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Bridgewater Bancshares Inc - Quarter Report: 2019 September (Form 10-Q)

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, 2019

 

OR

 

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

For the transition period from ____________ to ________

 

 

Commission File Number 001-38412


BRIDGEWATER BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

Minnesota
(State or other jurisdiction of
incorporation or organization)

 

26‑0113412
(I.R.S. Employer
Identification No.)

 

 

 

3800 American Boulevard West, Suite 100
Bloomington, Minnesota
(Address of principal executive offices)

 

55431
(Zip Code)

 

(952) 893‑6868

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer 

 

 

 

 

Non‑accelerated filer

  

Smaller reporting company

 

Emerging growth company 

 

 

 

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

 

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

 

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

 

 

 

 

 

 

Title of each class: 

      

Trading Symbol 

    

Name of each exchange on which registered: 

Common Stock, $0.01 Par Value 

 

 BWB

 

The Nasdaq Stock Market LLC 

 

The number of shares of the Common Stock outstanding as of November 5, 2019 was 28,781,162. 

 

 

 

 

Table of Contents

Table of Contents

 

 

 

PART I FINANCIAL INFORMATION 

3

 

 

Item 1. Consolidated Financial Statements (unaudited) 

3

Consolidated Balance Sheets 

3

Consolidated Statements of Income 

4

Consolidated Statements of Comprehensive Income 

5

Consolidated Statements of Shareholders’ Equity 

6

Consolidated Statements of Cash Flows 

7

Notes to Consolidated Financial Statements 

8

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

58

Item 4. Controls and Procedures 

59

 

 

PART II OTHER INFORMATION 

60

 

 

Item 1. Legal Proceedings 

60

Item 1A. Risk Factors 

60

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

60

Item 3. Defaults Upon Senior Securities 

60

Item 4. Mine Safety Disclosures 

60

Item 5. Other Information 

60

Item 6. Exhibits 

61

 

 

SIGNATURES 

62

 

 

 

 

2

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

89,619

 

$

28,444

Bank-Owned Certificates of Deposit

 

 

2,654

 

 

3,305

Securities Available for Sale, at Fair Value

 

 

263,803

 

 

253,378

Loans, Net of Allowance for Loan Losses of $22,124 at September 30, 2019 (unaudited) and $20,031 at December 31, 2018

 

 

1,818,306

 

 

1,640,385

Federal Home Loan Bank (FHLB) Stock, at Cost

 

 

8,024

 

 

7,614

Premises and Equipment, Net

 

 

25,764

 

 

13,074

Accrued Interest

 

 

6,519

 

 

6,589

Goodwill

 

 

2,626

 

 

2,626

Other Intangible Assets, Net

 

 

909

 

 

1,052

Other Assets

 

 

14,115

 

 

17,274

Total Assets

 

$

2,232,339

 

$

1,973,741

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

  

 

 

  

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest Bearing

 

$

478,493

 

$

369,203

Interest Bearing

 

 

1,323,743

 

 

1,191,731

Total Deposits

 

 

1,802,236

 

 

1,560,934

Federal Funds Purchased

 

 

 —

 

 

18,000

Notes Payable

 

 

13,500

 

 

15,000

FHLB Advances

 

 

141,500

 

 

124,000

Subordinated Debentures, Net of Issuance Costs

 

 

24,707

 

 

24,630

Accrued Interest Payable

 

 

1,763

 

 

1,806

Other Liabilities

 

 

12,574

 

 

8,373

Total Liabilities

 

 

1,996,280

 

 

1,752,743

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

  

 

 

  

Preferred Stock- $0.01 par value

 

 

 

 

 

 

Authorized 10,000,000; None Issued and Outstanding at September 30, 2019 (unaudited) and December 31, 2018

 

 

 —

 

 

 —

Common Stock- $0.01 par value

 

 

 

 

 

  

Common Stock - Authorized 75,000,000; Issued and Outstanding 28,781,162 at September 30, 2019 (unaudited) and 30,097,274 at December 31, 2018

 

 

288

 

 

301

Additional Paid-In Capital

 

 

111,670

 

 

126,031

Retained Earnings

 

 

119,066

 

 

96,234

Accumulated Other Comprehensive Income (Loss)

 

 

5,035

 

 

(1,568)

Total Shareholders' Equity

 

 

236,059

 

 

220,998

Total Liabilities and Equity

 

$

2,232,339

 

$

1,973,741

 

See accompanying notes to consolidated financial statements.

3

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

 

  

Loans, Including Fees

 

$

24,220

 

$

20,207

 

$

69,720

 

$

56,055

Investment Securities

 

 

1,910

 

 

1,790

 

 

5,739

 

 

4,830

Other

 

 

442

 

 

139

 

 

900

 

 

353

Total Interest Income

 

 

26,572

 

 

22,136

 

 

76,359

 

 

61,238

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

 

 

 

  

Deposits

 

 

6,209

 

 

4,322

 

 

17,932

 

 

10,853

Notes Payable

 

 

127

 

 

144

 

 

378

 

 

442

FHLB Advances

 

 

908

 

 

488

 

 

2,510

 

 

1,159

Subordinated Debentures

 

 

393

 

 

401

 

 

1,163

 

 

1,167

Federal Funds Purchased

 

 

 —

 

 

147

 

 

172

 

 

321

Total Interest Expense

 

 

7,637

 

 

5,502

 

 

22,155

 

 

13,942

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

18,935

 

 

16,634

 

 

54,204

 

 

47,296

Provision for Loan Losses

 

 

900

 

 

1,275

 

 

2,100

 

 

2,775

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER

 

 

  

 

 

  

 

 

  

 

 

  

PROVISION FOR LOAN LOSSES

 

 

18,035

 

 

15,359

 

 

52,104

 

 

44,521

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

  

 

 

  

 

 

  

 

 

  

Customer Service Fees

 

 

184

 

 

184

 

 

564

 

 

539

Net Gain (Loss) on Sales of Available for Sale Securities

 

 

58

 

 

(49)

 

 

516

 

 

(108)

Net Gain (Loss) on Sales of Foreclosed Assets

 

 

69

 

 

(88)

 

 

69

 

 

(225)

Other Income

 

 

635

 

 

767

 

 

1,565

 

 

1,480

Total Noninterest Income

 

 

946

 

 

814

 

 

2,714

 

 

1,686

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and Employee Benefits

 

 

5,915

 

 

4,910

 

 

15,841

 

 

13,534

Occupancy and Equipment

 

 

761

 

 

596

 

 

2,202

 

 

1,767

Other Expense

 

 

2,408

 

 

2,020

 

 

8,400

 

 

5,221

Total Noninterest Expense

 

 

9,084

 

 

7,526

 

 

26,443

 

 

20,522

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

9,897

 

 

8,647

 

 

28,375

 

 

25,685

Provision for Income Taxes

 

 

2,092

 

 

2,184

 

 

5,543

 

 

6,526

NET INCOME

 

$

7,805

 

$

6,463

 

$

22,832

 

$

19,159

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 

$

0.27

 

$

0.22

 

$

0.77

 

$

0.67

Diluted

 

 

0.27

 

 

0.21

 

 

0.76

 

 

0.66

Dividends Paid Per Share

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

See accompanying notes to consolidated financial statements.

4

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net Income

 

$

7,805

 

$

6,463

 

$

22,832

 

$

19,159

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) on Available for Sale Securities

 

 

2,014

 

 

(2,253)

 

 

10,218

 

 

(6,551)

Unrealized Gains (Losses) on Cash Flow Hedge

 

 

(326)

 

 

 5

 

 

(1,344)

 

 

155

Reclassification Adjustment for (Gains) Losses Realized in Income

 

 

(58)

 

 

49

 

 

(516)

 

 

108

Income Tax Impact

 

 

(343)

 

 

462

 

 

(1,755)

 

 

1,374

Total Other Comprehensive Income (Loss), Net of Tax

 

 

1,287

 

 

(1,737)

 

 

6,603

 

 

(4,914)

Comprehensive Income

 

$

9,092

 

$

4,726

 

$

29,435

 

$

14,245

 

See accompanying notes to consolidated financial statements.

5

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Three and Nine Months Ended September 30, 2019 and 2018

(dollars in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Shares

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

Three Months Ended

 

Voting

    

Nonvoting

    

Voting

    

Nonvoting

    

Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE June 30, 2018

 

27,235,832

 

2,823,542

 

$

272

 

$

28

 

$

125,516

 

$

82,010

 

$

(1,899)

 

$

205,927

Stock-based Compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

199

 

 

 —

 

 

 —

 

 

199

Comprehensive Income (Loss)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,463

 

 

(1,737)

 

 

4,726

BALANCE September 30, 2018

 

27,235,832

 

2,823,542

 

$

272

 

$

28

 

$

125,715

 

$

88,473

 

$

(3,636)

 

$

210,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE June 30, 2019

 

28,986,729

 

 —

 

$

290

 

$

 —

 

$

113,838

 

$

111,261

 

$

3,748

 

$

229,137

Stock-based Compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

175

 

 

 —

 

 

 —

 

 

175

Comprehensive Income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,805

 

 

1,287

 

 

9,092

Stock Options Exercised

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock Repurchases

 

(205,567)

 

 —

 

 

(2)

 

 

 —

 

 

(2,343)

 

 

 —

 

 

 —

 

 

(2,345)

BALANCE September 30, 2019

 

28,781,162

 

 —

 

$

288

 

$

 —

 

$

111,670

 

$

119,066

 

$

5,035

 

$

236,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Shares

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

Nine Months Ended

    

Voting

    

Nonvoting

    

Voting

    

Nonvoting

    

Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

BALANCE December 31, 2017

 

20,834,001

 

3,845,860

 

$

208

 

$

38

 

$

66,324

 

$

69,508

 

$

1,084

 

$

137,162

Stock-based Compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

588

 

 

 —

 

 

 —

 

 

588

Comprehensive Income (Loss)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

19,159

 

 

(4,914)

 

 

14,245

Issuance of Common Stock, Net of Issuance Costs

 

5,379,513

 

 —

 

 

54

 

 

 —

 

 

58,803

 

 

 —

 

 

 —

 

 

58,857

Conversion of Non-voting Stock to Voting Stock

 

1,022,318

 

(1,022,318)

 

 

10

 

 

(10)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act to Retained Earnings

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(194)

 

 

194

 

 

 —

BALANCE September 30, 2018

 

27,235,832

 

2,823,542

 

$

272

 

$

28

 

$

125,715

 

$

88,473

 

$

(3,636)

 

$

210,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE December 31, 2018

 

30,097,274

 

 —

 

$

301

 

$

 —

 

$

126,031

 

$

96,234

 

$

(1,568)

 

$

220,998

Stock-based Compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

524

 

 

 —

 

 

 —

 

 

524

Comprehensive Income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

22,832

 

 

6,603

 

 

29,435

Stock Options Exercised

 

15,400

 

 —

 

 

 —

 

 

 —

 

 

61

 

 

 —

 

 

 —

 

 

61

Stock Repurchases

 

(1,331,512)

 

 —

 

 

(13)

 

 

 —

 

 

(14,946)

 

 

 —

 

 

 —

 

 

(14,959)

BALANCE September 30, 2019

 

28,781,162

 

 —

 

$

288

 

$

 —

 

$

111,670

 

$

119,066

 

$

5,035

 

$

236,059

 

See accompanying notes to consolidated financial statements.

6

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net Income

 

$

22,832

 

$

19,159

Adjustments to Reconcile Net Income to Net Cash

 

 

 

 

 

 

Provided by Operating Activities:

 

 

 

 

 

 

Net Amortization on Securities Available for Sale

 

 

1,865

 

 

2,309

Net (Gain) Loss on Sales of Securities Available for Sale

 

 

(516)

 

 

108

Provision for Loan Losses

 

 

2,100

 

 

2,775

Depreciation and Amortization of Premises and Equipment

 

 

662

 

 

560

Amortization of Other Intangible Assets

 

 

143

 

 

143

Amortization of Subordinated Debt Issuance Costs

 

 

77

 

 

77

Net (Gain) Loss on Sale of Foreclosed Assets

 

 

(69)

 

 

225

Stock-based Compensation

 

 

524

 

 

588

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

Accrued Interest Receivable and Other Assets

 

 

129

 

 

(4,897)

Accrued Interest Payable and Other Liabilities

 

 

4,158

 

 

1,176

Net Cash Provided by Operating Activities

 

 

31,905

 

 

22,223

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

(Increase) Decrease in Bank-owned Certificates of Deposit

 

 

651

 

 

(233)

Proceeds from Sales of Securities Available for Sale

 

 

42,864

 

 

21,590

Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale

 

 

28,693

 

 

17,298

Purchases of Securities Available for Sale

 

 

(73,628)

 

 

(59,043)

Net Increase in Loans

 

 

(181,054)

 

 

(252,975)

Net Increase in FHLB Stock

 

 

(410)

 

 

(2,667)

Purchases of Premises and Equipment

 

 

(13,352)

 

 

(1,832)

Proceeds from Sales of Foreclosed Assets

 

 

1,102

 

 

356

Net Cash Used in Investing Activities

 

 

(195,134)

 

 

(277,506)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net Increase in Deposits

 

 

241,302

 

 

139,738

Net Increase (Decrease) in Federal Funds Purchased

 

 

(18,000)

 

 

30,000

Principal Payments on Notes Payable

 

 

(1,500)

 

 

(1,500)

Proceeds from FHLB Advances

 

 

37,500

 

 

35,000

Principal Payments on FHLB Advances

 

 

(20,000)

 

 

(9,000)

Stock Options Exercised

 

 

61

 

 

58,857

Stock Repurchases

 

 

(14,959)

 

 

 —

Net Cash Provided by Financing Activities

 

 

224,404

 

 

253,095

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

61,175

 

 

(2,188)

Cash and Cash Equivalents Beginning

 

 

28,444

 

 

23,725

Cash and Cash Equivalents Ending

 

$

89,619

 

$

21,537

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURE

 

 

 

 

 

 

Cash Paid for Interest

 

$

22,121

 

$

14,043

Cash Paid for Income Taxes

 

 

3,800

 

 

5,590

Loans Transferred to Foreclosed Assets

 

 

1,033

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

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Bridgewater Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

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

Organization

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10‑Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the nine-month period ended September 30, 2019 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 14, 2019.

Principles of Consolidation

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

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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

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Emerging Growth Company

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

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

Impact of Recently Issued Accounting Standards

The following accounting standard updates (“ASU”) have been issued by the Financial Accounting Standards Board (“FASB”) and may impact the Company’s consolidated financial statements in future reporting periods.

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). ASU 2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015‑14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015‑14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. The timing of the Company’s revenue recognition is not expected to materially change. The Company’s largest portions of revenue, interest and fees on loans, are specifically excluded from the scope of the guidance, and the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new guidance. Management believes that revenue recognized under the new guidance will generally approximate revenue recognized under current GAAP. These observations are subject to change as the evaluation is completed.

In January 2016, the FASB issued ASU 2016‑01, Financial Instruments—Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016‑01”). This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity

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investments that do not have readily determinable fair values; however, the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim reporting periods beginning after December 15, 2019. Early adoption is permitted for only one of the six amendments. The Company is evaluating the impact this new standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (“ASU 2016‑02”). The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements which provides an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statement in the period of adoption. The guidance is effective for fiscal years beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020. The Company’s assets and liabilities will increase based on the present value of the remaining lease payments for leases in place at the adoption date; however, this is not expected to be significant to the Company’s results of operations.

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (modified by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses and ASU 2019-05, Financial Instruments Credit Losses – Targeted Transition Relief.) The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. In October, 2019, the FASB voted to approve an amendment to the effective date of ASU No. 2016-13 for smaller reporting companies and non-SEC reporting entities. The amendment would delay the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company can take advantage of this delay. The final ASU is expected to be issued in November 2019.

