Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________
Commission File Number 001-38412
BRIDGEWATER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Minnesota(State or other jurisdiction ofincorporation or organization)
26-0113412(I.R.S. EmployerIdentification No.)
4450 Excelsior Boulevard, Suite 100St. Louis Park, Minnesota(Address of principal executive offices)
55416(Zip Code)
(952) 893-6868
(Registrant’s telephone number, including area code)
. Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Common Stock, $0.01 Par Value
BWB
The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/100th interest in a share of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share
BWBBP
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Common Stock outstanding as of October 29, 2024 was 27,425,690.
PART I FINANCIAL INFORMATION
3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Shareholders’ Equity
6
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
65
Item 4. Controls and Procedures
67
PART II OTHER INFORMATION
68
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
69
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
70
SIGNATURES
71
2
PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Bridgewater Bancshares, Inc. and Subsidiaries
(dollars in thousands, except share data)
September 30,
December 31,
2024
2023
(Unaudited)
ASSETS
Cash and Cash Equivalents
$
191,859
128,562
Securities Available for Sale, at Fair Value
664,715
604,104
Loans, Net of Allowance for Credit Losses of $51,018 at September 30, 2024 (unaudited) and $50,494 at December 31, 2023
3,628,867
3,667,215
Federal Home Loan Bank (FHLB) Stock, at Cost
18,626
17,097
Premises and Equipment, Net
47,777
48,886
Foreclosed Assets
434
—
Accrued Interest
16,750
16,697
Goodwill
2,626
Other Intangible Assets, Net
163
188
Bank-Owned Life Insurance
38,219
34,477
Other Assets
81,481
92,138
Total Assets
4,691,517
4,611,990
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing
713,309
756,964
Interest Bearing
3,034,133
2,952,984
Total Deposits
3,747,442
3,709,948
Notes Payable
13,750
FHLB Advances
349,500
319,500
Subordinated Debentures, Net of Issuance Costs
79,574
79,288
Accrued Interest Payable
3,458
5,282
Other Liabilities
45,593
58,707
Total Liabilities
4,239,317
4,186,475
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value; Authorized 10,000,000
Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at September 30, 2024 (unaudited) and December 31, 2023
66,514
Common Stock- $0.01 par value; Authorized 75,000,000
Common Stock - Issued and Outstanding 27,425,690 at September 30, 2024 (unaudited) and 27,748,965 at December 31, 2023
274
277
Additional Paid-In Capital
94,597
96,320
Retained Earnings
302,231
280,650
Accumulated Other Comprehensive Loss
(11,416)
(18,246)
Total Shareholders' Equity
452,200
425,515
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
(dollars in thousands, except per share data)
Three Months Ended
Nine Months Ended
INTEREST INCOME
Loans, Including Fees
51,895
48,999
152,861
141,675
Investment Securities
8,725
6,507
24,818
18,962
Other
2,407
1,303
4,895
3,165
Total Interest Income
63,027
56,809
182,574
163,802
INTEREST EXPENSE
Deposits
34,187
27,225
95,995
66,597
Federal Funds Purchased
548
1,159
8,253
296
887
844
1,942
2,316
6,325
5,269
Subordinated Debentures
1,001
1,003
2,982
2,979
Total Interest Expense
37,428
31,388
107,348
83,942
NET INTEREST INCOME
25,599
25,421
75,226
79,860
Provision for (Recovery of) Credit Losses
(600)
1,350
75
NET INTEREST INCOME AFTER
PROVISION FOR (RECOVERY OF) CREDIT LOSSES
26,021
73,876
79,785
NONINTEREST INCOME
Customer Service Fees
373
379
1,081
1,096
Net Gain (Loss) on Sales of Available for Sale Securities
(28)
385
(6)
Letter of Credit Fees
424
315
1,127
1,328
Debit Card Interchange Fees
152
150
448
443
352
252
965
724
FHLB Prepayment Income
493
792
Other Income
249
137
829
707
Total Noninterest Income
1,522
1,726
4,835
5,084
NONINTEREST EXPENSE
Salaries and Employee Benefits
9,851
9,519
28,959
26,923
Occupancy and Equipment
1,069
1,101
3,218
3,385
FDIC Insurance Assessment
750
1,075
2,350
2,640
Data Processing
368
392
1,252
1,150
Professional and Consulting Fees
1,149
715
2,890
2,299
Derivative Collateral Fees
381
543
1,395
1,327
Information Technology and Telecommunications
840
683
2,448
2,077
Marketing and Advertising
367
222
1,006
805
Intangible Asset Amortization
26
91
Other Expense
976
978
2,944
2,883
Total Noninterest Expense
15,760
15,237
46,488
43,580
INCOME BEFORE INCOME TAXES
11,361
12,510
32,223
41,289
Provision for Income Taxes
2,686
2,881
7,602
10,202
NET INCOME
8,675
9,629
24,621
31,087
Preferred Stock Dividends
(1,013)
(3,040)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
7,662
8,616
21,581
28,047
EARNINGS PER SHARE
Basic
0.28
0.31
0.79
1.01
Diluted
0.27
0.30
0.77
0.99
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities
14,738
(10,151)
16,141
(14,338)
Unrealized Gains (Losses) on Cash Flow Hedges
(6,761)
7,763
987
10,167
Reclassification Adjustment for Gains Realized in Income
(2,498)
(1,623)
(7,543)
(4,004)
Income Tax Impact
(1,575)
1,153
(2,755)
2,351
Total Other Comprehensive Income (Loss), Net of Tax
3,904
(2,858)
6,830
(5,824)
Comprehensive Income
12,579
6,771
31,451
25,263
Three and Nine Months Ended September 30, 2024 and 2023
Accumulated
Additional
Preferred
Common Stock
Paid-In
Retained
Comprehensive
Stock
Shares
Amount
Capital
Earnings
Income (Loss)
Total
BALANCE June 30, 2023
27,973,995
280
99,044
264,196
(20,908)
409,126
Stock-based Compensation
12,588
997
Comprehensive Income (Loss)
Stock Options Exercised
27,000
90
Vested Restricted Stock Units
3,000
Restricted Shares Withheld for Taxes
(1,078)
(11)
Preferred Stock Dividend
BALANCE September 30, 2023
28,015,505
100,120
272,812
(23,766)
415,960
BALANCE June 30, 2024
27,348,049
273
93,205
294,569
(15,320)
439,241
8,496
923
69,856
1
517
518
(3,711)
(48)
BALANCE September 30, 2024
27,425,690
BALANCE December 31, 2022
27,751,950
278
96,529
248,685
(17,942)
394,064
Cumulative Effect of Change in Accounting Principle, Net of Tax
(3,920)
Balance as of January 1, 2023, as Adjusted for Change in Accounting Principle
244,765
390,144
35,460
2,910
226,000
717
Forfeiture of Restricted Stock Awards
(250)
5,225
(2,880)
(34)
BALANCE December 31, 2023
27,748,965
29,832
2,994
78,356
586
587
Stock Repurchases
(446,509)
(4)
(5,173)
(5,177)
25,665
(10,619)
(130)
7
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale
(1,064)
196
Net (Gain) Loss on Sales of Securities Available for Sale
(385)
Provision for Credit Losses on Loans
1,450
2,050
Credit for Credit Losses on Off-Balance Sheet Exposures
(100)
(1,975)
Depreciation of Premises and Equipment
1,767
1,901
Amortization of Other Intangible Assets
Amortization of Right-of Use Asset
117
396
Amortization of Subordinated Debt Issuance Costs
286
287
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets
(2,530)
(8,923)
Accrued Interest Payable and Other Liabilities
(15,383)
10,457
Net Cash Provided by Operating Activities
11,799
38,483
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Bank-Owned Certificates of Deposit
(44)
Proceeds from Sales of Securities Available for Sale
101,612
26,976
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale
45,219
23,812
Purchases of Securities Available for Sale
(189,344)
(63,777)
Net Decrease (Increase) in Loans
36,464
(155,123)
Net Decrease (Increase) in FHLB Stock
(1,529)
2,550
Purchases of Premises and Equipment
(658)
(2,787)
Proceeds from Sales of Foreclosed Assets
116
Net Cash Used in Investing Activities
(8,236)
(168,277)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
37,494
258,966
Net Decrease in Federal Funds Purchased
(287,000)
Proceeds from FHLB Advances
699,000
486,500
Principal Payments on FHLB Advances
(669,000)
(289,000)
Preferred Stock Dividends Paid
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards
(94)
Shares Repurchased for Tax Withholdings Upon Exercise Stock Options
(36)
Net Cash Provided by Financing Activities
59,734
167,109
NET CHANGE IN CASH AND CASH EQUIVALENTS
63,297
37,315
Cash and Cash Equivalents Beginning
87,043
Cash and Cash Equivalents Ending
124,358
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest
108,886
82,670
Cash Paid for Income Taxes
5,485
8,931
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net Investment Securities Sold but Not Settled
6,007
Loans Transferred to Foreclosed Assets
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 subsidiary, Bridgewater Bank (the “Bank”). 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.
Recent Developments
On August 28, 2024, the Company and First Minnetonka Bancorporation, Inc. (“FMB”) jointly announced the signing of a definitive merger agreement under which Bridgewater Bank will, subject to the completion of remaining closing conditions, acquire First Minnetonka City Bank, the wholly-owned banking subsidiary of FMB, in an all-cash transaction. First Minnetonka City Bank operates two full-service branches and had approximately $241 million in assets, $129 million in loans, and $215 million in deposits as of September 30, 2024.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2024.
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, and Bridgewater Investment Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Information available which could affect judgements includes, but is not limited to, changes in interest rates, changes in the performance of the economy, including elevated levels of inflation and possible recession, and changes in the financial condition of borrowers.
Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses, or ACL, calculation of deferred tax assets, fair value of financial instruments, and investment securities impairment.
Derivative Financial Instruments
The Company enters into fair value hedge relationships to mitigate the effect of changing interest rates on the fair value of fixed rate available for sale securities. The gain or loss on a given derivative instrument, as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk, are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the corresponding hedged item. The Company prepares written hedge documentation for all derivatives which are designed as hedges. The written hedge documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management's assertion that the hedge will be highly effective. For derivatives designated as fair value hedges, the Company assesses hedge effectiveness on qualifying instruments using the shortcut method, whereby the hedges are considered perfectly effective at the onset of the hedge and over the life of the hedging relationship.
Impact of Recently Issued Accounting Guidance
In March 2024, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2024-02, Codification Improvements: Amendments to Remove References to the Concepts Statements. The ASU amends the Codification to remove references to various concepts and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a material impact on the Company’s consolidated financial statements.
Subsequent Events
Subsequent events have been evaluated through October 31, 2024, which is the date the consolidated financial statements were available to be issued.
