ — $ 722 $ 2,819,472
At September 30, 2022, there were two loans classified as troubled debt restructurings with total aggregate outstanding balances of $193,000. In comparison, at December 31, 2021, there were four loans classified as troubled debt restructurings with total aggregate outstanding balances of $1.4 million. There were no new loans classified as troubled debt restructurings during the nine month period ended September 30, 2022 and no loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the nine months ended September 30, 2022.
In response to the COVID-19 pandemic, the Company developed programs for clients who experienced business and personal disruptions due to the COVID-19 pandemic pursuant to which the Company provided interest-only modifications, loan payment deferrals, or extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic, made before January 1, 2022, are not considered troubled debt restructurings.
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The following table presents a summary of active loan modifications made in response to the COVID-19 pandemic, by loan segment and modification type, as of September 30, 2022:
Interest-Only Extended Amortization Total
(dollars in thousands) Amount # of Loans Amount # of Loans Amount # of Loans
Real Estate Mortgage:
CRE Nonowner Occupied $ 10,623 1 $ — — $ 10,623 1
Totals $ 10,623 1 $ — — $ 10,623 1
Note 5: Deposits
The following table presents the composition of deposits at September 30, 2022 and December 31, 2021:
September 30, December 31,
(dollars in thousands) 2022 2021
Transaction Deposits $ 1,471,480 $ 1,419,873
Savings and Money Market Deposits 1,077,333 863,567
Time Deposits 293,052 293,474
Brokered Deposits 463,209 369,323
Totals $ 3,305,074 $ 2,946,237
Brokered deposits contain brokered transaction and money market accounts of $195.7 million and $131.2 million as of September 30, 2022 and December 31, 2021, respectively.
The following table presents the scheduled maturities of brokered and customer time deposits at September 30, 2022:
September 30,
(dollars in thousands) 2022
Less than 1 Year $ 222,981
1 to 2 Years 103,232
2 to 3 Years 114,268
3 to 4 Years 74,726
4 to 5 Years 28,391
Greater than 5 Years 17,000
Totals $ 560,598
The aggregate amount of time deposits greater than $250,000 was approximately $100.0 million and $59.6 million at September 30, 2022 and December 31, 2021, respectively.
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.
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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, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Notional Estimated Notional Estimated
(dollars in thousands) Amount Fair Value Amount Fair Value
Interest rate swap agreements:
Assets $ 65,618 $ 8,492 $ 49,101 $ 641
Liabilities 65,618 (8,492) 49,101 (641)
Total $ 131,236 $ — $ 98,202 $ —
Cash Flow Hedging Derivatives
For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, 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 $3.4 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, 2022 and December 31, 2021:
(dollars in thousands) September 30, 2022 December 31, 2021
Notional Amount $ 125,000 $ 125,000
Weighted Average Pay Rate 1.23 % 1.27 %
Weighted Average Receive Rate 2.24 % 0.14 %
Weighted Average Maturity (Years) 3.02 3.76
Net Unrealized Gain $ 10,834 $ 791
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 nine months ended September 30, 2022 and 2021, the company recognized amortization expense on the interest rate caps of $574,000 and $212,000, 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, 2022 and December 31, 2021:
(dollars in thousands) September 30, 2022 December 31, 2021
Notional Amount $ 125,000 $ 110,000
Unamortized Premium Paid 6,070 5,859
Weighted Average Strike Rate 0.96 % 0.90 %
Weighted Average Maturity (Years) 7.60 8.72
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The following table presents a summary of the Company’s interest rate contracts as of September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Notional Estimated Notional Estimated
(dollars in thousands) Amount Fair Value Amount Fair Value
Interest rate swap agreements:
Assets $ 125,000 $ 10,834 $ 90,000 $ 1,717
Liabilities — — 35,000 (926)
Interest rate cap agreements:
Assets 125,000 19,203 110,000 7,356
The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of September 30, 2022 and December 31, 2021, the Company pledged cash collateral for the Company’s derivative contracts of $0 and $370,000, respectively. In addition, as of September 30, 2022 and December 31, 2021, the Company's counterparties pledged cash collateral to the Company of $38.2 million and $8.6 million, respectively.
The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2022 2021 2022 2021
Derivatives in Location of Gain (Loss) Gain (Loss) Loss
Cash Flow Hedging Reclassified Reclassified from Reclassified from
Relationships from AOCI into Income AOCI into Earnings AOCI into Earnings
Interest rate swaps Interest expense $ 288 $ (290) $ (24) $ (827)
Interest rate caps Interest expense (169) (116) (539) (252)
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, 2022 and 2021, 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 principal balances of $1.14 billion and $930.9 million at September 30, 2022 and December 31, 2021, respectively, were pledged to the FHLB as collateral. FHLB advances are also secured with FHLB stock owned by the Company. Total remaining available capacity under the agreement was $426.6 million and $550.8 million at September 30, 2022 and December 31, 2021, respectively.
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The following table presents FHLB advances, by maturity, at September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Weighted Weighted
Average Total Average Total
(dollars in thousands) Rate Outstanding Rate Outstanding
Less than 1 Year 2.83 % $ 55,000 — % $ —
1 to 2 Years 1.29 7,500 — —
2 to 3 Years 1.22 5,000 1.66 22,500
3 to 4 Years — — 1.22 16,000
4 to 5 Years 0.78 4,000 0.78 4,000
Totals $ 71,500 $ 42,500
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. As of September 30, 2022 and December 31, 2021, the Company believes it was in compliance with all covenants.
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, 2022 and December 31, 2021, there were no outstanding balances under the revolving line of credit.
Note 8: Subordinated Debentures
The following table presents a summary of the Company’s subordinated debentures as of September 30, 2022:
Total Debt Total Debt
Date First Maturity Outstanding Outstanding Interest
Name Established Redemption Date Date September 30, 2022 December 31, 2021 Rate Coupon Structure
(dollars in thousands)
2027 Notes July 12, 2017 July 15, 2022 July 15, 2027 $ 13,750 $ 13,750 6.62 % Fixed-to-Floating (1)
2030 Notes June 19, 2020 July 1, 2025 July 1, 2030 50,000 50,000 5.25 % Fixed-to-Floating (2)
2031 Notes July 8, 2021 July 15, 2026 July 15, 2031 30,000 30,000 3.25 % Fixed-to-Floating (3)
Subordinated Debentures 93,750 93,750
Debt Issuance Costs (1,191) (1,511)
Subordinated Debentures, Net of Issuance Costs $ 92,559 $ 92,239
(1) Three month LIBOR (as determined on July 15, 2022) + 3.88 % beginning July 15, 2022 until either the early redemption date or the maturity date.
(2) Migrates to three month term SOFR + 5.13 % beginning July 1, 2025 until either the early redemption date or the maturity date.
(3) Migrates to three month term SOFR + 2.52 % beginning July 15, 2026 until either the early redemption date or the maturity date.
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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 commitments were outstanding at September 30, 2022 and December 31, 2021:
September 30, December 31,
(dollars in thousands) 2022 2021
Unfunded Commitments Under Lines of Credit $ 837,708 $ 799,148
Letters of Credit 122,438 119,647
Totals $ 960,146 $ 918,795
The Company had outstanding letters of credit with the FHLB in total amounts of $95.7 million and $36.5 million at September 30, 2022 and December 31, 2021, respectively, on behalf of customers and to secure public deposits.
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 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 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, 2022 and December 31, 2021, there were 44,700 and 294,700 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.
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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, 2022 and December 31, 2021, there were 346,247 and 352,575 shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.
Stock Options
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of 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, 2022, are as follows:
September 30,
2022
Dividend Yield — %
Expected Life 7 Years
Expected Volatility 24.71 %
Risk-Free Interest Rate 1.70 %
The following table presents a summary of the status of the Company’s stock option grants for the nine months ended September 30, 2022:
September 30, 2022
Weighted
Average
Shares Exercise Price
Outstanding at Beginning of Year 1,768,745 $ 7.67
Granted 290,000 17.50
Exercised (28,000) 3.81
Forfeitures (12,000) 14.77
Outstanding at Period End 2,018,745 $ 9.10
Options Exercisable at Period End 1,348,470 $ 7.06
For the three months ended September 30, 2022 and 2021, the Company recognized compensation expense for stock options of $326,000 and $234,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for stock options of $926,000 and $686,000, respectively.
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The following table presents information pertaining to options outstanding at September 30, 2022:
Options Outstanding Options Exercisable
Weighted Average
Number of Weighted Average Remaining Contractual Number of Weighted Average
Range of Exercise Prices Options Exercise Price Life in Years Options Exercise Price
$ 2.13 - 3.99 384,000 $ 3.04 1.3 384,000 $ 3.04
7.00 - 7.99 926,717 7.47 5.0 733,317 7.47
8.00 - 8.99 20,000 8.76 7.5 7,500 8.76
10.00 - 10.99 10,000 10.08 7.7 5,000 10.08
11.00 - 11.99 85,000 11.27 6.6 51,000 11.27
12.00 - 12.99 267,528 12.90 6.9 145,028 12.90
13.00 - 13.99 25,000 13.22 5.6 20,000 13.22
17.00 - 17.99 300,500 17.50 9.3 2,625 17.49
Totals 2,018,745 $ 9.10 5.3 1,348,470 $ 7.06
As of September 30, 2022, there was $1.8 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 2.8 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, 2022:
Weighted
Number of Average Grant
Shares Date Fair Value
Nonvested Options at December 31, 2021 435,900 $ 3.43
Granted 290,000 5.28
Vested (43,625) 3.95
Forfeited (12,000) 5.12
Nonvested Options at September 30, 2022 670,275 $ 4.17
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, 2022:
Weighted
Number of Average Grant
Shares Date Fair Value
Nonvested Awards at December 31, 2021 75,113 $ 12.59
Granted — —
Vested (2,786) 10.32
Forfeited (1,000) 12.92
Nonvested Awards at September 30, 2022 71,327 $ 12.68
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, 2022 and 2021, the Company recognized compensation expense for restricted stock
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awards of $113,000 and $115,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for restricted stock awards of $335,000 and $340,000, respectively.
As of September 30, 2022, there was $546,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 1.2 years.
In addition, during the nine months ended September 30, 2022, the Company issued 14,400 shares of unrestricted common stock to non-employee directors, or their designee, 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, or their designee, of $236,000 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, 2022:
Weighted
Number of Average Grant
Units Date Fair Value
Nonvested Units at December 31, 2021 344,908 $ 15.02
Granted 2,500 17.50
Vested (5,100) 15.67
Forfeited (9,572) 15.12
Nonvested Units at September 30, 2022 332,736 $ 15.02
Compensation expense associated with the restricted stock units is recognized on a straight-line basis over the period that the restrictions associated with the units lapse based on the total cost of the unit at the grant date. For the three months ended September 30, 2022 and 2021, the Company recognized compensation expense for restricted stock units of $358,000 and $179,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for restricted stock units of $1.1 million and $499,000, respectively.