 

All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company is evaluating the impact this new standard will have on its consolidated financial statements. A steering committee has been established with representation from various departments across the organization to assess and implement the new standard.

 

In January 2017, the FASB issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is intended to reduce the cost and complexity of the two-step goodwill impairment test and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2021, with early adoption permitted for testing performed after January 1, 2017. Upon adoption, the amendments should be applied on a prospective basis

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and the entity is required to disclose the nature of and reason for the change in accounting principle upon transition. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017‑08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount as discounts continue to be accreted to maturity. This ASU is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates and prices securities to maturity when the coupon is below market rates. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. This ASU is intended to reduce diversity in practice and is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Upon adoption, the amendments should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principles. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments of this ASU better align an entity’s accounting and financial reporting for hedging activities with the economic objectives of those activities. The ASU is effective for fiscal years beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact this new standard will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments of this ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. This ASU provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, this ASU (i) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. In October, 2019, the FASB voted to approve an amendment to the effective date of ASU No. 2019-01 for smaller reporting companies and non-SEC reporting entities. The amendment would delay the effective date to fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. As an emerging growth company, the Company can take advantage of this delay. The final ASU is expected to be issued in

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November 2019. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections, which amends certain SEC sections or paragraphs within the Accounting Standards Codification to reflect changes in SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and 33-10231 and 33-10442, “Investment Company Reporting Modernization.” Other revisions in ASU No. 2019-07 update language in the codification to match the electronic Code of Federal Regulations. The amendments became effective upon addition to the FASB Codification and there is no impact on the consolidated financial statements.

 

Subsequent Events

 

Subsequent events have been evaluated through November 7, 2019, which is the date the consolidated financial statements were available to be issued.

 

Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock options. The dilutive effect was computed using the treasury stock method, which assumes the stock options were exercised and the hypothetical proceeds from the exercise were used by the Company to purchase common stock at the average market price during the period. The calculation of diluted earnings per common share excludes outstanding stock options for which the results would have been anti-dilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net Income Available to Common Shareholders

 

$

7,805

 

$

6,463

 

$

22,832

 

$

19,159

Weighted Average Common Stock Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Stock Outstanding (Basic)

 

 

28,820,144

 

 

30,059,374

 

 

29,535,589

 

 

28,640,601

Stock Options

 

 

677,817

 

 

430,274

 

 

645,967

 

 

430,275

Weighted Average Common Stock Outstanding (Dilutive)

 

 

29,497,961

 

 

30,489,648

 

 

30,181,556

 

 

29,070,876

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Common Share

 

$

0.27

 

$

0.22

 

$

0.77

 

$

0.67

Diluted Earnings per Common Share

 

 

0.27

 

 

0.21

 

 

0.76

 

 

0.66

 

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Note 3: Securities

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

9,975

 

$

12

 

$

(1)

 

$

9,986

Municipal Bonds

 

 

98,821

 

 

6,766

 

 

(22)

 

 

105,565

Mortgage-Backed Securities

 

 

55,959

 

 

917

 

 

(157)

 

 

56,719

Corporate Securities

 

 

39,712

 

 

515

 

 

(72)

 

 

40,155

SBA Securities

 

 

48,963

 

 

38

 

 

(634)

 

 

48,367

Asset-Backed Securities

 

 

3,008

 

 

 3

 

 

 —

 

 

3,011

Total Securities Available for Sale

 

$

256,438

 

$

8,251

 

$

(886)

 

$

263,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

17,862

 

$

54

 

$

(19)

 

$

17,897

Municipal Bonds

 

 

117,991

 

 

1,257

 

 

(1,115)

 

 

118,133

Mortgage-Backed Securities

 

 

48,816

 

 

52

 

 

(1,692)

 

 

47,176

Corporate Securities

 

 

21,170

 

 

72

 

 

(124)

 

 

21,118

SBA Securities

 

 

49,876

 

 

13

 

 

(835)

 

 

49,054

Total Securities Available for Sale

 

$

255,715

 

$

1,448

 

$

(3,785)

 

$

253,378

 

 

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, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

September 30, 2019

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

4,998

 

$

(1)

 

$

 —

 

$

 —

 

$

4,998

 

$

(1)

Municipal Bonds

 

 

429

 

 

(1)

 

 

1,382

 

 

(21)

 

 

1,811

 

 

(22)

Mortgage-Backed Securities

 

 

21,335

 

 

(117)

 

 

3,462

 

 

(40)

 

 

24,797

 

 

(157)

Corporate Securities

 

 

8,515

 

 

(72)

 

 

 —

 

 

 —

 

 

8,515

 

 

(72)

SBA Securities

 

 

9,467

 

 

(39)

 

 

33,575

 

 

(595)

 

 

43,042

 

 

(634)

Total Securities Available for Sale

 

$

44,744

 

$

(230)

 

$

38,419

 

$

(656)

 

$

83,163

 

$

(886)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

December 31, 2018

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

14,866

 

$

(19)

 

$

 —

 

$

 —

 

$

14,866

 

$

(19)

Municipal Bonds

 

 

15,405

 

 

(199)

 

 

34,172

 

 

(916)

 

 

49,577

 

 

(1,115)

Mortgage-Backed Securities

 

 

1,751

 

 

(21)

 

 

41,776

 

 

(1,671)

 

 

43,527

 

 

(1,692)

Corporate Securities

 

 

9,063

 

 

(74)

 

 

1,996

 

 

(50)

 

 

11,059

 

 

(124)

SBA Securities

 

 

28,186

 

 

(366)

 

 

15,878

 

 

(469)

 

 

44,064

 

 

(835)

Total Securities Available for Sale

 

$

69,271

 

$

(679)

 

$

93,822

 

$

(3,106)

 

$

163,093

 

$

(3,785)

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At September 30, 2019, 100 debt securities had unrealized losses with aggregate depreciation of approximately 1.1% from the Company’s amortized cost basis. At December 31, 2018, 195 debt securities had unrealized losses with aggregate depreciation of approximately 2.3% from the Company’s amortized cost basis. These unrealized losses relate principally to changes in interest rates and are not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of September 30, 2019.

The following is a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of September 30, 2019. Call date is used when a call of the debt security is expected, which is 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.

 

 

 

 

 

 

 

 

September 30, 2019

    

Amortized Cost

    

Fair Value

Due in One Year or Less

 

$

21,240

 

$

21,302

Due After One Year Through Five Years

 

 

42,786

 

 

43,908

Due After Five Years Through 10 Years

 

 

73,733

 

 

77,922

Due After 10 Years

 

 

10,749

 

 

12,574

Subtotal

 

 

148,508

 

 

155,706

Mortgage-Backed Securities

 

 

55,959

 

 

56,719

SBA Securities

 

 

48,963

 

 

48,367

Asset-Backed Securities

 

 

3,008

 

 

3,011

Totals

 

$

256,438

 

$

263,803

 

As of September 30, 2019 and December 31, 2018, the securities portfolio was unencumbered.

The following is 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, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

Proceeds From Sales of Securities

 

$

2,555

 

$

10,640

 

$

42,864

 

$

21,590

Gross Gains on Sales

 

 

58

 

 

237

 

 

774

 

 

289

Gross Losses on Sales

 

 

 —

 

 

(286)

 

 

(258)

 

 

(397)

 

 

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Note 4: Loans

The following table presents the components of the loan portfolio at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Commercial

 

$

291,723

 

$

260,833

Construction and Land Development

 

 

216,054

 

 

210,041

Real Estate Mortgage:

 

 

 

 

 

 

1-4 Family Mortgage

 

 

254,782

 

 

226,773

Multifamily

 

 

456,257

 

 

407,934

CRE Owner Occupied

 

 

71,209

 

 

64,458

CRE Non-owner Occupied

 

 

551,992

 

 

490,632

Total Real Estate Mortgage Loans

 

 

1,334,240

 

 

1,189,797

Consumer and Other

 

 

4,201

 

 

4,260

Total Loans, Gross

 

 

1,846,218

 

 

1,664,931

Allowance for Loan Losses

 

 

(22,124)

 

 

(20,031)

Net Deferred Loan Fees

 

 

(5,788)

 

 

(4,515)

Total Loans, Net

 

$

1,818,306

 

$

1,640,385

 

The following table presents the activity in the allowance for loan losses, by segment, for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

CRE

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Land

 

1-‑4 Family

 

 

 

Owner

 

Non‑owner

 

Consumer

 

 

 

 

 

 

Three Months Ended September 30, 2019

    

Commercial

    

Development

    

Mortgage

    

Multifamily

    

Occupied

    

Occupied

    

and Other

    

Unallocated

    

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

3,181

 

$

2,246

 

$

2,827

 

$

4,994

 

$

844

 

$

6,485

 

$

66

 

$

719

 

$

21,362

Provision for Loan Losses

 

 

196

 

 

196

 

 

(15)

 

 

183

 

 

 5

 

 

50

 

 

18

 

 

267

 

 

900

Loans Charged-off

 

 

(141)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3)

 

 

 —

 

 

(144)

Recoveries of Loans

 

 

 2

 

 

 —

 

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 6

Total Ending Allowance Balance

 

$

3,238

 

$

2,442

 

$

2,815

 

$

5,177

 

$

849

 

$

6,535

 

$

82

 

$

986

 

$

22,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,248

 

$

1,965

 

$

2,567

 

$

3,552

 

$

823

 

$

5,611

 

$

57

 

$

843

 

$

17,666

Provision for Loan Losses

 

 

362

 

 

244

 

 

(47)

 

 

757

 

 

 —

 

 

127

 

 

 8

 

 

(176)

 

 

1,275

Loans Charged-off

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10)

 

 

 —

 

 

(11)

Recoveries of Loans

 

 

 1

 

 

 —

 

 

16

 

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

19

Total Ending Allowance Balance

 

$

2,611

 

$

2,208

 

$

2,536

 

$

4,309

 

$

823

 

$

5,738

 

$

57

 

$

667

 

$

18,949

 

The following table presents the activity in the allowance for loan losses, by segment, for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

CRE

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Land

 

1-‑4 Family

 

 

 

Owner

 

Non‑owner

 

Consumer

 

 

 

 

 

 

Nine Months Ended September 30, 2019

    

Commercial

    

Development

    

Mortgage

    

Multifamily

    

Occupied

    

Occupied

    

and Other

    

Unallocated

    

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,898

 

$

2,451

 

$

2,597

 

$

4,644

 

$

808

 

$

5,872

 

$

65

 

$

696

 

$

20,031

Provision for Loan Losses

 

 

495

 

 

(10)

 

 

53

 

 

533

 

 

41

 

 

663

 

 

35

 

 

290

 

 

2,100

Loans Charged-off

 

 

(160)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23)

 

 

 —

 

 

(183)

Recoveries of Loans

 

 

 5

 

 

 1

 

 

165

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

 

176

Total Ending Allowance Balance

 

$

3,238

 

$

2,442

 

$

2,815

 

$

5,177

 

$

849

 

$

6,535

 

$

82

 

$

986

 

$

22,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,435

 

$

1,892

 

$

2,317

 

$

3,170

 

$

956

 

$

5,087

 

$

60

 

$

585

 

$

16,502

Provision for Loan Losses

 

 

153

 

 

674

 

 

190

 

 

1,139

 

 

(133)

 

 

651

 

 

19

 

 

82

 

 

2,775

Loans Charged-off

 

 

 —

 

 

(358)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(26)

 

 

 —

 

 

(384)

Recoveries of Loans

 

 

23

 

 

 —

 

 

29

 

 

 —

 

 

 —

 

 

 —

 

 

 4

 

 

 —

 

 

56

Total Ending Allowance Balance

 

$

2,611

 

$

2,208

 

$

2,536

 

$

4,309

 

$

823

 

$

5,738

 

$

57

 

$

667

 

$

18,949

15

Table of Contents

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

CRE

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

and Land

 

1-‑4 Family

 

 

 

 

Owner

 

Non‑owner

 

Consumer

 

 

 

 

 

 

Allowance for Loan Losses at September 30, 2019

    

Commercial

    

Development

    

Mortgage

    

Multifamily

    

Occupied

    

Occupied

    

and Other

    

Unallocated

    

Total

Individually Evaluated for Impairment

 

$

57

 

$

50

 

$

60

 

$

 —

 

$

 —

 

$

 —

 

$

14

 

$

 —

 

$

181

Collectively Evaluated for Impairment

 

 

3,181

 

 

2,392

 

 

2,755

 

 

5,177

 

 

849

 

 

6,535

 

 

68

 

 

986

 

 

21,943

Totals

 

$

3,238

 

$

2,442

 

$

2,815

 

$

5,177

 

$

849

 

$

6,535

 

$

82

 

$

986

 

$

22,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses at December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

 8

 

$

 —

 

$

17

 

$

 —

 

$

22

 

$

 —

 

$

 —

 

$

 —

 

$

47

Collectively Evaluated for Impairment

 

 

2,890

 

 

2,451

 

 

2,580

 

 

4,644

 

 

786

 

 

5,872

 

 

65

 

 

696

 

 

19,984

Totals

 

$

2,898

 

$

2,451

 

$

2,597

 

$

4,644

 

$

808

 

$

5,872

 

$

65

 

$

696

 

$

20,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

CRE

 

CRE

 

 

 

 

 

 

 

 

 

 

and Land

 

1-‑4 Family

 

 

 

 

Owner

 

Non‑owner

 

Consumer

 

 

 

Loans at September 30, 2019

    

Commercial

    

Development

    

Mortgage

    

Multifamily

    

Occupied

    

Occupied

    

and Other

    

Total

Individually Evaluated for Impairment

 

$

132

 

$

2,156

 

$

1,963

 

$

 —

 

$

337

 

$

 —

 

$

14

 

$

4,602

Collectively Evaluated for Impairment

 

 

291,591

 

 

213,898

 

 

252,819

 

 

456,257

 

 

70,872

 

 

551,992

 

 

4,187

 

 

1,841,616

Totals

 

$

291,723

 

$

216,054

 

$

254,782

 

$

456,257

 

$

71,209

 

$

551,992

 

$

4,201

 

$

1,846,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans at December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

 8

 

$

198

 

$

1,676

 

$

 —

 

$

365

 

$

 —

 

$

58

 

$

2,305

Collectively Evaluated for Impairment

 

 

260,825

 

 

209,843

 

 

225,097

 

 

407,934

 

 

64,093

 

 

490,632

 

 

4,202

 

 

1,662,626

Totals

 

$

260,833

 

$

210,041

 

$

226,773

 

$

407,934

 

$

64,458

 

$

490,632

 

$

4,260

 

$

1,664,931

 

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Balance

    

Allowance

Loans With No Related Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Land Development

 

$

2,106

 

$

2,715

 

$

 —

 

$

198

 

$

807

 

$

 —

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

HELOC and 1-4 Family Junior Mortgage

 

 

155

 

 

155

 

 

 —

 

 

157

 

 

157

 

 

 —

1st REM - 1-4 Family

 

 

617

 

 

617

 

 

 —

 

 

253

 

 

253

 

 

 —

1st REM - Rentals

 

 

758

 

 

758

 

 

 —

 

 

957

 

 

957

 

 

 —

CRE Owner Occupied

 

 

337

 

 

337

 

 

 —

 

 

209

 

 

209

 

 

 —

Consumer and Other

 

 

 —

 

 

 —

 

 

 —

 

 

58

 

 

78

 

 

 —

Totals

 

 

3,973

 

 

4,582

 

 

 —

 

 

1,832

 

 

2,461

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans With An Allowance for Loan Losses:

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

Commercial

 

 

132

 

 

247

 

 

57

 

 

 8

 

 

 8

 

 

 8

Construction and Land Development

 

 

50

 

 

50

 

 

50

 

 