10
Note 2: Earnings Per Share
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares, adjusted for the dilutive effect of stock compensation. For the three and nine months ended September 30, 2024, stock options and restricted stock units totaling 774,770 and 1,137,208 shares, respectively, were excluded from the calculation because they were deemed to be anti-dilutive. For the three and nine months ended September 30, 2023, stock options, restricted stock awards and restricted stock units totaling 1,152,060 and 1,042,502 shares, 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 and nine months ended September 30, 2024 and 2023:
Net Income Available to Common Shareholders
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)
27,382,798
27,943,409
27,486,590
27,853,036
Dilutive Effect of Stock Compensation
522,112
368,369
433,194
486,816
Weighted Average Common Stock Outstanding (Dilutive)
27,904,910
28,311,778
27,919,784
28,339,852
Basic Earnings per Common Share
Diluted Earnings per Common Share
Note 3: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at September 30, 2024 and December 31, 2023:
September 30, 2024
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
Securities Available for Sale:
U.S. Treasury Securities
105,998
(123)
105,875
Municipal Bonds
125,423
74
(13,610)
111,887
Mortgage-Backed Securities
218,550
4,287
(12,366)
210,471
Corporate Securities
144,539
822
(7,254)
138,107
SBA Securities
14,105
217
(56)
14,266
Asset-Backed Securities
83,964
193
84,109
Total Securities Available for Sale
692,579
5,593
(33,457)
December 31, 2023
151,512
47
(19,035)
132,524
249,455
2,261
(16,401)
235,315
142,098
386
(11,879)
130,605
18,497
279
(102)
18,674
87,054
357
(425)
86,986
648,616
3,330
(47,842)
11
Securities with a carrying value of $150.4 million and $170.7 million were pledged to secure borrowing capacity at the Federal Reserve Discount Window as of September 30, 2024 and December 31, 2023, respectively.
The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2024 and December 31, 2023:
Less Than 12 Months
12 Months or Greater
Number of
(dollars in thousands, except number of holdings)
Holdings
169
101,085
113
12,988
(37)
120,465
(12,329)
133,453
103
8,018
(114)
101,053
(7,140)
109,071
32
458
(1)
4,428
(55)
4,886
12,807
(26)
9,419
(22)
22,226
427
140,146
(301)
336,450
(33,156)
476,596
212
4,052
(17)
120,527
(19,018)
124,579
128
35,719
(310)
135,829
(16,091)
171,548
110
14,528
(756)
101,311
(11,123)
115,839
1,731
(3)
7,072
(99)
8,803
24
39,011
(234)
13,805
(191)
52,816
521
95,041
(1,320)
378,544
(46,522)
473,585
At September 30, 2024, 427 debt securities had unrealized losses with aggregate depreciation of approximately 6.6% from the Company’s amortized cost basis. At December 31, 2023, 521 debt securities had unrealized losses with aggregate depreciation of approximately 9.2% from the Company’s amortized cost basis. These unrealized losses have not been recognized into income because management does not intend to sell these securities, and it is not more likely than not it will be required to sell the securities before recovery of its amortized cost basis. Furthermore, the unrealized losses are due to changes in interest rates and other market conditions and were not reflective of credit events. To make this determination, consideration is given to such factors as the credit rating of the issuer, level of credit enhancement, changes in credit ratings, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. As of September 30, 2024 and December 31, 2023, there was no allowance for credit losses carried on the Company’s securities portfolio.
Accrued interest receivable on securities, which is recorded within accrued interest on the balance sheet, totaled $6.3 million and $4.9 million at September 30, 2024 and December 31, 2023, respectively, and was excluded from the estimate of credit losses.
The Company has entered into a fair value hedging transaction to mitigate the impact of changing interest rates on the fair value of U.S. treasury securities. See Note 6 – Derivative Instruments and Hedging Activities for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.
12
The following table presents a summary of the amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of September 30, 2024. Call date is used when a call of the debt security is expected, as determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.
Amortized Cost
Due in One Year or Less
31,330
31,668
Due After One Year Through Five Years
48,487
46,985
Due After Five Years Through 10 Years
166,585
151,981
Due After 10 Years
129,558
125,235
Subtotal
375,960
355,869
Totals
The following table presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three and nine months ended September 30, 2024 and 2023:
Proceeds From Sales of Securities
50,779
Gross Gains on Sales
488
1,594
247
Gross Losses on Sales
(516)
(1,209)
(253)
Note 4: Loans and Allowance for Credit Losses
The following table presents the components of the loan portfolio at September 30, 2024 and December 31, 2023:
Commercial
493,403
464,061
Construction and Land Development
118,596
232,804
1-4 Family Construction
45,822
65,087
Real Estate Mortgage:
1-4 Family Mortgage
421,179
402,396
Multifamily
1,379,814
1,388,541
CRE Owner Occupied
182,239
175,783
CRE Nonowner Occupied
1,032,142
987,306
Total Real Estate Mortgage Loans
3,015,374
2,954,026
Consumer and Other
12,395
8,304
Total Loans, Gross
3,685,590
3,724,282
Allowance for Credit Losses
(51,018)
(50,494)
Net Deferred Loan Fees
(5,705)
(6,573)
Total Loans, Net
13
The following tables present the aging in past due loans and loans on nonaccrual status, with and without an ACL by loan segment as of September 30, 2024 and December 31, 2023:
Accruing Interest
30-89 Days
90 Days or
Nonaccrual
Current
Past Due
More Past Due
with ACL
without ACL
493,338
118,532
64
1,023,828
8,314
3,677,147
8,378
463,966
95
232,724
80
64,838
1,373,431
15,110
175,289
494
8,303
3,708,253
919
The Company aggregates loans into credit quality indicators based on relevant information about the ability of borrowers to service their debt by using internal reviews in which management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate, and the fair values of collateral securing the loans. The Company analyzes all loans individually to assign a risk rating, grouped into five major categories defined as follows:
Pass: A pass loan is a credit with no known or existing potential weaknesses deserving of management’s close attention.
Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain loss if the deficiencies are not corrected.
14
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and charged-off immediately.
15
The following tables present loan balances classified by credit quality indicators by year of origination as of September 30, 2024 and December 31, 2023:
2022
2021
2020
Prior
Revolving
Pass
89,609
66,265
81,681
27,568
14,641
20,026
178,919
478,709
Watch
495
Substandard
44
10,458
3,697
14,199
Total Commercial
66,309
92,139
183,111
Current Period Gross Write-offs
44,342
59,852
5,640
610
28
8,060
Total Construction and Land Development
5,704
27,554
3,144
4,574
760
9,790
Total 1-4 Family Construction
69,363
54,020
98,356
74,281
49,254
11,785
62,646
419,705
197
302
327
826
648
Total 1-4 Family Mortgage
54,217
74,583
49,581
12,433
169,306
105,433
498,422
365,638
162,839
59,454
5,844
1,366,936
12,878
Total Multifamily
118,311
17,714
30,824
63,452
35,215
19,759
10,322
2,251
179,537
1,725
977
Total CRE Owner Occupied
31,801
36,940
178,443
137,938
315,481
189,778
73,685
100,341
4,660
1,000,326
9,677
3,679
2,711
16,067
10,231
5,518
15,749
Total CRE Nonowner Occupied
198,351
147,135
192,489
935
454,734
351,464
975,711
669,650
305,864
182,550
75,401
235
2,717
164
1,279
7,999
Total Consumer and Other
Total Period Gross Write-offs
946
949
Total Loans
616,474
483,486
1,078,292
698,589
321,812
202,576
284,361
16
2019
93,299
121,274
37,056
19,297
18,594
4,507
149,836
443,863
1,700
318
34
2,003
4,055
11,299
50
4,791
16,143
95,002
132,891
37,090
4,557
156,630
72
96
180
87,402
99,133
34,122
46
12,021
99,213
35,172
16,156
941
355
12,214
35,421
74,602
106,085
83,525
52,813
18,789
3,403
62,490
401,707
659
30
689
4,062
62,520
192,078
456,179
444,162
196,784
41,998
45,847
8,577
1,385,625
2,916
194,994
36,255
61,724
40,748
20,610
4,903
8,312
1,672
174,224
194
871
1,559
36,449
41,242
9,183
164,226
305,749
253,683
77,618
78,288
66,569
4,521
950,654
16,301
3,213
19,514
15,183
1,955
17,138
195,710
307,704
256,896
501,755
931,692
825,825
347,825
143,978
125,661
77,290
2,908
256
1,460
3,665
42
114
224
722,488
1,180,208
897,987
368,983
162,578
130,218
261,820
17
The following tables present the activity in the ACL, by segment, for the three and nine months ended September 30, 2024 and 2023:
Construction
CRE
and Land
1-4 Family
1--4 Family
Owner
Non-owner
Consumer
Development
Mortgage
Occupied
and Other
Three Months Ended September 30, 2024
Allowance for Credit Losses for Loans:
Beginning Balance
6,018
1,220
522
2,774
22,480
1,258
17,581
51,949
Provision for (Recovery of) Credit Losses for Loans
(350)
(141)
(128)
(125)
(25)
730
Loans Charged-off
(935)
(2)
(937)
Recoveries of Loans
Total Ending Allowance Balance
5,673
1,079
394
2,779
22,355
1,233
17,376
129
51,018
Nine Months Ended September 30, 2024
5,398
2,156
558
2,651
22,217
1,184
16,225
105
50,494
265
(1,077)
(164)
125
138
49
2,086
(14)
(949)
23
Unallocated
Three Months Ended September 30, 2023
5,439
3,476
654
2,836
21,164
1,086
15,976
50,701
151
(704)
(80)
22
1,052
(464)
20
(96)
(122)
5,496
2,772
574
2,860
22,216
1,089
15,512
66
50,585
Nine Months Ended September 30, 2023
Beginning Balance, Prior to Adoption of CECL
6,501
3,911
845
4,325
17,459
1,965
12,576
263
47,996
Impact of Adopting CECL
(1,158)
(1,070)
(235)
(1,778)
3,318
(943)
2,869
(90)
(263)
650
Balance as of January 1, 2023, as Adjusted for Adoption of CECL
5,343
2,841
2,547
20,777
1,022
15,445
61
48,646
242
(69)
309
1,439
31
(33)
(129)
18
The following tables present the balance in the ACL and the recorded investment in loans, by segment, as of September 30, 2024 and December 31, 2023:
ACL at September 30, 2024
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
5,662
51,007
ACL at December 31, 2023
5,390
16,130
50,391
Loans at September 30, 2024
31,637
479,204
420,531
181,262
1,016,393
3,653,953
Loans at December 31, 2023
35,858
447,918
970,168
3,688,424
The following tables present the amortized cost basis of collateral dependent loans by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of September 30, 2024 and December 31, 2023:
Primary Type of Collateral
Business
ACL
Real Estate
Assets
Allocation
3,841
10,358
17,438
5,782
10,361
19,715
Accrued interest receivable on loans, which is recorded within accrued interest on the balance sheet, totaled $10.0 million and $11.8 million at September 30, 2024 and December 31, 2023, respectively, and was excluded from the estimate of credit losses.