As of September 30, 2022, there was $3.9 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 2.8 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.
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Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.
The following tables present the capital amounts and ratios for the Company, on a consolidated basis, and the Bank as of September 30, 2022 and December 31, 2021:
Minimum Required For Capital Adequacy To be Well Capitalized
For Capital Adequacy Purposes Plus Capital Under Prompt Corrective
Actual Purposes Conservation Buffer Action Regulations
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
September 30, 2022
Company (Consolidated):
Total Risk-based Capital $ 535,184 13.78 % $ 310,810 8.00 % $ 407,939 10.50 % N/A N/A
Tier 1 Risk-based Capital 395,765 10.19 233,108 6.00 330,236 8.50 N/A N/A
Common Equity Tier 1 Capital 329,251 8.47 174,831 4.50 271,959 7.00 N/A N/A
Tier 1 Leverage Ratio 395,765 9.98 158,647 4.00 158,647 4.00 N/A N/A
Bank:
Total Risk-based Capital $ 491,982 12.67 % $ 310,689 8.00 % $ 407,779 10.50 % $ 388,361 10.00 %
Tier 1 Risk-based Capital 445,131 11.46 233,017 6.00 330,107 8.50 310,689 8.00
Common Equity Tier 1 Capital 445,131 11.46 174,762 4.50 271,853 7.00 252,435 6.50
Tier 1 Leverage Ratio 445,131 11.24 158,453 4.00 158,453 4.00 198,067 5.00
Minimum Required For Capital Adequacy To be Well Capitalized
For Capital Adequacy Purposes Plus Capital Under Prompt Corrective
Actual Purposes Conservation Buffer Action Regulations
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
December 31, 2021
Company (Consolidated):
Total Risk-based Capital $ 499,554 15.55 % $ 256,966 8.00 % $ 337,268 10.50 % N/A N/A
Tier 1 Risk-based Capital 367,161 11.43 192,725 6.00 273,027 8.50 N/A N/A
Common Equity Tier 1 Capital 300,647 9.36 144,543 4.50 224,845 7.00 N/A N/A
Tier 1 Leverage Ratio 367,161 10.82 135,723 4.00 135,723 4.00 N/A N/A
Bank:
Total Risk-based Capital $ 415,848 12.94 % $ 257,005 8.00 % $ 337,319 10.50 % $ 321,256 10.00 %
Tier 1 Risk-based Capital 375,688 11.69 192,754 6.00 273,068 8.50 257,005 8.00
Common Equity Tier 1 Capital 375,688 11.69 144,565 4.50 224,879 7.00 208,816 6.50
Tier 1 Leverage Ratio 375,688 11.09 135,508 4.00 135,508 4.00 169,386 5.00
The Company and the Bank must maintain a capital conservation buffer, as defined by 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
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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 the assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:
September 30, 2022
(dollars in thousands) Level 1 Level 2 Level 3 Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities $ 2,338 $ — $ — $ 2,338
Municipal Bonds — 170,236 — 170,236
Mortgage-Backed Securities — 191,585 — 191,585
Corporate Securities — 108,060 — 108,060
SBA Securities — 22,540 — 22,540
Asset-Backed Securities — 47,248 — 47,248
Interest Rate Caps — 19,203 — 19,203
Interest Rate Swaps — 19,326 — 19,326
Total Fair Value of Financial Assets $ 2,338 $ 578,198 $ — $ 580,536
Fair Value of Financial Liabilities:
Interest Rate Swaps $ — $ 8,492 $ — $ 8,492
Total Fair Value of Financial Liabilities $ — $ 8,492 $ — $ 8,492
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December 31, 2021
(dollars in thousands) Level 1 Level 2 Level 3 Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities $ 754 $ — $ — $ 754
Municipal Bonds — 158,369 — 158,369
Mortgage-Backed Securities — 124,537 — 124,537
Corporate Securities — 84,480 — 84,480
SBA Securities — 30,370 — 30,370
Asset-Backed Securities — 40,852 — 40,852
Interest Rate Caps — 7,356 — 7,356
Interest Rate Swaps — 2,358 — 2,358
Total Fair Value of Financial Assets $ 754 $ 448,322 $ — $ 449,076
Fair Value of Financial Liabilities:
Interest Rate Swaps $ — $ 1,567 $ — $ 1,567
Total Fair Value of Financial Liabilities $ — $ 1,567 $ — $ 1,567
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.
For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.
Interest Rate Caps
The fair value of the caps 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
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.
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The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at September 30, 2022 and December 31, 2021:
September 30, 2022
(dollars in thousands) Level 1 Level 2 Level 3 Loss
Impaired Loans $ — $ 11,984 $ — $ 234
Totals $ — $ 11,984 $ — $ 234
December 31, 2021
(dollars in thousands) Level 1 Level 2 Level 3 Loss
Impaired Loans $ — $ 9,360 $ — $ 625
Totals $ — $ 9,360 $ — $ 625
Impaired Loans
In accordance with the provisions of the loan impairment guidance, impairment is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.
Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.
Fair Value
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
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The following tables present the carrying amount and estimated fair values of financial instruments at September 30, 2022 and December 31, 2021:
September 30, 2022
Fair Value Hierarchy
Carrying Estimated
(dollars in thousands) Amount Level 1 Level 2 Level 3 Fair Value
Financial Assets:
Cash and Due From Banks $ 75,496 $ 75,496 $ — $ — $ 75,496
Bank-Owned Certificates of Deposit 1,182 — 1,168 — 1,168
Securities Available for Sale 542,007 2,338 539,669 — 542,007
FHLB Stock, at Cost 15,603 — 15,603 — 15,603
Loans, Net 3,324,503 — 3,199,676 — 3,199,676
Accrued Interest Receivable 11,198 — 11,198 — 11,198
Interest Rate Caps 19,203 — 19,203 — 19,203
Interest Rate Swaps 19,326 — 19,326 — 19,326
Financial Liabilities:
Deposits $ 3,305,073 $ — $ 3,275,575 $ — $ 3,275,575
Federal Funds Purchased 212,000 — 212,000 — 212,000
FHLB Advances 71,500 — 70,336 — 70,336
Subordinated Debentures 92,559 — 89,674 — 89,674
Accrued Interest Payable 2,214 — 2,214 — 2,214
Interest Rate Swaps 8,492 — 8,492 — 8,492
December 31, 2021
Fair Value Hierarchy
Carrying Estimated
(dollars in thousands) Amount Level 1 Level 2 Level 3 Fair Value
Financial Assets:
Cash and Due From Banks $ 143,473 $ 143,473 $ — $ — $ 143,473
Bank-Owned Certificates of Deposit 1,876 — 1,884 — 1,884
Securities Available for Sale 439,362 754 438,608 — 439,362
FHLB Stock, at Cost 5,242 — 5,242 — 5,242
Loans, Net 2,769,917 — 2,726,417 — 2,726,417
Accrued Interest Receivable 9,186 — 9,186 — 9,186
Interest Rate Caps 7,356 — 7,356 — 7,356
Interest Rate Swaps 2,358 — 2,358 — 2,358
Financial Liabilities:
Deposits $ 2,946,237 $ — $ 2,931,215 $ — $ 2,931,215
FHLB Advances 42,500 — 42,515 — 42,515
Subordinated Debentures 92,239 — 97,700 — 97,700
Accrued Interest Payable 1,409 — 1,409 — 1,409
Interest Rate Swaps 1,567 — 1,567 — 1,567
The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.
Cash and due from banks – The carrying amount of cash and cash equivalents approximates their fair value.
Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.
FHLB stock – The carrying amount of FHLB stock approximates its fair value.
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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, 2022 and December 31, 2021.
Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Note 13: Subsequent Events
On October 15, 2022, the Company elected to redeem the outstanding 2027 Notes in the aggregate principal amount of $13.8 million and made all payments of principal and interest due on the 2027 Notes on October 17, 2022. Concurrently, the Company drew on its revolving line of credit with a correspondent lender in the amount of $13.8 million.
On October 25, 2022, the Company’s Board of Directors declared 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, 2022, to shareholders of record on the Series A Preferred Stock at the close of business on November 15, 2022.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2022. 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, 2021, filed with the Securities and Exchange Commission, or the SEC, on March 8, 2022.
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:
● interest rate risk, including the effects of recent and anticipated rate increases by the Federal Reserve;
● fluctuations in the values of the securities held in our securities portfolio or the values of derivative instruments held in our derivatives portfolio, including as the result of rising interest rates;
● business and economic conditions generally and in the financial services industry, nationally and within our market area, including rising rates of inflation;
● the negative effects of the ongoing COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, including due to supply chain disruptions, as well as any changes to federal, state or local government laws, regulations or orders in response to the pandemic;
● loan concentrations in our loan portfolio;
● the overall health of the local and national real estate market;
● the ability to successfully manage credit risk;
● the ability to maintain an adequate level of allowance for loan losses;
● new or revised accounting standards, including as a result of the implementation of the new Current Expected Credit Loss standard;
● the concentration of large loans to certain borrowers;
● the concentration of large deposits from certain clients;
● the ability to successfully manage liquidity risk;
● the dependence on non-core funding sources and our cost of funds;
● the ability to raise additional capital to implement our business plan;
● the ability to implement our growth strategy and manage costs effectively;
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● developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates;
● the composition of senior leadership team and the ability to attract and retain key personnel;
● talent and labor shortages and high rates of employee turnover;
● the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;
● interruptions involving our information technology and telecommunications systems or third-party servicers;
● competition in the financial services industry, including from nonbank competitors such as credit unions and “fintech” companies;
● the effectiveness of the risk management framework;
● the commencement and outcome of litigation and other legal proceedings and regulatory actions against us;
● the impact of recent and future legislative and regulatory changes, including changes to federal and state corporate tax rates;
● the imposition of tariffs or other governmental policies impacting the value of products produced by our commercial borrowers;
● severe weather, natural disasters, wide spread disease or pandemics (including the COVID-19 pandemic) , acts of war or terrorism, civil unrest or other adverse external events, including the Russian invasion of Ukraine;
● potential impairment to the goodwill recorded in connection with a past acquisition;
● changes to U.S. or state tax laws, regulations and guidance, including the new 1% excise tax on stock buybacks by publicly traded companies;
● success at managing the risks involved in the foregoing items; and
● any other risks described in the “Risk Factors” section of this report and in other reports filed by Bridgewater Bancshares, Inc. with the Securities and Exchange Commission.
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. We undertake 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.
