S-1/A 1 a2234585zs-1a.htm S-1/A

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on March 9, 2018.

Registration No. 333-223079


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 2 to

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



BRIDGEWATER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of
incorporation or organization)
  6022
(Primary Standard Industrial
Classification Code Number)
  26-0113412
(I.R.S. Employer
Identification No.)

3800 American Boulevard West, Suite 100
Bloomington, Minnesota 55431
(952) 893-6868

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



Jerry Baack
President and Chief Executive Officer
Bridgewater Bancshares, Inc.
3800 American Boulevard West, Suite 100
Bloomington, Minnesota 55431
(952) 893-6868

(Name, address, including zip code and telephone number, including area code, of agent for service)



Copies to:

Joseph Ceithaml
Barack Ferrazzano
Kirschbaum & Nagelberg LLP
200 West Madison Street
Chicago, Illinois 60606
(312) 984-3100

 

Jennifer Durham King
Vedder Price P.C.
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500

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

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

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

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

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

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

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

Emerging growth company ý

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



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

   


Table of Contents

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

SUBJECT TO COMPLETION, DATED MARCH 9, 2018

PROSPECTUS

6,700,000 Shares

LOGO

Common Stock

        This is the initial public offering of Bridgewater Bancshares, Inc. We are offering 4,374,513 shares of our common stock and the selling shareholders are offering 2,325,487 shares of our common stock. We will not receive any proceeds from the sales of shares by the selling shareholders.

        Prior to this offering, there has been no established public market for our common stock. We anticipate that the public offering price of our common stock will be between $10.50 and $12.50 per share. Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol "BWB."

        Investing in our common stock involves risk. See "Risk Factors" beginning on page 19.

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

       
 
 
  Per Share
  Total
 

Public offering price

  $               $            
 

Underwriting discounts and commissions(1)

  $               $            
 

Proceeds to us, before expenses

  $               $            
 

Proceeds to the selling shareholders, before expenses

  $               $            

 

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

        The underwriters have an option to purchase up to an additional 1,005,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

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

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

        The shares of common stock will be ready for delivery on or about                                    , 2018.

Joint Book-Running Managers

GRAPHIC   GRAPHIC

   

The date of this prospectus is                        , 2018.


Table of Contents

GRAPHIC


Table of Contents


TABLE OF CONTENTS



Prospectus Summary

   
1
 

The Offering

    14  

Selected Historical Consolidated Financial Data

    16  

Risk Factors

    19  

Cautionary Note Regarding Forward-Looking Statements

    48  

Use of Proceeds

    50  

Dividend Policy

    51  

Capitalization

    52  

Dilution

    53  

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

    55  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    57  

Business

    84  

Management

    102  

Executive Compensation

    110  

Principal and Selling Shareholders

    119  

Description of Capital Stock

    124  

Shares Eligible for Future Sale

    129  

Certain Relationships and Related Party Transactions

    131  

Supervision and Regulation

    133  

Material United States Federal Income Tax Considerations for Non-U.S. Holders

    144  

Underwriting

    147  

Legal Matters

    151  

Experts

    151  

Where You Can Find More Information

    151  

Index to Consolidated Financial Statements

    F-1  




About this Prospectus

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

        Unless we state otherwise or the context otherwise requires, references in this prospectus to "we," "our," "us" or "the Company" refer to Bridgewater Bancshares, Inc., a Minnesota corporation, and our consolidated subsidiaries, references to "Bridgewater Bank" or "Bank" refer to our banking subsidiary, Bridgewater Bank, a Minnesota state chartered bank. References to "common stock" refer to the common stock, par value $0.01 per share, of the Company.

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

i


Table of Contents

licensors to these trademarks and other intellectual property. All trademarks appearing in this prospectus are the property of their respective owners.

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


Market and Industry Data

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


Implications of Being an Emerging Growth Company

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

    we may present as few as two years of audited financial statements and two years of related management discussion and analysis of financial condition and results of operations;

    we are exempt from the requirement to obtain an attestation and report from our auditors on management's assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

    we are permitted to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation; and

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

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

ii


Table of Contents

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

iii


Table of Contents

 


PROSPECTUS SUMMARY

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

Our Company

        We are a financial holding company headquartered in Bloomington, Minnesota, a suburb located approximately 10 miles south of downtown Minneapolis and in close proximity to the Minneapolis-St. Paul International Airport. We say that we are "founded by, funded by and focused on entrepreneurs," and this focus underlies everything we do for our clients. Our bank subsidiary, Bridgewater Bank, was established in 2005 as a de novo bank by a group of industry veterans and local business leaders committed to serving the diverse needs of commercial real estate investors, small business entrepreneurs and high-net-worth individuals. Our investors are strong local advocates and are part of an expanding referral network that consistently generates new clients for the Bank.

        Since inception, we have grown significantly and profitably, with a focus on organic growth, driven primarily by commercial real estate lending. Our assets have grown at a compound annual growth rate, or CAGR, of 37.6%, since 2005, surpassing total asset milestones of $500 million in 2013, $1.0 billion in 2016 and $1.5 billion in 2017. This growth made us the fastest growing de novo bank in the Minneapolis-St. Paul-Bloomington metropolitan statistical area, or Twin Cities MSA, over the past two decades. As of June 30, 2017, we were the 8th largest bank headquartered in Minnesota by asset size, and the 10th largest bank in the Twin Cities MSA by deposit market share, based on Federal Deposit Insurance Corporation, or FDIC, data. Following our initial equity capital raise of $10.0 million, we raised $57.3 million in additional equity capital to support our growth, including $42.5 million from affiliates of Castle Creek Capital LLC, EJF Capital LLC, Endeavour Capital Advisors Inc. and GCP Capital Partners, four nationally recognized institutional community bank investors. As of December 31, 2017, we had total assets of approximately $1.6 billion, total gross loans of approximately $1.3 billion, total deposits of approximately $1.3 billion and total shareholders' equity of approximately $137.2 million. We believe our credit quality today is strong, as demonstrated by the low level of nonperforming assets to total assets of 0.11% as of December 31, 2017 and net charge-offs to average loans of 0.00% for the year ended December 31, 2017.

        We believe our company is one of only a few in the banking industry to have achieved substantial growth while maintaining consistently strong earnings. We became profitable in our third month of operations and have achieved monthly profitability since that time. For the year ended December 31, 2017, our return on average assets, or ROA, was 1.16%, and our return on average shareholders' equity, or ROE, was 13.18%. Our operating efficiency, as evidenced by our efficiency ratio of 44.4% for the year ended December 31, 2017, is one of the main drivers of our profitability. Our 2017 profitability was negatively impacted by a large, non-recurring expense associated with Public Law 115-97, or the Tax Cuts and Jobs Act, being signed into law on December 22, 2017. While the Tax Cuts and Jobs Act reduces the federal corporate tax rate from a maximum of 35% to a flat rate of 21%, it correspondingly reduces the future net tax benefits of timing differences between book and taxable income recorded as a net deferred tax asset. Therefore, we revalued our net deferred tax asset and recorded a one-time additional income tax expense of $2.0 million in December of 2017. Net income for the year ended December 31, 2017, before giving effect to the adjustment of our net deferred tax asset, was $18.9 million, which would have resulted in a ROA and ROE of 1.30% and 14.75%, respectively.

1


Table of Contents

        Historically, our profitable growth has been driven by applying our core competencies, including our commercial banking expertise, experienced management team and efficient business model, to capitalize on opportunities in our attractive market area. In 2016, we completed a complementary small bank acquisition, which added approximately $76.1 million in assets, $66.7 million in seasoned core deposits and two branch locations within our market. While small in scale, this targeted transaction demonstrates that we have the ability to execute and integrate an acquisition. In future periods, we intend to continue to execute our existing business strategy, which is focused on organic growth, and pursue opportunistic acquisitions. Our goal is to be one of the highest performing entrepreneurial banks headquartered in the Twin Cities MSA.

Our Growth and Financial Performance

        As a result of our commercial banking focus, simple and efficient business model and attractive market area, we have consistently delivered some of the strongest performance metrics in the community banking industry. We measure our success using two primary categories, growth and earnings. To monitor our performance, we routinely track our results relative to the broader industry as a whole and comparable peer groups using several key metrics. Specifically, the comparative financial performance analyses described in this prospectus measure our results against:

    a Nationwide Industry Group, which we define as all publicly traded bank holding companies with total assets between $1.0 billion and $7.5 billion;(1)

    a High Loan Growth Peer Group, which we define as a group of 9 publicly traded bank holding companies with a five-year gross loans CAGR greater than 15.0%;(2) and

    a High Performing Peer Group, which we define as a group of 12 publicly traded bank holding companies with a five-year average ROA greater than 1.15% and a five-year average efficiency ratio less than 60.0%.(3)

Source: S&P Global Market Intelligence

(1)
Our Nationwide Industry Group consists of the 159 commercial bank holding companies located throughout the United States with total assets between $1.0 billion and $7.5 billion as of December 31, 2017.

(2)
Our High Loan Growth Peer Group consists of: Eagle Bancorp, Inc. (EGBN), HomeStreet, Inc. (HMST), Preferred Bank (PFBC), Guaranty Bancshares, Inc. (GNTY), Bankwell Financial Group, Inc. (BWFG), Southern First Bancshares, Inc. (SFST), Hanmi Financial Corporation (HAFC), Northeast Bancorp (NBN) and Middlefield Banc Corp. (MBCN).

(3)
Our High Performing Peer Group consists of: Eagle Bancorp, Inc. (EGBN), First Financial Bankshares, Inc. (FFIN), Westamerica Bancorporation (WABC), Hanmi Financial Corporation (HAFC), Lakeland Financial Corporation (LKFN), Washington Trust Bancorp, Inc. (WASH), Community Trust Bancorp, Inc. (CTBI), Preferred Bank (PFBC), Stock Yards Bancorp, Inc. (SYBT), German American Bancorp, Inc. (GABC), West Bancorporation, Inc. (WTBA), and Parke Bancorp, Inc. (PKBK).

        Based on industry data, we believe many institutions sacrifice returns on their capital for more aggressive growth, while others forgo growth opportunities to focus on attractive earnings metrics. We believe we have consistently combined the two concepts of growth and earnings to create a high growth, high performing company as illustrated in the tables below.

2


Table of Contents

        Growth.    As shown in the following table, our growth over the past five years has significantly exceeded the growth of the industry and our peer groups.

 
  Five-Year CAGR(1)  
 
  Bridgewater
Bancshares, Inc.
  Nationwide
Industry Group
Median
  High Loan
Growth Peer
Group Median
  High Performing
Peer Group
Median
 

Total Deposits

    26.7 %   10.5 %   16.1 %   8.9 %

Noninterest Bearing Deposits

    43.9     16.3     21.1     12.1  

Gross Loans

    28.7     13.5     17.7     10.5  

Net Income

    30.7     13.7     27.7     9.2  

Tangible Book Value Per Share

    19.2     5.9     7.3     7.8  

Source: S&P Global Market Intelligence

(1)
For the five-year period ended December 31, 2017.

        We believe our focus on and commitment to performing commercial banking at the highest level will continue to drive growth and strong earnings. Our emphasis on gathering core, noninterest bearing deposits to fund our balance sheet growth has helped us deliver strong earnings to fuel additional growth. While we continually review opportunities to increase our noninterest and fee income, we believe our capital is more effectively utilized by continuing to reinvest in our platform to grow tangible book value and enhance shareholder value. We believe the efficiency of our business model has been, and will continue to be, a primary driver of profitability and one of our key competitive strengths.

        Earnings.    As shown in the following table, we have generated attractive financial performance results compared to the industry and our peer groups.

 
  Five-Year Average(1)  
 
  Bridgewater
Bancshares, Inc.
  Nationwide
Industry Group
Median
  High Loan
Growth Peer
Group Median
  High Performing
Peer Group
Median
 

ROA(2)

    1.31 %   0.91 %   0.88 %   1.31 %

ROE(3)

    16.52     8.94     10.46     12.26  

Net Interest Margin(4)

    4.25     3.65     3.87     3.78  

Efficiency Ratio(5)

    43.0     63.1     62.7     49.5  

Noninterest Expense / Average Assets

    1.82     2.70     2.50     2.20  

    Source: S&P Global Market Intelligence

(1)
For the five-year period ended December 31, 2017.

(2)
Net income divided by average assets.

(3)
Net income divided by average shareholders' equity.

(4)
Net interest income divided by average earning assets.

(5)
Efficiency ratio is a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" for additional information.

3


Table of Contents


        We believe these metrics illustrate our ability to achieve high performing earnings, while still maintaining growth and efficiency. Another key contributor to our profitability is the productivity of our employees. As of December 31, 2017, we had $14.2 million of total assets per full-time equivalent employee, or FTE. We believe this productivity has allowed us to invest significantly in technology and operational systems, further enhancing our efficient delivery system and positioning us to capitalize on the opportunity in our market.

Our Market Area

        We operate in the Twin Cities MSA, which had total deposits of $188.7 billion as of June 30, 2017, and ranks as the 11th largest metropolitan statistical area in the United States in total deposits, and the second largest metropolitan statistical area in the Midwest in total deposits, based on FDIC data. This area is commonly known as the "Twin Cities" after its two largest cities, Minneapolis, the city with the largest population in the state, and St. Paul, which is the state capital.