 —

 

 

 —

 

 

 —

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

305

 

 

331

 

 

42

 

 

309

 

 

336

 

 

17

1st REM - Rentals

 

 

128

 

 

128

 

 

18

 

 

 —

 

 

 —

 

 

 —

CRE Owner Occupied

 

 

 —

 

 

 —

 

 

 —

 

 

156

 

 

156

 

 

22

Consumer and Other

 

 

14

 

 

14

 

 

14

 

 

 —

 

 

 —

 

 

 —

Totals

 

 

629

 

 

770

 

 

181

 

 

473

 

 

500

 

 

47

Grand Totals

 

$

4,602

 

$

5,352

 

$

181

 

$

2,305

 

$

2,961

 

$

47

 

16

Table of Contents

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2019

    

2018

 

2019

    

2018

 

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

    

Investment

    

Recognized

    

Investment

    

Recognized

    

Investment

    

Recognized

    

Investment

    

Recognized

Loans With No Related Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Land Development

 

$

2,410

 

$

35

 

$

214

 

$

 —

 

$

2,734

 

$

122

 

$

217

 

$

 —

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

155

 

 

 2

 

 

157

 

 

 2

 

 

156

 

 

 6

 

 

159

 

 

 7

1st REM - 1-4 Family

 

 

617

 

 

 6

 

 

372

 

 

 3

 

 

617

 

 

18

 

 

376

 

 

 8

1st REM - Rentals

 

 

760

 

 

11

 

 

971

 

 

12

 

 

766

 

 

29

 

 

981

 

 

36

Multifamily

 

 

 —

 

 

 —

 

 

65

 

 

 1

 

 

 —

 

 

 —

 

 

65

 

 

 2

CRE Owner Occupied

 

 

338

 

 

 5

 

 

501

 

 

 7

 

 

406

 

 

17

 

 

512

 

 

21

Consumer and Other

 

 

 —

 

 

 —

 

 

64

 

 

 —

 

 

 —

 

 

 —

 

 

67

 

 

 —

Totals

 

 

4,280

 

 

59

 

 

2,344

 

 

25

 

 

4,679

 

 

192

 

 

2,377

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans With An Allowance for Loan Losses:

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial

 

 

133

 

 

 6

 

 

14

 

 

 —

 

 

138

 

 

 7

 

 

14

 

 

 —

Construction and Land Development

 

 

50

 

 

 1

 

 

 —

 

 

 —

 

 

50

 

 

 1

 

 

 —

 

 

 —

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

305

 

 

 —

 

 

322

 

 

 —

 

 

306

 

 

 —

 

 

328

 

 

 —

LOCs and 2nd REM - Rentals

 

 

 —

 

 

 —

 

 

64

 

 

 1

 

 

 —

 

 

 —

 

 

64

 

 

 2

1st REM - Rentals

 

 

128

 

 

 3

 

 

 —

 

 

 —

 

 

129

 

 

 3

 

 

 —

 

 

 —

CRE Owner Occupied

 

 

 —

 

 

 —

 

 

158

 

 

 2

 

 

 —

 

 

 —

 

 

158

 

 

 5

Consumer and Other

 

 

14

 

 

 2

 

 

 —

 

 

 —

 

 

54

 

 

 2

 

 

 —

 

 

 —

Totals

 

 

630

 

 

12

 

 

558

 

 

 3

 

 

677

 

 

13

 

 

564

 

 

 7

Grand Totals

 

$

4,910

 

$

71

 

$

2,902

 

$

28

 

$

5,356

 

$

205

 

$

2,941

 

$

81

 

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

17

Table of Contents

The following tables present the risk category of loans by loan segment as of September 30, 2019 and December 31, 2018, based on the most recent analysis performed by management:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Pass

    

Watch

    

Substandard

    

Doubtful

    

Total

Commercial

 

$

291,569

 

$

22

 

$

108

 

$

24

 

$

291,723

Construction and Land Development

 

 

213,757

 

 

141

 

 

2,156

 

 

 —

 

 

216,054

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

30,782

 

 

137

 

 

 —

 

 

 —

 

 

30,919

1st REM - 1-4 Family

 

 

37,924

 

 

125

 

 

795

 

 

 —

 

 

38,844

LOCs and 2nd REM - Rentals

 

 

13,488

 

 

481

 

 

460

 

 

 —

 

 

14,429

1st REM - Rentals

 

 

168,499

 

 

1,382

 

 

709

 

 

 —

 

 

170,590

Multifamily

 

 

456,257

 

 

 —

 

 

 —

 

 

 —

 

 

456,257

CRE Owner Occupied

 

 

69,527

 

 

 —

 

 

1,682

 

 

 —

 

 

71,209

CRE Non-owner Occupied

 

 

548,888

 

 

3,104

 

 

 —

 

 

 —

 

 

551,992

Consumer and Other

 

 

4,187

 

 

 —

 

 

14

 

 

 —

 

 

4,201

Totals

 

$

1,834,878

 

$

5,392

 

$

5,924

 

$

24

 

$

1,846,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Pass

    

Watch

    

Substandard

    

Doubtful

    

Total

Commercial

 

$

260,225

 

$

600

 

$

 8

 

$

 —

 

$

260,833

Construction and Land Development

 

 

207,174

 

 

2,669

 

 

198

 

 

 —

 

 

210,041

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

30,669

 

 

587

 

 

 —

 

 

 —

 

 

31,256

1st REM - 1-4 Family

 

 

37,526

 

 

126

 

 

253

 

 

 —

 

 

37,905

LOCs and 2nd REM - Rentals

 

 

11,341

 

 

628

 

 

474

 

 

 —

 

 

12,443

1st REM - Rentals

 

 

142,357

 

 

1,854

 

 

958

 

 

 —

 

 

145,169

Multifamily

 

 

407,934

 

 

 —

 

 

 —

 

 

 —

 

 

407,934

CRE Owner Occupied

 

 

62,223

 

 

 —

 

 

2,235

 

 

 —

 

 

64,458

CRE Non-owner Occupied

 

 

487,438

 

 

3,194

 

 

 —

 

 

 —

 

 

490,632

Consumer and Other

 

 

4,202

 

 

 —

 

 

58

 

 

 —

 

 

4,260

Totals

 

$

1,651,089

 

$

9,658

 

$

4,184

 

$

 —

 

$

1,664,931

 

The following tables present the aging of the recorded investment in past due loans by loan segment as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing Interest

 

 

 

 

 

 

 

 

 

 

 

30-89 Days

 

90 Days or

 

 

 

 

 

 

September 30, 2019

    

Current

    

Past Due

    

More Past Due

    

Nonaccrual

    

Total

Commercial

 

$

291,691

 

$

 —

 

$

 —

 

$

32

 

$

291,723

Construction and Land Development

 

 

215,822

 

 

 —

 

 

 —

 

 

232

 

 

216,054

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

30,919

 

 

 —

 

 

 —

 

 

 —

 

 

30,919

1st REM - 1-4 Family

 

 

38,844

 

 

 —

 

 

 —

 

 

 —

 

 

38,844

LOCs and 2nd REM - Rentals

 

 

14,124

 

 

 —

 

 

 —

 

 

305

 

 

14,429

1st REM - Rentals

 

 

170,331

 

 

 —

 

 

 —

 

 

259

 

 

170,590

Multifamily

 

 

456,257

 

 

 —

 

 

 —

 

 

 —

 

 

456,257

CRE Owner Occupied

 

 

71,209

 

 

 —

 

 

 —

 

 

 —

 

 

71,209

CRE Non-owner Occupied

 

 

551,992

 

 

 —

 

 

 —

 

 

 —

 

 

551,992

Consumer and Other

 

 

4,201

 

 

 —

 

 

 —

 

 

 —

 

 

4,201

Totals

 

$

1,845,390

 

$

 —

 

$

 —

 

$

828

 

$

1,846,218

 

18

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing Interest

 

 

 

 

 

 

 

 

 

 

 

30-89 Days

 

90 Days or

 

 

 

 

 

 

December 31, 2018

    

Current

    

Past Due

    

More Past Due

    

Nonaccrual

    

Total

Commercial

 

$

260,813

 

$

12

 

$

 —

 

$

 8

 

$

260,833

Construction and Land Development

 

 

209,843

 

 

 —

 

 

 —

 

 

198

 

 

210,041

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC and 1-4 Family Junior Mortgage

 

 

30,939

 

 

 —

 

 

 —

 

 

317

 

 

31,256

1st REM - 1-4 Family

 

 

37,705

 

 

200

 

 

 —

 

 

 —

 

 

37,905

LOCs and 2nd REM - Rentals

 

 

12,443

 

 

 —

 

 

 —

 

 

 —

 

 

12,443

1st REM - Rentals

 

 

145,169

 

 

 —

 

 

 —

 

 

 —

 

 

145,169

Multifamily

 

 

407,934

 

 

 —

 

 

 —

 

 

 —

 

 

407,934

CRE Owner Occupied

 

 

64,360

 

 

98

 

 

 —

 

 

 —

 

 

64,458

CRE Non-owner Occupied

 

 

490,632

 

 

 —

 

 

 —

 

 

 —

 

 

490,632

Consumer and Other

 

 

4,201

 

 

 1

 

 

 —

 

 

58

 

 

4,260

Totals

 

$

1,664,039

 

$

311

 

$

 —

 

$

581

 

$

1,664,931

 

At September 30, 2019, there were three loans classified as troubled debt restructurings with a current outstanding balance of $460. In comparison, at December 31, 2018, there were three loans classified as troubled debt restructurings with an outstanding balance of $437. There was one new loan classified as a troubled debt restructuring during the nine month period ended September 30, 2019, and no loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the nine months ended September 30, 2019.

 

 

Note 5: Deposits

The following table presents the composition of deposits at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Transaction Deposits

 

$

722,382

 

$

548,770

Savings and Money Market Deposits

 

 

470,518

 

 

402,639

Time Deposits

 

 

363,308

 

 

318,356

Brokered Deposits

 

 

246,028

 

 

291,169

Totals

 

$

1,802,236

 

$

1,560,934

 

 

Note 6: Tax Credit Investments

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

The following table presents the Company’s investments in qualified affordable housing projects and other tax credit investments at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

Investment

 

Accounting Method

 

 

Investment

 

 

Unfunded Commitment (1)

 

 

Investment

 

 

Unfunded Commitment

Low Income Housing Tax Credit (LIHTC)

 

Proportional Amortization

 

$

2,220

 

$

 —

 

$

2,436

 

$

 —

Federal Historic Tax Credit (FHTC)

 

Equity

 

 

1,890

 

 

3,451

 

 

1,814

 

 

3,226

Total

 

 

 

$

4,110

 

$

3,451

 

$

4,250

 

$

3,226


(1)

All commitments are expected to be paid by the Company by December 31, 2020.

 

19

Table of Contents

The following table presents the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

2019

    

2018

 

2019

    

2018

Amortization Expense (1)

 

 

 

 

 

 

 

 

 

 

 

LIHTC

$

72

 

$

76

 

$

216

 

$

237

FHTC

 

530

 

 

15

 

 

2,097

 

 

15

Total

$

602

 

$

91

 

$

2,313

 

$

252

Tax Benefit Recognized (2)

 

 

 

 

 

 

 

 

 

 

 

LIHTC

$

(83)

 

$

(83)

 

$

(248)

 

$

(248)

FHTC

 

(641)

 

 

(12)

 

 

(2,539)

 

 

(12)

Total

$

(724)

 

$

(95)

 

$

(2,787)

 

$

(260)


(1)

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

(2)

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

 

Note 7: 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. Because some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.

The following commitments were outstanding at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Unfunded Commitments Under Lines of Credit

 

$

491,472

 

$

395,032

Letters of Credit

 

 

80,324

 

 

81,053

Totals

 

$

571,796

 

$

476,085

 

The Company had outstanding letters of credit with the FHLB in total amounts of $85,809 and $129,152 at September 30, 2019 and December 31, 2018, respectively, on behalf of customers and to secure public deposits.

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC (the “Contractor”) entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank is required to pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23,000, with anticipated construction completed in 2020. As of September 30, 2019, $12,437 has been paid under this Construction Contract.

20

Table of Contents

Legal Contingencies

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

 

Note 8: Stock Options

In 2017, the Company approved 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, and employees 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 estimated fair market value of the Company’s stock on the date of grant and an option’s maximum term is ten years. All outstanding options have been granted with a vesting period of five years. As September 30, 2019 and December 31, 2018, there were 488,600 and 540,000, respectively, unissued shares of the Company’s common stock authorized for option grants under the 2017 Plan.

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

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 44 banks in the index ranging in market capitalization from $470.0 million up to $4.5 billion.

 

The weighted average assumptions used in the model for valuing stock option grants for the nine months ended September 30, 2019, are as follows:

 

 

 

 

 

 

 

September 30, 

 

 

    

2019

    

Dividend Yield

 

 —

%  

Expected Life

 

 7

Years

Expected Volatility

 

21.95

%  

Risk-Free Interest Rate

 

1.65

%  

 

The following table presents a summary of the status of the Company’s stock option plans for the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

    

    

Weighted

 

 

 

 

Average

 

 

Shares

 

Exercise Price

Outstanding at Beginning of Year

 

1,807,100

 

$

6.24

Granted

 

60,000

 

 

11.13

Exercised

 

(15,400)

 

 

4.00

Forfeitures

 

(8,600)

 

 

10.65

Outstanding at Period End

 

1,843,100

 

$

6.39

 

 

 

 

 

 

Options Exercisable at Period End

 

833,296

 

$

4.18

 

21

Table of Contents

For the three months ended September 30, 2019 and 2018, the Company recognized compensation expense for stock options of $175 and $199, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized compensation expense for stock options of $524 and $588, respectively.

The following table presents information pertaining to options outstanding at September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

Number

 

Remaining

 

    

 

 

Number

Exercise Price

    

Outstanding

    

Contractual Life

 

Exercise Price

    

Outstanding

$

1.65

 

7,500

 

2.1

Years  

 

$

1.65

 

 

7,500

 

2.13

 

80,000

 

3.5

Years  

 

 

2.13

 

 

80,000

 

3.00

 

490,000

 

4.3

Years  

 

 

3.00

 

 

490,000

 

3.58

 

50,000

 

5.3

Years  

 

 

3.58

 

 

40,000

 

7.47

 

1,030,600

 

8.0

Years  

 

 

7.47

 

 

201,796

 

13.22

 

25,000

 

8.6

Years  

 

 

13.22

 

 

5,000

 

12.86

 

45,000

 

8.9

Years  

 

 

12.86

 

 

9,000

 

12.94

 

30,000

 

9.0

Years  

 

 

12.94

 

 

 —

 

11.59

 

25,000

 

9.1

Years  

 

 

11.59

 

 

 —

 

11.15

 

10,000

 

9.4

Years  

 

 

11.15

 

 

 —

 

11.13

 

50,000

 

9.9

Years  

 

 

11.13

 

 

 —

 

Totals

 

1,843,100

 

6.8

Years  

 

$

6.39

 

$

833,296

 

As of September 30, 2019, there was $2,293 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2017 Plan that is expected to be recognized over a period of five years.