Information Regarding COVID-19 Impact
Management continues to monitor and consider the impact of the ongoing COVID-19 pandemic closely, given the unpredictable nature in which it is evolving. This includes monitoring the effects of the CARES Act and Coronavirus Relief Act and the prospects for additional fiscal stimulus programs, the acceptance of COVID-19 vaccines and new variants of the virus. The situation remains fluid and management cannot estimate the duration and full impact of the
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COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations.
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 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 8, 2022. 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.
Allowance for Loan Losses
The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to original contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.
Investment Securities Impairment
Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. In any such instance, the Company would consider many factors, including the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and the near-term prospects of the issuer, expected cash flows, and the intent and ability to hold the investment for a period of time
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sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).
The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs an annual analysis on the pricing of investment securities to ensure that the prices represent reasonable estimates of fair value. The procedures include initial and ongoing reviews of pricing methodologies and trends. The Company seeks to ensure prices represent reasonable estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.
Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.
Deferred Tax Asset
The Company uses the asset and liability method of accounting for income taxes as prescribed by GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. If currently available information indicates it is “more likely than not” that the deferred tax asset will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Accounting for deferred income taxes is a critical accounting estimate because the Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. These judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.
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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
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands, except per share data) 2022 2022 2022 2021 2021
Per Common Share Data
Basic Earnings Per Share $ 0.49 $ 0.43 $ 0.40 $ 0.41 $ 0.41
Diluted Earnings Per Share 0.47 0.41 0.39 0.39 0.40
Adjusted Diluted Earnings Per Common Share (1) 0.47 0.41 0.39 0.39 0.41
Book Value Per Share 11.44 11.14 11.12 11.09 10.73
Tangible Book Value Per Share (1) 11.33 11.03 11.01 10.98 10.62
Basic Weighted Average Shares Outstanding 27,520,117 27,839,260 28,123,809 28,004,334 28,047,280
Diluted Weighted Average Shares Outstanding 28,592,854 28,803,842 29,156,085 29,038,785 29,110,547
Shares Outstanding at Period End 27,587,978 27,677,372 28,150,389 28,206,566 28,066,822
Selected Performance Ratios
Return on Average Assets (Annualized) 1.46 % 1.38 % 1.42 % 1.46 % 1.37 %
Pre-Provision Net Revenue Return on Average Assets (Annualized) (1) 2.15 2.19 2.12 2.11 2.09
Return on Average Shareholders' Equity (Annualized) 14.99 13.55 12.98 13.27 13.81
Return on Average Tangible Common Equity (Annualized) (1) 17.03 15.26 14.56 14.78 15.47
Yield on Interest Earning Assets(2) 4.37 4.16 4.13 4.06 4.14
Yield on Total Loans, Gross(2) 4.59 4.45 4.45 4.49 4.65
Cost of Interest Bearing Liabilities 1.30 0.86 0.80 0.86 0.88
Cost of Funds 0.93 0.63 0.59 0.61 0.65
Cost of Total Deposits 0.73 0.46 0.43 0.45 0.48
Net Interest Margin (2) 3.53 3.58 3.60 3.51 3.54
Core Net Interest Margin (1)(2) 3.38 3.34 3.34 3.25 3.22
Efficiency Ratio (1) 39.8 40.2 42.4 40.8 43.9
Adjusted Efficiency Ratio (1) 39.4 40.0 42.0 40.3 41.5
Noninterest Expense to Average Assets (Annualized) 1.42 1.47 1.56 1.45 1.58
Adjusted Noninterest Expense to Average Assets (Annualized) (1) 1.41 1.47 1.55 1.43 1.49
Loan to Deposit Ratio 102.3 100.7 98.4 95.7 95.0
Core Deposits to Total Deposits (3) 83.0 82.9 84.3 85.4 83.3
Tangible Common Equity to Tangible Assets (1) 7.57 7.87 8.60 8.91 8.81
(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.
(2) Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%.
(3) Core deposits are defined as total deposits less brokered deposits and certificates of deposit greater than $250,000.
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Selected Financial Data
The following tables summarize certain selected financial data as of and for the periods indicated:
As of and for the Three Months Ended
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021
Selected Balance Sheet Data
Total Assets $ 4,128,987 $ 3,883,264 $ 3,607,920 $ 3,477,659 $ 3,389,125
Total Loans, Gross 3,380,082 3,225,885 2,987,967 2,819,472 2,712,012
Allowance for Loan Losses 46,491 44,711 41,692 40,020 38,901
Goodwill and Other Intangibles 2,962 3,009 3,057 3,105 3,153
Deposits 3,305,074 3,201,953 3,035,611 2,946,237 2,854,157
Tangible Common Equity (1) 312,531 305,360 309,870 309,653 298,135
Total Shareholders' Equity 382,007 374,883 379,441 379,272 367,803
Average Total Assets - Quarter-to-Date 3,948,201 3,743,575 3,513,798 3,403,270 3,332,301
Average Shareholders' Equity - Quarter-to-Date 384,020 381,448 383,024 374,035 330,604
(1) Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details.
For the Three Months Ended
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021
Selected Income Statement Data
Interest Income $ 42,359 $ 37,782 $ 34,694 $ 33,775 $ 33,517
Interest Expense 8,264 5,252 4,514 4,622 4,844
Net Interest Income 34,095 32,530 30,180 29,153 28,673
Provision for Loan Losses 1,500 3,025 1,675 1,150 1,300
Net Interest Income after Provision for Loan Losses 32,595 29,505 28,505 28,003 27,373
Noninterest Income 1,387 1,650 1,557 1,288 1,410
Noninterest Expense 14,157 13,752 13,508 12,459 13,236
Income Before Income Taxes 19,825 17,403 16,554 16,832 15,547
Provision for Income Taxes 5,312 4,521 4,292 4,318 4,038
Net Income 14,513 12,882 12,262 12,514 11,509
Preferred Stock Dividends (1,013) (1,014) (1,013) (1,171) —
Net Income Available to Common Shareholders $ 13,500 $ 11,868 $ 11,249 $ 11,343 $ 11,509
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Discussion and Analysis of Results of Operations
Net Income
Net income was $14.5 million for the third quarter of 2022, a 26.1% increase compared to net income of $11.5 million for the third quarter of 2021. Earnings per diluted common share for the third quarter of 2022 were $0.47, a 19.4% increase compared to $0.40 per diluted common share for the third quarter of 2021. Net income was $39.7 million for the nine months ended September 30, 2022, a 19.5% increase compared to net income of $33.2 million for the nine months ended September 30, 2021. Net income per diluted common share for the nine months ended September 30, 2022 was $1.27, an 11.1% increase compared to $1.14 per diluted common share for the nine months ended September 30, 2021.
Net Interest Income
The Company’s primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate. Management’s ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings.
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Average Balances and Yields
The following tables present, for the three and nine months ended September 30, 2022 and 2021, 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.
For the Three Months Ended
September 30, 2022 September 30, 2021
Average Interest Yield/ Average Interest Yield/
Balance & Fees Rate Balance & Fees Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments $ 57,613 $ 165 1.13 % $ 187,405 $ 67 0.14 %
Investment Securities:
Taxable Investment Securities 461,255 3,741 3.22 314,367 1,751 2.21
Tax-Exempt Investment Securities (1) 75,801 799 4.18 71,801 737 4.07
Total Investment Securities 537,056 4,540 3.35 386,168 2,488 2.56
Paycheck Protection Program Loans (2) 2,424 96 15.75 76,006 1,753 9.15
Loans (1)(2) 3,263,390 37,724 4.59 2,579,021 29,348 4.51
Total Loans 3,265,814 37,820 4.59 2,655,027 31,101 4.65
Federal Home Loan Bank Stock 11,413 156 5.42 5,701 68 4.65
Total Interest Earning Assets 3,871,896 42,681 4.37 % 3,234,301 33,724 4.14 %
Noninterest Earning Assets 76,305 98,000
Total Assets $ 3,948,201 $ 3,332,301
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits $ 517,658 $ 1,032 0.79 % $ 479,580 $ 562 0.47 %
Savings and Money Market Deposits 999,932 2,494 0.99 801,354 904 0.45
Time Deposits 288,621 847 1.16 318,222 928 1.16
Brokered Deposits 447,034 1,612 1.43 440,167 1,023 0.92
Total Interest Bearing Deposits 2,253,245 5,985 1.05 2,039,323 3,417 0.66
Federal Funds Purchased 106,826 709 2.63 — — —
FHLB Advances 72,343 328 1.80 54,130 213 1.56
Subordinated Debentures 92,503 1,242 5.33 91,337 1,214 5.27
Total Interest Bearing Liabilities 2,524,917 8,264 1.30 % 2,184,790 4,844 0.88 %
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits 991,545 784,148
Other Noninterest Bearing Liabilities 47,719 32,759
Total Noninterest Bearing Liabilities 1,039,264 816,907
Shareholders' Equity 384,020 330,604
Total Liabilities and Shareholders' Equity $ 3,948,201 $ 3,332,301
Net Interest Income / Interest Rate Spread 34,417 3.07 % 28,880 3.26 %
Net Interest Margin (3) 3.53 % 3.54 %
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans (322) (207)
Net Interest Income $ 34,095 $ 28,673
(1) Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.
(2) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3) Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
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For the Nine Months Ended
September 30, 2022 September 30, 2021
Average Interest Yield/ Average Interest Yield/
Balance & Fees Rate Balance & Fees Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments $ 66,301 $ 231 0.47 % $ 127,283 $ 134 0.14 %
Investment Securities:
Taxable Investment Securities 417,462 8,692 2.78 310,078 5,122 2.21
Tax-Exempt Investment Securities (1) 73,900 2,373 4.29 76,564 2,460 4.30
Total Investment Securities 491,362 11,065 3.01 386,642 7,582 2.62
Paycheck Protection Program Loans (2) 9,575 922 12.88 124,466 5,384 5.78
Loans (1)(2) 3,082,924 103,204 4.48 2,402,844 82,433 4.59
Total Loans 3,092,499 104,126 4.50 2,527,310 87,817 4.65
Federal Home Loan Bank Stock 9,593 269 3.75 5,658 200 4.71
Total Interest Earning Assets 3,659,755 115,691 4.23 % 3,046,893 95,733 4.20 %
Noninterest Earning Assets 77,028 70,968
Total Assets $ 3,736,783 $ 3,117,861
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits $ 545,301 $ 2,322 0.57 % $ 422,000 $ 1,504 0.48 %
Savings and Money Market Deposits 934,408 4,597 0.66 763,646 2,853 0.50
Time Deposits 286,059 2,257 1.05 331,664 3,269 1.32
Brokered Deposits 419,352 3,422 1.09 407,680 2,975 0.98
Total Interest Bearing Deposits 2,185,120 12,598 0.77 1,924,990 10,601 0.74
Federal Funds Purchased 85,287 1,128 1.77 3,311 6 0.24
Notes Payable — — — 2,216 61 3.66
FHLB Advances 54,227 646 1.59 56,364 669 1.59
Subordinated Debentures 92,396 3,658 5.29 79,723 3,411 5.72
Total Interest Bearing Liabilities 2,417,030 18,030 1.00 % 2,066,604 14,748 0.95 %
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits 899,456 731,269
Other Noninterest Bearing Liabilities 37,463 23,228
Total Noninterest Bearing Liabilities 936,919 754,497
Shareholders' Equity 382,834 296,760
Total Liabilities and Shareholders' Equity $ 3,736,783 $ 3,117,861
Net Interest Income / Interest Rate Spread 97,661 3.23 % 80,985 3.25 %
Net Interest Margin (3) 3.57 % 3.55 %
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans (856) (629)
Net Interest Income $ 96,805 $ 80,356
(1) Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.