        The Twin Cities MSA is defined by attractive market demographics, including strong household incomes, dense populations, low unemployment and the presence of a diverse group of large and small businesses. As of December 31, 2017, our market ranked first in median household income in the Midwest and fifth in the nation, when compared to the top 20 metropolitan statistical areas by population size in each area, based on data available on S&P Global Market Intelligence. According to the U.S. Bureau of Labor Statistics, the population in the Twin Cities MSA was approximately 3.6 million as of December 31, 2017, making it the third largest metropolitan statistical area in the Midwest and 16th largest metropolitan statistical area in the United States. The low unemployment rate of 2.4% and the significant presence of national and international businesses make the Twin Cities MSA one of the most economically vibrant and diverse markets in the country. As of the end of 2016, the Twin Cities MSA was home to 16 of the 17 Fortune 500 companies headquartered in Minnesota and a number of significant private companies, including one of the country's largest privately owned companies.

        Within our market, we target commercial real estate investors, small business entrepreneurs and high-net-worth individuals living or investing in the Twin Cities MSA. We currently have six offices, including our headquarters in Bloomington. Our branches are strategically located across the Twin Cities MSA in areas densely populated with successful professionals and companies, which we believe provide attractive loan and deposit opportunities. On August 28, 2017, we announced plans to open our seventh office in St. Paul in the summer of 2018 as a natural extension within our existing market. In addition, we are in the process of seeking city approval for a real estate development project next to the location of our existing branch in St. Louis Park, a suburb of Minneapolis, that would eventually become our new corporate headquarters.

        We operate in a competitive market area and compete with other, often much larger, retail and commercial banks and financial institutions. Two large, national banking chains, Wells Fargo and US Bank, together controlled 77.8% of the deposit market share in the Twin Cities MSA as of June 30, 2017, based on FDIC data and as displayed in the table below. By comparison, as of the same date, we

4


Table of Contents

had a deposit market share of approximately 0.7%, which ranked us tenth in the Twin Cities MSA overall and fifth in the Twin Cities MSA among banks headquartered in Minnesota.

Rank
  Institution   State
Headquarters
  Branch
Count
  Total
Deposits
($000)
  Market
Share
(%)
 

1

 

Wells Fargo & Co

  CA   98     76,689,285     40.64  

2

 

U.S. Bancorp

  MN   99     70,184,348     37.19  

3

 

TCF Financial Corp. 

  MN   87     6,163,189     3.27  

4

 

Bremer Financial Corp. 

  MN   25     4,246,178     2.25  

5

 

Bank of Montreal

  N/A   32     3,125,818     1.66  

6

 

Associated Banc-Corp

  WI   24     1,724,183     0.91  

7

 

Old National Bancorp

  IN   17     1,677,373     0.89  

8

 

Klein Financial Inc. 

  MN   19     1,512,396     0.80  

9

 

Bank of America Corp. 

  NC   7     1,435,337     0.76  

10

 

Bridgewater Bancshares, Inc. 

  MN   6     1,223,929     0.65  

 

    Top 10 Institutions

      414     167,982,036     89.02  

        This market has also experienced disruption in recent years due to acquisitions of local institutions by larger regional banks headquartered outside of the market. We seek to attract customers by offering a higher level of professionalism, responsiveness and certainty than our larger competitors and by providing a more tailored array of products and services.

Our Products and Services

        Consistent with our straightforward business model, we offer a full array of simple, quality loan and deposit products primarily for commercial clients. While we provide products and services that compete with those offered by our large, national and regional competitors, we offer responsive support and personalized solutions tailored for each client. We emphasize customer service over price, and we believe we provide distinguishing levels of client service through the experience of our people, the responsiveness and certainty of our credit process and the efficiency with which we conduct our business. We believe that our clients notice a difference when dealing with our bank compared to the much larger institutions in our market. We depend on our reputation in the communities we serve, and we believe we have built a strong referral network that continually provides us with new client relationships. At this time, we do not operate any non-depository business lines such as mortgage, wealth management or trust.

        Lending.    We focus primarily on commercial lending, consisting of loans secured by nonfarm, nonresidential properties, loans secured by multifamily residential properties, construction loans, land development loans and commercial and industrial loans. As of December 31, 2017, commercial loans represented $1.1 billion, or 85.2%, of our total gross loans.

5


Table of Contents

        As illustrated below, our loan portfolio as of December 31, 2017, includes a diversified mix of commercial loans, including multifamily, industrial, office, retail and construction loans.


Loan Portfolio

GRAPHIC


Source: Company data as of December 31, 2017.

        Multifamily loans comprised our largest category of commercial loans at $317.9 million, or 23.6% of our total gross loans, as of December 31, 2017. Our multifamily clients typically invest in smaller, seasoned apartment buildings with an average of 30 units per property and fewer amenities and lower rental rates compared to newer luxury buildings. Commercial real estate loans (excluding multifamily and construction) totaled $480.9 million, or 35.7% of our total gross loans, as of December 31, 2017. Our clients target infill properties located close to the downtown areas of Minneapolis and St. Paul, which we believe have greater barriers to entry. This portfolio segment is also well diversified with loans secured by office buildings, retail strip centers, industrial properties, senior housing, hospitality and mixed-use properties. In addition to loans secured by improved commercial real estate properties, we engage in construction lending, which totaled $130.6 million, or 9.7% of our total gross loans, as of December 31, 2017. In recent years, we have also increased our commercial and industrial lending, which totaled $217.8 million, or 16.2% of our total gross loans, as of December 31, 2017.

        We focus on lending to borrowers located or investing in the Twin Cities MSA across a diverse range of industries and property types. We do not generally lend outside of our market; however, as a relationship lender, we will, from time to time, finance properties located outside of Minnesota for our existing customers in select situations. Loans to finance real estate located outside of Minnesota totaled 5.9% of our total gross loans outstanding as of December 31, 2017.

6


Table of Contents

        Deposits.    We have developed a suite of deposit products targeted at commercial clients, including a variety of remote deposit and cash management products, along with commercial transaction accounts. We believe our commercial loan clients are one of our best sources of deposits, and we seek to develop a deposit relationship with each of our borrowers. We also offer consumers traditional retail deposit products through our branch network, along with online, mobile and direct banking channels. Many of our deposits do not require a branch visit, creating efficiencies across our branch network.

        A breakdown of our deposits as of December 31, 2017 is below.


Deposit Mix

GRAPHIC


Source: Company data as of December 31, 2017.

        As of December 31, 2017, 76.7% of our total deposits were considered to be core deposits, which consist of deposits other than brokered deposits and time deposits in excess of $250,000, compared to 77.2% and 79.4% as of December 31, 2016 and 2015, respectively. While we are committed to growing our core deposits, we use brokered deposits as a strategic component of our funding strategy and interest rate risk management. As we have grown our core deposits, brokered deposits have remained a consistent part of the portfolio at 15.5% of our total deposits as of December 31, 2017, compared to 13.7% and 15.3% as of December 31, 2016 and December 31, 2015, respectively.

7


Table of Contents


Our Competitive Strengths

        As we seek to continue to grow our business, we believe the following strengths provide us with a competitive advantage over other financial institutions operating in our market area:

        Commercial Banking Expertise.    We believe we have earned a reputation as one of the prominent commercial real estate lenders in the Twin Cities MSA due in large part to the strength of our lending team. We have an experienced, professional team of 15 commercial lenders, and we believe our ability to drive quality, commercial loan growth is a result of being able to provide each of our clients with access to a knowledgeable, experienced and dedicated banker. Due to their market knowledge and understanding of our clients' businesses, our lenders are well positioned to provide timely and relevant feedback to our clients. We believe our responsive credit culture separates us from our competitors.

        To fund the growth of our loan portfolio, we continue to focus on growing our deposits. We have continued to build market share by offering a more personalized model than our larger competitors. For the year ended December 31, 2017, our noninterest bearing transaction accounts and savings and money market accounts grew at a rate of 22.9% and 54.7%, respectively, and represented 21.9% and 27.6%, respectively, of total deposits as of December 31, 2017. Many of these clients take advantage of our dedicated and specialized business banking support team and are utilizing multiple electronic products including ACH, wire payments and fraud protection.

        Multifamily Lending Niche.    We specialize in multifamily lending, which typically represents between 20% to 25% of our total loan portfolio. We believe this lending niche lowers the risk profile of our overall loan portfolio due to its lower historical loss rates when compared to other loan types. Over the past 25 years, loans secured by multifamily properties have experienced an average annual loss rate of approximately 0.4%, compared to 0.9% for all loan classes. While this asset class performs well on a national level, multifamily loans in the Twin Cities MSA have outperformed those in the national market. Over the past 15 years, the Twin Cities MSA has experienced lower historic vacancy and loan loss rates compared to the national average.

        Engaged and Experienced Board of Directors and Management Team.    Our board of directors consists of highly accomplished individuals with strong industry and business experience in our market area. We believe that the combined expertise of our board of directors and the significant banking and regulatory experience of our executive management team, which we refer to as our strategic leadership team, help us execute our growth strategy. Also, the interests of our directors and members of our strategic leadership team are aligned with those of our shareholders through common stock ownership. At December 31, 2017, this group beneficially owned approximately 25.1% of our common stock, and we estimate that our directors and executive officers will own approximately 18.9% after the completion of this offering, assuming no shares of common stock are sold to them in this offering.

        Our five-person strategic leadership team has a strong balance of extensive banking and regulatory experience, drive and talent. Our team has over 100 years of combined banking and financial services experience and more than 20 years of regulatory experience. Three members of the team have been leading the Bank since its formation, and with an average age of 45, we believe this group will continue to drive our growth for years to come. As we continue to grow our company, we believe the following members of our strategic leadership team are key to our success:

    Jerry Baack, our Chairman, Chief Executive Officer, President and principal founder, leads our strategic leadership team with over 25 years of commercial banking and regulatory experience, including working at the FDIC for seven years. In 2017, Mr. Baack received the award of Banker of the Year from the NorthWestern Financial Review.

8


Table of Contents

    Jeffrey D. Shellberg, our Executive Vice President and Chief Credit Officer, is a founder of the Company and has worked in the banking industry for over 30 years. Mr. Shellberg began his banking career at and spent over 15 years with the FDIC.

    Mary Jayne Crocker, our Executive Vice President and Chief Operating Officer, has been with us since our inception and has over 20 years in the financial services industry. In 2017, Ms. Crocker was recognized as a "Women in Business" honoree by the Minneapolis/St. Paul Business Journal.

    Joe Chybowski is Senior Vice President and our Chief Financial Officer and has over nine years of industry experience, joining us in 2013 from Performance Trust Capital Partners in Chicago.

    Nick Place is Senior Vice President and our Chief Lending Officer. Joining us in 2007, Mr. Place was promoted to Chief Lending Officer in 2015 and currently oversees our lending function.

        In addition to our strategic leadership team, we have demonstrated an ability to grow our company through the recruitment of high performing individuals. We seek to hire people with significant in-market experience who fit our hard-working, driven culture. We often recruit individuals who are early in their careers who we believe have strong potential, and we have been successful in developing this talent internally. Through our targeted hiring and internal development efforts, we believe we have established a deep bench of talent to continue to grow and manage our business. By combining our more experienced strategic leadership and commercial lending teams with the next generation of leaders, we believe we are preparing our organization for long-term success.

        Efficiency.    We operate an efficient organization based on a simple business model. By focusing on commercial real estate lending, our employee overhead is low due to the increased loan portfolio sizes of our lenders compared to smaller loan portfolio sizes related to other types of commercial lending. Our low efficiency ratio is also driven by the productivity of our lending team, which we believe is supported by our high gross loan-to-deposit ratio of 100.6% as of December 31, 2017. In addition, we serve our clients through a strategically positioned branch model, as well as through online, mobile and direct banking channels, and are not dependent on a traditional branch network with a large number of locations.

9


Table of Contents

        We use our efficiency ratio as one of the key financial metrics to measure profitability. For the year ended December 31, 2017, our efficiency ratio was 44.4%, which is consistent with our efficiency ratio in historical periods, as shown in the table below.


Efficiency Ratio

GRAPHIC


Source: Company data for the years shown.

Efficiency ratio is a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" for additional information.

        Our efficiency ratio during the periods presented above was significantly better than the median efficiency ratios of both the High Loan Growth Peer Group and the High Performing Peer Group. We intend to continue to focus on operational efficiency, which we believe to be important to our profitability and future growth prospects.

        Hard-Working and Entrepreneurial Culture.    We have developed a hard-working and entrepreneurial culture, which we believe is a critical component for attracting and retaining experienced and talented bankers, as well as clients. We have established a set of core values, based on characteristics that we believe describe and inspire our culture—we are unconventional, responsive, dedicated, focused on growth and accurate. To maintain our culture, all potential and current personnel evaluations include an assessment of these attributes.

        We believe that our people are our most valuable asset, and we maintain high delivery standards and reward strong performers and our key personnel with above-market compensation and benefits. We encourage the personal and professional growth of all of our employees by providing them with training, networking, mentorship and volunteering opportunities. The Bank was recognized by the Star Tribune in 2015, 2016 and 2017 as one of the top places to work in Minneapolis / St Paul and recognized as one of the best banks to work for by American Banker in 2017.

        Solid Asset Quality Metrics.    We believe our risk-management focused business model has contributed to strong asset quality during a period of strong loan growth over the past five years. As of December 31, 2017, the level of nonperforming assets as a percentage of our total assets was 0.11%, and our year-to-date net charge-offs were 0.00% of average loans. We diligently monitor and routinely stress test the loan portfolio. We believe our strong credit metrics are the result of our prudent

10


Table of Contents

underwriting standards, experienced lenders and close ties to and knowledge of our clients, as well as the currently strong economic environment in our market.

GRAPHIC


Source: Company data as of the dates shown.