For both the three months ended September 30, 2024 and September 30, 2023, there were no loans modified to borrowers experiencing financial difficulty. For the nine months ended September 30, 2024, there were no loans modified to borrowers experiencing financial difficulty. For the nine months ended September 30, 2023, the Company modified one commercial real estate, or CRE, nonowner occupied loan, with an outstanding balance of $9.6 million, for a borrower experiencing financial difficulty by granting a 12-month extension at a below market rate. There was no forgiveness of principal and this loan was current with its modified terms as of September 30, 2023.
19
Note 5: Deposits
The following table presents the composition of deposits at September 30, 2024 and December 31, 2023:
Transaction Deposits
1,519,065
1,449,765
Savings and Money Market Deposits
980,345
935,091
Time Deposits
347,080
300,651
Brokered Deposits
900,952
1,024,441
Brokered deposits included brokered transaction and money market accounts of $139.5 million and $174.0 million as of September 30, 2024 and December 31, 2023, respectively.
The following table presents the scheduled maturities of brokered and time deposits at September 30, 2024:
Less than 1 Year
335,002
1 to 2 Years
444,829
2 to 3 Years
141,353
3 to 4 Years
106,399
4 to 5 Years
68,212
Greater than 5 Years
12,755
1,108,550
The aggregate amount of time deposits greater than $250,000 was approximately $168.2 million and $138.4 million at September 30, 2024 and December 31, 2023, respectively.
Note 6: Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments, which consist of interest rate swaps and interest rate caps, to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.
Non-hedge Derivatives
The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.
The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of September 30, 2024 and December 31, 2023:
Notional
Estimated
Interest rate swap agreements:
66,189
5,791
63,814
6,981
Liabilities
(5,791)
(6,981)
132,378
127,628
Cash Flow Hedging Derivatives
For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that $5.1 million will be reclassified to interest expense, as a reduction of the expense.
The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of September 30, 2024 and December 31, 2023:
Notional Amount
183,000
Weighted Average Pay Rate
2.18
%
2.00
Weighted Average Receive Rate
5.31
5.48
Weighted Average Maturity (Years)
4.15
4.04
Net Unrealized Gain
1,342
5,271
The Company purchases interest rate caps, designated as cash flow hedges, of certain deposit liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the three and nine months ended September 30, 2024, the Company recognized amortization expense on the interest rate caps of $204,000 and $600,000, respectively, which was recorded as a component of interest expense on brokered deposits and Federal Home Loan Bank, or FHLB, advances. For the three and nine months ended September 30, 2023, the Company recognized amortization expense on the interest rate caps of $198,000 and $593,000, respectively, which was recorded as a component of interest expense on brokered deposits FHLB advances.
The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of September 30, 2024 and December 31, 2023:
125,000
Unamortized Premium Paid
4,481
5,081
Weighted Average Strike Rate
0.96
5.59
6.34
21
The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
Derivatives in
Location of Gain (Loss)
Gain (Loss)
Cash Flow Hedging
Reclassified
Reclassified from
Relationships
from AOCI into Income
AOCI into Earnings
Interest rate swaps
Interest expense
1,478
1,575
4,549
4,169
Interest rate caps
1,048
48
2,609
(159)
No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and nine months ended September 30, 2024 and 2023, 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.
Fair Value Hedging Derivatives
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate available for sale securities. The hedging strategy converts the fixed interest rates to variable interest rates based on SOFR.
The following table presents a summary of the Company’s interest rate swaps designated as fair flow hedges as of September 30, 2024:
97,650
3.46
5.24
19.64
The Company had no interest rate swaps designated as fair value hedges as of December 31, 2023.
The effects of the Company’s fair value hedge relationships on the income statement during the three and nine months ended September 30, 2024 and 2023 were as follows:
Amount of Gain (Loss) Recognized in Income
Securities
Interest Rate Swaps
Interest Income
893
Securities Available for Sale
(893)
The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2024:
Cumulative Amount of Fair Value Hedging Adjustment
Included in the Carrying Amount of the Hedged
Carrying Amount of The Hedged Assets/Liabilities
Assets/Liabilities
Line Item on the Balance Sheet
96,757
The following table presents a summary of the Company’s interest rate contracts as of September 30, 2024 and December 31, 2023:
Interest Rate Swap Agreements - Borrowings:
95,000
3,803
135,000
6,891
88,000
(2,461)
48,000
(1,620)
Interest Rate Swap Agreements - Securities:
Interest Rate Cap Agreements:
15,875
18,717
The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of September 30, 2024 and December 31, 2023, the Company pledged no cash collateral for the Company’s derivative contracts. As of September 30, 2024 and December 31, 2023, the Company’s counterparties pledged cash collateral to the Company of $23.0 million and $31.8 million, respectively.
The following table summarizes gross and net information about derivative instruments that are eligible for offset in the balance sheet at September 30, 2024 and December 31, 2023:
Gross Amounts Not Offset in the Balance Sheet
Net Amounts of
Gross Amounts
Assets (Liabilities)
of Recognized
Offset in the
Presented in the
Financial
Cash Collateral
Net Assets
Balance Sheet
Instruments
Received (Paid)
(Liabilities)
25,469
22,973
2,496
(9,145)
32,589
31,783
806
(8,601)
Note 7: Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank Advances. The Company has entered into an Advances, Pledge, and Security Agreement with the FHLB whereby specific mortgage loans of the Bank with aggregate principal balances of $1.49 billion and $1.45 billion at September 30, 2024 and December 31, 2023, respectively, were pledged to the FHLB as collateral. FHLB advances are also secured with FHLB stock owned by the Company. Total remaining available capacity under the agreement was $509.2 million and $498.7 million at September 30, 2024 and December 31, 2023, respectively.
The following table presents information regarding FHLB advances, by maturity, at September 30, 2024 and December 31, 2023:
Weighted
Average
Rate
Outstanding
5.22
278,000
233,000
4.06
17,500
4.31
25,000
3.71
31,500
3.45
21,500
4.01
22,500
3.94
Line of Credit. The Company has a Loan and Security Agreement and related revolving note with an unaffiliated financial institution that is secured by 100% of the issued and outstanding stock of the Bank. The note contains customary representations, warranties, and covenants, including certain financial covenants and capital ratio requirements. The Company believes it was in compliance with all covenants as of September 30, 2024 and December 31, 2023.
The following table presents information regarding the revolving line of credit at September 30, 2024 and December 31, 2023:
Total Debt
Interest
Name
Maturity Date
Coupon Structure
Revolving Credit Facility
September 1, 2026
8.00
Variable with Floor (1)
Note 8: Subordinated Debentures
The following table presents a summary of the Company’s subordinated debentures as of September 30, 2024 and December 31, 2023:
Date
First
Maturity
Established
Redemption Date
2030 Notes
June 19, 2020
July 1, 2025
July 1, 2030
50,000
5.25
Fixed-to-Floating (1)
2031 Notes
July 8, 2021
July 15, 2026
July 15, 2031
30,000
3.25
Fixed-to-Floating (2)
80,000
Debt Issuance Costs
(426)
(712)
Note 9: Tax Credit Investments
The Company invests in qualified affordable housing projects and federal historic projects for the purposes of community reinvestment and obtaining tax credits. The Company’s tax credit investments are limited to existing lending relationships with well-known developers and projects within the Company’s market area.
The following table presents a summary of the Company’s investments in qualified affordable housing projects and other tax credit investments at September 30, 2024 and December 31, 2023:
Investment Type
Investment
Unfunded Commitments (1)
Low Income Housing Tax Credit (LIHTC)
15,426
340
16,897
7,579
Federal Historic Tax Credit (FHTC)
3,076
2,541
2,353
18,502
20,300
9,932
The following table presents a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments during the three and nine months ended September 30, 2024 and 2023:
Amortization Expense (1)
LIHTC
503
1,483
927
FHTC
190
108
515
325
693
387
1,998
Tax Benefit Recognized (2)
(671)
(374)
(2,012)
(1,123)
(152)
(681)
(455)
(921)
(526)
(2,693)
(1,578)
Note 10: 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.
25
The following table presents information regarding commitments outstanding at September 30, 2024 and December 31, 2023:
Unfunded Commitments Under Lines of Credit
523,698
546,632
Letters of Credit
112,069
103,289
635,767
649,921
The Company had outstanding letters of credit with the FHLB of $133.9 million and $114.4 million at September 30, 2024 and December 31, 2023, respectively, on behalf of customers and to secure public deposits.
The ACL for off-balance sheet credit exposures was $2.9 million and $3.0 million at September 30, 2024 and December 31, 2023, respectively, and is separately classified on the balance sheet within other liabilities.
The following table presents the balance and activity in the ACL for off-balance sheet credit exposures for the three and nine months ended September 30, 2024 and 2023:
Allowance for Credit Losses:
2,885
3,835
2,985
360
4,850
Recovery of Off-Balance Sheet Credit Exposures
Total Ending Balance
3,235
Legal Contingencies
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any material proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Note 11: Stock Options and Restricted Stock
In 2012, the Company adopted the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company was able to grant options to its directors, officers, and employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options were granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant, and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. The 2012 Plan expired in March 2022, and awards are no longer able to be granted under the 2012 Plan.
In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of September 30, 2024 and December 31, 2023, there were 30,000 and 5,000 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.
In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted under the 2019 EIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of September 30, 2024 and December 31, 2023, there were 34,700 and -0- shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.
In 2023, the Company adopted the Bridgewater Bancshares, Inc. 2023 Equity Incentive Plan (the "2023 EIP"). Under the 2023 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,500,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of September 30, 2024 and December 31, 2023, there were 1,026,564 and 1,107,752 shares, respectively, of the Company’s common stock reserved for future grants under the 2023 EIP.
Stock Options
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account the fact that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future
The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 60 banks in the index ranging in market capitalization from $500 million up to $4.0 billion.
The weighted average assumptions used in the model for valuing stock options grants for the nine months ended September 30, 2024, are as follows:
Dividend Yield
Expected Life
Years
Expected Volatility
30.32
Risk-Free Interest Rate
3.89
27
The following table presents a summary of the status of the Company’s outstanding stock options for the nine months ended September 30, 2024:
Exercise Price
Outstanding at Beginning of Year
2,014,994
10.57
Granted
10,000
13.17
Exercised
(78,356)
7.50
Forfeitures
(50,000)
12.03
Outstanding at Period End
1,896,638
10.67
Options Exercisable at Period End
1,404,762
9.90
For the three months ended September 30, 2024 and 2023, the Company recognized compensation expense for stock options of $227,000 and $230,000, respectively. For the nine months ended September 30, 2024 and 2023, the Company recognized compensation expense for stock options of $712,000 and $601,000, respectively.
