10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ________

Commission File Number 001-38412

BRIDGEWATER BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)	26‑0113412 (I.R.S. Employer Identification No.)
3800 American Boulevard West, Suite 100 Bloomington, Minnesota (Address of principal executive offices)	55431 (Zip Code)

(952) 893‑6868

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non‑accelerated filer	☐	Smaller reporting company	☒
	Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 Par Value		BWB	The Nasdaq Stock Market LLC

The number of shares of the Common Stock outstanding as of May 1, 2020 was 28,813,082.    

Table of Contents

PART I FINANCIAL INFORMATION	3
Item 1. Consolidated Financial Statements (unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	60
Item 4. Controls and Procedures	62
PART II OTHER INFORMATION	63
Item 1. Legal Proceedings	63
Item 1A. Risk Factors	63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3. Defaults Upon Senior Securities	65
Item 4. Mine Safety Disclosures	65
Item 5. Other Information	65
Item 6. Exhibits	66
SIGNATURES	67

2

PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share data)

	March 31,		December 31,
	2020		2019
	(Unaudited)
ASSETS
Cash and Cash Equivalents	$	61,526	$	31,935
Bank-Owned Certificates of Deposit		2,895		2,654
Securities Available for Sale, at Fair Value		307,317		289,877
Loans, Net of Allowance for Loan Losses of $24,585 at March 31, 2020 (unaudited) and $22,526 at December 31, 2019		1,972,896		1,884,000
Federal Home Loan Bank (FHLB) Stock, at Cost		11,017		7,824
Premises and Equipment, Net		35,271		27,628
Accrued Interest		7,102		6,775
Goodwill		2,626		2,626
Other Intangible Assets, Net		813		861
Other Assets		17,267		14,650
Total Assets	$	2,418,730	$	2,268,830
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing	$	476,217	$	447,509
Interest Bearing		1,423,910		1,375,801
Total Deposits		1,900,127		1,823,310
Notes Payable		12,500		13,000
FHLB Advances		207,500		136,500
Subordinated Debentures, Net of Issuance Costs		24,759		24,733
Accrued Interest Payable		1,688		1,982
Other Liabilities		24,013		24,511
Total Liabilities		2,170,587		2,024,036
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value
Authorized 10,000,000; None Issued and Outstanding at March 31, 2020 (unaudited) and December 31, 2019		—		—
Common Stock- $0.01 par value
Common Stock - Authorized 75,000,000; Issued and Outstanding 28,807,375 at March 31, 2020 (unaudited) and 28,973,572 at December 31, 2019		288		290
Additional Paid-In Capital		110,446		112,093
Retained Earnings		135,080		127,637
Accumulated Other Comprehensive Income		2,329		4,774
Total Shareholders' Equity		248,143		244,794
Total Liabilities and Equity	$	2,418,730	$	2,268,830

See accompanying notes to consolidated financial statements.

3

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31,		March 31,
	2020		2019
INTEREST INCOME
Loans, Including Fees	$	25,113	$	22,179
Investment Securities		2,196		1,901
Other		159		187
Total Interest Income		27,468		24,267
INTEREST EXPENSE
Deposits		5,724		5,703
Notes Payable		115		121
FHLB Advances		1,027		775
Subordinated Debentures		393		377
Federal Funds Purchased		107		160
Total Interest Expense		7,366		7,136
NET INTEREST INCOME		20,102		17,131
Provision for Loan Losses		2,100		600
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		18,002		16,531
NONINTEREST INCOME
Customer Service Fees		240		191
Net Gain (Loss) on Sales of Available for Sale Securities		3		(5)
Other Income		1,476		448
Total Noninterest Income		1,719		634
NONINTEREST EXPENSE
Salaries and Employee Benefits		6,454		4,802
Occupancy and Equipment		713		656
Other Expense		2,579		2,427
Total Noninterest Expense		9,746		7,885
INCOME BEFORE INCOME TAXES		9,975		9,280
Provision for Income Taxes		2,532		2,262
NET INCOME	$	7,443	$	7,018
EARNINGS PER SHARE
Basic	$	0.26	$	0.23
Diluted		0.25		0.23
Dividends Paid Per Share		—		—

See accompanying notes to consolidated financial statements.

4

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020		2019
Net Income	$	7,443	$	7,018
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities		(178)		4,618
Unrealized Gains (Losses) on Cash Flow Hedge		(2,932)		(91)
Reclassification Adjustment for (Gains) Losses Realized in Income		15		5
Income Tax Impact		650		(951)
Total Other Comprehensive Income (Loss), Net of Tax		(2,445)		3,581
Comprehensive Income	$	4,998	$	10,599

See accompanying notes to consolidated financial statements.

5

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Three Months Ended March 31, 2020 and 2019

(dollars in thousands, except share data)

(Unaudited)

								Accumulated
				Additional				Other
	Shares	Common Stock		Paid-In		Retained		Comprehensive
Three Months Ended	Voting	Voting		Capital		Earnings		Income (Loss)		Total
BALANCE December 31, 2018	30,097,274	$	301	$	126,031	$	96,234	$	(1,568)	$	220,998
Stock-based Compensation	—		—		175		—		—		175
Comprehensive Income	—		—		—		7,018		3,581		10,599
Stock Options Exercised	400		—		3		—		—		3
BALANCE March 31, 2019	30,097,674	$	301	$	126,209	$	103,252	$	2,013	$	231,775
BALANCE December 31, 2019	28,973,572	$	290	$	112,093	$	127,637	$	4,774	$	244,794
Stock-based Compensation	7,721		—		401		—		—		401
Comprehensive Income (Loss)	—		—		—		7,443		(2,445)		4,998
Stock Repurchases	(177,864)		(2)		(2,048)		—		—		(2,050)
Issuance of Restricted Stock Awards	3,946		—		—		—		—		—
BALANCE March 31, 2020	28,807,375	$	288	$	110,446	$	135,080	$	2,329	$	248,143

See accompanying notes to consolidated financial statements.

6

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	7,443	$	7,018
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale		580		668
Net (Gain) Loss on Sales of Securities Available for Sale		(3)		5
Provision for Loan Losses		2,100		600
Depreciation and Amortization of Premises and Equipment		187		210
Amortization of Other Intangible Assets		48		48
Amortization of Subordinated Debt Issuance Costs		26		26
Stock-based Compensation		401		175
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets		(5,207)		1,574
Accrued Interest Payable and Other Liabilities		(7,736)		(665)
Net Cash Provided by (Used for) Operating Activities		(2,161)		9,659
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-owned Certificates of Deposit		(241)		357
Proceeds from Sales of Securities Available for Sale		2,102		8,150
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale		10,545		4,761
Purchases of Securities Available for Sale		(23,902)		(5,867)
Net Increase in Loans		(91,130)		(58,446)
Net (Increase) Decrease in FHLB Stock		(3,193)		290
Purchases of Premises and Equipment		(7,830)		(2,833)
Proceeds from Sales of Foreclosed Assets		134		—
Net Cash Used in Investing Activities		(113,515)		(53,588)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		76,817		82,732
Net Decrease in Federal Funds Purchased		—		(18,000)
Principal Payments on Notes Payable		(500)		(500)
Proceeds from FHLB Advances		76,000		—
Principal Payments on FHLB Advances		(5,000)		—
Stock Options Exercised		—		3
Stock Repurchases		(2,050)		—
Net Cash Provided by Financing Activities		145,267		64,235
NET CHANGE IN CASH AND CASH EQUIVALENTS		29,591		20,306
Cash and Cash Equivalents Beginning		31,935		28,444
Cash and Cash Equivalents Ending	$	61,526	$	48,750
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest	$	7,633	$	7,237
Cash Paid for Income Taxes		430		—
Loans Transferred to Foreclosed Assets		134		—
Investment Securities Purchased but Not Settled		6,944		—

See accompanying notes to consolidated financial statements.

7

Bridgewater Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

Note 1: Description of the Business and Summary of Significant Accounting Policies

Organization

Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company whose operations consist of the ownership of its wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc. The Bank commenced operations in 2005 and provides retail and commercial loan and deposit services, principally to customers within the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In 2008, the Bank formed BWB Holdings, LLC, a wholly owned subsidiary of the Bank, for the purpose of holding repossessed property. In 2018, the Bank formed Bridgewater Investment Management, Inc., a wholly owned subsidiary of the Bank, for the purpose of holding certain municipal securities and to engage in municipal lending activities.

Bridgewater Risk Management, a subsidiary of the Company, was incorporated in 2016 as a wholly owned insurance company. It insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. Bridgewater Risk Management pools resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10‑Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020.

Principles of Consolidation

These consolidated financial statements include the amounts of the Company, the Bank, with locations in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, Minnesota, BWB Holdings, LLC, Bridgewater Investment Management, Inc., and Bridgewater Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Information available which could affect judgements includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 pandemic related changes, and changes in the financial condition of borrowers.

8

Material estimates that are particularly susceptible to significant change in the near term include the valuation of securities, determination of the allowance for loan losses, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on March 13, 2018; (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

Impact of Recently Adopted Accounting Guidance

In January 2017, the Financial Accounting Standards Board, or FASB, issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this accounting standards update, or ASU, were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. During the three months ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis. Under the new simplified guidance, the Company’s estimated fair value to a market participant as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period.

In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments of this ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted this standard during the first quarter of 2020 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in

9

a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued an interagency statement titled Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40), a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.  The regulatory agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. These include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, that passed on March 27, 2020 further provides banks with the option to elect either or both of the following, from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates:

(i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

(ii) to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The Company is applying this guidance to qualifying loan modifications.

Impact of Recently Issued Accounting Standards

The following ASUs have been issued by the FASB and may impact the Company’s consolidated financial statements in future reporting periods.

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to have a material impact on the consolidated financial statements.

10

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps and approximately 10.7% of the Company’s loans as of March 31, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this pronouncement on those financial assets where LIBOR is used as an index rate.

Subsequent Events

Subsequent events have been evaluated through May 7, 2020, which is the date the consolidated financial statements were available to be issued. 

Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock compensation. For the three months ended March 31, 2020 and 2019,  303,0000 of stock options and 3,946 of restricted stock awards, and 135,000 of stock options, respectively, were excluded from the calculation because they were deemed to be antidilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Net Income Available to Common Shareholders	$	7,443	$	7,018
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		28,791,494		30,097,638
Dilutive Effect of Stock Compensation		710,751		609,098
Weighted Average Common Stock Outstanding (Dilutive)		29,502,245		30,706,736
Basic Earnings per Common Share	$	0.26	$	0.23
Diluted Earnings per Common Share		0.25		0.23

11

Note 3: Securities

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
Municipal Bonds	$	115,331	$	7,897	$	(996)	$	122,232
Mortgage-Backed Securities		62,405		1,099		(711)		62,793
Corporate Securities		49,079		1,021		(160)		49,940
SBA Securities		47,107		35		(550)		46,592
Asset-Backed Securities		26,915		9		(1,164)		25,760
Total Securities Available for Sale	$	300,837	$	10,061	$	(3,581)	$	307,317

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	4,990	$	8	$	—	$	4,998
Municipal Bonds		99,441		6,338		(36)		105,743
Mortgage-Backed Securities		64,312		697		(281)		64,728
Corporate Securities		49,674		633		(131)		50,176
SBA Securities		50,126		35		(602)		49,559
Asset-Backed Securities		14,673		—		—		14,673
Total Securities Available for Sale	$	283,216	$	7,711	$	(1,050)	$	289,877

The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2020
Municipal Bonds	$	19,372	$	(989)	$	223	$	(7)	$	19,595	$	(996)
Mortgage-Backed Securities		28,935		(684)		1,791		(27)		30,726		(711)
Corporate Securities		10,298		(160)		—		—		10,298		(160)
SBA Securities		9,191		(113)		28,908		(437)		38,099		(550)
Asset-Backed Securities		16,685		(1,164)		—		—		16,685		(1,164)
Total Securities Available for Sale	$	84,481	$	(3,110)	$	30,922	$	(471)	$	115,403	$	(3,581)

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2019
Municipal Bonds	$	2,760	$	(23)	$	1,390	$	(13)	$	4,150	$	(36)
Mortgage-Backed Securities		32,276		(242)		3,098		(39)		35,374		(281)
Corporate Securities		8,350		(131)		—		—		8,350		(131)
SBA Securities		11,907		(64)		31,036		(538)		42,943		(602)
Total Securities Available for Sale	$	55,293	$	(460)	$	35,524	$	(590)	$	90,817	$	(1,050)

12

At March 31, 2020, 152 debt securities had unrealized losses with aggregate depreciation of approximately 3.0%  from the Company’s amortized cost basis. At December 31, 2019, 110 debt securities had unrealized losses with aggregate depreciation of approximately 1.1% from the Company’s amortized cost basis. These unrealized losses related principally to changes in interest rates and were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of March 31, 2020 and December 31, 2019.

The following presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of March 31, 2020. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.

March 31, 2020	Amortized Cost		Fair Value
Due in One Year or Less	$	9,793	$	9,926
Due After One Year Through Five Years		59,106		60,660
Due After Five Years Through 10 Years		80,222		84,592
Due After 10 Years		15,289		16,994
Subtotal		164,410		172,172
Mortgage-Backed Securities		62,405		62,793
SBA Securities		47,107		46,592
Asset-Backed Securities		26,915		25,760
Totals	$	300,837	$	307,317

As of March 31, 2020 and December 31, 2019, the securities portfolio was unencumbered.

The following presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Proceeds From Sales of Securities	$	2,102	$	8,150
Gross Gains on Sales		3		76
Gross Losses on Sales		—		(81)

13

Note 4: Loans

The following table presents the components of the loan portfolio at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Commercial	$	299,425	$	276,035
Construction and Land Development		183,350		196,776
Real Estate Mortgage:
1-4 Family Mortgage		272,590		260,611
Multifamily		536,380		515,014
CRE Owner Occupied		75,207		66,584
CRE Non-owner Occupied		631,541		592,545
Total Real Estate Mortgage Loans		1,515,718		1,434,754
Consumer and Other		4,324		4,473
Total Loans, Gross		2,002,817		1,912,038
Allowance for Loan Losses		(24,585)		(22,526)
Net Deferred Loan Fees		(5,336)		(5,512)
Total Loans, Net	$	1,972,896	$	1,884,000

The following tables present the activity in the allowance for loan losses, by segment, for the three months ended March 31, 2020 and 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Three Months Ended March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526
Provision for Loan Losses		531		(71)		361		732		146		1,031		18		(648)		2,100
Loans Charged-off		(34)		—		—		—		—		—		(13)		—		(47)
Recoveries of Loans		2		—		2		—		—		—		2		—		6
Total Ending Allowance Balance	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Three Months Ended March 31, 2019
Allowance for Loan Losses:
Beginning Balance	$	2,898	$	2,451	$	2,597	$	4,644	$	808	$	5,872	$	65	$	696	$	20,031
Provision for Loan Losses		480		(354)		5		71		(18)		477		12		(73)		600
Loans Charged-off		(19)		—		—		—		—		—		(17)		—		(36)
Recoveries of Loans		2		—		9		—		—		—		1		—		12
Total Ending Allowance Balance	$	3,361	$	2,097	$	2,611	$	4,715	$	790	$	6,349	$	61	$	623	$	20,607

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of March 31, 2020 and December 31, 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Allowance for Loan Losses at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	35	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	49
Collectively Evaluated for Impairment		3,522		2,131		3,202		6,556		938		8,003		78		106		24,536
Totals	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Allowance for Loan Losses at December 31, 2019
Individually Evaluated for Impairment	$	31	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	45
Collectively Evaluated for Impairment		3,027		2,202		2,839		5,824		792		6,972		71		754		22,481
Totals	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526

14

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Loans at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Individually Evaluated for Impairment	$	267	$	170	$	1,243	$	—	$	1,847	$	224	$	14	$	3,765
Collectively Evaluated for Impairment		299,158		183,180		271,347		536,380		73,360		631,317		4,310		1,999,052
Totals	$	299,425	$	183,350	$	272,590	$	536,380	$	75,207	$	631,541	$	4,324	$	2,002,817
Loans at December 31, 2019
Individually Evaluated for Impairment	$	273	$	176	$	1,059	$	—	$	236	$	—	$	14	$	1,758
Collectively Evaluated for Impairment		275,762		196,600		259,552		515,014		66,348		592,545		4,459		1,910,280
Totals	$	276,035	$	196,776	$	260,611	$	515,014	$	66,584	$	592,545	$	4,473	$	1,912,038

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of March 31, 2020 and December 31, 2019:

	March 31, 2020						December 31, 2019
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial	$	157	$	157	$	—	$	167	$	167	$	—
Construction and Land Development		170		779		—		176		785		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		303		490		—		302		489		—
1st REM - Rentals		940		940		—		757		757		—
CRE Owner Occupied		1,847		1,847		—		236		236		—
CRE Non Owner Occupied		224		224		—		—		—		—
Totals		3,641		4,437		—		1,638		2,434		—
Loans With An Allowance for Loan Losses:
Commercial		110		113		35		106		109		31
Consumer and Other		14		14		14		14		14		14
Totals		124		127		49		120		123		45
Grand Totals	$	3,765	$	4,564	$	49	$	1,758	$	2,557	$	45

15

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020				2019
	Average		Interest		Average		Interest
	Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	163	$	3	$	—	$	—
Construction and Land Development		175		—		198		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		329		—		157		2
1st REM - Rentals		932		11		1,637		9
CRE Owner Occupied		1,837		25		449		6
CRE Non Owner Occupied		225		3		—		—
Consumer and Other		—		—		57		—
Totals		3,661		42		2,498		17
Loans With An Allowance for Loan Losses:
Commercial		111		—		688		9
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		308		—
Consumer and Other		14		—		—		—
		125		—		996		9
Grand Totals	$	3,786	$	42	$	3,494	$	26

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.

The following tables present the risk category of loans by loan segment as of March 31, 2020 and December 31, 2019, based on the most recent analysis performed by management:

	March 31, 2020
	Pass		Watch		Substandard		Total
Commercial	$	277,533	$	21,625	$	267	$	299,425
Construction and Land Development		183,045		135		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,790		138		—		30,928
1st REM - 1-4 Family		34,253		123		176		34,552
LOCs and 2nd REM - Rentals		19,156		476		303		19,935
1st REM - Rentals		185,643		768		764		187,175
Multifamily		536,380		—		—		536,380
CRE Owner Occupied		72,540		820		1,847		75,207
CRE Non-owner Occupied		609,598		21,719		224		631,541
Consumer and Other		4,310		—		14		4,324
Totals	$	1,953,248	$	45,804	$	3,765	$	2,002,817

16

	December 31, 2019
	Pass			Watch			Substandard		Total
Commercial	$	275,741	$		21	$		273	$	276,035
Construction and Land Development		196,462			138			176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,483			138			—		28,621
1st REM - 1-4 Family		36,370			124			177		36,671
LOCs and 2nd REM - Rentals		17,890			479			302		18,671
1st REM - Rentals		174,781			1,287			580		176,648
Multifamily		515,014			—			—		515,014
CRE Owner Occupied		65,411			—			1,173		66,584
CRE Non-owner Occupied		589,457			3,088			—		592,545
Consumer and Other		4,459			—			14		4,473
Totals	$	1,904,068		$	5,275		$	2,695	$	1,912,038

The following tables present the aging of the recorded investment in past due loans by loan segment as of March 31, 2020 and December 31, 2019:

	Accruing Interest
			30-89 Days		90 Days or
March 31, 2020	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	299,397	$	21	$	—	$	7	$	299,425
Construction and Land Development		183,180		—		—		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,928		—		—		—		30,928
1st REM - 1-4 Family		34,552		—		—		—		34,552
LOCs and 2nd REM - Rentals		19,632		—		—		303		19,935
1st REM - Rentals		187,049		—		—		126		187,175
Multifamily		536,380		—		—		—		536,380
CRE Owner Occupied		75,207		—		—		—		75,207
CRE Non-owner Occupied		631,541		—		—		—		631,541
Consumer and Other		4,324		—		—		—		4,324
Totals	$	2,002,190	$	21	$	—	$	606	$	2,002,817

	Accruing Interest
			30-89 Days		90 Days or
December 31, 2019	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	276,028	$	—	$	—	$	7	$	276,035
Construction and Land Development		196,600		—		—		176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,621		—		—		—		28,621
1st REM - 1-4 Family		36,671		—		—		—		36,671
LOCs and 2nd REM - Rentals		18,527		—		—		144		18,671
1st REM - Rentals		176,114		400		—		134		176,648
Multifamily		515,014		—		—		—		515,014
CRE Owner Occupied		66,584		—		—		—		66,584
CRE Non-owner Occupied		592,545		—		—		—		592,545
Consumer and Other		4,470		3		—		—		4,473
Totals	$	1,911,174	$	403	$	—	$	461	$	1,912,038

17

At March 31, 2020, there were four loans classified as troubled debt restructurings with a current outstanding balance of $839. At December 31, 2019, there were three loans classified as troubled debt restructurings with an outstanding balance of $452. There was one new loan classified as a troubled debt restructuring during the three month period ended March 31, 2020, and no loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the three months ended March 31, 2020.

In response to the COVID-19 pandemic, the Company is offering short-term loan modifications to borrowers who were current and otherwise not past due as of December 31, 2019. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. In accordance with regulatory guidance, these modifications are not considered to be troubled debt restructurings. The modifications completed in the three months ended March 31, 2020 were immaterial.

Note 5: Premises and Equipment

Premises and equipment are summarized as follows as of March 31, 2020 and December 31, 2019:

	Range of	March 31,		December 31,
	Useful Lives	2020		2019
Land	N/A	$	5,174	$	5,174
Building	15 - 39 Years		3,487		3,487
Leasehold Improvements	3 ‑ 10 Years		3,344		3,344
Furniture and Equipment	3 ‑ 5 Years		4,838		3,902
Construction in Progress	N/A		23,586		16,693
Subtotal			40,429		32,600
Accumulated Depreciation			(5,158)		(4,972)
Totals		$	35,271	$	27,628

Depreciation and amortization expense charged to noninterest expense for the three months ended March 31, 2020 and 2019, totaled $187 and $210, respectively. Construction in progress represents amounts paid for the construction of the Company’s new corporate headquarters building. Construction is expected to be completed in the third quarter of 2020.

Note 6: Deposits

The following table presents the composition of deposits at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Transaction Deposits	$	731,700	$	712,136
Savings and Money Market Deposits		514,113		516,785
Time Deposits		393,340		360,027
Brokered Deposits		260,974		234,362
Totals	$	1,900,127	$	1,823,310

Note 7: Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, which consist of interest rate swaps, to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

18

Non-hedge Derivatives

The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	50,113	$	3,254	$	7,140	$	150
Liabilities		50,113		(3,254)		7,140		(150)
Total	$	100,226	$	—	$	14,280	$	—

Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. During the next 12 months, the Company estimates that $693  will be reclassified to interest expense.

The following tables present a summary of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
Notional Amount	$	102,500		$	48,000
Weighted Average Pay Rate		1.35	%		1.89	%
Weighted Average Receive Rate		1.51	%		2.25	%
Weighted Average Maturity (Years)		4.48			3.53
Net Unrealized Gain (Loss)	$	(3,533)		$	(618)

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	—	$	—	$	18,000	$	134
Liabilities		102,500		(3,533)		30,000		(752)

19

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three months ended March 31, 2020 and 2019:

		Three Months Ended March 31,
(dollars in thousands)		2020			2019
Derivatives in	Location of Gain or	Gain (Loss)
Cash Flow Hedging	(Loss) Reclassified	Reclassified from
Relationships	from AOCI into Income	AOCI into Earnings
Interest Rate Swaps	Interest Expense		$	(18)		$	—

No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three months ended March 31, 2020 and 2019, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

Note 8: Tax Credit Investments

The Company invests in qualified affordable housing projects and federal historic projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.

The following table presents the Company’s investments in qualified affordable housing projects and other tax credit investments at March 31, 2020 and December 31, 2019:

		March 31, 2020				December 31, 2019
Investment	Accounting Method		Investment		Unfunded Commitment (1)		Investment		Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)	Proportional Amortization	$	2,077	$	—	$	2,148	$	—
Federal Historic Tax Credit (FHTC)	Equity		1,924		2,895		2,262		3,395
Total		$	4,001	$	2,895	$	4,410	$	3,395

(1) All commitments are expected to be paid by the Company by March 31, 2021.

The following table presents the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Amortization Expense (1)
LIHTC	$	71	$	72
FHTC		85		177
Total	$	156	$	249
Tax Benefit Recognized (2)
LIHTC	$	(83)	$	(83)
FHTC		(170)		(214)
Total	$	(253)	$	(297)

(1) The amortization expense for the LIHTC investments are included in income tax expense. The amortization for the FHTC tax credits are included in noninterest expense.