        Proactive Enterprise Risk Management.    We believe that our enterprise risk management practices provide an enhanced level of oversight allowing us to be proactive rather than reactive. Our Bank-level risk committee, comprised of senior representatives from all departments, meets monthly to review the Bank's overall enterprise risk position and to discuss how the Bank's strategic initiatives may impact the Bank's risk profile. Enterprise risk management reports are provided to the full Bank board on a quarterly basis. In 2016, we formed Bridgewater Risk Management, Inc. as a captive insurance subsidiary to provide supplemental insurance coverage to the Company and its subsidiaries for risk management purposes.

        We also have a comprehensive Commercial Real Estate Portfolio Risk Management Policy which implements formal processes and procedures specifically for managing and mitigating risk within our commercial real estate portfolio. This policy addresses regulatory guidelines for institutions, such as the Bank, that exhibit higher levels of commercial real estate concentrations. These processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, a credit risk review function and periodic stress testing to evaluate potential credit risk and the subsequent impact on capital and earnings.

        Strong Branding in an Attractive Market.    We believe we have created a brand that is recognized across the Twin Cities. We are proud to be one of the largest community banks headquartered in the Twin Cities MSA, and we believe that local investors, entrepreneurs, small business owners and professionals prefer to partner with a locally focused and operated bank. To distinguish our Bank from the larger, national institutions in our market, we launched a "Big Banks, No Thanks" marketing campaign, which speaks to our ability to be nimble, provide a personalized banking experience and find simple and creative solutions for our clients. We believe many of our clients and potential clients

11


Table of Contents

appreciate banking with a locally-headquartered institution that is able to couple the sophistication of a larger bank with the responsive and flexible decision-making process and personal connections of a local community bank.

Our Strategies for Growth

        To generate future growth, we intend to continue to execute the strategies that we have used over the past 12 years to achieve some of the strongest performance results in the community banking industry. These strategies include the following:

        Focus on Organic Growth in Our Market Area.    We intend to continue to grow our business organically in a focused and strategic manner by leveraging our competitive strengths, including our commercial banking expertise, experienced management team, efficient business model and strong branding, to capitalize on the opportunities we see in our market area. We believe what is missing from our market is a publicly traded but locally-headquartered community bank that can go beyond what the small banks can provide by offering the same sophisticated products and services as the much larger, out-of-state banks but in a manner that is tailored to the needs of local clients in a more efficient, responsive and flexible way. If this offering is successful, we will be the first bank holding company headquartered in Minnesota to complete an initial public offering since 1995 and the first bank headquartered in the Twin Cities MSA to do so in over 25 years. Although we may in the future identify new markets to enter, we believe that the long-term growth potential of our current market is substantial and that we have the ability to continue to grow organically in our market.

        We plan to increase our core deposits and build market share by expanding our existing client relationships, including lending clients that do not currently have a deposit relationship with us, and by developing new deposit-focused clients. Following the acquisition we completed in 2016, we retained substantially all of the acquired bank's existing clients and intend to continue to expand our footprint in the locations we acquired through marketing and networking efforts focused on generating deposits. Although we are committed to growing our core deposits, we intend to continue to supplement our growth, when necessary, with non-core, wholesale funding sources. On the lending side, we intend to rely on our commercial real estate lending expertise, and we believe we are well-positioned to continue to organically grow our commercial loans based on the favorable market demographics in the Twin Cities MSA.

        We believe that we have built a branch network that allows us to efficiently serve our clients throughout the entire Twin Cities MSA. We believe our existing branch footprint is scalable, and we are adding a new branch in St. Paul to provide us with better access to our clients on the east side of the Twin Cities. As of December 31, 2017, our branches had an average of $223.2 million in deposits per branch. Although we may consider opening new branches in the future, we do not believe that we need to establish a physical location in each community that we serve within our market area.

        Leverage our Entrepreneurial Culture and Talent.    We believe we have built a team of bankers that is hard-working, passionate and energized by the opportunities to continue to grow our business and develop our brand in our market area. With an experienced strategic leadership team and a strong layer of talented middle managers, we believe we are well positioned for future growth. We will continue to aggressively recruit qualified personnel and develop talent internally and believe our culture, which empowers our employees to be entrepreneurs for our business, will allow us to continue to attract and develop the talent we need to drive our growth.

        Consider Opportunistic Acquisitions.    In addition to our organic growth, we may, from time to time, consider additional acquisition opportunities that fit with our organization. Specifically, we will evaluate acquisitions that we believe would be complementary to our existing business. For example, our acquisition in 2016 added primarily consumer loans, as well as core, in-market deposits to our balance

12


Table of Contents

sheet, two areas that we intend to grow. We will continue to seek acquisitions that will bolster our balance sheet in areas where we would like to grow or diversify, without compromising our risk profile or culture. While we will pursue acquisitions that fit, we intend to be disciplined in our approach to pricing and will not generally look to acquire new business lines or sellers located in new markets. In the future, we may evaluate and act upon acquisition opportunities that we believe would produce attractive returns for our shareholders. We believe that there will be further bank consolidation in the Twin Cities MSA and that we are well positioned to be a preferred partner for smaller institutions looking to exit through a sale to an in-market buyer.

Summary Risk Factors

        There are a number of risks that you should consider before investing in our common stock. These risks are discussed more fully in the section titled "Risk Factors," beginning on page 19, and include, but are not limited to, the following:

    credit risks, including risks related to the concentration of commercial real estate loans in our portfolio, our ability to effectively manage our credit risk and the business and economic conditions in our market area;

    liquidity and funding risks, including the risk that we will not be able to meet our obligations and risks relating to our non-core funding sources and high concentration of large depositors;

    operational, strategic and reputational risks, including the risk that we may not be able to implement our growth strategy and risks related to cybersecurity, a loss of members of our senior leadership team and maintaining our reputation;

    legal, accounting and compliance risks, including risks related to the extensive state and federal regulation we operate under and changes in such regulations and accounting policies or standards;

    market and interest rate risks, including risks related to interest rate fluctuations, the monetary policies and regulations of the Board of Governors of the Federal Reserve System, or Federal Reserve, and potential losses in our securities portfolio; and

    offering and investment risks, including illiquidity and volatility in the trading of our common stock, limitations on our ability to pay dividends and the dilution that investors in this offering will experience.

Corporate Information

        Our principal executive office is located at 3800 American Boulevard West, Suite 100, Bloomington, Minnesota 55431, and our telephone number at that address is (952) 893-6868. Our website address is www.bridgewaterbankmn.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

13


Table of Contents

 


THE OFFERING

Common stock offered by us

  4,374,513 shares

Common stock offered by the selling shareholders

 

2,325,487 shares

Underwriters' purchase option

 

1,005,000 shares from us

Total common stock and non-voting common stock outstanding after completion of this offering

 

29,054,374 shares (or 30,059,374 shares if the underwriters exercise in full their option to purchase additional shares from us)

Use of proceeds

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $46.2 million (or approximately $57.1 million if the underwriters exercise in full their option to purchase additional shares from us), based on an assumed public offering price of $11.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus. We intend to use the net proceeds from this offering to support our growth and for general corporate purposes. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders. See "Use of Proceeds."

Voting rights

 

Each holder of our common stock will be entitled to one vote per share on all matters on which our shareholders generally are entitled to vote. See "Description of Capital Stock."

Dividend policy

 

We do not expect to pay cash dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and finance the growth of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, business strategy and other factors that our board of directors deems relevant. See "Dividend Policy."

Nasdaq listing

 

Our common stock has been approved for listing on the Nasdaq Capital Market under the trading symbol "BWB."

14


Table of Contents

Reserved share program

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, existing shareholders, certain employees of the Company and the Bank and persons having relationships with us. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Risk factors

 

Investing in shares of our common stock involves a high degree of risk. See "Risk Factors" beginning on page 19 for a discussion of certain factors you should consider carefully before deciding to invest.

        Unless we specifically state otherwise, all information in this prospectus is as of the date set forth on the front cover of this prospectus and:

    assumes no exercise of the underwriters' option to purchase additional shares of our common stock from us;

    excludes 1,721,000 shares of common stock issuable upon the exercise of stock options, with a weighted average exercise price of $5.68 per share, that were outstanding as of December 31, 2017; and

    excludes 664,000 additional shares of common stock reserved for future issuance under our equity incentive plans as of December 31, 2017.

15


Table of Contents



SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

        The following table sets forth selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of December 31, 2017 and 2016, and the selected income statement data for the years ended December 31, 2017 and 2016, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2015, 2014 and 2013 and the selected income statement data for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements that are not included in this prospectus.

        You should read the following financial data in conjunction with the other information contained in this prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our consolidated financial statements and related notes included elsewhere in this prospectus. The selected historical consolidated financial data presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States and have not been audited. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

 
  As of and for the year ended December 31,  
(dollars in thousands, except
share and per share data)

  2017   2016   2015   2014   2013  

Selected Balance Sheet Data

                               

Total Assets

  $ 1,616,612   $ 1,260,394   $ 928,686   $ 702,175   $ 576,222  

Total Loans, Gross

    1,347,113     1,000,739     799,497     598,547     477,114  

Allowance for Loan Losses

    16,502     12,333     10,052     9,489     8,361  

Securities Available for Sale

    229,491     217,083     100,769     70,022     52,944  

Goodwill and Other Intangibles

    3,869     4,060              

Deposits

   
1,339,350
   
1,023,508
   
761,882
   
601,373
   
522,179
 

Federal Funds Purchased

    23,000     44,000     13,000     10,000      

FHLB Advances and Notes Payable

    85,000     72,000     69,042     34,000     8,522  

Subordinated Debentures

    24,527         1,500     1,500     1,926  

Tangible Common Equity(1)

    133,293     111,306     80,178     53,738     42,363  

Total Shareholders' Equity

    137,162     115,366     80,178     53,738     42,363  

Average Total Assets

    1,451,732     1,098,654     806,625     656,826     503,318  

Average Common Equity

    128,123     102,588     63,981     48,443     34,835  

Selected Income Statement Data

   
 
   
 
   
 
   
 
   
 
 

Interest Income

  $ 66,346   $ 50,632   $ 39,193   $ 33,384   $ 27,069  

Interest Expense

    12,173     8,514     6,498     4,585     4,126  

Net Interest Income

    54,173     42,118     32,695     28,799     22,943  

Provision for Loan Losses

    4,175     3,250     1,500     1,500     3,000  

Net Interest Income after Provision for Loan Losses

    49,998     38,868     31,195     27,299     19,943  

Noninterest Income

    2,536     2,567     1,872     975     (145 )

Noninterest Expense

    25,496     20,168     14,817     11,983     9,275  

Income Before Income Taxes

    27,038     21,267     18,250     16,291     10,523  

Provision for Income Taxes

    10,149     8,052     7,055     6,365     4,070  

Net Income

  $ 16,889   $ 13,215   $ 11,195   $ 9,926   $ 6,453  

16


Table of Contents

 
  As of and for the year ended December 31,  
(dollars in thousands, except
share and per share data)

  2017   2016   2015   2014   2013  

Per Common Share Data(2)

                               

Basic Earnings Per Share

  $ 0.69   $ 0.59   $ 0.65   $ 0.63   $ 0.47  

Diluted Earnings Per Share

    0.68     0.58     0.64     0.60     0.45  

Book Value Per Share

    5.56     4.69     4.05     3.36     2.67  

Tangible Book Value Per Share(1)

    5.40     4.53     4.05     3.36     2.67  

Basic Weighted Average Shares Outstanding

    24,604,464     22,294,837     17,269,448     15,877,647     13,822,480  

Diluted Weighted Average Shares Outstanding

    25,017,690     22,631,741     17,606,253     16,506,363     14,444,636  

Shares Outstanding at Period End

    24,679,861     24,589,861     19,819,349     15,979,325     15,849,096  

Selected Performance Ratios

   
 
   
 
   
 
   
 
   
 
 

Return on Average Assets(3)(6)

    1.16 %   1.20 %   1.39 %   1.51 %   1.28 %

Return on Average Shareholders' Equity(4)(6)

    13.18     12.88     17.50     20.49     18.52  

Return on Average Tangible Common Equity(5)

    13.60     13.23     17.50     20.49     18.52  

Yield on Earning Assets

    4.77     4.78     4.99     5.19     5.48  

Yield on Total Loans, Gross

    5.10     5.20     5.37     5.82     6.10  

Cost of Interest Bearing Liabilities

    1.19     1.09     1.08     0.91     1.02  

Cost of Total Deposits

    0.80     0.76     0.77     0.64     0.78  

Net Interest Spread

    3.58     3.69     3.91     4.28     4.46  

Net Interest Margin(7)

    3.92     4.00     4.18     4.49     4.65  

Efficiency Ratio(1)

    44.4     45.8     43.6     40.6     40.7  

Loan to Deposit Ratio

    100.6     97.8     104.9     99.5     91.4  

Core Deposits to Total Deposits

    76.7     77.2     79.4     83.2     82.3  

Tangible Common Equity to Tangible Assets(1)

    8.26     8.86     8.63     7.65     7.35  

Selected Asset Quality Data

   
 
   
 
   
 
   
 
   
 
 

Loans 30 - 89 Days Past Due

  $ 664   $ 677   $ 1,087   $ 1,225   $ 1,134  

Loans 30 - 89 Days Past Due to Total Loans

    0.05 %   0.07 %   0.14 %   0.20 %   0.24 %

Nonperforming Loans

  $ 1,139   $ 2,323   $ 2,338   $ 923   $ 4,776  

Nonperforming Loans to Total Loans

    0.08 %   0.23 %   0.29 %   0.15 %   1.00 %

Foreclosed Assets

  $ 581   $ 4,183   $ 726   $ 2,944   $ 3,944  

Nonaccrual Loans to Total Loans

    0.08 %   0.23 %   0.29 %   0.15 %   1.00 %

Nonaccrual Loans and Loans Past Due 90 Days and Still Accruing to Total Loans

    0.08     0.23     0.29     0.15     1.00  

Nonperforming Assets(8)