The following table presents information pertaining to options outstanding at September 30, 2024:
Options Outstanding
Options Exercisable
Weighted Average
Remaining Contractual
Range of Exercise Prices
Options
Life in Years
7.00 - 7.99
840,649
7.47
3.0
8.00 - 8.99
10,461
8.76
5.5
10.00 - 10.99
224,000
10.63
8.7
59,749
10.55
11.00 - 11.99
257,500
11.16
7.7
85,000
11.27
12.00 - 12.99
263,528
12.90
4.8
13.00 - 13.99
9.8
17.00 - 17.99
290,500
17.50
7.3
145,375
5.3
As of September 30, 2024, there was $2.0 million of total unrecognized compensation cost related to nonvested stock options that is expected to be recognized over a weighted-average period of 2.5 years.
The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the nine months ended September 30, 2024:
Average Grant
Date Fair Value
Nonvested Options at December 31, 2023
666,250
5.09
5.35
Vested
(159,374)
5.07
Forfeited
(25,000)
Nonvested Options at September 30, 2024
491,876
5.11
Restricted Stock Awards
In 2019 and 2020, the Company granted restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with forfeitable voting and dividend rights.
The following table presents an analysis of nonvested restricted stock awards outstanding for the nine months ended September 30, 2024:
Nonvested at December 31, 2023
3,411
10.53
(2,786)
10.32
Nonvested at September 30, 2024
625
11.47
Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three months ended September 30, 2024 and 2023, the Company recognized compensation expense for restricted stock awards of $2,000 and $112,000, respectively. For the nine months ended September 30, 2024 and 2023, the Company recognized compensation expense for restricted stock awards of $12,000 and $333,000, respectively.
As of September 30, 2024, there was $1,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 0.1 years.
In addition, during the nine months ended September 30, 2024, the Company issued 29,832 shares of unrestricted common stock to non-employee directors, as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to non-employee directors of $368,000 was included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.
Restricted Stock Units
The Company has granted restricted stock units out of the 2019 EIP and 2023 EIP. Restricted stock units represent the right to receive one share of Company stock upon vesting and vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock units have no voting or dividend rights and are not considered outstanding until vesting.
29
The following table presents an analysis of nonvested restricted stock units outstanding for the nine months ended September 30, 2024:
Units
441,015
14.71
63,184
11.89
(25,665)
15.69
(31,528)
14.70
447,006
14.25
Compensation expense associated with the restricted stock units is recognized on a straight-line basis over the period that the restrictions associated with the units lapse based on the total cost of the unit at the grant date. For the three months ended September 30, 2024 and 2023, the Company recognized compensation expense for restricted stock units of $574,000 and $535,000, respectively. For the nine months ended September 30, 2024 and 2023, the Company recognized compensation expense for the restricted stock of $1.9 million and $1.6 million, respectively.
As of September 30, 2024, there was $4.1 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2019 EIP and 2023 EIP that is expected to be recognized over a weighted-average period of 2.3 years.
Note 12: Regulatory Capital
The Company and the Bank are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank must also meet certain specific capital guidelines under the regulatory framework for prompt corrective action. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.
The following tables present the capital amounts and ratios for the Company, on a consolidated basis, and the Bank as of September 30, 2024 and December 31, 2023:
Minimum Required
For Capital Adequacy
To be Well Capitalized
Purposes Plus Capital
Under Prompt Corrective
Actual
Purposes
Conservation Buffer
Action Regulations
Ratio
Company (Consolidated):
Total Risk-based Capital
589,088
14.62
322,278
422,990
10.50
N/A
Tier 1 Risk-based Capital
460,827
11.44
241,709
6.00
342,420
8.50
Common Equity Tier 1 Capital
394,313
9.79
181,281
4.50
281,993
7.00
Tier 1 Leverage Ratio
9.75
189,109
4.00
Bank:
573,720
14.27
321,749
422,296
402,187
10.00
525,114
13.06
241,312
341,859
180,984
281,531
261,421
6.50
11.12
188,832
236,040
5.00
570,770
13.97
326,872
429,019
440,947
10.79
245,154
347,301
374,433
9.16
183,865
286,013
9.57
184,383
554,269
13.58
326,528
428,568
408,160
503,787
12.34
244,896
346,936
183,672
285,712
265,304
10.95
184,037
230,047
The Company and the Bank must maintain a capital conservation buffer, as defined by regulatory guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers.
Note 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. There have been no changes in methodologies used as of September 30, 2024. The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023:
Level 1
Level 2
Level 3
Fair Value of Financial Assets:
Interest Rate Caps
9,594
Total Fair Value of Financial Assets
584,309
690,184
Fair Value of Financial Liabilities:
9,145
Total Fair Value of Financial Liabilities
13,872
636,693
8,601
When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.
For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.
The fair value of the caps is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities, and accordingly are valued using Level 2 inputs.
Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.
33
The following tables present net credit losses related to nonrecurring fair value measurements of certain assets at September 30, 2024 and December 31, 2023:
Loss
Individually Evaluated Loans
8,374
9,602
199
The Company records certain loans at fair value on a non-recurring basis. Individually evaluated loans for which an allowance is established, or a write-down has occurred during the period, based on the fair value of collateral require classification in the fair value hierarchy. The fair value of the loan’s collateral is determined by appraisals, independent valuation and other techniques. When the fair value of the loan’s collateral is based on an observable market price the Company classifies the fair value of the individually evaluated loans within Level 2 of the valuation hierarchy. For loans in which the valuation has unobservable inputs, the Company classifies these within the Level 3 of the valuation hierarchy. As of September 30, 2024, collateral values were estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs, including internally determined values based on cost adjusted for depreciation and customized discounting criteria on appraisals which ranged from 4-10%. Due to the significance of unobservable inputs, fair values of individually evaluated loans have been classified as Level 3.
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 amounts and estimated fair values of financial instruments at September 30, 2024 and December 31, 2023:
Fair Value Hierarchy
Carrying
Financial Assets:
Cash and Due From Banks
558,840
FHLB Stock, at Cost
Loans, Net
3,564,137
3,572,511
Accrued Interest Receivable
Financial Liabilities:
3,755,621
14,035
349,690
78,698
3,579,583
3,589,185
3,709,086
319,305
77,557
The following methods and assumptions were used by the Company to estimate fair value of financial instruments not previously discussed.
Cash and due from banks – The carrying amount of cash and cash equivalents approximates their fair value.
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.
35
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.
Notes payable and subordinated debentures – The fair values of the Company’s notes payable and subordinated debentures are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.
FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.
Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees and was not material at September 30, 2024 and December 31, 2023.
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.
36
Note 14: Accumulated Other Comprehensive Income
The following tables present the components of other comprehensive income for the three and nine months ended September 30, 2024 and 2023:
Before Tax
Tax Effect
Net of Tax
Net Unrealized Gain on Available for Sale Securities
(4,236)
10,502
Less: Reclassification Adjustment for Net Losses Included in Net Income
(8)
Total Unrealized Gain
14,766
(4,244)
10,522
Net Unrealized Loss on Cash Flow Hedge
1,943
(4,818)
Less: Reclassification Adjustment for Gains Included in Net Income
(2,526)
726
(1,800)
Total Unrealized Loss
(9,287)
2,669
(6,618)
Other Comprehensive Income
5,479
Net Unrealized Loss on Available for Sale Securities
2,917
(7,234)
Less: Reclassification Adjustment for Net Gains Included in Net Income
Net Unrealized Gain on Cash Flow Hedge
(2,231)
5,532
467
(1,156)
6,140
(1,764)
4,376
Other Comprehensive Loss
(4,011)
(4,639)
11,502
111
(274)
15,756
(4,528)
11,228
(284)
703
(7,158)
2,057
(5,101)
(6,171)
1,773
(4,398)
9,585
4,121
(10,217)
(14,332)
4,119
(10,213)
(2,921)
7,246
(4,010)
(2,857)
6,157
(1,768)
4,389
(8,175)
37
The following tables present the changes in each component of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2024 and 2023:
Available For
Other Comprehensive
Sale Securities
Cash Flow Hedge
Balance at Beginning of Period
(31,014)
15,694
Other Comprehensive Income Before Reclassifications
5,684
Amounts Reclassified from Accumulated Other Comprehensive Income
(1,780)
Net Other Comprehensive Income During Period
Balance at End of Period
(20,492)
9,076
(37,103)
16,195
Other Comprehensive Income (Loss) Before Reclassifications
(1,702)
Net Other Comprehensive Income (Loss) During Period
(44,337)
20,571
(31,720)
13,474
12,205
(5,375)
(34,124)
16,182
(2,971)
(2,853)
Note 15: Subsequent Events
On October 23, 2024, the Company’s Board of Directors announced a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), payable on December 2, 2024, to shareholders of record on the Series A Preferred Stock at the close of business on November 15, 2024.
38
General
The following discussion explains the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2024. Annualized results for these interim periods 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, 2023, filed with the Securities and Exchange Commission, or the SEC, on March 7, 2024.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of future results. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
The Company is a financial holding company headquartered in St. Louis Park, Minnesota. The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth.
40
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in “Note 1 – Description of the Business and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included as a part of the Company’s most recent Annual Report on Form 10-K, filed with the SEC on March 7, 2024. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2023. Certain policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
On August 28, 2024, the Company and FMB jointly announced the signing of a definitive merger agreement under which Bridgewater Bank will acquire First Minnetonka City Bank, the wholly-owned banking subsidiary of FMB, in an all-cash transaction.
On October 23, 2024, the Company announced the receipt of all necessary regulatory approvals for the transaction. The acquisition is expected to close in the fourth quarter of 2024, subject to the satisfaction of remaining closing conditions. At the closing of the transaction, First Minnetonka City Bank will merge with and into Bridgewater Bank, with Bridgewater Bank as the surviving entity. The combined organization is expected to have approximately $4.9 billion in total assets, $4.0 billion in deposits, $3.9 billion in loans and leases, and nine full-service branches across the Twin Cities.