(2) All of the tax benefits recognized are included in income tax expense. The tax benefit recognized for the FHTC investments primarily reflects the tax credits generated from the investments, and excludes the net tax expense/benefit of the investments’ income/loss.

20

Note 9: Commitments, Contingencies and Credit Risk

Financial Instruments with Off-Balance Sheet Credit Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual, or notional, amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.

The following commitments were outstanding at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Unfunded Commitments Under Lines of Credit	$	469,221	$	500,962
Letters of Credit		73,364		79,225
Totals	$	542,585	$	580,187

The Company had outstanding letters of credit with the FHLB in total amounts of $135,943 and  $108,502 at March 31, 2020 and December 31, 2019, respectively, on behalf of customers and to secure public deposits.

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC (the “Contractor”) entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23,000, with anticipated construction completed in the third quarter of 2020. As of March 31, 2020, $19,232 had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a separate contract with a third party relating to the construction of the build-out of the new headquarters building for the Bank. The total amount to be paid by the Bank under the contract is $6,321, with construction anticipated to be completed in the third quarter of 2020. As of March 31, 2020, $1,815 had been paid under this contract.

Legal Contingencies

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

Note 10: Stock Options and Restricted Stock Awards

The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company may grant options to its directors, officers, employees, and consultants for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of five years. As of March 31, 2020 and 2019, there were no remaining shares of the Company’s common stock reserved for future option grants under the 2012 Plan.

21

In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of March 31, 2020 and December 31, 2019, there were 310,600 remaining shares of the Company’s common stock reserved for future option grants under the 2017 Plan.

In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted under the 2019 EIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of March 31, 2020 and December 31, 2019, there were 830,373 and 867,040 of remaining shares of the Company’s common stock reserved for future grants under the 2019 EIP.

Stock Options

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future.

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 54 banks in the index ranging in market capitalization from $500 million up to $4.5 billion.

The weighted average assumptions used in the model for valuing stock option grants for the three months ended March 31, 2020, are as follows:

	March 31,
	2020
Dividend Yield	—	%
Expected Life	7	Years
Expected Volatility	19.56	%
Risk-Free Interest Rate	0.97	%

22

The following table presents a summary of the status of the Company’s stock option grants for the three months ended March 31, 2020:

	March 31, 2020
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,961,650	$	7.08
Granted	25,000		12.67
Exercised	—		—
Forfeitures	—		—
Outstanding at Period End	1,986,650	$	7.15
Options Exercisable at Period End	1,004,050	$	5.01

For the three months ended March 31, 2020 and 2019, the Company recognized compensation expense for stock options of $218 and $175, respectively.

The following table presents information pertaining to options outstanding at March 31, 2020:

		Options Outstanding			Options Exercisable
		Number	Remaining				Number
Exercise Price		Outstanding	Contractual Life		Exercise Price		Outstanding
$	2.13	74,750	3.0	Years	$	2.13		74,750
	3.00	455,000	3.8	Years		3.00		455,000
	3.58	45,000	4.8	Years		3.58		45,000
	7.47	1,023,900	7.5	Years		7.47		402,300
	13.22	25,000	8.1	Years		13.22		5,000
	12.86	45,000	8.4	Years		12.86		9,000
	12.94	30,000	8.5	Years		12.94		6,000
	11.59	25,000	8.6	Years		11.59		5,000
	11.15	10,000	8.9	Years		11.15		2,000
	11.13	50,000	9.4	Years		11.13		—
	12.92	178,000	9.7	Years		12.92		—
	12.67	25,000	9.9	Years		12.67		—
	Totals	1,986,650	6.8	Years	$	7.15		1,004,050

As of March 31, 2020, there was  $2,593  of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017  Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 4.8 years.

The following presents an analysis of nonvested stock options issued and outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2019	969,600	$	3.08
Granted	25,000		2.94
Vested	(12,000)		1.99
Forfeited	—		—
Nonvested Options at March 31, 2020	982,600	$	3.09

23

Restricted Stock Awards

In 2019, the Company began granting restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with voting and forfeitable dividend rights. 

The following table presents an analysis of nonvested restricted stock awards outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Awards at December 31, 2019	132,960	$	12.92
Granted	3,946		12.67
Vested	—		—
Forfeited	—		—
Nonvested Awards at March 31, 2020	136,906	$	12.91

Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three months ended March 31, 2020, the Company recognized compensation expense for restricted stock awards of $108.  No compensation expense was recognized for restricted stock awards for the three months ended March 31, 2019.  

As of March 31, 2020,  there was $1,630 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a period of four years. 

In addition, during the first quarter of 2020, the Company issued 7,721 shares of common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $75 is included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

Note 11: Regulatory Capital

Effective January 1, 2015, the capital requirements of the Company and the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The Basel III requirements, among other things, (i) apply a strengthened set of capital requirements to the Company and Bank, including requirements related to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and higher minimum tier 1 capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and buffer requirements which were phased in incrementally, with full implementation on January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the tables below and defined in the regulations) of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets, Common Equity Tier 1 Capital to Risk Weighted Assets, and Tier 1 Capital to Average Assets.

24

The following tables present the Company and the Bank’s capital amounts and ratios as of March 31, 2020 and December 31, 2019:

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
March 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	292,080	13.38	%	$	174,641	8.00	%	$	229,216	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		242,376	11.10			130,980	6.00			185,556	8.50			N/A	N/A
Common Equity Tier 1 Capital		242,376	11.10			98,235	4.50			152,810	7.00			N/A	N/A
Tier 1 Leverage Ratio		242,376	10.51			92,259	4.00			92,259	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	276,487	12.67	%	$	174,523	8.00	%	$	229,062	10.50	%	$	218,154	10.00	%
Tier 1 Risk-Based Capital		251,542	11.53			130,893	6.00			185,431	8.50			174,523	8.00
Common Equity Tier 1 Capital		251,542	11.53			98,169	4.50			152,708	7.00			141,800	6.50
Tier 1 Leverage Ratio		251,542	10.93			92,088	4.00			92,088	4.00			115,110	5.00

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

The Company and the Bank must maintain a capital conservation buffer, as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers.

Note 12: Stock Repurchase Program

On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to $15.0 million of its common stock during the 24-month period beginning on January 22, 2019. The stock repurchase program permits the Company’s management to acquire shares of the Company’s common stock from time to time in the open market in accordance with Rule 10b-18 of the Exchange Act or in privately negotiated transactions at prices management considers to be attractive and in the best interests of the Company and its shareholders. The stock repurchase program does not obligate the Company to repurchase shares of its common stock.

Any repurchases are subject to compliance with applicable laws and regulations. Repurchases will be conducted in consideration of general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The stock repurchase program may be modified, suspended or discontinued at any time at the discretion of the Company’s Board of Directors.

25

On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to up to a total of $25.0 million. The stock repurchase program continues through January 22, 2021.

During the first quarter of 2020, the Company repurchased 177,864 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.52 for a total of $2.0  million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At March 31, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $8.0 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the COVID-19 pandemic has subsided.

Note 13: Fair Value Measurement

The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs that are unobservable for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.

26

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
Municipal Bonds	$	—	$	122,232	$	—	$	122,232
Mortgage-Backed Securities		—		62,793		—		62,793
Corporate Securities		—		49,940		—		49,940
SBA Securities		—		46,592		—		46,592
Asset-Backed Securities		—		25,760		—		25,760
Interest Rate Swaps		—		3,254		—		3,254
Total Fair Value of Financial Assets	$	—	$	310,571	$	—	$	310,571
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	6,787	$	—	$	6,787
Total Fair Value of Financial Liabilities	$	—	$	6,787	$	—	$	6,787

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities	$	4,998	$	—	$	—	$	4,998
Municipal Bonds		—		105,743		—		105,743
Mortgage-Backed Securities		—		64,728		—		64,728
Corporate Securities		—		50,176		—		50,176
SBA Securities		—		49,559		—		49,559
Asset-Backed Securities		—		14,673		—		14,673
Interest Rate Swaps		—		284		—		284
Total Fair Value of Financial Assets	$	4,998	$	285,163	$	—	$	290,161
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	902	$	—	$	902
Total Fair Value of Financial Liabilities	$	—	$	902	$	—	$	902

Investment Securities

When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.

For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.

27

Interest Rate Swaps

Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.

The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	49
Totals	$	—	$	75	$	—	$	49

	December 31, 2019
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	206
Totals	$	—	$	75	$	—	$	206

Impaired Loans

In accordance with the provisions of the loan impairment guidance, impairment is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.

Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off. 

Fair Value

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for

28

sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present the carrying amount and estimated fair values of financial instruments at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	61,526	$	61,526	$	—	$	—	$	61,526
Bank-Owned Certificates of Deposit		2,895		—		2,968		—		2,968
Securities Available for Sale		307,317		—		307,317		—		307,317
FHLB Stock, at Cost		11,017		—		11,017		—		11,017
Loans, Net		1,972,896		—		1,989,365		—		1,989,365
Accrued Interest Receivable		7,102		—		7,102		—		7,102
Interest Rate Swaps		3,254		—		3,254		—		3,254
Financial Liabilities:
Deposits	$	1,900,127	$	—	$	1,912,436	$	—	$	1,912,436
Notes Payable		12,500		—		12,525		—		12,525
FHLB Advances		207,500		—		218,362		—		218,362
Subordinated Debentures		24,759		—		26,630		—		26,630
Accrued Interest Payable		1,688		—		1,688		—		1,688
Interest Rate Swaps		6,787		—		6,787		—		6,787

29

	December 31, 2019
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	31,935	$	31,935	$	—	$	—	$	31,935
Bank-Owned Certificates of Deposit		2,654		—		2,677		—		2,677
Securities Available for Sale		289,877		4,998		284,879		—		289,877
FHLB Stock, at Cost		7,824		—		7,824		—		7,824
Loans, Net		1,884,000		—		1,891,987		—		1,891,987
Accrued Interest Receivable		6,775		—		6,775		—		6,775
Interest Rate Swaps		284		—		284		—		284
Financial Liabilities:
Deposits	$	1,823,310	$	—	$	1,821,915	$	—	$	1,821,915
Notes Payable		13,000		—		13,022		—		13,022
FHLB Advances		136,500		—		141,152		—		141,152
Subordinated Debentures		24,733		—		25,309		—		25,309
Accrued Interest Payable		1,982		—		1,982		—		1,982
Interest Rate Swaps		902		—		902		—		902

The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.

Cash and due from banks – The carrying amount of cash and cash equivalents approximates their fair value.

Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.

FHLB stock – The carrying amount of FHLB stock approximates its fair value.

Loans, Net – Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.

Deposits – The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal funds purchased – The carrying amount of federal funds purchased approximates the fair value.

Notes payable and subordinated debentures – The fair values of the Company’s notes payable and subordinated debt are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.

FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.

30

Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and was not material at March 31, 2020 and December 31, 2019.

Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Note 14: Subsequent Events

COVID-19 and Current Economic Conditions

As of May 5, 2020, total COVID-19 related loan modifications had totaled $288,019, representing 157 borrowers and approximately 15% of the total loan portfolio.

The CARES Act provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration, or SBA, to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program, or PPP. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. As of May 5, 2020, the Company had received SBA approval to fund over 1,000 PPP loans, totaling approximately $181,847. 

In response to uncertainty regarding the severity and duration of the COVID-19 pandemic, the Company has taken additional action to ensure the strength of its liquidity position. The Company has established borrowing capacity through the Federal Reserve lending facility in connection with funding PPP loans.

31

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion explains the Company’s financial condition and results of operations as of and for the three months ended March 31, 2020. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,  filed with the Securities and Exchange Commission, or the SEC, on March 12, 2020.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature.  Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control.  Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

· the negative effects of the COVID-19 pandemic, including its potential effects on the economic environment, our clients and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic;

· loan concentrations in our portfolio;

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

· the ability to successfully manage credit risk;

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

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

· new or revised accounting standards, including as a result of the future implementation of the Current Expected Credit Loss standard;

· the high concentration of large loans to certain borrowers;

· the ability to successfully manage liquidity risk;

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

· the high concentration of large depositors;

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

· the ability to implement the Company’s growth strategy and manage costs effectively;

· developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates;

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

32

· the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;

· interruptions involving our information technology and telecommunications systems or third-party servicers;

· competition in the financial services industry;

· severe weather, natural disasters, wide spread disease or pandemics (including the current coronavirus pandemic), acts of war or terrorism or other adverse external events;

· the effectiveness of the risk management framework;

· the commencement and outcome of litigation and other legal proceedings and regulatory actions against us;

· the impact of recent and future legislative and regulatory changes;

· interest rate risk;

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

· changes in federal tax law or policy; and

· any other risks described in the “Risk Factors” section of this report and in the Company’s Annual Report on Form 10-K as of December 31, 2019, filed with the SEC on March 12, 2020, as well as those set forth in other reports filed by the Company with the SEC. 

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of future results. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

The Company is a financial holding company headquartered in Bloomington, Minnesota. The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses.  The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth. 

Information Regarding COVID-19 Impact

Financial Position and Results of Operations. The recent outbreak of the novel coronavirus, or COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has negatively impacted the global economy in extreme ways and created uncertainty in financial markets across the world. In response to this pandemic, the Company rapidly deployed its business continuity plan and continues to take steps to protect the health and safety of its employees and clients. Given the fluidity of the situation, management cannot estimate the duration and full impact of the COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations. At this point, management does not expect that the Company’s financial results in future quarters will track with the Company’s historical performance.

Effects on the Company’s Market Area. The Company’s primary banking market area is the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In Minnesota, the Governor issued an order that, subject to limited exceptions, required individuals to stay at home and non-essential businesses to cease all activities, other than minimum basic operations. This order went into effect on March 28, 2020 and has currently been extended through May 18, 2020. As a result, Minnesota has experienced a dramatic and sudden increase in unemployment levels. According to

33

data released by the U.S. Department of Labor, initial claims for unemployment insurance have spiked in recent weeks in the Company’s market, a trend the Company expects to continue for the foreseeable future until the state stay-at-home order is lifted.

Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

· The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.00 – 0.25%.

· On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration, or SBA, referred to as the paycheck protection program, or PPP.  Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.  The Bank is participating as a lender in the PPP.  On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted.  On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning on April 27, 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings, or TDRs, for a limited period of time to account for the effects of COVID-19. The Company is applying this guidance to qualifying loan modifications.  

· On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. 

· On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans pledged to the facility from their leverage ratio.

Capital and Liquidity. At March 31, 2020, the Company and Bank’s capital ratios were in excess of all regulatory requirements. The Company maintains access to multiple sources of liquidity. The Company has taken additional action to ensure the strength of its liquidity position by establishing borrowing capacity through the Federal Reserve lending facility in connection with funding PPP loans.

Asset Valuation. During the three months ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis. At March 31, 2020, the Company performed an interim analysis and determined that goodwill was not more likely than not impaired, resulting in no impairment charge for the period. In the event that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020, the Company had goodwill of $2.6 million.

Active Management of Credit Risk. The Company has increased oversight and analysis of all credits, especially in vulnerable industries such as hospitality, to proactively monitor evolving credit risk. With the change in economic conditions, and particularly, Minnesota’s stay-at-home order, the Company’s portfolio is expected to be negatively

34

impacted. Management expects delinquencies and charge-offs to rise in future periods due to the continued impact of the COVID-19 pandemic.  The Company has not yet experienced charge-offs related to the COVID-19 pandemic, but the continued uncertainty regarding the severity and duration of the pandemic and related economic effects has and will continue to affect the Company’s estimate of its allowance for loan losses and resulting provision for loan losses. The Company will continue to monitor credits closely, while working with clients to provide relief when appropriate.

COVID-19 Related Loan Deferrals and PPP Lending. The Company has developed programs for assisting existing clients through this uncertain time by providing, when appropriate, loan modifications that may include short-term loan payment deferrals or interest-only modifications. As of May 5, 2020, the Company had approved loan modifications for 157 loans totaling $288.0 million. Of that total, loan modifications to interest-only payments totaled $169.6 million and loans with payment deferrals totaled $118.4 million. In accordance with recent regulatory and accounting guidance, loans modified in response to the COVID-19 pandemic will not be considered TDRs.

In a further effort to assist both existing and new clients, the Company is participating in government loan programs through the SBA, primarily the PPP. As of May 5, 2020, the Company had received SBA approval to fund over 1,000 loans, totaling approximately $181.8 million to borrowers, including both existing and new clients. The Company has continued to accept and process applications under the newly expanded program. 

Processes, Controls, and Business Continuity. The Company’s operations are being conducted in material compliance with current federal, state and local government guidelines regarding social distancing, sanitation, and personal hygiene. Bank branches have modified hours and have been limited to two locations with drive-up services for in-person banking transactions, and lobby access to certain branches by appointment in the case of critical needs. Additional details about the Company’s COVID-19 pandemic assistance programs, including relevant disclosures and up-to-date information, have been added and are maintained at bwbmn.com.

Prior to the declaration of the COVID-19 pandemic, the Company had initiated efforts to update technology and desktop hardware in anticipation of the Company’s move to a new corporate headquarters in the second half of 2020. The Company was able to leverage these efforts and expedite the process of providing 100% of the Company’s non-branch personnel with the ability to work remotely. To ensure the safety of the Company’s staff and clients, branch personnel are working on a rotating schedule to limit exposure through social distancing.

The Company’s investments in technology, digital platforms and electronic banking have allowed clients and employees to transact with minimal interruption during this time of uncertainty. Additional staff have been assigned to assist clients over the telephone and work with clients on new enrollments in online banking and other treasury management services. Internally, these investments in technology have enabled increased communication capabilities for departments by use of video conferencing, chat, and other collaborative features.

The Company believes it is positioned to continue these business continuity measures for the foreseeable future, however, no assurances can be provided as these circumstances may change depending on the duration of the pandemic.

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 of the notes to the consolidated financial statements included as a part of the Company’s Annual Report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations of the Company.

35

Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.

The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that require the Company to make complex and subjective judgements.

Allowance for Loan Losses

The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to original contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.

Investment Securities Impairment

Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. In any such instance, the Company would consider many factors, including the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and the near-term prospects of the issuer, expected cash flows, and the intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).

The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs a semi-annual analysis on the pricing of investment securities to ensure that the prices represent reasonable estimates of fair value. The procedures include initial and ongoing reviews of pricing methodologies and trends. The Company seeks to ensure prices represent reasonable estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.

Fair Value of Financial Instruments

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers

36

the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.

Deferred Tax Asset

The Company uses the asset and liability method of accounting for income taxes as prescribed by GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. If currently available information indicates it is “more likely than not” that the deferred tax asset will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Accounting for deferred income taxes is a critical accounting estimate because the Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. These judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.

37

Operating Results Overview

The following table summarizes certain key financial results for the periods indicated:

	As of and for the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Per Common Share Data
Basic Earnings Per Share	$	0.26		$	0.30		$	0.27		$	0.27		$	0.23
Diluted Earnings Per Share		0.25			0.29			0.27			0.26			0.23
Book Value Per Share		8.61			8.45			8.20			7.90			7.70
Tangible Book Value Per Share (1)		8.49			8.33			8.08			7.78			7.58
Basic Weighted Average Shares Outstanding		28,791,494			28,833,576			28,820,144			29,703,024			30,097,638
Diluted Weighted Average Shares Outstanding		29,502,245			29,561,103			29,497,961			30,312,039			30,706,736
Shares Outstanding at Period End		28,807,375			28,973,572			28,781,162			28,986,729			30,097,674
Selected Performance Ratios
Return on Average Assets (Annualized)		1.29	%		1.53	%		1.43	%		1.55	%		1.42	%
Pre-Provision Net Revenue Return on Average Assets (Annualized)(1)		2.11			2.09			2.08			2.08			2.03
Return on Average Common Equity (Annualized)		11.94			14.16			13.31			13.88			12.60
Return on Average Tangible Common Equity (Annualized) (1)		12.10			14.37			13.52			14.10			12.81
Yield on Interest Earning Assets		4.90			5.01			4.98			5.05			4.99
Yield on Total Loans, Gross		5.17			5.33			5.32			5.33			5.27
Cost of Interest Bearing Liabilities		1.84			1.96			2.04			2.07			2.06
Cost of Total Deposits		1.27			1.34			1.42			1.46			1.46
Net Interest Margin (2)		3.59			3.65			3.56			3.60			3.54
Efficiency Ratio (1)		44.4			49.6			45.6			50.1			44.1
Adjusted Efficiency Ratio (3)		44.1			44.3			42.9			42.7			43.1
Noninterest Expense to Average Assets (Annualized)		1.69			1.87			1.66			1.84			1.59
Adjusted Noninterest Expense to Average Assets (Annualized) (3)		1.68			1.67			1.56			1.57			1.55
Loan to Deposit Ratio		105.4			104.9			102.4			105.0			104.9
Core Deposits to Total Deposits		78.6			80.7			79.9			78.3			75.8
Tangible Common Equity to Tangible Assets (1)		10.13			10.65			10.43			10.64			11.16

(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.

(2) Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%.

(3) Ratio excludes the amortization of tax credit investments and represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details.

38

Selected Financial Data

The following tables summarize certain selected financial data as of and for the periods indicated:

	March 31,		December 31,		September 30,		June 30,		March 31
(dollars in thousands)	2020		2019		2019		2019		2019
Selected Balance Sheet Data
Total Assets	$	2,418,730	$	2,268,830	$	2,232,339	$	2,123,631	$	2,048,111
Total Loans, Gross		2,002,817		1,912,038		1,846,218		1,784,903		1,723,629
Allowance for Loan Losses		24,585		22,526		22,124		21,362		20,607
Goodwill and Other Intangibles		3,439		3,487		3,535		3,582		3,630
Deposits		1,900,127		1,823,310		1,802,236		1,699,265		1,643,666
Tangible Common Equity (1)		244,704		241,307		232,524		225,555		228,145
Total Shareholders' Equity		248,143		244,794		236,059		229,137		231,775
Average Total Assets - Quarter-to-Date		2,317,040		2,221,370		2,168,909		2,069,707		2,011,174
Average Common Equity - Quarter-to-Date		250,800		240,188		232,590		231,374		225,844

(1) Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details.

	For the Three Months Ended
	March 31,		December 31,		September 30,		June 30,		March 31
(dollars in thousands)	2020		2019		2019		2019		2019
Selected Income Statement Data
Interest Income	$	27,468	$	27,419	$	26,572	$	25,520	$	24,267
Interest Expense		7,366		7,491		7,637		7,382		7,136
Net Interest Income		20,102		19,928		18,935		18,138		17,131
Provision for Loan Losses		2,100		600		900		600		600
Net Interest Income after Provision for Loan Losses		18,002		19,328		18,035		17,538		16,531
Noninterest Income		1,719		1,112		946		1,134		634
Noninterest Expense		9,746		10,489		9,084		9,474		7,885
Income Before Income Taxes		9,975		9,951		9,897		9,198		9,280
Provision for Income Taxes		2,532		1,380		2,092		1,189		2,262
Net Income	$	7,443	$	8,571	$	7,805	$	8,009	$	7,018

39

Discussion and Analysis of Results of Operations

Net Income

Net income was $7.4 million for the first quarter of 2020, a 6.1% increase over net income of $7.0 million for the first quarter of 2019. Net income per diluted common share for the first quarter of 2020 was $0.25, a 10.4% increase compared to $0.23 per diluted common share for the same period in 2019.

Net Interest Income

The Company’s primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate. Management’s ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings. In response to the COVID-19 pandemic, the FOMC decreased the targeted federal funds rate by a total of 150 basis points in March 2020. This decrease may impact the comparability of net interest income between 2019 and 2020 in future periods.

40

Average Balances and Yields

The following table presents, for the three months ended March 31, 2020 and 2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.