  $ 1,720   $ 6,506   $ 3,064   $ 3,867   $ 8,720  

Nonperforming Assets to Total Assets(8)

    0.11 %   0.52 %   0.33 %   0.55 %   1.51 %

Allowance for Loan Losses to Total Loans

    1.22     1.23     1.26     1.59     1.75  

17


Table of Contents

 
  As of and for the year ended December 31,  
(dollars in thousands, except
share and per share data)

  2017   2016   2015   2014   2013  

Allowance for Loans Losses to Nonperforming Loans

    1,448.81 %   530.91 %   429.94 %   1,028.06 %   175.06 %

Net Loan Charge-Offs to Average Loans

    0.00     0.11     0.14     0.07     0.51  

Capital Ratios (Bank Only)

   
 
   
 
   
 
   
 
   
 
 

Tier 1 Leverage Ratio

    9.83 %   9.24 %   9.49 %   9.70 %   9.02 %

Tier 1 Risk-based Capital Ratio

    11.15     11.38     11.06     11.47     10.79  

Total Risk-based Capital Ratio

    12.37     12.63     12.31     12.73     12.05  

Capital Ratios (Consolidated)

   
 
   
 
   
 
   
 
   
 
 

Tier 1 Leverage Ratio(9)

    8.38 %   9.44 %   8.89 %   7.75 %   7.62 %

Tier 1 Risk-based Capital Ratio(9)

    9.49     11.49     10.34     9.15     9.11  

Total Risk-based Capital Ratio(9)

    12.46     12.74     11.59     10.41     10.37  

Growth Ratios

   
 
   
 
   
 
   
 
   
 
 

Percentage Change in Total Assets

    28.26 %   35.72 %   32.26 %   21.86 %   25.27 %

Percentage Change in Total Loans, Gross

    34.61     25.17     33.57     25.45     25.03  

Percentage Change in Total Deposits

    30.86     34.34     26.69     15.17     27.47  

Percentage Change in Shareholders' Equity

    18.89     43.89     49.20     26.85     48.07  

Percentage Change in Net Income

    27.80     18.04     12.78     53.82     45.60  

Percentage Change in Diluted Earnings Per Share

    15.61     (8.17 )   5.74     34.61     33.79  

Percentage Change in Tangible Book Value Per Share(1)

    19.32     11.89     20.29     25.82     19.27  

(1)
Represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

(2)
Includes voting and non-voting common shares.

(3)
Return on average assets is defined as net income divided by total average assets.

(4)
Return on average shareholders' equity is defined as net income divided by average shareholders' equity.

(5)
Return on average tangible common equity is defined as net income divided by average tangible common equity.

(6)
ROA and ROE in 2017, excluding a one-time additional expense of $2.0 million related to the revaluation of our deferred tax asset, would have been 1.30% and 14.75%, respectively.

(7)
Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on interest earning assets and interest rate paid on interest bearing liabilities, divided by average earning assets.

(8)
Nonperforming assets are defined as non-accrual loans plus loans 90 days past due plus foreclosed assets.

(9)
The Company was not subject to consolidated capital ratio requirements until 2016. The 2015, 2014 and 2013 consolidated capital ratios presented are unaudited.

18


Table of Contents


RISK FACTORS

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


Risks Related to Our Business

Credit Risks

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

        As of December 31, 2017, we had $863.5 million of commercial real estate loans, consisting of $415.0 million of loans secured by nonfarm nonresidential properties, $317.9 million of loans secured by multifamily residential properties and $130.6 million of construction and land development loans. Commercial real estate loans represented 64.1% of our total gross loan portfolio and 502.6% of the Bank's total capital at December 31, 2017. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions. Adverse developments affecting real estate values in our market area could increase the credit risk associated with our loan portfolio. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the full value of the collateral that we anticipated at the time of originating the loan, which could force us to take charge-offs or require us to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        At December 31, 2017, approximately 83.5% of our total gross loan portfolio was comprised of loans with real estate as a primary component of collateral. As a result, adverse developments affecting real estate values in our market area could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect our profitability. Such declines and losses would have a material adverse effect on our business, financial condition, results of operations and growth prospects.

19


Table of Contents

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

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

        Unlike larger banks that are more geographically diversified, we conduct our operations almost exclusively in the Twin Cities MSA. As of December 31, 2017, 87.4% of our total gross loans secured by real estate were secured by properties located in this market. Because of the geographic concentration of our operations in the Twin Cities MSA, if the local economy weakens, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets and lower home sales and commercial activity. These factors could negatively affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosures and reduce the value of the properties securing our loans. Any regional or local economic downturn that affects the Twin Cities MSA may affect us and our profitability more significantly and more adversely than those of our competitors whose operations are less geographically focused.

Our business depends on our ability to manage credit risk.

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

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

        We establish and maintain our allowance for loan losses at a level that management considers adequate to absorb probable loan losses based on an analysis of our loan portfolio and current market environment. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us at such time. The allowance contains provisions for probable losses that have been identified relating to specific

20


Table of Contents

borrowing relationships, as well as probable losses inherent in the loan portfolio that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market area. The actual amount of loan losses is affected by, among other things, changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

        As of December 31, 2017, our allowance for loan losses as a percentage of total gross loans was 1.22% and as a percentage of total nonperforming loans was 1,448.8%. Although management believes that the allowance for loan losses was adequate on such date to absorb probable losses on existing loans that may become uncollectible, losses in excess of the existing allowance will reduce our net income and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. We may also be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management's assessment that the allowance is inadequate or as required by our banking regulators. Our banking regulators periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

        In addition, in June 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting standard that will replace the current approach under accounting principles generally accepted in the United States, or GAAP, for establishing the allowance for loan losses, which generally considers only past events and current conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the collectability of financial assets. The new standard is expected to generally result in increases to allowance levels and will require the application of the revised methodology to existing financial assets through a one-time adjustment to retained earnings upon initial effectiveness. As an emerging growth company, this standard will be effective for us for fiscal years beginning after December 15, 2020 and interim reporting periods beginning after December 15, 2021.

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

        Commercial and industrial loans represented 16.2% of our total gross loan portfolio at December 31, 2017. These loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment of such loans is often more sensitive than other types of loans to the general business climate and economy. Accordingly, a challenging business and economic environment may increase our risk related to commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers' ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers' ability to make repayment from the cash flow of the commercial venture. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses

21


Table of Contents

incurred on a small number of commercial loans could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        Construction and land development loans comprised approximately 9.7% of our total loan portfolio as of December 31, 2017. Such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction and land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

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

        Our growth over the last several years has been partially attributable to our ability to cultivate relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of December 31, 2017, our 10 largest borrowing relationships accounted for approximately 18.9% of our total gross loan portfolio. We have established an informal, internal limit on loans to one borrower, principal or guarantor, but we may, under certain circumstances, consider going above this internal limit in situations where management's understanding of the industry, the borrower's business and the credit quality of the borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, or personal circumstances, such as divorce or death, our nonaccruing loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        We lend to small to midsized businesses, which generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair their ability to repay their loans. In addition, the success of a small and midsized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse

22


Table of Contents

impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition, results of operations and growth prospects may be materially adversely affected.

Our lending limit may restrict our growth and prevent us from effectively implementing our growth strategy.

        We are limited in the total amount we can loan to a single borrower or related borrowers by the amount of our capital. The Bank is a Minnesota chartered bank and therefore all branches, regardless of location, fall under the legal lending limits of the laws, rules and regulations applicable to banks chartered in the state of Minnesota. Minnesota's legal lending limit is a safety and soundness measure intended to prevent one person or a relatively small and economically related group of persons from borrowing an unduly large amount of a bank's funds. It is also intended to safeguard a bank's depositors by diversifying the risk of loan losses among a relatively large number of creditworthy borrowers engaged in various types of businesses. Under Minnesota law, total loans and extensions of credit to a borrower may not generally exceed 20% of the Bank's capital stock and surplus, subject to certain exceptions. Based upon our current capital levels, the amount we may lend to one borrower is significantly less than that of many of our larger competitors, which may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. While we seek to accommodate larger loans by selling participations in those loans to other financial institutions, this strategy may not always be available. If we are unable to compete for loans from our target clients, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Greater seasoning of our loan portfolio could increase risk of credit defaults in the future.

        As a result of our rapid growth, a significant portion of our loan portfolio at any given time is of relatively recent origin. Typically, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time (which varies by loan duration and loan type), a process referred to as "seasoning." As a result, a portfolio of more seasoned loans may more predictably follow a bank's historical default or credit deterioration patterns than a newer portfolio. Because 77.0% of our portfolio has been originated in the past three years, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        As of December 31, 2017, our nonperforming loans (which consist of nonaccrual loans and loans past due 90 days or more) totaled $1.1 million, or 0.08% of our total gross loan portfolio, and our nonperforming assets totaled $1.7 million, or 0.11% of total assets. In addition, we had $664,000 in accruing loans that were 30-89 days delinquent as of December 31, 2017.

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

23


Table of Contents

nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        As of December 31, 2017, we had $581,000 of foreclosed assets, which consisted of properties that we obtained through foreclosure. Properties in this portfolio are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the "fair value," which represents the estimated sales price of the properties on the date initially acquired less estimated selling costs. Generally, in determining "fair value," an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of foreclosed property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.

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

Liquidity and Funding Risks

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

        Liquidity is essential to our business. Liquidity risk is the risk that we will not be able to meet our obligations, including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our client deposits, which can decrease for a variety of reasons, including when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If clients move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek other funding alternatives, including increasing our dependence on wholesale funding sources, in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

        Additionally, we access collateralized public funds, which are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which reduces standby liquidity by restricting the potential liquidity of the pledged collateral. As of December 31, 2017, we had pledged $81.6 million of investment securities for this purpose, which represented approximately 35.6% of our total securities portfolio. If we are unable to pledge sufficient collateral to secure public funding, we may lose access to this source of liquidity that we have historically relied upon. In addition, the availability of and fluctuations in these funds depends on the individual municipality's fiscal policies and cash flow needs.

        Other primary sources of funds consist of cash from operations, investment security maturities and sales and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by brokered deposits, repurchase agreements and the ability to borrow from the Federal Reserve and the Federal Home Loan Bank of Des Moines, or FHLB. We may also borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors

24


Table of Contents

that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. There is also the potential risk that collateral calls with respect to our repurchase agreements could reduce our available liquidity.

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

We depend on non-core funding sources, which causes our cost of our funds to be higher when compared to other financial institutions.

        We use certain non-core, wholesale funding sources, including brokered deposits and FHLB advances. As of December 31, 2017, we had approximately $207.5 million of brokered deposits, which represented approximately 15.5% of our total deposits, $23.0 million of federal funds purchased and $68.0 million of FHLB advances. Unlike traditional deposits from our local clients, there is a higher likelihood that the funds wholesale deposits provide will not remain with us after maturity. For example, depositors who have deposited funds with us through brokers are a less stable source of funding than typical relationship deposit clients. Although we are increasing our efforts to reduce our reliance on non-core funding sources, we may not be able to increase our market share of core-deposit funding in our highly competitive market area. If we are unable to do so, we may be forced to increase the amounts of wholesale funding sources. The cost of these funds can be volatile and may exceed the cost of core deposits in our market area, which could have a material adverse effect on our net interest income. In addition, our maximum borrowing capacity from the FHLB is based on the amount of mortgage and commercial loans we can pledge. As of December 31, 2017, our advances from the FHLB were collateralized by $490.5 million of real estate and commercial loans. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we may lose access to this source of liquidity that we have historically relied upon. If we are unable to access any of these types of funding sources or if our costs related to them increases, our liquidity and ability to support demand for loans could be materially adversely affected.

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

        We have developed relationships with certain individuals and businesses that have resulted in a concentration of large deposits from a small number of clients. As of December 31, 2017, our 10 largest depositor relationships accounted for approximately 25.5% of our total deposits. This high concentration of depositors presents a risk to our liquidity if one or more of them decides to change its relationship with us and to withdraw all or a significant portion of their accounts. If such an event occurs, we may need to seek out alternative sources of funding that may not be on the same terms as the deposits being replaced, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our liquidity is dependent on dividends from the Bank.

        The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow, including cash flow to pay principal and interest on any debt we may incur, comes from dividends the Company receives from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. For example, Minnesota law only permits

25


Table of Contents

banks to pay dividends if a bank has established a surplus fund equal to or more than 20% of the bank's capital stock and if the dividends will not reduce the bank's capital, undivided profits and reserves below specific requirements. As of December 31, 2017, the Bank had the capacity to pay the Company a dividend of up to $6.9 million without the need to obtain prior regulatory approval. Also, the Company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service any debt we may incur, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        We face significant capital and other regulatory requirements as a financial institution. Although management believes that funds raised in this offering will be sufficient to fund operations and growth initiatives for at least the next 12 months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. We do not have any current plans, arrangements or understandings to make any acquisitions.

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

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

        Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries with which we interact on a daily basis or key funding providers such as the FHLB, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition, results of operations and growth prospects.

26


Table of Contents

Operational, Strategic and Reputational Risks

We may not be able to implement our growth strategy or manage costs effectively, resulting in lower earnings or profitability.