41
Operating Results Overview
The following table summarizes certain key financial results as of and for the periods indicated:
As of and for the Three Months Ended
June 30
March 31,
Income Statement
Net Interest Income
24,996
24,631
25,314
600
Noninterest Income
1,763
1,550
1,409
Noninterest Expense
15,539
15,189
15,740
8,115
7,831
8,873
7,101
6,818
7,859
Per Common Share Data
Basic Earnings Per Share
0.26
0.25
Diluted Earnings Per Share
0.24
Book Value Per Share
14.06
13.63
13.30
12.94
12.47
Tangible Book Value Per Share (1)
13.96
13.53
13.20
12.84
12.37
Basic Weighted Average Shares Outstanding
27,386,713
27,691,401
27,870,430
Diluted Weighted Average Shares Outstanding
27,748,184
28,089,805
28,238,056
Shares Outstanding at Period End
27,589,827
Selected Performance Ratios
Return on Average Assets (2)
0.73
0.70
0.69
0.85
Pre-Provision Net Revenue Return on Average Assets (1)(2)
0.94
0.95
Return on Average Shareholders' Equity (2)
7.79
7.49
7.35
8.43
9.23
Return on Average Tangible Common Equity (1)(2)
8.16
7.80
7.64
8.95
9.92
Average Shareholders' Equity to Average Assets
9.42
9.37
9.32
9.15
9.19
Net Interest Margin (3)
2.24
2.27
2.32
Core Net Interest Margin (1)(3)
2.16
2.17
2.21
Yield on Interest Earning Assets(3)
5.41
5.28
5.14
Yield on Total Loans, Gross(3)
5.57
5.50
5.38
5.33
5.26
Cost of Interest Bearing Liabilities
4.27
4.19
4.03
3.97
3.81
Cost of Total Deposits
3.58
3.32
3.19
2.99
Cost of Funds
3.54
3.49
3.34
3.23
3.10
Efficiency Ratio (1)
58.0
58.7
58.2
58.8
56.1
Noninterest Expense to Average Assets (2)
1.33
1.35
1.37
1.34
4,687,035
4,723,109
4,557,070
3,800,385
3,784,205
3,722,271
3,807,712
3,807,225
3,675,509
433,611
Loan to Deposit Ratio
98.3
99.8
99.4
100.4
101.3
Core Deposits to Total Deposits (4)
71.5
67.9
69.3
68.7
70.3
Uninsured Deposits to Total Deposits
25.0
22.5
26.0
24.3
22.2
Capital Ratios (Consolidated) (6)
9.66
9.62
Common Equity Tier 1 Risk-based Capital Ratio
9.41
9.21
9.07
Tier 1 Risk-based Capital Ratio
11.03
10.83
10.69
Total Risk-based Capital Ratio
14.16
14.00
13.88
Tangible Common Equity to Tangible Assets (1)
8.17
7.90
7.72
7.73
7.61
Selected Asset Quality Data
Loans 30-89 Days Past Due
502
Loans 30-89 Days Past Due to Total Loans
0.00
0.01
0.41
Nonperforming Loans
678
749
Nonperforming Loans to Total Loans
0.23
0.02
Nonaccrual Loans to Total Loans
Nonaccrual Loans and Loans Past Due 90 Days and Still Accruing to Total Loans
Nonperforming Assets (5)
8,812
269
Nonperforming Assets to Total Assets (5)
0.19
Allowance for Credit Losses on Loans to Total Loans
1.38
1.36
Allowance for Credit Losses on Loans to Nonaccrual Loans
608.95
7,662.09
20,621.29
5,494.45
6,753.67
Net Loan Charge-Offs to Average Loans (2)
0.10
Watchlist Risk Rating Loans
31,991
30,436
21,624
26,485
26,877
Substandard Risk Rating Loans
33,908
33,829
33,858
35,621
Discussion and Analysis of Results of Operations
Net income was $8.7 million for the third quarter of 2024, compared to net income of $9.6 million for the third quarter of 2023. Earnings per diluted common share for the third quarter of 2024 were $0.27, compared to $0.30 per diluted common share for the third quarter of 2023. Net income was $24.6 million for the nine months ended September 30, 2024, compared to net income of $31.1 million for the nine months ended September 30, 2023. Earnings per diluted common share for the nine months ended September 30, 2024 were $0.77, compared to $0.99 per diluted common share for the nine months ended September 30, 2023.
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 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 managing net interest margin and the Company’s primary source of earnings.
43
Average Balances and Yields
The following tables present, for the three and nine months ended September 30, 2024 and 2023, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.
For the Three Months Ended
September 30, 2023
Yield/
Balance
& Fees
Interest Earning Assets:
Cash Investments
157,114
1,971
4.99
81,038
903
4.42
Investment Securities:
Taxable Investment Securities
668,429
8,406
565,008
6,234
4.38
Tax-Exempt Investment Securities (1)
31,496
402
5.08
29,955
346
4.58
Total Investment Securities
699,925
8,808
5.01
594,963
6,580
4.39
Loans (1)(2)
3,721,654
52,118
3,722,594
49,326
Federal Home Loan Bank Stock
16,828
436
10.31
17,829
400
8.89
Total Interest Earning Assets
4,595,521
63,333
4,416,424
57,209
Noninterest Earning Assets
108,283
88,513
4,703,804
4,504,937
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits
804,161
9,369
4.63
730,244
7,136
3.88
939,665
10,262
4.34
874,612
8,089
3.67
355,050
3,918
266,635
1,962
2.92
989,712
10,638
4.28
985,276
10,038
Total Interest Bearing Deposits
3,088,588
4.40
2,856,767
3.78
141
5.72
39,641
8.58
309,120
2.50
275,261
79,519
79,137
5.03
Total Interest Bearing Liabilities
3,491,118
3,264,556
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits
710,192
754,567
Other Noninterest Bearing Liabilities
59,417
71,767
Total Noninterest Bearing Liabilities
769,609
826,334
Shareholders' Equity
443,077
414,047
Total Liabilities and Shareholders' Equity
Net Interest Income / Interest Rate Spread
25,905
1.21
25,821
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans
(306)
(400)
For the Nine Months Ended
104,831
3,722
4.74
68,150
1,937
3.80
649,538
23,867
4.91
569,097
18,192
31,597
1,203
28,947
975
681,135
25,070
4.92
598,044
19,167
4.29
3,740,855
153,568
3,690,196
142,659
5.17
18,111
1,173
8.65
22,343
1,228
7.34
4,544,932
183,533
5.39
4,378,733
164,991
5.04
102,993
86,243
4,647,925
4,464,976
757,409
25,332
4.47
625,531
15,833
3.38
917,051
28,502
926,494
21,636
3.12
344,484
10,935
4.24
261,474
4,734
2.42
993,445
31,226
4.20
876,130
24,394
3.72
3,012,389
4.26
2,689,629
3.31
27,605
5.61
220,434
8.62
8.21
311,380
2.71
215,938
3.26
79,424
5.02
79,042
3,444,548
4.16
3,218,793
700,308
774,523
67,405
63,646
767,713
838,169
435,664
408,014
76,185
1.23
81,049
1.55
2.47
(959)
(1,189)
45
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, and for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023:
Compared with
Change Due To:
Volume
Variance
952
1,068
1,283
889
2,172
Tax-Exempt Investment Securities
56
Total Securities
1,301
2,228
Loans
(143)
2,935
2,792
(27)
63
2,083
4,041
6,124
842
1,391
2,233
1,484
2,173
970
986
1,956
581
2,520
4,442
6,962
(569)
(546)
204
(578)
(5)
2,158
3,882
6,040
(75)
159
84
1,305
480
1,785
2,972
2,703
5,675
102
126
228
3,074
2,829
5,903
2,223
8,686
10,909
219
6,328
18,542
4,426
5,073
9,499
(273)
7,139
6,866
2,639
3,562
6,201
3,709
3,123
6,832
10,501
18,897
29,398
(8,087)
993
(7,094)
(887)
1,056
(15)
4,375
19,031
23,406
1,953
(6,817)
(4,864)
Comparison of Net Interest Margin, Interest Income, and Interest Expense
Third Quarter of 2024 Compared to Third Quarter of 2023
Net interest income was $25.6 million for the third quarter of 2024, an increase of $178,000 compared to $25.4 million for the third quarter of 2023. The increase in net interest income was primarily due to increased cash balances, growth and higher yields in the securities portfolio, and higher yields on loans, offset partially by growth and higher rates on deposits.
Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2024 was 2.24%, an eight basis point decline from 2.32% in the third quarter of 2023. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees, was 2.16% for the third quarter of 2024, an eight basis point decline from 2.24% in the third quarter of 2023. The decline in the margin was primarily due to higher funding costs, offset partially by higher earning asset yields.
Average interest earning assets were $4.60 billion for the third quarter of 2024, an increase of $179.1 million, or 4.1%, compared to $4.42 billion for the third quarter of 2023. This increase in average interest earning assets was primarily due to increased cash balances and purchases of investment securities. Average interest bearing liabilities were $3.49 billion for the third quarter of 2024, an increase of $226.6 million, or 6.9%, compared to $3.26 billion for the third quarter of 2023. The increase in average interest bearing liabilities was primarily due to an increase in all deposit types and FHLB advances, offset partially by a decrease in federal funds purchased.
Average interest earning assets produced a tax-equivalent yield of 5.48% for the third quarter of 2024, compared to 5.14% for the third quarter of 2023. The increase in the yield on interest earning assets was primarily due to the purchase of higher yielding securities and the repricing of the loan and securities portfolios in the higher interest rate environment. The average rate paid on interest bearing liabilities was 4.27% for the third quarter of 2024, compared to
3.81% for the third quarter of 2023. The increase was primarily due to continued deposit repricing in the higher rate environment.
Interest Income. Total interest income, on a tax-equivalent basis, was $63.3 million for the third quarter of 2024, compared to $57.2 million for the third quarter of 2023. The $6.1 million, or 10.7%, increase in total interest income on a tax-equivalent basis was primarily due to purchases of investment securities and higher earning asset yields in the higher interest rate environment.
Interest income on the investment securities portfolio, on a tax-equivalent basis, increased $2.2 million for the third quarter of 2024, compared to the third quarter of 2023, primarily due to a $105.0 million, or 17.6%, increase in average balances between the two periods and higher rates earned on securities.
Interest income on loans, on a tax-equivalent basis, was $52.1 million for the third quarter of 2024, compared to $49.3 million for the third quarter of 2023. The $2.8 million increase was primarily due to the repricing of the loan portfolio in the higher interest rate environment.
Loan interest income and loan fees remained one of the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield increased to 5.57% in the third quarter of 2024, which was 31 basis points higher than 5.26% in the third quarter of 2023. The core loan yield continued to rise as new loans originated at higher yields and the existing portfolio reprice in the higher rate environment.
The following table presents a summary of interest and fees recognized on loans for the periods indicated:
June 30, 2024
March 31, 2024
5.47
5.42
5.16
Fees
0.08
0.07
Yield on Loans
Interest Expense. Interest expense on interest bearing liabilities was $37.4 million for the third quarter of 2024, an increase of $6.0 million, from $31.4 million for the third quarter of 2023. The increase was primarily due to growth and upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on deposits was $34.2 million for the third quarter of 2024, an increase of $7.0 million, from $27.2 million for the third quarter of 2023. The increase in interest expense on deposits was primarily due to upward repricing of the deposit portfolio in the higher interest rate environment and the average balance of interest bearing deposits increasing by $231.8 million, or 8.1%. The cost of total deposits was 3.58% in the third quarter of 2024, a 59 basis point increase, compared to 2.99% in the third quarter of 2023. The increase was primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings was $3.2 million for the third quarter of 2024, a decrease of $921,000, compared to $4.2 million for the third quarter of 2023. The decrease was primarily due to a decreased utilization of federal funds purchased and a decrease in the rate on FHLB advances.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Net interest income was $75.2 million for the nine months ended September 30, 2024, a decrease of $4.6 million, or 5.8%, compared to $79.9 million for the nine months ended September 30, 2023. The decrease in net interest income was primarily due to growth and higher rates paid on deposits, offset partially by growth and higher earning asset yields in the higher interest rate environment.