(2) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3) Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the
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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, 2022, compared to the three months ended September 30, 2021 and for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
Three Months Ended September 30, 2022
Compared with
Three Months Ended September 30, 2021
Change Due To: Interest
(dollars in thousands) Volume Rate Variance
Interest Earning Assets:
Cash Investments $ (371) $ 469 $ 98
Investment Securities:
Taxable Investment Securities 1,191 799 1,990
Tax-Exempt Investment Securities 43 19 62
Total Securities 1,234 818 2,052
Loans:
Paycheck Protection Program Loans (2,921) 1,264 (1,657)
Loans 7,912 464 8,376
Total Loans 4,991 1,728 6,719
Federal Home Loan Bank Stock 77 11 88
Total Interest Earning Assets $ 5,931 $ 3,026 $ 8,957
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits $ 76 $ 394 $ 470
Savings and Money Market Deposits 496 1,094 1,590
Time Deposits (86) 5 (81)
Brokered Deposits 24 565 589
Total Deposits 510 2,058 2,568
Federal Funds Purchased 709 — 709
FHLB Advances 82 33 115
Subordinated Debentures 382 (354) 28
Total Interest Bearing Liabilities 1,683 1,737 3,420
Net Interest Income $ 4,248 $ 1,289 $ 5,537
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Nine Months Ended September 30, 2022
Compared with
Nine Months Ended September 30, 2021
Change Due To: Interest
(dollars in thousands) Volume Rate Variance
Interest Earning Assets:
Cash Investments $ (213) $ 310 $ 97
Investment Securities:
Taxable Investment Securities 2,235 1,335 3,570
Tax-Exempt Investment Securities (86) (1) (87)
Total Securities 2,149 1,334 3,483
Loans:
Paycheck Protection Program Loans (11,065) 6,603 (4,462)
Loans 22,672 (1,901) 20,771
Total Loans 11,607 4,702 16,309
Federal Home Loan Bank Stock 110 (41) 69
Total Interest Earning Assets $ 13,653 $ 6,305 $ 19,958
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits $ 525 $ 293 $ 818
Savings and Money Market Deposits 841 903 1,744
Time Deposits (360) (652) (1,012)
Brokered Deposits 95 352 447
Total Deposits 1,101 896 1,997
Federal Funds Purchased 1,084 38 1,122
Notes Payable — (61) (61)
FHLB Advances (25) 2 (23)
Subordinated Debentures 501 (254) 247
Total Interest Bearing Liabilities 2,661 621 3,282
Net Interest Income $ 10,992 $ 5,684 $ 16,676
Comparison of Interest Income, Interest Expense, and Net Interest Margin
Third Quarter of 2022 Compared to Third Quarter of 2021
Net interest income was $34.1 million for the third quarter of 2022, an increase of $5.4 million, or 18.9%, compared to $28.7 million for the third quarter of 2021. The increase in net interest income was primarily due to growth in average interest earning assets and higher yields on investment securities and core loans, offset partially by higher rates paid on deposits and lower PPP fee recognition. The 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 and the reduction of cash balances.
Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2022 was 3.53%, a modest one basis point decline from 3.54% in the third quarter of 2021. 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 2022 was 3.38%, a 16 basis point increase from 3.22% in the third quarter of 2021. The Company remains focused on managing the impact of continued interest rate hikes and the evolving shape of the yield curve during this unique interest rate environment.
As the PPP loan portfolio has almost paid off, the recognition of fees associated with the originations has decreased significantly, which impacts comparability between periods. The Company recognized $90,000 of PPP origination fees during the third quarter of 2022, compared to $1.6 million during the third quarter of 2021. Remaining PPP origination fees to be recognized as of September 30, 2022 were $45,000.
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The following table summarizes PPP loan originations and net origination fees through September 30, 2022:
Originated Outstanding Program Lifetime
Number Principal Number Principal Net Origination Net Origination
(dollars in thousands) of Loans Balance of Loans Balance Fees Generated Fees Earned
Round One PPP Loans 1,200 $ 181,600 1 $ 160 $ 5,706 $ 5,706
Round Two PPP Loans 651 78,386 5 1,032 3,544 3,499
Totals 1,851 $ 259,986 6 $ 1,192 $ 9,250 $ 9,205
Average interest earning assets for the third quarter of 2022 increased $637.6 million, or 19.7%, to $3.87 billion, from $3.23 billion for the third quarter of 2021. 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 and the reduction of cash balances. Average interest bearing liabilities increased $340.1 million, or 15.6%, to $2.52 billion for the third quarter of 2022, from $2.18 billion for the third quarter of 2021. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits and federal funds purchased, offset partially by a decrease in time deposits.
Average interest earning assets produced a tax-equivalent yield of 4.37% for the third quarter of 2022, compared to 4.14% for the third quarter of 2021. The increase in the yield on interest earning assets was primarily due to growth and repricing in the rising interest rate environment, offset partially by the lower recognition of PPP origination fees. The average rate paid on interest bearing liabilities was 1.30% for the third quarter of 2022, compared to 0.88% for the third quarter of 2021 primarily due to higher rates paid on deposits and the increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.
Interest Income. Total interest income, on a tax-equivalent basis, was $42.7 million for the third quarter of 2022, compared to $33.7 million for the third quarter of 2021. The $9.0 million, or 26.6%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio and continued purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees as the PPP loan portfolio has almost fully paid off.
Interest income on loans, on a tax-equivalent basis, was $37.8 million for the third quarter of 2022, compared to $31.1 million for the third quarter of 2021. The $6.7 million, or 21.6%, increase was primarily due to a 23.0% increase in the average balance of loans outstanding from continued organic loan growth.
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, excluding PPP loans, increased to 4.59% in the third quarter of 2022 , which was eight basis points higher than 4.51% in the third quarter of 2021 . While loan fees have maintained a relatively stable contribution to the aggregate loan yield, the current period was impacted by fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.
The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the periods indicated is as follows:
Three Months Ended
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
Interest 4.42 % 4.17 % 4.15 % 4.20 % 4.28 %
Fees 0.17 0.26 0.25 0.21 0.23
Yield on Loans, Excluding PPP Loans 4.59 % 4.43 % 4.40 % 4.41 % 4.51 %
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Interest Expense. Interest expense on interest bearing liabilities increased $3.4 million, or 70.6%, to $8.3 million for the third quarter of 2022, compared to $4.8 million for the third quarter of 2021. The cost of interest bearing liabilities increased 42 basis points from 0.88% in the third quarter of 2021 to 1.30% in the third quarter of 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 was $6.0 million for the third quarter of 2022, an increase of $2.6 million, or 75.1%, from $3.4 million for the third quarter of 2021. The cost of total deposits increased 25 basis points from 0.48% in the third quarter of 2021, to 0.73% in the third quarter of 2022, primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings increased $853,000 to $2.3 million for the third quarter of 2022, compared to $1.4 million for the third quarter of 2021. This increase was primarily due to higher average balances of federal funds purchased and FHLB advances.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Net interest income was $96.8 million for the nine months ended September 30, 2022, an increase of $16.4 million, or 20.5%, compared to $80.4 million for the nine months ended September 30, 2021. The increase in net interest income was primarily due to growth in average interest earning assets, offset partially by lower PPP fee recognition and higher average balances of deposits and federal funds purchased.
Net interest margin (on a fully tax-equivalent basis) for the nine months ended September 30, 2022 was 3.57%, compared to 3.55% for the nine months ended September 30, 2021, an increase of two 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, 2022 was 3.35%, a six basis point increase from 3.29% for the nine months ended September 30, 2021.
Average interest earning assets for the nine months ended September 30, 2022 increased $612.9 million, or 20.1%, to $3.66 billion from $3.05 billion for the nine months ended September 30, 2021. 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 and the reduction of cash balances. Average interest bearing liabilities increased $350.4 million, or 17.0%, to $2.42 billion for the nine months ended September 30, 2022, from $2.07 billion for the nine months ended September 30, 2021. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing, nonmaturity deposits and federal funds purchased, offset partially by a decrease in time deposits.
Average interest earning assets produced a tax-equivalent yield of 4.23% for the nine months ended September 30, 2022, compared to 4.20% for the nine months ended September 30, 2021. The average rate paid on interest bearing liabilities was 1.00% for the nine months ended September 30, 2022, compared to 0.95% for the nine months ended September 30, 2021.
Interest Income. Total interest income on a tax-equivalent basis was $115.7 million for the nine months ended September 30, 2022, compared to $95.7 million for the nine months ended September 30, 2021. The $20.0 million, or 20.8%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees as the PPP loan portfolio has almost fully paid off.
Interest income on the investment securities portfolio, on a fully-tax equivalent basis, increased $3.5 million, or 45.9%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to a $104.7 million, or 27.1%, increase in average balances between the periods.
Interest income on loans, on a fully-tax equivalent basis, for the nine months ended September 30, 2022 was $104.1 million, compared to $87.8 million for the nine months ended September 30, 2021. The $16.3 million, or 18.6%,
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increase was primarily due to a 22.4% increase in the average balance of loans outstanding, which was offset partially by an 11 basis point decline in the average yield on loans, excluding PPP.
Interest Expense. Interest expense on interest bearing liabilities increased $3.3 million, or 22.3%, to $18.0 million for the nine months ended September 30, 2022, compared to $14.7 million for the nine months ended September 30, 2021, primarily due to higher deposit balances and rates paid on deposits and the increased utilization of federal funds purchased in the rising interest rate environment.
Interest expense on deposits increased to $12.6 million for the nine months ended September 30, 2022, compared to $10.6 million for the nine months ended September 30, 2021. The $2.0 million, or 18.8%, increase in interest expense on deposits was primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment as well as an increase in the average balance of interest bearing deposits. The increase in the average balance of interest bearing deposits resulted primarily from increases in interest bearing transaction deposits, savings and money market deposits, and brokered deposits, offset partially by a decline in time deposits.