        Our strategy focuses on organic growth, including through new branch openings, supplemented by opportunistic acquisitions, but we may not be able to continue to grow and increase our earnings in the future. Our growth requires that we increase our loans and deposits while managing risks by following prudent loan underwriting standards without increasing interest rate risk or compressing our net interest margin, hiring and retaining qualified employees and successfully implementing strategic projects and initiatives. Even if we are able to increase our interest income, our earnings may nonetheless be reduced by increased expenses, such as additional employee compensation or other general and administrative expenses and increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets.

        In addition, we are in the process of seeking city approval for a new real estate development that we expect to be the location of our new corporate headquarters. Due to the inherent difficulty in estimating costs associated with projects of this scale and nature, the costs associated with this project, which are likely to be material, may be higher than we have estimated. In addition, the process of moving our corporate headquarters is inherently complex and not part of our day-to-day operations. As a result, that process could cause significant disruption to our operations and cause the temporary diversion of management resources, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

        Additionally, if our competitors extend credit on terms we find to pose excessive risks, or at interest rates which we believe do not warrant the credit exposure, we may not be able to maintain our lending volume and could experience deteriorating financial performance. Our inability to manage our growth successfully could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        Our success is dependent, to a large degree, upon the continued service and skills of our strategic leadership team, which consists of Jerry Baack, our Chairman of the Board, President and Chief Executive Officer, Jeff Shellberg, our Executive Vice President and Chief Credit Officer, Mary Jayne Crocker, our Executive Vice President and Chief Operating Officer, Joe Chybowski, our Senior Vice President and Chief Financial Officer, and Nick Place, our Senior Vice President and Chief Lending Officer. Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within our market area. The loss of any of the members of our strategic leadership team or any of our other key personnel could have an adverse impact on our business and growth because of their skills, years of industry experience, knowledge of our market area, the difficulty of finding qualified replacement personnel and any difficulties associated with transitioning of responsibilities to any new members of the senior leadership team. As such, we need to continue to attract and retain key personnel and to recruit qualified individuals who fit our culture to succeed existing key personnel to ensure the continued growth and successful operation of our business. Leadership changes may occur from time to time, and we cannot predict whether significant retirements or resignations will occur or whether we will be able to recruit additional qualified personnel.

        Competition for senior executives and skilled personnel in the financial services and banking industry is intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In addition, our ability to effectively compete for senior executives and other

27


Table of Contents

qualified personnel by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and regulations. The loss of the services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable succession plan could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        We rely, in part, on our reputation to attract clients and retain our client relationships. Damage to our reputation could undermine the confidence of our current and potential clients in our ability to provide high-quality financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described in this prospectus, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, client and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. Maintaining our reputation also depends on our ability to successfully prevent third parties from infringing on the "Bridgewater Bank" brand and associated trademarks and our other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

        In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

        Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems maintained by us and certain third party partners, such as our online banking, mobile banking or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to

28


Table of Contents

our systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third party partners' inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile and online banking. The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation.

        It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, our ability to conduct

29


Table of Contents

business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

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

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

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

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

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

        In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

30


Table of Contents

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

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

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

        We plan to grow our business organically but remain open to considering potential bank or other acquisition opportunities that fit within our overall strategy and that we believe make financial and strategic sense. Although we do not have any current plans, arrangements or understandings to make any acquisitions, in the event that we pursue additional acquisitions, we may have difficulty completing them and may not realize the anticipated benefits of any transaction we complete. For example, we may not be successful in realizing anticipated cost savings, and we may not be successful in preventing disruptions in service to existing client relationships of the acquired institution. Our potential acquisition activities could require us to use a substantial amount of cash, other liquid assets or incur additional debt. In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.

        In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

        From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources, although we may not assign the appropriate level of resources or expertise necessary to make these new lines of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. Furthermore, any new line of business, product, product enhancement or service or system conversion could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product

31


Table of Contents

enhancements or services could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We operate in a highly competitive and changing industry and market area and compete with both banks and non-banks.

        We operate in the highly competitive financial services industry and face significant competition for clients from financial institutions located both within and beyond our market area. We compete with national commercial banks, regional banks, private banks, savings banks, credit unions, non-bank financial services companies and other financial institutions operating within or near the areas we serve, many of whom target the same clients we do in the Twin Cities MSA. As client preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. The banking industry is experiencing rapid changes in technology, and, as a result, our future success will depend in part on our ability to address our clients' needs by using technology. Client loyalty can be influenced by a competitor's new products, especially offerings that could provide cost savings or a higher return to the client. Increased lending activity of competing banks has also led to increased competitive pressures on loan rates and terms for high-quality credits. We may not be able to compete successfully with other financial institutions in our markets, particularly with larger financial institutions that have significantly greater resources than us, and we may have to pay higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new employees, resulting in lower net interest margins and reduced profitability. Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking clients may seek alternative banking sources as they develop needs for credit larger than we may be able to accommodate or more expansive product mixes offered by larger institutions.

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

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

Legal, Accounting and Compliance Risks

We are subject to commercial real estate lending guidance issued by the federal banking regulators that impacts our operations and capital requirements.

        The federal banking regulators have issued guidance regarding concentrations in commercial real estate lending directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. As of December 31, 2017, our commercial real estate loans represented 502.6% of the Bank's total capital. As a result, we are

32


Table of Contents

deemed to have a concentration in commercial real estate lending under applicable regulatory guidelines. Accordingly, pursuant to guidance issued by the federal bank regulatory agencies, we are required to have heightened risk management practices in place to account for the heightened degree of risk associated with commercial real estate lending and may be required to maintain capital in excess of regulatory minimums. We cannot guarantee that the risk management practices we have implemented will be effective to prevent losses relating to our commercial real estate portfolio. In addition, increased capital requirements could limit our ability to leverage our capital, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

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

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

        Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include policies related to the allowance for loan losses, investment securities impairment and deferred tax assets. See Note 1 of the Company's Consolidated Financial Statements included as part of this prospectus for further information. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve provided, experience additional impairment in our securities portfolio or record a valuation allowance against our deferred tax assets. Any of these could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

        Our risk management processes, internal controls, disclosure controls and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management attention from our business or subject us to

33


Table of Contents

regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

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

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

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

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

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

        In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation,

34


Table of Contents

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

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

        As of December 31, 2017, we had goodwill of $2.6 million, or 1.9% of our total shareholders' equity. The excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has occurred. In testing for impairment, we conduct a qualitative assessment, and we also estimate the fair value of net assets based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

35


Table of Contents

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

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

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

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

        The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax asset is measured by applying currently-enacted income tax rates to the accounting period during which the tax benefit is expected to be realized. As of December 31, 2017, our net deferred tax asset was $4.7 million.

        On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The act includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, which took effect on January 1, 2018. The reduction in the federal corporate income tax rate resulted in an impairment of our net deferred tax asset based on our revaluation of the future tax benefit of these deferrals using the lower tax rate. We recorded this impairment as an additional tax provision of $2.0 million in the fourth quarter of 2017.

        We also face risk based on recent actions of the U.S. Treasury and the Internal Revenue Service, or IRS. In November 2016, these agencies issued a notice making captive insurance company activities "transactions of interest" due to the potential for tax avoidance or evasion. We have a captive insurance company, which is a wholly-owned subsidiary of the Company that provides insurance coverage to the Company and its subsidiaries for risk management purposes or where insurance may not be available or economically feasible. It is not certain at this point how the notice may impact us or the continued operation of the captive insurance company as a risk management tool, but if the activity is deemed by the IRS to be an abusive tax structure, we may become subject to significant penalties and interest.

36


Table of Contents

        In addition, on February 13, 2018, we formed Bridgewater Investment Management, Inc., a Minnesota corporation and a subsidiary of the Bank, to hold certain municipal securities and to engage in municipal lending activities. Based on current tax regulations and guidance, we believe that municipal securities held by a non-bank subsidiary of a financial institution are eligible to receive favorable federal and state income tax treatment. Like our captive insurance company, there is a risk that the IRS may investigate these types of arrangements and issue new guidance eliminating the tax benefit to such a structure.

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

        The new presidential administration has indicated that it would like to see changes made to certain financial reform regulations, including the Dodd-Frank Act, which has resulted in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. At this time, it is unclear what laws, regulations and policies may change and whether future changes or uncertainty surrounding future changes will adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements.

        In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms, or Basel III, and issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small bank holding companies" (generally bank holding companies with consolidated assets of less than $1.0 billion). Basel III not only increases most of the required minimum regulatory capital ratios, it introduces a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a "well-capitalized" depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. The Basel III capital rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase-in period that generally extends through January 1, 2019 for many of the changes.

        The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs and our ability to make acquisitions and result in a material adverse effect on our business, financial condition, results of operations and growth prospects.

FDIC deposit insurance assessments may continue to materially increase in the future, which would have an adverse effect on earnings.

        As a result of our deposits being insured by the FDIC, the Bank is assessed a quarterly deposit insurance premium. During the financial crisis, failed banks nationwide significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. The FDIC adopted a Deposit

37


Table of Contents

Insurance Fund Restoration Plan, which requires the FDIC's deposit insurance fund to attain a 1.35% reserve ratio by September 30, 2020. As a result of this requirement, the Bank could be required to pay significantly higher premiums or additional special assessments, which would adversely affect its earnings, thereby reducing the availability of funds to pay dividends to us.

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

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

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

        The Community Reinvestment Act of 1977, or CRA, requires the Bank, consistent with safe and sound operations, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. Our failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. In addition, the CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution's compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

38


Table of Contents

restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.

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

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

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

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

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

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

39


Table of Contents

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

Market and Interest Rate Risks

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

        Fluctuations in interest rates may negatively affect our business and may weaken demand for some of our products. Our earnings and cash flows are largely dependent on our net interest income, which is the difference between the interest income that we earn on interest earning assets, such as loans and investment securities, and the interest expense that we pay on interest bearing liabilities, such as deposits and borrowings. Additionally, changes in interest rates also affect our ability to fund our operations with client deposits and the fair value of securities in our investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, can have a significant effect on our net interest income and results of operations.

        Our interest earning assets and interest bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest bearing liabilities. We cannot control or accurately predict changes in market rates of interest.

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

        As of December 31, 2017, we had $292.5 million of noninterest bearing deposit accounts and $1.0 billion of interest bearing deposit accounts. Current interest rates for interest bearing accounts are very low due to current market conditions. However, we do not know what market rates will eventually be, especially as the Federal Reserve increases interest rates in the near term. If we need to offer higher interest rates on these accounts to maintain current clients or attract new clients, our interest expense will increase, perhaps materially. Furthermore, if we fail to offer interest in a sufficient amount to keep these demand deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or risk slowing our future asset growth.

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

        As of December 31, 2017, the fair value of our securities portfolio was approximately $229.5 million, or 14.2% of our total assets. Factors beyond our control can significantly influence the

40


Table of Contents

fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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

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

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


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

An active, liquid trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the public offering price, or at all.

        Prior to this offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.

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

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

    actual or anticipated variations in our quarterly results of operations;

41


Table of Contents

    recommendations or research reports about us or the financial services industry in general published by securities analysts;

    the failure of securities analysts to cover, or continue to cover, us after this offering;

    operating and stock price performance of other companies that investors or analysts deem comparable to us;

    news reports relating to trends, concerns and other issues in the financial services industry;

    perceptions in the marketplace regarding us, our competitors or other financial institutions;

    future sales of our common stock;

    departure of members of our strategic leadership team or other key personnel;

    new technology used, or services offered, by competitors;

    significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

    changes or proposed changes in laws or regulations, or differing interpretations of existing laws and regulations, affecting our business, or enforcement of these laws and regulations;

    litigation and governmental investigations; and

    geopolitical conditions such as acts or threats of terrorism or military conflicts.

        In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, results of operations or growth prospects. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

An investment in our common stock is not an insured deposit.

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

Our ability to pay dividends may be limited, and we do not intend to pay cash dividends on our common stock in the foreseeable future. Consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

        Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. We expect that we will retain all earnings, if any, for operating capital, and we do not expect our board of directors to declare any dividends on our common stock in the foreseeable future. Even if we have earnings in an amount sufficient to pay cash dividends, our board of directors may decide to retain earnings for the purpose of funding growth. We cannot assure you that cash dividends on our common stock will ever be paid. You should not purchase shares of common stock offered hereby if you need or desire dividend income from this investment.

        In addition, we are a financial holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank and financial holding companies should generally pay dividends on capital stock only out of earnings, and

42


Table of Contents

only if prospective earnings retention is consistent with the organization's expected future needs, asset quality and financial condition.

        Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock in the event we decide to declare dividends. Any change in the level of our dividends or the suspension of the payment thereof could have a material adverse effect on the market price of our common stock.

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

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

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

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

        The market price of our common stock could decline as a result of sales of a large number of shares of our common stock available for sale after completion of this offering or from the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate. Upon completion of this offering, we will have a total of 26,230,832 outstanding shares of common stock, assuming the underwriters do not exercise their option to purchase additional shares. Of the outstanding shares, the 6,700,000 shares sold in this offering (or 7,705,000 shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased or held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the certain limitations imposed by the securities laws. The remaining 19,530,832 shares outstanding that are not sold in this offering will be restricted securities as defined under Rule 144 subject to certain restrictions on resale.

        In connection with this offering, we, our directors and executive officers and certain of our shareholders, including each of the selling shareholders, have agreed with the underwriters not to offer, pledge, sell or otherwise dispose of or hedge any shares of our common stock, subject to certain exceptions, for a 180-day period following the date of this prospectus, without the prior consent of the underwriters. The underwriters may, at any time, release us or any of the others from this lock-up agreement and allow us or them to sell shares of our common stock within this 180-day period.