The following is an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

    

    

    

Weighted

 

 

Number of

 

Average Grant

 

 

Shares

 

Date Fair Value

Nonvested Options at December 31, 2018

 

1,086,000

 

$

2.78

Granted

 

60,000

 

 

3.06

Vested

 

(127,596)

 

 

1.82

Forfeited

 

(8,600)

 

 

3.40

Nonvested Options at September 30, 2019

 

1,009,804

 

$

2.92

 

 

 

Note 9: Regulatory Capital

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

22

Table of Contents

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

The following tables present the Company and the Bank’s capital amounts and ratios as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Required

 

For Capital Adequacy

 

To be Well Capitalized

 

 

 

 

 

 

 

 

For Capital Adequacy

 

Purposes Plus Capital

 

Under Prompt Corrective

 

 

 

Actual

 

Purposes

 

Conservation Buffer

 

Action Regulations

 

September 30, 2019

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

 

 

(dollars in thousands)

 

Company (Consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

268,907

 

13.31

%  

$

161,635

 

8.00

%  

$

212,146

 

10.50

%  

 

N/A

 

N/A

 

Tier 1 Risk-Based Capital

 

 

227,489

 

11.26

 

 

121,226

 

6.00

 

 

171,737

 

8.50

 

 

N/A

 

N/A

 

Common Equity Tier 1 Capital

 

 

227,489

 

11.26

 

 

90,920

 

4.50

 

 

141,431

 

7.00

 

 

N/A

 

N/A

 

Tier 1 Leverage Ratio

 

 

227,489

 

10.53

 

 

86,401

 

4.00

 

 

86,401

 

4.00

 

 

N/A

 

N/A

 

Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

251,102

 

12.44

%  

$

161,450

 

8.00

%  

$

211,904

 

10.50

%  

$

201,813

 

10.00

%

Tier 1 Risk-Based Capital

 

 

234,391

 

11.61

 

 

121,088

 

6.00

 

 

171,541

 

8.50

 

 

161,450

 

8.00

 

Common Equity Tier 1 Capital

 

 

234,391

 

11.61

 

 

90,816

 

4.50

 

 

141,269

 

7.00

 

 

131,178

 

6.50

 

Tier 1 Leverage Ratio

 

 

234,391

 

10.88

 

 

86,197

 

4.00

 

 

86,197

 

4.00

 

 

107,746

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Required

 

For Capital Adequacy

 

To be Well Capitalized

 

 

 

 

 

 

 

 

For Capital Adequacy

 

Purposes Plus Capital

 

Under Prompt Corrective

 

 

 

Actual

 

Purposes

 

Conservation Buffer

 

Action Regulations

 

December 31, 2018

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

 

 

(dollars in thousands)

 

Company (Consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

263,909

 

14.55

%  

$

145,111

 

8.00

%  

$

179,121

 

9.875

%  

 

N/A

 

N/A

 

Tier 1 Risk-Based Capital

 

 

218,888

 

12.07

 

 

108,833

 

6.00

 

 

142,844

 

7.875

 

 

N/A

 

N/A

 

Common Equity Tier 1 Capital

 

 

218,888

 

12.07

 

 

81,625

 

4.50

 

 

115,635

 

6.375

 

 

N/A

 

N/A

 

Tier 1 Leverage Ratio

 

 

218,888

 

11.23

 

 

77,971

 

4.00

 

 

77,971

 

4.00

 

 

N/A

 

N/A

 

Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

230,865

 

12.76

%  

$

144,776

 

8.00

%  

$

178,707

 

9.875

%  

$

180,970

 

10.00

%

Tier 1 Risk-Based Capital

 

 

210,474

 

11.63

 

 

108,582

 

6.00

 

 

142,514

 

7.875

 

 

144,776

 

8.00

 

Common Equity Tier 1 Capital

 

 

210,474

 

11.63

 

 

81,436

 

4.50

 

 

115,368

 

6.375

 

 

117,630

 

6.50

 

Tier 1 Leverage Ratio

 

 

210,474

 

10.82

 

 

77,795

 

4.00

 

 

77,795

 

4.00

 

 

97,244

 

5.00

 

 

The Company and the Bank must maintain a capital conservation buffer, as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. The capital conservation buffer was fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2018 was 1.875%.

 

Note 10: Stock Repurchase Program

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

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

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

During the three months ended September 30, 2019, the Company repurchased 205,567 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.41 for a total of $2.3 million. During the nine months ended September 30, 2019, the Company repurchased 1,331,512 shares of its common stock, representing approximately 5% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.23 for a total of $15.0 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At September 30, 2019, the remaining amount that could be used to repurchase shares under the stock repurchase program was $10.0 million.

Note 11: 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.

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Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Fair Value of Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

9,986

 

$

 —

 

$

 —

 

$

9,986

Municipal Bonds

 

 

 —

 

 

105,565

 

 

 —

 

 

105,565

Mortgage-Backed Securities

 

 

 —

 

 

56,719

 

 

 —

 

 

56,719

Corporate Securities

 

 

 —

 

 

40,155

 

 

 —

 

 

40,155

SBA Securities

 

 

 —

 

 

48,367

 

 

 —

 

 

48,367

Asset-Backed Securities

 

 

 —

 

 

3,011

 

 

 

 

 

3,011

Interest Rate Swaps

 

 

 —

 

 

69

 

 

 —

 

 

69

Total Fair Value of Financial Assets

 

$

9,986

 

$

253,886

 

$

 —

 

$

263,872

Fair Value of Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

 —

 

$

1,061

 

$

 —

 

$

1,061

Total Fair Value of Financial Liabilities

 

$

 —

 

$

1,061

 

$

 —

 

$

1,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Fair Value of Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

17,897

 

$

 —

 

$

 —

 

$

17,897

Municipal Bonds

 

 

 —

 

 

118,133

 

 

 —

 

 

118,133

Mortgage-Backed Securities

 

 

 —

 

 

47,176

 

 

 —

 

 

47,176

Corporate Securities

 

 

 —

 

 

21,118

 

 

 —

 

 

21,118

SBA Securities

 

 

 —

 

 

49,054

 

 

 —

 

 

49,054

Interest Rate Swaps

 

 

 —

 

 

352

 

 

 —

 

 

352

Total Fair Value of Financial Assets

 

$

17,897

 

$

235,833

 

$

 —

 

$

253,730

 

Investment Securities

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

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

Interest Rate Swaps

Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses

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primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.

Nonrecurring Basis

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

The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Loss

Impaired Loans

 

$

 —

 

$

448

 

$

 —

 

$

182

Totals

 

$

 —

 

$

448

 

$

 —

 

$

182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Loss

Impaired Loans

 

$

 —

 

$

426

 

$

 —

 

$

396

Totals

 

$

 —

 

$

426

 

$

 —

 

$

396

 

Impaired Loans

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

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

Foreclosed Assets

Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the transfer with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or fair value, less estimated selling costs with changes in fair value or any impairment amount recorded in other noninterest income. Values are estimated using Level 2 inputs based on customized discounting criteria. The carrying value of foreclosed assets is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.

Fair Value

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

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Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

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

The following tables present the carrying amount and estimated fair values of financial instruments at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

Fair Value Hierarchy

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Estimated

 

    

Amount

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due From Banks

 

$

89,619

 

$

89,619

 

$

 —

 

$

 —

 

$

89,619

Bank-Owned Certificates of Deposit

 

 

2,654

 

 

 —

 

 

2,682

 

 

 —

 

 

2,682

Securities Available for Sale

 

 

263,803

 

 

9,986

 

 

253,817

 

 

 —

 

 

263,803

FHLB Stock, at Cost

 

 

8,024

 

 

 —

 

 

8,024

 

 

 —

 

 

8,024

Loans, Net

 

 

1,818,306

 

 

 —

 

 

1,820,514

 

 

 —

 

 

1,820,514

Accrued Interest Receivable

 

 

6,519

 

 

 —

 

 

6,519

 

 

 —

 

 

6,519

Interest Rate Swaps

 

 

69

 

 

 —

 

 

69

 

 

 —

 

 

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,802,236

 

$

 —

 

$

1,810,361

 

$

 —

 

$

1,810,361

Notes Payable

 

 

13,500

 

 

 —

 

 

13,461

 

 

 —

 

 

13,461

FHLB Advances

 

 

141,500

 

 

 —

 

 

146,616

 

 

 —

 

 

146,616

Subordinated Debentures

 

 

24,707

 

 

 —

 

 

25,466

 

 

 —

 

 

25,466

Accrued Interest Payable

 

 

1,763

 

 

 —

 

 

1,763

 

 

 —

 

 

1,763

Interest Rate Swaps

 

 

1,061

 

 

 —

 

 

1,061

 

 

 —

 

 

1,061

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Fair Value Hierarchy

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Estimated

 

    

Amount

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due From Banks

 

$

28,444

 

$

28,444

 

$

 —

 

$

 —

 

$

28,444

Bank-Owned Certificates of Deposit

 

 

3,305

 

 

 —

 

 

3,292

 

 

 —

 

 

3,292

Securities Available for Sale

 

 

253,378

 

 

17,897

 

 

235,481

 

 

 —

 

 

253,378

FHLB Stock, at Cost

 

 

7,614

 

 

 —

 

 

7,614

 

 

 —

 

 

7,614

Loans, Net

 

 

1,640,385

 

 

 —

 

 

1,634,196

 

 

 —

 

 

1,634,196

Accrued Interest Receivable

 

 

6,589

 

 

 —

 

 

6,589

 

 

 —

 

 

6,589

Interest Rate Swaps

 

 

352

 

 

 —

 

 

352

 

 

 —

 

 

352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,560,934

 

$

 —

 

$

1,560,488

 

$

 —

 

$

1,560,488

Federal Funds Purchased

 

 

18,000

 

 

 —

 

 

18,000

 

 

 —

 

 

18,000

Notes Payable

 

 

15,000

 

 

 —

 

 

15,551

 

 

 —

 

 

15,551

FHLB Advances

 

 

124,000

 

 

 —

 

 

124,952

 

 

 —

 

 

124,952

Subordinated Debentures

 

 

24,630

 

 

 —

 

 

25,365

 

 

 —

 

 

25,365

Accrued Interest Payable

 

 

1,806

 

 

 —

 

 

1,806

 

 

 —

 

 

1,806

 

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

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

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

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

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

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

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

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

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

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

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

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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, 2019 and December 31, 2018.

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.

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

General

The following discussion explains the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2019. 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, 2018,  filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2019.

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:

 

·

loan concentrations in our portfolio;

·

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

·

our ability to successfully manage credit risk;

·

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

·

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

·

our high concentration of large loans to certain borrowers;

·

our concentration of large deposits from certain borrowers;

·

our ability to successfully manage liquidity risk;

·

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

·

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

·

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

·

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

·

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

·

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

·

competition in the financial services industry;

·

the effectiveness of our risk management framework;

·

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

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·

the impact of recent and future legislative and regulatory changes;

·

interest rate risk;

·

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

·

the imposition of tariffs or other governmental policies impacting the value of products produced by our commercial borrowers; and

·

any other risks described in the “Risk Factors” section of this report and in the Company’s Annual Report on Form 10-K as of December 31, 2018, filed with the SEC on March 14, 2019, as well as those set forth in other reports filed by the Company with the SEC. 

 

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

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

Critical Accounting Policies and Estimates

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

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

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

Allowance for Loan Losses

The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all

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or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.

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

Investment Securities Impairment

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

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

Deferred Tax Asset

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

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Table of Contents

Operating Results Overview

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Three Months Ended

 

 

 

September 30, 

 

June 30,

 

March 31,

 

December 31, 

 

September 30,

 

 

 

2019

 

2019

 

2019

 

2018

 

2018

 

Per Common Share Data (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.27

 

$

0.27

 

$

0.23

 

$

0.26

 

$

0.22

 

Diluted Earnings Per Share

 

 

0.27

 

 

0.26

 

 

0.23

 

 

0.25

 

 

0.21

 

Book Value Per Share

 

 

8.20

 

 

7.90

 

 

7.70

 

 

7.34

 

 

7.01

 

Tangible Book Value Per Share (2)

 

 

8.08

 

 

7.78

 

 

7.58

 

 

7.22

 

 

6.89

 

Basic Weighted Average Shares Outstanding

 

 

28,820,144

 

 

29,703,024

 

 

30,097,638

 

 

30,072,003

 

 

30,059,374

 

Diluted Weighted Average Shares Outstanding

 

 

29,497,961

 

 

30,312,039

 

 

30,706,736

 

 

30,506,824

 

 

30,489,648

 

Shares Outstanding at Period End

 

 

28,781,162

 

 

28,986,729

 

 

30,097,674

 

 

30,097,274

 

 

30,059,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets (Annualized)

 

 

1.43

%  

 

1.55

%

 

1.42

%  

 

1.58

%

 

1.41

%

Return on Average Common Equity (Annualized)

 

 

13.31

 

 

13.88

 

 

12.60

 

 

14.30

 

 

12.28

 

Return on Average Tangible Common Equity (Annualized) (2)

 

 

13.52

 

 

14.10

 

 

12.81

 

 

14.55

 

 

12.51

 

Yield on Interest Earning Assets

 

 

4.98

 

 

5.05

 

 

4.99

 

 

4.96

 

 

4.92

 

Yield on Total Loans, Gross

 

 

5.32

 

 

5.33

 

 

5.27

 

 

5.27

 

 

5.25

 

Cost of Interest Bearing Liabilities

 

 

2.04

 

 

2.07

 

 

2.06

 

 

1.92

 

 

1.73

 

Cost of Total Deposits

 

 

1.42

 

 

1.46

 

 

1.46

 

 

1.32

 

 

1.19

 

Net Interest Margin (3)

 

 

3.56

 

 

3.60

 

 

3.54

 

 

3.62

 

 

3.71

 

Efficiency Ratio (2)

 

 

45.6

 

 

50.1

 

 

44.1

 

 

60.0

 

 

42.7

 

Adjusted Efficiency Ratio (4)

 

 

42.9

 

 

42.7

 

 

43.1

 

 

42.1

 

 

42.7

 

Noninterest Expense to Average Assets (Annualized)

 

 

1.66

 

 

1.84

 

 

1.59

 

 

2.25

 

 

1.64

 

Adjusted Noninterest Expense to Average Assets (Annualized) (4)

 

 

1.56

 

 

1.57

 

 

1.55

 

 

1.58

 

 

1.64

 

Loan to Deposit Ratio

 

 

102.4

 

 

105.0

 

 

104.9

 

 

106.7

 

 

108.2

 

Core Deposits to Total Deposits

 

 

79.9

 

 

78.3

 

 

75.8

 

 

74.2

 

 

76.6

 

Tangible Common Equity to Tangible Assets (2)

 

 

10.43

 

 

10.64

 

 

11.16

 

 

11.03

 

 

11.01

 


(1)

Includes shares of common stock and non-voting common stock. On October 25, 2018, the Company exchanged shares of common stock for all of the outstanding shares of non-voting common stock. Following the exchange, no shares of non-voting common stock were outstanding.