	For the Three Months Ended
	March 31, 2020						March 31, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	29,462	$	59	0.81	%	$	27,945	$	87	1.27	%
Investment Securities:
Taxable Investment Securities		188,186		1,387	2.96			138,397		973	2.85
Tax-Exempt Investment Securities (1)		94,728		1,024	4.35			110,463		1,173	4.31
Total Investment Securities		282,914		2,411	3.43			248,860		2,146	3.50
Loans (1)(2)		1,954,959		25,150	5.17			1,707,908		22,179	5.27
Federal Home Loan Bank Stock		10,270		100	3.93			7,911		100	5.12
Total Interest Earning Assets		2,277,605		27,720	4.90	%		1,992,624		24,512	4.99	%
Noninterest Earning Assets		39,435						18,550
Total Assets	$	2,317,040					$	2,011,174
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits		246,843		431	0.70	%		181,033		232	0.52	%
Savings and Money Market Deposits		533,578		1,905	1.44			414,811		1,766	1.73
Time Deposits		376,154		2,177	2.33			329,511		1,880	2.31
Brokered Deposits		218,289		1,211	2.23			292,067		1,825	2.53
Total Interest Bearing Deposits		1,374,864		5,724	1.67			1,217,422		5,703	1.90
Federal Funds Purchased		24,835		107	1.74			24,956		160	2.59
Notes Payable		12,505		115	3.70			14,500		121	3.38
FHLB Advances		172,379		1,027	2.40			124,000		775	2.54
Subordinated Debentures		24,744		393	6.39			24,647		377	6.20
Total Interest Bearing Liabilities		1,609,327		7,366	1.84	%		1,405,525		7,136	2.06	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		444,201						369,912
Other Noninterest Bearing Liabilities		12,712						9,893
Total Noninterest Bearing Liabilities		456,913						379,805
Shareholders' Equity		250,800						225,844
Total Liabilities and Shareholders' Equity	$	2,317,040					$	2,011,174
Net Interest Income / Interest Rate Spread				20,354	3.06	%				17,376	2.93	%
Net Interest Margin (3)					3.59	%					3.54	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(252)						(245)
Net Interest Income			$	20,102					$	17,131

(1) Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

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

(3) Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

41

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following table presents the changes in the volume and rate of interest bearing assets and liabilities for the three months ended March 31, 2020, compared to the three months ended  March 31, 2019.

	Three Months Ended March 31, 2020
	Compared with
	Three Months Ended March 31, 2019
	Change Due To:				Interest
(dollars in thousands)	Volume		Rate		Variance
Interest Earning Assets:
Cash Investments	$	4	$	(32)	$	(28)
Investment Securities:
Taxable Investment Securities		375		39		414
Tax-Exempt Investment Securities		(161)		12		(149)
Total Securities		214		51		265
Loans		3,360		(389)		2,971
Federal Home Loan Bank Stock		23		(23)		—
Total Interest Earning Assets	$	3,601	$	(393)	$	3,208
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	118	$	81	$	199
Savings and Money Market Deposits		436		(297)		139
Time Deposits		286		11		297
Brokered Deposits		(396)		(218)		(614)
Federal Funds Purchased		—		(53)		(53)
Notes Payable		(17)		11		(6)
FHLB Advances		295		(43)		252
Subordinated Debentures		5		11		16
Total Interest Bearing Liabilities		727		(497)		230
Net Interest Income	$	2,874	$	104	$	2,978

Comparison of Interest Income, Interest Expense, and Net Interest Margin

Net interest income was $20.1 million for the first quarter of 2020, an increase of $3.0 million, or 17.3%, compared to $17.1 million for the first quarter of 2019. The increase in net interest income was largely attributable to growth in average interest earning assets, which increased by $285.0 million, or 14.3%, to $2.28 billion for the first quarter of 2020, from $1.99 billion for the first quarter of 2019. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio. The Company anticipates that its interest income will be adversely affected in future periods as a result of the COVID-19 pandemic and the effects of lower interest rates.

Net interest margin (on a fully tax-equivalent basis) for the first quarter of 2020 was 3.59%, a 5 basis point increase from 3.54% in the first quarter of 2019. The year-over-year increase in net interest margin was largely attributable to the reduction in deposit costs outpacing the lower rates earned in interest and fees on loans. As a result of the recent reductions in the target fed funds rate, as well as the impact of the COVID-19 pandemic, the Company expects that its net interest margin will be under pressure in future periods.

42

Average interest earning assets for the first quarter of 2020 increased $285.0 million, or 14.3%, to $2.28 billion, from $1.99 billion for the first quarter of 2019. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio. Average interest bearing liabilities increased $203.8 million, or 14.5%, to $1.61 billion for the first quarter of 2020, from $1.41 billion for the first quarter of 2019. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits, offset partially by a decrease in brokered deposits.

Average interest earning assets produced a tax-equivalent yield of 4.90% for the first quarter of 2020, compared to 4.99% for the first quarter of 2019. The average rate paid on interest bearing liabilities was 1.84% for the first quarter of 2020, compared to 2.06% for the first quarter of 2019.

Interest Income. Total interest income on a tax-equivalent basis was $27.7 million for the first quarter of 2020, compared to $24.5 million for the first quarter of 2019. The $3.2 million, or 13.1%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio.

Interest income on loans for the first quarter of 2020 was $25.2 million, compared to $22.2 million for the first quarter of 2019. The $3.0 million, or 13.4%, increase was due to a 14.5% increase in the average balance of loans outstanding due to continued organic loan growth.

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield decreased to 5.17% in the first quarter of 2020, which is 10 basis points lower than 5.27% in the first quarter of 2019. While deferred loan fees are regularly amortized into income, fluctuations in the level of loan fees recognized can vary based on prepayments and other factors. On a year-over year basis, loan fees increased 7 basis points in their contribution to the aggregate loan yield; however, this was outweighed by the historically low yield curve pressuring the core loan yield lower, and ultimately resulted in the aggregate portfolio yield contracting by 10 basis points.

The following table presents a summary of interest and fees recognized on loans for the periods indicated as follows:

	Three Months Ended
	March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		March 31, 2019
Interest	4.90	%	5.00	%	5.07	%	5.10	%	5.07	%
Fees	0.27		0.33		0.25		0.23		0.20
Yield on Loans	5.17	%	5.33	%	5.32	%	5.33	%	5.27	%

Interest Expense. Interest expense on interest bearing liabilities increased $230,000, or 3.2%, to $7.4 million for the first quarter of 2020, compared to $7.1 million for the first quarter of 2019.  The cost of interest bearing liabilities decreased 22 basis points from 2.06% in the first quarter of 2019 to 1.84% in the first quarter of 2020. The FOMC reduced the Fed Funds target rate numerous times over the past twelve months, savings and money market deposit accounts indexed to Fed Funds were the most directly impacted costs as evidenced by the 29 basis point reduction in costs. With the most recent Fed Funds cuts occurring late in the first quarter of 2020, the Company expects a further reprieve in deposit funding costs in future quarters.

Interest expense on deposits was $5.7 million for the first quarter of 2020 and the first quarter of 2019. The average balance of interest bearing deposits increased $157.4 million, or 12.9%, to $1.37 billion in the first quarter of 2020, compared to $1.22  billion for the first quarter of 2019. The increase in the average balance of deposits resulted primarily from growth in interest bearing transaction deposits, savings and money market deposits, and time deposits. The average rate paid on interest bearing deposits decreased 23 basis points from 1.90% in the first quarter of 2019 to 1.67% in the first quarter of 2020. The decrease in the average rate paid was primarily due to the Company actively managing deposit costs lower as market interest rates declined.

43

Interest expense on borrowings increased $209,000 to $1.6 million for the first quarter of 2020, compared to $1.4 million for the first quarter of 2019. This increase was primarily due to an increased average balance of FHLB advances, offset in part by a reduction in interest expense on federal funds purchased as a result of lower overnight borrowing costs.

Provision for Loan Losses

The provision for loan losses was $2.1 million for the first quarter of 2020, an increase of $1.5 million, compared to the provision for loan losses of $600,000 for the first quarter of 2019. The increase in the provision for loan losses was primarily attributable to increased allocations for economic factors associated with the COVID-19 pandemic. The Company expects the provision for loan losses to increase in future periods based on its belief that the credit quality of its loan portfolio will decline, and loan defaults will increase as a result of COVID-19.

As an emerging growth company, the Company is not subject to Accounting Standards Update No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” or CECL, until January 1, 2023.

The following table presents the activity in the allowance for loan losses for the three month periods ended March 31, 2020 and 2019:

A reconciliation of the Company’s allowance for loan losses for the three month period ended March 31, 2020 and 2019 is as follows:
	Three Months Ended
	March 31,		March 31,
(dollars in thousands)	2020		2019
Balance at Beginning of Period	$	22,526	$	20,031
Provision for Loan Losses		2,100		600
Charge-offs		(47)		(36)
Recoveries		6		12
Balance at End of Period	$	24,585	$	20,607

Noninterest Income

Noninterest income was $1.7 million and $634,000 for the first quarter of 2020 and 2019, respectively, an increase of $1.1 million. The increase was primarily due to increased swap fees and customer service fees. The following table presents the major components of noninterest income for the three months ended March 31, 2020, compared to the three months ended March 31, 2019:

	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2020		2019		(Decrease)
Noninterest Income:
Customer Service Fees	$	240	$	191	$	49
Net Gain (Loss) on Sales of Securities		3		(5)		8
Letter of Credit Fees		274		246		28
Debit Card Interchange Fees		92		88		4
Swap Fees		907		—		907
Other Income		203		114		89
Totals	$	1,719	$	634	$	1,085

Noninterest Expense

Noninterest expense was $9.7 million for the first quarter of 2020, an increase of $1.9 million, or 23.6%, from $7.9 million for the first quarter of 2019. The increase was primarily driven by a $1.7 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth and a  

44

$97,000 increase in professional and consulting fees. The increase was partially offset by a decrease of $95,000 in FDIC insurance assessment and a decrease of $92,000 in amortization of tax credit investments.

Full-time equivalent employees increased to 170 at the end of the first quarter of 2020 from 143 at the end of the first quarter of 2019. The increase includes key strategic hires in deposit gathering, lending, information technology and other supportive roles to meet the needs of the Company’s growing infrastructure.    

Efficiency Ratio. The efficiency ratio, a non-GAAP financial measure, reports total noninterest expense, less amortization of intangible assets, as a  percentage of net interest income plus total noninterest income less gains (losses) on sales of securities. Management believes this non-GAAP financial measure provides a meaningful comparison of operational performance and facilitates investors’ assessments of business performance and trends in comparison to peers in the banking industry. The Company’s efficiency ratio, and its comparability to some peers, is negatively impacted by the amortization of tax credit investments within noninterest expense.

The efficiency ratio was 44.4% for the first quarter of 2020, compared to 44.1% for the first quarter of 2019. While the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit investments, remained relatively consistent at 44.1% for the first quarter of 2020, compared to 43.1% for the first quarter of 2019.

The following table presents the major components of noninterest expense for the three months ended March 31, 2020, compared to the three months ended March 31, 2019:

	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2020		2019		(Decrease)
Noninterest Expense:
Salaries and Employee Benefits	$	6,454	$	4,802	$	1,652
Occupancy and Equipment		713		656		57
FDIC Insurance Assessment		190		285		(95)
Data Processing		229		153		76
Professional and Consulting Fees		485		388		97
Information Technology and Telecommunications		266		236		30
Marketing and Advertising		466		465		1
Intangible Asset Amortization		48		48		—
Amortization of Tax Credit Investments		85		177		(92)
Other Expense		810		675		135
Totals	$	9,746	$	7,885	$	1,861

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes and the recognition of tax credits. The Company’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income.

Income tax expense was $2.5 million for the first quarter of 2020, compared to $2.3 million for the first quarter of 2019. The effective combined federal and state income tax rate for the first quarter of 2020 was 25.4%, compared to 24.4% for the first quarter of 2019. The higher effective combined rate was due to fewer tax credits being recognized.

45

Financial Condition

Assets

Total assets at March 31, 2020 were $2.42 billion, an increase of $149.9 million, or 6.6%, over total assets of $2.27 billion at December 31, 2019 and an increase of $370.6 million, or 18.1%, over total assets of $2.05 billion at March 31, 2019. 

Investment Securities Portfolio

The investment securities portfolio is used to make various term investments and is intended to provide the Company with adequate liquidity, a source of stable income, and at times, serve as collateral for certain types of deposits. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.

The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, Small Business Administration, or SBA, securities, and corporate securities comprised of subordinated debentures of bank and financial holding companies. In addition, the Company also holds U.S. treasury securities, asset-backed securities and other debt securities, all with varying contractual maturities. These maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities. All investment securities are held as available for sale.

Securities available for sale were $307.3 million at March 31, 2020, compared to $289.9 million at December 31, 2019, an increase of $17.4 million or 6.0%. At March 31, 2020, municipal securities represented 39.7% of the investment securities portfolio, government agency mortgage-backed securities represented 20.1% of the portfolio, SBA securities represented 15.2% of the portfolio, corporate securities represented 16.3% of the portfolio, asset-backed securities represented 8.4% of the portfolio, and other mortgage-backed securities represented 0.3% of the portfolio.

The following table presents the amortized cost and fair value of securities available for sale, by type, at March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
U.S. Treasury Securities	$	—	$	—	$	4,990	$	4,998
SBA Securities		47,107		46,592		50,126		49,559
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA		1,126		1,150		1,195		1,215
Issued by FNMA and FHLMC		3,500		3,545		3,571		3,543
Other Residential Mortgage-Backed Securities		45,104		45,158		46,464		46,695
Commercial Mortgage-Backed Securities		11,696		11,981		12,019		12,213
All Other Commercial MBS		979		959		1,063		1,062
Total MBS		62,405		62,793		64,312		64,728
Municipal Securities		115,331		122,232		99,441		105,743
Corporate Securities		49,079		49,940		49,674		50,176
Asset-Backed Securities		26,915		25,760		14,673		14,673
Total	$	300,837	$	307,317	$	283,216	$	289,877

46

Loan Portfolio

The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio. 

The Company manages concentrations of credit exposure through a risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, internal and external loan review, and stress testing.

The Company originated net loan exposures of $200.0 million for the first quarter of 2020, compared to $177.9 million for the first quarter of 2019. Net loan exposures include principal advances and unfunded commitments, net of loan participations sold. Total gross loans increased $90.8 million, or 4.7%, to $2.00 billion at March 31, 2020, compared to $1.91 billion at December 31, 2019, and increased $279.2 million, or 16.2%, from $1.72 billion at March 31, 2019.  The commercial, multifamily, and commercial real estate, or CRE, nonowner occupied categories contributed most significantly to the $90.8 million net loan growth in the three months ended March 31, 2020. As of March 31, 2020, commercial loans increased $23.4 million, or 8.5%; multifamily loans increased $21.4 million, or 4.1%; and nonowner occupied CRE loans increased $39.0 million, or 6.6%, when compared to December 31, 2019. Collectively, the Company’s annualized loan growth for the three months ended March 31, 2020 was 19.1%. The Company anticipates that its loan growth will slow in the future as a result of the COVID-19 pandemic and the related decline in economic conditions in its market area.

47

The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:

	March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
(dollars in thousands)
Commercial	$	299,425	15.0	%	$	276,035	14.5	%	$	291,723	15.8	%	$	287,804	16.1	%	$	284,807	16.5	%
Construction and Land Development		183,350	9.2			196,776	10.3			216,054	11.7			195,568	11.0			178,782	10.4
Real Estate Mortgage:
1 - 4 Family Mortgage		272,590	13.6			260,611	13.6			254,782	13.8			247,029	13.8			233,131	13.5
Multifamily		536,380	26.8			515,014	26.9			456,257	24.7			437,198	24.5			417,975	24.3
CRE Owner Occupied		75,207	3.8			66,584	3.5			71,209	3.9			68,681	3.9			66,130	3.8
CRE Nonowner Occupied		631,541	31.4			592,545	31.0			551,992	29.9			544,579	30.5			538,998	31.3
Total Real Estate Mortgage Loans		1,515,718	75.6			1,434,754	75.0			1,334,240	72.3			1,297,487	72.7			1,256,234	72.9
Consumer and Other		4,324	0.2			4,473	0.2			4,201	0.2			4,044	0.2			3,806	0.2
Total Loans, Gross		2,002,817	100.0	%		1,912,038	100.0	%		1,846,218	100.0	%		1,784,903	100.0	%		1,723,629	100.0	%
Allowance for Loan Losses		(24,585)				(22,526)				(22,124)				(21,362)				(20,607)
Net Deferred Loan Fees		(5,336)				(5,512)				(5,788)				(5,157)				(4,791)
Total Loans, Net	$	1,972,896			$	1,884,000			$	1,818,306			$	1,758,384			$	1,698,231

The Company’s primary focus has been on real estate mortgage lending, which constituted 75.6% of the portfolio as of March 31, 2020. The composition of the portfolio has remained consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.

As of March 31, 2020, CRE loans totaled $1.35 billion, consisting of $631.5 million of loans secured by nonowner occupied CRE, $536.4 million of loans secured by multifamily residential properties and $183.4 million of construction and land development loans. CRE loans represented 67.5% of the total gross loan portfolio and 488.7% of the Bank’s total risk-based capital at March 31, 2020. 

48

The following table presents time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years
Commercial	$	128,937	$	135,575	$	34,913
Construction and Land Development		118,363		40,861		24,126
Real Estate Mortgage:
1 - 4 Family Mortgage		58,061		178,237		36,292
Multifamily		94,259		173,864		268,257
CRE Owner Occupied		6,182		32,411		36,614
CRE Nonowner Occupied		123,145		253,320		255,076
Total Real Estate Mortgage Loans		281,647		637,832		596,239
Consumer and Other		801		2,695		828
Total Loans, Gross	$	529,748	$	816,963	$	656,106
Interest Rate Sensitivity:
Fixed Interest Rates	$	185,040	$	573,322	$	226,022
Floating or Adjustable Rates		344,708		243,641		430,084
Total Loans, Gross	$	529,748	$	816,963	$	656,106

	As of December 31, 2019
	Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years
Commercial	$	121,383	$	119,575	$	35,077
Construction and Land Development		132,221		53,194		11,361
Real Estate Mortgage:
1 - 4 Family Mortgage		53,707		170,116		36,788
Multifamily		117,406		168,770		228,838
CRE Owner Occupied		4,078		25,286		37,220
CRE Nonowner Occupied		114,533		234,599		243,413
Total Real Estate Mortgage Loans		289,724		598,771		546,259
Consumer and Other		1,589		2,420		464
Total Loans, Gross	$	544,917	$	773,960	$	593,161
Interest Rate Sensitivity:
Fixed Interest Rates	$	184,370	$	545,855	$	197,151
Floating or Adjustable Rates		360,547		228,105		396,010
Total Loans, Gross	$	544,917	$	773,960	$	593,161

Asset Quality

The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs. 

Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered

49

“uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “watch.”

The following table presents information on loan classifications at March 31, 2020. The Company had no assets classified as loss.

	Risk Category
(dollars in thousands)	Watch		Substandard		Doubtful		Total
Commercial	$	21,625	$	267	$	—	$	21,892
Construction and Land Development		135		170		—		305
Real Estate Mortgage:
1 - 4 Family Mortgage		1,505		1,243		—		2,748
CRE Owner Occupied		820		1,847		—		2,667
CRE Nonowner Occupied		21,719		224		—		21,943
Total Real Estate Mortgage Loans		24,044		3,314		—		27,358
Consumer and Other		—		14		—		14
Totals	$	45,804	$	3,765	$	—	$	49,569

The Company is closely analyzing all segments within the loan portfolio in response to the COVID-19 pandemic and as a result, the Company identified loans that have potential weaknesses that warrant a watchlist risk rating. At March 31, 2020, watchlist loans increased to $45.8 million, compared to $5.3 million at December 31, 2019. Loans added to the watchlist during the first quarter of 2020 were in vulnerable industries, primarily hospitality. As the COVID-19 pandemic continues to evolve, the length and extent of the economic contraction may dictate further watchlist or adverse classifications in the loan portfolio.

In response to the COVID-19 pandemic, the Company is offering short-term loan modifications, when appropriate, to borrowers who were current and otherwise not past due as of December 31, 2019. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. In accordance with regulatory guidance, these modifications are not considered to be TDRs. The modifications completed in the three months ended March 31, 2020 were immaterial.

Subsequent to March 31, 2020, the Company approved a significant amount of loan modifications. The following table presents a summary of approved loan modifications, by loan segment and modification type, as of May 5, 2020:

	Interest-Only 1-6 Months			Interest Only 7-12 Months			3 Month Payment Deferral			6 Month Payment Deferral			Total
	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
(dollars in thousands)
Commercial	$	15,982	35	$	693	1	$	4	1	$	11,853	13	$	28,532	50
Construction and Land Development		9,539	3		1,565	1		—	—		—	—		11,104	4
Real Estate Mortgage:
1 - 4 Family Mortgage		7,093	16		—	—		—	—		—	—		7,093	16
Multifamily		1,185	3		23,605	1		12,625	2		—	—		37,415	6
CRE Owner Occupied		8,208	16		—	—		—	—		2,434	4		10,642	20
CRE Nonowner Occupied		99,549	40		2,187	1		60,963	13		30,534	7		193,233	61
Consumer and Other		—	—		—	—		—	—		—	—		—	—
Totals	$	141,556	113	$	28,050	4	$	73,592	16	$	44,821	24	$	288,019	157

Nonperforming Assets

Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled $606,000 and $461,000 as of March 31, 2020 and December 31,

50

2019, respectively, an increase of $145,000. There were no loans 90 days past due and still accruing as of March 31, 2020 or December 31, 2019. There were no foreclosed assets as of March 31, 2020 and December 31, 2019. 

The following table presents a summary of nonperforming assets, by category, at the dates indicated:

	March 31,			December 31,
(dollars in thousands)	2020			2019
Nonaccrual Loans:
Commercial	$	7		$	7
Construction and Land Development		170			176
Real Estate Mortgage:
1 - 4 Family Mortgage		429			278
Total Nonaccrual Loans	$	606		$	461
Total Nonperforming Loans	$	606		$	461
Total Nonperforming Assets (1)	$	606		$	461
Total Restructured Accruing Loans		669			276
Total Nonperforming Assets and Restructured Accruing Loans	$	1,275		$	737
Nonaccrual Loans to Total Loans		0.03	%		0.02	%
Nonperforming Loans to Total Loans		0.03			0.02
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)		0.03			0.02
Nonperforming Assets and Restructured Accruing Loans to Total Loans Plus Foreclosed Assets		0.06			0.04

(1) Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets.

The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. Due to the low levels of nonaccrual loans, gross income that would have been recorded on nonaccrual loans during the first quarter of 2020 was $42.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.

51

At March 31, 2020, the allowance for loan losses was $24.6 million, an increase of $2.1 million from $22.5 million at December 31, 2019. Net charge-offs totaled $41,000 during the first quarter of 2020 and $24,000 during the first quarter of 2019. The allowance for loan losses as a percentage of total loans was 1.23% as of March 31, 2020 and 1.18% as of December 31, 2019. Based on current economic indicators, the Company increased the economic factors within the allowance for loan losses evaluation. The Company expects that the allowance for loan losses as a percent of total loans will increase in future periods based on its belief that the credit quality of its loan portfolio will decline, and loan defaults will increase as a result of COVID-19.

The following presents a summary of the activity in the allowance for loan loss reserve for the periods indicated:

	Three Months Ended
	March 31,
(dollars in thousands)	2020			2019
Balance, Beginning of Period	$	22,526		$	20,031
Charge-offs:
Commercial		34			19
Construction and Land Development		—			—
Consumer and Other		13			17
Total Charge-offs		47			36
Recoveries:
Commercial		2			2
Construction and Land Development		—			—
Real Estate Mortgage:
1 - 4 Family Mortgage		2			9
Consumer and Other		2			1
Total Recoveries		6			12
Net Charge-offs		41			24
Provision for Loan Losses		2,100			600
Balance at End of Period	$	24,585		$	20,607
Gross Loans, End of Period		2,002,817			1,723,629
Average Loans		1,954,959			1,707,908
Net Charge-offs (Recoveries) (Annualized) to Average Loans		0.01	%		0.01	%
Allowance to Total Gross Loans		1.23	%		1.20	%

The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:

	March 31,				December 31,
	2020				2019
(dollars in thousands)	Amount		Percent		Amount		Percent
Commercial	$	3,557	14.5	%	$	3,058	13.6	%
Construction and Land Development		2,131	8.7			2,202	9.8
Real Estate Mortgage:
1 - 4 Family Mortgage		3,202	13.0			2,839	12.6
Multifamily		6,556	26.7			5,824	25.9
CRE Owner Occupied		938	3.8			792	3.5
CRE Nonowner Occupied		8,003	32.5			6,972	30.9
Total Real Estate Mortgage Loans		18,699	76.0			16,427	72.9
Consumer and Other		92	0.4			85	0.4
Unallocated		106	0.4			754	3.3
Total Allowance for Loan Losses	$	24,585	100.0	%	$	22,526	100.0	%

52

Deposits

The principal sources of funds for the Company are deposits, consisting of demand deposits, money market accounts, savings accounts, and certificates of deposit. The following table details the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:

	March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Noninterest Bearing Transaction Deposits	$	476,217	25.1	%	$	447,509	24.5	%	$	478,493	26.5	%	$	409,198	24.1	%	$	404,937	24.6	%
Interest Bearing Transaction Deposits		255,483	13.4			264,627	14.5			243,889	13.5			231,318	13.6			180,459	11.0
Savings and Money Market Deposits		514,113	27.1			516,785	28.3			470,518	26.1			456,447	26.9			434,186	26.4
Time Deposits		393,340	20.7			360,027	19.8			363,308	20.2			359,338	21.1			346,163	21.1
Brokered Deposits		260,974	13.7			234,362	12.9			246,028	13.7			242,964	14.3			277,921	16.9
Total Deposits	$	1,900,127	100.0	%	$	1,823,310	100.0	%	$	1,802,236	100.0	%	$	1,699,265	100.0	%	$	1,643,666	100.0	%

Total deposits at March 31, 2020 were $1.90 billion, an increase of $76.8 million, or 4.2%, compared to total deposits of $1.82 billion at December 31, 2019, and an increase of $256.5 million, or 15.6%, over total deposits of $1.64 billion at March 31, 2019. Noninterest bearing deposits were $476.2 million at March 31, 2020, compared to $447.5 million at December 31, 2019, and $404.9 million at March 31, 2019. Noninterest bearing deposits comprised 25.1% of total deposits at March 31, 2020, compared to 24.5% at December 31, 2019, and 24.6% at March 31, 2019. The Company expects that deposit levels will fluctuate in future periods as a result of the distressed economic conditions in its market areas relating to the COVID-19 pandemic.