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

43


Table of Contents

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

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

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

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

        We intend to use the net proceeds generated by this offering to support our growth and for other general corporate purposes. Our management has broad discretion over how these proceeds are to be used and could spend the proceeds in ways with which you may not agree. In addition, we may not end up using the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, ROA and ROE.

Investors in this offering will experience immediate and substantial dilution.

        The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in the offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of the offering to be $5.32 per common share, representing the difference between the public offering price of $11.50 per common share (the mid-point of the range set forth on the cover page of this prospectus) and our adjusted net tangible book value of $6.18 per common share as of December 31, 2017, after giving effect to this offering. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment.

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

        For as long as we remain an emerging growth company, as defined in the JOBS Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, being permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the FASB or the SEC, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no longer an emerging growth company. Further, the JOBS Act allows us to

44


Table of Contents

present only two years of audited financial statements and only two years of related management's discussion and analysis of financial condition and results of operations and provide less than five years of selected financial data in this prospectus.

        We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the first fiscal year in which (A) the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) we have been a public reporting company under the Exchange Act for at least twelve calendar months and (C) we have filed at least one annual report on Form 10-K.

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

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

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

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

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

45


Table of Contents

        We have not performed an evaluation of our internal control over financial reporting, as contemplated by Section 404 of Sarbanes-Oxley, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting under the standards of the PCAOB as of any balance sheet date reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting under the standards of PCAOB, material weaknesses may have been identified. In addition, the JOBS Act provides that, so long as we qualify as an emerging growth company, we will be exempt from the provisions of Section 404(b) of Sarbanes-Oxley, which would require that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting under the standards of PCAOB. We may take advantage of this exemption so long as we qualify as an emerging growth company.

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

        We are generally not restricted from issuing additional shares of our common stock, up to the 75,000,000 shares of common stock and 10,000,000 shares of non-voting common stock authorized in our amended and restated articles of incorporation, which in each case could be increased by a vote of the holders of a majority of our shares of common stock. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of non-voting common stock, preferred stock or debt, or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.

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

        Although there are currently no shares of our preferred stock issued and outstanding, our amended and restated articles of incorporation authorize us to issue up to 10,000,000 shares of one or more series of preferred stock. Our board of directors also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

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

        In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us and claims of all of our outstanding shares of preferred stock. As of December 31, 2017, we had $17.0 million of senior indebtedness and $25.0 million of subordinated debentures outstanding. We do not currently have any shares of preferred stock outstanding. As a result, holders of our common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after

46


Table of Contents

all of our obligations to our debt holders have been satisfied and holders of senior equity securities, including preferred shares, if any, have received any payment or distribution due to them.

Certain banking laws and certain provisions of our amended and restated articles of incorporation may have an anti-takeover effect.

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

        There are also provisions in our amended and restated articles of incorporation and amended and restated bylaws that will be adopted prior to the consummation of this offering, such as the classification of our board of directors and limitations on the ability to call a special meeting of our shareholders, that may be used to delay or block a takeover attempt. In addition, our board of directors will be authorized under our amended and restated articles of incorporation to issue shares of preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without shareholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.

Our amended and restated bylaws have an exclusive forum provision, which could limit a shareholder's ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

        Our amended and restated bylaws have an exclusive forum provision providing that, unless we consent in writing to an alternative forum, the state or federal courts in Hennepin County, Minnesota shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee, or agent of the Company to the Company or the Company's shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Minnesota Business Corporation Act, the articles or the bylaws of the Company, or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said courts having personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our bylaws. The exclusive forum provision may limit a shareholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

47


Table of Contents


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

    the concentration of commercial real estate loans in our loan portfolio;

    the overall health of the local and national real estate market;

    our ability to successfully manage credit risk;

    business and economic conditions generally and in the financial services industry, nationally and within our market area;

    our ability to maintain an adequate level of allowance for loan losses;

    our high concentration of large loans to certain borrowers;

    our ability to successfully manage liquidity risk;

    our dependence on non-core funding sources and our cost of funds;

    our ability to raise additional capital to implement our business plan;

    our ability to implement our growth strategy and manage costs effectively;

    the composition of our senior leadership team and our ability to attract and retain key personnel;

    our ability to maintain our reputation;

    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;

    increased competition in the financial services industry;

    regulatory guidance on commercial lending concentrations;

48


Table of Contents

    the effectiveness of our risk management framework;

    the costs and obligations associated with being a public company;

    the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject;

    the extensive regulatory framework that applies to us;

    the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, and their application by our regulators;

    interest rate risks associated with our business;

    fluctuations in the values of the securities held in our securities portfolio;

    governmental monetary and fiscal policies;

    material weaknesses in our internal control over financial reporting; and

    our success at managing the risks involved in the foregoing items.

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

49


Table of Contents


USE OF PROCEEDS

        We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $46.2 million (or approximately $57.1 million if the underwriters exercise in full their option to purchase additional shares from us), based on an assumed public offering price of $11.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus. Each $1.00 increase or decrease in the assumed public offering price of $11.50 per share would increase or decrease the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $4.1 million (or approximately $5.1 million if the underwriters exercise in full their option to purchase additional shares from us). We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.

        We intend to use the net proceeds from this offering to support our growth, including the possibility of making larger loans due to our increased legal lending limit, and for general corporate purposes, which may include, but is not limited to, the repayment or refinancing of debt, maintenance of our required regulatory capital levels and the funding of new branches or potential future acquisition opportunities. We do not currently have any specific plans for the net proceeds and do not have any current plans, arrangements or understandings to make any acquisitions or to establish any new branches, other than our planned branch in St. Paul, Minnesota that we expect to open in the second quarter of 2018, and our real estate development in St. Louis Park, Minnesota, which we expect to begin later in 2018, subject to city approval. Our management will retain broad discretion to allocate the net proceeds of this offering, and the precise amounts and timing of our use of the net proceeds will depend upon market conditions, among other factors. Until we deploy the proceeds of this offering for the uses described above, we expect to hold such proceeds in short-term investments.

50


Table of Contents


DIVIDEND POLICY

General

        We have not historically declared or paid dividends on our common stock and we do not intend to declare or pay dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including:

    our historic and projected financial condition, liquidity and results of operations;

    our capital levels and needs;

    tax considerations;

    any acquisitions or potential acquisitions that we may pursue;

    statutory and regulatory prohibitions and other limitations;

    the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends;

    general economic conditions; and

    other factors deemed relevant by our board of directors.

        We are not obligated to pay dividends on our common stock and are subject to restrictions on paying dividends on our common stock.

Dividend Restrictions

        As a Minnesota corporation, we are subject to certain restrictions on dividends under the Minnesota Business Corporation Act, as amended. Generally, a Minnesota corporation is prohibited from paying a dividend if, after giving effect to the dividend the corporation would not be able to pay its debts as the debts become due in the usual course of business, or the corporation's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

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

        Under the terms of our loan agreement with a third party correspondent lender which we entered into in February of 2016, we cannot declare or pay any cash dividend or make any other distribution in respect to our capital stock without the prior written consent of the lender. In addition, under the terms of our subordinated notes issued in July of 2017, and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes, excluding any dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, any class of our common stock and any declaration of a non-cash dividend in connection with the implementation of a shareholders' rights plan.

51


Table of Contents


CAPITALIZATION

        The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis as of December 31, 2017, on an actual basis and on an as adjusted basis after giving effect to the net proceeds from the sale by us of 4,374,513 shares (assuming the underwriters do not exercise their option to purchase additional shares from us) at an assumed public offering price of $11.50 per share, which is the midpoint of the price range on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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

 
  As of December 31, 2017  
 
  Actual   As Adjusted  
 
  (dollars in thousands, except share data)
 

Long-Term Debt:

             

Notes Payable

  $ 17,000   $ 17,000  

Subordinated Debentures, Net of Issuance Costs

    24,527     24,527  

Total Long-Term Debt

    41,527     41,527  

Shareholders' Equity:

   
 
   
 
 

Common Stock—$0.01 Par Value

             

Common Stock—Authorized 75,000,000; Issued and Outstanding 20,834,001 and 26,230,832 on an actual and adjusted basis, respectively

  $ 208   $ 262  

Non-voting Common Stock—Authorized 10,000,000; Issued and Outstanding 3,845,860 and 2,823,542 on an actual and adjusted basis, respectively

    38     28  

Additional Paid-In Capital

    66,324     112,513  

Retained Earnings

    69,508     69,508  

Accumulated Other Comprehensive Income

    1,084     1,084  

Total Shareholders' Equity

  $ 137,162   $ 183,395  

Total Capitalization

  $ 178,689   $ 224,922  

Capital Ratios:

             

Total Risk-Based Capital Ratio

    12.46 %   15.77 %

Tier 1 Risk-Based Capital Ratio

    9.49     12.81  

Common Equity Tier 1 Capital Ratio

    9.49     12.81  

Leverage Ratio

    8.38     11.30  

Tangible Common Equity to Tangible Assets(1)

    8.26     10.82  

(1)
Tangible Common Equity to Tangible Assets is a non-GAAP financial measure. For more information on this financial measure, including a reconciliation to the most directly comparable financial measure, see "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures."

52


Table of Contents


DILUTION

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

        Our net tangible book value at December 31, 2017 was $133.3 million, or $5.40 per share based on the total number of shares of common stock and non-voting common stock outstanding as of such date. After giving effect to our sale of 4,374,513 shares of common stock in this offering at an assumed public offering price of $11.50 per share, which is the midpoint of the estimated price range on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value at December 31, 2017 would have been approximately $179.5 million, or $6.18 per share. Therefore, under those assumptions this offering would result in an immediate increase of $0.78 in the net tangible book value per share to our existing shareholders, and immediate dilution of $5.32 in the net tangible book value per share to investors purchasing shares of common stock in this offering.

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

Assumed public offering price per share

                       $ 11.50  

Net tangible book value per share at December 31, 2017

  $ 5.40                       

Increase in net tangible book value per share attributable to this offering

    0.78        

As adjusted net tangible book value per share after this offering

          6.18  

Dilution in net tangible book value per share to new investors

                       $ 5.32  

        A $1.00 increase (or decrease) in the assumed public offering price of $11.50 per share, which is the midpoint of the estimated price range on the cover of this prospectus, would increase (or decrease) our net tangible book value by $4.1 million, or $0.14 per share, and the dilution to new investors by $0.86 per share, assuming no change to the number of shares of common stock offered by us as set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters exercise in full their option to purchase additional shares of common stock from us, the as adjusted net tangible book value after giving effect to this offering would be $6.33 per share. This represents an increase in net tangible book value of $0.93 per share to existing shareholders and dilution of $5.17 per share to new investors.

        The following table sets forth information, as of December 31, 2017, regarding the shares of common stock and non-voting common stock issued to, and consideration paid by, the existing holders of shares of common stock and non-voting common stock and the shares of common stock to be issued to, and consideration to be paid by, investors in this offering at an assumed public offering price of $11.50 per share, which is the midpoint of the estimated price range on the cover of this prospectus,

53


Table of Contents

before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 
   
   
  Total consideration    
 
 
  Shares purchased    
 
 
  Amount
(in thousands)
   
  Average price
per share
 
 
  Number   Percent   Percent  

Existing shareholders

    24,679,861     84.9 % $ 67,775     57.4 % $ 2.75  

Investors in this offering

    4,374,513     15.1     50,307     42.6     11.50  

Total

    29,054,374     100.0 % $ 118,082     100.0 % $ 4.06  

        The tables and calculations above exclude:

    1,721,000 shares of common stock issuable upon the exercise of stock options, with a weighted average exercise price of $5.68 per share that were outstanding as of December 31, 2017; and

    664,000 additional shares of common stock reserved for future issuance under our equity incentive plans as of December 31, 2017.

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

54


Table of Contents


GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

        Some of the financial data included in our selected historical consolidated financial data and elsewhere in this prospectus are not measures of financial performance recognized by GAAP. These non-GAAP financial measures are "efficiency ratio," "tangible common equity," "tangible common equity to tangible assets" and "tangible book value per share." We use these non-GAAP financial measures in our analysis of our performance.

    "Efficiency ratio" is defined as noninterest expense less the amortization of intangibles divided by our operating revenue, which is equal to net interest income plus noninterest income excluding gains and losses on sales of securities. In our judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

    "Tangible common equity" is defined as shareholders' equity reduced by goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in shareholders' equity exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing both equity and assets while not increasing our tangible equity or tangible assets.

    "Tangible common equity to tangible assets" is defined as the ratio of tangible common equity, as defined above, divided by total assets reduced by goodwill and other intangible assets. We believe that this measure is important to many investors in the market place who are interested in relative changes from period to period in shareholders' equity to total assets, each exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing both equity and assets while not increasing our tangible equity or tangible assets.

    "Tangible book value per share" is defined as tangible shareholders' equity divided by total common voting and non-voting shares outstanding. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business combination have the effect of increasing book value while not increasing our tangible book value.