(2)

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

(3)

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

(4)

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

33

Table of Contents

Selected Financial Data

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

June 30,

 

March 31,

 

December 31, 

 

September 30,

(dollars in thousands)

    

2019

    

2019

    

2019

 

2018

    

2018

Selected Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,232,339

 

$

2,123,631

 

$

2,048,111

 

$

1,973,741

 

$

1,885,793

Total Loans, Gross

 

 

1,846,218

 

 

1,784,903

 

 

1,723,629

 

 

1,664,931

 

 

1,599,964

Allowance for Loan Losses

 

 

22,124

 

 

21,362

 

 

20,607

 

 

20,031

 

 

18,949

Goodwill and Other Intangibles

 

 

3,535

 

 

3,582

 

 

3,630

 

 

3,678

 

 

3,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,802,236

 

 

1,699,265

 

 

1,643,666

 

 

1,560,934

 

 

1,479,088

Tangible Common Equity (1)

 

 

232,524

 

 

225,555

 

 

228,145

 

 

217,320

 

 

207,126

Total Shareholders' Equity

 

 

236,059

 

 

229,137

 

 

231,775

 

 

220,998

 

 

210,852

Average Total Assets - Quarter-to-Date

 

 

2,168,909

 

 

2,069,707

 

 

2,011,174

 

 

1,948,909

 

 

1,816,485

Average Common Equity - Quarter-to-Date

 

 

232,590

 

 

231,374

 

 

225,844

 

 

215,254

 

 

208,773


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

September 30, 

 

June 30,

 

March 31,

 

December 31, 

 

September 30,

(dollars in thousands)

 

2019

    

2019

 

2019

 

2018

    

2018

Selected Income Statement Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

26,572

 

$

25,520

 

$

24,267

 

$

23,988

 

$

22,136

Interest Expense

 

 

7,637

 

 

7,382

 

 

7,136

 

 

6,546

 

 

5,502

Net Interest Income

 

 

18,935

 

 

18,138

 

 

17,131

 

 

17,442

 

 

16,634

Provision for Loan Losses

 

 

900

 

 

600

 

 

600

 

 

800

 

 

1,275

Net Interest Income after Provision for Loan Losses

 

 

18,035

 

 

17,538

 

 

16,531

 

 

16,642

 

 

15,359

Noninterest Income

 

 

946

 

 

1,134

 

 

634

 

 

857

 

 

814

Noninterest Expense

 

 

9,084

 

 

9,474

 

 

7,885

 

 

11,040

 

 

7,526

Income Before Income Taxes

 

 

9,897

 

 

9,198

 

 

9,280

 

 

6,459

 

 

8,647

Provision (Benefit) for Income Taxes

 

 

2,092

 

 

1,189

 

 

2,262

 

 

(1,302)

 

 

2,184

Net Income

 

$

7,805

 

$

8,009

 

$

7,018

 

$

7,761

 

$

6,463

 

34

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $7.8 million for the third quarter of 2019, a 20.8% increase over net income of $6.5 million for the third quarter of 2018. Net income per diluted common share for the third quarter of 2019 was $0.27, a 24.8% increase compared to $0.21 per diluted common share for the same period in 2018. Net income was $22.8 million for the nine months ended September 30, 2019, a 19.2% increase over net income of $19.2 million for the nine months ended September 30, 2018. Net income per diluted common share for the nine months ended September 30, 2019 was $0.76, a 14.8% increase compared to $0.66 per diluted common share for the nine months ended September 30, 2018. 

Net Interest Income

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

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Table of Contents

Average Balances and Yields

The following tables show, for the three and nine months ended September 30, 2019 and 2018, 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, 2019

 

September 30, 2018

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

    

Balance

    

& Fees

    

Rate

    

Balance

    

& Fees

    

Rate

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Investments

 

$

73,970

 

$

346

 

1.86

%

$

23,822

 

$

72

 

1.20

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Investment Securities

 

 

151,319

 

 

1,095

 

2.87

 

 

132,197

 

 

839

 

2.52

 

Tax-Exempt Investment Securities (1)

 

 

95,575

 

 

1,031

 

4.28

 

 

116,042

 

 

1,204

 

4.12

 

Total Investment Securities

 

 

246,894

 

 

2,126

 

3.42

 

 

248,239

 

 

2,043

 

3.27

 

Loans (2)

 

 

1,805,920

 

 

24,220

 

5.32

 

 

1,526,765

 

 

20,207

 

5.25

 

Federal Home Loan Bank Stock

 

 

8,111

 

 

96

 

4.72

 

 

6,619

 

 

67

 

4.02

 

Total Interest Earning Assets

 

 

2,134,895

 

 

26,788

 

4.98

%

 

1,805,445

 

 

22,389

 

4.92

%

Noninterest Earning Assets

 

 

34,014

 

 

 

 

 

 

 

11,040

 

 

 

 

 

 

Total Assets

 

$

2,168,909

 

 

 

 

 

 

$

1,816,485

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Transaction Deposits

 

 

250,667

 

 

511

 

0.81

%

 

171,923

 

 

165

 

0.38

%

Savings and Money Market Deposits

 

 

453,340

 

 

2,080

 

1.82

 

 

398,092

 

 

1,373

 

1.37

 

Time Deposits

 

 

359,329

 

 

2,229

 

2.46

 

 

295,320

 

 

1,490

 

2.00

 

Brokered Deposits

 

 

242,600

 

 

1,389

 

2.27

 

 

241,355

 

 

1,294

 

2.13

 

Federal Funds Purchased

 

 

 —

 

 

 —

 

 —

 

 

27,391

 

 

147

 

2.13

 

Notes Payable

 

 

13,500

 

 

127

 

3.73

 

 

15,500

 

 

144

 

3.69

 

FHLB Advances

 

 

143,690

 

 

908

 

2.51

 

 

89,652

 

 

488

 

2.16

 

Subordinated Debentures

 

 

24,699

 

 

393

 

6.31

 

 

24,595

 

 

401

 

6.47

 

Total Interest Bearing Liabilities

 

 

1,487,825

 

 

7,637

 

2.04

%

 

1,263,828

 

 

5,502

 

1.73

%

Noninterest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Bearing Transaction Deposits

 

 

434,021

 

 

 

 

 

 

 

335,483

 

 

 

 

 

 

Other Noninterest Bearing Liabilities

 

 

14,473

 

 

 

 

 

 

 

8,401

 

 

 

 

 

 

Total Noninterest Bearing Liabilities

 

 

448,494

 

 

 

 

 

 

 

343,884

 

 

 

 

 

 

Shareholders' Equity

 

 

232,590

 

 

 

 

 

 

 

208,773

 

 

 

 

 

 

Total Liabilities and Shareholders' Equity

 

$

2,168,909

 

 

 

 

 

 

$

1,816,485

 

 

 

 

 

 

Net Interest Income / Interest Rate Spread

 

 

 

 

 

19,151

 

2.94

%

 

 

 

 

16,887

 

3.19

%

Net Interest Margin (3)

 

 

 

 

 

 

 

3.56

%

 

 

 

 

 

 

3.71

%

Taxable Equivalent Adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-Exempt Investment Securities

 

 

 

 

 

(216)

 

 

 

 

 

 

 

(253)

 

 

 

Net Interest Income

 

 

 

 

$

18,935

 

 

 

 

 

 

$

16,634

 

 

 


(1)

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

(2)

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

(3)

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

36

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2019

 

September 30, 2018

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

    

Balance

    

& Fees

    

Rate

    

Balance

    

& Fees

    

Rate

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Investments

 

$

46,158

 

$

604

 

1.75

%

$

23,540

 

$

188

 

1.07

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Investment Securities

 

 

143,583

 

 

3,126

 

2.91

 

 

125,668

 

 

1,960

 

2.09

 

Tax-Exempt Investment Securities (1)

 

 

103,032

 

 

3,307

 

4.29

 

 

117,284

 

 

3,634

 

4.14

 

Total Investment Securities

 

 

246,615

 

 

6,433

 

3.49

 

 

242,952

 

 

5,594

 

3.08

 

Loans (2)

 

 

1,756,855

 

 

69,720

 

5.31

 

 

1,436,152

 

 

56,055

 

5.22

 

Federal Home Loan Bank Stock

 

 

7,906

 

 

296

 

5.00

 

 

5,837

 

 

165

 

3.78

 

Total Interest Earning Assets

 

 

2,057,534

 

 

77,053

 

5.01

%

 

1,708,481

 

 

62,002

 

4.85

%

Noninterest Earning Assets

 

 

26,303

 

 

 

 

 

 

 

11,410

 

 

 

 

 

 

Total Assets

 

$

2,083,837

 

 

 

 

 

 

$

1,719,891

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Transaction Deposits

 

 

211,784

 

 

1,130

 

0.71

%

 

178,518

 

 

438

 

0.33

%

Savings and Money Market Deposits

 

 

433,430

 

 

5,784

 

1.78

 

 

366,198

 

 

3,006

 

1.10

 

Time Deposits

 

 

347,731

 

 

6,230

 

2.40

 

 

299,566

 

 

4,099

 

1.83

 

Brokered Deposits

 

 

266,976

 

 

4,788

 

2.40

 

 

220,733

 

 

3,310

 

2.00

 

Federal Funds Purchased

 

 

8,923

 

 

172

 

2.58

 

 

22,743

 

 

321

 

1.89

 

Notes Payable

 

 

14,000

 

 

378

 

3.61

 

 

16,000

 

 

442

 

3.69

 

FHLB Advances

 

 

133,097

 

 

2,510

 

2.52

 

 

78,212

 

 

1,159

 

1.98

 

Subordinated Debentures

 

 

24,673

 

 

1,163

 

6.30

 

 

24,570

 

 

1,167

 

6.35

 

Total Interest Bearing Liabilities

 

 

1,440,614

 

 

22,155

 

2.06

%

 

1,206,540

 

 

13,942

 

1.54

%

Noninterest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Bearing Transaction Deposits

 

 

401,973

 

 

 

 

 

 

 

317,437

 

 

 

 

 

 

Other Noninterest Bearing Liabilities

 

 

11,289

 

 

 

 

 

 

 

8,965

 

 

 

 

 

 

Total Noninterest Bearing Liabilities

 

 

413,262

 

 

 

 

 

 

 

326,402

 

 

 

 

 

 

Shareholders' Equity

 

 

229,961

 

 

 

 

 

 

 

186,949

 

 

 

 

 

 

Total Liabilities and Shareholders' Equity

 

$

2,083,837

 

 

 

 

 

 

$

1,719,891

 

 

 

 

 

 

Net Interest Income / Interest Rate Spread

 

 

 

 

 

54,898

 

2.95

%

 

 

 

 

48,060

 

3.31

%

Net Interest Margin (3)

 

 

 

 

 

 

 

3.57

%

 

 

 

 

 

 

3.76

%

Taxable Equivalent Adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-Exempt Investment Securities

 

 

 

 

 

(694)

 

 

 

 

 

 

 

(764)

 

 

 

Net Interest Income

 

 

 

 

$

54,204

 

 

 

 

 

 

$

47,296

 

 

 


(1)

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

(2)

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

(3)

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

 

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following tables show 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. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. The following tables present the changes in the volume and rate of interest bearing assets and

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Table of Contents

liabilities for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, and for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

Compared with

 

 

Three Months Ended September 30, 2018

 

 

Change Due To:

 

Interest

(dollars in thousands)

    

Volume

    

Rate

    

Variance

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

Cash Investments

 

$

151

 

$

123

 

$

274

Investment Securities:

 

 

 

 

 

 

 

 

 

Taxable Investment Securities

 

 

122

 

 

134

 

 

256

Tax-Exempt Investment Securities

 

 

(213)

 

 

40

 

 

(173)

Total Securities

 

 

(91)

 

 

174

 

 

83

Loans

 

 

3,695

 

 

318

 

 

4,013

Federal Home Loan Bank Stock

 

 

15

 

 

14

 

 

29

Total Interest Earning Assets

 

$

3,770

 

$

629

 

$

4,399

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

Interest Bearing Transaction Deposits

 

$

76

 

$

270

 

$

346

Savings and Money Market Deposits

 

 

191

 

 

516

 

 

707

Time Deposits

 

 

323

 

 

416

 

 

739

Brokered Deposits

 

 

 7

 

 

88

 

 

95

Federal Funds Purchased

 

 

(147)

 

 

 —

 

 

(147)

Notes Payable

 

 

(19)

 

 

 2

 

 

(17)

FHLB Advances

 

 

294

 

 

126

 

 

420

Subordinated Debentures

 

 

 2

 

 

(10)

 

 

(8)

Total Interest Bearing Liabilities

 

 

727

 

 

1,408

 

 

2,135

Net Interest Income

 

$

3,043

 

$

(779)

 

$

2,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

Compared with

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Change Due To:

 

 

Interest

(dollars in thousands)

    

 

Volume

    

 

Rate

    

 

Variance

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

Cash Investments

 

 

181

 

 

235

 

 

416

Investment Securities:

 

 

 

 

 

 

 

 

 

Taxable Investment Securities

 

 

279

 

 

887

 

 

1,166

Tax Exempt Investment Securities

 

 

(442)

 

 

115

 

 

(327)

Total Securities

 

 

(163)

 

 

1,002

 

 

839

Loans

 

 

12,517

 

 

1,148

 

 

13,665

Federal Home Loan Bank Stock

 

 

59

 

 

72

 

 

131

Total Interest Earning Assets

 

$

12,594

 

$

2,457

 

$

15,051

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

Interest Bearing Transaction Deposits

 

 

82

 

 

610

 

 

692

Savings and Money Market Deposits

 

 

552

 

 

2,226

 

 

2,778

Time Deposits

 

 

659

 

 

1,472

 

 

2,131

Brokered Deposits

 

 

693

 

 

785

 

 

1,478

Federal Funds Purchased

 

 

(195)

 

 

46

 

 

(149)

Notes Payable

 

 

(55)

 

 

(9)

 

 

(64)

FHLB Advances

 

 

813

 

 

538

 

 

1,351

Subordinated Debentures

 

 

 5

 

 

(9)

 

 

(4)

Total Interest Bearing Liabilities

 

 

2,554

 

 

5,659

 

 

8,213

Net Interest Income

 

$

10,040

 

$

(3,202)

 

$

6,838

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Table of Contents

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

Third Quarter of 2019 Compared to Third Quarter of 2018

Net interest income was $18.9 million for the third quarter of 2019, an increase of $2.3 million, or 13.8%, compared to $16.6 million for the third quarter of 2018. The increase in net interest income was largely attributable to growth in average interest earning assets due to strong organic growth in the loan portfolio.

Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2019 was 3.56%, compared to 3.71% for the third quarter of 2018, a decrease of 15 basis points. Net interest margin has benefitted from the repricing of variable-rate loans and the origination of new loans at higher rates; however, it compressed due to elevated cash balances, lower loan fees recognized and increased rates on deposits and borrowings.

Average interest earning assets for the third quarter of 2019 increased $329.5 million, or 18.2%, to $2.13 billion from $1.81 billion for the third quarter of 2018. This increase in average interest earning assets was primarily due to continued strong organic growth in the loan portfolio. Average interest bearing liabilities increased $224.0 million, or 17.7%, to $1.49 billion for the third quarter of 2019, from $1.26 billion for the third quarter of 2018. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and FHLB advances, offset partially by a decrease in federal funds purchased.

Average interest earning assets produced a tax-equivalent yield of 4.98% for the third quarter of 2019, compared to 4.92% for the third quarter of 2018. The average rate paid on interest bearing liabilities was 2.04% for the third quarter of 2019, compared to 1.73% for the third quarter of 2018.

Interest Income. Total interest income on a tax-equivalent basis was $26.8 million for the third quarter of 2019, compared to $22.4 million for the third quarter of 2018. The $4.4 million, or 19.6%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and an increase in the average yield on loans.

Interest income on cash investments increased $274,000, or 381.0%, during the third quarter of 2019, compared to the third quarter of 2018 due to increased liquidity, which resulted from strong deposit growth. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $83,000, or 4.1%, during the third quarter of 2019, compared to the third quarter of 2018 primarilly due to a 15 basis point increase in the aggregate portfolio yield.

Interest income on loans for the third quarter of 2019 was $24.2 million, compared to $20.2 million for the third quarter of 2018. The $4.0 million, or 19.9%, increase was due to an 18.3% increase in the average balance of loans outstanding and a 7 basis point increase in the average yield on loans. The increase in the average balance of loans outstanding was due to strong organic loan growth. The increase in yield on the loan portfolio resulted primarily from solid loan growth at yields accretive to the existing portfolio yield and has enabled the Company to offset the decrease in loan fee income. While deferred loan fees are regularly amortized into income, fluctuations in the level of loan fees recognized can vary based on prepayments and other factors.