Interest expense on borrowings increased $1.3 million to $5.4 million for the nine months ended September 30, 2022, compared to $4.1 million for the nine months ended September 30, 2021. This increase was primarily due to an increase in federal funds purchased in the rising interest rate environment.
Provision for Loan Losses
The provision for loan losses was $1.5 million for the third quarter of 2022, an increase of $200,000, compared to the provision for loan losses of $1.3 million for the third quarter of 2021. The provision for loan losses was $6.2 million for the nine months ended September 30, 2022, an increase of $2.2 million compared to the provision for loan losses of $4.0 million for the nine months ended September 30, 2021. The increase in the provision for loan losses was primarily attributable to the robust growth of the loan portfolio. The allowance for loan losses to total loans was 1.38% at September 30, 2022, compared to 1.43% at September 30, 2021.
As an emerging growth company, the Company is not subject to Accounting Standards Update No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” or CECL, until January 1, 2023.
The following table presents a summary of the activity in the allowance for loan losses for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Balance at Beginning of Period $ 44,711 $ 37,591 $ 40,020 $ 34,841
Provision for Loan Losses 1,500 1,300 6,200 4,000
Charge-offs (5) (20) (34) (37)
Recoveries 285 30 305 97
Balance at End of Period $ 46,491 $ 38,901 $ 46,491 $ 38,901
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Noninterest Income
Noninterest income was $1.4 million for the third quarter of 2022, a decrease of $23,000 from $1.4 million for the third quarter of 2021. The decrease was primarily due to decreased letter of credit fees, offset partially by an increase in bank-owned life insurance income and other income. Noninterest income was $4.6 million for the nine months ended September 30, 2022, an increase of $573,000, compared to $4.0 million for the nine months ended September 30, 2021. The increase was primarily due to increased customer service fees, letter of credit fees, bank-owned life insurance income, and swap fees, offset partially by lower gains on sales of securities.
The following table presents the major components of noninterest income for the periods indicated:
Three Months Ended Nine Months Ended
September 30, Increase/ September 30, Increase/
(dollars in thousands) 2022 2021 (Decrease) 2022 2021 (Decrease)
Noninterest Income:
Customer Service Fees $ 313 $ 268 $ 45 $ 892 $ 733 $ 159
Net Gain on Sales of Securities — 48 (48) 52 750 (698)
Letter of Credit Fees 428 577 (149) 1,234 1,135 99
Debit Card Interchange Fees 153 143 10 438 414 24
Swap Fees — — — 557 — 557
Bank-Owned Life Insurance 227 166 61 524 166 358
Other Income 266 208 58 897 823 74
Totals $ 1,387 $ 1,410 $ (23) $ 4,594 $ 4,021 $ 573
Noninterest Expense
Third Quarter of 2022 Compared to Third Quarter of 2021
Noninterest expense was $14.2 million for the third quarter of 2022, an increase of $921,000 from $13.2 million for the third quarter of 2021. The increase was primarily driven by a $1.1 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, offset partially by lower debt prepayment fees.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Noninterest expense was $41.4 million for the nine months ended September 30, 2022, an increase of $5.8 million, or 16.2%, from $35.6 million for the nine months ended September 30, 2021. The increase was primarily driven by a $4.2 million increase in salaries and employee benefits, a $611,000 increase in marketing and advertising expense, a $377,000 increase in professional and consulting fees, and a $691,000 increase in other expenses, offset partially by lower debt prepayment fees.
The Company continues to add key talent across the organization. Full-time equivalent employees increased from 219 at the end of the third quarter of 2021 to 246 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 Company’s efficiency ratio, and its comparability to some peers, is negatively impacted by the amortization of tax credit investments, as well as other non-routine items, within noninterest expense.
The efficiency ratio was 39.8% for the third quarter of 2022, compared to 43.9% for the third quarter of 2021. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial
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measure, was 39.4% for the third quarter of 2022, compared to 41.5% for the third quarter of 2021. The adjusted efficiency ratio for the nine months ended September 30, 2022 and 2021 was 40.4% and 41.3%, respectively. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue making investments in technology and branding as the industry adapts to evolving client behavior.
The following table presents the major components of noninterest expense for the periods indicated:
Three Months Ended Nine Months Ended
September 30, Increase/ September 30, Increase/
(dollars in thousands) 2022 2021 (Decrease) 2022 2021 (Decrease)
Noninterest Expense:
Salaries and Employee Benefits $ 9,449 $ 8,309 $ 1,140 $ 27,120 $ 22,923 $ 4,197
Occupancy and Equipment 1,086 942 144 3,213 2,977 236
FDIC Insurance Assessment 315 355 (40) 1,005 960 45
Data Processing 372 325 47 1,025 916 109
Professional and Consulting Fees 716 708 8 2,181 1,804 377
Information Technology and Telecommunications 650 598 52 1,822 1,609 213
Marketing and Advertising 479 418 61 1,629 1,018 611
Intangible Asset Amortization 48 48 — 143 143 —
Amortization of Tax Credit Investments 114 152 (38) 294 410 (116)
Debt Prepayment Fees — 582 (582) — 582 (582)
Other Expense 928 799 129 2,985 2,294 691
Totals $ 14,157 $ 13,236 $ 921 $ 41,417 $ 35,636 $ 5,781
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 $5.3 million for the third quarter of 2022, compared to $4.0 million for the third quarter of 2021. The effective combined federal and state income tax rate for the third quarter of 2022 was 26.8%, compared to 26.0% for the third quarter of 2021. Income tax expense was $14.1 million for the nine months ended September 30, 2022, compared to $11.6 million for the nine months ended September 30, 2021. The effective combined federal and state income tax rate for the nine months ended September 30, 2022 and 2021 was 26.3% and 25.9%, respectively.
Financial Condition
Assets
Total assets at September 30, 2022 were $4.13 billion, an increase of $651.3 million, or 18.7%, over total assets of $3.48 billion at December 31, 2021, and an increase of $739.9 million, or 21.8%, over total assets of $3.39 billion at September 30, 2021. The growth in both periods was primarily driven by strong organic loan growth and purchases of investment securities, offset partially by a decrease in cash and cash equivalents.
Total gross loans at September 30, 2022 were $3.38 billion, an increase of $560.6 million, or 19.9%, over total gross loans of $2.82 billion at December 31, 2021, and an increase of $668.1 million, or 24.6%, over total gross loans of $2.71 billion at September 30, 2021. The increase in the loan portfolio during the third quarter of 2022 was primarily due to growth in the commercial and multifamily segments, offset partially by a decrease in the construction and land development segment, which was primarily the result of completed construction projects migrating to permanent financing. Gross loans grew $154.2 million during the third quarter of 2022, or 19.0% on an annualized basis. While the Company’s loan growth in the third quarter of 2022 remained strong, the pace began to moderate slightly, compared to
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the first half of 2022 due to active balance sheet management to align loan growth with the funding outlook, sales of participations on larger originations to manage growth, and the impact of the higher interest rate environment on the number of deals that made financial sense.
Investment Securities Portfolio
The investment securities portfolio is used to make various term investments and is intended to provide the Company with adequate liquidity, a source of stable income, and at times, serve as collateral for certain types of deposits. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.
The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, SBA securities, asset-backed 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 $542.0 million at September 30, 2022, compared to $439.4 million at December 31, 2021, an increase of $102.6 million or 23.4%. At September 30, 2022, municipal securities represented 31.4% of the investment securities portfolio, government agency mortgage-backed securities represented 29.6% of the portfolio, SBA securities represented 4.2% of the portfolio, corporate securities represented 19.9% of the portfolio, U.S. treasury securities represented 0.4% of the portfolio, asset-backed securities represented 8.7% of the portfolio, and other mortgage-backed securities represented 5.8% of the portfolio.
The following table presents the amortized cost and fair value of securities available for sale, by type, at September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Cost Value
U.S. Treasury Securities $ 2,374 $ 2,338 $ 756 $ 754
SBA Securities 22,585 22,540 30,474 30,370
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA 54,852 54,127 671 702
Issued by FNMA and FHLMC 26,693 23,464 20,649 20,363
Other Residential Mortgage-Backed Securities 81,747 72,421 83,394 82,271
Commercial Mortgage-Backed Securities 11,126 10,518 10,646 11,138
All Other Commercial MBS 33,555 31,055 10,203 10,063
Total MBS 207,973 191,585 125,563 124,537
Municipal Securities 196,102 170,236 151,665 158,369
Corporate Securities 113,041 108,060 81,925 84,480
Asset-Backed Securities 47,359 47,248 39,867 40,852
Total $ 589,434 $ 542,007 $ 430,250 $ 439,362
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
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residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.
The Company manages concentrations of credit exposure through a risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, internal and external loan review, and stress testing.
Total gross loans increased $560.6 million to $3.38 billion at September 30, 2022, compared to $2.82 billion at December 31, 2021, and increased $668.1 million from $2.71 billion at September 30, 2021. As of September 30, 2022, construction and land development loans increased $54.1 million, multifamily loans increased $320.3 million, and nonowner occupied CRE loans increased $82.1 million, when compared to December 31, 2021. Collectively, the Company’s annualized loan growth for the nine months ended September 30, 2022, excluding PPP loans, was 28.0%.
The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial $ 412,448 12.2 % $ 403,569 12.5 % $ 363,290 12.2 % $ 360,169 12.8 % $ 350,081 12.9 %
Paycheck Protection Program 1,192 — 4,860 0.2 12,309 0.4 26,162 0.9 54,190 2.0
Construction and Land Development 335,557 9.9 359,191 11.1 321,131 10.7 281,474 10.0 257,167 9.5
Real Estate Mortgage:
1 - 4 Family Mortgage 341,102 10.1 334,815 10.4 312,201 10.5 305,317 10.8 290,535 10.7
Multifamily 1,230,509 36.4 1,087,865 33.7 1,012,623 33.9 910,243 32.3 865,172 31.9
CRE Owner Occupied 151,088 4.5 142,214 4.4 117,969 3.9 111,096 4.0 101,834 3.8
CRE Nonowner Occupied 900,691 26.7 886,432 27.5 840,463 28.1 818,569 29.0 786,271 29.0
Total Real Estate Mortgage Loans 2,623,390 77.7 2,451,326 76.0 2,283,256 76.4 2,145,225 76.1 2,043,812 75.4
Consumer and Other 7,495 0.2 6,939 0.2 7,981 0.3 6,442 0.2 6,762 0.2
Total Loans, Gross 3,380,082 100.0 % 3,225,885 100.0 % 2,987,967 100.0 % 2,819,472 100.0 % 2,712,012 100.0 %
Allowance for Loan Losses (46,491) (44,711) (41,692) (40,020) (38,901)
Net Deferred Loan Fees (9,088) (9,536) (9,065) (9,535) (10,199)
Total Loans, Net $ 3,324,503 $ 3,171,638 $ 2,937,210 $ 2,769,917 $ 2,662,912
The Company’s primary focus has been on real estate mortgage lending, which constituted 77.7% of the portfolio as of September 30, 2022. The composition of the portfolio has remained relatively consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.