The Company relies on increasing the deposit base to fund loans and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. At March 31, 2020, total brokered deposits were $261.0 million, an increase of $26.6 million, or 11.4%, compared to total brokered deposits of $234.4 million at December 31, 2019. While the Company continued to exercise embedded call features on higher rate, brokered time deposits, and replace at lower funding levels, the net increase is primarily in conjunction with increased utilization of cash flow hedges.

The following table presents the average balance and average rate paid on each of the following deposit categories for the three months ended March 31, 2020 and March 31, 2019:

	As of and for the				As of and for the
	Three Months Ended				Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest Bearing Transaction Deposits	$	444,201	—	%	$	369,912	—	%
Interest Bearing Transaction Deposits		246,843	0.70			181,033	0.52
Savings and Money Market Deposits		533,578	1.44			414,811	1.73
Time Deposits < $250,000		246,017	2.39			214,287	2.17
Time Deposits > $250,000		130,137	2.20			115,224	2.57
Brokered Deposits		218,289	2.23			292,067	2.53
Total Deposits	$	1,819,065	1.27	%	$	1,587,334	1.46	%

53

Borrowed Funds

Federal Funds Purchased

In addition to deposits, the Company utilizes overnight borrowings to meet the daily liquidity needs of clients and fund loan growth. The following table summarizes overnight borrowings, which consist of federal funds purchased from correspondent banks on an overnight basis at the prevailing overnight market rates and the weighted average interest rates paid for the periods presented:

	As of and for the			As of and for the			As of and for the
	Three Months Ended			Three Months Ended			Three Months Ended
(dollars in thousands)	March 31, 2020			December 31, 2019			March 31, 2019
Outstanding at Period-End	$	—		$	—		$	—
Average Amount Outstanding		24,835			3,011			24,956
Maximum Amount Outstanding at any Month-End		37,000			6,000			87,000
Weighted Average Interest Rate:
During Period		1.74	%		1.82	%		2.59	%
End of Period		0.36	%		2.63	%		2.62	%

Other Borrowings

At March 31, 2020, other borrowings outstanding consisted of FHLB advances of $207.5 million and notes payable of $12.5 million. The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $121.3 million and$209.8million at March 31, 2020 and December 31, 2019, respectively, based on collateral amounts pledged.

Additionally, the Company has borrowing capacity from other sources. As of March 31, 2020, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately $111.2 million and $113.2 million at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, the Company had no outstanding advances.

The Company has a swap agreement with an unaffiliated third party in order to hedge interest rate risk associated with the notes payable. This agreement provides for the Company to make payments at a fixed rate in exchange for receiving payments at a variable rate determined by the one-month LIBOR.

Subordinated Debentures

On July 12, 2017, the Company issued $25.0 million of subordinated debentures at an initial fixed interest rate of 5.875% which is payable semi-annually. Beginning July 15, 2022, the interest rate converts to a variable interest rate equal to the three-month LIBOR plus 3.88%. The subordinated debentures mature on July 15, 2027. The subordinated debentures, net of issuance costs, were $24.8 million at March 31, 2020, compared to $24.7 million at December 31, 2019. The subordinated debentures qualify for Tier 2 regulatory capital treatment for the first five years, under applicable regulatory guidelines.

54

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations at March 31, 2020:

	Within		One to		Three to		After
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		Total
Deposits Without a Stated Maturity	$	1,300,461	$	—	$	—	$	—	$	1,300,461
Time Deposits		358,468		157,143		84,055		—		599,666
Notes Payable		12,500		—		—		—		12,500
FHLB Advances		60,000		49,000		88,500		10,000		207,500
Subordinated Debentures		—		—		—		25,000		25,000
Commitment to Fund Tax Credit Investments		2,895		—		—		—		2,895
Operating Lease Obligations		794		728		646		1,048		3,216
Totals	$	1,735,118	$	206,871	$	173,201	$	36,048	$	2,151,238

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC, or the Contractor, entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23.0 million, with anticipated construction to be completed in 2020. As of March 31, 2020, $19.2 million had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a contract with a third party relating to the construction of the interior build-out of the new headquarters building for the Bank. The sum of the contract is $6.32 million, with anticipated construction to be completed in 2020. As of March 31, 2020, $1.8 million had been paid under this contract.

The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Shareholders’ Equity

Shareholders’ equity at March 31, 2020 was $248.1 million, an increase of $3.3 million, or 1.4%, over shareholders’ equity of $244.8 million at December 31, 2019, primarily due to $7.4 million of net income, partially offset by a $2.4 million decrease in accumulated other comprehensive income and $2.0 million of stock repurchases. The decrease in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods.

Stock Repurchase Program. On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company is authorized to repurchase up to $15.0 million of its common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to a total of $25.0 million. During the three months ended March 31, 2020, the Company repurchased 177,864 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $11.52 for a total of $2.0 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At March 31, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $8.0 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the COVID-19 pandemic has subsided.

55

Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.

Under applicable regulatory capital rules, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank must also meet certain specific capital guidelines under the prompt corrective action framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.

Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of March 31, 2020. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
March 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	292,080	13.38	%	$	174,641	8.00	%	$	229,216	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		242,376	11.10			130,980	6.00			185,556	8.50			N/A	N/A
Common Equity Tier 1 Capital		242,376	11.10			98,235	4.50			152,810	7.00			N/A	N/A
Tier 1 Leverage Ratio		242,376	10.51			92,259	4.00			92,259	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	276,487	12.67	%	$	174,523	8.00	%	$	229,062	10.50	%	$	218,154	10.00	%
Tier 1 Risk-Based Capital		251,542	11.53			130,893	6.00			185,431	8.50			174,523	8.00
Common Equity Tier 1 Capital		251,542	11.53			98,169	4.50			152,708	7.00			141,800	6.50
Tier 1 Leverage Ratio		251,542	10.93			92,088	4.00			92,088	4.00			115,110	5.00

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require a capital conservation buffer of 2.5%

56

that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At March 31, 2020, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.

In 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying depository institutions and depository institution holding companies, titled the community bank leverage ratio, or CBLR framework. Generally, under the CBLR framework, qualifying depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and that meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9% (subsequently reduced to 8% as a COVID-19 relief measure), will be eligible to opt into the CBLR framework. Qualifying organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s prompt corrective action framework. The final rule was effective on January 1, 2020 and the CBLR framework was available for banks to use in their March 31, 2020 Call Report. The Company has elected not to opt into the CBLR framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.

Off-Balance Sheet Arrangements

In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.

The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Fixed		Variable		Fixed		Variable
	(dollars in thousands)
Unfunded Commitments Under Lines of Credit	$	166,359	$	302,862	$	181,622	$	319,340
Letters of Credit		16,653		56,711		17,503		61,722
Totals	$	183,012	$	359,573	$	199,125	$	381,062

Liquidity

Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or financial condition. The Bank’s Asset Liability Management, or ALM, Committee, which is comprised of members of senior management, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.

57

The Company manages liquidity by maintaining adequate levels of cash and other assets from on- and off-balance sheet arrangements. Specifically, on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and the Federal Reserve Bank of Minneapolis, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity. In addition, the Bank is a member of the American Financial Exchange, or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of March 31, 2020, the Company had no borrowings outstanding through the AFX.

The following tables provide a summary of primary and secondary liquidity levels as of the dates indicated:

Primary Liquidity—On-Balance Sheet	March 31, 2020			December 31, 2019
	(Dollars in thousands)
Cash and Cash Equivalents	$	61,526		$	31,935
Securities Available for Sale		307,317			289,877
Total Primary Liquidity	$	368,843		$	321,812
Ratio of Primary Liquidity to Total Deposits		19.4	%		17.6	%

Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity	March 31, 2020			December 31, 2019
	(Dollars in thousands)
Net Secured Borrowing Capacity with the FHLB	$	121,302		$	209,840
Net Secured Borrowing Capacity with the Federal Reserve Bank		111,178			113,164
Unsecured Borrowing Capacity with Correspondent Lenders		105,000			105,000
Total Secondary Liquidity	$	337,480		$	428,004
Ratio of Primary and Secondary Liquidity to Total Deposits		37.2	%		41.1	%

During the three months ended March 31, 2020, primary liquidity increased by $47.0 million due to a $29.6 million increase in cash and cash equivalents and a $17.4 million increase in securities available for sale, when compared to December 31, 2019. Secondary liquidity decreased by $90.5 million as of March 31, 2020 when compared to December 31, 2019, due to an $88.5 million decrease in the borrowing capacity on the secured borrowing line with the FHLB and a $2.0 million decrease in the borrowing capacity on the secured credit line with the Federal Reserve Bank.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At March 31, 2020, core deposits totaled approximately $1.49 billion and represented 78.6% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At March 31, 2020, brokered deposits totaled $261.0 million, consisting of $206.3 million of brokered time deposits and $54.6 million of non-maturity brokered money market and transaction accounts. At December 31, 2019, brokered deposits totaled $234.4 million, consisting of $231.9 million of brokered time deposits and $2.4 million of non-maturity brokered money market and transaction accounts.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of March 31, 2020, the Company was in compliance with all established liquidity guidelines in the policy.

58

Subsequent to March 31, 2020, the Company has established borrowing capacity through the Federal Reserve PPP lending facility in connection with funding PPP loans.

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, the Company routinely supplements its

evaluation with an analysis of certain non-GAAP financial measures. The Company believes these non-GAAP financial

measures, in addition to the related GAAP measures, provide meaningful information to investors to help them

understand the Company’s operating performance and trends, and to facilitate comparisons with the performance of

peers. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP,

nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Reconciliations of non-GAAP disclosures used in this report to the comparable GAAP measures are provided in the

following tables.

	For the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
(dollars in thousands)
Efficiency Ratio
Noninterest Expense	$	9,746		$	10,489		$	9,084		$	9,474		$	7,885
Less: Amortization of Intangible Assets		(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	9,698		$	10,441		$	9,036		$	9,427		$	7,837
Net Interest Income		20,102			19,928			18,935			18,138			17,131
Noninterest Income		1,719			1,112			946			1,134			634
Less: (Gain) Loss on Sales of Securities		(3)			—			(58)			(463)			5
Adjusted Operating Revenue	$	21,818		$	21,040		$	19,823		$	18,809		$	17,770
Efficiency Ratio		44.4	%		49.6	%		45.6	%		50.1	%		44.1	%
Adjusted Efficiency Ratio
Noninterest Expense	$	9,746		$	10,489		$	9,084		$	9,474		$	7,885
Less: Amortization of Tax Credit Investments		(85)			(1,128)			(530)			(1,390)			(177)
Less: Amortization of Intangible Assets		(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	9,613		$	9,313		$	8,506		$	8,037		$	7,660
Net Interest Income		20,102			19,928			18,935			18,138			17,131
Noninterest Income		1,719			1,112			946			1,134			634
Less: (Gain) Loss on Sales of Securities		(3)			—			(58)			(463)			5
Adjusted Operating Revenue	$	21,818		$	21,040		$	19,823		$	18,809		$	17,770
Adjusted Efficiency Ratio		44.1	%		44.3	%		42.9	%		42.7	%		43.1	%

59

			For the Three Months Ended
			March 31,					December 31,					September 30,					June 30,					March 31,
			2020					2019					2019					2019					2019
(dollars in thousands)
Pre-Provision Net Revenue
Noninterest Income			$	1,719				$	1,112				$	946				$	1,134				$	634
Less: (Gain) Loss on sales of Securities				(3)					—					(58)					(463)					5
Total Operating Noninterest Income				1,716					1,112					888					671					639
Plus: Net Interest income				20,102					19,928					18,935					18,138					17,131
Net Operating Revenue			$	21,818				$	21,040				$	19,823				$	18,809				$	17,770
Noninterest Expense			$	9,746				$	10,489				$	9,084				$	9,474				$	7,885
Less: Amortization of Tax Credit Investments				(85)					(1,128)					(530)					(1,390)					(177)
Total Operating Noninterest Expense			$	9,661				$	9,361				$	8,554				$	8,084				$	7,708
Pre-Provision Net Revenue			$	12,157				$	11,679				$	11,269				$	10,725				$	10,062
Plus:
Non-Operating Revenue Adjustments				3					—					58					463					(5)
Less:
Provision for Loan Losses				2,100					600					900					600					600
Non-Operating Expense Adjustments				85					1,128					530					1,390					177
Provision for Income Taxes				2,532					1,380					2,092					1,189					2,262
Net Income			$	7,443				$	8,571				$	7,805				$	8,009				$	7,018
	For the Three Months Ended
	March 31,					December 31,					September 30,					June 30,					March 31,
	2020					2019					2019					2019					2019
(dollars in thousands)
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Common Equity	$	248,143				$	244,794				$	236,059				$	229,137				$	231,775
		(3,439)					(3,487)					(3,535)					(3,582)					(3,630)
Tangible Common Equity		244,704					241,307					232,524					225,555					228,145
Total Assets		2,418,730					2,268,830					2,232,339					2,123,631					2,048,111
Less: Intangible Assets		(3,439)					(3,487)					(3,535)					(3,582)					(3,630)
Tangible Assets	$	2,415,291				$	2,265,343				$	2,228,804				$	2,120,049				$	2,044,481
Tangible Common Equity/Tangible Assets		10.13			%		10.65			%		10.43			%		10.64			%		11.16			%
Tangible Book Value Per Share
Book Value Per Common Share	$	8.61				$	8.45				$	8.20				$	7.90				$	7.70
Less: Effects of Intangible Assets		(0.12)					(0.12)					(0.12)					(0.12)					(0.12)
Tangible Book Value Per Common Share	$	8.49				$	8.33				$	8.08				$	7.78				$	7.58
Average Tangible Common Equity
Average Common Equity	$	250,800				$	240,188				$	232,590				$	231,374				$	225,844
Less: Effects of Average Intangible Assets		(3,466)					(3,510)					(3,558)					(3,605)					(3,653)
Average Tangible Common Equity	$	247,334				$	236,678				$	229,032				$	227,769				$	222,191

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As a financial institution, the Company’s primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. The Company continually seeks to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.

The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income

60

simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis. The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.

The Company manages the interest rate risk associated with interest earning assets by managing the interest rates and terms associated with the investment securities portfolio by purchasing and selling investment securities from time to time. The Company manages the interest rate risk associated with interest bearing liabilities by managing the interest rates and terms associated with wholesale borrowings and deposits from customers which the Company relies on for funding. For example, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities.

The Company has entered into certain hedging transactions including interest rate swaps, which are designed to lessen elements of the Company’s interest rate exposure. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. The hedging strategy converts variable interest rates to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability. At March 31, 2020 and December 31, 2019, these cash flow hedges had a total notional amount of $102.5 million and $48.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.

Net Interest Income Simulation

The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purposes of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.

Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2020 are presented in the table below. The projections assume immediate, parallel shifts downward of the yield curve of 100 and 200 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 300 and 400 basis points does not provide us with meaningful results and thus is not presented.

61

	March 31, 2020				December 31, 2019
Change (basis points) in Interest Rates	Forecasted Net		Percentage Change		Forecasted Net		Percentage Change
(12-Month Projection)	Interest Income		from Base		Interest Income		from Base
+400	$	82,298	11.73	%	$	80,558	13.47	%
+300		79,538	7.99			78,064	9.95
+200		76,688	4.12			75,591	6.47
+100		74,477	1.12			73,113	2.98
0		73,655	—			70,996	—
−100		71,839	(2.46)			68,685	(3.26)
−200		71,577	(2.82)			67,127	(5.45)

The table above indicates that as of March 31, 2020, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience an 11.73% increase in net interest income. In the event of an immediate 200 basis point decrease in interest rates, the Company would experience a 2.82% decrease in net interest income.

The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or re-price faster than the Company’s assets. Actual results could differ from those projected if the Company grows assets and liabilities faster or slower than estimated, if the Company experienced a net outflow of deposit liabilities, or if the mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if the Company experienced substantially different repayment speeds in the loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that the Company may undertake in response to potential or actual changes in interest rates, such as changes to the Company’s loan, investment, deposit, or funding strategies.

LIBOR Transition

The London Interbank Offered Rate, or LIBOR, is used as an index rate for the Company’s interest-rate swaps and approximately 10.7% of the Company’s loans as of March 31, 2020. It is expected that the number of institutions that have been reporting information used to set LIBOR will stop doing so after 2021 when their reporting commitment ends. As a result, LIBOR may no longer be available as an index or may be seen as no longer representative of the market. Alternative reference rates are being identified, but existing contracts may not have been written to allow the use of these alternatives. The Company is evaluating the risks related to this transition and its evaluation and mitigation of risks related to the discontinuation of LIBOR may span several reporting periods through 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of March 31, 2020, the end of the fiscal quarter covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

62

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10‑Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020, with the exception of the following:

The outbreak of Coronavirus Disease 2019, or COVID-19, and measures intended to prevent its spread, could adversely impact certain industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The spread of COVID-19 has caused severe disruptions in the U.S. economy at large, and for small businesses in particular, which has disrupted the Company’s operations. We are starting to see the impact from COVID-19 on our business, and we believe that it will be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The responses on the part of the U.S. and global governments and populations have created a risk of a recession, reduced economic activity and caused a significant correction in the global stock markets. We expect that we will experience significant disruption across our business due to these effects, leading to decreased earnings and significant slowdowns in our loan collections or loan defaults. We expect increased unemployment and recessionary concerns will adversely affect loan originations in future periods. COVID-19 may impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. In addition, certain of our borrowers are in or have exposure to the retail and hospitality industries and/or are located in areas that are quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. A prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

The outbreak of COVID-19 has resulted in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment and a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the

63

Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

We believe that the economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and that it could result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital.

As a participating lender in the U.S. Small Business Administration, or SBA, Paycheck Protection Program, or PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some of or all PPP loan guarantees.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning on April 27, 2020.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by the PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the  Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. 

64

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Repurchases of Equity Securities

The following table presents stock purchases made during the first quarter of 2020:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
January 1 - 31, 2020	-	$	-	-	$	10,040,837
February 1 - 29, 2020	32,194		12.66	32,194		9,633,294
March 1 - 31, 2020	145,670		11.27	145,670		7,991,429
Total	177,864	$	11.52	177,864	$	7,991,429

(1) On January 22, 2019, the Company's Board of Directors authorized the Company to repurchase up to $15.0 million of its outstanding common stock. The Company may repurchase these shares from time to time in the open market in accordance with Rule 10b-18 of the Exchange Act or in privately negotiated transactions at the Company's discretion. The amount, timing and nature of any share repurchases will be based on a variety of factors, including the trading price of the Company’s common stock, applicable securities laws restrictions, regulatory limitations and market and economic factors. This repurchase program is authorized for a 24-month period and does not require the Company to repurchase any specific number of shares. The repurchase program may be modified, suspended or discontinued at any time, at the Company’s discretion. On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to up to a total of $25.0 million. The stock repurchase program continues through January 22, 2021.

Use of Proceeds from Registered Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

65

Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1	Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements

66

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Bridgewater Bancshares, Inc.
Date: May 7, 2020	By:	/s/ Jerry J. Baack
	Name:	Jerry J. Baack
	Title:	Chairman, Chief Executive Officer and President (Principal Executive Officer)
Date: May 7, 2020	By:	/s/ Joe M. Chybowski
	Name:	Joe M. Chybowski
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

67

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to 
Section 302 of the Sarbanes-Oxley Act of 2002

I, Jerry J. Baack, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bridgewater Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May  7, 2020

/s/ Jerry J. Baack

Jerry J. Baack

Chairman, Chief Executive Officer and President

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Joe M. Chybowski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bridgewater Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May  7, 2020

/s/ Joe M. Chybowski

Joe M. Chybowski

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350 as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Bridgewater Bancshares, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jerry J. Baack, Chairman, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:  

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  May 7, 2020	/s/ Jerry J. Baack
	Jerry J. Baack
	Chairman, Chief Executive Officer and President

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350 as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Bridgewater Bancshares, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joe M. Chybowski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:  

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  May  7, 2020	/s/ Joe M. Chybowski
	Joe M. Chybowski
	Chief Financial Officer

XML

Tax Credit Investments - Investments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Investments in qualified affordable housing projects and other tax credit investments
Investment	$ 4,001		$ 4,410
Unfunded Commitment	2,895		3,395
Amortization Expense	156	$ 249
Tax Benefit Recognized	(253)	(297)
Low Income Housing Tax Credit (LIHTC)
Investments in qualified affordable housing projects and other tax credit investments
Investment	2,077		2,148
Amortization Expense	71	72
Tax Benefit Recognized	(83)	(83)
Federal Historic Tax Credit (FHTC)
Investments in qualified affordable housing projects and other tax credit investments
Investment	1,924		2,262
Unfunded Commitment	2,895		$ 3,395
Amortization Expense	85	177
Tax Benefit Recognized	$ (170)	$ (214)

XML

Stock Options and Restricted Stock Awards - Stock Option Plans (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Stock Option Plans
Outstanding at Beginning of Year	1,961,650
Granted	25,000
Outstanding at End of Year	1,986,650
Options Exercisable at End of Year	1,004,050
Weighted Average Exercise Price
Outstanding at Beginning of Year	$ 7.08
Granted	12.67
Outstanding at End of Year	7.15
Options Exercisable at End of Year	$ 5.01
Stock Options
Weighted Average Exercise Price
Compensation expense for stock options	$ 218	$ 175

XML

Securities - Securities Available for Sale (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	$ 300,837	$ 283,216
Gross Unrealized Gains	10,061	7,711
Gross Unrealized Losses	(3,581)	(1,050)
Fair Value	307,317	289,877
U.S. Treasury Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost		4,990
Gross Unrealized Gains		8
Fair Value		4,998
Municipal Bonds
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	115,331	99,441
Gross Unrealized Gains	7,897	6,338
Gross Unrealized Losses	(996)	(36)
Fair Value	122,232	105,743
Mortgage-Backed Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	62,405	64,312
Gross Unrealized Gains	1,099	697
Gross Unrealized Losses	(711)	(281)
Fair Value	62,793	64,728
Corporate Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	49,079	49,674
Gross Unrealized Gains	1,021	633
Gross Unrealized Losses	(160)	(131)
Fair Value	49,940	50,176
SBA Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	47,107	50,126
Gross Unrealized Gains	35	35
Gross Unrealized Losses	(550)	(602)
Fair Value	46,592	49,559
Asset-Backed Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses
Amortized Cost	26,915	14,673
Gross Unrealized Gains	9
Gross Unrealized Losses	(1,164)
Fair Value	$ 25,760	$ 14,673

XML

Regulatory Capital (Tables)

3 Months Ended

Mar. 31, 2020

Regulatory Capital

Summary of company and the Bank’s capital amounts and ratios

The following tables present the Company and the Bank’s capital amounts and ratios as of March 31, 2020 and December 31, 2019:

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
March 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	292,080	13.38	%	$	174,641	8.00	%	$	229,216	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		242,376	11.10			130,980	6.00			185,556	8.50			N/A	N/A
Common Equity Tier 1 Capital		242,376	11.10			98,235	4.50			152,810	7.00			N/A	N/A
Tier 1 Leverage Ratio		242,376	10.51			92,259	4.00			92,259	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	276,487	12.67	%	$	174,523	8.00	%	$	229,062	10.50	%	$	218,154	10.00	%
Tier 1 Risk-Based Capital		251,542	11.53			130,893	6.00			185,431	8.50			174,523	8.00
Common Equity Tier 1 Capital		251,542	11.53			98,169	4.50			152,708	7.00			141,800	6.50
Tier 1 Leverage Ratio		251,542	10.93			92,088	4.00			92,088	4.00			115,110	5.00

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

XML

Stock Repurchase Program

3 Months Ended

Mar. 31, 2020

Stock Repurchase Program

Stock Repurchase Program

Note 12: Stock Repurchase Program

On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to $15.0 million of its common stock during the 24-month period beginning on January 22, 2019. The stock repurchase program permits the Company’s management to acquire shares of the Company’s common stock from time to time in the open market in accordance with Rule 10b-18 of the Exchange Act or in privately negotiated transactions at prices management considers to be attractive and in the best interests of the Company and its shareholders. The stock repurchase program does not obligate the Company to repurchase shares of its common stock.