        We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial

55


Table of Contents

measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

 
  As of and for the year ended December 31,  
(dollars in thousands, except share data)
  2017   2016   2015   2014   2013  

Efficiency Ratio

                               

Noninterest Expense

  $ 25,496   $ 20,168   $ 14,817   $ 11,983   $ 9,275  

Less: Amortization of Intangible Assets

    (191 )   (104 )            

Adjusted Noninterest Expense

  $ 25,305   $ 20,064   $ 14,817   $ 11,983   $ 9,275  

Net Interest Income

    54,173     42,118     32,695     28,799     22,943  

Noninterest Income

    2,536     2,567     1,872     975     (145 )

Less: (Gain) Loss on Sales of Securities

    250     (830 )   (574 )   (270 )    

Adjusted Operating Revenue

  $ 56,959   $ 43,855   $ 33,993   $ 29,504   $ 22,798  

Efficiency Ratio

    44.4 %   45.8 %   43.6 %   40.6 %   40.7 %

Tangible Common Equity and Tangible Common Equity/Tangible Assets

   
 
   
 
   
 
   
 
   
 
 

Common Equity

  $ 137,162   $ 115,366   $ 80,178   $ 53,738   $ 42,363  

Less: Intangible Assets

    (3,869 )   (4,060 )            

Tangible Common Equity

    133,293   $ 111,306   $ 80,178   $ 53,738   $ 42,363  

Total Assets

    1,616,612     1,260,394     928,686     702,175     576,222  

Less: Intangible Assets

    (3,869 )   (4,060 )            

Tangible Assets

  $ 1,612,743   $ 1,256,334   $ 928,686   $ 702,175   $ 576,222  

Tangible Common Equity/Tangible Assets

    8.26 %   8.86 %   8.63 %   7.65 %   7.35 %

Tangible Book Value Per Share

   
 
   
 
   
 
   
 
   
 
 

Book Value Per Common Share

  $ 5.56   $ 4.69   $ 4.05   $ 3.36   $ 2.67  

Less: Effects of Intangible Assets

    (0.16 )   (0.17 )            

Tangible Book Value Per Common Share

  $ 5.40   $ 4.53   $ 4.05   $ 3.36   $ 2.67  

56


Table of Contents


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

        The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the "Selected Historical Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and elsewhere in this prospectus, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.

Overview

        The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through our Bank, the discussion and analysis relates to activities primarily conducted at the Bank level.

        We are a financial holding company headquartered in Bloomington, Minnesota with two wholly-owned subsidiaries, Bridgewater Bank, which we refer to as the Bank, and Bridgewater Risk Management, Inc., a captive insurance entity. The Bank has six full-service offices located in Bloomington, St. Louis Park, Greenwood, Minneapolis (2), and Orono, Minnesota. Our principal source of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. Our principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. Our principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. In historical periods, we have grown organically and have had an over-arching focus on enhancing shareholder value and building a platform for scalability.

Material Trends and Developments

        Interest Rates.    Net interest income is the largest contributor to our net income and is the difference between the interest and fees earned on interest earning assets and the interest expense incurred in connection with interest bearing liabilities. Net interest income is primarily a function of the average balances and yields of these interest earning assets and interest bearing liabilities. These factors are influenced by internal considerations such as product mix and risk appetite as well as external influences such as economic conditions, competition for loans and deposits and market interest rates.

        The cost of our deposits and short-term wholesale borrowings is primarily based on short-term interest rates, which are largely driven by the Federal Reserve's actions and market competition. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates, which are driven by market competition and market rates often impacted by the Federal Reserve's actions. The level of net interest income is influenced by movements in such interest rates and the pace at which such movements occur.

        We anticipate that interest rates will continue to increase over the historic lows experienced over the past several years. Based on our asset sensitivity as discussed in "Quantitative and Qualitative Disclosures About Market Risk and Liquidity," significant increases in interest rates coupled with a steepening in the yield curve would be expected to benefit our net interest income. Conversely, a flatter yield curve could have an adverse impact on our net interest income. In regards to the market reaction of such rate movements, historical trends in rising rate environments can be used as a potential indicator for the necessity and pace of deposit repricing; however, deposit repricing may be required to occur more quickly and perhaps at greater levels than would have been experienced historically.

57


Table of Contents

        Credit Quality.    We have well established loan policies and underwriting practices that have resulted in very low levels of charge-offs and nonperforming assets. We strive to originate quality loans that will maintain the credit quality of our loan portfolio. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition.

        Competition.    The industry and business in which we operate are highly competitive. We may see increased competition in different areas including interest rates, underwriting standards and product offerings and structure. While we seek to maintain an appropriate return on our investments, we anticipate that we will experience continued pressure on our net interest margins as we operate in this competitive environment.

        Economic Conditions.    Our business and financial performance are affected by economic conditions generally in the United States and more directly in the Twin Cities MSA where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates.

Results of Operations Metrics

        Net Income.    We evaluate our net income based on measures including return on average assets, return on average equity and efficiency ratio.

        Net Interest Income.    Net interest income represents interest income less interest expense. We generate interest income from interest, dividends and fees received on interest earning assets, including loans and investment securities we own. We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits, borrowings and other forms of indebtedness. Net interest income typically is the most significant contributor to our net income. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest spread; and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest earning assets and rates paid on interest bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest earning assets. Because noninterest bearing sources of funds, such as noninterest bearing deposits and shareholders' equity, also fund interest earning assets, net interest margin includes the benefit of these noninterest bearing sources.

        Changes in market interest rates and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders' equity, usually have the largest impact on periodic changes in our net interest spread, net interest margin and net interest income. We measure net interest income before and after the provision for loan losses we maintain.

        Provision for Loan Losses.    The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management's judgement, is appropriate under relevant accounting guidance. The determination of the allowance for loan losses is complex and involves a high degree of judgment and subjectivity.

        Noninterest Income.    Noninterest income consists of, among other things: (i) service charges on deposit accounts; (ii) gains on sales of investment securities; (iii) gains on sales of foreclosed assets; (iv) fees earned on off-balance sheet commitments; (v) debit card interchange fees; and (vi) other noninterest income.

58


Table of Contents

        Our income from service charges on deposit accounts and debit card interchange fees are largely impacted by the volume, growth and type of deposits we hold, which are impacted by prevailing market conditions for our deposit products, market interest rates, our marketing efforts, and other factors.

        Noninterest Expense.    Noninterest expense includes, among other things: (i) salaries and employee benefits; (ii)  occupancy and equipment expense; (iii) data processing fees; (iv) professional fees, such as legal, accounting and consulting; (v) information technology expense; (vi) marketing and advertising expense; (vii) acquisition expenses; (viii) provision for off-balance sheet commitments; (iv) amortization of intangible assets; and (x) other general and administrative expenses.

        Salaries and employee benefits include compensation, employee benefits and tax expenses for our personnel. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses. Data processing fees include expenses paid to our third-party data processing system provider and other data service providers. Professional fees include legal, accounting, consulting and other outsourcing arrangements. Information technology expense includes costs related to maintenance and monitoring of our systems. Marketing and advertising expense includes costs for advertising, promotions and sponsorships. Acquisition expenses include costs associated with the acquisition completed in 2016. Provision for off-balance sheet commitments includes expense charges to fund the reserve for off-balance sheet commitments. Amortization of intangible assets includes the amortization of intangible assets associated with the acquisition completed in 2016. Other general and administrative expenses include expenses associated with FDIC assessments, communications, travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased commensurate with growth over the past few years as we have grown organically and as we have built out and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven banking operation with significant capacity for growth.

Financial Condition

        The primary factors we use to evaluate and manage our financial condition include asset quality, capital and liquidity.

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

        Capital.    Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. During the first quarter of 2015, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity Tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III established a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. Our capital ratios at December 31, 2017 exceeded all of the current well capitalized regulatory requirements.

        We manage capital based upon factors that include: (i) the level and quality of capital and our overall financial condition; (ii) the trend and volume of problem assets; (iii) the adequacy of discounts and reserves; (iv) the level and quality of earnings; (v) the risk exposures in our balance sheet; (vi) the levels of Tier 1 and total capital; (vii) the Tier 1 risk-based capital ratio, the total risk-based capital ratio, the Tier 1 leverage ratio, and the common equity Tier 1 capital ratio; and (viii) other factors.

59


Table of Contents

        Liquidity.    We manage liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

Critical Accounting Policies and Estimates

        Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to our consolidated financial statements included as a part of this prospectus. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our 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 our future financial condition and results of operations.

    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 Bank 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 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, we 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, we 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 our intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).

60


Table of Contents

        The fair values of investment securities are generally determined by various pricing models. We evaluate the methodologies used to develop the resulting fair values. We perform a semi-annual analysis on the pricing of investment securities to ensure that the prices represent a reasonable estimate of the fair value. Our procedures include initial and ongoing review of pricing methodologies and trends. We seek to ensure prices represent a reasonable estimate of fair value through the use of broker quotes, current sales transactions from our 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 we determine there is a more appropriate fair value, the price is adjusted accordingly.

    Deferred Tax Asset

        We use 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 bases. 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 we exercise 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 us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.

Discussion and Analysis of Results of Operations

    Average Balances and Yields

        The following table shows, for the years ended December 31, 2017, 2016 and 2015, the average balances of each principal category of our 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

61


Table of Contents

loan origination costs accounted for as yield adjustments. This table is presented on a tax-equivalent basis, if applicable.

 
  December 31, 2017   December 31, 2016   December 31, 2015  
(dollars in thousands)
  Average
Balance
  Interest &
Fees
  Yield/
Rate
  Average
Balance
  Interest &
Fees
  Yield/
Rate
  Average
Balance
  Interest &
Fees
  Yield/
Rate
 

Interest Earning Assets:

                                                       

Cash Investments

  $ 22,244     225     1.01 % $ 32,186   $ 267     0.83 % $ 34,325   $ 263     0.77 %

Investment Securities:

                                                       

Taxable Investment Securities

    102,115     1,894     1.85     68,722     1,041     1.51     25,179     455     1.81  

Tax-Exempt Investment Securities(1)

    130,289     6,289     4.83     87,226     4,012     4.60     57,166     2,608     4.56  

Total Securities

    232,404     8,183     3.52     155,948     5,053     3.24     82,345     3,063     3.72  

Loans(2)

    1,177,491     60,023     5.10     896,915     46,622     5.20     684,498     36,726     5.37  

Federal Home Loan Bank Stock

    4,288     115     2.68     3,583     94     2.62     2,825     54     1.91  

Total Interest Earning Assets

    1,436,427     68,546     4.77     1,088,632     52,036     4.78     803,993     40,106     4.99  

Noninterest Earning Assets

    15,305                 10,022                 2,632              

Total Assets

  $ 1,451,732               $ 1,098,654               $ 806,625              

Interest Bearing Liabilities:

                                                       

Interest Bearing Transaction Deposits

    161,454     389     0.24 %   133,130     401     0.30 %   120,724     462     0.38 %

Savings and Money Market Deposits

    284,641     2,218     0.78     199,525     1,411     0.71     110,668     703     0.64  

Time Deposits

    286,840     4,360     1.52     236,641     3,496     1.48     198,330     2,696     1.36  

Brokered Deposits

    185,144     2,752     1.49     125,414     1,647     1.31     105,210     1,303     1.24  

Federal Funds Purchased

    15,247     169     1.11     8,852     56     0.63     26,114     82     0.31  

Notes Payable

    17,750     656     3.70     19,275     718     3.73     16,431     781     4.75  

FHLB Advances

    56,458     880     1.56     54,599     769     1.41     23,699     366     1.54  

Subordinated Debentures

    12,253     749     6.11     229     16     7.00     1,500     105     7.00  

Total Interest Bearing Liabilities

    1,019,787     12,173     1.19 %   777,665     8,514     1.09 %   602,676     6,498     1.08 %

Noninterest Bearing Liabilities:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Noninterest Bearing Transaction Deposits            

    299,232                 214,490                 137,549              

Other Noninterest Bearing Liabilities

    4,590                 3,911                 2,419              

Total Noninterest Bearing Liabilities

    303,822                 218,401                 139,968              

Shareholders' Equity

   
128,123
               
102,588
               
63,981
             

Total Liabilities and Shareholders' Equity

  $ 1,451,732               $ 1,098,654               $ 806,625              

Net Interest Income/ Interest Rate Spread

          56,373     3.58 %         43,522     3.69 %         33,608     3.91 %

Net Interest Margin(3)

                3.92 %               4.00 %               4.18 %

Taxable Equivalent Adjustment:

                                                       

Tax-Exempt Investment Securities

          (2,200 )               (1,404 )               (913 )      

Net Interest Income

        $ 54,173               $ 42,118               $ 32,695        

(1)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.

(2)
Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(3)
Net tax-equivalent interest margin during the periods presented represents: (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.

62


Table of Contents

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 tables show the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period's volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. The following tables present the changes in the volume and rate of our interest bearing assets and liabilities for the year ended December 31, 2017, compared to the year ended December 31, 2016; and the year ended December 31, 2016, compared to the year ended December 31, 2015.

 
  Year Ended December 31, 2017
Compared with Year Ended
December 31, 2016
  Year Ended December 31, 2016
Compared with Year Ended
December 31, 2015
 
 
  Change Due To:    
  Change Due To:    
 
 
  Interest
Variance
  Interest
Variance
 
(dollars in thousands)
  Volume   Rate   Volume   Rate  

Interest Earning Assets:

                                     

Cash Investments

  $ (82 ) $ 40   $ (42 ) $ (16 ) $ 20   $ 4  

Investment Securities:

                                     

Taxable Investment Securities

    506     347     853     787     (201 )   586  

Tax Exempt Investment Securities

    1,981     296     2,277     1,371     33     1,404  

Total Securities

    2,487     643     3,130     2,158     (168 )   1,990  

Loans

    14,584     (1,183 )   13,401     11,397     (1,501 )   9,896  

Federal Home Loan Bank Stock

    18     3     21     14     26     40  

Total Interest Earning Assets

  $ 17,007   $ (497 ) $ 16,510   $ 13,553   $ (1,623 ) $ 11,930  

Interest Bearing Liabilities:

                                     

Interest Bearing Transaction Deposits

    85     (97 )   (12 )   47     (108 )   (61 )

Savings and Money Market Deposits          

    602     205     807     564     144     708  

Time Deposits

    742     122     864     521     279     800  

Brokered Deposits

    784     321     1,105     250     94     344  

Federal Funds Purchased

    40     73     113     (54 )   28     (26 )

Notes Payable

    (57 )   (5 )   (62 )   135     (198 )   (63 )

FHLB Advances

    26     85     111     477     (74 )   403  

Subordinated Debentures

    842     (109 )   733     (89 )       (89 )

Total Interest Bearing Liabilities

  $ 3,064   $ 595   $ 3,659   $ 1,851   $ 165   $ 2,016  

Net Interest Income

  $ 13,943   $ (1,092 ) $ 12,851   $ 11,702   $ (1,788 ) $ 9,914  

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2017 and December 31, 2016

        The following discussion of our results of operations compares the year ended December 31, 2017, to the year ended December 31, 2016.