As of September 30, 2022, investor CRE loans totaled $2.47 billion, consisting of $900.7 million of loans secured by nonowner occupied CRE, $1.23 billion of loans secured by multifamily residential properties and $335.6 million of construction and land development loans. Investor CRE loans represented 73.0% of the total gross loan portfolio and 501.4% of the Bank’s total risk-based capital at September 30, 2022, compared to 483.4% at December 31, 2021.
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The following tables present time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at September 30, 2022 and December 31, 2021:
As of September 30, 2022
Due in One Year More Than One More Than Five After
(dollars in thousands) or Less Year to Five Years Year to Fifteen Years Fifteen Years
Commercial $ 136,722 $ 188,471 $ 84,190 $ 3,065
Paycheck Protection Program — 1,192 — —
Construction and Land Development 122,022 165,567 47,865 103
Real Estate Mortgage:
1 - 4 Family Mortgage 51,415 205,763 83,259 665
Multifamily 87,070 452,491 638,451 52,497
CRE Owner Occupied 5,418 44,112 101,558 —
CRE Nonowner Occupied 121,926 442,063 336,702 —
Total Real Estate Mortgage Loans 265,829 1,144,429 1,159,970 53,162
Consumer and Other 4,290 2,996 — 209
Total Loans, Gross $ 528,863 $ 1,502,655 $ 1,292,025 $ 56,539
Interest Rate Sensitivity:
Fixed Interest Rates $ 260,671 $ 1,141,193 $ 788,065 $ 4,519
Floating or Adjustable Rates 268,192 361,462 503,960 52,020
Total Loans, Gross $ 528,863 $ 1,502,655 $ 1,292,025 $ 56,539
As of December 31, 2021
Due in One Year More Than One More Than Five After
(dollars in thousands) or Less Year to Five Years Year to Fifteen Years Fifteen Years
Commercial $ 143,878 $ 149,541 $ 63,588 $ 3,162
Paycheck Protection Program 898 25,264 — —
Construction and Land Development 88,814 121,357 71,303 —
Real Estate Mortgage:
1 - 4 Family Mortgage 55,794 185,729 63,117 677
Multifamily 78,875 331,447 470,353 29,568
CRE Owner Occupied 4,679 22,385 84,032 —
CRE Nonowner Occupied 146,508 359,735 312,326 —
Total Real Estate Mortgage Loans 285,856 899,296 929,828 30,245
Consumer and Other 3,088 2,645 495 214
Total Loans, Gross $ 522,534 $ 1,198,103 $ 1,065,214 $ 33,621
Interest Rate Sensitivity:
Fixed Interest Rates $ 226,008 $ 919,024 $ 591,560 $ 7,477
Floating or Adjustable Rates 296,526 279,079 473,654 26,144
Total Loans, Gross $ 522,534 $ 1,198,103 $ 1,065,214 $ 33,621
Asset Quality
The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs. Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly
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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, 2022. The Company had no assets classified as doubtful or loss at September 30, 2022.
Risk Category
(dollars in thousands) Watch Substandard Total
Commercial $ 5,439 $ 10,273 $ 15,712
Construction and Land Development — 110 110
Real Estate Mortgage:
1 - 4 Family Mortgage 688 280 968
CRE Owner Occupied — 1,667 1,667
CRE Nonowner Occupied 16,632 18,437 35,069
Total Real Estate Mortgage Loans 17,320 20,384 37,704
Totals $ 22,759 $ 30,767 $ 53,526
The Company has increased oversight and analysis of all segments of the loan portfolio in response to the COVID-19 pandemic and now economic uncertainty. Loans that have potential weaknesses that warranted a watchlist risk rating at September 30, 2022, totaled $22.8 million, compared to $49.3 million at December 31, 2021. Loans that warranted a substandard risk rating at September 30, 2022 totaled $30.8 million, compared to $22.6 million at December 31, 2021. Management continues to actively work with these borrowers and closely monitor substandard credits.
During the COVID-19 pandemic, the Company developed programs for clients who experienced business and personal disruptions by providing interest-only modifications and extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic are not considered TDRs. Modifications under this guidance, which could only be applied to modifications made by January 1, 2022, have been granted on a case-by-case basis based on specific needs and circumstances affecting each borrower. The Company had one modified loan totaling $10.6 million outstanding as of September 30, 2022, representing 0.3% of the loan portfolio, excluding PPP loans, which was down from $35.0 million at December 31, 2021.
The following table presents a rollforward of loan modification activity, by modification type, from December 31, 2021 to September 30, 2022:
(dollars in thousands) Interest-Only Extended Amortization Total
Principal Balance - December 31, 2021 $ 30,249 $ 4,740 $ 34,989
Modification Expired (19,063) (4,694) (23,757)
Net Principal Advances (Payments) (563) (46) (609)
Principal Balance - September 30, 2022 $ 10,623 $ — $ 10,623
The following table presents a summary of active loan modifications, by loan segment and modification type, at September 30, 2022:
Interest-Only Extended Amortization Total
(dollars in thousands) Amount # of Loans Amount # of Loans Amount # of Loans
Real Estate Mortgage:
CRE Nonowner Occupied $ 1 10,623 $ — — 1 10,623
Totals $ 1 10,623 $ - - $ 1 10,623
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Nonperforming Assets
Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled $663,000 at September 30, 2022 and $722,000 at December 31, 2021, a decrease of $59,000. There were no loans 90 days past due and still accruing as of September 30, 2022 or December 31, 2021 and there were no foreclosed assets as of September 30, 2022 or December 31, 2021.
The following table presents a summary of nonperforming assets, by category, at the dates indicated:
September 30, December 31,
(dollars in thousands) 2022 2021
Total Nonaccrual Loans $ 663 $ 722
Total Nonperforming Loans $ 663 $ 722
Plus: Foreclosed Assets — —
Total Nonperforming Assets (1) $ 663 $ 722
Total Restructured Accruing Loans 83 1,304
Total Nonperforming Assets and Restructured Accruing Loans $ 746 $ 2,026
Nonaccrual Loans to Total Loans 0.02 % 0.03 %
Nonperforming Loans to Total Loans 0.02 0.03
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1) 0.02 0.03
(1) Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets. There were no loans greater than 90 days past due still accruing for any period shown.
The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. Gross income that would have been recorded on nonaccrual loans during the three and nine months ended September 30, 2022 was $15,000 and $37,000, respectively.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, rising inflation and the risk of recession, and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of
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borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.
At September 30, 2022, the allowance for loan losses was $46.5 million, an increase of $6.5 million from $40.0 million at December 31, 2021. Net charge-offs (recoveries) totaled ($280,000) during the third quarter of 2022 and ($10,000) during the third quarter of 2021. Net charge-offs (recoveries) totaled ($271,000) for the nine months ended September 30, 2022 and ($60,000) for the nine months ended September 30, 2021. The allowance for loan losses as a percentage of total loans was 1.38% at September 30, 2022, compared to 1.42% at December 31, 2021.
The following table presents a summary of net charge-offs for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Net Charge-offs (Recoveries)
Commercial $ (3) $ (6) $ 6 $ (28)
Real Estate Mortgage:
1 - 4 Family Mortgage (281) (18) (286) (18)
CRE Owner Occupied — — — (32)
Total Real Estate Mortgage Loans (281) (18) (286) (50)
Consumer and Other 4 14 9 18
Total Net Charge-offs (Recoveries) $ (280) $ (10) $ (271) $ (60)
Net Charge-offs to Average Loans
Commercial 0.00 % (0.01) % 0.00 % (0.01) %
Real Estate Mortgage:
1 - 4 Family Mortgage (0.33) (0.02) (0.12) (0.01)
CRE Owner Occupied 0.00 0.00 0.00 (0.05)
Total Real Estate Mortgage Loans (0.04) 0.00 (0.02) 0.00
Consumer and Other 0.22 0.77 0.16 0.32
Total Net Charge-offs (Recoveries) (Annualized) to Average Loans (0.03) % 0.00 % (0.01) % 0.00 %
Gross Loans, End of Period $ 3,380,082 $ 2,712,012 $ 3,380,082 $ 2,712,012
Average Loans 3,265,814 2,655,027 3,092,499 2,527,310
Allowance to Total Gross Loans 1.38 % 1.43 % 1.38 % 1.43 %
Allowance to Total Gross Loans, Excluding PPP Loans 1.38 1.46 1.38 1.46
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The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment as of the dates indicated:
September 30, December 31,
2022 2021
(dollars in thousands) Amount Percent Amount Percent
Commercial $ 6,348 13.7 % $ 6,256 15.6 %
Paycheck Protection Program 1 — 13 —
Construction and Land Development 4,469 9.6 3,757 9.4
Real Estate Mortgage:
1 - 4 Family Mortgage 4,230 9.1 3,757 9.4
Multifamily 16,822 36.2 12,610 31.5
CRE Owner Occupied 2,027 4.4 1,495 3.7
CRE Nonowner Occupied 12,282 26.4 11,335 28.3
Total Real Estate Mortgage Loans 35,361 76.1 29,197 72.9
Consumer and Other 163 0.4 147 0.5
Unallocated 149 0.3 650 1.6
Total Allowance for Loan Losses $ 46,491 100.0 % $ 40,020 100.0 %
Deposits
The principal sources of funds for the Company are deposits, consisting of demand deposits, money market accounts, savings accounts, and certificates of deposit. The following table presents the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:
September 30, 2022 March 31, 2021 March 31, 2021 December 31, 2021 September 30, 2021
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Noninterest Bearing Transaction Deposits $ 961,084 29.1 % $ 961,998 30.0 % $ 835,482 27.5 % $ 875,084 29.7 % $ 846,490 29.7 %
Interest Bearing Transaction Deposits 510,396 15.4 522,151 17.1 598,402 19.7 544,789 18.5 488,785 17.1
Savings and Money Market Deposits 1,077,333 32.6 952,138 29.0 890,926 29.3 863,567 29.3 791,861 27.7
Time Deposits 293,052 8.9 272,424 8.5 286,674 9.5 293,474 10.0 309,824 10.9
Brokered Deposits 463,209 14.0 493,242 15.4 424,127 14.0 369,323 12.5 417,197 14.6
Total Deposits $ 3,305,074 100.0 % $ 3,201,953 100.0 % $ 3,035,611 100.0 % $ 2,946,237 100.0 % $ 2,854,157 100.0 %
Total deposits at September 30, 2022 were $3.31 billion, an increase of $358.8 million, or 12.2%, compared to total deposits of $2.95 billion at December 31, 2021, and an increase of $450.9 million, or 15.8%, over total deposits of $2.85 billion at September 30, 2021. Deposit growth in the third quarter of 2022 was primarily due to an increase in savings and money market deposits and time deposits, offset partially by declines in interest bearing transaction deposits and brokered deposits. In addition to continued growth of core deposits, brokered deposits were also being used as a supplemental funding source, as needed, for the robust loan portfolio growth. Given the rapid rise in interest rates and the prospect for more, management believes deposits could experience fluctuations in future periods.