Any repurchases are subject to compliance with applicable laws and regulations. Repurchases will be conducted in consideration of general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The stock repurchase program may be modified, suspended or discontinued at any time at the discretion of the Company’s Board of Directors.

On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to up to a total of $25.0 million. The stock repurchase program continues through January 22, 2021.

During the first quarter of 2020, the Company repurchased 177,864 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.52 for a total of $2.0  million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At March 31, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $8.0 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the COVID-19 pandemic has subsided.

XML

Loans

3 Months Ended

Mar. 31, 2020

Loans

Loans

Note 4: Loans

The following table presents the components of the loan portfolio at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Commercial	$	299,425	$	276,035
Construction and Land Development		183,350		196,776
Real Estate Mortgage:
1-4 Family Mortgage		272,590		260,611
Multifamily		536,380		515,014
CRE Owner Occupied		75,207		66,584
CRE Non-owner Occupied		631,541		592,545
Total Real Estate Mortgage Loans		1,515,718		1,434,754
Consumer and Other		4,324		4,473
Total Loans, Gross		2,002,817		1,912,038
Allowance for Loan Losses		(24,585)		(22,526)
Net Deferred Loan Fees		(5,336)		(5,512)
Total Loans, Net	$	1,972,896	$	1,884,000

The following tables present the activity in the allowance for loan losses, by segment, for the three months ended March 31, 2020 and 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Three Months Ended March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526
Provision for Loan Losses		531		(71)		361		732		146		1,031		18		(648)		2,100
Loans Charged-off		(34)		—		—		—		—		—		(13)		—		(47)
Recoveries of Loans		2		—		2		—		—		—		2		—		6
Total Ending Allowance Balance	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Three Months Ended March 31, 2019
Allowance for Loan Losses:
Beginning Balance	$	2,898	$	2,451	$	2,597	$	4,644	$	808	$	5,872	$	65	$	696	$	20,031
Provision for Loan Losses		480		(354)		5		71		(18)		477		12		(73)		600
Loans Charged-off		(19)		—		—		—		—		—		(17)		—		(36)
Recoveries of Loans		2		—		9		—		—		—		1		—		12
Total Ending Allowance Balance	$	3,361	$	2,097	$	2,611	$	4,715	$	790	$	6,349	$	61	$	623	$	20,607

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of March 31, 2020 and December 31, 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Allowance for Loan Losses at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	35	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	49
Collectively Evaluated for Impairment		3,522		2,131		3,202		6,556		938		8,003		78		106		24,536
Totals	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Allowance for Loan Losses at December 31, 2019
Individually Evaluated for Impairment	$	31	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	45
Collectively Evaluated for Impairment		3,027		2,202		2,839		5,824		792		6,972		71		754		22,481
Totals	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Loans at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Individually Evaluated for Impairment	$	267	$	170	$	1,243	$	—	$	1,847	$	224	$	14	$	3,765
Collectively Evaluated for Impairment		299,158		183,180		271,347		536,380		73,360		631,317		4,310		1,999,052
Totals	$	299,425	$	183,350	$	272,590	$	536,380	$	75,207	$	631,541	$	4,324	$	2,002,817
Loans at December 31, 2019
Individually Evaluated for Impairment	$	273	$	176	$	1,059	$	—	$	236	$	—	$	14	$	1,758
Collectively Evaluated for Impairment		275,762		196,600		259,552		515,014		66,348		592,545		4,459		1,910,280
Totals	$	276,035	$	196,776	$	260,611	$	515,014	$	66,584	$	592,545	$	4,473	$	1,912,038

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of March 31, 2020 and December 31, 2019:

	March 31, 2020						December 31, 2019
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial	$	157	$	157	$	—	$	167	$	167	$	—
Construction and Land Development		170		779		—		176		785		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		303		490		—		302		489		—
1st REM - Rentals		940		940		—		757		757		—
CRE Owner Occupied		1,847		1,847		—		236		236		—
CRE Non Owner Occupied		224		224		—		—		—		—
Totals		3,641		4,437		—		1,638		2,434		—
Loans With An Allowance for Loan Losses:
Commercial		110		113		35		106		109		31
Consumer and Other		14		14		14		14		14		14
Totals		124		127		49		120		123		45
Grand Totals	$	3,765	$	4,564	$	49	$	1,758	$	2,557	$	45

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020				2019
	Average		Interest		Average		Interest
	Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	163	$	3	$	—	$	—
Construction and Land Development		175		—		198		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		329		—		157		2
1st REM - Rentals		932		11		1,637		9
CRE Owner Occupied		1,837		25		449		6
CRE Non Owner Occupied		225		3		—		—
Consumer and Other		—		—		57		—
Totals		3,661		42		2,498		17
Loans With An Allowance for Loan Losses:
Commercial		111		—		688		9
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		308		—
Consumer and Other		14		—		—		—
		125		—		996		9
Grand Totals	$	3,786	$	42	$	3,494	$	26

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.

The following tables present the risk category of loans by loan segment as of March 31, 2020 and December 31, 2019, based on the most recent analysis performed by management:

	March 31, 2020
	Pass		Watch		Substandard		Total
Commercial	$	277,533	$	21,625	$	267	$	299,425
Construction and Land Development		183,045		135		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,790		138		—		30,928
1st REM - 1-4 Family		34,253		123		176		34,552
LOCs and 2nd REM - Rentals		19,156		476		303		19,935
1st REM - Rentals		185,643		768		764		187,175
Multifamily		536,380		—		—		536,380
CRE Owner Occupied		72,540		820		1,847		75,207
CRE Non-owner Occupied		609,598		21,719		224		631,541
Consumer and Other		4,310		—		14		4,324
Totals	$	1,953,248	$	45,804	$	3,765	$	2,002,817

	December 31, 2019
	Pass			Watch			Substandard		Total
Commercial	$	275,741	$		21	$		273	$	276,035
Construction and Land Development		196,462			138			176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,483			138			—		28,621
1st REM - 1-4 Family		36,370			124			177		36,671
LOCs and 2nd REM - Rentals		17,890			479			302		18,671
1st REM - Rentals		174,781			1,287			580		176,648
Multifamily		515,014			—			—		515,014
CRE Owner Occupied		65,411			—			1,173		66,584
CRE Non-owner Occupied		589,457			3,088			—		592,545
Consumer and Other		4,459			—			14		4,473
Totals	$	1,904,068		$	5,275		$	2,695	$	1,912,038

The following tables present the aging of the recorded investment in past due loans by loan segment as of March 31, 2020 and December 31, 2019:

	Accruing Interest
			30-89 Days		90 Days or
March 31, 2020	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	299,397	$	21	$	—	$	7	$	299,425
Construction and Land Development		183,180		—		—		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,928		—		—		—		30,928
1st REM - 1-4 Family		34,552		—		—		—		34,552
LOCs and 2nd REM - Rentals		19,632		—		—		303		19,935
1st REM - Rentals		187,049		—		—		126		187,175
Multifamily		536,380		—		—		—		536,380
CRE Owner Occupied		75,207		—		—		—		75,207
CRE Non-owner Occupied		631,541		—		—		—		631,541
Consumer and Other		4,324		—		—		—		4,324
Totals	$	2,002,190	$	21	$	—	$	606	$	2,002,817

	Accruing Interest
			30-89 Days		90 Days or
December 31, 2019	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	276,028	$	—	$	—	$	7	$	276,035
Construction and Land Development		196,600		—		—		176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,621		—		—		—		28,621
1st REM - 1-4 Family		36,671		—		—		—		36,671
LOCs and 2nd REM - Rentals		18,527		—		—		144		18,671
1st REM - Rentals		176,114		400		—		134		176,648
Multifamily		515,014		—		—		—		515,014
CRE Owner Occupied		66,584		—		—		—		66,584
CRE Non-owner Occupied		592,545		—		—		—		592,545
Consumer and Other		4,470		3		—		—		4,473
Totals	$	1,911,174	$	403	$	—	$	461	$	1,912,038

At March 31, 2020, there were four loans classified as troubled debt restructurings with a current outstanding balance of $839. At December 31, 2019, there were three loans classified as troubled debt restructurings with an outstanding balance of $452. There was one new loan classified as a troubled debt restructuring during the three month period ended March 31, 2020, and no loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the three months ended March 31, 2020.  

In response to the COVID-19 pandemic, the Company is offering short-term loan modifications to borrowers who were current and otherwise not past due as of December 31, 2019. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. In accordance with regulatory guidance, these modifications are not considered to be troubled debt restructurings. The modifications completed in the three months ended March 31, 2020 were immaterial.

XML

Tax Credit Investments

3 Months Ended

Mar. 31, 2020

Tax Credit Investments

Tax Credit Investments

Note 8: Tax Credit Investments

The Company invests in qualified affordable housing projects and federal historic projects for the purpose of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.

The following table presents the Company’s investments in qualified affordable housing projects and other tax credit investments at March 31, 2020 and December 31, 2019:

		March 31, 2020				December 31, 2019
Investment	Accounting Method		Investment		Unfunded Commitment (1)		Investment		Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)	Proportional Amortization	$	2,077	$	—	$	2,148	$	—
Federal Historic Tax Credit (FHTC)	Equity		1,924		2,895		2,262		3,395
Total		$	4,001	$	2,895	$	4,410	$	3,395

(1) All commitments are expected to be paid by the Company by March 31, 2021.

The following table presents the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Amortization Expense (1)
LIHTC	$	71	$	72
FHTC		85		177
Total	$	156	$	249
Tax Benefit Recognized (2)
LIHTC	$	(83)	$	(83)
FHTC		(170)		(214)
Total	$	(253)	$	(297)

(1) The amortization expense for the LIHTC investments are included in income tax expense. The amortization for the FHTC tax credits are included in noninterest expense.

(2) All of the tax benefits recognized are included in income tax expense. The tax benefit recognized for the FHTC investments primarily reflects the tax credits generated from the investments, and excludes the net tax expense/benefit of the investments’ income/loss.

XML

Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2020

Earnings Per Share

Schedule of numerators and denominators for basic and diluted earnings per share computations

Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock compensation. For the three months ended March 31, 2020 and 2019,  303,0000 of stock options and 3,946 of restricted stock awards, and 135,000 of stock options, respectively, were excluded from the calculation because they were deemed to be antidilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Net Income Available to Common Shareholders	$	7,443	$	7,018
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		28,791,494		30,097,638
Dilutive Effect of Stock Compensation		710,751		609,098
Weighted Average Common Stock Outstanding (Dilutive)		29,502,245		30,706,736
Basic Earnings per Common Share	$	0.26	$	0.23
Diluted Earnings per Common Share		0.25		0.23

XML

Deposits (Tables)

3 Months Ended

Mar. 31, 2020

Deposits.

Schedule of composition of deposits

The following table presents the composition of deposits at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Transaction Deposits	$	731,700	$	712,136
Savings and Money Market Deposits		514,113		516,785
Time Deposits		393,340		360,027
Brokered Deposits		260,974		234,362
Totals	$	1,900,127	$	1,823,310

XML

Regulatory Capital - Capital Amounts and Ratios (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Total Risk-Based Capital
Total Risk-Based Capital, Actual amount	$ 292,080	$ 269,613
Total Risk-Based Capital, For Capital Adequacy Purposes, amount	174,641	166,163
Total Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conversion Buffer, amount	$ 229,216	$ 218,089
Total Risk-Based Capital, Actual ratio	13.38%	12.98%
Total Risk-Based Capital, For Capital Adequacy Purposes, Ratio	8.00%	8.00%
Total Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	10.50%	10.50%
Tier 1 Risk-Based Capital
Tier One Risk Based Capital	$ 242,376	$ 236,533
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes, amount	130,980	124,623
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	$ 185,556	$ 176,549
Tier 1 Risk-Based Capital, Actual ratio	11.10%	11.39%
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes, Ratio	6.00%	6.00%
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	8.50%	8.50%
Common Equity Tier 1 Capital
Common Equity Tier 1 Capital, Actual amount	$ 242,376	$ 236,533
Common Equity Tier 1 Capital, For Capital Adequacy Purposes, amount	98,235	93,467
Common Equity Tier 1 Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	$ 152,810	$ 145,393
Common Equity Tier 1 Capital, Actual ratio	11.10%	11.39%
Common Equity Tier 1 Capital, For Capital Adequacy Purposes, Ratio	4.50%	4.50%
Common Equity Tier 1 Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	7.00%	7.00%
Leverage Ratio
Tier 1 Leverage Ratio, Actual amount	$ 242,376	$ 236,533
Tier 1 Leverage Ratio, For Capital Adequacy Purposes, amount	92,259	88,498
Tier 1 Leverage Ratio, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	$ 92,259	$ 88,498
Tier 1 Leverage Ratio, Actual ratio	10.51%	10.69%
Tier 1 Leverage Ratio, For Capital Adequacy Purposes, Ratio	4.00%	4.00%
Tier 1 Leverage Ratio, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	4.00%	4.00%
Bank
Total Risk-Based Capital
Total Risk-Based Capital, Actual amount	$ 276,487	$ 252,501
Total Risk-Based Capital, For Capital Adequacy Purposes, amount	174,523	166,137
Total Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conversion Buffer, amount	229,062	218,055
Total Risk-Based Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, amount	$ 218,154	$ 207,671
Total Risk-Based Capital, Actual ratio	12.67%	12.16%
Total Risk-Based Capital, For Capital Adequacy Purposes, Ratio	8.00%	8.00%
Total Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	10.50%	10.50%
Total Risk-Based Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, Ratio	10.00%	10.00%
Tier 1 Risk-Based Capital
Tier One Risk Based Capital	$ 251,542	$ 243,461
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes, amount	130,893	124,603
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	185,431	176,521
Tier 1 Risk-Based Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, amount	$ 174,523	$ 166,137
Tier 1 Risk-Based Capital, Actual ratio	11.53%	11.72%
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes, Ratio	6.00%	6.00%
Tier 1 Risk-Based Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	8.50%	8.50%
Tier 1 Risk-Based Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, Ratio	8.00%	8.00%
Common Equity Tier 1 Capital
Common Equity Tier 1 Capital, Actual amount	$ 251,542	$ 243,461
Common Equity Tier 1 Capital, For Capital Adequacy Purposes, amount	98,169	93,452
Common Equity Tier 1 Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	152,708	145,370
Common Equity Tier 1 Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, amount	$ 141,800	$ 134,986
Common Equity Tier 1 Capital, Actual ratio	11.53%	11.72%
Common Equity Tier 1 Capital, For Capital Adequacy Purposes, Ratio	4.50%	4.50%
Common Equity Tier 1 Capital, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	7.00%	7.00%
Common Equity Tier 1 Capital, To be Well Capitalized Under Prompt Corrective Action Regulations, Ratio	6.50%	6.50%
Leverage Ratio
Tier 1 Leverage Ratio, Actual amount	$ 251,542	$ 243,461
Tier 1 Leverage Ratio, For Capital Adequacy Purposes, amount	92,088	88,455
Tier 1 Leverage Ratio, For Capital Adequacy Purposes Plus Capital Conservation Buffer, amount	92,088	88,455
Tier 1 Leverage Ratio, To be Well Capitalized Under Prompt Corrective Action Regulations, amount	$ 115,110	$ 110,569
Tier 1 Leverage Ratio, Actual ratio	10.93%	11.01%
Tier 1 Leverage Ratio, For Capital Adequacy Purposes, Ratio	4.00%	4.00%
Tier 1 Leverage Ratio, For Capital Adequacy Purposes Plus Capital Conservation Buffer, Ratio	4.00%	4.00%
Tier 1 Leverage Ratio, To be Well Capitalized Under Prompt Corrective Action Regulations, Ratio	5.00%	5.00%

XML

Fair Value Measurement - Estimated Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Financial Assets:
Cash and Due From Banks	$ 61,526	$ 31,935
Bank-Owned Certificates of Deposit	2,895	2,654
Securities Available for Sale, at Fair Value	307,317	289,877
FHLB Stock, at Cost	11,017	7,824
Loans, Net	1,972,896	1,884,000
Accrued Interest Receivable	7,102	6,775
Interest Rate Swaps	3,254	284
Financial Liabilities:
Deposits	1,900,127	1,823,310
Notes Payable	12,500	13,000
FHLB Advances	207,500	136,500
Subordinated Debentures	24,759	24,733
Accrued Interest Payable	1,688	1,982
Interest Rate Swaps	6,787	902
Level 1
Financial Assets:
Cash and Due From Banks	61,526	31,935
Securities Available for Sale, at Fair Value		4,998
Level 2
Financial Assets:
Bank-Owned Certificates of Deposit	2,968	2,677
Securities Available for Sale, at Fair Value	307,317	284,879
FHLB Stock, at Cost	11,017	7,824
Loans, Net	1,989,365	1,891,987
Accrued Interest Receivable	7,102	6,775
Interest Rate Swaps	3,254	284
Financial Liabilities:
Deposits	1,912,436	1,821,915
Notes Payable	12,525	13,022
FHLB Advances	218,362	141,152
Subordinated Debentures	26,630	25,309
Accrued Interest Payable	1,688	1,982
Interest Rate Swaps	6,787	902
Estimated Fair Value
Financial Assets:
Cash and Due From Banks	61,526	31,935
Bank-Owned Certificates of Deposit	2,968	2,677
Securities Available for Sale, at Fair Value	307,317	289,877
FHLB Stock, at Cost	11,017	7,824
Loans, Net	1,989,365	1,891,987
Accrued Interest Receivable	7,102	6,775
Interest Rate Swaps	3,254	284
Financial Liabilities:
Deposits	1,912,436	1,821,915
Notes Payable	12,525	13,022
FHLB Advances	218,362	141,152
Subordinated Debentures	26,630	25,309
Accrued Interest Payable	1,688	1,982
Interest Rate Swaps	$ 6,787	$ 902

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Consolidated Statements of Comprehensive Income
Net Income	$ 7,443	$ 7,018
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities	(178)	4,618
Unrealized Gains (Losses) on Cash Flow Hedges	(2,932)	(91)
Reclassification Adjustment for (Gains) Losses Realized in Income	15	5
Income Tax Impact	650	(951)
Total Other Comprehensive Income (Loss), Net of Tax	(2,445)	3,581
Comprehensive Income	$ 4,998	$ 10,599

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 01, 2020
Document and Entity Information
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Entity Registrant Name	Bridgewater Bancshares Inc
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Interactive Data Current	Yes
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		28,813,082
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Entity Central Index Key	0001341317
Amendment Flag	false
Entity Ex Transition Period	false

XML

Loans - Summary of loans modified in TDRs and those restructurings (Details) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020 USD ($) loan	Dec. 31, 2019 USD ($) loan
Loans
Troubled Debt Restructurings, Number of Loans	4	3
New Troubled Debt Restructurings, Post-Modification Outstanding Balance | $	$ 839	$ 452
New Troubled Debt Restructurings, Number of Loans	1
Troubled Debt Restructurings That Subsequently Defaulted Within 12 Months of The Restructure Date, Number of Loans	0

XML

Earnings Per Share

3 Months Ended

Mar. 31, 2020

Earnings Per Share

Earnings Per Share

Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock compensation. For the three months ended March 31, 2020 and 2019,  303,0000 of stock options and 3,946 of restricted stock awards, and 135,000 of stock options, respectively, were excluded from the calculation because they were deemed to be antidilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Net Income Available to Common Shareholders	$	7,443	$	7,018
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		28,791,494		30,097,638
Dilutive Effect of Stock Compensation		710,751		609,098
Weighted Average Common Stock Outstanding (Dilutive)		29,502,245		30,706,736
Basic Earnings per Common Share	$	0.26	$	0.23
Diluted Earnings per Common Share		0.25		0.23

XML

Loans - Impaired loans by loan segment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	$ 3,641	$ 1,638
Loans With No Related Allowance for Loan Losses, Principal Balance	4,437	2,434
Loans With An Allowance for Loan Losses, Recorded Investment	124	120
Loans With An Allowance for Loan Losses, Principal Balance	127	123
Total Recorded Investment	3,765	1,758
Total Principal Balance	4,564	2,557
Related Allowance	49	45
Commercial
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	157	167
Loans With No Related Allowance for Loan Losses, Principal Balance	157	167
Loans With An Allowance for Loan Losses, Recorded Investment	110	106
Loans With An Allowance for Loan Losses, Principal Balance	113	109
Related Allowance	35	31
Construction and Land Development
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	170	176
Loans With No Related Allowance for Loan Losses, Principal Balance	779	785
HELOC and 1-4 Family Junior Mortgage
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	303	302
Loans With No Related Allowance for Loan Losses, Principal Balance	490	489
1st REM - Rentals
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	940	757
Loans With No Related Allowance for Loan Losses, Principal Balance	940	757
Consumer and other
Impaired loans by loan segment
Loans With An Allowance for Loan Losses, Recorded Investment	14	14
Loans With An Allowance for Loan Losses, Principal Balance	14	14
Related Allowance	14	14
CRE Owner Occupied
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	1,847	236
Loans With No Related Allowance for Loan Losses, Principal Balance	1,847	$ 236
CRE Non-owner Occupied
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Recorded Investment	224
Loans With No Related Allowance for Loan Losses, Principal Balance	$ 224

XML

Description of the Business and Summary of Significant Accounting Policies (Policies )

3 Months Ended

Mar. 31, 2020

Description of the Business and Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10‑Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020.

Principles of Consolidation

Principles of Consolidation

These consolidated financial statements include the amounts of the Company, the Bank, with locations in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, Minnesota, BWB Holdings, LLC, Bridgewater Investment Management, Inc., and Bridgewater Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Information available which could affect judgements includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 pandemic related changes, and changes in the financial condition of borrowers.

Material estimates that are particularly susceptible to significant change in the near term include the valuation of securities, determination of the allowance for loan losses, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.

Impact of Recent Accounting Standards

Impact of Recently Adopted Accounting Guidance

In January 2017, the Financial Accounting Standards Board, or FASB, issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this accounting standards update, or ASU, were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. During the three months ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis. Under the new simplified guidance, the Company’s estimated fair value to a market participant as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period.

In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments of this ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted this standard during the first quarter of 2020 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued an interagency statement titled Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40), a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.  The regulatory agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. These include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, that passed on March 27, 2020 further provides banks with the option to elect either or both of the following, from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates:

(i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

(ii) to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The Company is applying this guidance to qualifying loan modifications.

Impact of Recently Issued Accounting Standards

The following ASUs have been issued by the FASB and may impact the Company’s consolidated financial statements in future reporting periods.

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps and approximately 10.7% of the Company’s loans as of March 31, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this pronouncement on those financial assets where LIBOR is used as an index rate.

Subsequent Events

Subsequent Events

Subsequent events have been evaluated through May 7, 2020, which is the date the consolidated financial statements were available to be issued.

XML

Premises and Equipment (Tables)

3 Months Ended

Mar. 31, 2020

Premises and Equipment

Schedule of Premises and equipment

Premises and equipment are summarized as follows as of March 31, 2020 and December 31, 2019:

	Range of	March 31,		December 31,
	Useful Lives	2020		2019
Land	N/A	$	5,174	$	5,174
Building	15 - 39 Years		3,487		3,487
Leasehold Improvements	3 ‑ 10 Years		3,344		3,344
Furniture and Equipment	3 ‑ 5 Years		4,838		3,902
Construction in Progress	N/A		23,586		16,693
Subtotal			40,429		32,600
Accumulated Depreciation			(5,158)		(4,972)
Totals		$	35,271	$	27,628

XML

Stock Options and Restricted Stock Awards - Restricted Stock Awards (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Number of Shares
Nonvested Awards at beginning of period	132,960
Granted	3,946
Nonvested Awards at end of period	136,906
Weighted Average Grant Date Fair Value
Nonvested Awards at beginning of period	$ 12.92
Granted	12.67
Nonvested Awards at end of period	$ 12.91
Compensation expense
Recognition period for non vested restricted stock awards	4 years 9 months 18 days
Shares issued for services on board of directors	7,721
Value of shares issued for services on board of directors	$ 75
Restricted Stock
Compensation expense
Compensation expense recognized	108	$ 0
Unrecognized compensation cost	$ 1,630
Recognition period for non vested restricted stock awards	4 years

XML

Fair Value Measurement - Nonrecurring (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Balances of the assets and liabilities measured at fair value on a nonrecurring basis
Loss	$ 2,100	$ 600
Nonrecurring
Balances of the assets and liabilities measured at fair value on a nonrecurring basis
Loss	49		$ 206
Nonrecurring | Impaired Loans
Balances of the assets and liabilities measured at fair value on a nonrecurring basis
Loss	49		206
Level 2 | Nonrecurring
Balances of the assets and liabilities measured at fair value on a nonrecurring basis
Assets measured at fair value	75		75
Level 2 | Nonrecurring | Impaired Loans
Balances of the assets and liabilities measured at fair value on a nonrecurring basis
Assets measured at fair value	$ 75		$ 75

XML

Description of the Business and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Description of the Business and Summary of Significant Accounting Policies

Description of the Business and Summary of Significant Accounting Policies

Note 1: Description of the Business and Summary of Significant Accounting Policies

Organization

Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company whose operations consist of the ownership of its wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc. The Bank commenced operations in 2005 and provides retail and commercial loan and deposit services, principally to customers within the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In 2008, the Bank formed BWB Holdings, LLC, a wholly owned subsidiary of the Bank, for the purpose of holding repossessed property. In 2018, the Bank formed Bridgewater Investment Management, Inc., a wholly owned subsidiary of the Bank, for the purpose of holding certain municipal securities and to engage in municipal lending activities.