    Net Income

        Net income and net income available to voting and non-voting common shareholders for the years ended December 31, 2017 and 2016 was $16.9 million and $13.2 million, respectively. The increase in

63


Table of Contents

net income was primarily attributable to increases in net interest income due to the Company's growth in loans. Partially offsetting the revenue increases were higher employee, occupancy, and other operating expenses, which increased commensurate with the Company's growing infrastructure. Our 2017 profitability was negatively impacted by the tax bill signed in December 2017, which required us to revalue our net deferred tax asset, resulting in an additional $2.0 million of tax expense recorded in the fourth quarter of 2017. Our ROA for the years ended December 31, 2017 and 2016 was 1.16% and 1.20%, respectively. Our ROE for the years ended December 31, 2017 and 2016 was 13.18% and 12.88%, respectively. For the year ended December 31, 2017, our ROA and ROE without such revaluation would have been 1.30% and 14.75%, respectively.

    Net Interest Income

        Our 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 levels 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 35% tax rate. Our management's ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.

        The net interest margin is impacted by the average volumes of interest-sensitive assets and interest-sensitive liabilities and by the difference between the yield on interest-sensitive assets and the cost of interest-sensitive liabilities (spread). Loan fees collected at origination represent an additional adjustment to the yield on loans. Our spread can be affected by economic conditions, the competitive environment, loan demand, and deposit flows. The net yield on earning assets is an indicator of the effectiveness of our ability to manage the net interest margin by managing the overall yield on assets and cost of funding those assets.

        The two primary factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits. We have been disciplined in raising interest rates on deposits only as the market demanded and thereby managing our cost of funds. Also, we have not generally competed for new loans on interest rate alone, but rather we have relied significantly on effective marketing to business customers.

        For the year ended December 31, 2017, net interest income was $54.2, an increase of $12.1 million, or 28.6%, compared to net interest income of $42.1 million for the year ended December 31, 2016. The increase in net interest income was largely attributable to growth in average interest earning assets, which increased by 31.9% to $1.4 billion for 2017, from $1.1 billion during 2016.

        Our net interest spread and net interest margin were 3.58% and 3.92%, respectively, for the year ended December 31, 2017, compared to 3.69% and 4.00%, respectively, for the year ended December 31, 2016. Our average interest earning assets for the year ended December 31, 2017, increased $347.8 million or 31.9%, to $1.4 billion from $1.1 billion for the year ended December 31, 2016. This increase in our average interest earning assets was due to continued organic growth in our loan portfolio as a result of increased loan production. Our average interest bearing liabilities increased $242.1 million, or 31.1%, to $1.0 billion at December 31, 2017, from $777.7 million at December 31, 2016. This increase in our average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of $25.0 million of subordinated debentures in July of 2017.

64


Table of Contents

The ratio of our average interest earning assets to average interest bearing liabilities was 140.9% and 140.0% for the years ended December 31, 2017 and 2016, respectively.

        Our average interest earning assets produced a tax-equivalent yield of 4.77% for the year ended December 31, 2017, compared to 4.78% for the year ended December 31, 2016. The average rate paid on interest bearing liabilities was 1.19% for the year ended December 31, 2017 compared to 1.09% for the year ended December 31, 2016.

        Interest Income.    Total interest income on a tax-equivalent basis was $68.5 million for the year ended December 31, 2017, compared to $52.0 million for the year ended December 31, 2016. The $16.5 million, or 31.7%, increase in total interest income on a tax-equivalent basis was primarily due to growth in our loan and investment securities portfolios.

        Interest income on loans for the year ended December 31, 2017 was $60.0 million, compared to $46.6 million for the year ended December 31, 2016. The $13.4 million, or 28.7%, increase was primarily due to a 31.3% increase in the average balance of loans outstanding, offset in part by a 10 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to loan growth in commercial real estate loans. The decrease in yield on the loan portfolio resulted primarily from the lagging of repricing from the historic low interest rate environment and competitive pricing pressure in the market. Interest income on our investment securities portfolio increased $3.1 million, or 61.9% to $8.2 million in the year ended December 31, 2017, compared to the year ended December 31, 2016. Such growth in investment securities was intended to address our rising loan-to-deposit ratio and further diversify our earning asset composition. Futhermore, meaningful growth in the investment securities portfolio added necessary on-balance sheet liquidity, as investment securities were more actively utilized for pledging to public entites.

        Interest Expense.    Interest expense on interest bearing liabilities increased $3.7 million, or 43.0%, to $12.2 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily due to increases in average balances of both deposits and borrowings.

        Interest expense on deposits increased to $9.7 million for the year ended December 31, 2017, as compared to $7.0 million for the year ended December 31, 2016. The $2.8 million, or 39.7%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 32.2% combined with a 4 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from increases in transaction deposits, savings and money market deposits, time deposits and brokered deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits.

        Interest expense on borrowings increased $895,000, or 57.4%, to $2.5 million in the year ended December 31, 2017 as compared to the year ended December 31, 2016. This increase was primarily due to the issuance of $25.0 million in subordinated debentures in July 2017, as well as an increased average balance of federal funds purchased, offset in part by a reduction in interest expense on notes payable as a result of decreased principal balance.

    Provision for Loan Losses

        The provision for loan losses was $4.2 million for the year ended December 31, 2017, compared to $3.3 million for the year ended December 31, 2016, due largely, in both periods, to growth in the Bank's loan portfolio. The allowance for loan losses to total gross loans ratio was 1.22% and 1.23% at December 31, 2017 and 2016, respectively.

    Noninterest Income

        Noninterest income was $2.5 million and $2.6 million for the years ended December 31, 2017 and 2016, respectively. The marginal decrease of $31,000 was due to the company realizing a net loss of

65


Table of Contents

$250,000 on sales of investment securities in 2017 compared to a net gain of $830,000 in 2016. This was offset in part by increased gains on the sale of OREO of $386,000 and increased letter of credit fees of $230,000. Increased fees related to customer deposit accounts were due to an overall increase in the number of our deposit clients. The following table presents the major components of noninterest income for the year ended December 31, 2017, compared to the year ended December 31, 2016:

 
  Year Ended
December 31,
   
 
 
  Increase/
(Decrease)
 
(dollars in thousands)
  2017   2016  

Noninterest Income:

                   

Customer Service Fees

  $ 660   $ 490   $ 170  

Net Gain (Loss) on Sales of Securities

    (250 )   830     (1,080 )

Net Gain (Loss) on Sales of Foreclosed Assets

    356     (30 )   386  

Letter of Credit Fees

    1,072     842     230  

Debit Card Interchange Fees

    390     265     125  

Other Income

    308     170     138  

Totals

  $ 2,536   $ 2,567   $ (31 )

    Noninterest Expense

        Noninterest expense has increased significantly in recent years as we have expanded our geographic reach within our market area and invested in our infrastructure to support our strong asset growth.

        For the year ended December 31, 2017, noninterest expense totaled $25.5 million, a $5.3 million, or 26.4%, increase from $20.2 million for the year ended December 31, 2016. The increase was primarily due to higher salaries and employee benefits of $2.0 million, professional and consulting expenses of $1.3 million and the expense related to the impairment of a tax credit investment that was available to be used in 2017 of $1.9 million. The following table presents the major components of noninterest expense for the year ended December 31, 2017, compared to the year ended December 31, 2016:

 
  Year Ended
December 31,
   
 
 
  Increase/
(Decrease)
 
(dollars in thousands)
  2017   2016  

Noninterest Expense:

                   

Salaries and Employee Benefits

  $ 14,051   $ 12,087   $ 1,964  

Occupancy and Equipment

    2,192     1,821     371  

Data Processing

    592     667     (75 )

Professional and Consulting Fees

    2,198     904     1,294  

Information Technology

    452     394     58  

Marketing and Advertising

    983     864     119  

Acquisition Expenses

        323     (323 )

Provision for Off-Balance Sheet Reserve

        290     (290 )

Impairment of Tax Credit Investment

    1,916         1,916  

Other Expense

    3,112     2,818     294  

Totals

  $ 25,496   $ 20,168   $ 5,328  

        Management continues to focus efforts on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent. Our success in this regard is evident in the stable nature of our efficiency ratio, a widely-followed metric in the banking industry which measures operating expenses as a percentage of net revenue.

66


Table of Contents

    Income Tax Expense

        The provision of income taxes includes both federal and state taxes. For the year ended December 31, 2017, the provision for income taxes also includes a revaluation of our deferred tax asset as the result of tax reform. Fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Our future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans we make and our overall taxable income.

        We recorded income tax expense of $10.1 million for the year ended December 31, 2017, compared to $8.1 million for the year ended December 31, 2016. The increase in tax expenses was due to the increase of taxable earnings and a $2.0 million expense related to the revaluation of the deferred tax asset in 2017, offset in part by historic tax credit benefit of $1.6 million. Our effective tax rate for the years ended December 31, 2017 and 2016 was 37.5% and 37.9%, respectively. Management has thus far taken a conservative approach to the Company's tax position and is currently exploring various strategies to potentially lower our effective tax rates in the future. Furthermore, our future effective income tax rate will be lower as a result of the Tax Cuts and Jobs Act.

Financial Condition

    Assets

        Total assets at December 31, 2017 were $1.6 billion, an increase of $356.2 million, or 28.3%, over total assets of $1.3 billion at December 31, 2016. Total gross loans increased $346.4 million, or 34.6%, to $1.3 billion at December 31, 2017, compared to $1.0 billion at December 31, 2016. Securities available for sale were $229.5 million at December 31, 2017, compared to $217.1 million at December 31, 2016, an increase of $12.4 million or 5.7%.

    Investment Securities Portfolio

        Our investment securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits. We manage our investment securities portfolio according to a written investment policy. Investment balances in our investment securities portfolio are subject to change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and all available sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in meeting our anticipated funding needs.

        Our securities investment portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, and Small Business Administration, or SBA, securities, although we also hold corporate securities and other debt securities, all with varying contractual maturities. However, 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. The Bank's investment committee reviews the investment securities portfolio on an ongoing basis to ensure that the investments conform to our investment policy.

        All investments are classified as "available for sale" securities. As a result, the carrying values of our investment securities are adjusted on a monthly basis for unrealized gain or loss as a valuation allowance, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders' equity. Periodically, we 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, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or

67


Table of Contents

industry, and for debt securities, external credit ratings and recent downgrades. 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).

        At December 31, 2017, municipal securities represented 51.6% of the investment securities portfolio, government agency mortgage-backed securities represented 25.6% of the investment securities portfolio, SBA securities represented 19.8% of the investment securities portfolio, corporate securities represented 2.2% of the investment securities portfolio, and other mortgage-backed securities represented 0.8% of the investment securities portfolio. The following table presents the amortized cost and fair value of securities available for sale by type at December 31, 2017, 2016 and 2015.

 
  December 31, 2017   December 31, 2016   December 31, 2015  
 
  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
 

U.S. Treasury Securities

  $   $   $   $   $ 4,928   $ 4,934  

SBA Securities

    45,368     45,383     25,453     25,405     6,002     6,024  

Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):

                                     

Residential Pass-Through:

                                     

Guaranteed by GNMA

    7,080     6,940     7,712     7,442     975     974  

Issued by FNMA and FHLMC

    11,340     11,272     13,891     13,868     3,988     4,079  

Other Residential Mortgage-Backed Securities

    29,516     28,834     34,859     33,978     11,598     11,594  

Commercial Mortgage-Backed Securities

    12,121     11,748     10,247     9,686          

All Other Commercial MBS

    1,888     1,887                  

Total MBS

    61,945     60,681     66,710     64,974     16,561     16,647  

Municipal Securities

    115,784     118,320     128,124     124,697     71,850     73,164  

Corporate Securities

    5,052     5,107     2,059     2,007          

Total

  $ 228,149   $ 229,491   $ 222,345   $ 217,083   $ 99,341   $ 100,769  

        The following tables present the fair value of our securities as of December 31, 2017 and December 31, 2016 by their stated maturities, as well as the fully tax-equivalent yields for each maturity range.

 
  Maturity as of December 31, 2017  
 
  Due in One Year
or Less
  More Than One
Year to Five Years
  More Than Five
Years to Ten Years
  Due After Ten Years  
 
  Fair
Value
  Weighted
Average
Yield
  Fair
Value
  Weighted
Average
Yield
  Fair
Value
  Weighted
Average
Yield
  Fair
Value
  Weighted
Average
Yield
 

SBA Securities

  $     % $     % $ 11,132     2.29 % $ 34,251     2.24 %

Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):

                                                 

Residential Pass-Through:

                                                 

Guaranteed by GNMA

                            6,940     2.27  

Issued by FNMA and FHLMC

                    678     2.16     10,594     1.38  

Other Residential Mortgage-Backed Securities

            838     1.69     448     2.60     27,548     2.36  

Commercial Mortgage-Backed Securities

            2,593     1.74     5,526     2.34     3,629     2.75  

All Other Commercial MBS