Net interest margin (on a fully tax-equivalent basis) for the nine months ended September 30, 2024 was 2.24%, a 23 basis point decline from 2.47% for the nine months ended September 30, 2023. Core net interest margin (on a fully
tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees, was 2.17% for the nine months ended September 30, 2024, a 22 basis point decline from 2.39% for the nine months ended September 30, 2023.
Average interest earning assets were $4.54 billion for the nine months ended September 30, 2024, an increase of $166.2 million, or 3.8%, compared to $4.38 billion for the nine months ended September 30, 2023. This increase in average interest earning assets was primarily due to organic growth in the loan portfolio, continued purchases of investment securities, and an increase in cash balances. Average interest bearing liabilities were $3.44 billion for the nine months ended September 30, 2024, an increase of $225.8 million, or 7.0%, compared to $3.22 billion for the nine months ended September 30, 2023. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing transaction deposits, time deposits, brokered deposits, and FHLB advances, offset partially by a decrease in federal funds purchased.
Average interest earning assets produced a tax-equivalent yield of 5.39% for the nine months ended September 30, 2024, compared to 5.04% for the nine months ended September 30, 2023. The average rate paid on interest bearing liabilities was 4.16% for the nine months ended September 30, 2024, compared to 3.49% for the nine months ended September 30, 2023.
Interest Income. Total interest income on a tax-equivalent basis was $183.5 million for the nine months ended September 30, 2024, compared to $165.0 million for the nine months ended September 30, 2023. The $18.5 million increase in total interest income on a tax-equivalent basis was primarily due to an increase in cash balances, organic growth in the loan portfolio, purchases of investment securities and higher earning asset yields in the higher interest rate environment.
Interest income on the investment securities portfolio, on a tax-equivalent basis, increased $5.9 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to a $83.1 million, or 13.9%, increase in average balances and a 63 basis point increase in yield between the periods.
Interest income on loans, on a tax-equivalent basis, was $153.6 million for the nine months ended September 30, 2024, compared to $142.7 million for the nine months ended September 30, 2023. The $10.9 million increase was primarily due to a 1.4% increase in the average balances of loans outstanding and a 31 basis point increase in yield.
Interest Expense. Interest expense on interest bearing liabilities was $107.3 million for the nine months ended September 30, 2024, an increase of $23.4 million, compared to $83.9 million for the nine months ended September 30, 2023. The increase was primarily due to growth and continued deposit repricing in the higher interest rate environment, offset partially by decreased utilization of federal funds purchased.
Interest expense on deposits increased to $96.0 million for the nine months ended September 30, 2024, compared to $66.6 million for the nine months ended September 30, 2023. The $29.4 million increase in interest expense on deposits was primarily due to upward repricing of the deposit portfolio in the higher interest rate environment.
Interest expense on borrowings was $11.4 million for the nine months ended September 30, 2024, compared to $17.3 million for the nine months ended September 30, 2023. This decrease was primarily due to lower average balances of federal funds purchased.
Provision for Credit Losses
The provision for credit losses on loans was $-0- for both the third quarter of 2024 and the third quarter of 2023. The provision for credit losses on loans was $1.5 million for the nine months ended September 30, 2024, compared to $2.1 million for the nine months ended September 30, 2023. Although loans decreased during the quarter, increased loss rates and other qualitative factor adjustments resulted in no provision for the quarter. The allowance for credit losses on loans to total loans was 1.38% at September 30, 2024, compared to 1.36% at December 31, 2023.
The following table presents a summary of the activity in the allowance for credit losses on loans for the periods indicated:
Charge-offs
Recoveries
The provision for credit losses for off-balance sheet credit exposures was $-0- for the third quarter of 2024, compared to a negative provision of $600,000 for the third quarter of 2023. No provision was recorded during the third quarter of 2024 due to unfunded commitments remaining stable as the migration to funded loans was offset by the volume of newly originated loans with unfunded commitments. The provision for credit losses for off-balance sheet exposures was a negative provision of $100,000 for the nine months ended September 30, 2024, compared to a negative provision of $2.0 million for the nine months ended September 30, 2023. The negative provision for both periods was due to a reduction in outstanding unfunded commitments. The allowance for credit losses on off-balance sheet credit exposures was $2.9 million as of September 30, 2024, compared to $3.0 million as of December 31, 2023.
The following table presents a summary of the activity in the provision for credit losses for the periods indicated:
Increase/
(Decrease)
Provision for (Recovery of) Credit Losses for Off-Balance Sheet Credit Exposures
1,875
1,275
Noninterest income was $1.5 million for the third quarter of 2024, a decrease of $204,000 from $1.7 million for the third quarter of 2023. The decrease was primarily due to $493,000 of FHLB prepayment income recognized in the previous year which did not reoccur, offset partially by higher letter of credit fees, an increase in the cash surrender value of bank-owned life insurance and an increase in other income. Noninterest income was $4.8 million for the nine months ended September 30, 2024, a decrease of $249,000 from $5.1 million for the nine months ended September 30, 2023. The decrease was primarily due to lower letter of credit fees and $792,000 of FHLB prepayment income recognized in the previous year which did not reoccur, offset partially by an increase in net gain on sale of securities and an increase in the cash surrender value of bank-owned life insurance.
The following table presents the major components of noninterest income for the periods indicated:
Noninterest Income:
Net Gain (Loss) on Sales of Securities
391
109
(201)
100
241
(493)
(792)
112
122
(204)
(249)
Noninterest expense was $15.8 million for the third quarter of 2024, an increase of $523,000 from $15.2 million for the third quarter of 2023. The increase was primarily attributable to increases in salaries and employee benefits, higher professional and consulting fees relating to the acquisition of First Minnetonka City Bank, increases in information technology and telecommunications, and marketing and advertising expense, offset partially by a decrease in the FDIC insurance assessment and lower derivative collateral fees.
Noninterest expense was $46.5 million for the nine months ended September 30, 2024, an increase of $2.9 million, from $43.6 million for the nine months ended September 30, 2023. The increase was primarily attributable to increases in salaries and employee benefits and higher professional and consulting fees driven by the acquisition of First Minnetonka City Bank.
The Company had 265 full-time equivalent employees at the end of the third quarter of 2024, compared to 255 at the end of the third quarter of 2023.
Efficiency Ratio. The efficiency ratio, a non-GAAP financial measure, reports total noninterest expense, less amortization of intangible assets, as a percentage of net interest income plus total noninterest income, less gains (losses) on sales of securities. Management believes this non-GAAP financial measure provides a meaningful comparison of operational performance and facilitates investors’ assessments of business performance and trends in comparison to peers in the banking industry.
The efficiency ratio was 58.0% for the third quarter of 2024, compared to 56.1% for the third quarter of 2023. The efficiency ratio for the nine months ended September 30, 2024 and 2023 was 58.3% and 51.2%, respectively. The efficiencies of the Company’s “branch-light” model have positioned the Company well to continue navigating a challenging environment for a more spread-based revenue model.
51
The following table presents the major components of noninterest expense for the periods indicated:
Noninterest Expense:
332
2,036
(32)
(167)
(325)
(290)
(24)
591
(162)
157
371
145
201
(65)
523
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 $2.7 million for the third quarter of 2024, compared to $2.9 million for the third quarter of 2023. The effective combined federal and state income tax rate for the third quarter of 2024 was 23.6%, compared to 23.0% for the third quarter of 2023. Income tax expense was $7.6 million for the nine months ended September 30, 2024, compared to $10.2 million for the nine months ended September 30, 2023. The effective combined federal and state income tax rate for the nine months ended September 30, 2024 and 2023 was 23.6% and 24.7%, respectively. The fluctuations in the effective tax rate across both periods was primarily due to the timing and delivery of tax credits.
Financial Condition
Total assets at September 30, 2024 were $4.69 billion, an increase of $79.5 million, or 1.7%, over total assets of $4.61 billion at December 31, 2023, and an increase of $134.4 million, or 3.0%, over total assets of $4.56 billion at September 30, 2023. The year-to-date and year-over-year growth were primarily due to an increase in cash and cash equivalents and purchases of investment securities.
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 or borrowings. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.
The investment securities portfolio consists primarily of U.S. government agency mortgage backed securities, municipal securities, and corporate securities comprised primarily of subordinated debentures of banks and financial holding companies. In addition, the Company also holds U.S. treasury securities, other mortgage backed and other debt
52
securities. The investment securities portfolio has varying contractual maturities, some of 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 $664.7 million at September 30, 2024, compared to $604.1 million at December 31, 2023, an increase of $60.6 million, or 10.0%. At September 30, 2024, U.S. government agency mortgage-backed securities represented 15.5% of the portfolio, municipal securities represented 16.8% of the portfolio, corporate securities represented 20.8% of the portfolio, U.S. treasury securities represented 15.9% of the portfolio, SBA securities represented 2.2% of the portfolio, other mortgage-backed securities represented 16.1% of the portfolio, and asset-backed securities represented 12.7% of the portfolio.
The following table presents the amortized cost and fair value of securities available for sale, by type, at September 30, 2024 and December 31, 2023:
Fair
Value
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA
6,947
6,484
45,256
44,188
Issued by FNMA and FHLMC
23,117
20,970
24,319
21,687
Other Residential Mortgage-Backed Securities
73,153
65,738
74,832
65,617
Commercial Mortgage-Backed Securities
10,316
9,975
10,811
10,292
All Other Commercial MBS
105,017
107,304
94,237
93,531
Total MBS
Municipal Securities
Loan Portfolio
The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.
The Company manages concentrations of credit exposure through a risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, internal and external loan review, and stress testing.
Total gross loans at September 30, 2024 were $3.69 billion, a decrease of $38.7 million, or 1.0%, over total gross loans of $3.72 billion at December 31, 2023, and a decrease of $36.7 million, or 1.0%, over total gross loans of $3.72 billion at September 30, 2023. The decrease in the loan portfolio during both periods was primarily due to elevated loan payoffs, offset partially by loan originations. The pace of loan growth has moderated in recent quarters, when compared to historical levels, due to active balance sheet management to continue to align loan growth with the funding outlook and ultimately the impact of the higher interest rate environment on the number of prospective deals that meet underwriting standards.