Bridgewater Risk Management, a subsidiary of the Company, was incorporated in 2016 as a wholly owned insurance company. It insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. Bridgewater Risk Management pools resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10‑Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020.

Principles of Consolidation

These consolidated financial statements include the amounts of the Company, the Bank, with locations in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, Minnesota, BWB Holdings, LLC, Bridgewater Investment Management, Inc., and Bridgewater Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Information available which could affect judgements includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 pandemic related changes, and changes in the financial condition of borrowers.

Material estimates that are particularly susceptible to significant change in the near term include the valuation of securities, determination of the allowance for loan losses, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on March 13, 2018; (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues; (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (4) the date on which the Company has, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

Impact of Recently Adopted Accounting Guidance

In January 2017, the Financial Accounting Standards Board, or FASB, issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this accounting standards update, or ASU, were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. During the three months ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis. Under the new simplified guidance, the Company’s estimated fair value to a market participant as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period.

In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments of this ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted this standard during the first quarter of 2020 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued an interagency statement titled Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40), a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.  The regulatory agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. These include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, that passed on March 27, 2020 further provides banks with the option to elect either or both of the following, from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates:

(i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

(ii) to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The Company is applying this guidance to qualifying loan modifications.

Impact of Recently Issued Accounting Standards

The following ASUs have been issued by the FASB and may impact the Company’s consolidated financial statements in future reporting periods.

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps and approximately 10.7% of the Company’s loans as of March 31, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this pronouncement on those financial assets where LIBOR is used as an index rate.

Subsequent Events

Subsequent events have been evaluated through May 7, 2020, which is the date the consolidated financial statements were available to be issued. 

XML

Premises and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Premises and Equipment
Subtotal	$ 40,429		$ 32,600
Accumulated Depreciation	(5,158)		(4,972)
Totals	35,271		27,628
Depreciation and Amortization	187	$ 210
Land
Premises and Equipment
Subtotal	5,174		5,174
Building
Premises and Equipment
Subtotal	$ 3,487		3,487
Building | Minimum
Premises and Equipment
Estimated Useful Life	15 years
Building | Maximum
Premises and Equipment
Estimated Useful Life	39 years
Leasehold Improvements
Premises and Equipment
Subtotal	$ 3,344		3,344
Leasehold Improvements | Minimum
Premises and Equipment
Estimated Useful Life	3 years
Leasehold Improvements | Maximum
Premises and Equipment
Estimated Useful Life	10 years
Furniture and Equipment
Premises and Equipment
Subtotal	$ 4,838		3,902
Furniture and Equipment | Minimum
Premises and Equipment
Estimated Useful Life	3 years
Furniture and Equipment | Maximum
Premises and Equipment
Estimated Useful Life	5 years
Construction in Progress
Premises and Equipment
Subtotal	$ 23,586		$ 16,693

XML

Loans - Average balances and interest income recognized (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	$ 3,661	$ 2,498
Loans With No Related Allowance for Loan Losses, Interest Recognized	42	17
Loans With An Allowance for Loan Losses, Average Investment	125	996
Loans With An Allowance for Loan Losses, Interest Recognized		9
Total Average Investment	3,786	3,494
Total Interest Recognized	42	26
Commercial
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	163
Loans With No Related Allowance for Loan Losses, Interest Recognized	3
Loans With An Allowance for Loan Losses, Average Investment	111	688
Loans With An Allowance for Loan Losses, Interest Recognized		9
Construction and Land Development
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	175	198
HELOC and 1-4 Family Junior Mortgage
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	329	157
Loans With No Related Allowance for Loan Losses, Interest Recognized		2
Loans With An Allowance for Loan Losses, Average Investment		308
1st REM - Rentals
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	932	1,637
Loans With No Related Allowance for Loan Losses, Interest Recognized	11	9
CRE Owner Occupied
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	1,837	449
Loans With No Related Allowance for Loan Losses, Interest Recognized	25	6
CRE Non-owner Occupied
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment	225
Loans With No Related Allowance for Loan Losses, Interest Recognized	3
Consumer and other
Impaired loans by loan segment
Loans With No Related Allowance for Loan Losses, Average Investment		$ 57
Loans With An Allowance for Loan Losses, Average Investment	$ 14

XML

Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
INTEREST INCOME
Loans, Including Fees	$ 25,113	$ 22,179
Investment Securities	2,196	1,901
Other	159	187
Total Interest Income	27,468	24,267
INTEREST EXPENSE
Deposits	5,724	5,703
Notes Payable	115	121
FHLB Advances	1,027	775
Subordinated Debentures	393	377
Federal Funds Purchased	107	160
Total Interest Expense	7,366	7,136
NET INTEREST INCOME	20,102	17,131
Provision for Loan Losses	2,100	600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	18,002	16,531
NONINTEREST INCOME
Customer Service Fees	240	191
Net Gain (Loss) on Sales of Available for Sale Securities	3	(5)
Other Income	1,476	448
Total Noninterest Income	1,719	634
NONINTEREST EXPENSE
Salaries and Employee Benefits	6,454	4,802
Occupancy and Equipment	713	656
Other Expense	2,579	2,427
Total Noninterest Expense	9,746	7,885
INCOME BEFORE INCOME TAXES	9,975	9,280
Provision for Income Taxes	2,532	2,262
NET INCOME	$ 7,443	$ 7,018
EARNINGS PER SHARE
Basic (in dollars per share)	$ 0.26	$ 0.23
Diluted (in dollars per share)	$ 0.25	$ 0.23

XML

Derivative Instruments and Hedging Activities - Derivative Instruments in Cash Flow Hedging Relationships (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Gain or (Loss) Reclassified from AOCI into earnings	$ (15)	$ (5)
Amounts reclassified from AOCI into earnings related to hedge ineffectiveness	0	0
Amount expected to be relassified from AOCI into earnings related to hedge ineffectiveness	0	$ 0
Interest Rate Swap | Interest expense | Cash flow hedge
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Gain or (Loss) Reclassified from AOCI into earnings	$ (18)

XML

Stock Options and Restricted Stock Awards - Black-Scholes Assumptions (Details)	3 Months Ended
	Mar. 31, 2020
Black-Scholes Assumptions
Expected Life	7 years
Expected Volatility	19.56%
Risk-Free Interest Rate	0.97%

XML

Securities - Continuous Unrealized Loss Position (Details) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020 USD ($) security	Dec. 31, 2019 USD ($) security
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	$ 84,481	$ 55,293
Less Than 12 Months, Unrealized Losses	(3,110)	(460)
12 Months or Greater, Fair Value	30,922	35,524
12 Months or Greater, Unrealized Losses	(471)	(590)
Fair Value	115,403	90,817
Unrealized Losses	$ (3,581)	$ (1,050)
Number of debt securities with unrealized losses | security	152	110
Percentage of aggregate depreciation from amortized cost basis	3.00%	1.10%
Municipal Bonds
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	$ 19,372	$ 2,760
Less Than 12 Months, Unrealized Losses	(989)	(23)
12 Months or Greater, Fair Value	223	1,390
12 Months or Greater, Unrealized Losses	(7)	(13)
Fair Value	19,595	4,150
Unrealized Losses	(996)	(36)
Mortgage-Backed Securities
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	28,935	32,276
Less Than 12 Months, Unrealized Losses	(684)	(242)
12 Months or Greater, Fair Value	1,791	3,098
12 Months or Greater, Unrealized Losses	(27)	(39)
Fair Value	30,726	35,374
Unrealized Losses	(711)	(281)
Corporate Securities
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	10,298	8,350
Less Than 12 Months, Unrealized Losses	(160)	(131)
Fair Value	10,298	8,350
Unrealized Losses	(160)	(131)
SBA Securities
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	9,191	11,907
Less Than 12 Months, Unrealized Losses	(113)	(64)
12 Months or Greater, Fair Value	28,908	31,036
12 Months or Greater, Unrealized Losses	(437)	(538)
Fair Value	38,099	42,943
Unrealized Losses	(550)	$ (602)
Asset-Backed Securities
Fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
Less Than 12 Months, Fair Value	16,685
Less Than 12 Months, Unrealized Losses	(1,164)
Fair Value	16,685
Unrealized Losses	$ (1,164)

XML

Fair Value Measurement (Tables)

3 Months Ended

Mar. 31, 2020

Fair Value Measurement

Summary of balances of the assets and liabilities measured at fair value on a recurring basis

The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
Municipal Bonds	$	—	$	122,232	$	—	$	122,232
Mortgage-Backed Securities		—		62,793		—		62,793
Corporate Securities		—		49,940		—		49,940
SBA Securities		—		46,592		—		46,592
Asset-Backed Securities		—		25,760		—		25,760
Interest Rate Swaps		—		3,254		—		3,254
Total Fair Value of Financial Assets	$	—	$	310,571	$	—	$	310,571
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	6,787	$	—	$	6,787
Total Fair Value of Financial Liabilities	$	—	$	6,787	$	—	$	6,787

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities	$	4,998	$	—	$	—	$	4,998
Municipal Bonds		—		105,743		—		105,743
Mortgage-Backed Securities		—		64,728		—		64,728
Corporate Securities		—		50,176		—		50,176
SBA Securities		—		49,559		—		49,559
Asset-Backed Securities		—		14,673		—		14,673
Interest Rate Swaps		—		284		—		284
Total Fair Value of Financial Assets	$	4,998	$	285,163	$	—	$	290,161
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	902	$	—	$	902
Total Fair Value of Financial Liabilities	$	—	$	902	$	—	$	902

Summary of net impairment losses related to nonrecurring fair value measurements of certain asset

The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	49
Totals	$	—	$	75	$	—	$	49

	December 31, 2019
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	206
Totals	$	—	$	75	$	—	$	206

Summary of carrying amount and estimated fair values of financial instruments

The following tables present the carrying amount and estimated fair values of financial instruments at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	61,526	$	61,526	$	—	$	—	$	61,526
Bank-Owned Certificates of Deposit		2,895		—		2,968		—		2,968
Securities Available for Sale		307,317		—		307,317		—		307,317
FHLB Stock, at Cost		11,017		—		11,017		—		11,017
Loans, Net		1,972,896		—		1,989,365		—		1,989,365
Accrued Interest Receivable		7,102		—		7,102		—		7,102
Interest Rate Swaps		3,254		—		3,254		—		3,254
Financial Liabilities:
Deposits	$	1,900,127	$	—	$	1,912,436	$	—	$	1,912,436
Notes Payable		12,500		—		12,525		—		12,525
FHLB Advances		207,500		—		218,362		—		218,362
Subordinated Debentures		24,759		—		26,630		—		26,630
Accrued Interest Payable		1,688		—		1,688		—		1,688
Interest Rate Swaps		6,787		—		6,787		—		6,787

	December 31, 2019
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	31,935	$	31,935	$	—	$	—	$	31,935
Bank-Owned Certificates of Deposit		2,654		—		2,677		—		2,677
Securities Available for Sale		289,877		4,998		284,879		—		289,877
FHLB Stock, at Cost		7,824		—		7,824		—		7,824
Loans, Net		1,884,000		—		1,891,987		—		1,891,987
Accrued Interest Receivable		6,775		—		6,775		—		6,775
Interest Rate Swaps		284		—		284		—		284
Financial Liabilities:
Deposits	$	1,823,310	$	—	$	1,821,915	$	—	$	1,821,915
Notes Payable		13,000		—		13,022		—		13,022
FHLB Advances		136,500		—		141,152		—		141,152
Subordinated Debentures		24,733		—		25,309		—		25,309
Accrued Interest Payable		1,982		—		1,982		—		1,982
Interest Rate Swaps		902		—		902		—		902

XML

Securities

3 Months Ended

Mar. 31, 2020

Securities

Securities

Note 3: Securities

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
Municipal Bonds	$	115,331	$	7,897	$	(996)	$	122,232
Mortgage-Backed Securities		62,405		1,099		(711)		62,793
Corporate Securities		49,079		1,021		(160)		49,940
SBA Securities		47,107		35		(550)		46,592
Asset-Backed Securities		26,915		9		(1,164)		25,760
Total Securities Available for Sale	$	300,837	$	10,061	$	(3,581)	$	307,317

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	4,990	$	8	$	—	$	4,998
Municipal Bonds		99,441		6,338		(36)		105,743
Mortgage-Backed Securities		64,312		697		(281)		64,728
Corporate Securities		49,674		633		(131)		50,176
SBA Securities		50,126		35		(602)		49,559
Asset-Backed Securities		14,673		—		—		14,673
Total Securities Available for Sale	$	283,216	$	7,711	$	(1,050)	$	289,877

The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2020
Municipal Bonds	$	19,372	$	(989)	$	223	$	(7)	$	19,595	$	(996)
Mortgage-Backed Securities		28,935		(684)		1,791		(27)		30,726		(711)
Corporate Securities		10,298		(160)		—		—		10,298		(160)
SBA Securities		9,191		(113)		28,908		(437)		38,099		(550)
Asset-Backed Securities		16,685		(1,164)		—		—		16,685		(1,164)
Total Securities Available for Sale	$	84,481	$	(3,110)	$	30,922	$	(471)	$	115,403	$	(3,581)

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2019
Municipal Bonds	$	2,760	$	(23)	$	1,390	$	(13)	$	4,150	$	(36)
Mortgage-Backed Securities		32,276		(242)		3,098		(39)		35,374		(281)
Corporate Securities		8,350		(131)		—		—		8,350		(131)
SBA Securities		11,907		(64)		31,036		(538)		42,943		(602)
Total Securities Available for Sale	$	55,293	$	(460)	$	35,524	$	(590)	$	90,817	$	(1,050)

At March 31, 2020,  152 debt securities had unrealized losses with aggregate depreciation of approximately 3.0%  from the Company’s amortized cost basis. At December 31, 2019,  110 debt securities had unrealized losses with aggregate depreciation of approximately 1.1% from the Company’s amortized cost basis. These unrealized losses related principally to changes in interest rates and were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of March 31, 2020 and December 31, 2019.

The following presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of March 31, 2020. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.

March 31, 2020	Amortized Cost		Fair Value
Due in One Year or Less	$	9,793	$	9,926
Due After One Year Through Five Years		59,106		60,660
Due After Five Years Through 10 Years		80,222		84,592
Due After 10 Years		15,289		16,994
Subtotal		164,410		172,172
Mortgage-Backed Securities		62,405		62,793
SBA Securities		47,107		46,592
Asset-Backed Securities		26,915		25,760
Totals	$	300,837	$	307,317

As of March 31, 2020 and December 31, 2019, the securities portfolio was unencumbered.

The following presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Proceeds From Sales of Securities	$	2,102	$	8,150
Gross Gains on Sales		3		76
Gross Losses on Sales		—		(81)

XML

Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 7: Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, which consist of interest rate swaps, to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Non-hedge Derivatives

The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	50,113	$	3,254	$	7,140	$	150
Liabilities		50,113		(3,254)		7,140		(150)
Total	$	100,226	$	—	$	14,280	$	—

Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. During the next 12 months, the Company estimates that $693  will be reclassified to interest expense.

The following tables present a summary of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
Notional Amount	$	102,500		$	48,000
Weighted Average Pay Rate		1.35	%		1.89	%
Weighted Average Receive Rate		1.51	%		2.25	%
Weighted Average Maturity (Years)		4.48			3.53
Net Unrealized Gain (Loss)	$	(3,533)		$	(618)

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	—	$	—	$	18,000	$	134
Liabilities		102,500		(3,533)		30,000		(752)

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three months ended March 31, 2020 and 2019:

		Three Months Ended March 31,
(dollars in thousands)		2020			2019
Derivatives in	Location of Gain or	Gain (Loss)
Cash Flow Hedging	(Loss) Reclassified	Reclassified from
Relationships	from AOCI into Income	AOCI into Earnings
Interest Rate Swaps	Interest Expense		$	(18)		$	—

No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three months ended March 31, 2020 and 2019, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

XML

Regulatory Capital

3 Months Ended

Mar. 31, 2020

Regulatory Capital

Regulatory Capital

Note 11: Regulatory Capital

Effective January 1, 2015, the capital requirements of the Company and the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The Basel III requirements, among other things, (i) apply a strengthened set of capital requirements to the Company and Bank, including requirements related to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and higher minimum tier 1 capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and buffer requirements which were phased in incrementally, with full implementation on January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the tables below and defined in the regulations) of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets, Common Equity Tier 1 Capital to Risk Weighted Assets, and Tier 1 Capital to Average Assets.

The following tables present the Company and the Bank’s capital amounts and ratios as of March 31, 2020 and December 31, 2019:

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
March 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	292,080	13.38	%	$	174,641	8.00	%	$	229,216	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		242,376	11.10			130,980	6.00			185,556	8.50			N/A	N/A
Common Equity Tier 1 Capital		242,376	11.10			98,235	4.50			152,810	7.00			N/A	N/A
Tier 1 Leverage Ratio		242,376	10.51			92,259	4.00			92,259	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	276,487	12.67	%	$	174,523	8.00	%	$	229,062	10.50	%	$	218,154	10.00	%
Tier 1 Risk-Based Capital		251,542	11.53			130,893	6.00			185,431	8.50			174,523	8.00
Common Equity Tier 1 Capital		251,542	11.53			98,169	4.50			152,708	7.00			141,800	6.50
Tier 1 Leverage Ratio		251,542	10.93			92,088	4.00			92,088	4.00			115,110	5.00

					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

The Company and the Bank must maintain a capital conservation buffer, as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers.

XML

Derivative Instruments and Hedging Activities (Tables)

3 Months Ended

Mar. 31, 2020

Derivative Instruments, Gain (Loss) [Line Items]

Summary of interest rate swaps

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	50,113	$	3,254	$	7,140	$	150
Liabilities		50,113		(3,254)		7,140		(150)
Total	$	100,226	$	—	$	14,280	$	—

Derivative Instruments and Hedging Activities

The following tables present a summary of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
Notional Amount	$	102,500		$	48,000
Weighted Average Pay Rate		1.35	%		1.89	%
Weighted Average Receive Rate		1.51	%		2.25	%
Weighted Average Maturity (Years)		4.48			3.53
Net Unrealized Gain (Loss)	$	(3,533)		$	(618)

Effect of derivative instruments in cash flow hedging relationships

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three months ended March 31, 2020 and 2019:

		Three Months Ended March 31,
(dollars in thousands)		2020			2019
Derivatives in	Location of Gain or	Gain (Loss)
Cash Flow Hedging	(Loss) Reclassified	Reclassified from
Relationships	from AOCI into Income	AOCI into Earnings
Interest Rate Swaps	Interest Expense		$	(18)		$	—

Cash flow hedge

Derivative Instruments, Gain (Loss) [Line Items]

Summary of interest rate swaps

	March 31, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	—	$	—	$	18,000	$	134
Liabilities		102,500		(3,533)		30,000		(752)

XML

Fair Value Measurement

3 Months Ended

Mar. 31, 2020

Fair Value Measurement

Fair Value Measurement

Note 13: Fair Value Measurement

The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs that are unobservable for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
Municipal Bonds	$	—	$	122,232	$	—	$	122,232
Mortgage-Backed Securities		—		62,793		—		62,793
Corporate Securities		—		49,940		—		49,940
SBA Securities		—		46,592		—		46,592
Asset-Backed Securities		—		25,760		—		25,760
Interest Rate Swaps		—		3,254		—		3,254
Total Fair Value of Financial Assets	$	—	$	310,571	$	—	$	310,571
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	6,787	$	—	$	6,787
Total Fair Value of Financial Liabilities	$	—	$	6,787	$	—	$	6,787

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities	$	4,998	$	—	$	—	$	4,998
Municipal Bonds		—		105,743		—		105,743
Mortgage-Backed Securities		—		64,728		—		64,728
Corporate Securities		—		50,176		—		50,176
SBA Securities		—		49,559		—		49,559
Asset-Backed Securities		—		14,673		—		14,673
Interest Rate Swaps		—		284		—		284
Total Fair Value of Financial Assets	$	4,998	$	285,163	$	—	$	290,161
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	902	$	—	$	902
Total Fair Value of Financial Liabilities	$	—	$	902	$	—	$	902

Investment Securities

When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.

For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.

Interest Rate Swaps

Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.

The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at March 31, 2020 and December 31, 2019:

	March 31, 2020
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	49
Totals	$	—	$	75	$	—	$	49

	December 31, 2019
	Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	206
Totals	$	—	$	75	$	—	$	206

Impaired Loans

In accordance with the provisions of the loan impairment guidance, impairment is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.

Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off. 

Fair Value

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present the carrying amount and estimated fair values of financial instruments at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	61,526	$	61,526	$	—	$	—	$	61,526
Bank-Owned Certificates of Deposit		2,895		—		2,968		—		2,968
Securities Available for Sale		307,317		—		307,317		—		307,317
FHLB Stock, at Cost		11,017		—		11,017		—		11,017
Loans, Net		1,972,896		—		1,989,365		—		1,989,365
Accrued Interest Receivable		7,102		—		7,102		—		7,102
Interest Rate Swaps		3,254		—		3,254		—		3,254
Financial Liabilities:
Deposits	$	1,900,127	$	—	$	1,912,436	$	—	$	1,912,436
Notes Payable		12,500		—		12,525		—		12,525
FHLB Advances		207,500		—		218,362		—		218,362
Subordinated Debentures		24,759		—		26,630		—		26,630
Accrued Interest Payable		1,688		—		1,688		—		1,688
Interest Rate Swaps		6,787		—		6,787		—		6,787

	December 31, 2019
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	31,935	$	31,935	$	—	$	—	$	31,935
Bank-Owned Certificates of Deposit		2,654		—		2,677		—		2,677
Securities Available for Sale		289,877		4,998		284,879		—		289,877
FHLB Stock, at Cost		7,824		—		7,824		—		7,824
Loans, Net		1,884,000		—		1,891,987		—		1,891,987
Accrued Interest Receivable		6,775		—		6,775		—		6,775
Interest Rate Swaps		284		—		284		—		284
Financial Liabilities:
Deposits	$	1,823,310	$	—	$	1,821,915	$	—	$	1,821,915
Notes Payable		13,000		—		13,022		—		13,022
FHLB Advances		136,500		—		141,152		—		141,152
Subordinated Debentures		24,733		—		25,309		—		25,309
Accrued Interest Payable		1,982		—		1,982		—		1,982
Interest Rate Swaps		902		—		902		—		902

The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.

Cash and due from banks – The carrying amount of cash and cash equivalents approximates their fair value.

Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.

FHLB stock – The carrying amount of FHLB stock approximates its fair value.

Loans, Net – Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.

Deposits – The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal funds purchased – The carrying amount of federal funds purchased approximates the fair value.

Notes payable and subordinated debentures – The fair values of the Company’s notes payable and subordinated debt are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.

FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.

Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and was not material at March 31, 2020 and December 31, 2019.

Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

XML

Securities (Tables)

3 Months Ended

Mar. 31, 2020

Securities

Summary of the amortized cost and estimated fair value of securities with gross unrealized gains and losses

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
Municipal Bonds	$	115,331	$	7,897	$	(996)	$	122,232
Mortgage-Backed Securities		62,405		1,099		(711)		62,793
Corporate Securities		49,079		1,021		(160)		49,940
SBA Securities		47,107		35		(550)		46,592
Asset-Backed Securities		26,915		9		(1,164)		25,760
Total Securities Available for Sale	$	300,837	$	10,061	$	(3,581)	$	307,317

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	4,990	$	8	$	—	$	4,998
Municipal Bonds		99,441		6,338		(36)		105,743
Mortgage-Backed Securities		64,312		697		(281)		64,728
Corporate Securities		49,674		633		(131)		50,176
SBA Securities		50,126		35		(602)		49,559
Asset-Backed Securities		14,673		—		—		14,673
Total Securities Available for Sale	$	283,216	$	7,711	$	(1,050)	$	289,877

Summary of fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2020
Municipal Bonds	$	19,372	$	(989)	$	223	$	(7)	$	19,595	$	(996)
Mortgage-Backed Securities		28,935		(684)		1,791		(27)		30,726		(711)
Corporate Securities		10,298		(160)		—		—		10,298		(160)
SBA Securities		9,191		(113)		28,908		(437)		38,099		(550)
Asset-Backed Securities		16,685		(1,164)		—		—		16,685		(1,164)
Total Securities Available for Sale	$	84,481	$	(3,110)	$	30,922	$	(471)	$	115,403	$	(3,581)

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2019
Municipal Bonds	$	2,760	$	(23)	$	1,390	$	(13)	$	4,150	$	(36)
Mortgage-Backed Securities		32,276		(242)		3,098		(39)		35,374		(281)
Corporate Securities		8,350		(131)		—		—		8,350		(131)
SBA Securities		11,907		(64)		31,036		(538)		42,943		(602)
Total Securities Available for Sale	$	55,293	$	(460)	$	35,524	$	(590)	$	90,817	$	(1,050)

Schedule of contractual maturities of debt

The following presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of March 31, 2020. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.

March 31, 2020	Amortized Cost		Fair Value
Due in One Year or Less	$	9,793	$	9,926
Due After One Year Through Five Years		59,106		60,660
Due After Five Years Through 10 Years		80,222		84,592
Due After 10 Years		15,289		16,994
Subtotal		164,410		172,172
Mortgage-Backed Securities		62,405		62,793
SBA Securities		47,107		46,592
Asset-Backed Securities		26,915		25,760
Totals	$	300,837	$	307,317

Summary of the proceeds from sales of securities available for sale, as well as gross gains and losses

The following presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Proceeds From Sales of Securities	$	2,102	$	8,150
Gross Gains on Sales		3		76
Gross Losses on Sales		—		(81)

XML

Loans - Recorded investment in past due loans by loan segment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Aging of the recorded investment in past due loans by loan segment
Current	$ 2,002,190	$ 1,911,174
Nonaccrual	606	461
Totals	2,002,817	1,912,038
30-89 Days Past Due
Aging of the recorded investment in past due loans by loan segment
Past Due	21	403
Commercial
Aging of the recorded investment in past due loans by loan segment
Current	299,397	276,028
Nonaccrual	7	7
Totals	299,425	276,035
Commercial | 30-89 Days Past Due
Aging of the recorded investment in past due loans by loan segment
Past Due	21
Construction and Land Development
Aging of the recorded investment in past due loans by loan segment
Current	183,180	196,600
Nonaccrual	170	176
Totals	183,350	196,776
HELOC and 1-4 Family Junior Mortgage
Aging of the recorded investment in past due loans by loan segment
Current	30,928	28,621
Totals	30,928	28,621
1st REM - 1-4 Family
Aging of the recorded investment in past due loans by loan segment
Current	34,552	36,671
Totals	34,552	36,671
LOCs and 2nd REM - Rentals
Aging of the recorded investment in past due loans by loan segment
Current	19,632	18,527
Nonaccrual	303	144
Totals	19,935	18,671
1st REM - Rentals
Aging of the recorded investment in past due loans by loan segment
Current	187,049	176,114
Nonaccrual	126	134
Totals	187,175	176,648
1st REM - Rentals | 30-89 Days Past Due
Aging of the recorded investment in past due loans by loan segment
Past Due		400
Multifamily
Aging of the recorded investment in past due loans by loan segment
Current	536,380	515,014
Totals	536,380	515,014
CRE Owner Occupied
Aging of the recorded investment in past due loans by loan segment
Current	75,207	66,584
Totals	75,207	66,584
CRE Non-owner Occupied
Aging of the recorded investment in past due loans by loan segment
Current	631,541	592,545
Totals	631,541	592,545
Consumer and other
Aging of the recorded investment in past due loans by loan segment
Current	4,324	4,470
Totals	$ 4,324	4,473
Consumer and other | 30-89 Days Past Due
Aging of the recorded investment in past due loans by loan segment
Past Due		$ 3

XML

Loans - Allowance for loan losses by segment (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019	Mar. 31, 2020	Dec. 31, 2019
Allowance for Loan Losses:
Beginning Balance	$ 22,526	$ 20,031	$ 20,031
Provision for Loan Losses	2,100	600
Loans Charged-off	(47)	(36)
Recoveries of Loans	6	12
Total Ending Allowance Balance	24,585	20,607	22,526
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Individually Evaluated for Impairment				$ 49	$ 45
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				24,536	22,481
Loans and Leases Receivable, Allowance, Total	24,585	20,607	22,526	24,585	22,526
Loans, Individually Evaluated for Impairment				3,765	1,758
Loans, Collectively Evaluated for Impairment				1,999,052	1,910,280
Totals				2,002,817	1,912,038
Commercial
Allowance for Loan Losses:
Beginning Balance	3,058	2,898	2,898
Provision for Loan Losses	531	480
Loans Charged-off	(34)	(19)
Recoveries of Loans	2	2
Total Ending Allowance Balance	3,557	3,361	3,058
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Individually Evaluated for Impairment				35	31
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				3,522	3,027
Loans and Leases Receivable, Allowance, Total	3,557	3,361	3,058	3,557	3,058
Loans, Individually Evaluated for Impairment				267	273
Loans, Collectively Evaluated for Impairment				299,158	275,762
Totals				299,425	276,035
Construction and Land Development
Allowance for Loan Losses:
Beginning Balance	2,202	2,451	2,451
Provision for Loan Losses	(71)	(354)
Total Ending Allowance Balance	2,131	2,097	2,202
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				2,131	2,202
Loans and Leases Receivable, Allowance, Total	2,131	2,097	2,202	2,131	2,202
Loans, Individually Evaluated for Impairment				170	176
Loans, Collectively Evaluated for Impairment				183,180	196,600
Totals				183,350	196,776
1-4 Family Mortgage
Allowance for Loan Losses:
Beginning Balance	2,839	2,597	2,597
Provision for Loan Losses	361	5
Recoveries of Loans	2	9
Total Ending Allowance Balance	3,202	2,611	2,839
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				3,202	2,839
Loans and Leases Receivable, Allowance, Total	3,202	2,611	2,839	3,202	2,839
Loans, Individually Evaluated for Impairment				1,243	1,059
Loans, Collectively Evaluated for Impairment				271,347	259,552
Totals				272,590	260,611
Multifamily
Allowance for Loan Losses:
Beginning Balance	5,824	4,644	4,644
Provision for Loan Losses	732	71
Total Ending Allowance Balance	6,556	4,715	5,824
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				6,556	5,824
Loans and Leases Receivable, Allowance, Total	6,556	4,715	5,824	6,556	5,824
Loans, Collectively Evaluated for Impairment				536,380	515,014
Totals				536,380	515,014
CRE Owner Occupied
Allowance for Loan Losses:
Beginning Balance	792	808	808
Provision for Loan Losses	146	(18)
Total Ending Allowance Balance	938	790	792
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				938	792
Loans and Leases Receivable, Allowance, Total	938	790	792	938	792
Loans, Individually Evaluated for Impairment				1,847	236
Loans, Collectively Evaluated for Impairment				73,360	66,348
Totals				75,207	66,584
CRE Non-owner Occupied
Allowance for Loan Losses:
Beginning Balance	6,972	5,872	5,872
Provision for Loan Losses	1,031	477
Total Ending Allowance Balance	8,003	6,349	6,972
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				8,003	6,972
Loans and Leases Receivable, Allowance, Total	8,003	6,349	6,972	8,003	6,972
Loans, Individually Evaluated for Impairment				224
Loans, Collectively Evaluated for Impairment				631,317	592,545
Totals				631,541	592,545
Consumer and other
Allowance for Loan Losses:
Beginning Balance	85	65	65
Provision for Loan Losses	18	12
Loans Charged-off	(13)	(17)
Recoveries of Loans	2	1
Total Ending Allowance Balance	92	61	85
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Individually Evaluated for Impairment				14	14
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				78	71
Loans and Leases Receivable, Allowance, Total	92	61	85	92	85
Loans, Individually Evaluated for Impairment				14	14
Loans, Collectively Evaluated for Impairment				4,310	4,459
Totals				4,324	4,473
Unallocated
Allowance for Loan Losses:
Beginning Balance	754	696	696
Provision for Loan Losses	(648)	(73)
Total Ending Allowance Balance	106	623	754
Allowance for loan losses and the recorded investment
Allowance for Loan Losses and Loans, Collectively Evaluated for Impairment				106	754
Loans and Leases Receivable, Allowance, Total	$ 106	$ 623	$ 754	$ 106	$ 754

XML

Derivative Instruments and Hedging Activities - Non-hedge Derivatives (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Derivatives, Fair Value [Line Items]
Estimated Fair Value, Asset	$ 3,254	$ 284
Estimated Fair Value, Liability	(6,787)	(902)
Interest Rate Swap | Derivatives not designated as hedging instruments
Derivatives, Fair Value [Line Items]
Notional Amount, Asset	50,113	7,140
Notional Amount, Liability	50,113	7,140
Notional Amount	100,226	14,280
Estimated Fair Value, Asset	3,254	150
Estimated Fair Value, Liability	$ (3,254)	$ (150)

XML

Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Common Stock Voting Common Stock	Additional Paid In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Balance at the beginning at Dec. 31, 2018	$ 301	$ 126,031	$ 96,234	$ (1,568)	$ 220,998
Balance at the beginning (in shares) at Dec. 31, 2018	30,097,274
Stock-based Compensation		175			175
Comprehensive Income (Loss)			7,018	3,581	10,599
Stock Options Exercised		3			3
Stock Options Exercised (in shares)	400
Balance at the end at Mar. 31, 2019	$ 301	126,209	103,252	2,013	231,775
Balance at the end (in shares) at Mar. 31, 2019	30,097,674
Balance at the beginning at Dec. 31, 2019	$ 290	112,093	127,637	4,774	244,794
Balance at the beginning (in shares) at Dec. 31, 2019	28,973,572
Stock-based Compensation		401			401
Stock-based Compensation (in shares)	7,721
Comprehensive Income (Loss)			7,443	(2,445)	4,998
Stock Repurchases	$ (2)	(2,048)			(2,050)
Stock Repurchases (in shares)	(177,864)
Issuance of Restricted Stock Awards (in shares)	3,946
Balance at the end at Mar. 31, 2020	$ 288	$ 110,446	$ 135,080	$ 2,329	$ 248,143
Balance at the end (in shares) at Mar. 31, 2020	28,807,375

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
ASSETS
Cash and Cash Equivalents	$ 61,526	$ 31,935
Bank-Owned Certificates of Deposit	2,895	2,654
Securities Available for Sale, at Fair Value	307,317	289,877
Loans, Net of Allowance for Loan Losses of $24,585 at March 31, 2020 (unaudited) and $22,526 at December 31, 2019	1,972,896	1,884,000
Federal Home Loan Bank (FHLB) Stock, at Cost	11,017	7,824
Premises and Equipment, Net	35,271	27,628
Accrued Interest	7,102	6,775
Goodwill	2,626	2,626
Other Intangible Assets, Net	813	861
Other Assets	17,267	14,650
Total Assets	2,418,730	2,268,830
Deposits:
Noninterest Bearing	476,217	447,509
Interest Bearing	1,423,910	1,375,801
Total Deposits	1,900,127	1,823,310
Notes Payable	12,500	13,000
FHLB Advances	207,500	136,500
Subordinated Debentures, Net of Issuance Costs	24,759	24,733
Accrued Interest Payable	1,688	1,982
Other Liabilities	24,013	24,511
Total Liabilities	2,170,587	2,024,036
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value Authorized 10,000,000; None Issued and Outstanding at March 31, 2020 (unaudited) and December 31, 2019
Common Stock- $0.01 par value Common Stock - Authorized 75,000,000; Issued and Outstanding 28,807,375 at March 31, 2020 (unaudited) and 28,973,572 at December 31, 2019	288	290
Additional Paid-In Capital	110,446	112,093
Retained Earnings	135,080	127,637
Accumulated Other Comprehensive Income	2,329	4,774
Total Shareholders' Equity	248,143	244,794
Total Liabilities and Shareholders' Equity	$ 2,418,730	$ 2,268,830

XML

Stock Repurchase Program (Details) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended
	Jul. 23, 2019	Jan. 22, 2019	Mar. 31, 2020
Stock Repurchase Program
Increase in stock repurchase authorized amount	$ 10,000
Authorized stock repurchase amount	$ 25,000	$ 15,000
Authorized repurchase program period		24 months
Shares repurchased			177,864
Percentage of shares outstanding of entity			1.00%
Weighted average share repurchase price			$ 11.52
Stock Repurchases			$ 2,050
Remaining repurchase amount			$ 8,000

XML

Subsequent Events (Details) $ in Thousands		3 Months Ended	12 Months Ended
	May 05, 2020 USD ($) borrower loan	Mar. 31, 2020 USD ($) loan	Dec. 31, 2019 USD ($) loan
Subsequent Events
Number of PPP loans | loan		4	3
Total Loans, Gross		$ 2,002,817	$ 1,912,038
Subsequent Event | PPP
Subsequent Events
Number of PPP loans | loan	1,000
Total Loans, Gross	$ 181,847
Subsequent Event | COVID-19 related loan modifications
Subsequent Events
Loan modifications	$ 288,019
Number of borrowers | borrower	157
Percentage of loan portfolio	15.00%

XML

Stock Options and Restricted Stock Awards - Exercise Price (Details) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) $ / shares shares
Exercise Price
Options Outstanding, Number Outstanding	1,986,650
Options Outstanding, Remaining Contractual Life	6 years 9 months 18 days
Options Outstanding, Exercise Price | $ / shares	$ 7.15
Options Exercisable, Number Outstanding	1,004,050
Total unrecognized compensation cost | $	$ 2,593
Weighted-average period over which total unrecognized compensation cost is expected to be recognized (in years)	4 years 9 months 18 days
2.13
Exercise Price
Options Outstanding, Number Outstanding	74,750
Options Outstanding, Remaining Contractual Life	3 years
Options Outstanding, Exercise Price | $ / shares	$ 2.13
Options Exercisable, Number Outstanding	74,750
3.00
Exercise Price
Options Outstanding, Number Outstanding	455,000
Options Outstanding, Remaining Contractual Life	3 years 9 months 18 days
Options Outstanding, Exercise Price | $ / shares	$ 3.00
Options Exercisable, Number Outstanding	455,000
3.58
Exercise Price
Options Outstanding, Number Outstanding	45,000
Options Outstanding, Remaining Contractual Life	4 years 9 months 18 days
Options Outstanding, Exercise Price | $ / shares	$ 3.58
Options Exercisable, Number Outstanding	45,000
7.47
Exercise Price
Options Outstanding, Number Outstanding	1,023,900
Options Outstanding, Remaining Contractual Life	7 years 6 months
Options Outstanding, Exercise Price | $ / shares	$ 7.47
Options Exercisable, Number Outstanding	402,300
13.22
Exercise Price
Options Outstanding, Number Outstanding	25,000
Options Outstanding, Remaining Contractual Life	8 years 1 month 6 days
Options Outstanding, Exercise Price | $ / shares	$ 13.22
Options Exercisable, Number Outstanding	5,000
12.86
Exercise Price
Options Outstanding, Number Outstanding	45,000
Options Outstanding, Remaining Contractual Life	8 years 4 months 24 days
Options Outstanding, Exercise Price | $ / shares	$ 12.86
Options Exercisable, Number Outstanding	9,000
12.94
Exercise Price
Options Outstanding, Number Outstanding	30,000
Options Outstanding, Remaining Contractual Life	8 years 6 months
Options Outstanding, Exercise Price | $ / shares	$ 12.94
Options Exercisable, Number Outstanding	6,000
11.59
Exercise Price
Options Outstanding, Number Outstanding	25,000
Options Outstanding, Remaining Contractual Life	8 years 7 months 6 days
Options Outstanding, Exercise Price | $ / shares	$ 11.59
Options Exercisable, Number Outstanding	5,000
11.15
Exercise Price
Options Outstanding, Number Outstanding	10,000
Options Outstanding, Remaining Contractual Life	8 years 10 months 24 days
Options Outstanding, Exercise Price | $ / shares	$ 11.15
Options Exercisable, Number Outstanding	2,000
11.13
Exercise Price
Options Outstanding, Number Outstanding	50,000
Options Outstanding, Remaining Contractual Life	9 years 4 months 24 days
Options Outstanding, Exercise Price | $ / shares	$ 11.13
12.92
Exercise Price
Options Outstanding, Number Outstanding	178,000
Options Outstanding, Remaining Contractual Life	9 years 8 months 12 days
Options Outstanding, Exercise Price | $ / shares	$ 12.92
12.67
Exercise Price
Options Outstanding, Number Outstanding	25,000
Options Outstanding, Remaining Contractual Life	9 years 10 months 24 days
Options Outstanding, Exercise Price | $ / shares	$ 12.67

XML

Derivative Instruments and Hedging Activities - Cash Flow Derivatives (Details) - Cash flow hedge - Designated as Hedging Instrument - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Cash Flow Hedging Derivatives
Amount expected to be reclassified from AOCI into earnings	$ 693
Interest Rate Swap
Cash Flow Hedging Derivatives
Notional Amount	$ 102,500	$ 48,000
Weighted Average Pay Rate	1.35%	1.89%
Weighted Average Receive Rate	1.51%	2.25%
Derivative Weighted Average Maturity	4 years 5 months 23 days	3 years 6 months 11 days
Net Unrealized Gain (Loss)	$ (3,533)	$ (618)

XML

Commitments, Contingencies and Credit Risk (Details) - USD ($) $ in Thousands		3 Months Ended		4 Months Ended	19 Months Ended
	Dec. 03, 2019	Mar. 31, 2020	Mar. 31, 2019	Mar. 31, 2020	Mar. 31, 2020	Dec. 31, 2019
Commitments Outstanding
Unfunded Commitments Under Lines of Credit		$ 469,221		$ 469,221	$ 469,221	$ 500,962
Letters of Credit		73,364		73,364	73,364	79,225
Totals		542,585		542,585	542,585	580,187
Payment of construction costs		$ 7,830	$ 2,833
Construction of corporate headquarters office
Commitments Outstanding
Percentage of cost of work		3.75%
Commitment under contract		$ 23,000
Payment of construction costs					19,232
Contract With Third Party
Commitments Outstanding
Commitment under contract	$ 6,321
Payment of construction costs				1,815
Federal Home Loan Bank Advances
Commitments Outstanding
Outstanding letters of credit		$ 135,943		$ 135,943	$ 135,943	$ 108,502

XML

Premises and Equipment

3 Months Ended

Mar. 31, 2020

Premises and Equipment

Premises and Equipment

Note 5: Premises and Equipment

Premises and equipment are summarized as follows as of March 31, 2020 and December 31, 2019:

	Range of	March 31,		December 31,
	Useful Lives	2020		2019
Land	N/A	$	5,174	$	5,174
Building	15 - 39 Years		3,487		3,487
Leasehold Improvements	3 ‑ 10 Years		3,344		3,344
Furniture and Equipment	3 ‑ 5 Years		4,838		3,902
Construction in Progress	N/A		23,586		16,693
Subtotal			40,429		32,600
Accumulated Depreciation			(5,158)		(4,972)
Totals		$	35,271	$	27,628

Depreciation and amortization expense charged to noninterest expense for the three months ended March 31, 2020 and 2019, totaled $187 and $210, respectively. Construction in progress represents amounts paid for the construction of the Company’s new corporate headquarters building. Construction is expected to be completed in the third quarter of 2020.

XML

Commitments, Contingencies and Credit Risk

3 Months Ended

Mar. 31, 2020

Commitments, Contingencies and Credit Risk

Commitments, Contingencies and Credit Risk

Note 9: Commitments, Contingencies and Credit Risk

Financial Instruments with Off-Balance Sheet Credit Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual, or notional, amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.

The following commitments were outstanding at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Unfunded Commitments Under Lines of Credit	$	469,221	$	500,962
Letters of Credit		73,364		79,225
Totals	$	542,585	$	580,187

The Company had outstanding letters of credit with the FHLB in total amounts of $135,943 and  $108,502 at March 31, 2020 and December 31, 2019, respectively, on behalf of customers and to secure public deposits.

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC (the “Contractor”) entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23,000, with anticipated construction completed in the third quarter of 2020. As of March 31, 2020, $19,232 had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a separate contract with a third party relating to the construction of the build-out of the new headquarters building for the Bank. The total amount to be paid by the Bank under the contract is $6,321, with construction anticipated to be completed in the third quarter of 2020. As of March 31, 2020, $1,815 had been paid under this contract.

Legal Contingencies

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

XML

Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Net Income Available to Common Shareholders	$ 7,443	$ 7,018
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)	28,791,494	30,097,638
Dilutive Effect of Stock Compensation	710,751	609,098
Weighted Average Common Stock Outstanding (Dilutive)	29,502,245	30,706,736
Basic Earnings per Common Share (in dollars per share)	$ 0.26	$ 0.23
Diluted Earnings per Common Share (in dollars per share)	$ 0.25	$ 0.23
Stock Options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti dilutive securities excluded from the calculation of EPS	3,030,000	135,000
Restricted Stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti dilutive securities excluded from the calculation of EPS	3,946

XML

Stock Options and Restricted Stock Awards (Tables)

3 Months Ended

Mar. 31, 2020

Stock Options and Restricted Stock Awards

Summary of valuation assumptions used to determine the fair value of option award

The weighted average assumptions used in the model for valuing stock option grants for the three months ended March 31, 2020, are as follows:

	March 31,
	2020
Dividend Yield	—	%
Expected Life	7	Years
Expected Volatility	19.56	%
Risk-Free Interest Rate	0.97	%

Summary of the status of the Company’s outstanding stock options

The following table presents a summary of the status of the Company’s stock option grants for the three months ended March 31, 2020:

	March 31, 2020
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,961,650	$	7.08
Granted	25,000		12.67
Exercised	—		—
Forfeitures	—		—
Outstanding at Period End	1,986,650	$	7.15
Options Exercisable at Period End	1,004,050	$	5.01

Summary of information pertaining to options outstanding based on range of exercise price

The following table presents information pertaining to options outstanding at March 31, 2020:

		Options Outstanding			Options Exercisable
		Number	Remaining				Number
Exercise Price		Outstanding	Contractual Life		Exercise Price		Outstanding
$	2.13	74,750	3.0	Years	$	2.13		74,750
	3.00	455,000	3.8	Years		3.00		455,000
	3.58	45,000	4.8	Years		3.58		45,000
	7.47	1,023,900	7.5	Years		7.47		402,300
	13.22	25,000	8.1	Years		13.22		5,000
	12.86	45,000	8.4	Years		12.86		9,000
	12.94	30,000	8.5	Years		12.94		6,000
	11.59	25,000	8.6	Years		11.59		5,000
	11.15	10,000	8.9	Years		11.15		2,000
	11.13	50,000	9.4	Years		11.13		—
	12.92	178,000	9.7	Years		12.92		—
	12.67	25,000	9.9	Years		12.67		—
	Totals	1,986,650	6.8	Years	$	7.15		1,004,050

Summary of analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding

The following presents an analysis of nonvested stock options issued and outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2019	969,600	$	3.08
Granted	25,000		2.94
Vested	(12,000)		1.99
Forfeited	—		—
Nonvested Options at March 31, 2020	982,600	$	3.09

Summary of the status of the Company’s outstanding restricted stock awards

The following table presents an analysis of nonvested restricted stock awards outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Awards at December 31, 2019	132,960	$	12.92
Granted	3,946		12.67
Vested	—		—
Forfeited	—		—
Nonvested Awards at March 31, 2020	136,906	$	12.91

XML

Securities - Available for Sale Securities Gross Realized Gain Loss (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Summary of the proceeds from sales of securities available for sale, as well as gross gains and losses
Proceeds From Sales of Securities	$ 2,102	$ 8,150
Gross Gains on Sales	$ 3	76
Gross Losses on Sales		$ (81)

XML

Derivative Instruments and Hedging Activities - Cash Flow Hedging Reclassification (Details) - Cash flow hedge - Interest Rate Swap - Designated as Hedging Instrument - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Derivatives, Fair Value [Line Items]
Notional Amount, Asset		$ 18,000
Notional Amount, Liability	$ 102,500	30,000
Estimated Fair Value, Asset		134
Estimated Fair Value, Liability	$ (3,533)	$ (752)

XML

Stock Options and Restricted Stock Awards - Narrative (Details) $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) item shares	Dec. 31, 2019 shares	Mar. 31, 2019 shares
Stock Options and Restricted Stock Awards
Number of banks in the index | item	54
Minimum
Stock Options and Restricted Stock Awards
Market capitalization | $	$ 500
Maximum
Stock Options and Restricted Stock Awards
Market capitalization | $	$ 4,500
2012 Plan
Stock Options and Restricted Stock Awards
Number of shares authorized for grant options to its directors, officers, and employees	750,000
Term of award	10 years
Vesting period	5 years
Number of unissued shares of the Company’s common stock authorized for option grants	0		0
2017 Plan
Stock Options and Restricted Stock Awards
Number of shares authorized for grant options to its directors, officers, and employees	1,500,000
Term of award	10 years
Number of unissued shares of the Company’s common stock authorized for option grants	310,600	310,600
2017 Plan | Minimum
Stock Options and Restricted Stock Awards
Vesting period	4 years
2017 Plan | Maximum
Stock Options and Restricted Stock Awards
Vesting period	5 years
2019 EIP
Stock Options and Restricted Stock Awards
Number of shares authorized for grant options to its directors, officers, and employees	1,000,000
Term of award	10 years
Vesting period	4 years
Number of unissued shares of the Company’s common stock authorized for option grants	830,373	867,040

XML

Stock Options and Restricted Stock Awards - Non-Vested Options (Details)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Number of Shares
Nonvested Options at beginning of period | shares	969,600
Granted | shares	25,000
Vested | shares	(12,000)
Nonvested Options at end of period | shares	982,600
Weighted Average Grant Date Fair Value
Nonvested Options at beginning of period | $ / shares	$ 3.08
Granted | $ / shares	2.94
Vested | $ / shares	1.99
Nonvested Options at end of period | $ / shares	$ 3.09

XML

Deposits

3 Months Ended

Mar. 31, 2020

Deposits.