A summary of interest and fees recognized on loans for the periods indicated is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

March 31, 2019

 

 

    

December 31, 2018

 

    

September 30, 2018

 

Interest

 

5.07

%  

 

5.10

%  

 

5.07

%  

 

 

4.98

%  

 

4.87

%

Fees

 

0.25

 

 

0.23

 

 

0.20

 

 

 

0.29

 

 

0.38

 

Yield on Loans

 

5.32

%  

 

5.33

%  

 

5.27

%  

 

 

5.27

%  

 

5.25

%

 

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Table of Contents

Interest Expense. Interest expense on interest bearing liabilities increased $2.1 million, or 38.8%, to $7.6 million for the third quarter of 2019, compared to $5.5 million for the third quarter of 2018, due to increases in interest rates paid and growth in average balances of both deposits and borrowings.

Interest expense on deposits increased to $6.2 million for the third quarter of 2019, compared to $4.3 million for the third quarter of 2018. The $1.9 million, or 43.7%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 18.0% combined with a 34 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from growth in interest bearing transaction deposits, savings and money market deposits, and time deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits in the local and wholesale markets.

Interest expense on borrowings increased $248,000 to $1.4 million for the third quarter of 2019, compared to $1.2 million for the third quarter of 2018. This increase was primarily due to increased rate and average balance of FHLB advances, offset in part by a reduction in interest expense on federal funds purchased as a result of a decrease in the average balance of this type of borrowing.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net interest income was $54.2 million for the nine months ended September 30, 2019, an increase of $6.9 million, or 14.6%, compared to $47.3 million for the nine months ended September 30, 2018. The increase in net interest income was largely attributable to growth in average interest earning assets due to strong organic growth in the loan portfolio.

Net interest margin (on a fully tax-equivalent basis) for the nine months ended September 30, 2019 was 3.57%, compared to 3.76% for the nine months ended September 30, 2018, a decrease of 19 basis points. Net interest margin has benefitted from the repricing of variable-rate loans and the origination of new loans at higher rates; however it compressed due to elevated cash balances, lower loan fees recognized and increased rates on deposits and borrowings.

Average interest earning assets for the nine months ended September 30, 2019 increased $349.1 million, or 20.4%, to $2.06 billion from $1.71 billion for the nine months ended September 30, 2018. This increase in average interest earning assets was primarily due to continued strong organic growth in the loan portfolio. Average interest bearing liabilities increased $234.1 million, or 19.4%, to $1.44 billion for the nine months ended September 30, 2019, from $1.21 billion for the nine months ended September 30, 2018. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing 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 5.01% for the nine months ended September 30, 2019, compared to 4.85% for the nine months ended September 30, 2018. The average rate paid on interest bearing liabilities was 2.06% for the nine months ended September 30, 2019, compared to 1.54% for the nine months ended September 30, 2018.

Interest Income. Total interest income on a tax-equivalent basis was $77.1 million for the nine months ended September 30, 2019, compared to $62.0 million for the nine months ended September 30, 2018. The $15.1 million, or 24.3%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and an increase in the average yield on loans.

Interest income on cash investments increased $416,000, or 221.3%, during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to increased liquidity. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $839,000, or 15.0%, during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, due to a $3.7 million, or 1.5%, increase in average balances between the periods, as well as a 41 basis point increase in the aggregate portfolio yield.

Interest income on loans for the nine months ended September 30, 2019 was $69.7 million, compared to $56.1 million for the nine months ended September 30, 2018. The $13.7 million, or 24.4%, increase was primarily due to

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a 22.3% increase in the average balance of loans outstanding and a 9 basis point increase in the average yield on loans. The increase in the average balance of loans outstanding was due to strong organic loan growth. The increase in yield on the loan portfolio resulted primarily from solid loan growth at yields accretive to the existing portfolio yield, and was partially offset by a decrease in loan fee income.

Interest Expense. Interest expense on interest bearing liabilities increased $8.2 million, or 58.9%, to $22.2 million for the nine months ended September 30, 2019, compared to $13.9 million for the nine months ended September 30, 2018, due to increases in interest rates paid and growth in average balances of both deposits and borrowings.

Interest expense on deposits increased to $17.9 million for the nine months ended September 30, 2019, compared to $10.9 million for the nine months ended September 30, 2018. The $7.1 million, or 65.2%, increase in interest expense on deposits was primarily due to an 18.3% increase in the average balance of deposits combined with a 54 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from growth in savings and money market deposits, time deposits, and brokered deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits in the local and wholesale markets.

Interest expense on borrowings increased $1.1 million to $4.2 million for the nine months ended September 30, 2019, compared to $3.1 million for the nine months ended September 30, 2018. This increase was primarily due to an increased rate and average balance of FHLB advances, offset in part by a reduction in interest expense on notes payable as a result of a decreased principal balance and a reduction in interest expense on federal funds purchased as a result of a decrease in the average balance of this type of borrowing.

Provision for Loan Losses

The provision for loan losses was $900,000 for the third quarter of 2019, a decrease of $375,000, compared to the provision for loan losses of $1.3 million for the third quarter of 2018. The provision for loan losses was $2.1 million for the nine months ended September 30, 2019, a decrease of $675,000 compared to the provision for loan losses of $2.8 million for the nine months ended September 30, 2018. The decrease in the provision for loan losses compared to both prior periods was primarily attributable to the strong asset quality and consistent performance of the loan portfolio within the diversified economy of the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area.  The allowance for loan losses to total gross loans ratio was 1.20% and 1.18% as of September 30, 2019 and 2018, respectively.

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Table of Contents

A reconciliation of the Company’s allowance for loan losses for the three and nine month periods ended September 30, 2019 and 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

(dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Balance at Beginning of Period

 

$

21,362

 

$

17,666

 

$

20,031

 

$

16,502

Provision for Loan Losses

 

 

900

 

 

1,275

 

 

2,100

 

 

2,775

Charge-offs

 

 

(144)

 

 

(11)

 

 

(183)

 

 

(384)

Recoveries

 

 

 6

 

 

19

 

 

176

 

 

56

Balance at End of Period

 

$

22,124

 

$

18,949

 

$

22,124

 

$

18,949

 

Noninterest Income

Noninterest income was $946,000 and $814,000 for the third quarter of 2019 and 2018, respectively, an increase of $132,000. Noninterest income was $2.7 million and $1.7 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $1.0 million. The increase in both periods was primarily due to increased gains on sales of securities as well as decreased losses on sales of foreclosed assets. The following table presents the major components of noninterest income for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

Increase/

 

September 30, 

 

Increase/

(dollars in thousands)

 

2019

    

2018

    

(Decrease)

    

2019

    

2018

    

(Decrease)

Noninterest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Service Fees

 

$

184

 

$

184

 

$

 —

 

$

564

 

$

539

 

$

25

Net Gain (Loss) on Sales of Securities

 

 

58

 

 

(49)

 

 

107

 

 

516

 

 

(108)

 

 

624

Net Gain (Loss) on Sales of Foreclosed Assets

 

 

69

 

 

(88)

 

 

157

 

 

69

 

 

(225)

 

 

294

Letter of Credit Fees

 

 

331

 

 

447

 

 

(116)

 

 

790

 

 

814

 

 

(24)

Debit Card Interchange Fees

 

 

116

 

 

99

 

 

17

 

 

313

 

 

287

 

 

26

Other Income

 

 

188

 

 

221

 

 

(33)

 

 

462

 

 

379

 

 

83

Totals

 

$

946

 

$

814

 

$

132

 

$

2,714

 

$

1,686

 

$

1,028

 

Noninterest Expense

Third Quarter of 2019 Compared to Third Quarter of 2018

Noninterest expense was $9.1 million for the third quarter of 2019, an increase of $1.6 million, or 20.7%, from $7.5 million for the third quarter of 2018. The increase was primarily driven by a $515,000 increase in amortization of tax credit investments and a $1.0 million increase in salaries and employee benefits as a result of merit increases and increased staff to meet the needs of the Company’s growth.

The Company’s FDIC insurance assessment expense decreased to zero for the third quarter of 2019, compared to $240,000 for the third quarter of 2018. The Bank has a credit with the FDIC for a portion of premiums previously paid to the deposit insurance fund (“DIF”) that became refundable when the DIF exceeded 1.38% of insured deposits, which occurred with the June 30, 2019 computation. Additionally, if the DIF remains above 1.38% of insured deposits at September 30, 2019, the Bank will receive an additional credit of approximately $130,000 to be recorded in the fourth quarter of 2019.

 

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Noninterest expense was $26.4 million for the nine months ended September 30, 2019, an increase of $5.9 million, or 28.9%, from $20.5 million for the nine months ended September 30, 2018. The increase was attributed to the

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Table of Contents

amortization of tax credit investments of $2.1 million and continued investments in employees, technology, marketing, and other operating costs to meet the needs of the Company’s growth and brand awareness efforts.

The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet growth. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. Full-time equivalent employees increased from 139 at the end of the third quarter of 2018 to 158 at the end of the third quarter of 2019. The increase includes key strategic hires in deposit gathering, lending, information technology, and other supportive roles. 

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

The efficiency ratio was 45.6% for the third quarter of 2019, compared to 42.7% for the third quarter of 2018. While the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit investments, remained relatively consistent at 42.9% for the third quarter of 2019, compared to 42.7% for the third quarter of 2018. The adjusted efficiency ratio for the nine months ended September 30, 2019 and 2018 was 42.9% and 41.5%, respectively.

The following table presents the major components of noninterest expense for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

Increase/

 

September 30, 

 

Increase/

(dollars in thousands)

 

2019

    

2018

    

(Decrease)

    

2019

    

2018

    

(Decrease)

Noninterest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and Employee Benefits

 

$

5,915

 

$

4,910

 

$

1,005

 

$

15,841

 

$

13,534

 

$

2,307

Occupancy and Equipment

 

 

761

 

 

596

 

 

165

 

 

2,202

 

 

1,767

 

 

435

FDIC Insurance Assessment

 

 

 —

 

 

240

 

 

(240)

 

 

570

 

 

675

 

 

(105)

Data Processing

 

 

182

 

 

167

 

 

15

 

 

486

 

 

325

 

 

161

Professional and Consulting Fees

 

 

414

 

 

313

 

 

101

 

 

1,253

 

 

836

 

 

417

Information Technology and Telecommunications

 

 

233

 

 

271

 

 

(38)

 

 

677

 

 

674

 

 

 3

Marketing and Advertising

 

 

339

 

 

347

 

 

(8)

 

 

1,208

 

 

911

 

 

297

Intangible Asset Amortization

 

 

48

 

 

48

 

 

 —

 

 

143

 

 

143

 

 

 —

Amortization of Tax Credit Investments

 

 

530

 

 

15

 

 

515

 

 

2,097

 

 

15

 

 

2,082

Other Expense

 

 

662

 

 

619

 

 

43

 

 

1,966

 

 

1,642

 

 

324

Totals

 

$

9,084

 

$

7,526

 

$

1,558

 

$

26,443

 

$

20,522

 

$

5,921

 

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 $2.1 million for the third quarter of 2019, compared to $2.2 million for the third quarter of 2018. The effective combined federal and state income tax rate for the third quarter of 2019 was 21.1%, compared to 25.3% for the third quarter of 2018. Income tax expense was $5.5 million for the nine months ended September 30, 2019, compared to $6.5 million for the nine months ended September 30, 2018. The effective combined federal and state income tax rate for the nine months ended September 30, 2019 and 2018 was 19.5% and 25.4%,

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Table of Contents

respectively. The lower effective combined rate compared to both prior periods was due to the recognition of tax credits that became eligible to be applied in 2019.

Financial Condition

Assets

Total assets at September 30, 2019 were $2.23 billion, an increase of $258.6 million, or 13.1%, over total assets of $1.97 billion at December 31, 2018 and an increase of $346.5 million, or 18.4%, over total assets of $1.89 billion at September 30, 2018.

Investment Securities Portfolio

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

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

Securities available for sale were $263.8 million at September 30, 2019, compared to $253.4 million at December 31, 2018, an increase of $10.4 million or 4.1%. At September 30, 2019, municipal securities represented 40.1% of the investment securities portfolio, government agency mortgage-backed securities represented 21.1% of the portfolio, SBA securities represented 18.3% of the portfolio, corporate securities represented 15.2% of the portfolio, U.S. treasury securities represented 3.8% of the portfolio, asset-backed securities represented 1.1% of the portfolio, and other mortgage-backed securities represented 0.4% of the portfolio.

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The following table presents the amortized cost and fair value of securities available for sale, by type, at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

    

Cost

    

Value

    

Cost

    

Value

U.S. Treasury Securities

 

$

9,975

 

$

9,986

$

 

17,862

 

$

17,897

SBA Securities

 

 

48,963

 

 

48,367

 

 

49,876

 

 

49,054

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

 

 

 

 

 

 

 

 

 

 

 

 

Residential Pass-Through:

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed by GNMA

 

 

1,298

 

 

1,319

 

 

6,357

 

 

6,137

Issued by FNMA and FHLMC

 

 

166

 

 

168

 

 

314

 

 

314

Other Residential Mortgage-Backed Securities

 

 

41,103

 

 

41,507

 

 

25,252

 

 

24,539

Commercial Mortgage-Backed Securities

 

 

12,242

 

 

12,575

 

 

15,443

 

 

14,736

All Other Commercial MBS

 

 

1,150

 

 

1,150

 

 

1,450

 

 

1,450

Total MBS

 

 

55,959

 

 

56,719

 

 

48,816

 

 

47,176

Municipal Securities

 

 

98,821

 

 

105,565

 

 

117,991

 

 

118,133

Corporate Securities

 

 

39,712

 

 

40,155

 

 

21,170

 

 

21,118

Asset-Backed Securities

 

 

3,008

 

 

3,011

 

 

 —

 

 

 —

Total

 

$

256,438

 

$

263,803

 

$

255,715

 

$

253,378

 

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 increased $181.3 million, or 10.9%, to $1.85 billion at September 30, 2019, compared to $1.66 billion at December 31, 2018 and increased $246.3 million, or 15.4%, from $1.60 billion at September 30, 2018.  The commercial, multifamily, and commercial real estate (“CRE”) nonowner occupied categories contributed most significantly to the $181.3 million loan growth in the nine months ended September 30, 2019. As of September 30, 2019, commercial loans increased $30.9 million, or 11.8%, multifamily loans increased $48.3 million, or 11.8%, and nonowner occupied CRE loans increased $61.4 million, or 12.5%, when compared to December 31, 2018. Collectively, the Company’s annualized loan growth for the nine months ended September 30, 2019 was 14.6%.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

June 30, 2019

 

March 31, 2019

 

December 31, 2018

 

September 30, 2018

 

 

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

291,723

 

15.8

%

$

287,804

 

16.1

%

$

284,807

 

16.5

%

$

260,833

 

15.7

%

$

235,502

 

14.7

%

Construction and Land Development

 

 

216,054

 

11.7

 

 

195,568

 

11.0

 

 

178,782

 

10.4

 

 

210,041

 

12.6

 

 

187,919

 

11.8

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

254,782

 

13.8

 

 

247,029

 

13.8

 

 

233,131

 

13.5

 

 

226,773

 

13.6

 

 

224,124

 

14.0

 

Multifamily

 

 

456,257

 

24.7

 

 

437,198

 

24.5

 

 

417,975

 

24.3

 

 

407,934

 

24.5

 

 

389,511

 

24.3

 

CRE Owner Occupied

 

 

71,209

 

3.9

 

 

68,681

 

3.9

 

 

66,130

 

3.8

 

 

64,458

 

3.9

 

 

65,905

 

4.1

 

CRE Nonowner Occupied

 

 

551,992

 

29.9

 

 

544,579

 

30.5

 

 

538,998

 

31.3

 

 

490,632

 

29.5

 

 

492,499

 

30.8

 

Total Real Estate Mortgage Loans

 

 

1,334,240

 

72.3

 

 

1,297,487

 

72.7

 

 

1,256,234

 

72.9

 

 

1,189,797

 

71.5

 

 

1,172,039

 

73.2

 

Consumer and Other

 

 

4,201

 

0.2

 

 

4,044

 

0.2

 

 

3,806

 

0.2

 

 

4,260

 

0.2

 

 

4,504

 

0.3

 

Total Loans, Gross

 

 

1,846,218

 

100.0

%

 

1,784,903

 

100.0

%

 

1,723,629

 

100.0

%

 

1,664,931

 

100.0

%

 

1,599,964

 

100.0

%

Allowance for Loan Losses

 

 

(22,124)

 

 

 

 

(21,362)

 

 

 

 

(20,607)

 

 

 

 

(20,031)

 

 

 

 

(18,949)

 

 

 

Net Deferred Loan Fees

 

 

(5,788)

 

 

 

 

(5,157)

 

 

 

 

(4,791)

 

 

 

 

(4,515)

 

 

 

 

(4,308)

 

 

 

Total Loans, Net

 

$

1,818,306

 

 

 

$

1,758,384

 

 

 

$

1,698,231

 

 

 

$

1,640,385

 

 

 

$

1,576,707

 

 

 

 

The Company’s primary focus has been on real estate mortgage lending, which constituted 72.3% of the portfolio as of September 30, 2019. The composition of the portfolio remained consistent with prior periods and although the Company expects continued growth, it does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.