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, 2022, total brokered deposits were $463.2 million, an increase of $93.9 million, or 25.4%, compared to total brokered deposits of $369.3 million at December 31, 2021.
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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, 2022 and 2021:
As of and for the As of and for the
Three Months Ended Three Months Ended
September 30, 2022 September 30, 2021
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
Noninterest Bearing Transaction Deposits $ 991,545 — % $ 784,148 — %
Interest Bearing Transaction Deposits 517,658 0.79 479,580 0.47
Savings and Money Market Deposits 999,932 0.99 801,354 0.45
Time Deposits < $250,000 209,200 0.95 256,160 1.14
Time Deposits > $250,000 79,421 1.74 62,062 1.22
Brokered Deposits 447,034 1.43 440,167 0.92
Total Deposits $ 3,244,790 0.73 % $ 2,823,471 0.48 %
The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.40 billion and $1.21 billion at September 30, 2022 and December 31, 2021, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
Other Borrowings
At September 30, 2022, other borrowings outstanding consisted of FHLB advances of $71.5 million. The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $426.6 million and $550.8 million at September 30, 2022 and December 31, 2021, respectively.
The Company has an outstanding Loan and Security Agreement and revolving note with a third party correspondent lender, which is secured by 100% of the issued and outstanding stock of the Bank. On September 1, 2022, the Company entered into a second amendment to the agreement which increased the maximum principal amount of the Company’s revolving line of credit from $25.0 million to $40.0 million and extended the maturity date from February 28, 2023 to September 1, 2024. As of September 30, 2022 and December 31, 2021, there were no outstanding balances under the revolving line of credit.
Additionally, the Company has borrowing capacity from other sources. As of September 30, 2022, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately $156.5 million and $126.0 million at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, the Company had no outstanding advances from the discount window.
Subordinated Debentures
For additional information, see “Note 8 – Subordinated Debentures” of the Company’s Consolidated Financial Statements included as part of this report.
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Contractual Obligations
The following table presents supplemental information regarding total contractual obligations at September 30, 2022:
Within One to Three to After
(dollars in thousands) One Year Three Years Five Years Five Years Total
Deposits Without a Stated Maturity $ 2,744,476 $ — $ — $ — $ 2,744,476
Time Deposits 222,981 217,500 103,117 17,000 560,598
FHLB Advances 55,000 12,500 4,000 — 71,500
Subordinated Debentures — — 13,750 80,000 93,750
Commitment to Fund Tax Credit Investments 323 — — — 323
Operating Lease Obligations 513 1,010 670 370 2,563
Totals $ 3,023,293 $ 231,010 $ 121,537 $ 97,370 $ 3,473,210
The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Capital
Total shareholders’ equity at September 30, 2022 was $382.0 million, an increase of $2.7 million compared to total shareholders’ equity of $379.3 million at December 31, 2021, primarily due to net income retained and unrealized gains in the derivatives portfolio, offset partially by an increase in unrealized losses in the securities portfolio and stock repurchases made under the Company’s stock repurchase program.
Stock Repurchase Program. During the three months ended September 30, 2022, the Company repurchased 99,310 shares of its common stock, representing 0.4% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $16.27 per share, for a total of $1.6 million. During the nine months ended September 30, 2022, the Company repurchased 662,765 shares of its common stock, representing 2.4% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $16.26 per share, for a total of $10.8 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares.
On August 17, 2022, the Company’s board of directors approved a new stock repurchase program which authorizes the Company to repurchase up to $25.0 million of its common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded the $40.0 million stock repurchase program, under which approximately $1.6 million remained. The new stock repurchase program will expire on August 16, 2024. At September 30, 2022, no shares had been repurchased under the new plan. The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program based on various factors including valuation, capital levels and other uses of capital.
Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.
Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2022. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action
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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:
Minimum Required For Capital Adequacy To be Well Capitalized
For Capital Adequacy Purposes Plus Capital Under Prompt Corrective
Actual Purposes Conservation Buffer Action Regulations
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
September 30, 2022
Company (Consolidated):
Total Risk-based Capital $ 535,184 13.78 % $ 310,810 8.00 % $ 407,939 10.50 % N/A N/A
Tier 1 Risk-based Capital 395,765 10.19 233,108 6.00 330,236 8.50 N/A N/A
Common Equity Tier 1 Capital 329,251 8.47 174,831 4.50 271,959 7.00 N/A N/A
Tier 1 Leverage Ratio 395,765 9.98 158,647 4.00 158,647 4.00 N/A N/A
Bank:
Total Risk-based Capital $ 491,982 12.67 % $ 310,689 8.00 % $ 407,779 10.50 % $ 388,361 10.00 %
Tier 1 Risk-based Capital 445,131 11.46 233,017 6.00 330,107 8.50 310,689 8.00
Common Equity Tier 1 Capital 445,131 11.46 174,762 4.50 271,853 7.00 252,435 6.50
Tier 1 Leverage Ratio 445,131 11.24 158,453 4.00 158,453 4.00 198,067 5.00
Minimum Required For Capital Adequacy To be Well Capitalized
For Capital Adequacy Purposes Plus Capital Under Prompt Corrective
Actual Purposes Conservation Buffer Action Regulations
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
December 31, 2021
Company (Consolidated):
Total Risk-based Capital $ 499,554 15.55 % $ 256,966 8.00 % $ 337,268 10.50 % N/A N/A
Tier 1 Risk-based Capital 367,161 11.43 192,725 6.00 273,027 8.50 N/A N/A
Common Equity Tier 1 Capital 300,647 9.36 144,543 4.50 224,845 7.00 N/A N/A
Tier 1 Leverage Ratio 367,161 10.82 135,723 4.00 135,723 4.00 N/A N/A
Bank:
Total Risk-based Capital $ 415,848 12.94 % $ 257,005 8.00 % $ 337,319 10.50 % $ 321,256 10.00 %
Tier 1 Risk-based Capital 375,688 11.69 192,754 6.00 273,068 8.50 257,005 8.00
Common Equity Tier 1 Capital 375,688 11.69 144,565 4.50 224,879 7.00 208,816 6.50
Tier 1 Leverage Ratio 375,688 11.09 135,508 4.00 135,508 4.00 169,386 5.00
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, 2022, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these
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commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.
The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
Fixed Variable Fixed Variable
(dollars in thousands)
Unfunded Commitments Under Lines of Credit $ 412,703 $ 425,005 $ 335,842 $ 463,306
Letters of Credit 16,171 106,267 10,521 109,126
Totals $ 428,874 $ 531,272 $ 346,363 $ 572,432
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, 2022, the Company had no borrowings outstanding through the AFX.
The following tables present a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity—On-Balance Sheet September 30, 2022 December 31, 2021
(dollars in thousands)
Cash and Cash Equivalents $ 36,332 $ 130,884
Securities Available for Sale 542,007 439,362
Total Primary Liquidity $ 578,339 $ 570,246
Ratio of Primary Liquidity to Total Deposits 17.5 % 19.4 %
Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity September 30, 2022 December 31, 2021
(dollars in thousands)
Net Secured Borrowing Capacity with the FHLB $ 426,604 $ 550,807
Net Secured Borrowing Capacity with the Federal Reserve Bank 156,534 126,043
Unsecured Borrowing Capacity with Correspondent Lenders 208,000 208,000
Secured Borrowing Capacity with Correspondent Lender 40,000 25,000
Total Secondary Liquidity $ 831,138 $ 909,850
Ratio of Primary and Secondary Liquidity to Total Deposits 42.6 % 50.2 %
During the nine months ended September 30, 2022, primary liquidity increased by $8.1 million due to a $102.6 million increase in securities available for sale, offset partially by a $94.6 million decrease in cash and cash equivalents,
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when compared to December 31, 2021. Secondary liquidity decreased by $78.1 million as of September 30, 2022, when compared to December 31, 2021, due to a $124.2 million decrease in the borrowing capacity with FHLB, offset partially by a $30.5 million increase on the secured credit line with the Federal Reserve Bank and a $15.0 million increase in the secured borrowing capacity with a correspondent lender.
In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At September 30, 2022, core deposits totaled approximately $2.74 billion and represented 83.0% 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, 2022, brokered deposits totaled $463.2 million, consisting of $267.5 million of brokered time deposits and $195.7 million of non-maturity brokered money market and transaction accounts. At December 31, 2021, brokered deposits totaled $369.3 million, consisting of $238.1 million of brokered time deposits and $131.2 million of non-maturity brokered money market and transaction accounts.
The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of September 30, 2022, the Company was in compliance with all established liquidity guidelines in the policy.
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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 .