53
The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:
Percent
13.4
518,762
13.6
483,069
12.8
12.4
459,854
12.3
3.2
134,096
3.5
200,970
6.3
294,818
7.9
1.3
60,551
1.6
65,606
1.7
1.8
64,463
11.4
416,944
11.0
417,773
10.8
404,716
10.9
37.4
1,404,835
37.0
1,389,345
36.7
37.3
1,378,669
5.0
185,988
4.9
182,589
4.7
159,485
4.3
28.0
1,070,050
28.2
1,035,702
27.4
26.5
951,263
25.6
81.8
3,077,817
81.1
3,025,409
79.9
79.3
2,894,133
77.8
0.3
9,159
0.2
9,151
9,003
100.0
(51,949)
(51,347)
(50,585)
(6,214)
(6,356)
(7,222)
3,742,222
3,726,502
3,664,464
The Company primarily focuses on real estate mortgage lending, which constituted 81.8% of the portfolio at September 30, 2024. The composition of the portfolio has remained relatively consistent with prior periods and the Company does not expect any significant changes in the composition of the loan portfolio or the emphasis on real estate lending in the foreseeable future.
As of September 30, 2024, investor CRE loans totaled $2.58 billion, consisting of $1.03 billion of loans secured by nonowner occupied CRE, $1.38 billion of loans secured by multifamily residential properties, $45.8 million of 1-4 family construction loans and $118.6 million of construction and land development loans. Investor CRE loans represented 69.9% of the total gross loan portfolio and 449.1% of the Bank’s total risk-based capital at September 30, 2024, compared to 71.8% and 482.4%, respectively, at December 31, 2023.
The following table provides a breakdown of CRE nonowner occupied loans by collateral types as of September 30, 2024:
Percent of
CRE Nonowner
Total Loan
Occupied Portfolio
Portfolio
Collateral Type:
Industrial
251,428
24.4
6.8
Office
197,309
19.1
5.4
Retail
168,750
16.3
4.6
Nursing/Assisted Living
108,846
10.6
2.9
Mini Storage Facility
107,473
10.4
Medical Office
98,551
9.6
2.7
99,785
54
The following tables present time to contractual maturity and sensitivity to interest rate changes for the loan portfolio as of September 30, 2024 and December 31, 2023:
As of September 30, 2024
Due in One Year
More Than One
More Than Five
After
or Less
Year to Five Years
Year to Fifteen Years
Fifteen Years
201,028
220,303
68,399
3,673
50,820
65,868
1,908
37,959
67,910
279,126
73,509
634
223,731
563,634
505,554
86,895
5,793
112,218
64,228
267,106
505,874
259,162
564,540
1,460,852
902,453
87,529
8,760
3,408
227
863,107
1,758,093
972,961
91,429
Interest Rate Sensitivity:
Fixed Interest Rates
557,598
1,463,797
481,866
26,531
Floating or Adjustable Rates
305,509
294,296
491,095
64,898
As of December 31, 2023
157,047
206,460
96,826
3,728
99,183
93,013
40,608
46,601
9,476
9,010
59,962
262,468
79,320
646
242,291
482,380
576,348
87,522
8,271
83,280
84,232
204,297
503,196
279,813
514,821
1,331,324
1,019,713
88,168
2,568
5,533
203
820,220
1,645,806
1,166,157
92,099
502,454
1,414,656
673,563
26,172
317,766
231,150
492,594
65,927
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
55
questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “watch.”
The following table presents information on loan classifications at September 30, 2024. The Company had no assets classified as doubtful or loss at September 30, 2024.
Risk Category
14,694
1,474
2,702
31,816
17,374
48,870
63,628
Loans that have potential weaknesses that warranted a watchlist risk rating at September 30, 2024 totaled $32.0 million, compared to $26.5 million at December 31, 2023. Loans that warranted a substandard risk rating at September 30, 2024 totaled $31.6 million, compared to $35.9 million at December 31, 2023. Management continues to actively work with these borrowers and closely monitor substandard credits.
Nonperforming Assets
Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonaccrual loans totaled $8.4 million as of September 30, 2024 and $919,000 as of December 31, 2023. There were no loans 90 days past due and still accruing as of September 30, 2024 or December 31, 2023. As of September 30, 2024, there were $434,000 of foreclosed assets. There were no foreclosed assets as of December 31, 2023. The overall increase in nonperforming assets was primarily due to one central business district office loan, which previously had a substandard risk rating.
The following table presents a summary of nonperforming assets, by category, at the dates indicated:
Total Nonaccrual Loans
Total Nonperforming Loans
Plus: Foreclosed Assets
Total Nonperforming Assets (1)
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)
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, to place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but
uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for credit losses on loans is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. For the three and nine months ended September 30, 2024, the gross income that would have been recorded on nonaccrual loans was $116,000 and $152,000, respectively. For the three and nine months ended September 30, 2023, gross income that would have been recorded on nonacrrual loans was $20,000 and $51,000, respectively.
The allowance for credit losses on loans is a reserve established through charges to earnings in the form of a provision for credit losses. The Company maintains an allowance for credit losses at a level management considers adequate to provide for expected lifetime losses in the portfolio. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies, among other factors, all could cause changes to the allowance for credit losses on loans.
At September 30, 2024, the allowance for credit losses on loans was $51.0 million, an increase of $524,000 from $50.5 million at December 31, 2023. Net charge-offs totaled $931,000 during the third quarter of 2024 and $116,000 during the third quarter of 2023. Net charge-offs totaled $926,000 for the nine months ended September 30, 2024 and $111,000 for the nine months ended September 30, 2023. The allowance for credit losses on loans as a percentage of total loans was 1.38% at September 30, 2024, compared to 1.36% at December 31, 2023.
The following table presents a summary of net charge-offs for the periods indicated:
Net Charge-offs (Recoveries)
94
(10)
89
932
Total Net Charge-offs (Recoveries)
931
926
Net Charge-offs to Average Loans
0.03
0.35
0.12
0.04
1.02
0.05
0.36
Total Net Charge-offs (Recoveries) (Annualized) to Average Loans
Gross Loans, End of Period
Average Loans
Allowance for Credit Losses to Total Gross Loans
57
The following table presents a summary of the allocation of the allowance for credit losses on loans by loan portfolio segment as of the dates indicated:
11.1
10.7
2.1
0.8
1.1
1 - 4 Family Mortgage
43.8
44.0
2.4
2.3
34.1
32.1
43,743
85.7
42,277
83.7
Total Allowance for Credit Losses
The principal sources of funds for the Company are deposits, consisting of demand deposits, money market accounts, savings accounts, and certificates of deposit. The following table presents the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:
19.0
705,175
18.5
698,432
18.3
20.4
754,297
20.5
805,756
21.5
752,568
19.8
783,736
20.6
692,801
18.7
780,863
21.3
26.2
943,994
24.8
979,773
25.7
25.2
872,534
23.7
9.3
373,713
352,510
8.1
265,737
7.2
24.0
1,032,262
27.1
992,774
26.1
27.6
1,002,078
27.3
Total deposits at September 30, 2024 were $3.75 billion, an increase of $37.5 million, or 1.0%, compared to total deposits of $3.71 billion at December 31, 2023, and an increase of $71.9 million, or 2.0%, over total deposits of $3.68 billion at September 30, 2023. Core deposits, defined as total deposits excluding brokered deposits and time deposits greater than $250,000, increased $131.2 million, or 6.9% annualized, from December 31, 2023. Growth in core deposits was primarily due to increased balances of existing clients and new client acquisitions. Based on the nature of the Company’s client base, management believes core deposits could fluctuate in future periods as deposit growth is not always linear.
The Company relies on increasing the deposit base to fund loans and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. The brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels. As of September 30, 2024, total brokered deposits were $901.0 million, a decrease of $123.5 million, compared to total brokered deposits of $1.02 billion at December 31, 2023. Brokered deposits continue to be used as a supplemental funding source, as needed, to support loan portfolio growth.
58
The following table presents the average balance and average rate paid on each of the following deposit categories as of and for the three months ended September 30, 2024 and 2023:
As of and for the
Time Deposits < $250,000
184,397
181,689
2.56
Time Deposits > $250,000
170,653
4.80
84,946
3.70
3,798,780
3,611,334
The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $944.0 million, or 25.0% of total deposits, at September 30, 2024 and $900.0 million, or 24.3% of total deposits, at December 31, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
Other Borrowings
At September 30, 2024, the Company had outstanding FHLB advances of $349.5 million, compared to $319.5 million at December 31, 2023. 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 $509.2 million and $498.7 million at September 30, 2024 and December 31, 2023, respectively.
The Company has an outstanding Loan and Security Agreement and revolving note with a third party correspondent lender, which is secured by 100% of the issued and outstanding stock of the Bank. On September 1, 2024, the Company entered into a third amendment to the agreement which extended the maturity date of the Company’s existing revolving line of credit with a maximum principal amount of $40.0 million from September 1, 2024 to September 1, 2026. The amendment also increased the floor rate from 3.85% to 4.50%. As of both September 30, 2024 and December 31, 2023, the Company had $13.8 million of outstanding balances under the revolving line of credit.
Additionally, the Company has borrowing capacity from other sources. As of September 30, 2024, 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 $868.0 million and $979.4 million at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 and December 31, 2023, the Company had no outstanding advances from the discount window.
As of September 30, 2024 and December 31, 2023, the Company had subordinated debentures, net of issuance costs, of $79.6 million and $79.3 million, respectively.
For additional information, see “Note 8 – Subordinated Debentures” of the Company’s Consolidated Financial Statements included as part of this report.
59
Contractual Obligations
The following table presents supplemental information regarding total contractual obligations at September 30, 2024:
Within
One to
Three to
One Year
Three Years
Five Years
Deposits Without a Stated Maturity
2,638,892
586,182
174,611
49,000
Commitment to Fund Tax Credit Investments
Operating Lease Obligations
596
811
370
1,777
3,255,371
649,743
197,481
92,755
4,195,350
The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Total shareholders’ equity at September 30, 2024 was $452.2 million, an increase of $26.7 million, or 6.3%, compared to total shareholders’ equity of $425.5 million at December 31, 2023. The increase was primarily due to net income retained and a decrease in unrealized losses in the securities portfolio, offset partially by a decrease in unrealized gains in the derivatives portfolio, preferred stock dividends, and stock repurchases.
Tangible book value per share, a non-GAAP financial measure, was $13.96 as of September 30, 2024, an increase of 8.8% from $12.84 as of December 31, 2023. Tangible common equity as a percentage of tangible assets, a non-GAAP financial measure, was 8.17% at September 30, 2024, compared to 7.73% at December 31, 2023.
Stock Repurchase Program. During the three months ended September 30, 2024, the Company repurchased no shares of its common stock. During the nine months ended September 30, 2024, the Company repurchased 446,509 shares of its common stock, representing 1.6% of the Company’s issued and outstanding shares at that time. Shares were repurchased during this period at a weighted average price of $11.60 per share, for a total of $5.2 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares.