 

As of September 30, 2019, CRE loans totaled $1.22 billion, consisting of $552.0 million of loans secured by nonowner occupied CRE, $456.3 million of loans secured by multifamily residential properties and $216.1 million of construction and land development loans. CRE loans represented 66.3% of the total gross loan portfolio and 487.6% of the Bank’s total risk-based capital at September 30, 2019.  

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The following table details time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

    

Due in One Year

    

More Than One

    

    

 

(dollars in thousands)

 

or Less

 

Year to Five Years

 

After Five Years

Commercial

 

$

126,176

 

$

112,153

 

$

53,394

Construction and Land Development

 

 

148,416

 

 

62,938

 

 

4,700

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

53,100

 

 

172,785

 

 

28,897

Multifamily

 

 

62,360

 

 

160,049

 

 

233,848

CRE Owner Occupied

 

 

4,025

 

 

29,238

 

 

37,946

CRE Nonowner Occupied

 

 

82,436

 

 

234,797

 

 

234,759

Total Real Estate Mortgage Loans

 

 

201,921

 

 

596,869

 

 

535,450

Consumer and Other

 

 

920

 

 

2,659

 

 

622

Total Loans, Gross

 

$

477,433

 

$

774,619

 

$

594,166

Interest Rate Sensitivity:

 

 

  

 

 

  

 

 

  

Fixed Interest Rates

 

$

141,516

 

$

565,806

 

$

178,405

Floating or Adjustable Rates

 

 

335,917

 

 

208,813

 

 

415,761

Total Loans, Gross

 

$

477,433

 

$

774,619

 

$

594,166

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

    

Due in One Year

    

More Than One

    

    

 

(dollars in thousands)

 

or Less

 

Year to Five Years

 

After Five Years

Commercial

 

$

127,439

 

$

92,689

 

$

40,705

Construction and Land Development

 

 

155,117

 

 

33,292

 

 

21,632

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

43,795

 

 

154,864

 

 

28,114

Multifamily

 

 

41,773

 

 

147,129

 

 

219,032

CRE Owner Occupied

 

 

7,948

 

 

25,287

 

 

31,223

CRE Nonowner Occupied

 

 

63,266

 

 

254,842

 

 

172,524

Total Real Estate Mortgage Loans

 

 

156,782

 

 

582,122

 

 

450,893

Consumer and Other

 

 

1,207

 

 

2,360

 

 

693

Total Loans, Gross

 

$

440,545

 

$

710,463

 

$

513,923

Interest Rate Sensitivity:

 

 

  

 

 

  

 

 

  

Fixed Interest Rates

 

$

154,318

 

$

537,119

 

$

162,901

Floating or Adjustable Rates

 

 

286,227

 

 

173,344

 

 

351,022

Total Loans, Gross

 

$

440,545

 

$

710,463

 

$

513,923

 

Asset Quality

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

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

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“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, 2019. The Company had no assets classified as loss.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Category

    

 

(dollars in thousands)

 

Watch

 

Substandard

 

Doubtful

 

Total

Commercial

 

$

22

 

$

108

 

$

24

 

$

154

Construction and Land Development

 

 

141

 

 

2,156

 

 

 —

 

 

2,297

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

2,125

 

 

1,964

 

 

 —

 

 

4,089

CRE Owner Occupied

 

 

 —

 

 

1,682

 

 

 —

 

 

1,682

CRE Nonowner Occupied

 

 

3,104

 

 

 —

 

 

 —

 

 

3,104

Total Real Estate Mortgage Loans

 

 

5,229

 

 

3,646

 

 

 —

 

 

8,875

Consumer and Other

 

 

 —

 

 

14

 

 

 —

 

 

14

Totals

 

$

5,392

 

$

5,924

 

$

24

 

$

11,340

 

Nonperforming Assets

Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled $828,000 and $581,000 as of September 30, 2019 and December 31, 2018, respectively, an increase of $247,000. There were no loans 90 days past due and still accruing as of September 30, 2019 or December 31, 2018. There were no foreclosed assets as of September 30, 2019 and December 31, 2018.

The following table summarizes nonperforming assets, by category, at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(dollars in thousands)

    

2019

    

2018

 

Nonaccrual Loans:

 

 

  

 

 

  

 

Commercial

 

$

32

 

$

 8

 

Construction and Land Development

 

 

232

 

 

198

 

Real Estate Mortgage:

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

564

 

 

317

 

Consumer and Other

 

 

 —

 

 

58

 

Total Nonaccrual Loans

 

$

828

 

$

581

 

Total Nonperforming Loans

 

$

828

 

$

581

 

Total Nonperforming Assets (1)

 

$

828

 

$

581

 

Total Restructured Accruing Loans

 

 

278

 

 

181

 

Total Nonperforming Assets and Restructured Accruing Loans

 

$

1,106

 

$

762

 

Nonaccrual Loans to Total Loans

 

 

0.04

%  

 

0.03

%

Nonperforming Loans to Total Loans

 

 

0.04

 

 

0.03

 

Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)

 

 

0.04

 

 

0.03

 

Nonperforming Assets and Restructured Accruing Loans to Total Loans Plus Foreclosed Assets

 

 

0.06

 

 

0.05

 


(1)

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

The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized

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and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms. Due to the low levels of nonaccrual loans, gross income that would have been recorded is immaterial.

Allowance for Loan Losses

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

At September 30, 2019, the allowance for loan losses was $22.1 million, an increase of $2.1 million from $20.0 million at December 31, 2018. Net charge-offs totaled $138,000 during the third quarter of 2019 and ($8,000) (net recoveries) during the third quarter of 2018. The allowance for loan losses as a percentage of total loans was 1.20% at September 30, 2019 and December 31, 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands)

    

2019

    

2018

 

2019

    

2018

 

Balance, Beginning of Period

 

$

21,362

 

$

17,666

 

$

20,031

 

$

16,502

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

141

 

 

 —

 

 

160

 

 

 —

 

Construction and Land Development

 

 

 —

 

 

 1

 

 

 —

 

 

358

 

Consumer and Other

 

 

 3

 

 

10

 

 

23

 

 

26

 

Total Charge-offs

 

 

144

 

 

11

 

 

183

 

 

384

 

Recoveries:

 

 

  

 

 

  

 

 

  

 

 

  

 

Commercial

 

 

 2

 

 

 1

 

 

 5

 

 

23

 

Construction and Land Development

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

 3

 

 

16

 

 

165

 

 

29

 

Consumer and Other

 

 

 1

 

 

 2

 

 

 5

 

 

 4

 

Total Recoveries

 

 

 6

 

 

19

 

 

176

 

 

56

 

Net Charge-offs

 

 

138

 

 

(8)

 

 

 7

 

 

328

 

Provision for Loan Losses

 

 

900

 

 

1,275

 

 

2,100

 

 

2,775

 

Balance at End of Period

 

$

22,124

 

$

18,949

 

$

22,124

 

$

18,949

 

Gross Loans, End of Period

 

 

1,846,218

 

 

1,599,964

 

 

1,846,218

 

 

1,559,964

 

Average Loans

 

 

1,805,920

 

 

1,526,765

 

 

1,756,855

 

 

1,436,152

 

Net Charge-offs (Recoveries) (Annualized) to Average Loans

 

 

0.03

%

 

 —

%

 

 —

%

 

0.03

%

Allowance to Total Gross Loans

 

 

1.20

%

 

1.18

%

 

1.20

%

 

1.18

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2019

 

2018

 

(dollars in thousands)

    

Amount

    

Percent

    

Amount

    

Percent

 

Commercial

 

$

3,238

 

14.6

%  

$

2,898

 

14.5

%

Construction and Land Development

 

 

2,442

 

11.0

 

 

2,451

 

12.2

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

1 - 4 Family Mortgage

 

 

2,815

 

12.7

 

 

2,597

 

13.0

 

Multifamily

 

 

5,177

 

23.4

 

 

4,644

 

23.2

 

CRE Owner Occupied

 

 

849

 

3.8

 

 

808

 

4.0

 

CRE Nonowner Occupied

 

 

6,535

 

29.6

 

 

5,872

 

29.3

 

Total Real Estate Mortgage Loans

 

 

15,376

 

69.5

 

 

13,921

 

69.5

 

Consumer and Other

 

 

82

 

0.4

 

 

65

 

0.3

 

Unallocated

 

 

986

 

4.5

 

 

696

 

3.5

 

Total Allowance for Loan Losses

 

$

22,124

 

100.0

%  

$

20,031

 

100.0

%

 

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Deposits

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

March 31, 2019

 

 

December 31, 2018

 

 

September 30, 2018

 

(dollars in thousands)

    

Amount

    

Percent

    

 

Amount

    

Percent

    

 

Amount

    

Percent

    

 

Amount

    

Percent

    

 

Amount

    

Percent

 

Noninterest Bearing Transaction Deposits

 

$

478,493

 

26.5

%

 

$

409,198

 

24.1

%

 

$

404,937

 

24.6

%

 

$

369,203

 

23.6

%

 

$

342,292

 

23.1

%

Interest Bearing Transaction Deposits

 

 

243,889

 

13.5

 

 

 

231,318

 

13.6

 

 

 

180,459

 

11.0

 

 

 

179,567

 

11.5

 

 

 

175,455

 

11.9

 

Savings and Money Market Deposits

 

 

470,518

 

26.1

 

 

 

456,447

 

26.9

 

 

 

434,186

 

26.4

 

 

 

402,639

 

25.8

 

 

 

416,140

 

28.1

 

Time Deposits

 

 

363,308

 

20.2

 

 

 

359,338

 

21.1

 

 

 

346,163

 

21.1

 

 

 

318,356

 

20.4

 

 

 

290,887

 

19.7

 

Brokered Deposits

 

 

246,028

 

13.7

 

 

 

242,964

 

14.3

 

 

 

277,921

 

16.9

 

 

 

291,169

 

18.7

 

 

 

254,314

 

17.2

 

Total Deposits

 

$

1,802,236

 

100.0

%

 

$

1,699,265

 

100.0

%

 

$

1,643,666

 

100.0

%

 

$

1,560,934

 

100.0

%

 

$

1,479,088

 

100.0

%

 

Total deposits at September 30, 2019 were $1.80 billion, an increase of $241.3 million, or 15.5%, compared to total deposits of $1.56 billion at December 31, 2018, and an increase of $323.1 million, or 21.8%, over total deposits of $1.48 billion at September 30, 2018. Noninterest bearing deposits were $478.5 million at September 30, 2019, compared to $369.2 million at December 31, 2018, and $342.3 million at September 30, 2018. Noninterest bearing deposits comprised 26.5% of total deposits at September 30, 2019, compared to 23.6% at December 31, 2018, and 23.1% at September 30, 2018.

 

The Company relies on increasing the deposit base to fund loans and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. At September 30, 2019, total brokered deposits were $246.0 million, a decrease of $45.1 million, or 15.5%, compared to total brokered deposits of $291.2 million at December 31, 2018. The decrease in brokered deposits as a percent of total deposits is primarily attributable to the Company’s success in growing core deposits. The core deposit growth supported a strategy whereby the Company was able to exercise embedded call features on higher rate, brokered time deposits during the nine months ended September 30, 2019. The Company exercised the embedded optionality to decrease

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brokered deposit exposure, reissue brokered time deposits at lower rates, and utilize other funding sources, such as FHLB advances.

The following table presents the average balance and average rate paid on each of the following deposit categories for the three months ended September 30, 2019 and September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

As of and for the

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2019

 

September 30, 2018

 

 

 

Average

 

Average

 

Average

 

Average

 

(dollars in thousands)

    

Balance

    

Rate

    

Balance

    

Rate

 

Noninterest Bearing Transaction Deposits

 

$

434,021

 

 —

%  

$

335,483

 

 —

%

Interest Bearing Transaction Deposits

 

 

250,667

 

0.81

 

 

171,923

 

0.38

 

Savings and Money Market Deposits

 

 

453,340

 

1.82

 

 

398,092

 

1.37

 

Time Deposits < $250,000

 

 

238,556

 

2.35

 

 

200,100

 

1.99

 

Time Deposits > $250,000

 

 

120,773

 

2.69

 

 

95,220

 

2.03

 

Brokered Deposits

 

 

242,600

 

2.27

 

 

241,355

 

2.13

 

Total Deposits

 

$

1,739,957

 

1.42

%  

$

1,442,173

 

1.19

%

 

Borrowed Funds

Federal Funds Purchased

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

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

As of and for the

 

As of and for the

 

 

 

Three Months Ended

 

Three Months Ended

 

Three Months Ended

 

(dollars in thousands)

    

September 30, 2019

    

December 31, 2018

 

September 30, 2018

 

Outstanding at Period-End

 

$

 —

 

$

18,000

 

$

53,000

 

Average Amount Outstanding

 

 

 —

 

 

50,228

 

 

27,391

 

Maximum Amount Outstanding at any Month-End

 

 

 —

 

 

90,000

 

 

53,000

 

Weighted Average Interest Rate:

 

 

 

 

 

  

 

 

  

 

During Period

 

 

 —

%  

 

2.49

%

 

2.13

%

End of Period

 

 

 —

%  

 

2.63

%

 

2.39

%

 

Other Borrowings

At September 30, 2019, other borrowings outstanding consisted of FHLB advances of $141.5 million and notes payable of $13.5 million. The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $204.7 million and $122.1 million at September 30, 2019 and December 31, 2018, respectively, based on collateral amounts pledged.

Additionally, the Company has borrowing capacity from other sources. As of September 30, 2019, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets available for collateral as of the applicable date, the Bank’s borrowing availability was approximately $105.4 million and $114.1 million at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, the Company had no outstanding advances.

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

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Contractual Obligations

The following table contains supplemental information regarding total contractual obligations at September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Within

    

One to

    

Three to

    

After

    

 

(dollars in thousands)

 

One Year

 

Three Years

 

Five Years

 

Five Years

 

Total

Deposits Without a Stated Maturity

 

$

1,195,562

 

$

 —

 

$

 —

 

$

 —

 

$

1,195,562

Time Deposits

 

 

292,521

 

 

215,627

 

 

98,526

 

 

 —

 

 

606,674

Notes Payable

 

 

2,000

 

 

11,500

 

 

 —

 

 

 —

 

 

13,500

FHLB Advances

 

 

10,000

 

 

39,000

 

 

77,500

 

 

15,000

 

 

141,500

Subordinated Debentures

 

 

 —

 

 

 —

 

 

 —

 

 

25,000

 

 

25,000

Commitment to Fund Tax Credit Investments

 

 

3,451

 

 

 —

 

 

 —

 

 

 —

 

 

3,451

Operating Lease Obligations

 

 

1,086

 

 

820

 

 

640

 

 

1,211

 

 

3,757

Totals

 

$

1,504,620

 

$

266,947

 

$

176,666

 

$

41,211

 

$

1,989,444

 

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC (the “Contractor”) entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank is required to pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23.0 million, with anticipated construction completed in 2020. As of September 30, 2019, $12.4 million has been paid under this Construction Contract.