For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Pre-Provision Net Revenue
Noninterest Income $ 1,387 $ 1,650 $ 1,557 $ 1,288 $ 1,410 $ 4,594 $ 4,021
Less: Gain on sales of Securities — (52) — — (48) (52) (750)
Total Operating Noninterest Income 1,387 1,598 1,557 1,288 1,362 4,542 3,271
Plus: Net Interest Income 34,095 32,530 30,180 29,153 28,673 96,805 80,356
Net Operating Revenue $ 35,482 $ 34,128 $ 31,737 $ 30,441 $ 30,035 $ 101,347 $ 83,627
Noninterest Expense $ 14,157 $ 13,752 $ 13,508 $ 12,459 $ 13,236 $ 41,417 $ 35,636
Less: Amortization of Tax Credit Investments (114) (63) (117) (152) (152) (294) (410)
Less: Debt Prepayment Fees — — — — (582) — (582)
Total Operating Noninterest Expense $ 14,043 $ 13,689 $ 13,391 $ 12,307 $ 12,502 $ 41,123 $ 34,644
Pre-Provision Net Revenue $ 21,439 $ 20,439 $ 18,346 $ 18,134 $ 17,533 $ 60,224 $ 48,983
Plus:
Non-Operating Revenue Adjustments — 52 — — 48 52 750
Less:
Provision for Loan Losses 1,500 3,025 1,675 1,150 1,300 6,200 4,000
Non-Operating Expense Adjustments 114 63 117 152 734 294 992
Provision for Income Taxes 5,312 4,521 4,292 4,318 4,038 14,125 11,568
Net Income $ 14,513 $ 12,882 $ 12,262 $ 12,514 $ 11,509 $ 39,657 $ 33,173
Average Assets $ 3,948,201 $ 3,743,575 $ 3,513,798 $ 3,403,270 $ 3,332,301 $ 3,736,783 $ 3,117,861
Pre-Provision Net Revenue Return on Average Assets 2.15 % 2.19 % 2.12 % 2.11 % 2.09 % 2.15 % 2.10 %
For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Core Net Interest Margin
Net Interest Income (Tax-equivalent Basis) $ 34,417 $ 32,806 $ 30,438 $ 29,388 $ 28,880 $ 97,661 $ 80,985
Less: Loan Fees (1,400) (2,030) (1,743) (1,462) (1,487) (5,173) (3,712)
Less: PPP Interest and Fees (96) (263) (563) (1,057) (1,753) (922) (5,384)
Core Net Interest Income $ 32,921 $ 30,513 $ 28,132 $ 26,869 $ 25,640 $ 91,566 $ 71,889
Average Interest Earning Assets 3,871,896 3,671,748 3,430,774 3,320,603 3,234,301 3,659,755 3,046,893
Less: Average PPP Loans (2,424) (8,335) (18,140) (39,900) (76,006) (9,575) (124,466)
Core Average Interest Earning Assets $ 3,869,472 $ 3,663,413 $ 3,412,634 $ 3,280,703 $ 3,158,295 $ 3,650,180 $ 2,922,427
Core Net Interest Margin 3.38 % 3.34 % 3.34 % 3.25 % 3.22 % 3.35 % 3.29 %
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For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Efficiency Ratio
Noninterest Expense $ 14,157 $ 13,752 $ 13,508 $ 12,459 $ 13,236 $ 41,417 $ 35,636
Less: Amortization of Intangible Assets (48) (47) (48) (48) (48) (143) (143)
Adjusted Noninterest Expense $ 14,109 $ 13,705 $ 13,460 $ 12,411 $ 13,188 $ 41,274 $ 35,493
Net Interest Income 34,095 32,530 30,180 29,153 28,673 96,805 80,356
Noninterest Income 1,387 1,650 1,557 1,288 1,410 4,594 4,021
Less: Gain on Sales of Securities — (52) — — (48) (52) (750)
Adjusted Operating Revenue $ 35,482 $ 34,128 $ 31,737 $ 30,441 $ 30,035 $ 101,347 $ 83,627
Efficiency Ratio 39.8 % 40.2 % 42.4 % 40.8 % 43.9 % 40.7 % 42.4 %
Adjusted Efficiency Ratio
Noninterest Expense $ 14,157 $ 13,752 $ 13,508 $ 12,459 $ 13,236 $ 41,417 $ 35,636
Less: Amortization of Tax Credit Investments (114) (63) (117) (152) (152) (294) (410)
Less: Debt Prepayment Fees — — — — (582) — (582)
Less: Amortization of Intangible Assets (48) (47) (48) (48) (48) (143) (143)
Adjusted Noninterest Expense $ 13,995 $ 13,642 $ 13,343 $ 12,259 $ 12,454 $ 40,980 $ 34,501
Net Interest Income 34,095 32,530 30,180 29,153 28,673 96,805 80,356
Noninterest Income 1,387 1,650 1,557 1,288 1,410 4,594 4,021
Less: Gain on Sales of Securities — (52) — — (48) (52) (750)
Adjusted Operating Revenue $ 35,482 $ 34,128 $ 31,737 $ 30,441 $ 30,035 $ 101,347 $ 83,627
Adjusted Efficiency Ratio 39.4 % 40.0 % 42.0 % 40.3 % 41.5 % 40.4 % 41.3 %
For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Adjusted Noninterest Expense to Average Assets (Annualized)
Noninterest Expense $ 14,157 $ 13,752 $ 13,508 $ 12,459 $ 13,236 $ 41,417 $ 35,636
Less: Amortization of Tax Credit Investments (114) (63) (117) (152) (152) (294) (410)
Less: Debt Prepayment Fees — — — — (582) — (582)
Adjusted Noninterest Expense $ 14,043 $ 13,689 $ 13,391 $ 12,307 $ 12,502 $ 41,123 $ 34,644
Average Assets $ 3,948,201 $ 3,743,575 $ 3,513,798 $ 3,403,270 $ 3,332,301 $ 3,736,783 $ 3,117,861
Adjusted Noninterest Expense to Average Assets (Annualized) 1.41 % 1.47 % 1.55 % 1.43 % 1.49 % 1.47 % 1.49 %
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For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Total Shareholders' Equity $ 382,007 $ 374,883 $ 379,441 $ 379,272 $ 367,803
Less: Preferred Stock (66,514) (66,514) (66,514) (66,514) (66,515)
Total Common Shareholders' Equity 315,493 308,369 312,927 312,758 301,288
Less: Intangible Assets (2,962) (3,009) (3,057) (3,105) (3,153)
Tangible Common Equity $ 312,531 $ 305,360 $ 309,870 $ 309,653 $ 298,135
Total Assets $ 4,128,987 $ 3,883,264 $ 3,607,920 $ 3,477,659 $ 3,389,125
Less: Intangible Assets (2,962) (3,009) (3,057) (3,105) (3,153)
Tangible Assets $ 4,126,025 $ 3,880,255 $ 3,604,863 $ 3,474,554 $ 3,385,972
Tangible Common Equity/Tangible Assets 7.57 % 7.87 % 8.60 % 8.91 % 8.81 %
Tangible Book Value Per Share
Book Value Per Common Share $ 11.44 $ 11.14 $ 11.12 $ 11.09 $ 10.73
Less: Effects of Intangible Assets (0.11) (0.11) (0.11) (0.11) (0.11)
Tangible Book Value Per Common Share $ 11.33 $ 11.03 $ 11.01 $ 10.98 $ 10.62
Return on Average Tangible Common Equity
Net Income Available to Common Shareholders $ 13,500 $ 11,868 $ 11,249 $ 11,343 $ 11,509 $ 36,617 $ 33,173
Average Shareholders' Equity $ 384,020 $ 381,448 $ 383,024 $ 374,035 $ 330,604 $ 382,834 $ 296,760
Less: Average Preferred Stock (66,514) (66,514) (66,514) (66,515) (32,332) (66,514) (10,896)
Average Common Equity 317,506 314,934 316,510 307,520 298,272 316,320 285,864
Less: Effects of Average Intangible Assets (2,989) (3,037) (3,084) (3,132) (3,180) (3,036) (3,227)
Average Tangible Common Equity $ 314,517 $ 311,897 $ 313,426 $ 304,388 $ 295,092 $ 313,284 $ 282,637
Return on Average Tangible Common Equity 17.03 % 15.26 % 14.56 % 14.78 % 15.47 % 15.63 % 15.69 %
For the Three Months Ended For the Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
(dollars in thousands) 2022 2022 2022 2021 2021 2022 2021
Adjusted Diluted Earnings Per Common Share
Net Income Available to Common Shareholders $ 13,500 $ 11,868 $ 11,249 $ 11,343 $ 11,509 $ 36,617 $ 33,173
Add: Debt Prepayment Fees — — — — 582 — 582
Less: Tax Impact — — — — (151) — (151)
Net Income, Excluding Impact of Debt Prepayment Fees $ 13,500 $ 11,868 $ 11,249 $ 11,343 $ 11,940 $ 36,617 $ 33,604
Diluted Weighted Average Shares Outstanding 28,592,854 28,803,842 29,156,085 29,038,785 29,110,547 28,882,701 29,077,850
Adjusted Diluted Earnings Per Common Share $ 0.47 $ 0.41 $ 0.39 $ 0.39 $ 0.41 $ 1.27 $ 1.16
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
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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, 2022 and December 31, 2021, these cash flow hedges had a total notional amount of $250.0 million and $235.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.
Net Interest Income Simulation
The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purposes of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.
Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2022 are presented in the table below. The projections assume an immediate, parallel shift downward of the yield curve of 100 and 200 basis points and immediate, parallel shifts upward of the yield curve of
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100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 300 and 400 basis points does not provide us with meaningful results and thus is not presented.
(dollars in thousands) September 30, 2022 December 31, 2021
Change (basis points) Forecasted Percentage Forecasted Percentage
in Interest Rates Net Interest Change Net Interest Change
(12-Month Projection) Income from Base Income from Base
+400 $ 133,251 (7.88) % $ 116,256 5.75 %
+300 136,485 (5.65) 114,328 4.00
+200 139,442 (3.60) 112,288 2.15
+100 142,158 (1.73) 110,539 0.55
0 144,657 — 109,930 —
−100 149,153 3.11 106,955 (2.71)
−200 148,178 2.43 NM NM
The table above indicates that as of September 30, 2022, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a 7.88% decrease in net interest income. In the event of an immediate 200 basis point decrease in interest rates, the Company would experience a 2.43% 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of September 30, 2022, 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, 2022, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
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 8, 2022.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities
The following table presents stock purchases made during the third quarter of 2022:
Period Total Number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2022 100,388 $ 16.27 99,310 $ 1,627,982
August 1 - 31, 2022 — — — 25,000,000
September 1 - 30, 2022 — — — 25,000,000
Total 100,388 $ 16.27 99,310 $ 25,000,000
(1) The total number of shares repurchased during the periods indicated includes shares repurchased as part of the Company’s stock repurchase program and shares withheld for income tax purposes in connection with vesting of restricted stock. The shares were purchased or otherwise valued at the closing price of the Company’s common stock on the date of purchase and/or withholding.
(2) On August 17, 2022, the Company’s board of directors approved a new stock repurchase program which authorizes the Company to repurchase up to $25.0 million of its common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded the previous $40.0 million stock repurchase program which expired on October 27, 2022, under which approximately $1.6 million remained. The new stock repurchase program will expire on August 16, 2024. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice .
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Number Description
3.1 Second Amended and Restated Articles of Incorporation of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on April 25, 2019)
3.2 Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 on Form S-1/A filed on March 5, 2018)
3.3 Statement of Designation of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on August 17, 2021)
10.1 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, 2022, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
104 The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended September 30, 2022 formatted in inline XBRL and contained in Exhibit 101
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SIGNATURES
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 3, 2022 By: /s/ Jerry J. Baack
Name: Jerry J. Baack
Title: Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Date: November 3, 2022 By: /s/ Joe M. Chybowski
Name: Joe M. Chybowski
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
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