On July 23, 2024, the Company’s Board of Directors extended the expiration date of the Company’s previously announced stock repurchase program (the “2022 Stock Repurchase Program”) from August 16, 2024 to August 20, 2025. As of September 30, 2024, the remaining amount that could be used to repurchase shares under the stock repurchase program was $15.3 million. The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program based on various factors including valuation, capital levels and other uses of capital.
Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.
60
Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2024. 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 as of the dates indicated are presented in the following tables:
Regulations include a capital conservation buffer of 2.5% that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At September 30, 2024, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.
The following table presents credit arrangements and financial instruments whose contract amounts represented credit risk as of September 30, 2024 and December 31, 2023:
Fixed
Variable
162,664
361,034
164,880
381,752
5,745
106,324
6,780
96,509
168,409
467,358
171,660
478,261
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 flow and collateral needs without adversely affecting either daily operations or financial condition. The Bank’s Asset Liability Management, or ALM, Committee, which is comprised of members of senior management, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.
The Company manages liquidity by maintaining adequate levels of cash and other assets from on- and off-balance sheet arrangements. Specifically, on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB, the Federal Reserve Bank of Minneapolis, and a correspondent lender, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity. During the second quarter of 2024, the Company elected not to renew its membership and discontinued its use of the American Financial Exchange, or AFX. This had no impact on liquidity ratios as the availability of funds changed daily and therefore was not previously included in secondary liquidity. The Company had no borrowings outstanding through the AFX as of December 31, 2023.
Total on- and off-balance sheet liquidity was $2.29 billion as of September 30, 2024, compared to $2.23 billion at December 31, 2023. The Company did not utilize the Federal Reserve Discount Window during the nine months ended September 30, 2024.
62
The following tables present a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity—On-Balance Sheet
167,869
96,594
Less: Pledged Securities
(146,144)
(170,727)
Total Primary Liquidity
686,440
529,971
Ratio of Primary Liquidity to Total Deposits
14.3
Secondary Liquidity—Off-Balance Sheet
Net Secured Borrowing Capacity with the FHLB
509,223
498,736
Net Secured Borrowing Capacity with the Federal Reserve Bank
867,955
979,448
Unsecured Borrowing Capacity with Correspondent Lenders
200,000
Secured Borrowing Capacity with Correspondent Lender
26,250
Total Secondary Liquidity
1,603,428
1,704,434
Total Primary and Secondary Liquidity
2,289,868
2,234,405
Ratio of Primary and Secondary Liquidity to Total Deposits
61.1
60.2
During the nine months ended September 30, 2024, primary liquidity increased by $156.5 million due to a $71.3 million increase in cash and cash equivalents, a $60.6 million increase in securities available for sale and a $24.6 million decrease in pledged securities, when compared to December 31, 2023. Secondary liquidity decreased by $101.0 million as of September 30, 2024, when compared to December 31, 2023, due to a $111.5 million decrease in the borrowing capacity with the Federal Reserve Bank, offset partially by a $10.5 million increase in the borrowing capacity with the FHLB.
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 deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At September 30, 2024, core deposits totaled approximately $2.68 billion and represented 71.5% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.
The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity and interest rate risk management purposes. At September 30, 2024, brokered deposits totaled $901.0 million, consisting of $761.5 million of brokered time deposits and $139.5 million of non-maturity brokered money market and transaction accounts. At December 31, 2023, brokered deposits totaled $1.02 billion, consisting of $850.5 million of brokered time deposits and $174.0 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.
Non-GAAP Financial Measures
In addition to financial measures 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:
June 30,
Pre-Provision Net Revenue
Less: (Gain) Loss on Sales of Securities
(320)
(93)
Less: FHLB Advance Prepayment Income
Total Operating Noninterest Income
1,443
1,457
1,436
4,450
4,298
Plus: Net Interest Income
Net Operating Revenue
27,149
26,439
26,088
26,750
26,654
79,676
84,158
Total Operating Noninterest Expense
11,389
10,900
10,899
11,010
11,417
33,188
40,578
Plus:
Non-Operating Revenue Adjustments
320
93
786
Less:
2,505
2,411
2,360
Average Assets
4,646,517
4,592,838
4,567,446
Pre-Provision Net Revenue Return on Average Assets
1.22
Core Net Interest Margin
Net Interest Income (Tax-equivalent Basis)
25,288
24,992
25,683
25,822
Less: Loan Fees
(968)
(767)
(608)
(751)
(914)
(2,342)
Core Net Interest Income
24,937
24,521
24,384
24,932
24,908
73,843
78,196
Average Interest Earning Assets
4,545,920
4,492,756
4,480,428
2.39
Efficiency Ratio
Less: Amortization of Intangible Assets
(9)
(91)
Adjusted Noninterest Expense
15,751
15,531
15,180
15,731
15,228
46,462
43,489
Less: Gain (Loss) on Sales of Securities
Adjusted Operating Revenue
27,147
84,950
58.3
51.2
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Less: Preferred Stock
(66,514)
Total Common Shareholders' Equity
385,686
372,727
367,097
359,001
349,446
Less: Intangible Assets
(2,789)
(2,797)
(2,806)
(2,814)
(2,823)
Tangible Common Equity
382,897
369,930
364,291
356,187
346,623
Tangible Assets
4,688,728
4,684,238
4,720,303
4,609,176
4,554,247
Tangible Common Equity/Tangible Assets
Tangible Book Value Per Share
Book Value Per Common Share
Less: Effects of Intangible Assets
(0.10)
Tangible Book Value Per Common Share
Return on Average Tangible Common Equity
Average Shareholders' Equity
435,585
428,248
417,789
Less: Average Preferred Stock
Average Common Equity
376,563
369,071
361,734
351,275
347,533
369,150
341,500
Less: Effects of Average Intangible Assets
(2,794)
(2,802)
(2,811)
(2,819)
(2,828)
(2,856)
Average Tangible Common Equity
373,769
366,269
358,923
348,456
344,705
366,348
338,644
7.87
11.07
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As a financial institution, the Company’s primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. The Company continually seeks to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.
The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates
based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis. The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.
The Company manages the interest rate risk associated with interest earning assets by managing the interest rates and terms associated with the investment securities portfolio by purchasing and selling investment securities from time to time. The Company manages the interest rate risk associated with interest bearing liabilities by managing the interest rates and terms associated with wholesale borrowings and deposits from customers which the Company relies on for funding. For example, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities.
The Company has entered into certain hedging transactions including interest rate swaps and caps, which are designed to lessen elements of the Company’s interest rate exposure. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. At both September 30, 2024 and December 31, 2023, these cash flow hedges had a total notional amount of $308.0 million. Fair value hedge relationships mitigate exposure to changes in the fair value of a recognized asset or value. The Company utilizes fair value hedges to manage fair value exposure for the U.S. treasury security portfolio. At September 30, 2024, these fair value hedges had a total notional amount of $97.7 million. There were no fair value hedges at December 31, 2023. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.
Net Interest Income Simulation
The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purposes of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.
Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2024 and December 31, 2023 are presented in the table below. The projections assume an immediate, parallel shift downward of the yield curve of 100, 200, and 300 basis points and immediate, parallel shifts
upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 400 basis points does not provide us with meaningful results and thus is not presented.
Change (basis points)
Forecasted
Percentage
in Interest Rates
Net Interest
Change
(12-Month Projection)
Income
from Base
+400
109,509
(6.58)
118,597
(2.39)
+300
110,994
(5.31)
118,983
(2.08)
+200
112,118
(4.35)
119,395
(1.74)
+100
114,416
119,916
(1.31)
0
117,218
121,504
−100
120,865
3.11
125,138
−200
124,853
6.51
128,643
5.87
−300
130,226
11.10
132,269
8.86
The table above indicates that as of September 30, 2024, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a 6.58% decrease in net interest income. In the event of an immediate 300 basis point decrease in interest rates, the Company would experience an 11.10% increase in net interest income.
The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or re-price faster than the Company’s assets. Actual results could differ from those projected if the Company grows assets and liabilities faster or slower than estimated, if the Company experienced a net outflow of deposit liabilities, or if the mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if the Company experienced substantially different repayment speeds in the loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that the Company may undertake in response to potential or actual changes in interest rates, such as changes to the Company’s loan, investment, deposit, or funding strategies.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of September 30, 2024, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Item 1.A. Risk Factors
Other than disclosed below, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 7, 2024.
Transaction-Related Risks
The Company May Fail to Realize the Anticipated Benefits of the Proposed Merger with First Minnetonka City Bank.
Bridgewater Bank and First Minnetonka City Bank have operated and, until the consummation of the proposed merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend on, among other things, the Company’s ability to combine the businesses of Bridgewater Bank and First Minnetonka City Bank in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and does not materially disrupt the existing customer relationships of Bridgewater Bank and First Minnetonka City Bank nor result in decreased revenues due to any loss of customers. If the Company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the surviving corporation’s business, financial condition, operating results, prospects and stock price.
While individuals employed by First Minnetonka City Bank immediately prior to the effective time will automatically become employees of Bridgewater Bank following the merger, certain employees may not be retained by Bridgewater Bank after the merger. In addition, certain employees that the Company wishes to retain may elect to terminate their employment as a result of the merger, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of the Company’s or FMB’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of Bridgewater Bank and First Minnetonka City Bank to maintain relationships with customers and employees or to achieve the anticipated benefits and cost savings of the merger.
Among the factors considered by the boards of directors of both the Company and FMB in connection with their respective approvals of the merger agreement were the anticipated benefits that could result from the merger. There can be no assurance that these benefits will be realized within the time periods contemplated or at all.
Issuer Repurchases of Equity Securities
The following table presents stock purchases made during the third quarter of 2024:
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2024
1,078
11.52
15,281,253
August 1 - 31, 2024
September 1 - 30, 2024
2,633
13.60
3,711
13.00
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
Not applicable.
Rule 10b5-1 Trading Plans
During the quarter ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Exhibit Number
Description
3.1
Third Amended and Restated Articles of Incorporation of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on April 27, 2023)
Second Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 on Form 8-K filed on April 27, 2023)
3.3
Statement of Designation of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on August 17, 2021)
10.1
Third Amendment to Loan and Security Agreement, dated as of September 1, 2024, by and between Bridgewater Bancshares, Inc., as Borrower, and ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on September 6, 2024).
10.2
Amended and Restated Revolving Note, dated as of September 1, 2024, made by Bridgewater Bancshares, Inc., as Borrower, to and in favor of ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on September 6, 2024).
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
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
104
The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended September 30, 2024 formatted in inline XBRL and contained in Exhibit 101
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bridgewater Bancshares, Inc.
Date: October 31, 2024
By:
/s/ Jerry J. Baack
Name:
Jerry J. Baack
Title:
Chairman and Chief Executive Officer(Principal Executive Officer)
/s/ Joe M. Chybowski
Joe M. Chybowski
President and Chief Financial Officer(Principal Financial Officer)