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

Shareholders’ Equity

Shareholders’ equity at September 30, 2019 was $236.1 million, an increase of $15.1 million, or 6.8%, over shareholders’ equity of $221.0 million at December 31, 2018, primarily due to $22.8 million of net income and a $6.6 million increase in accumulated other comprehensive income, partially offset by $15.0 million of stock repurchases. The increase in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods.

Stock Repurchase Program. On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company is authorized to repurchase up to $15.0 million of its common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to a total of $25.0 million. During the three months ended September 30, 2019, the Company repurchased 205,567 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $11.41 for a total of $2.3 million. During the nine months ended September 30, 2019, the Company repurchased 1,331,512 shares of its common stock, representing approximately 5% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.23 for a total of $15.0 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At September 30, 2019, the remaining amount that could be used to repurchase shares under the stock repurchase program was $10.0 million.

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

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and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.

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

Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2019. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Required

 

For Capital Adequacy

 

To be Well Capitalized

 

 

 

 

 

 

 

 

For Capital Adequacy

 

Purposes Plus Capital

 

Under Prompt Corrective

 

 

 

Actual

 

Purposes

 

Conservation Buffer

 

Action Regulations

 

September 30, 2019

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

 

 

(dollars in thousands)

 

Company (Consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

268,907

 

13.31

%  

$

161,635

 

8.00

%  

$

212,146

 

10.50

%  

 

N/A

 

N/A

 

Tier 1 Risk-Based Capital

 

 

227,489

 

11.26

 

 

121,226

 

6.00

 

 

171,737

 

8.50

 

 

N/A

 

N/A

 

Common Equity Tier 1 Capital

 

 

227,489

 

11.26

 

 

90,920

 

4.50

 

 

141,431

 

7.00

 

 

N/A

 

N/A

 

Tier 1 Leverage Ratio

 

 

227,489

 

10.53

 

 

86,401

 

4.00

 

 

86,401

 

4.00

 

 

N/A

 

N/A

 

Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

251,102

 

12.44

%  

$

161,450

 

8.00

%  

$

211,904

 

10.50

%  

$

201,813

 

10.00

%

Tier 1 Risk-Based Capital

 

 

234,391

 

11.61

 

 

121,088

 

6.00

 

 

171,541

 

8.50

 

 

161,450

 

8.00

 

Common Equity Tier 1 Capital

 

 

234,391

 

11.61

 

 

90,816

 

4.50

 

 

141,269

 

7.00

 

 

131,178

 

6.50

 

Tier 1 Leverage Ratio

 

 

234,391

 

10.88

 

 

86,197

 

4.00

 

 

86,197

 

4.00

 

 

107,746

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Required

 

For Capital Adequacy

 

To be Well Capitalized

 

 

 

 

 

 

 

 

For Capital Adequacy

 

Purposes Plus Capital

 

Under Prompt Corrective

 

 

 

Actual

 

Purposes

 

Conservation Buffer

 

Action Regulations

 

December 31, 2018

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

 

 

(dollars in thousands)

 

Company (Consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

263,909

 

14.55

%  

$

145,111

 

8.00

%  

$

179,121

 

9.875

%  

 

N/A

 

N/A

 

Tier 1 Risk-Based Capital

 

 

218,888

 

12.07

 

 

108,833

 

6.00

 

 

142,844

 

7.875

 

 

N/A

 

N/A

 

Common Equity Tier 1 Capital

 

 

218,888

 

12.07

 

 

81,625

 

4.50

 

 

115,635

 

6.375

 

 

N/A

 

N/A

 

Tier 1 Leverage Ratio

 

 

218,888

 

11.23

 

 

77,971

 

4.00

 

 

77,971

 

4.00

 

 

N/A

 

N/A

 

Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital

 

$

230,865

 

12.76

%  

$

144,776

 

8.00

%  

$

178,707

 

9.875

%  

$

180,970

 

10.00

%

Tier 1 Risk-Based Capital

 

 

210,474

 

11.63

 

 

108,582

 

6.00

 

 

142,514

 

7.875

 

 

144,776

 

8.00

 

Common Equity Tier 1 Capital

 

 

210,474

 

11.63

 

 

81,436

 

4.50

 

 

115,368

 

6.375

 

 

117,630

 

6.50

 

Tier 1 Leverage Ratio

 

 

210,474

 

10.82

 

 

77,795

 

4.00

 

 

77,795

 

4.00

 

 

97,244

 

5.00

 

 

The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a capital conservation buffer that was added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a four year phase-in period that began on January 1, 2016, and was fully phased-in on

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January 1, 2019, at 2.5%. The required phase-in capital conservation buffer during 2018 was 1.875%. 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, 2019, 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 sets forth credit arrangements and financial instruments whose contract amounts represent credit risk as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

    

Fixed

    

Variable

    

Fixed

    

Variable

 

 

(dollars in thousands)

Unfunded Commitments Under Lines of Credit

 

$

141,300

 

$

350,172

 

$

58,611

 

$

336,421

Letters of Credit

 

 

21,732

 

 

58,592

 

 

33,899

 

 

47,154

Totals

 

$

163,032

 

$

408,764

 

$

92,510

 

$

383,575

 

Liquidity

Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or financial condition. The Bank’s Asset Liability Management (“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 and the Federal Reserve Bank of Minneapolis, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity. In addition, the Bank is a member of the American Financial Exchange (“AFX”), through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of September 30, 2019, the Company had no borrowings outstanding through the AFX.

55

Table of Contents

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

 

 

 

 

 

 

 

 

Primary Liquidity—On-Balance Sheet

    

September 30, 2019

    

December 31, 2018

 

 

 

(Dollars in thousands)

 

Cash and Cash Equivalents

 

$

89,619

 

$

28,444

 

Securities Available for Sale

 

 

263,803

 

 

253,378

 

Less: Pledged Securities

 

 

 —

 

 

 —

 

Total Primary Liquidity

 

$

353,422

 

$

281,822

 

Ratio of Primary Liquidity to Total Deposits

 

 

19.6

%

 

18.1

%

 

 

 

 

 

 

 

 

 

Secondary Liquidity—Off-Balance Sheet

 

 

 

 

 

 

 

Borrowing Capacity

    

September 30, 2019

    

December 31, 2018

 

 

 

(Dollars in thousands)

 

Net Secured Borrowing Capacity with the FHLB

 

$

204,693

 

$

122,120

 

Net Secured Borrowing Capacity with the Federal Reserve Bank

 

 

105,424

 

 

114,051

 

Unsecured Borrowing Capacity with Correspondent Lenders

 

 

105,000

 

 

90,000

 

Total Secondary Liquidity

 

$

415,117

 

$

326,171

 

Ratio of Primary and Secondary Liquidity to Total Deposits

 

 

42.6

%

 

39.0

%

 

During the nine months ended September 30, 2019, primary liquidity increased by $71.6 million due to a $61.2 million increase in cash and cash equivalents and a $10.4 million increase in securities available for sale, when compared to December 31, 2018. Secondary liquidity increased by $88.9 million as of September 30, 2019 when compared to December 31, 2018, due to a $82.6 million increase in the borrowing capacity on the secured borrowing line with the FHLB and a $15.0 million increase in unsecured borrowing capacity with correspondent lenders, partially offset by a $8.6 million decrease in the borrowing capacity on the secured credit line with the Federal Reserve Bank.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At September 30, 2019, core deposits totaled approximately $1.44 billion and represented 79.9% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At September 30, 2019, brokered deposits totaled $246.0 million, consisting of $243.4 million of brokered time deposits and $2.7 million of non-maturity brokered money market and transaction accounts. At December 31, 2018, brokered deposits totaled $291.2 million, consisting of $264.2 million of brokered time deposits and $27.0 million of non-maturity brokered money market accounts.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of September 30, 2019, the Company was in compliance with all established liquidity guidelines.

 

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. The Company believes these non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the Company’s operating performance and trends, and to facilitate comparisons with the performance of peers. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 

 

June 30,

 

March 31,

 

December 31, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2019

    

2019

 

2018

    

2018

    

2019

    

2018

    

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

$

9,084

 

$

9,474

 

$

7,885

 

$

11,040

 

$

7,526

 

$

26,443

 

$

20,522

 

Less: Amortization of Intangible Assets

 

 

(48)

 

 

(47)

 

 

(48)

 

 

(48)

 

 

(48)

 

 

(143)

 

 

(143)

 

Adjusted Noninterest Expense

 

$

9,036

 

$

9,427

 

$

7,837

 

$

10,992

 

$

7,478

 

$

26,300

 

$

20,379

 

Net Interest Income

 

 

18,935

 

 

18,138

 

 

17,131

 

 

17,442

 

 

16,634

 

 

54,204

 

 

47,296

 

Noninterest Income

 

 

946

 

 

1,134

 

 

634

 

 

857

 

 

814

 

 

2,714

 

 

1,686

 

Less: (Gain) Loss on Sales of Securities

 

 

(58)

 

 

(463)

 

 

 5

 

 

17

 

 

49

 

 

(516)

 

 

108

 

Adjusted Operating Revenue

 

$

19,823

 

$

18,809

 

$

17,770

 

$

18,316

 

$

17,497

 

$

56,402

 

$

49,090

 

Efficiency Ratio

 

 

45.6

%  

 

50.1

%  

 

44.1

%  

 

60.0

%  

 

42.7

%  

 

46.6

%  

 

41.5

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

$

9,084

 

$

9,474

 

$

7,885

 

$

11,040

 

$

7,526

 

$

26,443

 

$

20,522

 

Less: Amortization of Tax Credit Investments

 

 

(530)

 

 

(1,390)

 

 

(177)

 

 

(3,278)

 

 

(15)

 

 

(2,097)

 

 

(15)

 

Less: Amortization of Intangible Assets

 

 

(48)

 

 

(47)

 

 

(48)

 

 

(48)

 

 

(48)

 

 

(143)

 

 

(143)

 

Adjusted Noninterest Expense

 

$

8,506

 

$

8,037

 

$

7,660

 

$

7,714

 

$

7,463

 

$

24,203

 

$

20,364

 

Net Interest Income

 

 

18,935

 

 

18,138

 

 

17,131

 

 

17,442

 

 

16,634

 

 

54,204

 

 

47,296

 

Noninterest Income

 

 

946

 

 

1,134

 

 

634

 

 

857

 

 

814

 

 

2,714

 

 

1,686

 

Less: (Gain) Loss on Sales of Securities

 

 

(58)

 

 

(463)

 

 

 5

 

 

17

 

 

49

 

 

(516)

 

 

108

 

Adjusted Operating Revenue

 

$

19,823

 

$

18,809

 

$

17,770

 

$

18,316

 

$

17,497

 

$

56,402

 

$

49,090

 

Adjusted Efficiency Ratio

 

 

42.9

%  

 

42.7

%  

 

43.1

%  

 

42.1

%  

 

42.7

%  

 

42.9

%  

 

41.5

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible Common Equity and Tangible Common Equity/Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity

 

$

236,059

 

$

229,137

 

$

231,775

 

$

220,998

 

$

210,852

 

 

 

 

 

 

 

Less: Intangible Assets

 

 

(3,535)

 

 

(3,582)

 

 

(3,630)

 

 

(3,678)

 

 

(3,726)

 

 

 

 

 

 

 

Tangible Common Equity

 

 

232,524

 

 

225,555

 

 

228,145

 

 

217,320

 

 

207,126

 

 

 

 

 

 

 

Total Assets

 

 

2,232,339

 

 

2,123,631

 

 

2,048,111

 

 

1,973,741

 

 

1,885,793

 

 

 

 

 

 

 

Less: Intangible Assets

 

 

(3,535)

 

 

(3,582)

 

 

(3,630)

 

 

(3,678)

 

 

(3,726)

 

 

 

 

 

 

 

Tangible Assets

 

$

2,228,804

 

$

2,120,049

 

$

2,044,481

 

$

1,970,063

 

$

1,882,067

 

 

 

 

 

 

 

Tangible Common Equity/Tangible Assets

 

 

10.43

%  

 

10.64

%  

 

11.16

%  

 

11.03

%  

 

11.01

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible Book Value Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book Value Per Common Share

 

$

8.20

 

$

7.90

 

$

7.70

 

$

7.34

 

$

7.01

 

 

 

 

 

 

 

Less: Effects of Intangible Assets

 

 

(0.12)

 

 

(0.12)

 

 

(0.12)

 

 

(0.12)

 

 

(0.12)

 

 

 

 

 

 

 

Tangible Book Value Per Common Share

 

$

8.08

 

$

7.78

 

$

7.58

 

$

7.22

 

$

6.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Tangible Common Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Equity

 

$

232,590

 

$

231,374

 

$

225,844

 

$

215,254

 

$

208,773

 

$

229,961

 

$

186,949

 

Less: Effects of Average Intangible Assets

 

 

(3,558)

 

 

(3,605)

 

 

(3,653)

 

 

(3,701)

 

 

(3,748)

 

 

(3,605)

 

 

(3,797)

 

Average Tangible Common Equity

 

$

229,032

 

$

227,769

 

$

222,191

 

$

211,553

 

$

205,025

 

$

226,356

 

$

183,152

 

 

 

57

Table of Contents

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.

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, 2019 are presented in the table below. The projections assume immediate, parallel shifts downward of the yield curve of 100 and 200 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 300 and 400 basis points does not provide us with meaningful results and thus is not presented.

58

Table of Contents

 

 

 

 

 

 

 

Change (basis points) in Interest Rates

    

Forecasted Net 

 

Percentage Change

(12-Month Projection)

 

Interest Income

 

from Base

+400

 

$

78,098

 

12.98

%

+300

 

 

75,854

 

9.73

 

+200

 

 

73,571

 

6.43

 

+100

 

 

71,248

 

3.07

 

0

 

 

69,125

 

 —

 

−100

 

 

66,491

 

(3.81)

 

−200

 

 

64,736

 

(6.35)

 

 

The table above indicates that as of September 30, 2019, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a 12.98% increase in net interest income. In the event of an immediate 200 basis point decrease in interest rates, the Company would experience a 6.35% decrease in net interest income.

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

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of September 30, 2019, 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, 2019, 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.

 

59

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

 

Item 1.A. Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2019.

 

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

Unregistered Sales of Equity Securities

The following table presents stock purchases made during the third quarter of 2019:

 

 

 

 

 

 

 

 

 

 

Period

Total Number of Shares Purchased

 

Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

 

Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)

July 1 - 31, 2019

164,445

 

$

11.45

 

164,445

 

$

10,502,808

August 1 - 31, 2019

13,827

 

 

11.24

 

13,827

 

 

10,347,410

September 1 - 30, 2019

27,295

 

 

11.23

 

27,295

 

 

10,040,837

Total

205,567

 

$

11.41

 

205,567

 

$

10,040,837


(1)

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

 

Use of Proceeds from Registered Securities

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

60

Table of Contents

Item 6. Exhibits

 

 

 

Exhibit Number

    

Description

31.1

 

Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1

 

Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements

 

 

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Table of Contents

SIGNATURES

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

 

 

 

 

Bridgewater Bancshares, Inc.

 

 

Date: November 7, 2019

By:

/s/ Jerry Baack

 

Name:

Jerry Baack

 

Title:

Chairman, Chief Executive Officer and President
(Principal Executive Officer)

 

 

Date: November 7, 2019

By:

/s/ Joe Chybowski

 

Name:

Joe Chybowski

 

Title:

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

 

62