Deposits

Note 6: Deposits

The following table presents the composition of deposits at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Transaction Deposits	$	731,700	$	712,136
Savings and Money Market Deposits		514,113		516,785
Time Deposits		393,340		360,027
Brokered Deposits		260,974		234,362
Totals	$	1,900,127	$	1,823,310

XML

Stock Options and Restricted Stock Awards

3 Months Ended

Mar. 31, 2020

Stock Options and Restricted Stock Awards

Stock Options and Restricted Stock Awards

Note 10: Stock Options and Restricted Stock Awards

The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company may grant options to its directors, officers, employees, and consultants for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of five years. As of March 31, 2020 and 2019, there were no remaining shares of the Company’s common stock reserved for future option grants under the 2012 Plan.

In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of March 31, 2020 and December 31, 2019, there were 310,600 remaining shares of the Company’s common stock reserved for future option grants under the 2017 Plan.

In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted under the 2019 EIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of March 31, 2020 and December 31, 2019, there were 830,373 and 867,040 of remaining shares of the Company’s common stock reserved for future grants under the 2019 EIP.

Stock Options

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future.

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 54 banks in the index ranging in market capitalization from $500 million up to $4.5 billion.

The weighted average assumptions used in the model for valuing stock option grants for the three months ended March 31, 2020, are as follows:

	March 31,
	2020
Dividend Yield	—	%
Expected Life	7	Years
Expected Volatility	19.56	%
Risk-Free Interest Rate	0.97	%

The following table presents a summary of the status of the Company’s stock option grants for the three months ended March 31, 2020:

	March 31, 2020
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,961,650	$	7.08
Granted	25,000		12.67
Exercised	—		—
Forfeitures	—		—
Outstanding at Period End	1,986,650	$	7.15
Options Exercisable at Period End	1,004,050	$	5.01

For the three months ended March 31, 2020 and 2019, the Company recognized compensation expense for stock options of $218 and $175, respectively.

The following table presents information pertaining to options outstanding at March 31, 2020:

		Options Outstanding			Options Exercisable
		Number	Remaining				Number
Exercise Price		Outstanding	Contractual Life		Exercise Price		Outstanding
$	2.13	74,750	3.0	Years	$	2.13		74,750
	3.00	455,000	3.8	Years		3.00		455,000
	3.58	45,000	4.8	Years		3.58		45,000
	7.47	1,023,900	7.5	Years		7.47		402,300
	13.22	25,000	8.1	Years		13.22		5,000
	12.86	45,000	8.4	Years		12.86		9,000
	12.94	30,000	8.5	Years		12.94		6,000
	11.59	25,000	8.6	Years		11.59		5,000
	11.15	10,000	8.9	Years		11.15		2,000
	11.13	50,000	9.4	Years		11.13		—
	12.92	178,000	9.7	Years		12.92		—
	12.67	25,000	9.9	Years		12.67		—
	Totals	1,986,650	6.8	Years	$	7.15		1,004,050

As of March 31, 2020, there was  $2,593  of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 4.8 years.

The following presents an analysis of nonvested stock options issued and outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2019	969,600	$	3.08
Granted	25,000		2.94
Vested	(12,000)		1.99
Forfeited	—		—
Nonvested Options at March 31, 2020	982,600	$	3.09

Restricted Stock Awards

In 2019, the Company began granting restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with voting and forfeitable dividend rights. 

The following table presents an analysis of nonvested restricted stock awards outstanding for the three months ended March 31, 2020:

		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Awards at December 31, 2019	132,960	$	12.92
Granted	3,946		12.67
Vested	—		—
Forfeited	—		—
Nonvested Awards at March 31, 2020	136,906	$	12.91

Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three months ended March 31, 2020, the Company recognized compensation expense for restricted stock awards of $108.  No compensation expense was recognized for restricted stock awards for the three months ended March 31, 2019.  

As of March 31, 2020,  there was $1,630 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a period of four years. 

In addition, during the first quarter of 2020, the Company issued 7,721 shares of common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $75 is included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

XML

Securities - Contractual Maturities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Contractual maturities, amortized cost
Due in One Year or Less	$ 9,793
Due After One Year Through Five Years	59,106
Due After Five Years Through 10 Years	80,222
Due After 10 Years	15,289
Subtotal	164,410
Totals	300,837	$ 283,216
Contractual maturities, fair value
Due in One Year or Less	9,926
Due After One Year Through Five Years	60,660
Due After Five Years Through 10 Years	84,592
Due After 10 Years	16,994
Subtotal	172,172
Totals	307,317	289,877
Mortgage-Backed Securities
Contractual maturities, amortized cost
Totals	62,405	64,312
Contractual maturities, fair value
Totals	62,793	64,728
SBA Securities
Contractual maturities, amortized cost
Totals	47,107	50,126
Contractual maturities, fair value
Totals	46,592	49,559
Asset-Backed Securities
Contractual maturities, amortized cost
Totals	26,915	14,673
Contractual maturities, fair value
Totals	$ 25,760	$ 14,673

XML

Description of the Business and Summary of Significant Accounting Policies (Details)	Mar. 31, 2020
Description of the Business and Summary of Significant Accounting Policies
Loans with LIBOR index rate (as a percent)	10.70%

XML

Commitments, Contingencies and Credit Risk (Tables)

3 Months Ended

Mar. 31, 2020

Commitments, Contingencies and Credit Risk

Schedule of commitments outstanding

The following commitments were outstanding at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Unfunded Commitments Under Lines of Credit	$	469,221	$	500,962
Letters of Credit		73,364		79,225
Totals	$	542,585	$	580,187

XML

Subsequent Events

3 Months Ended

Mar. 31, 2020

Subsequent Events

Subsequent Events

Note 14: Subsequent Events

COVID-19 and Current Economic Conditions

As of May 5, 2020, total COVID-19 related loan modifications had totaled $288,019, representing 157 borrowers and approximately 15% of the total loan portfolio.

The CARES Act provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration, or SBA, to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program, or PPP. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. As of May 5, 2020, the Company had received SBA approval to fund over 1,000 PPP loans, totaling approximately $181,847. 

In response to uncertainty regarding the severity and duration of the COVID-19 pandemic, the Company has taken additional action to ensure the strength of its liquidity position. The Company has established borrowing capacity through the Federal Reserve lending facility in connection with funding PPP loans.

XML

Loans (Tables)

3 Months Ended

Mar. 31, 2020

Loans

Summary of components of loans

The following table presents the components of the loan portfolio at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
Commercial	$	299,425	$	276,035
Construction and Land Development		183,350		196,776
Real Estate Mortgage:
1-4 Family Mortgage		272,590		260,611
Multifamily		536,380		515,014
CRE Owner Occupied		75,207		66,584
CRE Non-owner Occupied		631,541		592,545
Total Real Estate Mortgage Loans		1,515,718		1,434,754
Consumer and Other		4,324		4,473
Total Loans, Gross		2,002,817		1,912,038
Allowance for Loan Losses		(24,585)		(22,526)
Net Deferred Loan Fees		(5,336)		(5,512)
Total Loans, Net	$	1,972,896	$	1,884,000

Summary of the activity in the allowance for loan losses by segment

The following tables present the activity in the allowance for loan losses, by segment, for the three months ended March 31, 2020 and 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Three Months Ended March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526
Provision for Loan Losses		531		(71)		361		732		146		1,031		18		(648)		2,100
Loans Charged-off		(34)		—		—		—		—		—		(13)		—		(47)
Recoveries of Loans		2		—		2		—		—		—		2		—		6
Total Ending Allowance Balance	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Three Months Ended March 31, 2019
Allowance for Loan Losses:
Beginning Balance	$	2,898	$	2,451	$	2,597	$	4,644	$	808	$	5,872	$	65	$	696	$	20,031
Provision for Loan Losses		480		(354)		5		71		(18)		477		12		(73)		600
Loans Charged-off		(19)		—		—		—		—		—		(17)		—		(36)
Recoveries of Loans		2		—		9		—		—		—		1		—		12
Total Ending Allowance Balance	$	3,361	$	2,097	$	2,611	$	4,715	$	790	$	6,349	$	61	$	623	$	20,607

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of March 31, 2020 and December 31, 2019:

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Allowance for Loan Losses at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	35	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	49
Collectively Evaluated for Impairment		3,522		2,131		3,202		6,556		938		8,003		78		106		24,536
Totals	$	3,557	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Allowance for Loan Losses at December 31, 2019
Individually Evaluated for Impairment	$	31	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	45
Collectively Evaluated for Impairment		3,027		2,202		2,839		5,824		792		6,972		71		754		22,481
Totals	$	3,058	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526

			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Loans at March 31, 2020	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Individually Evaluated for Impairment	$	267	$	170	$	1,243	$	—	$	1,847	$	224	$	14	$	3,765
Collectively Evaluated for Impairment		299,158		183,180		271,347		536,380		73,360		631,317		4,310		1,999,052
Totals	$	299,425	$	183,350	$	272,590	$	536,380	$	75,207	$	631,541	$	4,324	$	2,002,817
Loans at December 31, 2019
Individually Evaluated for Impairment	$	273	$	176	$	1,059	$	—	$	236	$	—	$	14	$	1,758
Collectively Evaluated for Impairment		275,762		196,600		259,552		515,014		66,348		592,545		4,459		1,910,280
Totals	$	276,035	$	196,776	$	260,611	$	515,014	$	66,584	$	592,545	$	4,473	$	1,912,038

Summary of impaired loans by loan segment

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of March 31, 2020 and December 31, 2019:

	March 31, 2020						December 31, 2019
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial	$	157	$	157	$	—	$	167	$	167	$	—
Construction and Land Development		170		779		—		176		785		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		303		490		—		302		489		—
1st REM - Rentals		940		940		—		757		757		—
CRE Owner Occupied		1,847		1,847		—		236		236		—
CRE Non Owner Occupied		224		224		—		—		—		—
Totals		3,641		4,437		—		1,638		2,434		—
Loans With An Allowance for Loan Losses:
Commercial		110		113		35		106		109		31
Consumer and Other		14		14		14		14		14		14
Totals		124		127		49		120		123		45
Grand Totals	$	3,765	$	4,564	$	49	$	1,758	$	2,557	$	45

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020				2019
	Average		Interest		Average		Interest
	Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	163	$	3	$	—	$	—
Construction and Land Development		175		—		198		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		329		—		157		2
1st REM - Rentals		932		11		1,637		9
CRE Owner Occupied		1,837		25		449		6
CRE Non Owner Occupied		225		3		—		—
Consumer and Other		—		—		57		—
Totals		3,661		42		2,498		17
Loans With An Allowance for Loan Losses:
Commercial		111		—		688		9
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		308		—
Consumer and Other		14		—		—		—
		125		—		996		9
Grand Totals	$	3,786	$	42	$	3,494	$	26

Summary of risk category of loans by loan segment, based on the most recent analysis performed by management

The following tables present the risk category of loans by loan segment as of March 31, 2020 and December 31, 2019, based on the most recent analysis performed by management:

	March 31, 2020
	Pass		Watch		Substandard		Total
Commercial	$	277,533	$	21,625	$	267	$	299,425
Construction and Land Development		183,045		135		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,790		138		—		30,928
1st REM - 1-4 Family		34,253		123		176		34,552
LOCs and 2nd REM - Rentals		19,156		476		303		19,935
1st REM - Rentals		185,643		768		764		187,175
Multifamily		536,380		—		—		536,380
CRE Owner Occupied		72,540		820		1,847		75,207
CRE Non-owner Occupied		609,598		21,719		224		631,541
Consumer and Other		4,310		—		14		4,324
Totals	$	1,953,248	$	45,804	$	3,765	$	2,002,817

	December 31, 2019
	Pass			Watch			Substandard		Total
Commercial	$	275,741	$		21	$		273	$	276,035
Construction and Land Development		196,462			138			176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,483			138			—		28,621
1st REM - 1-4 Family		36,370			124			177		36,671
LOCs and 2nd REM - Rentals		17,890			479			302		18,671
1st REM - Rentals		174,781			1,287			580		176,648
Multifamily		515,014			—			—		515,014
CRE Owner Occupied		65,411			—			1,173		66,584
CRE Non-owner Occupied		589,457			3,088			—		592,545
Consumer and Other		4,459			—			14		4,473
Totals	$	1,904,068		$	5,275		$	2,695	$	1,912,038

Summary of aging of the recorded investment in past due loans by loan segment

The following tables present the aging of the recorded investment in past due loans by loan segment as of March 31, 2020 and December 31, 2019:

	Accruing Interest
			30-89 Days		90 Days or
March 31, 2020	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	299,397	$	21	$	—	$	7	$	299,425
Construction and Land Development		183,180		—		—		170		183,350
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,928		—		—		—		30,928
1st REM - 1-4 Family		34,552		—		—		—		34,552
LOCs and 2nd REM - Rentals		19,632		—		—		303		19,935
1st REM - Rentals		187,049		—		—		126		187,175
Multifamily		536,380		—		—		—		536,380
CRE Owner Occupied		75,207		—		—		—		75,207
CRE Non-owner Occupied		631,541		—		—		—		631,541
Consumer and Other		4,324		—		—		—		4,324
Totals	$	2,002,190	$	21	$	—	$	606	$	2,002,817

	Accruing Interest
			30-89 Days		90 Days or
December 31, 2019	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	276,028	$	—	$	—	$	7	$	276,035
Construction and Land Development		196,600		—		—		176		196,776
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,621		—		—		—		28,621
1st REM - 1-4 Family		36,671		—		—		—		36,671
LOCs and 2nd REM - Rentals		18,527		—		—		144		18,671
1st REM - Rentals		176,114		400		—		134		176,648
Multifamily		515,014		—		—		—		515,014
CRE Owner Occupied		66,584		—		—		—		66,584
CRE Non-owner Occupied		592,545		—		—		—		592,545
Consumer and Other		4,470		3		—		—		4,473
Totals	$	1,911,174	$	403	$	—	$	461	$	1,912,038

XML

Tax Credit Investments (Tables)

3 Months Ended

Mar. 31, 2020

Tax Credit Investments

Summary of investments in qualified affordable housing projects and other tax credit investments

The following table presents the Company’s investments in qualified affordable housing projects and other tax credit investments at March 31, 2020 and December 31, 2019:

		March 31, 2020				December 31, 2019
Investment	Accounting Method		Investment		Unfunded Commitment (1)		Investment		Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)	Proportional Amortization	$	2,077	$	—	$	2,148	$	—
Federal Historic Tax Credit (FHTC)	Equity		1,924		2,895		2,262		3,395
Total		$	4,001	$	2,895	$	4,410	$	3,395

(1) All commitments are expected to be paid by the Company by March 31, 2021.

Schedule of amortization expense and tax benefit for qualified affordable housing projects and other tax credit investments

The following table presents the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
Amortization Expense (1)
LIHTC	$	71	$	72
FHTC		85		177
Total	$	156	$	249
Tax Benefit Recognized (2)
LIHTC	$	(83)	$	(83)
FHTC		(170)		(214)
Total	$	(253)	$	(297)

(1) The amortization expense for the LIHTC investments are included in income tax expense. The amortization for the FHTC tax credits are included in noninterest expense.

All of the tax benefits recognized are included in income tax expense. The tax benefit recognized for the FHTC investments primarily reflects the tax credits generated from the investments, and excludes the net tax expense/benefit of the investments’ income/loss.

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$ 7,443	$ 7,018
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Net Amortization on Securities Available for Sale	580	668
Net (Gain) Loss on Sales of Securities Available for Sale	(3)	5
Provision for Loan Losses	2,100	600
Depreciation and Amortization of Premises and Equipment	187	210
Amortization of Other Intangible Assets	48	48
Amortization of Subordinated Debt Issuance Costs	26	26
Stock-based Compensation	401	175
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets	(5,207)	1,574
Accrued Interest Payable and Other Liabilities	(7,736)	(665)
Net Cash Provided by (Used for) Operating Activities	(2,161)	9,659
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-owned Certificates of Deposit	(241)	357
Proceeds from Sales of Securities Available for Sale	2,102	8,150
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale	10,545	4,761
Purchases of Securities Available for Sale	(23,902)	(5,867)
Net Increase in Loans	(91,130)	(58,446)
Net (Increase) Decrease in FHLB Stock	(3,193)	290
Purchases of Premises and Equipment	(7,830)	(2,833)
Proceeds from Sales of Foreclosed Assets	134
Net Cash Used in Investing Activities	(113,515)	(53,588)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Deposits	76,817	82,732
Net Decrease in Federal Funds Purchased		(18,000)
Principal Payments on Notes Payable	(500)	(500)
Proceeds from FHLB Advances	76,000
Principal Payments on FHLB Advances	(5,000)
Stock Options Exercised		3
Stock Repurchases	(2,050)
Net Cash Provided by Financing Activities	145,267	64,235
NET CHANGE IN CASH AND CASH EQUIVALENTS	29,591	20,306
Cash and Cash Equivalents Beginning	31,935	28,444	$ 28,444
Cash and Cash Equivalents Ending	61,526	48,750	$ 31,935
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest	7,633	$ 7,237
Cash Paid for Income Taxes	430
Loans Transferred to Foreclosed Assets	134
Investment Securities Purchased but Not Settled	$ 6,944

XML

Deposits (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Deposits, by Type [Abstract]
Transaction Deposits	$ 731,700	$ 712,136
Savings and Money Market Deposits	514,113	516,785
Time Deposits	393,340	360,027
Brokered Deposits	260,974	234,362
Total Deposits	$ 1,900,127	$ 1,823,310

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Consolidated Balance Sheets
Allowance of loan loss	$ 24,585	$ 22,526
Preferred shares, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common shares, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	75,000,000	75,000,000
Common stock, shares issued (in shares)	28,807,375	28,973,572
Common stock, shares outstanding (in shares)	28,807,375	28,973,572

XML

Loans - Risk category of loans by loan segment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	$ 2,002,817	$ 1,912,038
Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	1,953,248	1,904,068
Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	45,804	5,275
Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	3,765	2,695
Commercial
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	299,425	276,035
Commercial | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	277,533	275,741
Commercial | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	21,625	21
Commercial | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	267	273
Construction and Land Development
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	183,350	196,776
Construction and Land Development | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	183,045	196,462
Construction and Land Development | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	135	138
Construction and Land Development | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	170	176
HELOC and 1-4 Family Junior Mortgage
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	30,928	28,621
HELOC and 1-4 Family Junior Mortgage | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	30,790	28,483
HELOC and 1-4 Family Junior Mortgage | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	138	138
1st REM - 1-4 Family
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	34,552	36,671
1st REM - 1-4 Family | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	34,253	36,370
1st REM - 1-4 Family | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	123	124
1st REM - 1-4 Family | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	176	177
LOCs and 2nd REM - Rentals
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	19,935	18,671
LOCs and 2nd REM - Rentals | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	19,156	17,890
LOCs and 2nd REM - Rentals | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	476	479
LOCs and 2nd REM - Rentals | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	303	302
1st REM - Rentals
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	187,175	176,648
1st REM - Rentals | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	185,643	174,781
1st REM - Rentals | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	768	1,287
1st REM - Rentals | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	764	580
Multifamily
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	536,380	515,014
Multifamily | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	536,380	515,014
CRE Owner Occupied
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	75,207	66,584
CRE Owner Occupied | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	72,540	65,411
CRE Owner Occupied | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	820
CRE Owner Occupied | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	1,847	1,173
CRE Non-owner Occupied
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	631,541	592,545
CRE Non-owner Occupied | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	609,598	589,457
CRE Non-owner Occupied | Watch
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	21,719	3,088
CRE Non-owner Occupied | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	224
Consumer and other
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	4,324	4,473
Consumer and other | Pass
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	4,310	4,459
Consumer and other | Substandard
Risk category of loans by loan segment, based on the most recent analysis performed by management
Totals	$ 14	$ 14

XML

Loans - Components of loans (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019	Dec. 31, 2018
Components of loans
Total Loans, Gross	$ 2,002,817	$ 1,912,038
Allowance for Loan Losses	(24,585)	(22,526)	$ (20,607)	$ (20,031)
Net Deferred Loan Fees	(5,336)	(5,512)
Total Loans, Net	1,972,896	1,884,000
Commercial
Components of loans
Total Loans, Gross	299,425	276,035
Allowance for Loan Losses	(3,557)	(3,058)	(3,361)	(2,898)
Construction and Land Development
Components of loans
Total Loans, Gross	183,350	196,776
Allowance for Loan Losses	(2,131)	(2,202)	(2,097)	(2,451)
Real Estate Mortgage
Components of loans
Total Loans, Gross	1,515,718	1,434,754
1-4 Family Mortgage
Components of loans
Total Loans, Gross	272,590	260,611
Allowance for Loan Losses	(3,202)	(2,839)	(2,611)	(2,597)
Multifamily
Components of loans
Total Loans, Gross	536,380	515,014
Allowance for Loan Losses	(6,556)	(5,824)	(4,715)	(4,644)
CRE Owner Occupied
Components of loans
Total Loans, Gross	75,207	66,584
Allowance for Loan Losses	(938)	(792)	(790)	(808)
CRE Non-owner Occupied
Components of loans
Total Loans, Gross	631,541	592,545
Allowance for Loan Losses	(8,003)	(6,972)	(6,349)	(5,872)
Consumer and other
Components of loans
Total Loans, Gross	4,324	4,473
Allowance for Loan Losses	$ (92)	$ (85)	$ (61)	$ (65)

XML

Fair Value Measurement - Recurring (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	$ 307,317	$ 289,877
Interest Rate Swaps	3,254	284
Interest Rate Swaps	6,787	902
Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Interest Rate Swaps	3,254	284
Total Fair Value of Financial Assets	310,571	290,161
Interest Rate Swaps	6,787	902
Total Fair Value of Financial Liabilities	6,787	902
U.S. Treasury Securities
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value		4,998
U.S. Treasury Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value		4,998
Municipal Bonds
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	122,232	105,743
Municipal Bonds | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	122,232	105,743
Mortgage-Backed Securities
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	62,793	64,728
Mortgage-Backed Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	62,793	64,728
Corporate Securities
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	49,940	50,176
Corporate Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	49,940	50,176
SBA Securities
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	46,592	49,559
SBA Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	46,592	49,559
Asset-Backed Securities
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	25,760	14,673
Asset-Backed Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	25,760	14,673
Level 1
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value		4,998
Level 1 | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Total Fair Value of Financial Assets		4,998
Level 1 | U.S. Treasury Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value		4,998
Level 2
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	307,317	284,879
Interest Rate Swaps	3,254	284
Interest Rate Swaps	6,787	902
Level 2 | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Interest Rate Swaps	3,254	284
Total Fair Value of Financial Assets	310,571	285,163
Interest Rate Swaps	6,787	902
Total Fair Value of Financial Liabilities	6,787	902
Level 2 | Municipal Bonds | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	122,232	105,743
Level 2 | Mortgage-Backed Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	62,793	64,728
Level 2 | Corporate Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	49,940	50,176
Level 2 | SBA Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	46,592	49,559
Level 2 | Asset-Backed Securities | Recurring
Balances of the assets and liabilities measured at fair value on a recurring basis
Securities Available for Sale, at Fair Value	$ 25,760	$ 14,673